Professional Documents
Culture Documents
FINANCIAL ACCOUNTING
CHAPTER I
Group 3
ROJO CORPORATION
Statement of Cash Flows
For the Year Ended December 31,2017
Cash flows from operating activities
Cash received from customers $132,000
Cash paid to suppliers ($104,000)
Net cash provided by operating activities $28,000
b. An increase in net cash provided by operating activities ($28,000), with the cash at
beginning of period was $9,000, allows the company more rooms for investments
and dividend payments which appeals greatly to both current and future investors.
P1-5A:
a. Comment on the proper accounting treatment of the three items above:
1. About the Boat and Boat Loan:
The Boat is actually related to the owner, Miko Liu, not to Micado
Corporation. It will not be recorded as an Asset of the business. Because the
Boat is not in the ownership of Micado Corporation, it is in the ownership of
the owner. The Boat of $24,000, therefore, will be unlisted from the assets.
Now the Boat Loan represents the personal loan taken by the owner for
purchase of Boat. It is a personal loan not a business loan, so this loan should
not be recorded anywhere in the books of accounts of the business (Micado
Corporation). Thus, the Boat
Loan of $22,000 will be unlisted from the Liabilities.
As we know that Total Assets = Stockholers' Equity + Liabilities
The treatment of Boat and Boat Loan will be as follows:
Total Assets = Stockholers' Equity + Liabilities
$24,000 = $2,000 + $22,000
In this case, we have to reduce $2,000 from the Stockholders' Equity. Boat
$24,000 and Boat Loan $22,000 will be unlisted.
2. About the Inventory:
The inventory was originally purchased for $25,000, but since there is a surge
in demand, Miko now thinks she could sell it for 36,000. She put it in the
Balance Sheet as $36,000. The Inventory is valued at market price or cost, so
we must reduce the Inventory by $11,000 (36,000 - 25,000). As a result, the
Inventory will be shown at $25,000.
Stockholders' Equity will also be reduced by $11,000 because it is overstated
by $11,000 because of the overvaluation of the Inventory.
3. About the Accounts receivable:
The Accounts receivable is the amount of money owed to a company by its
debtors.
In the provided information, it includes $10,000 that Miko loaned to her
brother. Since it is her money and has nothing to do with the company, this is a
personal transaction and not a business transaction and the Accounts receivable
will be decreased to: $50,000 - $10,000 = $40,000.
At the same time, Stockholders' Equity overstated by $10,000, so it will be
reduced by $10,000.
MICADO CORPORATION
Balance Sheet
December 31,2017
Assets
Cash $20,000
Accounts receivable $40,000
Inventory $25,000
Total assets $85,000