Analyzing, Journaling, And Interpreting Business Activities

Analyzing, Journaiizing and Interpreting Business Activities for DCC

Analyze the business activities of Dry Cleaner Corporation (DCC) involving transactions from December 1 to December 31. For each transaction, determine its effects on the accounting equation, prepare appropriate journal entries with debits first and credits second, and then post these journal entries to T-accounts. Carry the account balances forward from the T-accounts to prepare a worksheet showing account balances, account types, whether they have a debit or credit balance, and the financial statement on which they appear. Prepare a trial balance as of December 31, 2017. Using the trial balance, prepare the financial statements: an income statement, a statement of retained earnings, and a classified balance sheet. Determine whether the company’s financing source was debt or equity, showing your calculations. Calculate the current ratio and quick ratio (acid test) and evaluate whether these ratios are favorable based on standard benchmarks. Finally, compute the net profit ratio for December 31st, analyzing its significance.

Sample Paper For Above instruction

Introduction

Understanding the financial activities of a business firms like Dry Cleaner Corporation (DCC) involves analyzing transactions, recording journal entries, posting to T-accounts, and preparing financial statements. These steps are fundamental in accurately presenting the financial position and performance of the company. This paper systematically reviews the transactions from December 1 to December 31 of DCC to illustrate the process of analyzing, journaling, and interpreting business activities, ultimately leading to the financial statements and financial ratio analyses.

Analyzing Transactions and Effects on the Accounting Equation

Each business activity affects the accounting equation: Assets = Liabilities + Stockholders’ Equity. Transactions such as issuing shares, borrowing funds, purchasing supplies, paying rent, selling gift cards, providing services, incurring advertising expenses, and selling stock influence either assets, liabilities, or equity.

For example, on December 1, the owner paid cash to acquire common shares. This transaction increases cash (asset) and increases common stock (equity). The journal entry: Debit Cash $10,000; Credit Common Stock $10,000. Similarly, borrowing $2,000 from Bank of America increases both cash (asset) and notes payable (liability). The journal entry: Debit Cash $2,000; Credit Notes Payable $2,000.

Purchases of supplies on December 3, and receipt of supplies on December 29 but payment due in January, are recorded as increases to supplies (asset) with no immediate cash effect. Paying rent on December 4 and 22 decreases cash and increases prepaid rent or rent expense accordingly. Sale of gift cards increases cash and unearned revenue, while revenue from December 15 and December 31 services increases accounts receivable or cash and revenue account.

Post-Journal Entries to T-Accounts and Balances

After recording all journal entries, they are posted to T-accounts for each account involved. For example, Cash account records increases from December 1 and 2, decreases from rent payments and advertising expenses, ending with a balance reflecting inflows and outflows. Revenue accounts like Service Revenue accumulate credits, while expense accounts such as Advertising Expense accumulate debits.

This step provides the cumulative balances on the worksheet, which serve as a basis for preparing financial statements. The account types are identified (assets, liabilities, equity, revenues, expenses), and whether they normally carry a debit or credit balance is noted.

Preparation of Financial Statements

The trial balance consolidates all account balances. Using this trial balance, the income statement summarizes revenues and expenses, providing net income or loss. The statement of retained earnings begins with opening retained earnings, adds net income, deducts dividends, to show ending retained earnings. The classified balance sheet groups assets and liabilities into current and non-current categories, with equity accounts included accordingly.

Source of Financing

The company's financing is derived from both debt (e.g., borrowings, accounts payable) and equity (e.g., issuing shares). Based on the transaction analysis, the total liabilities and equity are summarized to determine the proportion of debt versus equity financing. For example, initial cash paid for shares indicates equity funding, while borrowing shows debt funding.

Ratios and Evaluation

The current ratio (current assets divided by current liabilities) and quick ratio (quick assets divided by current liabilities) are calculated to assess liquidity. A ratio above 1 suggests good short-term financial health. For DCC, the ratios are calculated based on the aggregated account balances. The net profit ratio (net income divided by total revenue) indicates profitability, with standard benchmarks typically around 5-10% for small service firms. A higher ratio reflects better profitability.

Conclusion

This analysis illustrates the comprehensive process of interpreting business transactions, journaling, posting to accounts, preparing financial statements, and evaluating financial health through ratios. Proper application of these procedures ensures accurate financial reporting and aids management decision-making.

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