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Question:

Summary financial data for the Nu-Look Dry Cleaning Co. for November are presented below in transaction form.

1.Opened a business bank account, depositing $ 12,000
2.Purchased supplies for cash, $220
3.Purchased dry cleaning equipment from Hill cleaning Equipment, Inc. for $3,500, paying $1,500 in cash with the balance on account.
4.Paid rent for the month, $825
5.Cash sales for the month totaled $1,850
6.Paid salaries of $375
7.Paid $500 on account to Hill cleaning Equipment, Inc.
8.The cost of supplies used was determined to be $60.

Answer:
Solution 1:

 

Assets

 = Liabilities + Owner’s Equity

 

Cash

+ Supplies

+ Equipment

 = Accounts Payable

+ Capital

-1

50000

0

0

0

50000

-2

-27000

0

27000

0

0

Balance

23000

0

27000

0

50000

-3

-2000

2000

0

0

0

Balance

21000

2000

27000

0

50000

-4

11600

0

0

0

11600

Balance

32600

2000

27000

0

61600

-5

-900

0

0

0

-900

Balance

31700

2000

27000

0

60700

-6

-1800

0

0

0

-1800

Balance

29900

2000

27000

0

58900

-7

-3000

3000

0

0

0

Balance

26900

5000

27000

0

58900

-8

-1500

0

0

0

-1500

Balance

25400

5000

27000

0

57400

Solution 2:

 

Assets

 = Liabilities + Owner’s Equity

 

Cash

+ Supplies

+ Equipment

 = Accounts Payable

+ Capital

-1

12000

0

0

0

12000

-2

-220

220

0

0

0

Balance

11780

220

0

0

12000

-3

-1500

3500

0

2000

0

Balance

10280

3720

0

2000

12000

-4

-825

0

0

0

-825

Balance

9455

3720

0

2000

11175

-5

1850

0

0

0

1850

Balance

11305

3720

0

2000

13025

-6

-375

0

0

0

-375

Balance

10930

3720

0

2000

12650

-7

-500

 

0

-500

0

Balance

10430

3720

0

1500

12650

-8

0

-60

0

0

-60

Balance

10430

3660

0

1500

12590

Solution 3:

Lucky Dip Ice Cream Consulting

Income Statement

Year Ended December 31, 19x8

Fees Incomes

 

66,700

Operating Expenses

 

 

Wages Expense

31,500

 

Rent Expense

7,200

 

Supplies Expense

700

 

Miscellaneous Expense

900

 

Total Operating Expenses

 

40,300

Net Income

 

26,400

Lucky Dip Ice Cream Consulting

Statement of Owner’s Equity

Year Ended December 31, 19x8

Capital, January 1, 19x8

 

18,000

Net Income for the Year

26,400

 

Less: Withdrawals

20,000

 

Increase in Capital

 

6,400

Capital, December 31, 19x8

 

24,400

Lucky Dip Ice Cream Consulting

Balance Sheet

December 31, 19x8

ASSETS

 

 

Current Assets

 

 

Cash

11,000

 

Accounts Receivable

13,000

 

Supplies

5,700

 

Total Current Assets

 

29,700

LIABILITIES

 

 

Accounts Payable

2,500

 

Notes Payable

2,800

 

Total Liabilities

 

5,300

OWNER’S EQUITY

 

 

John Sweet, Capital

 

24,400

Total Liabilities and Owner’s Equity

 

29,700

Solution 4:

Depreciation=

Purchase price of the asset- Salvage value

 

Useful life of asset

Depreciation as on December 31, 20X7

Depreciation =

15000-1000

 

14

=

14000

 

14

=

1000

(a)

As on December 31, 20X7

Amount

 

Cost of the printing press

15000

 

Less: Depreciation for the year

1000

 

Balance as on December 31, 20X7

14000

 

 

 

(b)

As on December 31, 20X8

Amount

 

Cost of the printing press

15000

 

Less: Depreciation for the year

2000

 

