W01 ACCTG201FINANCHIAL ACCOUNTING CHAPTER 2 PG45-90

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Stitch in Time “Drive loyalty and relevance for customers” —KATRINA LAKE SAN FRANCISCO—Katrina Lake planned to pursue a health care career until she came up with a business idea as part of a class project. “I looked at people like [Google founders] Larry Page and Sergey Brin," recalls Katrina, “It took me a while to think that this was a path that was available to me.” Katrina believed in her idea and launched her business, Stitch Fix (Stitchfix.com). Stitch Fix is an online subscription service that sends stylish clothes to customers' homes, Katrina’s business has taken off. Stitch Fix already has over 2 million customers, and the company recently began offering its stock for sale to the public (ticker: SFIX), which makes Katrina the youngest woman ever to take a company public. Admits Katrina, “We've been underestimated before.” Katrina explains that accounting is one key to her success. In the early stages of her business, Katrina set up an accounting system to track sales and expenses. She also made sure her financial reports were top quality to attract investors. Katrina asserts that reliable numbers cause “people [investors] to pay more attention.” Katrina is among the best at using accounting analytics to predict customer preferences. Much of what drives Stitch Fix's success is its algorithm that recommends clothing to customers. Sources: Stitch Fix website, Janusry 2020; CNN, July 2018; Time.com, May 2018 Dia Dipasupil/Getty Images This drives additional sales and further subscription revenue Katrina says that her use of accounting analytics is “what makes this company special!” We introduced financial statements in Chapter 1. This chapter extends that discussion to analysis of financial statements and the underlying transactions. Transaction analysis is slowly introduced over Chapters 1. 2, and 3. Financial statement analysis is covered in all chapters. We begin this chapter with an overview of financial statement analysis, which is applying analytical tools to financial statements for making business decisions. Analyzing Financial Statements Financial statement analysis is used by both inter- nal and external users. Internal users use it to improve company efficiency and effectiveness in providing products and services. External users use financial analysis for investing, lending, and evaluating management. For example, analysts such as Moody’s use financial statements in making buy/sell stock advice and in setting credit ratings. Financial Results Assessing Company Results When interpreting financial statements, we use stan- dards (benchmarks) for comparisons that include the following. ® Intracompany—comparing company results across two or more periods; an example is com- paring Apple’s current income to its prior-year income. ® Intercompany—comparing results across competitors; an example is comparing Apple’s profit margin to that of Samsung, ® Industry—comparing results (o industry norms: an example is comparing Apple’s profit margin to the industry’s profit margin. ® Guidelines (rules of thumb)—comparing results to standards based on experience; an example is the 2:1 level for the current ratio. 45
46 Chapter 2 Financial Statements and the Accounting System Using Ratios to Analyze Financial Statements Ratios reveal relations and trends that are difficult to detect by looking at numbers alone. A ratio can be shown as a per- cent, rate, or proportion. A change from $100 to $250 can be expressed as (1) 150% increase, (2) 2.5 times, or (3) 2.5to 1 (or 2.5:1). Building Blocks of Analysis Financial statement analysis focuses on four building blocks of analysis. The four building blocks cover different, but interrelated, parts of a com- pany’s financial condition or performance. We view these blocks as making up the four legs of a table, where the four must work for the table to perform properly. ® Liquidity—ability to meet short-term obligations and generate revenues. Performance and Financial Condition ® Solvency—ability to meet long-term obligations and generate future revenues. ® Profitability—ability to provide financial rewards to attract and retain financing. Markets P | - ® Market prospects—ability to generate positive market expectations. Financial Ratios for Business Decisions The Decision Analysis section in each chapter covers one or mere ratios relevant to that chapter. Exhibit 13.16 in Chapter 13 orga- nizes these ratios into measures of liquidity, solvency, profitability, and market prospects. BASIS OF FINANCIAL STATEMEN C1 Describe an account and its use in recording transactions. Point: Acc Business transactions and events are the starting points of financial statements. The process to go from transactions and events to financial statements includes the following. ® [dentify each transaction and event from source documents. ® Analyze each transaction and event using the accounting equation. @ Record relevant transactions and events in a journal. [ =l ® Post journal information to E ledger accounts. i q ® Prepare and analyze the = 3 trial balance and financial statements. Transacians reported Source Documents Source documents identify and describe transactions and events entering the accounting sys- tem. They can be in hard copy or electronic form. Examples are sales receipts, checks, purchase orders, bills from suppliers, payroll records, and bank statements. For example, cash registers record each sale on a tape or electronic file. This record is a source document for recording sales in the accounting system. Source documents are objective and reliable evidence about transac- tions and events and their amounts. The “Account” Underlying Financial Statements An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense. The general ledger, or simply ledger, is a record of all accounts used by a company. The ledger is often in electronic form. While most companies’ ledgers have similar accounts, a
