Question

Prepare the period's financial statements and calculate the following primary financial ratio:

Debt Ratio Total Liabilities / Total Assets

Current Ratio Current Assets / Current Liabilities

Working Capital Current Assets - Current Liabilities

Assets-to-Equity Ratio Total Assets / Owner's Equity

Debt-to-Equity Ratio Total Liabilities / Owner's Equity

Nelson Adams and Marina Fedorova started Local Souvenir Inc., on January 1. They were two owners of the corporation. They decided to produce food and drink containers in a birch bark crafts technique that have been popular in Russia since ancient times. The water-resistant and robust bark could be cut, bent, sewn and painted. They hired three workers who made all bark crafts operations and one artist who made decorations. Also, one girl helped the crafters twice a week to perform small work related to the internet promotion of the brand and bill customers. Accounting services and cleaning services were outsourced.

The following transactions all took place in January.

On January 1, Nelson Adams and Marina Fedorova invested $2,500 each in the business as owners. On January 1, the firm paid $750 rent from January 1 through January 31.

The firm borrowed $4,000 from a bank on a 9 per cent note payable, with interest payable quarterly and the principal due in full at the end of two years.

Equipment costing $7,200 was purchased for cash (a sewing machine $5,000 and a drying box $2,200). The expected life of the machines was ten years.

An initial inventory of birch bark, paints and paper boxes was purchased on credit for $800, including: bark $500,

paints $200,

boxes $100.

During the month an additional $5,750 of ingredients and boxes was purchased on credit, including:

bark $5,000, paints $500, boxes $250.

On January 12, the firm organized a workshop for a fee of $200. Because the customer was a friend of Nelson's, the customer was told that payment could be made some time later in the month.

Placed $6,000 of raw materials into production in the process of making goods, including: bark $5,200,

paints $500,

boxes $300.

In January containers were produced and stored in the studio:

Week 1 = 40 containers Week 2 = 60 containers Week 3 = 70 containers Week 4 = 80 containers

In January containers sales were $12,000, all for cash: Week 1 = 40 containers

Week 2 = 55 containers Week 3 = 60 containers Week 4 = 85 containers

On January 29, a check was received from Nelson's friend for the party of January 12.

During January, the firm employees were paid in wages (simplified as we are disregarding certain real- world complications such as payroll taxes), including:

$2100 to bark crafts operators (they work 40 hours a week each), $800 to the artist (she's working 30 hours a week),

$100 to the part-time employee who performed small work in the studio (paid for 20 hours a week).

At the end of the month, bills for various utilities used in January were received, totalling $350 (assuming that a non-manufacturing use of those utilities is insufficient).

At the end of the month, a bill for accounting services used in January was received, totalling $80.

At the end of the month, a bill for studio cleaning services used in January was received, totalling $20. During the month, $4,800 of accounts payable was paid.

TOTAL ASSETS $ 13 496.00

Net Income $ 1 812

Working Capital $ 3 702.00

Answer 1

Refer adjusted column for financial statements. As is column is calculated to find out containers value.

Statement of comprehensive income (P&L)	As is	Adjusted
	31-Jan	31-Jan
Sales	12200	12200
Cost of sales (consumption from table below)	6000	5108
Gross profit	6200	7092
Expenses
Rent	750	750
Wages	3000	3000
Utilities	350	350
Accounting charges	80	80
Cleaning charges	20	20
Depreciation	720	720
Interest accrued	360	360
Net profit	920	1812
Taxes	0	0
Net income / Profit after tax	920	1812	0
Taxes information not available.
Statement of financial position	As is	Adjusted
	31-Jan	31-Jan
Equity
Nelson's capital	2,500	2,500
Marina's capital	2,500	2,500
Net Income for the year	920	1812
	5,920	6,812
Non-current liabilities
Bank Borrowing @ 9%	4000	4000
	4000	4000
Current liabilities
Utilities payable	350	350
Accounting charges payable	80	80
Cleaning charges payable	20	20
Interest accrued on borrowing	360	360
Account payables	1750	1750
	2560	2560
Total liabilities	12,480	13,372
Assets
Non-current assets
Sewing Machine	4500	4500
Drying box	1980	1980
	6480	6480
Current assets
Account receivable	0	0
Cash	5450	5450
Inventory- Raw material	550	550
Inventory- 10 containers		892
	6000	6892
Total assets	12,480	13,372
	-	-
Debt Ratio (Total liabilities / total assets)		29.9%	=4000/13372
Current Ratio		2.7	times
Working capital (current assets - current liabilities)		4,332
Assets to Equity ratio (Total assets / Owner's equity)		2.0	times
Debt to Equity ratio (total liabilities / Owner's equity)		58.7%

Appendix 1 Inventory Schedule
Opening	800
Bark	500
Paint	200
Boxes	100
Purchases	5750
Bark	5000
Paint	500
Boxes	250
Consumption	6000
Bark	5200
Paint	500
Boxes	300
Closing inventory	550
Bark	300
Paint	200
Boxes	50

Appendix 2: Containers stock
	W1	W2	W3	W4
Opening	0	0	5	15
Produced	40	60	70	80
Sold	-40	-55	-60	-85
Closing	0	5	15	10