The trial balance of the Wall Fashion Center, Inc. contained the following accou
ID: 2475413 • Letter: T
Question
The trial balance of the Wall Fashion Center, Inc. contained the following accounts at December 31, 2007 the end of the company’s calendar year.
WALL FASHION CENTER, INC.
Trial Balance
31-Dec-07
Debit
Credit
Cash
$ 16,700
Accounts Receivable
33,700
Merchandise Inventory (Beginning)
38,000
Store Supplies
5,500
Store Equipment
85,000
Accumulated Depreciation-Store Equipment
$ 18,000
Delivery Equipment
48,000
Accumulated Depreciation-Delivery Equipment
6,000
Notes Payable
51,000
Accounts Payable
48,500
Common Stock
80,000
Retained Earnings
30,000
Dividends
12,000
Sales
746,600
Sales Returns and Allowances
4,200
Purchases
503,600
Purchase Returns and Allowances
6,900
Purchase Discounts
3,700
Freight-in
10,800
Salaries Expense
140,000
Advertising Expense
26,400
Utilities Expense
17,000
Repair Expense
9,100
Delivery Expense
16,700
Rent Expense
24,000
$ 990,700
$ 990,700
Adjustment data:
Store supplies on hand totaled $3,500.
Depreciation is $9,000 on the store equipment and $7,000 on the delivery equipment.
Interest of $11,000 is accrued on notes payable at December 31.
Other data:
Merchandise inventory on hand at December 31, 2007 is $45,000.
Salaries expense is 70% selling and 30% administrative.
Rent expense and utilities expense are 80% selling and 20% administrative.
$30,000 of notes payable are due for payment next year.
Repair expense is 100% administrative.
The beginning balance of accounts receivable is $31,250.
The amount of total assets at the beginning of the year is $199,700.
Instructions
Journalize the adjusting entries.
Prepare a multiple-step income statement and a retained earnings statement for the year and a classified balance sheet as of December 31, 2007.
Journalize the closing entries.
Prepare a post-closing trial balance.
Prepare the following ratios and show all support for your computations:
a) Current Ratio
b) Quick Ratio
c) Working Capital
d) Accounts Receivable Turnover
e) Average Collection Period
f) Inventory Turnover
g) Days in Inventory
h) Debt to Total Assets Ratio
i) Gross Profit Ratio
j) Profit Margin Ratio
k) Return on Assets Ratio
l) Asset Turnover Ratio
6) Based on the ratios computed in 5) above, answer the following questions and use the financial statement ratios to support your answers where appropriate:
Do you feel that the company is able to meet its current and long term obligations as they become due?
Comment on the profitability of the company with respect to the various profitability ratios that you computed.
Would you lend money to this company for the long term?
Comment on the ability of the company to collect its receivables and mange inventory.
2004
2005
2006
Industry Average
Liquidity
Current
1.09
1.30
1.80
1.42
Quick
0.89
1.08
1.28
1.10
Working Capital
$ 10,000.00
$ 13,500.00
$ 18,000.00
$ 20,000.00
Leverage
Debt to Total Assets (%)
52.03%
48.52%
43.61%
40.00%
Times Interest Earned
1.50
3.50
4.75
5.00
Activity
Inventory Turnover (sales)
12.56
13.85
14.02
19.98
Fixed Asset Turnover
9.50
9.98
10.50
10.25
Total Asset Turnover
5.34
6.92
7.12
6.40
Average Collection Period (days)
15.57
14.05
12.41
15.00
Accounts Receivable Turnover
23.12
25.62
29.01
28.64
Days in Inventory
29.06
26.35
26.03
24.52
Profitability
Gross Profit Margin (%)
40.98%
45.27%
49.02%
48.82%
Net Profit (%)
6.98%
9.99%
13.01%
12.35%
Return on Total Assets (%)
10.86%
11.25%
12.09%
11.36%
Return on Equity (%)
20.56%
23.07%
25.12%
24.59%
Payout Ratio
45.00%
45.00%
45.00%
35.26%
WALL FASHION CENTER, INC.
