Fred Smithers, a recent colleg
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Fred Smithers, arecent college graduate decided to open his own portable juice bar,Smither’s Smoothies, to wheel around Newport beach. You, a trustedfriend of Fred, are a business major that has also recentlygraduated and agreed to handle the books for a while to get somepractical experience and have a favor that you can ask of Fred inthe future. Given the followingfive transactions… May2: Fred invests $12,000 of his own money to start the newcompany. This money was obtained from a part-time job working at alegal firm while he was in school. May3: Fred spent $5,100 cash to purchase a refrigeratedtrailer that he can pull behind his car and set up at the beach.Under your advice, Fred agrees to place the new asset under anaccount called “Equipment.” May6: Fred bought $640 of supplies on account from theFlav-O-Rite confectioners company. Because they will last longerthan a single accounting period Fred agrees to record them as,”Supplies” as per your suggestion. May13: Fred sat on the beach for six hours without a singlesale and was feeling very down. Right before he left, however, aplumber escorting his family reunion along the beach stopped by hisstand and bought $800 worth of smoothies for the entire family.Under your advice, Fred agrees to call this cash revenue,”Sales.”
Question: Whatwould be the balance in the Cash account at the end of the periodfollowing the posting of all the transactions?
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Answer:
Based on the information available inthe question, we cancalculate the balance in the cash account at the end of theaccounting period as follows:-
| Date | Amount | Effect on Cashaccount | Rationale |
| May 2 | 12,000 | Increase | This would result in an increase tothe cash account as it is capital contribution to thebusiness. |
| May 3 | (5,100) | Decrease | This would result in a decrease to thecash account because an asset has been purchased by payingcash |
| May 6 | – | No effect | The purchase of supplies on creditwould not affect the cash account as it is a credit transaction andno cash is involved |
| May 13 | 800 | Increase | Sales Revenue increases the amount ofcash available. |
| Cashbalance | 7,700 |
Based on the calculation above, the correct answer isOption D – $7,700.
Option A and Option C are incorrect based on the abovecalculations.
Optoin B is incorrect as we have an answer at Option D.
All the best and please let me know if you have any questionsvia comments 🙂
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