Determine Proper Cash Balance For Francis Equipment Co

Determine Proper Cash Balance2francis Equipment Co. Closes Its Books

Francis Equipment Co. closes its books regularly on December 31, but at the end of 2014, it held its cash book open to prepare a more favorable balance sheet for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information provided includes cash receipts, collections, discounts given, and accounts payable payments, as well as the inventory count and previous balance sheet figures. The company uses the periodic inventory method and has not closed its ledger for 2014. The task is to prepare any necessary adjusting entries at December 31 and to evaluate how the open cash book affected the company's financial ratios, specifically working capital and the current ratio, given the official balance sheet figures. The goal is to understand the impact of the open cash book on the financial position and to determine accurate cash balances for the period-end.

Paper For Above instruction

In financial reporting, ensuring accurate representation of a company's financial position involves proper recording and adjustment of accounts at the end of an accounting period. For Francis Equipment Co., the scenario presents a situation where the cash book was kept open beyond the regular closing date of December 31, 2014. This practice potentially inflates cash holdings, thereby affecting key financial ratios like working capital and the current ratio. To address this, it is essential to identify and execute the necessary adjusting entries, evaluate the manipulation of the balance sheet, and understand the consequences of holding the cash book open on financial analysis.

The first step involves analyzing the cash receipts and disbursements recorded in January but pertaining to December. Specifically, cash receipts totaling $45,640 include $28,000 of cash sales and $17,640 from collections on account. The collections on account involved cash discounts of $360. Similarly, disbursements include payments totaling $22,450 on accounts payable, which took advantage of discounts of $250. Since these transactions occurred in January but were recorded in December, they need correction to ensure the cash and related accounts accurately reflect December's position.

To adjust for the receipts, the company should debit cash for the amount received and credit accounts receivable, adjusting for discounts where applicable. An example adjustment would be:

• Debit Cash $45,640 (total January receipts recorded in December)
• Credit Accounts Receivable $17,280 (Collections excluding discounts: $17,640 - $360)
• Credit Sales Revenue $28,000 (Cash sales)

This ensures only December transactions impact the December ending balances. For disbursements, the adjustments involve recognizing payments and discounts on accounts payable:

• Debit Accounts Payable $22,450 (to clear liabilities)
• Credit Cash $22,450
• Adjust for discounts taken of $250, which means the payable was effectively $22,700 before discounts, or adjustments might be necessary based on detailed records.

Further necessary entries must consider the inventory count and the unclosed ledger, which means that the 2014 year's financials may not be fully closed. These require closing entries to reset temporary accounts, ensuring that income and expense accounts are closed into retained earnings.

Regarding the impact of holding the cash book open, manipulation of the cash account can significantly skew financial ratios. The provided balance sheet shows cash at $39,000, which appears favorable, given the actual cash flows and adjustments. To analyze the impact, we calculate working capital and the current ratio using both the company's reported figures and the corrected figures based on adjustments.

Calculation of Working Capital and Current Ratio

Working capital is defined as current assets minus current liabilities:

• Reported figures:
• Current assets: Cash ($39,000) + Accounts receivable ($42,000) + Inventory ($67,000) = $148,000
• Current liabilities: Accounts payable ($45,000) + Other liabilities ($14,200) = $59,200
• Working capital = $148,000 - $59,200 = $88,800

The current ratio is current assets divided by current liabilities:

• Current ratio = $148,000 / $59,200 ≈ 2.50

If adjustments reduce cash or other current assets to more accurate levels, these ratios would decrease accordingly, reflecting a less favorable financial position. The open cash book effectively inflates cash balances, leading to an overstatement of working capital and the current ratio, which could mislead creditors or investors about the company's liquidity.

In conclusion, proper year-end adjustments are necessary to accurately reflect the company's financial position. Adjusting entries should correct the cash, receivables, and payables to their true December balances. The key impact of holding the cash book open was the artificial inflation of cash and liquidity ratios. Accurate, closed ledger balances are essential for fair financial reporting, ensuring that stakeholders make informed decisions based on true financial data. Proper closing of the ledger at December 31 not only adheres to accounting standards but also enhances the credibility of the financial statements.

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