On January 1, 2024, the general ledger of Dynamite Fireworks includes the following account balances:
Accounts Debit Credit
Cash $23,800
Accounts Receivable 5,200
Supplies 3,100
Land 50,000
Accounts Payable $3,200
Common Stock 65,000
Retained Earnings 13,900
Totals $82,100 $82,100
During January 2024, the following transactions occur:
January 2 Purchase rental space for one year in advance, $6,000 ($500/month).
January 9 Purchase additional supplies on account, $3,500.
January 13 Provide services to customers on account, $25,500.
January 17 Receive cash in advance from customers for services to be provided in the future, $3,700.
January 20 Pay cash for salaries, $11,500.
January 22 Receive cash on accounts receivable, $24,100.
January 29 Pay cash on accounts payable, $4,000.
Required:Record each of the transactions listed above.
Record the adjusting entries on January 31.
Rent for the month of January has expired.
Supplies remaining at the end of January total $2,800. All other supplies have been used.
By the end of January, $3,200 of services has been provided to customers who paid in advance on January 17.
Unpaid salaries at the end of January are $5,800.
Prepare an adjusted trial balance as of January 31, Prepare an income statement for the period ended January 31, 2Prepare a classified balance sheet as of January 31, 2024.Record closing entries.
Analyze the following features of Dynamite Fireworks’ financial condition:
a. What is the amount of profit reported for the month of January?
b. Calculate the ratio of current assets to current liabilities (the current ratio) at the end of January.
c. Based on Dynamite Fireworks’ profit and ratio of current assets to current liabilities, indicate whether Dynamite Fireworks appears to be in good or bad financial condition.
The Correct Answer and Explanation is:
Here is the complete financial analysis for Dynamite Fireworks for January 2024:
1. Amount of Profit (Net Income) for January:
\$6,100
This is calculated as:
- Service Revenue: \$28,700
- Expenses:
- Rent Expense: \$500
- Supplies Expense: \$4,800
- Salaries Expense: \$17,300
- Total Expenses: \$22,600
- Net Income = Revenue – Expenses = \$28,700 – \$22,600 = \$6,100
2. Current Ratio (Liquidity Measure):
3.82
This is calculated as:
- Current Assets:
- Cash: \$50,100
- Accounts Receivable: \$6,600
- Supplies: \$1,800
- Prepaid Rent: \$6,500
- Total Current Assets = \$65,000
- Current Liabilities:
- Accounts Payable: \$10,700
- Unearned Revenue: \$500
- Salaries Payable: \$5,800
- Total Current Liabilities = \$17,000
Current Ratio = Current Assets / Current Liabilities = \$65,000 / \$17,000 ≈ 3.82
3. Financial Health Evaluation:
Dynamite Fireworks appears to be in good financial condition at the end of January 2024 based on the following:
Conclusion:
With a solid net income and a strong current ratio, Dynamite Fireworks demonstrates robust financial health for January 2024. The company is well-positioned to meet its short-term obligations and continue generating profits.