Maynard Company (A)

Diane Maynard made the following request of a friend：

My bookkeeper has quit, and I need to see the balance sheets of my company. He has left behind a
book with the numbers already entered in it. Would you be willing to prepare balance sheets for
me? Also, any comments you care to make about the numbers would be appreciated. The Cash
account is healthy, which is a good sign, and he has told me that the net income in June was $l
9,635.

The book contained a detailed record of transactions, and from it the friend was able to copy off the
balances at the beginning of the month and at the end of the month as shown in Exhibit 1, Diane
Maynard owned all the stock of Maynard Company. At the end of June, Diane Maynard paid herself
an $11,700 dividend and used the money to repay her loan from the company.

EXHIBIT 1 Account Balances

June 1 June 30

Accounts payable $ 8,517 $ 21,315

Accounts receivable 21,798 26,505

Accrued wages payable 1,974 2,202

Accumulated depreciation on building 156,000 157,950

Accumulated depreciation on equipment 5,304 5,928

Bank notes payable 8,385 29,250

Building 585,000 585,000

Capital stock 390,000 390,000

Cash 34,983 66,660

Equipment (at cost) 13,260 36,660

Land 89,700 89,700

Merchandise inventory 29,835 26,520

Note receivable, Diane Maynard 11,700 0

Other noncurrent liabilities 2,451 2,451

Prepaid insurance 3,150 2,826

Retained earnings 221,511 229,446

Supplies on hand 5,559 6,630

Taxes payable 5,700 7,224

Questions

1. Prepare balance sheets as of June 1 and as of June 30, in proper format.

2. Make comments about how the financial condition as of the end of June compared with that at
the beginning of June.

3. Why do retained earnings not increase by the amount of June net income?

4. As of June 30, do you feel that Maynard Company is worth the amount in Shareholder's Equity,
$619, 446? Explain.
Answers

1. Balance Sheets as of June 1 and June 30

Balance Sheet for Maynard Company as of June 1

Assets Liabilities and Equity

Current Assets Current Liabilities

Cash $34,983 Accounts Payable $8,517

Accounts Receivable $21,798 Accrued Wages Payable $1,974

Merchandise Inventory $29,835 Taxes Payable $5,700

Prepaid Insurance $3,150 Other Current Liabilities $0

Supplies on Hand $5,559 Total Current Liabilities $16,191

Total Current Assets $95,325

Long-term Liabilities

Non-current Assets Bank Notes Payable $8,385

Building (at cost) $585,000 Other Noncurrent Liabilities $2,451

Equipment (at cost) $13,260 Total Liabilities $27,027

Accumulated Depreciation - Building ($156,000)

Accumulated Depreciation - Equipment ($5,304) Equity

Land $89,700 Capital Stock $390,000

Other Noncurrent Assets $4,857 Retained Earnings $221,511

Total Equity $611,511

Total Liabilities and Equity $638,538

Total Assets $638,538

Assets Liabilities and Equity

Current Assets Current Liabilities

Cash $66,660 Accounts Payable $21,315

Accounts Receivable $26,505 Accrued Wages Payable $2,202

Merchandise Inventory $26,520 Taxes Payable $7,224

Prepaid Insurance $2,826 Other Current Liabilities $0

Supplies on Hand $6,630 Total Current Liabilities $30,741

Total Current Assets $129,141

Long-term Liabilities

Non-current Assets Bank Notes Payable $29,250

Building (at cost) $585,000 Other Noncurrent Liabilities $2,451

Equipment (at cost) $36,660 Total Liabilities $62,442

Accumulated Depreciation - Building ($157,950)

Accumulated Depreciation - Equipment ($5,928) Equity

Land $89,700 Capital Stock $390,000

Other Noncurrent Assets $5,265 Retained Earnings $229,446

Total Equity $619,446

Total Liabilities and Equity $681,888

Total Assets $681,888

2. Comments on Financial Condition

At the end of June, Maynard Company's financial condition shows several improvements compared
to the beginning of the month:

 Increase in Cash: The cash balance increased significantly, indicating better liquidity.

 Accounts Receivable: There’s a healthy increase in accounts receivable, suggesting that sales
are strong, but it’s important to monitor the collection.

 Liabilities: While current liabilities increased, which is a concern, this also indicates the
company is managing its payables and possibly investing more in operations.
  Retained Earnings: Retained earnings grew, indicating that the company is retaining more
profits.

Overall, the company appears to be in a stronger position due to increased cash and retained
earnings, although rising liabilities should be watched closely.

3. Why Retained Earnings Don’t Increase by June Net Income

Retained earnings do not increase by the full amount of net income ($19,635) because Diane paid
herself an $11,700 dividend. The increase in retained earnings is calculated as:

Retained Earnings (End of June) - Retained Earnings (Beginning of June) = Net Income - Dividends
Paid

So:

$229,446 - $221,511 = $19,635 - $11,700 = $7,935

This shows that only the amount retained after dividends contributes to the growth of retained
earnings.

4. Valuation of Shareholder's Equity

As of June 30, Maynard Company’s shareholder's equity stands at $619,446. This amount is a
representation of the company’s net worth to the shareholders.

Factors to Consider:

 Asset Composition: The company has a substantial amount of non-current assets, primarily
in buildings and equipment, which contribute to its long-term value.

 Liabilities: The current liabilities and long-term debt seem manageable given the company’s
asset base and cash flow.

 Profitability: The positive net income suggests that the company is profitable and has
potential for future growth.

Overall, the amount in shareholder's equity appears reasonable based on the assets and earnings.
However, it’s crucial to continually assess the company’s ability to manage its liabilities and generate
consistent income to sustain or increase this valuation.

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