Accounting Concepts and Practice Income Statement and Essay

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Accounting Concepts and Practice

Income Statement and Balance Sheet

Smith Company

Income Statement

For the Year Ended 31st Dec 2012

Revenue

$406,000

Less cost of goods sold

$234,000

Gross profit

$172,000

Less: Expenses

Depreciation expense

$24,350

Insurance

$1,400

Marketing

$4,500

Property taxes

$8,900

Rent

$18,000

Utilities

$6,700

Salaries

Total expenses

($131,350)

Net Income (Balance C/D)

$40,650

Computations

Retained Earnings: Difference between debit and credit balances.

$760,850 -- $718,000 = $42,850

Retained earnings to be transferred to the balance sheet:

Income statement balance b/f

balance c/d $40,650

$40,650

Add: retained earnings

$42,850

Retained earnings balance c/d $83,500

Smith Company

Balance Sheet

For the Year Ended 31st Dec 2012

Non-Current Assets

Equipment

$316,000

Current Assets

Accounts receivable

$24,500

Cash

$30,000

Inventory

$25,000

Total current assets

$79,500

Total assets

$395,500

Current Liabilities

Accounts payable

$67,000

Non-Current Liabilities

Long-term debt

$145,000

Financed By

Common stock

$10,000

Paid in capital

$90,000

Retained earnings $83,500

$183,500

Total liabilities

$395,500

Analysis

This section will analyze the success of Smith Company based on information derived from the financial statements I have prepared above.

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The table below contains some of the ratios I will be making use of in that endeavor.

Table 1

Ratio

Formula

Computation

Value

Return on Assets

Net Income/Total Assets

$40,650/$395,500

0.10

Current Ratio

Current Assets/Current Liabilities

$79,500/$67,000

1.19

Debt ratio

Total Debt/Total Assets

$212,000/$395,500

0.54

Return on Equity

Net Income/Shareholder Equity

$40,650/$183,500

0.22

From the return on assets ratio, it is clear that for each dollar of assets, Smith Company earns $0.10. In my view, the profit per dollar of assets is in this case significantly high and for this reason, one could say that the company's management is effectively utilizing assets in the generation of profits. This is an indicator of managerial competence. In seeking to determine the ability of Smith Company to settle its short-term obligations, it would be prudent to take into consideration its current ratio. From the table above, the firm has a current.....

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