Balance as on December 31, 20X8

13000

Solution 5:

(a)

Working Capital

 

 

 

 

 

 

 

Working Capital  

=

Current asset- Current liabilities

 

 

=

233000-176000

 

 

=

57000

(b)

Current Ratio

 

 

 

 

 

 

 

Current Ratio

=

Current Asset

 

Current liabilities

 

 

=

233000

 

 

 

176000

 

 

=

                                                                        1.32

( c)

Quick Ratio

 

 

 

Quick Ratio

=

Current asset - Inventories - Prepaid expenses

 

Current liabilities

 

 

=

233000-120000-1000

 

 

176000

 

 

=

112000

 

 

 

176000

 

 

=

                                                                        0.64

Solution 6:

Account receivable turnover=

Net sales

 

Average account receivables

Particulars

20X2

20X1

Net credit sales

2600000

3100000

Average account receivables

400000

416000

Account receivable turnover

6.5

      7.45

As per our calculations, we can conclude that the average collection period for the receivables in 2011 was 7.45 times and that in 2012 was 6.5 times. This indicates that the frequency of collection of debt has reduced form 7.45 times to 6.5 times.

Solution 7:
 
We have the following formulas:

Payback Period

=

a+(b/c)

Where,

 

 

A

=

Last period with negative cash flow

B

=

Cumulative cash flow for period a

C

=

Cash flow for the period after a

Accounting Rate of Return

=

Average Accounting Profit

Average Investment

 

 

 

Average Accounting Profit

=

Cash flow-Depreciation

Calculation of Payback period:

Calculation of Payback Period - Project A

 

 

 

Year

 Cash Flows

 Cumulative Cash Flow

0

    -3,50,000

                     -3,50,000

1

     1,00,000

                     -2,50,000

2

     2,00,000

                        -50,000

3

     1,00,000

                         50,000

4

     1,00,000

                      1,50,000

5

     1,40,000

                      2,90,000

Pay Back Period for Project A =

                             2.50

Calculation of Payback Period - Project B

Year

 Cash Flows

 Cumulative Cash Flow

0

    -3,50,000

                     -3,50,000

1

        40,000

                     -3,10,000

2

     1,00,000

                     -2,10,000

3

     2,10,000

                                 -   

4

     2,60,000

                      2,60,000

5

     1,60,000

                      4,20,000

Pay Back Period for Project B =

                             3.00

Calculation of Payback Period - Project C

Year

 Cash Flows

 Cumulative Cash Flow

0

    -3,50,000

                     -3,50,000

1

     2,00,000

                     -1,50,000

2

     1,50,000

                                 -   

3

     2,40,000

                      2,40,000

4

        40,000

                      2,80,000

5

                -   

                      2,80,000

Pay Back Period for Project C =

                             2.00

Calculation of Accounting Rate of Return:

Calculation of Accounting Rate Return - Project A

Average Cash Flow

=

6,40,000

=

 1,28,000

5

Average Depreciation

=

70,000

 

 

Average Accounting Profit

=

128000-70000

=

    58,000

Average Investment

=

3,50,000

=

 1,75,000

2

Accounting Rate of Return

=

58,000

=

33.14%

 

1,75,000

Calculation of Accounting Rate Return - Project B

Average Cash Flow

=

7,70,000

=

 1,54,000

5

Average Depreciation

=

70,000

 

 

Average Accounting Profit

=

154000-70000

=

    84,000

 

 

 

 

 

Average Investment

=

3,50,000

=

 1,75,000

2

Accounting Rate of Return

=

84,000

=

48.00%

 

1,75,000

 

 

 

 

 

Calculation of Accounting Rate Return - Project C

Average Cash Flow

=

6,30,000

=

 1,26,000

5

Average Depreciation

=

70,000

 

 

Average Accounting Profit

=

126000-70000

=

    56,000

Average Investment

=

3,50,000

=

 1,75,000

2

Accounting Rate of Return

=

56,000

=

32.00%

 

1,75,000

Calculation of Net Present Value:

Calculation of Net Present Value - Project A

Year

 Cash Flows

 PV Factor @ 9%

Present Value

0

    -3,50,000

                                  1

       -3,50,000

1

     1,00,000

                         0.9174

            91,743

2

     2,00,000

                         0.8417

         1,68,336

3

     1,00,000

                         0.7722

            77,218

4

     1,00,000

                         0.7084

            70,843

5

     1,40,000

                         0.6499

            90,990

Net Present Value

         1,49,130

Calculation of Net Present Value - Project B

 

 

 

 

Year

 Cash Flows

 PV Factor @ 9%

Present Value

0

    -3,50,000

                                  1

       -3,50,000

1

        40,000

                         0.9174

            36,697

2

     1,00,000

                         0.8417

            84,168

3

     2,10,000

                         0.7722

         1,62,159

4

     2,60,000

                         0.7084

         1,84,191

5

     1,60,000

                         0.6499

         1,03,989

Net Present Value

         2,21,203

Calculation of Net Present Value - Project C

Year

 Cash Flows

 PV Factor @ 9%

Present Value

0

    -3,50,000

                                  1

       -3,50,000

1

     2,00,000

                         0.9174

         1,83,486

2

     1,50,000

                         0.8417

         1,26,252

3

     2,40,000

                         0.7722

         1,85,324

4

        40,000

                         0.7084

            28,337

5

                -   

                         0.6499

                   -   

Net Present Value

         1,73,399

We summarise the above information as below:

For pay-back period we have:

Pay Back Period for Project A =

 2.50

Pay Back Period for Project B =

 3.00

Pay Back Period for Project C =

 2.00

Pay-back period indicates the time period in which the investments made are recovered. Lower the period better it is for the investors. In the given case we see that project C has the lowest pay-back period of 2 years. Therefore, based on pay-back period project C should be accepted.

For accounting rate of return we have:

Accounting Rate of Return for project A =

33.14%

Accounting Rate of Return for project B =

48%

Accounting Rate of Return for project C =

32%

Accounting rate of return measures the percentage of average profits earned by a project during its life time. Since it measures return, higher the ratio better it is. In the given scenario we see that the ARR for project B is maximum, 48%. Therefore, as per accounting rate of return project B should be opted for.

For Net Present Value we have:

Net Present Value for project A =

          1,49,130

Net Present Value for project B =

          2,21,203

Net Present Value for project C =

          1,73,399

Net present value is the tool which helps to measure the present value of the cash flows from a given project. The project with higher net present value is better. In the given case we see that net present value for project B is the highest with $221203. Therefore based on Net present value approach Project B should be opted for. (Collier, 2013)

Therefore, based on all the attributed and calculations above we can conclude that the investor should invest in project B, as it would provide higher returns than the other projects.

Solution 8:

Calculation of expected cash receipts

Particulars

June

July

August

Sales

 70,000

 1,00,000

 1,00,000

Cash for sales of current month

 35,000

    50,000

    50,000

Cash for sales of last month

 15,000

    17,500

    25,000

Cash for sales of last second month

 16,250

    15,000

    17,500

Total Cash Inflow

 66,250

    82,500

    92,500

Solution 9:

In the books of Maris Brothers Inc

Cash Disbursement Schedule

Particulars

 April

 May

 June

Cash inflow form sales

 5,60,000

 6,10,000

 6,50,000

Less:

 

 

 

Cash paid for Purchases

 3,24,600

 3,56,400

 3,80,400

Cash paid for Rent

      8,000

      8,000

      8,000

Cash paid for Wages & Salaries

    45,200

    48,700

    51,500

Cash paid for Taxes

            -   

            -   

    54,500

Cash paid for Fixed Asset

    75,000

            -   

            -   

Cash paid for interest

            -   

            -   

    30,000

Cash paid for dividend

    12,500

            -   

            -   

Net Cash flow for the month

    94,700

 1,96,900

 1,25,600

Workings

 

 

 

 

 

