Sheet1 Case Memories Gift Shop Solution Part 1 Full Accounti

Sheet1case Memories Gift Shop Solutionpart 1full Accounting Cycleme

Memories Gift Shop sells novelty souvenirs of Long Beach. You have been working for the company since its inception a few years ago and have been promoted to be their accounting manager. They use the perpetual inventory system and use FIFO to determine value for the inventory. The opening balances for the month of January 2016 are as follows.

Memories Gift Shop Balance Sheet As at December 31, 2015 Assets Liabilities Cash $23,580 Accounts Payable $17,300 Accounts Receivable $12,230 Interest Payable $225 Office Supplies $300 Bank Loan $30,000 Inventory $1,300 Furniture $24,000 Total Liabilities $47,525 Accumulated Depreciation-Furniture -$7,200 Equipment $3,000 Owners' Equity Grizabella, Capital $7,885 Total Assets $55,410 Total Liabilities & Owners' Equity $55,410 The Chart of Accounts (GL no.) includes various asset, liability, revenue, and expense accounts.

The transactions for January 2016 include inventory purchases from suppliers, sales to customers, payments of expenses such as rent, insurance, interest, and salaries, owner withdrawals, and payments of bills. Each transaction affects multiple accounts, requiring journal entries, ledger postings, inventory valuation, adjustments, financial statement preparation, and closing entries. Additional tasks include bank reconciliation and financial analysis using ratios such as working capital, current ratio, gross profit margin, and return on assets, among others.

The detailed steps involve recording journal entries for each transaction, posting to ledger accounts, completing inventory valuation tables, preparing a six-column worksheet with adjusting entries, recording those adjustments, and posting them to the ledger. Subsequently, financial statements are prepared, including an income statement, statement of owner’s equity, and a classified balance sheet. Closing entries are then journalized and posted, followed by the preparation of a post-closing trial balance and a comprehensive financial analysis comparing ratios from January 2016 with those of January 2015.

Paper For Above instruction

This paper presents a comprehensive analysis and complete accounting cycle process for Memories Gift Shop, a retail business specializing in novelty souvenirs of Long Beach. The process involves meticulous recording of transactions, ledger management, inventory valuation, adjustments, financial statement preparation, and financial analysis, following generally accepted accounting principles (GAAP).

Introduction

Memories Gift Shop operates under a perpetual inventory system, applying FIFO for inventory valuation. Accurate recording and processing of financial transactions are crucial for providing reliable financial information for managing the business effectively. The accounting cycle begins with data entry through journal entries, continues with ledger postings, adjustments, and the formation of financial statements, culminating in closing entries and a financial analysis to evaluate the firm's performance and liquidity.

Recording Transactions

During January 2016, the shop engaged in numerous transactions, including inventory purchases, sales, expenses, and owner withdrawals. For example, inventory was purchased from Tourism Supplies on January 1 for 50 units at $11 each; payment terms were 2/10, net 30. The sale to Long Tourism on January 2 involved 30 units at $30 each, with 3/10 credit terms. Other transactions included purchasing insurance, additional inventory, and equipment, as well as several cash sales and owner withdrawals.

Each transaction was systematically recorded in the general journal, specifying accounts affected, amounts debited and credited, and explanations. These journal entries comply with the accrual accounting principles, recognizing expenses and revenue when they are incurred or earned, regardless of cash flow timings.

For example, the purchase of inventory on January 1 was debited to Inventory and credited to Accounts Payable. The sale on January 2 involved debiting Accounts Receivable and crediting Sales Revenue, while Cost of Goods Sold was debited and Inventory credited according to the FIFO inventory valuation method, which ensures the oldest inventory costs are recognized first.

Ledger Posting

All journal entries were posted to the respective ledger accounts. For instance, the Cash account reflected the beginning balance plus receipts from sales and payments, minus payments for inventory, rent, and expenses. The Accounts Receivable account showed increases from sales and decreases from collections. Inventory accounts updated with purchases and COGS, while asset accounts such as Furniture and Equipment reflected acquisitions and depreciation.