Chapter 2 Financial Statements and the Accounting System s Asset Accounts Equity Accounts 47 company often uses one or more unique accounts to match its type of operations. An unclassified balance sheet broadly groups accounts into assets, liabilities, and equity. Exhibit 2.1 shows common asset, liability, and equity accounts, Asset Accounts Assets are resources owned or controlled by a company. Resources have expected future benefits. Most accounting systems include (at a minimum) separate accounts for the assets described here., Cash A Cash account shows a company’s cash balance. All increases and decreases in cash are recorded in the Cash account. It includes money and any funds that a bank accepts for deposit (coins, checks, money orders, and checking account balances). Accounts Receivable Accounts receivable are held by a seller and are promises of payment from customers to sellers. Accounts receivable are increased by credit sales or sales on credit (or on account). They are decreased by customer payments. We record all increases and decreases in receivables in the Accounts Receivable account. When there are multiple custom- ers, scparate records arc kept for each, titled Accounts Receivable—‘Customer Name'. Notes Receivable A note receivable, or promissory note, is a written promise of another entity to pay a specific sum of money on a specified future date to the holder of the note; the holder has an asset recorded in a Notes Receivable account. It is different than accounts receiv- able because it comes from a formal contract called a promissory note. Notes receivable usually require interest, whereas accounts receivable do not. Prepaid Accounts Prepaid accounts (or prepaid expenses) are assets from prepayments of future expenses (expenses expected to be incurred in future accounting periods). When the expenses are later incurred, the amounts in prepaid accounts are transferred to expense accounts. Common examples of prepaid accounts are prepaid insurance, prepaid rent, and prepaid ser- vices. Prepaid accounts expire with the passage of time (such as with rent) or through use (such as with prepaid meal plans). Chapter 3 covers prepaid accounts in detail. Supplies Accounts Supplies are assets until they are used. When they are used up, their costs are reported as expenses. Unused supplies are recorded in a Supplies asset account. Sup- plies often are grouped by purpose—for example, office supplies and store supplies. Equipment Accounts Equipment is an asset. When equipment is used and wears down, its cost is gradually reported as an expense (called depreciation). Equipment often is grouped by its purpose—for example, office equipment and store equipment. Buildings Accounts Buildings such as stores, offices, warehouses, and factories are assets because they provide expected future benefits. When a building is used and wears down, its cost is reported as an expense (called depreciation). When several buildings are owned, separate accounts are sometimes kept for each of them. Land The cost of land is recorded in a Land account. The cost of buildings located on the land is separately recorded in building accounts. EXHIBIT 2.1 Accounts Organized by the Accounting Equation
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48 Rob Kim/Getty Images Land B ) buieees 7 T Z Chapter 2 Financial Statements and the Accounting System B Decision Insight B L e s s Women Entrepreneurs Sara Elakely (in photo), the billionaire entrepreneur/owner of SPANX, has promised to donate half of her wealth to charity. The Center for Women's Business Research reports women-owned businesses (1) total more than 11 million and employ nearly 20 million workers, (2) generate $2.5 trillion in annual sales and tend to embrace technology, and (3) are philanthropic—70% of owners volunleer al least once per month. ® Liability Accounts Liabilities are obligations to transfer assets or provide products or services to others. They are claims (by creditors) against assets. Creditors are individuals and organizations that have rights to receive payments from a company. Debtors are those who owe money. Common liability accounts are described here. Accounts Payable Accounts payable are promises to pay later. Payables can come from pur- chases on credit or on account of merchandise-for-resale, supplics, equipment, and services. We record all increases and decreases in payables in the Accounts Payable account. When there are multiple suppliers, separate records are kept for each, titled Accounts Payable—‘Supplier Name’. Notes Payable A note payable is a written promissory note to pay a future amount. Notes payable are different than accounts payable because they come from a formal contract called a promissory note and usually require interest. Unearned Revenue Accounts Unearned revenue is a liability that is recorded when cus- tomers pay in advance for products or services. Examples of unearned revenue include maga- zine subscriptions collected in advance by a publisher, rent collected in advance by a landlord, and season ticket sales by sports teams. The seller would record these in liability accounts such as