P3-4 Analyzing the Effects of Transactions Using T-Accounts, Preparing an Income Statement, and Evaluating the Net Profit Margin Ratio as a Manager LO3-4, 3-5, 3-6

Kaylee James, a connoisseur of fine chocolate, opened Kaylee’s Sweets in Collegetown on February 1, 2014. The shop specializes in a selection of gourmet chocolate candies and a line of gourmet icecream. You have been hired as manager. Your duties include maintaining the store’s financial records. The following transactions occurred in February 2014, the first month of operations.

a. Received four shareholders’ contributions totaling $30,200 cash to form the corporation; issued 400 shares of $.10 par value common stock.

b. Paid three months’ rent for the store at $1,750 per month (recorded as prepaid expenses).

c. Purchased and received candy for $6,000 on account, due in 60 days.

d. Purchased supplies for $1,560 cash.

e. Negotiated and signed a two-year $11,000 loan at the bank.

f. Used the money from (e) to purchase a computer for $2,750 (for recordkeeping and inventory tracking); used the balance for furniture and fixtures for the store.

g. Placed a grand opening advertisement in the local paper for $400 cash; the ad ran in the current month.

h. Made sales on Valentine’s Day totaling $3,500; $2,675 was in cash and the rest on accounts receivable. The cost of the candy sold was $1,600.

i. Made a $550 payment on accounts payable.

j. Incurred and paid employee wages of $1,300.

k. Collected accounts receivable of $600 from customers.

l. Made a repair to one of the display cases for $400 cash.

m. Made cash sales of $1,200 during the rest of the month. The cost of the candy sold was $600.

Required:

1 & 2. Record in the T-accounts the effects of each transaction for Kaylee’s Sweets in February, referencing each transaction in the accounts with the transaction letter. Show the ending balances in the T-accounts. An example amount has been posted to the Cash T-Account from transaction (l).

Required:

3. Prepare an income statement at the end of the month ended February 28, 2014.

Required:

5 After three years in business, you are being evaluated for a promotion. One measure is how effectively you managed the sales and expenses of the business.

The following data are available:

5-a. Calculate the net profit margin ratio for each year. (Round your answers to 1 decimal place.)

5-b. Do you think you should be promoted?