Generally Accepted Accounting Principles and Balance Sheet

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E1-3. The Long Run Golf & Country Club details the following accounts in its financial statements.

Accounts payable and accrued liabilities a) liability (L) b) operating activity (O) Accounts receivablea) asset (A)b) operating activity (O) Property, plant, and equipmenta) asset (A)b) investing activity (I) Food and beverage operations revenuea) revenue (R) b) operating activity (O) Golf course operations revenuea) revenue (R) b) operating activity (O) Inventorya) asset (A) b) operating activity (O) Long term debta) liability (L) b) financing activity (F) Office and general expensea) expense (E) b) operating activity (O) Professional fees expensea) expense (E) b) operating activity (O) Wages and benefits expensea) expense (E) b) operating activity (O)

P1-3A part (a)

Eckersley Service Company
Income Statement
For the period June 1, 2011 to June 30, 2011

Sales Revenue$7000

Wage expense$1400
Supplies expense$1000
Gas and Oil expense $ 600
Advertising expense $ 400
Utilities expense $300
Total Expenses $3700
Net Income $3300


Eckersley Service Company
Retained Earnings Statement
For the period June 1, 2011 to June 30, 2011

Retained earnings, June 1$ 0
Add: Net Income$3300

Less: Dividends$2000
Retained earnings, June 30$1300


Eckersley Service Company
Balance Sheet
June 30, 2011

Accounts Receivable$4000
Equipment $29000
Total Assets $40000

Liabilities and Stockholders' Equity
Notes payable$12000
Accounts payable $500
Total Liabilities $12500
Stockholder's Equity
Common Stock$26200
Retained earnings $1300
Total stockholders' equity$27500
Total liabilities and Stockholders' Equity$40000


P1-3A – part (b)

I think that the company's first month was pretty successful for a new company. The company had sales of $7000 in the first month of business, but more importantly, had a net income of $3300 on those sales, which is a 47% return on revenue with an advertising budget of only $400. If you assume business growth and an eventual lowering of fixed costs as loans get repaid and retained earnings accumulate, the business could very well be profitable.

P1-3A – part (c)

The company's decision to distribute a dividend is puzzling, and probably a pretty poor business decision if you take everything into account. Most investors would prefer growth in retained earnings, and a quicker repayment of any notes, and I would also think that most investors would not expect a fledgling company to pay dividends in its first month of business. The $2000 that was given in dividends, if retained would have increased both the total stockholder's equity and retained earnings, raising the total stockholder's equity to $29500 for a company that started with an initial investment of $26200. Another perhaps better option would have been to use some of the money that was paid out in dividends to increase the advertising budget and increase sales and name recognition. Paying out the dividend didn't hurt the company, though.


Company Memo

To: Diane Wynne
From: Student

Subject: Balance Sheet

In reviewing your balance sheet, I noticed a couple of errors. The thing to remember about a balance sheet is that it is a financial statement that summarizes a company's assets, liabilities...
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