Unearned Subscriptions and Unearned Rent. When products and services are later delivered, unearned revenue is transferred to revenue. Accrued Liabilities Accrued liabilities are amounts owed that are not yet paid. Examples are wages payable, taxes payable, and interest payable. These often are recorded in separate liability accounts by the same title. Equity Accounts The owner’s claim on a company’s assets is called equity, stockholders’ equity, or shareholders’ equity. Equity is the owner’s residual interest in the assets of a business after subtracting liabilities. Equity is impacted by four types of accounts. Dividends + Revenues - Expenses Equity = ;\'Commun stn;k = We show this in Exhibit 2.2 by expanding the accounting equation. We also organize assets and liabilities into subgroups that have similar attributes. An important subgroup for both assets Divicends Corrmon Stock Asset Accounts [— Liability Accounts Equity Accounts EXHIBIT 2.2 Accounts Classified by the Expanded Accounting Equation
Chaepter 2 Financial Statements and the Accounting System 49 and liabilities is the current items. Current items are expected to be cither collected or owed within the next ycar, The next chapter explains this. At this point, know that a classified bal- ance sheet groups accounts into classifications (such as land and buildings into Plant Assets) and it reports current assets before noncurrent assets and current liabilities before noncurrent liabilities. Owner Investments When an owner invests in a company, it increases both assets and equity. The increase to equity is recorded in the account titled Common Stock. Owner invest- ments are not revenues of the business. Owner Distributions When a corporation distributes assets to its owners, it decreases both company assets and total equity. The decrease to equity is recorded in an account titled Dividends. Dividends are not expenses of the business; they are simply the opposite of owner investments. Revenue Accounts Sales of products and services to customers are recorded in revenue accounts, which increase equity. Examples of revenue accounts are Sales, Commissions Reve- nue, Professional Fees Revenue, Rent Revenue, and Interest Revenue. Revenues always increase equity. Account titles can differ: product sales are called net sales at Apple. revenues at Google. and revenue at Samsung. Revenues or fees is commonly used with service busi- nesses, and net sales or sales is used with product businesses. Expense Accounts Costs of providing products and services are recorded in expense accounts, which decrease equity. Examples of expense accounts are Advertising Expense, Sala- ries Expense, Rent Expense, Utilities Expense, and Insurance Expense. Expenses always decrease equity. A variety of revenues and expenses are in the chart of accounts at the end of this book. Ledger and Chart of Accounts EXHIBIT 2.3 The collection of all accounts and their balances is called a ledger (or gen- ~ YPice Chert of Accounts for s Smaller Business eral ledger). A company’s size and diversity of operations affect the num- ber of accounts needed. A small company can have as few as 20 accounts; a large company can require thousands. The chart of accounts is a list of all ledger accounts and has an identification number assigned to each account. Exhibit 2.3 shows a common numbering system of accounts for a smaller business. These account numbers have a three-digit code that is useful in record- keeping. In this example, the first digit of asset accounts is a I, the first digit of liability accounts is a 2, and so on. The second and third digits relate to the accounts’ subcategories. Exhibit 2.4 shows a partial chart of accounts for FastForward. Accounts 101-199 Asset accounts 201-299 Liability accounts 301-399 Equity accounts 401-499 Revenue accounts 1-699 Expense accounts EXHIBIT 2.4 Partial Chart of Accounts for FastForward 101 Cash 201 Accounts payable Revenues Expenses 106 Accounts receivable 236 Unearned consulting 307 Common stock 403 Consulting revenue 622 Salaries expense 126 Supplies revenue 318 Retained earnings 406 Rental revenue 637 Insurance expense 128 Prepaid insurance 319 Dividends 640 Rent expense 167 Equipment 652 Supplies expense 690 Utilities expense
50 Sam Wasson/Getty Images L EDR0EG IR 21 Classifying Accounts ¢ Do More: QS 2-1, QS 2-2, QS 2-3, E2-1,E2-2,E2-3E24 Chapter 2 Financial Statements and the Accounting System @ Decision Insight Unearned Revenue Many professional sports teams have over $100 million in advance ticket sales in Unearned Revenue. When a team plays its home games, it settles this liability to its ticket holders and then transfers the amount earned to Ticket Revenue. Teams such as the Seattle Storm, Minnesota Lynx, and L.A. Sparks of the Women's National Basketball Association have unearned revenue, B Classify each of the following accounts as cither an asset (A), liability (L). or equity (EQ) account. 