Ledger postings enable the shop to maintain current balances for all accounts, facilitating accurate trial balances and financial statement preparation.

Inventory Valuation

The inventory valuation table was completed using FIFO, listing all purchase and sale transactions, quantities, unit costs, and total values. For January 2016, inventory on hand was calculated by assigning the earliest costs to units sold and the latest costs remaining in inventory, resulting in precise ending inventory valuation adhering to FIFO principles.

Adjusting Entries and Worksheet

Adjustments as of January 31 included accruing interest expense on the bank loan, adjusting prepaid expenses like insurance, recognizing depreciation on furniture and equipment, and updating supplies and accrued liabilities. These adjustments were recorded in the six-column worksheet, which summarized unadjusted balances, adjustments, and adjusted trial balances.

Key adjusting entries included accruing interest at 9% annually, calculating depreciation expense for furniture and equipment using straight-line methods, and recognizing expenses for bank charges and utilities paid immediately. These adjustments ensure the financial statements reflect the true financial position and performance of the shop.

Financial Statement Preparation

Following adjustments, financial statements were prepared. The multi-step income statement detailed gross profit—calculated as sales minus cost of goods sold—and operating expenses, culminating in net income. The statement of owner’s equity showed beginning equity, additional investments, net income, and owner withdrawals. The classified balance sheet segregated assets and liabilities into current and long-term categories, with owner’s equity reflecting retained earnings and capital contributions.

For example, total assets included cash, accounts receivable, inventory, furniture, and equipment. Liabilities comprised accounts payable, interest payable, and bank loans. The equity section reflected owner’s investments and accumulated earnings after expenses and withdrawals.

Closing Entries and Trial Balance

All revenue and expense accounts were closed to the Income Summary account, which was then closed to the owner’s capital account. Owner’s drawings were debited and credited to drawings and capital accounts accordingly. These entries reset temporary accounts for the next period.

The post-closing trial balance confirmed the total debits equaled credits, ensuring the books are balanced after closing entries.

Financial Analysis

The ratios calculated provided insights into the financial health of the shop. Working capital, current ratio, and quick ratio evaluated liquidity. Profitability ratios such as gross profit margin and net profit margin assessed operational efficiency. Leverage ratios like debt-to-equity and debt-to-asset measured leverage and solvency, while efficiency ratios like inventory turnover and accounts receivable turnover evaluated asset management.

Comparing the ratios from January 2016 with those from January 2015 offered trend analysis and identified areas for improvement. For instance, an increase in the current ratio indicated improved liquidity, while a decreased inventory turnover might suggest excess inventory or slower sales, prompting operational adjustments.

Conclusion

The detailed application of the accounting cycle demonstrates the importance of meticulous record-keeping, analytical adjustment, and financial interpretation in retail business management. Continuous monitoring of financial ratios enables proactive decision-making, ensuring the business's stability and profitability.

References

  • Gibson, C. H. (2019). Financial Reporting and Analysis (14th ed.). Cengage Learning.
  • Wild, John J., et al. (2020). Financial Accounting (13th ed.). McGraw-Hill Education.
  • Horngren, Charles T., et al. (2018). Financial & Managerial Accounting (17th ed.). Pearson.
  • Schroeder, Ray G., et al. (2014). Financial Accounting Theory and Analysis (11th ed.). Cengage Learning.
  • Harrison, Walter T., et al. (2021). Financial Accounting: Tools for Business Decision Making (12th ed.). McGraw-Hill.
  • Brigham, Eugene F., & Houston, Joel F. (2022). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • Prominent online resources such as Investopedia and the Accounting Coach website for tutorials on FIFO inventory valuation, financial ratios, and ledger posting procedures.
  • Accounting Standards Codification (ASC). (2023). GAAP guidelines on inventory and depreciation.
  • U.S. Small Business Administration. (2023). Financial Management and Accounting Resources.
  • Financial Accounting Standards Board (FASB). (2022). Accounting Standards Updates on lease accounting and revenue recognition.

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