1. What did Donahoo’s balance sheet look like at the outset of the firm’s life?
According to the text, at the start of the business, all of the firm’s capital was held in cash. This is represented by the $1,500,000 in cash current assets, which we can see are comprised of a $500,000 long-term loan and $1,000,000 in equity.
2. What did the firm’s balance sheet look like after each transaction?
In the following balance sheet, we see that cash has been reduced by $500,000 that went towards the new $1,000,000 in inventory. The remaining $500,000 was financed by a short-term payable.
In the next balance sheet, we can see that inventory decreased by $200,000 but that accounts payable increased by $250,000. Thus, retained earnings increased by $50,000.
On Jan. 15, Donahoo increased inventory by $200,000 adding this value to short-term liabilities:
Here, we see inventory decrease $400,000 but other current assets increased $500,000 (with $50,000 going in to cash and $450,000 into A/R). Rather than moving the $100,000 to retained earnings, the company used $100,000 in cash to pay a dividend. The company then took an additional $250,000 from cash and paid down long-term debt:
3. Ignoring taxes, determine how much income Donahoo earned during January. Prepare an income statement for the month. Recognize an interest expense of 1 percent for the month (12 percent annually) on the $500,000 long-term debt, which has not been paid but is owed.
Unfortunately, the data that is provided does not include the operating expenses for January 2011 for the Donahoo Western Furnishings Company. Therefore, we can see what the Net Profit is before Operating Expenses. That is, this number is overstated and would likely be dramatically reduced once Operating Expenses were included. The graph on the right represents an illustration of what the furniture company’s real next income might be (i.e. operating income was estimated, incorporating rent, utilities, salaries, etc.).