Trial Balance
31-Dec-07
Debit
Credit
Cash
$ 16,700
Accounts Receivable
33,700
Merchandise Inventory (Beginning)
38,000
Store Supplies
5,500
Store Equipment
85,000
Accumulated Depreciation-Store Equipment
$ 18,000
Delivery Equipment
48,000
Accumulated Depreciation-Delivery Equipment
6,000
Notes Payable
51,000
Accounts Payable
48,500
Common Stock
80,000
Retained Earnings
30,000
Dividends
12,000
Sales
746,600
Sales Returns and Allowances
4,200
Purchases
503,600
Purchase Returns and Allowances
6,900
Purchase Discounts
3,700
Freight-in
10,800
Salaries Expense
140,000
Advertising Expense
26,400
Utilities Expense
17,000
Repair Expense
9,100
Delivery Expense
16,700
Rent Expense
24,000
$ 990,700
$ 990,700
Explanation / Answer
Wall fashion Centre Adjusting JVs Account Dr $ Cr $ Supplies Store expense 2,000 Supplies Store 2,000 Depreciation Expense 16,000 Accumulated Depreciation-Store Equipment 9,000 Accumulated Depreciation-Delivery Equipment 7,000 Interest expense 11,000 Accrued Interest Payable 11,000 Merchandise Inventory (Beginning) 38,000 Purchases 503,600 Purchase Returns and Allowances 6,900 Purchase Discounts 3,700 Freight-in 10,800 Merchandise Inventory (closing) 45,000 Cost of Merchandise sold 496,800 JV for Closing Entries Account Dr $ Cr $ Sales 746,600 Sales Returns and Allowances 4,200 Income statement 746,600 Income statement 4,200 Supplies Store expense 2,000 Cost of Merchandise sold 496,800 Salaries Expense 140,000 Advertising Expense 26,400 Utilities Expense 17,000 Repair Expense 9,100 Depreciation Expense 16,000 Delivery Expense 16,700 Rent Expense 24,000 Interest Expense 11,000 Income statement 759,000 Post Closing TB As on 31-12-07 Accounts Debit Credit Cash 16,700 Accounts Receivable 33,700 Merchandise Inventory (Beginning) - Merchandise Inventory (closing) 45,000 Store Supplies 3,500 Store Equipment 85,000 Accumulated Depreciation-Store Equipment 27,000 Delivery Equipment 48,000 Accumulated Depreciation-Delivery Equipment 13,000 Notes Payable 51,000 Accrued Interest Payable 11,000 Accounts Payable 48,500 Common Stock 80,000 Retained Earnings 1,400 231,900 231,900 Wall fashion Centre Income statement for the period ending 31-12-2007 Details Amt $ Amt $ Sales 746,600 Less Sales Returns and Allowances 4,200 Net Sales 742,400 Less: Cost of Merchandise sold 496,800 Gross profit 245,600 Selling Expenses Salary -Sales 98,000 Advertising Expense 26,400 Utilities Expense 13,600 Rent Expense 19,200 Depreciation 16,000 Delivery Expense 16,700 Total Selling Expense 189,900 Admin Expense Supplies Store expense 2,000 Salary -Admin 42,000 Rent 4,800 Utilities Expense 3,400 Repair Expense 9,100 61,300 EBIT (5,600) Interest expense 11,000 Earning Before Tax (16,600) Wall fashion Centre Balance sheet As On 31-12-2007. Assets Current Asset Cash 16,700 Accounts Receivable 33,700 Merchandise Inventory (closing) 45,000 Store Supplies 3,500 Total Current Assets 98,900 Non Current Assets Store Equipment 85,000 Accumulated Depreciation-Store Equipment (27,000) Delivery Equipment 48,000 Accumulated Depreciation-Delivery Equipment (13,000) Total Non Current Assets 93,000 Total Assets 191,900 Liabilities & Equities Current Liabilities Notes Payable 30,000 Accrued Interest Payable 11,000 Accounts Payable 48,500 Total Current Liabilities 89,500 Non Current Liabilities Notes Payable 21,000 Total Non Current Liabilities Equities Common Stock 80,000 Retained Earnings 1,400 Total Equities 81,400 Total Liabilities & Equities 191,900 Ratio a Current Raio= Current Asset/Current Liabilities =98900/89500 1.11 b Quick ratio= (Current Asset-Inventory)/Current Laib =(98900-45000)/89500 0.60 c Working Capital = Current Asset -Current Liab 9,400.00 d AR Turnover =Sales/Avg AR =742400/(33700+31250)/2 5.72 e Average collection period =365/AR TO 63.87 f Inventory TO = Sales/Avg Inventory =742400/(45000+38000)/2 4.47 g Days in Inventory =365/Inv TO 81.61 h Debt to Total Assets =51000/191900 0.27 i Gross profit Ratio= Gr Profit/sales = 245600/742400 33.08% j Profit Margin Ratio= Net Profit/sales -2.24% k Return on Assets=Net profit/Avg Assets = -16600/(191900+199700)/2 -2.12% l Asset TO ratio =Sales/Avg Asste 0.95 Wall fashion Centre Observation on ratio 6 Cuurent Ratio is good , but lower than industry avg. quick raio is slightly low. Liquidy is bit lower.But as working capital requirement is less than industry average, the company may be able to fulfill short term obligations. Debt to Assets ratio is lower than Industry average, but the firm has negatibe EBIT. So honoring long term debt is a concern. Gross profit ratio s healthy bit EBIT & EBT negative due to very high selling expense. Specially in 2007 the net profit became negative , though in earlier years it was positive, As a lender , I would be cautious and would not lend to the company at present due to negative margin. Though the earlier year ratio were good , I need to watch the raio for coming years before lending. The collection period jumped four times and inventory days juped 3 times over previous years and industry average. This prove the company has managed collections and inventory very poorly in 2007
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