1. Prepaid Rent 5. Accounts Receivable 9. Land 2. Common Stock 6. Equipment 10. Prepaid Insurance 3. Note Receivable 7. Interest Payable 11. Wages Payable 4. Accounts Payable 8. Unecarned Revenue 12. Rent Payable Solution 1. A 2.EQ 3. A 4L 5.A 6A 7.L 8L 9. A 10.A 11.L 12. L C2 Define debits and credits and explain double-entry accounting EXHIBIT 2.5 The T-Account Point: Debit anc ] 3 n ctions for left EXHIBIT 2.6 Debits and Credits in the Accounting Equation Debits and Credits A T-account represents a ledger account and is used to show the effects of transactions. Its name comes from its shape like the letter T. The layout of a T-account is shown in Exhibit 2.5. The left side of an account is called the debit side, or Dr. The right side is called the credit side. or Cr. To enter amounts on the left side of an account is to debir the account. To enter amounts on the right side is to credit the account. The term debit or credit, by itself, does not mean increase or decrease. Whether a debit or a credit is an increase or decrease depends on the account. The difference between total debits and total credits for an account, including any beginning balance, is the account balance. When total debits exceed total credits, the account has a debit balance. Tt has a credit balance when total credits exceed total debits. When total debits equal total credits, the account has a zero balance. Account Title (Left side) Debit (Right side) Credit Double-Entry System Double-entry accounting demands the accounting equation o "?’j;ld‘eo'tfi:ls remain in balance, which means that for each transaction: C?edits i ® At least two accounts are involved, with at least one each entry” debit and one credit. o Total amount debited must equal total amount credited. This means total debits must equal total credits for all entries, and total debit account balances in the ledger must equal total credit account balances. The system for recording debits and credits follows the accounting equation—see Exhibit 2.6. Assets = Liabilities + Equity ST - P — Debit for . Credit for Debit for ECreditfur Debit for Credit for increases = decreases decreases Eincreases decreases increases + | - -+ -+ Normal | Normal Normal
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Chapter 2 Financial Statements and the Accounting System Net increases or decreases on one side have equal net effects on the other side. For exam- ple, a net increase in assets must include an equal net increase on the liabilities and equity side. Some transactions affect only one side of the equation, such as acquiring a land asset by giving up a cash asset, but their net cffect on this one side is zero. The left side is the normal balance side for assets; the right side is the normai balance side for liabilities and equity. This matches their layout in the accounting equation, where assets are on the left side and liabilities and equity are on the right. Equity increases from revenues and owner investments (stock issuances), and it decreases from expenses and dividends. We see this by expanding the accounting equation to include debits and credits in double-entry form, as shown in Exhibit 2.7. 51 quation and thus incr an the right EXHIBIT 2.7 Debit and Credit Effects for Component Accounts Dividends Assets = Liabilities Revenues Dr. for Cr. for Dr. for Cr. for Dr. for Cr. for Dr. for Cr. for Dr. for Cr. for Dr. for Cr. for increases | decreases decreases . increases decreases § increases increases § decreases decreases § increases increases §decreases Normal ENfifml Normal Normal Normal Normal Increases (credits) to common stock and revenues increase equity; increases (debits) to dividends and expenses decrease equity. The normal balance of each account is the side where increases are recorded. The T-account for FastForward’s Cash account, reflecting its first 11 transactions (from Exhibit 1.9), is shown in Exhibit 2.8. The total increases (debits) in its Cash account are $36,100), and the total decreases (credits) are $31,300. Total debits exceed total credits by $4.,800, result- ing in its ending debit balance of $4,800. Cash Receive investment by owner for stock 30,000 Purchase of supplies 2,500 Consulting services revenue earned 4,200 Purchase of equipment 26,000 Collection of account receivable 1,900 Payment of rent 1,000 -31 .300 Payment of salary 700 - Payment of account payable 900 Payment of cash dividend 200 Balance 4,800 1 36,100 — 31,300 Identify the normal balance (debit [Dr] or credit |Cr]) for cach of the following accounts. 1. Prepaid Rent 5. Accounts Receivable 9. Land 2. Common Stock 6. Equipment 10. Prepaid Insurance 3. Note Receivable 7. Interest Payable 11. Dividends 4. Accounts Payable 8. Unearned Revenue 12. Utilities Expense Solution 1.Dr. 2.Cr. 3.Dr 4.C. 5. Dt 6Dr 7.Cr. 8 Cr 9 D. 10.Dr 11.Dr 12 Dr EXHIBIT 2.8 Computing the Balance for a T-Account ance is on er dollar LISR0E TS 2-2 Normal Account Balance > Do More: @S 2-4, QS 2-5, QS 2-6,QS 2-7,E2-5
52 Chapter 2 Financial Statements and the Accounting System ANALYZING AND PROCESSING TRANSACTION A1 This section covers analyzing, recording, and posting transactions. Analyre ana recoarans. . Journalizing and Posting Transactions actions and their impact on financial statements. The four steps of processing transactions are shown in Exhibit 2.9. Steps 1 and 2—transaction analysis and the accounting equation—already were covered. This section focuses on steps 3 and 4. Step 3 is to record each transaction chronologically in a journal. A journal is a complete record of each transaction in one place. It also shows debits and credits for each transaction. Recording transactions in a journal is called journalizing. Step 4 is to transfer (or post) EXHIBIT 2.9 entries from the journal to the ledger. Transferring journal entry information to the ledger is Steps in Processing called posting. Transactions Step 1: Identify transactions and Step 2: Analyze transactions Step 3: Record journal entry. Step 4: Post entry to ledger. source documents. using the accounting equation. Purchase Order Services Contract Sales Receipt asl | Bank Statement Common Stock | ___[30.000) Deposit |30,000] | [Dec. 2|Supplies 2.500] Cash 2.500) B TOTAL Journalizing Transactions