 

 

Calculation of Purchases

 

 

 

 

 

 

 

Particulars

 February

 March

 April

 May

 June

 July

 August

Sales

    5,00,000

    5,00,000

    5,60,000

    6,10,000

    6,50,000

    6,50,000

 

Purchases

    3,00,000

    3,36,000

    3,66,000

    3,90,000

    3,90,000

              -   

 

 - Cash paid in the month of purchase

       30,000

       33,600

       36,600

       39,000

       39,000

              -   

 

 - Cash paid for 1 month after purchase

              -   

    1,50,000

    1,68,000

    1,83,000

    1,95,000

    1,95,000

               -   

 - Cash paid for 2 month after purchase

              -   

              -   

    1,20,000

    1,34,400

    1,46,400

    1,56,000

     1,56,000

Total Cash paid for Purchases

       30,000

    1,83,600

    3,24,600

    3,56,400

    3,80,400

    3,51,000

     1,56,000

Calculation of Wages & Salaries

 

 

 

 

 

 

 

Particulars

 February

 March

 April

 May

 June

 July

 August

Fixed Wages

         6,000

         6,000

         6,000

         6,000

         6,000

         6,000

          6,000

Variable Wages (7% of sales of current month)

       35,000

       35,000

       39,200

       42,700

       45,500

       45,500

               -   

Total Cash paid for Wages & Salaries

       41,000

       41,000

       45,200

       48,700

       51,500

       51,500

          6,000

Solution 10:

a.

The above diagram shows the cash flow from the project over the project life.

b.

We assume that the required rate of return for the given project is 10% and that the amount earned is reinvested in the business. Taking this information into consideration, we can see that the investor would require earning at least $2500 in the first year, $2750 in the second year and so on.

c.

The above diagram shows the how the present value of the cash flows earned is to be discounted. The amount earned in year 3 is to be discounted with the factor for 3 years in order to arrive at the present value today.

  1. The financial managers generally rely on present value approach in order to determine the viability of a project. The interest rate or the required rate of return keeps changing. Therefore, while calculating the future value, we need to determine the interest rates for all the years separately. This is a tedious job and often leads to wrong conclusions. In the present value approach, the calculations are made on the required rate of return which exists currently. This saves time and narrows the room for errors.
Solution 11:

Let the amount be x

 

We know,

 

FV=PV * [(1+i)^n]

 

Here,

 

FV=PV * [(1+i)^n]

 

FV= Future Value

 

PV= Present Value

 

i= Interest Rate

 

n= time period for investment

 

We are provided with the following information

 

FV= 6000

 

i= 0.12

 

n= 6 years

 

Putting this in the above formula we get,

 

PV

FV

[(1+i)^n]

Therefore,

 

PV

6000

[(1+0.12)^6]

PV

    3,039.79

Therefore, investment of $3039.79 will result in $6000 in 6 years with interest of 12% per annum.

In the given case we need to find the present value of some amount which turns out to be $6000 after 6 years with 12% required rate of return. Therefore applying the present value formula helps to determine the same. If we invest $ 3,039.79 today, then we will receive $6000 at the end of 6 years with 12% interest.(Loughran, 2011)
  1. We are to receive $ 6000 at the end of 6 years. If we discount it with the interest rate factor of 125 for 6 years we get the present value as $3,039.79
  2. Given an opportunity cost of 12%, the investor would require to earn 12% in order to make up for the opportunity lost. Therefore, taking this in consideration the investor is required to invest $3,039.79 in order to receive $6000 after 6 years today.
  3. In all the above cases we are required to find the present value of the future amount $6000, given an interest rate of 12% and 6 years. The requirements in each of the cases presented are same, only the situation is different. Therefore, an investor needs to invest $ 3,039.79 today in order to receive $6000 on completion of 6 years.
 
References

Collier, P. (2013). Accounting for managers. Milton: John Wiley & Sons.

Loughran, M. (2011). Financial accounting for dummies. Hoboken (NJ): Wiley.

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