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Financial Accounting: Water Fun Store; prepare income statement and cash flows

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The Water Fun Store is a retailer of water sports products for backyard swimming pools. During August, the firm had the following operating activities:

Date Event

Aug. 1 Bought $5000 of goods for resale from Pinetree Wholesalers on credit
5 Paid $450 to the local newspaper for advertising that ran during July.
6 Paid $975 rent for the month of August.
9 Sold goods to customers for $7350 on credit. These goods had cost the firm $3600.
10 Paid $3000 to Pinetree Wholesalers in partial payment for goods purchased August 1.
11 Collected $5350 from goods sold on August 9.
13 Bought $9200 of goods for resale from Stanley Company. Paid cash.
16 Paid employees for their work so far in August, $1050.
19 Sold goods to customers on credit for $6350. These goods had cost the firm $2400.
25 Collected $3700 from the sales made on August 19.
29 Paid $975 rent for the month of September.
31 Employees had earned an additional $1200 of wages but would not be paid until September 1.

A) Prepare a report of net cash flow from operating activities.
B) Prepare an accrual basis income statement.
C) Which documents a more realistic or complete picture of August's activity? Why?

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Solution Preview

Refer to attached excel file.

The answers are in the 2nd worksheet. Workings are presented in the first worksheet.

General Journal
Date Particulars DR ($) CR ($)
1 Purchases 5000
Creditors - Pinetree Wholesalers 5000
5 Accrued Advertising Expenses 450
Cash 450
6 Rent Expense 975
Cash 975
9 Debtors 7350
Sales 7350
10 Creditors - Pinetree Wholesalers 3000
Cash ...

Solution Summary

The solution presents both an accrual-based income statement and a cash flow report together with explanations.

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Your parents have been left a substantial amount of money and want to invest in a company. Your father trusts you to make a recommendation, but also wants to see the reasoning behind your choice.

You have an idea of which company to choose and you decide to prepare three sets of documents for your parents to consider: business analysis, combined income and cash flow statement, and trend analysis.

Business analysis

Select a public company that trades on either the NYSE or the NASDAQ. Perform a business analysis (both external and internal) for your company using various sources of information. Possible sources include the following:
- Annual report and/or Form 10-K
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Combined income and cash flow statement

Download the company's annual report from its website, or the company's Form 10-K from the U.S. Securities and Exchange Commission (SEC) website [www.sec.gov].

- Confirm that the firm's income, dividends, and other capital transactions explain the change in equity for the most recent year. (You may need to consult the statement of shareholders' equity.)
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- Confirm that the firm's cash flow statement shows a change in cash that is equal to the difference between cash shown on the balance sheet at the beginning and end of the year. In Excel, construct a combined income statement and cash flow statement.
- Write a piece that answers the following: what would you do if you found there was a huge difference in the net income amounts and the reported cash flow amounts? How could technology limit the likelihood of this happening again?

Trend analysis

Finally, prepare a trend analysis of operating ratios for at least three years' worth of financial data. Prepare the analysis in Excel. You may wish to create a common-sized income statement first, but it isn't required.
If you adjusted for any nonrecurring items in step (1), explain the adjustments in a separate Word document. Use any other information in your company's annual report to explain the change in revenues, gross margin percentage, and operating margin percentage. Add this information to the Word document.

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