74 Part 1 Financial Accounting

Problem 3-8.
Determine the amount oftotal assets, current assets, and noncurrent assets at the end ofthe
period, given the following data:

Current liabilities, ending balance $ 50,000 Purchases during the period $40,000
Current ratio, ending 1.6:1 Inventory, ending balance $ 30,000
Owners' equity, beginning Gross margin percentage 45o/o
balance $120,000 Profit margin 1Oo/o

Inventory, beginning balance $ 35,000 Long-term debt, ending

balance $40,000

Problem 3-9.
Ace Corporation operates in a highly inflationary economy. On January I the consumer
price index was 100; at midyear 150; and at year-end 200. The company adjusts its finan-
cial statements for changing prices. How would the company report the following in its
year-end financial statements adjusted for inflation?
a. Sales of local currency (LC) 20,000,000 (assume spread evenly throughout the
year).
b. January I cash LC 500,000 (beginning ofthe year).
c. December 3l cash LC 600,000 (end of the year).
Using cash as a measure of liquidity, was the company more or less liquid at year-end rel-
ative to its cash position January l?

Cases
Case 3-1
Maynard eompany (B)*
Diane Maynard was gratef-ul for the balance sheets
that her fi'iend prepared fsee Case 2-1, Maynard Com-
pany (A)]. In going over the numbers, she remarked,
"lt's sort of surprising that cash increased by $3 I ,677,
but net income was only $ 19,635. Why was that'1"
Her friend replied, 'A partial altswer to that ques-
tion is to look at an income statement fbr Jutte. I think
I can find the data I need to prepare one for you."
In addition to the data given in the (A) case. her
friend found a record of cash receipts and disburse-
ffrents, which is sLrmrnarized in Exhibit 1. She also
learned that all accoLlltts payable were to vendors fbr
* O Professor Robert N. Anthony, Harvard Business School.
purchase of merchandise inventory and that cost of
sales was $39,,345 in June.
Qr.r.stions
I . Prepare an income statement for June in proper
format. Explain the derivation of each item on this
statement, including cost of sales.
2. Explain why the change in the cash balance was
greater than the net income.
3. Explain why the following amoLlnts are incorrect
cost of sales amounts for June: (a) $ 14'7 I 5 and
(h) $36,030. ljnder what circumstances would
these amounts be correct cost of sales amounts?
 Chapter 3 Basic'Accounting Concepts: The Income Statement 75

EXHIBIT 1

Cash Receipts and Disbursements

Month of f une
Cash Receipts Cash Disbursements

Cash sales $44,420 Equipment purchased $23,400

Credit customers 21 ,798 Other assets purchased 408
Diane Maynard 1 1,700 Payments on accounts payable 8,517
Bank loan 20,865 Cash purchases of merchandise 14,715
Total receipts $98,783 Cash purchase of supplies 1,671
Dividends 1 1,700
Wages paid 5,660
Utilities paid 900
Miscellaneous payments 13s
Total disbursements $6?,106
Reconciliation:
Cash balance, f une 1 $ 34,983
Receipts P8,ZS3
Su btotal $133,766
Disbu rsements 67 JA6
Cash balance, f une 30 $ 66,560

Case 3-2
Lone Pine Cafe (B)*
In addition topreparing the balance sheet described in
Monthly payments to partners* $23,1 50
Lone Pine Cafe (A), Mr, Simpson, the accountant., Wages to part-time employees 5,480
agreed to prepare an income statement. He said that lnterest 540
such a financial statement would show Mrs. Antoine Food and beverage suppliers 10,0,| 6
how profitable operations had been, and thus help her Telephone and electricity 3,270
to judge whether it was worthwhile to continue operat- Miscellaneous 255
ing the restaurant. Rent payments 7 ,504
In addition to the information given in the (A) case, *Onc-third to each partner.
Mr. Simpson learned that cash received fi om cus-
tomers through March 30 amounted to $43,480 and
that cash payments were as follows:
Questions
l. Prepare an incoure statement for thc period of the
* Copyright O Professor Robert N. Anthony, Harvard Busi- cafe's operations thror-rgh March 30', 2006.
ness School. 2. What does this inconre statement tell Mrs. Antoine'l

Case 3-3
Dispensers of ealifornia, Inc.
Peter Hynes created a working rnodel of a ttew and im- Hynes was eltger to exploit his patent collllrrer-
proved commercial paint spray, which he hacl patented. cially, but he had lto firnds of his owtl. Several of
The patent had a legal life of l6 years retraining. Hyncs' friends, who had used prototypcs of Hyrles'