Question

Five individuals organized Miami Music Corporation on January 1. At the end of January 31, the following monthly financial data are available:

Total Revenues…………………………....... $131,000
Operating Expenses………………………… 90,500
Cash…………………………………………...........30,800
Accounts Receivable……………………… .25,300
Supplies……………………………………..........40,700
Accounts Payable…………………………... 25,700
Common Stock………………………………...30,600

Required:
a. Did Miami Music Corporation generate a profit? Which financial statement indicates this?
c. Does Miami Music Corporation have sufficient resources to pay its liabilities? Which financial statement indicates this?

Answer 1

a. Profit(loss) = Total revenue - Total expenses

= 131,000 - 90,500

= $41,000

The company did in fact generate profit of $41,000 and this can be shown from the Income Statement which is where profit or loss is calculated.

b. A company uses its assets to pay off its liabilities so if the liabilities are less than the assets then the company is capable of paying off its liabilities:

Assets = Cash + Accounts Receivable + Supplies

= 30,800 + 25,300 + 40,700

= $96,800

Liabilities are just the Accounts Payable of $25,700.

Liabilities are less than Assets so Miami Music does indeed have sufficient resources to pay its liabilities.

This information comes from the Balance Sheet which is where assets and liabilities are shown.