Journalizing transactions requires an understanding of a jour- nal. While companies can use various journals, every company uses a general journal. Tt can be used to record any transaction. Exhibit 2.10 shows how the first two transactions of FastForward are recorded in a general journal. To record entries in a general journal, apply these steps; refer to Exhibit 2.10. (@ Date the transaction on the first line of each journal entry. (D) Enter titles of accounts debited and then enter amounts in the Debil column on the same line. Account titles are taken from the chart of accounts. (© Enter titles of accounts credited and then enter amounts in the Credit column on the same EXHIBIT 2.10 line. Account titles are from the chart of accounts and are indented to separate them from debited accounts. Partial General Journal General Journal @ Enter a brief explanation of the transaction on the line below the entry. Date Account Titles and PR Debit Credit EQ;: |® ® Cash 30,000 When a transaction is first recorded, the posting ref- © Common Stock 30,000 erence (PR) column is left blank (in a manual sys- 3 Supp"::cew ety ouner @ = .Lcm)._Ijalm:. when posting enLries.lo <th.e ledger, the Cash 2500 identification numbers of the individual ledger Burcheise sippies for cosh, accounts are entered in the PR column. Balance Column Account T-accounts are simple and show how the accounting pro- cess works. However, actual accounting systems need more structure and therefore use a differ- ent formatting of T-accounts, called balance column accounts, shown in Exhibit 2.11. The balance column account format is similar to a T-account in having columns for debits and credits. It is different in including transaction date and explanation columns. It also has a column where the balance of the account after each entry is recorded. FastForward’s Cash account in Exhibit 2.11 is debited on December 1 for the $30.000 owner investment, yielding a $30,000 debit balance. The account is credited on December 2 for $2,500, yielding a $27,500 debit bal- ance. On December 3. it is credited for $26.000, and its debit balance is reduced to $1.500.
Chapter 2 Financial Statements and the Accounting System 53 The Cash account is debited for $4,200 on December 10, and its debit balance increases to EXHIBIT 2.11 $5,700; and so on. Cash Account in Balance The heading of the Balance column does not show whether it is a Column Format debit or credit balance. Instead, an account is assumed (o have a nor- General Ledger . . h . mal balance. Unusual events can sometimes temporarily create an g Eiplension T e T aeennt No- 101 abnormal balance. An abnormal balance is a balance on the side [2020 i 56,505 000 where decreases are recorded. For example, a customer might mis- [Dec. 2 Gl ’ 2,500 | 27500 i . Dec. 3 <] 26,000 | 1500 takenly overpay a bill. Dec. 10 Gl [ 4200 5700 Posting Journal Entries Step 4 of processing transactions is to post journal entries to ledger accounts. All entries are posted to the ledger before financial statements are prepared so that account balances are up-to-date. When entries are posted to the ledger, the debits in journal entries are transferred into ledger accounts as debits, and credits are transferred into ledger accounts as credits. Exhibit 2.12 shows four parts to posting a journal entry. @) Identify the ledger account(s) that is debited in the entry. In the ledger, enter the entry date, the journal and page in its PR column, the debit amount, and the new balance of the ledger account. (G shows it came from the general journal.) (B) Enter the ledger account number in the PR col- umn of the journal. Parts (C) and D) repeat the first two steps for credit entries and amounts. The posting process creates a link between the ledger and the journal entry. This link is a useful cross-reference for tracing an amount from one record to another. General Journal EXHIBIT 2.12 Date Account Titles and Explanation PR Debit Credit Posting an Entry to the 2020 Ledger Dec. 1 Cash 1 101 30,000 Common Stock Py 307 30,000 Receive investment by owner. [ General Ledger Cash Account No. 1 “ Key: 10, CC) () Identify debit account in ledger: enter date, pite Explensiion o e S, Salance Jjournal page, amount, and balance (red line). 2020 wDec. 1 Gl 30,000 30,000 @ Enter the debit account number from the ledger in the PR column of the journal (blue line). Carimon Stook Account No, 307 -] @ ?denuf?/ credit account in ‘ljeSQler. enter l(la;e, Date Explanation PR Debit Credit | Balance journal page, amount. and baance [gold line). 2020 (T) Enter the credit account number from the Dec. 1 Gl 30,000 30,000 ledger in the PR column of the journal (green line). B Analytics Insight Blockchain Ledger Blockchain, the technology used to authenticate and track Bitcoin transactions, could radically change accounting systems. This technology unlocks the potential for a new type of ledger that is constantly verified, and one that cannot be changed without others noticing. Blockchain presents a unique opportunity for those with accounting knowledge, as they are highly desired to help build, implement, maintain, and audil lhis new lechnology. m Ekaphon maneechot/Shutterstock Processing Transactions—An Example ‘We use FastForward to show how double-entry accounting is used in analyzing and processing transactions. Analysis of cach (ransaction follows the four steps of Exhibit 2.9. Identity transactions and source documents. Analyze the transaction using the accounting equation. Record the journal entry. Post the entry (for simplicity, we use T-accounts as ledger accounts).
