We Love Coffee Inc. - College of Business Administration

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We Love Coffee Inc.
Practice Set
ACCT 2302- Principles of Accounting II
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Table of Contents
Practice Set ................................................................................................................................................... 1
Purpose ..................................................................................................................................................... 1
The Business.............................................................................................................................................. 1
Part One Instructions ................................................................................................................................ 2
Comparative Balance Sheet .................................................................................................................. 3
Comparative Income Statement ........................................................................................................... 5
Comparative Statement of Retained Earnings...................................................................................... 6
Part Two Instructions ................................................................................................................................ 7
Manufacturing Process Information ..................................................................................................... 8
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Practice Set
Principles of Accounting II
Purpose
Completion of an accounting practice set is an important component in most accounting
courses. Practice sets integrate the conceptual learning in the accounting text with a hands-on real
world scenario. “We Love Coffee Inc.” is designed to assist the student in mastering the concepts of
financial statement analysis as well as expanding the operations of the corporation to include
manufacturing statements and analysis. Completion of the Practice Set is a mandatory requirement for
the following accounting courses: ACCT 2301, 2302, and 3321.
The Business
This practice set is designed in two parts. The first part provides a review of the financial
statements of a corporation selling inventory. We Love Coffee Inc.’s primary operation is the sale of
plastic coffee cups to retailers in the market, such as Wal-Mart, Target, and more and a financial analysis
and Statement of Cash Flow will be required. In the second part, “We Love Coffee Inc.” decides to start
producing the plastic coffee cup and selling them directly on the Internet.
All cases of academic dishonesty will be reported to the Office of Student Life.
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Part One Instructions
The financial information for the past two years (2014 and 2013) is provided. Using a spreadsheet
application, such as Microsoft Excel, and the information from the previous year, provide the following:
1.
2.
3.
4.
Prepare a Statement of Cash Flows for the current year using the indirect method.
Using horizontal analysis, prepare a Comparative Balance Sheet.
Using vertical analysis, prepare an Income Statement.
Using the textbook, calculate the ratios set out below:
a. Current Ratio
b. Quick ratio
c. Accounts Receivable Turnover
d. Inventory Turnover
e. Number of Days Sales in Inventory
f. Ratio of Liabilities to Stockholders’ Equity
g. Rate earned on Total Assets
h. Rate earned on Stockholders’ Equity
i. Earnings Per Share (assume shares sold on January 1, 2014)
The financial statements provided in this practice set can also be downloaded from the following
website. Read the instructions provided before downloading. An example of a Statement of Cash Flow
has been provided at the end of the Practice Set. Download the Excel files (Income Statement and
Balance Sheet) and add a column and calculate the ratios for the vertical and horizontal analysis.
(Enter a link or website here where students can access the practice set online)
5. Acting as an accounting advisor to the firm, prepare a memo in which you analyze the financial
statements you prepared in step two and prepare an analysis of the company’s financial
position. Identify two strengths and two weaknesses in the company. Make two
recommendations to improve the company’s financial position. Be specific in each of the
recommendations and use the ratios to support your analysis. The length should be no more
than one page.
6. Save, print, and turn in the following documents to your instructor by the assigned date:
a. Statement of Cash Flows
b. Balance Sheet with horizontal analysis
c. Income Statement with vertical analysis
d. Worksheet showing your ratios done in Excel
e. Memo analyzing the company’s strengths and weaknesses with two recommendations.
Students must use a memo template in Word and make sure there are no spelling,
grammatical, or punctuation errors.
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Comparative Balance Sheet
We Love Coffee Inc.
Comparative Balance Sheet
December 31, 2014 and 2013
Assets
2014
2013
Current Assets:
Cash
Accounts Receivable, Net
Merchandise Inventory
Prepaid Rent
Total Current Assets
$
$
$
$
$
366,520
160,000
130,000
70,000
726,520
$
$
$
$
$
90,000
170,000
70,000
50,000
380,000
Property, Plant, and Equipment:
Equipment
Less: Accumulated Depreciation - Equipment
Total Property, Plant, and Equipment
Total Assets
$
$
$
$
240,000
(60,000)
180,000
906,520
$
$
$
$
260,000
(40,000)
220,000
600,000
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2014
Liabilities and Stockholders’ Equity
2013
Current Liabilities:
Accounts Payable
Dividends Payable
Unearned Revenue
Salaries Payable
Federal Income Taxes Payable
Total Current Liabilities
$
$
$
$
$
$
90,000
20,000
70,000
30,000
210,000
$
$
$
$
$
$
55,000
80,000
50,000
15,000
200,000
Long Term Liabilities
Mortgage Payable
Note Payable
Total Liabilities
$
$
$
20,000
60,000
290,000
$
$
$
100,000
300,000
Stockholders’ Equity:
Common Stock, $1 Par
Paid-In Capital in Excess of Par
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$
$
$
$
$
150,000
15,000
451,520
616,520
906,520
$
$
$
$
$
100,000
10,000
190,000
300,000
600,000
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Comparative Income Statement
We Love Coffee Inc.
Comparative Statement of Income
For the Years Ended December 31, 2014 and 2013
2014
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses:
Salaries and Wages Expense
Rent Expense
Depreciation Expense
Total Operating Expenses
Income from Operations
Loss on Sale of Equipment
Interest Expense
Increase (Decrease) in Operating
Income
Income before Taxes
Federal Income Taxes
Net Income
2013
$ 1,600,000
$ 1,040,000
$ 560,000
$
$
$
940,000
693,000
247,000
$
$
$
$
$
$
$
$
80,000
20,000
30,000
130,000
430,000
500
8,000
(8,500)
$
$
$
$
$
$
$
$
50,000
20,000
24,000
94,000
153,000
3,000
(3,000)
$
$
$
421,500
126,450
295,050
$
$
$
150,000
45,000
105,000
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Comparative Statement of Retained Earnings
We Love Coffee Inc.
