Financial Statement Assignments

FIRST FINANCIAL STATEMENT ASSIGNMENT

The assignment due date is Monday, February 5 (Tuesday February 6 for day class students). The financial period over which the statements are prepared is January 22, 1996 to February 2, 1996.

The assignment should be typed on unlined 8-1/2 x 11 inch paper. Hand in TWO copies to your T.A. Computer printouts can be attached.

You should have made at least 10 trades (including both purchases and sales but excluding your first bundle transaction purchasing 20 portfolios) in the Minnesota Returns Market as a basis for completing this assignment.

Remember, these statements are for you as a trader. The sale of assets (contracts) in the market by you will result in your revenue; the cost you paid for the contracts you sold will be your expenses. You will make money if you BUY LOW AND SELL HIGH. You want to reflect your financial position at the beginning and end of the period, your income and cash flow.

To that end, you must hand in four statements (Numbers 1 to 4 below). In addition, hand in a copy of your portfolio holdings as of the assignment date, and a print out of your past history of trades as of the assignment date. Also write a short paragraph in answer to the essay question in part 5 below. Each of the statements is discussed below (I have noted some issues that you should consider when constructing your statement).

1. Initial Balance Sheet. It is the balance sheet following your first transaction. It should be dated January 22, 1996. This is to reflect your position after the initial purchase of 20 portfolio contracts for $.10 each. So you should have 20 shares of each asset and $.50 in cash.

- You should have 4 categories of assets (DH, TTC, INDQA, SP500). Each category should be listed and valued separately.

- Initial valuation of assets in inventory should be at acquisition cost.

- Think about the Stockholder's Equity section - Do you have any Paid-In-Capital?

2. Income Statement for the period January 22 to February 2, 1996 (You need your past history of trades here).

-What revenue did you receive from the sale of contracts this period?

- Using the matching principle, expenses must be set against this revenue to determine income. You need to determine the 'cost' to you of the assets you sold.

Think of having a T-account for each category of asset (DH, TTC, INDQA, SP500). For example, consider a T-account for DH. When you purchase a DH contract, the price you paid is debited to the DH T-account, if you sell one DH contract, the historical cost paid for the contract is credited to the DH T-account. These 'costs' will be the expenses on the income statement. For purposes of this assignment, you are free to decide which individual assets were sold this period and which remain in Ending Inventory. Now compute Cost of Goods Sold.

3. End of Period Balance Sheet February 2 1996

- You will have cash and an Inventory of some or all of the 4 categories of assets (DH, TTC, INDQA, SP500). You should show the value of your end of period holding of each category of asset separately. For example, if you hold contracts in all 4 categories of assets, then you will have 4 types of inventory on the Balance Sheet. This valuation should be consistent with your calculation of Cost of Goods Sold on the Income Statement.

4. Prepare a Statement of Cash Flow for the Period January22, 1995 to February 2,1996.

5. Suppose you must pay 40% federal tax on the income shown on your income statement. How would the existence of this tax potentially effect your choice of which units were considered sold during the period and which units are considered held in ending inventory. No additional statements are required in your answer to Part 5

SECOND FINANCIAL STATEMENT ASSIGNMENT DUE DATE IS February 19th (February 20th for day class students)

The statements prepared for this assignment cover the period from January 22 to February 16, 1996. (Note that the market will close at the end of this date. Why is this important?).

The assignment should be typed on unlined 8-1/2 x 11 inch paper. Hand in TWO copies to your T.A. Computer printouts can be attached.

You should have made at least 15 trades (including both purchases and sales) since the first financial statement assignment.

Be sure to include a copy of your portfolio holdings February 16, 1996, and a printout of your complete history of trades.

1. Initial Balance Sheet. January 22, 1996. This is to reflect your position after the initial purchase of 20 portfolio contracts for $.10 each. So you should have 20 shares of each asset and $.50 in cash. This statement will be identical to the initial balance sheet prepared for the first financial statement assignment. You only need to hand in one of these.

2. Three sets of financial statements. (You need your entire past history of trades here) Prepare the February 16, 1996 Balance Sheet, and the Income Statement and Statement of Cash Flow for the period January 22 to February 16 under each of these 3 different assumptions about inventory:

a. Periodic FIFO - cost flow

b. Periodic LIFO - cost flow

c. Periodic LIFO plus LCM Portfolio Method (for current market prices use those of the last day of the market)

On the End of Period Balance Sheets your portfolio of assets as of February 16 will determine the units in your inventory, each Income Statement will reflect your trading activity up to February 16.

3. Which of the three inventory methods shows the highest income? Does the method also show the highest value for inventory on the Balance Sheet? Explain? What did you learn from this assignment about the relation between asset valuation and income determination?