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54 Point: I Ne accounts for the ledger. Chapter 2 Financial Statements and the Accounting System Study each transaction before moving to the next. The first 11 transactions are from Chapter 1, and we analyze five additional December transactions of FastForward (numbered 12 through 16). 1. Receive Investment by Owner [IJIpENTIFY FastForward receives $30,000 cash from Chas [@ Post Taylor in exchange for common stock. Cash 101 [Z]ANALYZE Assets = Liabililes + Equty —»(1) 30,000 Common Cash Stock - 430,000 & 0 £30,000 ‘Common Stock 307 Date _ Account Tilles nd Explanation PR Debit Credt .5:30.000 RECORD (1) | Cash l 101 I 30,000 T - CommonStock | 307 1 30,000- 2. Purchase Supplies for Cash [ IpEnTIFY FastForward pays $2.500 cash for supplies. [4]Post [2]ANaLyzE Assets = Liabiliies + Equity . Supplies’: 1261 Cash Supplies —(2) 2,500 —2,500 +2,500 = 0 Ho00 Changes the composition of assets but not the total. Cash 101 Date _ Account Titles and Explanation PR Debit Credit 1) 30,000 | (2) 2,500 [3IRecorn (2) | Supplies 126 | 2,500 : Cash 101 2500— 3. Purchase Equipment for Cash [[ientiry FastForward pays $26,000 cash for equipment. [@]Posr [ Aikiniie Assets = Liabilies + Equity Eqpipment L Cash Equipment : - —™(3) 26,000 —26,000 +26,000 = 0 +o 0 Changes the composition of assets but not the total. Cash 101 Date_Account Tites and Explanation PR Debit Credit (1) 30,000 | (2) 2,500 Recorp (3) [ Equipment 167 I 26,000 - @ 26,000 - Cash 101 ‘26‘0'001 f 4. Purchase Supplies on Credit [[entiry FastForward purchases $7,100 of supplics on [@]Post credit from a supplier. Supplies 126 ANALYZE Assets = Liabilities + Equity @ 2,500 Accounts —>{4) 7,100 Supplies Payable +7,100 = 47100 + 0 nts Payable 201 Date Account Titles and Explanation PR Debit Credit ) 7.100 ReEcorp (4 | Supplies I 126 | 7.100 ' : Accounts Payable 201 7,100 — T 5. Provide Services for Cash IpenTiFy FastForward provides consulting services and [4]Post immediately collects $4,200 cash. Cash_ 101 [Z]ANaLvzE Assels = Liabilites + Equity ) 30,000 | (2) 2,500 Consuiing [0 4,200 | (3) 26,000 Cash Revenue +4,200 = 0 +4,200 Consulting Revenue 403 Date Account Titles and Explanation PR Debit Credit 5) 4,200 [3]REcorRD {5) [ Cash { 101 | 4,200 ¢ Consulting Revenue 403 | 4,200-
6. Payment of Expense in Cash Chapter 2 Financial Statements and the Accounting System [[]moeNTiIFY FastForward pays $1.000 cash for December rent. [4]PosT RIANALYZE Assets — Lisbilties + Equity Rent Expense. 640 Rent —»{6) 1,000 Cash Expense —1,000 = 0 - —1,000 Cath 101 Date _ Account Tilles and Explanation PR Debit Credit (1) 30,000 | (2) 2,500 [B1RecoRD {6) | RentExpense ' 640 | 1,000 (®) 4,200 | (3) 26,000 Cash 101 1,000— ® 1'?00 7. Payment of Expense in Cash [M]me~TiFy FastForward pays $700 cash for employee salary. Post Z]ANaLyze Assets = Lisbilities + Equity : fe2 Salaries [ >(7) 700 Cash Expense 700 =0 g 101 ‘Date_ Accourt Tiles and Explanation PR Behit ciedi M 30,000 | (2) 2,500 Recorp (7) | Salaries Expense 622 700 () 4200 | (3) 26,000 Cash 101 700— 6) 1,000 8. Provide Consulting and Rental Services on Credit [1]1oEnTIFY FastForward provides consulting services of $1,600 [d]Post ] and rents its test facilities for $300. The customer is ' Accounts Receivable 106 billed $1,900 for these services. »(8) 1,900 Anaryze Assets = Labies + Equy Accounts Consulting Rental Consulting Revenue 403 M R - +19800 = +1, 4 @ 1.?00 ‘Date Account Titles and Explanation PR Debit Credit [3]REcORD (8) | Accounts Receivable 106 | 1,900 : J Rental Revenue 406 Consulting Revenue 403 1,600 3) Rental Revenue | 406 (¢ 3%0 9. Receipt of Cash from Accounts Receivable [I]IoENTIFY FastForward receives $1,900 cash from the [@Posr customer billed in Transaction 8. Cash 101 [Z] ANALYZE - Assets = Liabities + Equity (1) Fe3n0iog (2) 2,500 ‘ Accounts (5) 4,200 | (3) 26,000 Cash Receivable : —(9) 1,900 | (6) 1,000 +1,900 —1,900 = 0 + 0 @) 700 ‘DateAccount Titles and Explanation PR Debit Credit i 2 BlRecorn (8 | Cash 101 I 1,000 fcrouiits Recetvelite 7.~ 106 Accounts Receivable 106 | 1,900—, 8) 1,900 | (9) 1,9Too 55 Point: Salary usually compensatio ven time period. Wage sation based on time Paint: Revenue is rec when produc provi the cus ery arily when Point: Transaction & is a compound journal ent ntry that affects 1