Comparative Statement of Retained Earnings
For the Years Ended December 31, 2014 and 2013
2014
$
190,000
2013
95,000
Retained Earnings, Beginning
$
of Year
Net Income
$ 295,050
$
105,000
Less: Dividends
$
33,530
$
10,000
Retained Earnings, End of Year
$
451,520
$
190,000
1. Equipment with a cost of $20,000 on which accumulated depreciation has been recorded for $10,000 was sold for $9,500
cash.
2. Stock was issued for cash.
3. Dividends were paid in cash.
4. The tax rate is 30 %
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Part Two Instructions
Using a spreadsheet and based on the information provided in the next section, complete the following
requirements:
1. Determine the predetermined overhead rate.
2. Determine the total number of plastic cups to account for.
3. Prepare an equivalent units schedule. The schedule should follow the format below; you may
add additional information if you would like.
Whole Units
(Actual)
Equivalent Units
Direct Materials
Conversion
Costs
XXX
XXX
Beginning
XXX
Start/Completed
XXX
XXX
XXX
Completed/Transferred Out
XXX
XXX
XXX
Ending
XXX
XXX
XXX
4.
5.
6.
7.
Determine the total costs for the plastic and the unit plastic cost for the cups.
Determine the total conversion cost and the conversion cost per cup.
Determine the total equivalent cost per cup.
Prepare a Cost of Production report. This report should show all costs transferred into Work-inProcess and the costs transferred to Finished Goods. This process uses FIFO costing.
8. Determine the amounts for the following. Show calculations for credit.
a)
b)
c)
d)
e)
f)
g)
Ending Work-in-Process Inventory in Units AND Dollars
Ending Finished Goods Inventory in Units AND Dollars
Cost of Goods Sold
Over/Under Applied Manufacturing Overhead
Gross Margin
Tax Amount
Net Income
9. Prepare the necessary Journal Entries related to the manufacturing cycle for this accounting
period.
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Manufacturing Process Information
We Love Coffee Inc. started a small manufacturing plant that fabricates insulated plastic coffee cups.
The manufacturing process starts by melting the plastic into a semi-liquid state and then pouring the
material into a mold press. The resulting cups are then sent to quality control and if the inspection is
approved, they are transferred to finished goods. This process is completely automated.
Direct material, Plastic is added 100% at the beginning of the process.
Conversion costs are added equally throughout the process. Conversion is 30% complete for the
beginning inventory work in process and 60% complete for the ending inventory work in process.
At the beginning of the accounting period, We Love Coffee Inc. estimated that production would be
2,100 units. Our predetermined factory overhead rate is based on an estimated FOH of $6,210.
Overhead is applied to production on the basis of direct labor hours. This information is to be used to
determine the application rate for overhead.
Estimated and actual direct labor costs totaled $10,350 which is calculated at $10.00 per hour.
Actual factory overhead costs totaled $12,800.
Beginning Work-in-Process costs totaled $1,715.
The following information is available concerning direct materials.
Direct Materials-Plastic
Beginning inventory
350 pounds @ $4.00 per unit
Purchase of Plastic
1,800 pounds @ $4.00 per unit
Ending Inventory
50 pounds @ $4.00 per unit
One pound of plastic makes 1 plastic coffee cup
The Work-in-Process account has the following information
Beginning Work-in-Process contains 300 equivalent units
Ending Work-in-Process contains 400 equivalent units
The Finished Goods account has the following Information
Beginning Finished Goods contains 300 cups
Ending Finished Goods contains 100 cups
The selling price is $20 per cup and 2,200 cups were sold
Selling and Administrative Costs totaled $1,600
Note: Tax rate is 30 %.
Round your conversion cost per unit to the nearest cent and everything else to the nearest
dollar. At the end of the practice set you will find an excel spreadsheet showing the nine
steps to be completed.
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We Love Coffee, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to
Net cash flow from operating activities
Depreciation
Amortization
Gain or Loss
Changes in current operating assets and liabilities
Net Cash Flow from Operating Activities
Cash Flows from Investing Activities
Cash received from sale
Less cash used for purchases
Net Cash Flow from Investing Activities
Cash Flow from Financing Activities
Cash received from sale
Less cash paid dividends or long-term debt
Net Cash Flow from Financing Activities
Increase or decrease in cash
Cash at the beginning of the year
Cash at the end of the year
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We Love Coffee, Inc.
Cost of Production Report
For the year ended December 31, 2014
Plastic
Conversion Costs
Total
Beginning Balance
Units
XXX
Total Beginning Costs Transferred in
XXX
XXX
XXX
Started and Completed
XXX
XXX
XXX
Costs Transferred to Finished Goods
Ending Costs in Work-In-Process XXX
Total Costs
XXX
XXX
XXX
XXX
Costs to Account For
Beginning Work-In Process
Direct Materials
Direct Labor
Applied Factory Overhead
Total Costs
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9 Steps to be completed in order
Step (1)
Determine the predetermined overhead rate
Step (2)
Determine the total number of cups to account for – see example on page 8
Step (3)
Determine the Equivalent Units Schedule – see example on page 8
Step (4)
Determine the total costs for the Plastic and the unit plastic cost for the cup
Step (5)
Determine the total conversion cost and the conversion cost per cup using the predetermined rate
Step (6)
Determine the total equivalent cost per cup (Plastic plus conversion cost)
Step (7)
Production Report - see provided example on page 11
Step (8)
WIP and Finished Goods Ending Inventory and COGS calculation
Step (9)
Prepare an Income Statement
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