Establish an Excel Worksheet for the financial statement analysis framework. Ref

Question

Establish an Excel Worksheet for the financial statement analysis framework. Refer to the following information:

a. On January 1, 2014, Frances Corporation started doing business and the owners contributed $200,000 capital in cash.

b. The company paid $24,000 to cover the rent for the office space for the 24-month period from January 1, 2014 to December 31, 2015.

c. On March 1, 2014, MSK Inc. entered into a consulting contract under which Frances Corporation promised to provide consulting to MSK Inc. for the 10-month period from March 1, 2014, to December 31, 2014. In return, MSK promised to pay a monthly consulting fee of $15,000, which was to be paid in January 2015. Frances fulfilled its contractual obligation during 2014.

d. On July 1, 2014, Frances purchased office equipment for $100,000 cash. The equipment has an estimated useful life of five years and no salvage value. The equipment was immediately placed into use. Frances uses the straight-line method of depreciation. It records depreciation expense in proportion to the number of months’ usage.

e. Through November 30, 2014, the company had paid $66,000 to its employees for 11 months of salaries. Accrued salaries on December 31, 2014, were $6,000.

f. On December 31, 2014, Norbert Corporation advanced $20,000 to Frances Corporation for consulting services to be provided during 2015.

Questions:

1. For each of these transactions, using the financial statement effect template, analyze the effects of the above transactions on financial statements.

2. At the end of the year, analyze how the adjustment for accrual basis accounting affects the financial statements.

3. Prepare financial statements for the year ended December 31, 2014.

(balance sheet / income statement/ cash flow statement)

4. If Frances recognized "rent expense" instead of "prepaid rent" on Jan. 1, discuss the effect of this error on the financial statements.

Explanation / Answer

1 & 2) Effect of transactions and adjustment for accural basis : Balance Sheet Income Statement Cash flow Statement Transaction Assets Liabilities & SH Eq Revenues Expenses Inflow Outflow a Cash 200000 Capital 200000 200000 b Cash -24000, Prepaid rent 12000 Rent exp 12000 24000 c Accounts Payable 150000 Consultancy exp 150000 d Cash -100000, Equipment 100000 100000 Equipment -10000 Depreciation exp 10000 e Cash - 66000 Salary payable 6000 72000 66000 f Cash 20000 Unearned revenue 20000 20000 3) Financial Statements: Income Statement: Revenues 0 less: Expenses: Rent -12000 Consultancy -150000 Depreciation -10000 salary -72000 NOL -244000 Balance Sheet: Assets: Amount $ Liabilities Amount $ Cash 30000 AP 150000 Prepaid rent 12000 Salary payable 6000 Equipment 90000 Unearned revenue 20000 Capital 200000 NOL -244000 Total Assets 132000 Total Liabilities 132000 Cash flow Statement: From operation: Net Loss -244000 add: depreciation 10000 less: Prepaid rent increase -12000 add: AP increases 150000 add:salary payable increases 6000 add: Unearned rev increases 20000 Cash outflow of operations -70000 From investing: less: equip purchase -100000 Cash outflow of investing -100000 From financing: add: shares issues 200000 Cash inflow of financing 200000 Net cash inflow of all 30000 Opening Cash 0 Closing Cash 30000 4) If Rent expense is used to record the transaction, then the prepaid rent adjustment is necessary at the year end. The entry should be: Debit Prepaid Rent $12,000 Credit Rent Expense $12,000

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