56 Point: Dividends always decrease equily. Paint; “Unearned' bilities that musf Chapter 2 Financial Statements and the Accounting System 10. Partial Payment of Accounts Payable [ 1eNTiry FastForward pays CalTech Supply $900 cash [4] Post toward the payable of Transaction 4. AccountsPayable 201 ANALYZE 0wt = Liabiliies ~ + Equity [—>(10) 900 | (4) 7,100 Cash Accounts Payable -900 = -%00 + 0 ~ Cash 101 . o - (1) 30,000 | (2) 2,500 Date AccountTiles and Explanation PR~ Debit Credit RECORD (10) | Accounts Payable 201 900 () 4200 | B) 26,000 Cash 101 900— @ 1,900 | (6) 1,000 (7 700 (10) 900 A 11. Payment of Cash Dividend [DlIpenTiFy FastForward pays a $200 cash dividend. (@] Post . B Dividends 319 [2] ANaLyzE Assets = iabilities i ~ Equity “Cash ; Dividends i ) 200 < 0 200 Cash 101 Date Account Titles and Explanation PR Debit Credit (1) 30,000 | (2) 2,500 Recorp (1) | Dividends 319 [ 200 ; ) 4200 | (3) 26,000 Eosl 195 H— 1900 | (6) 1,000 (7 700 (10) 900 (1) 200 A 12. Receipt of Cash for Future Services [ EnTIFy FastForward receives $3,000 cash in advance of Post providing consulting services to a customer, Cash 101 L Bssets = Lisbilies 4+ Equity (1) 30000 1(2) 2l ANALYLR = ‘ 5 4200 | (3 26000 nearned Cash Consulting Revenue o 1,800 | (6) 1,000 43000 = +3,000 + 0 (12 3,000 | (7) 700 p . . (10) 900 Accepting $3,000 cash requires FastForward It 200 to perform future services and is a liability. No revenue is recorded until services are provided. - Unearned Consulting Date _Account Titles and Explanation PR Debit Credit Revenue 236 Rucorp (12) [Cash 101 | 3,000 Unearned Consulting (12) 3.200 Revenue 236 3,000- 13. Pay Cash for Future Insurance Coverage [ IpenTIFY FastForward pays $2.400 cash (insurance premium) Post . for a 24-month insurance policy. Coverage begins Prepaid Insurance 128 on December 1. —»(13) 2,400 Assets = Liabilites + Equity ANALYZE (2] Anacvze Prepaid Cash 101 Cash Insurance ~2400 +2400 = 0 el i RS S0 (5) 4,200 | (3) 26,000 Changes the composition of assets from cash to © 1,900 | (6) 1,000 prepaid insurance. Expense is recorded as insur- (12) 3,000 | (7) 700 ance coverage expires. (10) 900 Date Account Titles and Explanation PR Debit Credit (11) 200 [3]Recorp (13) [Prepaid Insurance 128 | 2,400 (13) 2,400 Cash 101 2,400—
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Chapter 2 Financial Statements and the Accounting System 14. Purchase Supplies for Cash IpenTIFY - FastForward pays $120 cash for supplies. [@]Posr Supplies 126 ANALYZE Assets = Liabilites + Equity 3 Cash Supplies @ 200 =120 +120 = 0 3 0 ) 7,100 —>(14) 120 Date Account Titles and Explanation PR Debit Credit [BIRecorp (14) [Supplies 126 I 120 Cash 101 Cash 101 1204 ) 30000 | @ 2,500 5) 4200 | (3 26000 9) 1,900 | (6) 1,000 (12) 3,000 | (7) 700 (1) 900 1 200 13 2,400 (14) 120 15. Payment of Expense in Cash [IlToentiry FastForward pays $305 cash for December [d]Post utilities expense. Utilities Expense 690 [2]ANALYZE Assets = Liabilities + Equity (15 i Utilities Cash Expense Cash 101 =305 S ~305 M 30000 | @ 2500 Date _ Account Titles and Explanation PR Debit Credit ) 4200 | @3) 26,000 [31Recorp {15) [ Utilities Expense { 690 ’ 305 - 9 1900 | (8) 1,000 Cash 101 05— (12) 3,000 | () 700 (10) 900 (11 200 13 2,400 (14 120 (15) 305 16. Payment of Expense in Cash IpENTIFY FastForward pays $700 cash in employee salary for [@]Post work performed in the latter part of December. Salaries Expense 622 7) 700 [Z1ANALYZE Assets = Libilites + Equity :1)6) s Salarles Cash Expense —700 = 0 ~700 Cash 101 ‘Date_Accourt Ttles and Bxplanation PR Debit _ Credit [0 30,000 | (2) 2,500 RECORD {16) | Salaries Expense 622 I 700- (5) 4,200 | (3) 26,000 Cash 101 70— (9 1,900 | (6) 1,000 (12) 3,000 | (7) 700 (10) 900 (1) 200 (13) 2,400 (14) 120 (15) 305 (16) 700
