I need help with these two homework problems...could you provide a step by step solution so that I may understand the concepts?
P7-1 (Determine Proper Cash Balance) Dumaine Equipment Co. closes its books regularly on December
31, but at the end of 2007 it held its cash book open so that a more favorable balance sheet could
be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were
recorded as December transactions. The following information is given.
1. January cash receipts recorded in the December cash book totaled $39,640, of which $22,000 represents
cash sales, and $17,640 represents collections on account for which cash discounts of $360
2. January cash disbursements recorded in the December check register liquidated accounts payable
of $26,450 on which discounts of $250 were taken.
3. The ledger has not been closed for 2007.
4. The amount shown as inventory was determined by physical count on December 31, 2007.
The company uses the periodic method of inventory.
(a) Prepare any entries you consider necessary to correct Dumaine's accounts at December 31.
(b) To what extent was Dumaine Equipment Co. able to show a more favorable balance sheet at
December 31 by holding its cash book open? (Compute working capital and the current ratio.)
Assume that the balance sheet that was prepared by the company showed the following amounts:
Accounts payable $45,000
Other current liabilities 14,200
E8-1 (Inventoriable Costs) Presented below is a list of items that may or may not be reported as inventory
in a company's December 31 balance sheet.
1. Goods out on consignment at another company's store.
2. Goods sold on an installment basis (bad debts can be reasonably estimated).
3. Goods purchased f.o.b. shipping point that are in transit at December 31.
4. Goods purchased f.o.b. destination that are in transit at December 31.
5. Goods sold to another company, for which our company has signed an agreement to repurchase
at a set price that covers all costs related to the inventory.
6. Goods sold where large returns are predictable.
7. Goods sold f.o.b. shipping point that are in transit at December 31.
8. Freight charges on goods purchased.
9. Interest costs incurred for inventories that are routinely manufactured.
10. Costs incurred to advertise goods held for resale.
11. Materials on hand not yet placed into production by a manufacturing firm.
12. Office supplies.
13. Raw materials on which a manufacturing firm has started production, but which are not completely
14. Factory supplies.
15. Goods held on consignment from another company.
16. Costs identified with units completed by a manufacturing firm, but not yet sold.
17. Goods sold f.o.b. destination that are in transit at December 31.
18. Short-term investments in stocks and bonds that will be resold in the near future.
Indicate which of these items would typically be reported as inventory in the financial statements. If
an item should not be reported as inventory, indicate how it should be reported in the financial statements.
Proper Cash Balance is assessed.