Case Study: 21.2 Balanced Books Bookkeeping

Jessica and David are student interns at Balanced Books Bookkeeping. They have taken several
business math and accounting classes and are now applying what they have learned to real-life situ-
ations. They enjoy their internship, but they are sometimes surprised by the assignments they are
given. Luckily, they work together, so they share the assignments and learn from each other. Their
most recent assignment is to take a listing of accounts provided by one of Balanced Books’ clients
and turn them into a balance sheet and income statement. David suggests that their client might ap-
preciate it if they also performed a vertical analysis of each statement. Jessica suggests that they
should also compute the current ratio and the acid-test ratio.

1. Create the financial statements for December 31, 2011, depict them in vertical format, and compute the current and acid test ratios.

Account title                   Amount                         Account title                    Amount
Cash                              $4,000                          Accounts payable              $3,500
Depreciation                    2,000                          Merchandise inventory      15,000
Carlton, equity               34,500                          Accounts receivable            6,000
Cost of goods sold         85,000                          Net sales                         120,000
Rent expense                 15,000                          Insurance payable                 500
Wages payable                1,500                           Equipment                        15,000
Utilities                             6,500                           Wages                                 8,000
Misc expenses   0              1,500