58 Chapter 2 Finencial Slalements and the Accounting System Summarizing Transactions in a Ledger Exhibit 2.13 shows the ledger accounts (in T-account form) of FastForward after all 16 transac- tions are recorded and posted and the balances computed. The accounts are grouped into three columns following the accounting equation: assets, liabilities, and equity. Debit and Credit Rules Increase Accounts {normalbal) Decrease Asset Debit Credit Credit Debit Credit Debit Dividends. . Debit Credit Revenue Credit Detit Expense . Debit Credit EXHIBIT 2.13 ® Totals for the three columns obey the accounting equation: = Assets equal $42,395 (54,275 + $0 + $9,720 + $2.400 + $26.000). = Liabilities equal $9,200 ($6,200 + $3,000). = Equity equals $33,195 ($30,000 — $200 + $5.800 -+ $300 — $1,400 — $1,000 — $305). The accounting equation: $42,395 = $9,200 + $33,195. ® Common stock, dividends, revenue, and expense accounts reflect transactions that change equity. ® Revenue and expense account balances are reported in the income statement. Ledger for FastForward (in T-Account Form) 101 Accounts Payable 201 Common Stock 307 = Cash o ) 30,000 | (2) 2,500 (10) 900 | (4) 7,100 0] 30,000 5) 4200 | (3 26,000 Balance 6,200 () 1,900 | (6) 1,000 Dividends 319 (12) 3,000 | (7) 700 Unearned Consulting Revenue 236 i) 200 (10) e (12) 3,000 (1) 200 (13 2,400 Consulting Revenue 403 (14) 120 (5) 4,200 (15) 305 @) 1,600 (16) e Balance 5,800 Balance 4,275 Rental Revenue 406 Accounts Receivable 106 8) 300 @) 1,900 | (9) 1,900 Balance 0 ~ Salaries Expense 622 7) 700 Supplies 126 EE (16) 700 @ 2500 Balance 1,400 ] 7,100 (14) 120 Balance 9,720 Rent Expense 640 (6) 1,000 Prepaid Insurance 128 13 2,400 Utilities Expense 690 (15) 305 Equipment 167 @ 26,000 Accounts in this white area are on the 4 income statement. $42,395 = $9,200 + $33.195
Chapter 2 Financial Statements and the Accounting System Tata Company began operations on January 1 and completed the following transactions. For each transac- tion, (a) analyze the transaction using the accounting equation, (b) record the journal entry, and (c) post the entry using T-accounts as ledger accounts. Jan. 1 Jamsetji Tata invested $4,000 cash in the Tata Company in exchange for common stock. 5 Tata Company purchased $2,000 of equipment on credit. 14 Tata Company provided $540 of services for a client on credit. Solution Jan. 1 Receive Investment by Owner [a] ANALYZE Assets = Liabilties + Equity [c]PosT Coninon Cash 101 Cash Stock Jan.1 4,000 +4,000 = 0 4,000 Date Account Titles and Explanation__PR Debit Credit Common Stack 307 [b] RECORD san1] Cash l 101 l 4,000— Jan.1 4,000 Common Stock 307 4.0|00 Jan. 5 Purchase Equipment on Credit [l ARwwnzs Assets = Liabilites + Equity Post Accounts Equipment 167 Equipment Payable Jan.5 2,000 +2,000 = 42000 + 0 Date _Account Titles and Explanation PR Debit Credt Accounisbaysbi 20 [B] RECORD ans | Equipment j 167 ’ 2,000 Jan.5 2,000 Accounts Payable 201 2,000—| Jan. 14 Provide Services on Credit [a] ANALYZE Assets — Liabiltes + Equity Post Atcoume Services Accounts Receivable 106 Receivable Revenue Jan. 14 540 +540 = 0 +540 Date_ Account Ttes and Explanation PR Debit Cred Seidcetieiemie 03 Do More: G5 2.8 through [b] RECORD Jan1a Accoun.ts Receivable 106 | 540 ~ Jan.14 540 QS 2-11, E 2-6 through E 2-11, Services Revenue 403 540—1 E 2-13, E 215 through E 2-19 59 LIRS 2-3 Recording Transactions M TRIAL BALANC A trial balance is a list of all ledger accounts and their balances at a point in time. It is nor a financial statement but a tool for checking equality of debits and credits in the ledger. Exhibit 2.14 shows the trial balance for FastForward after its 16 entries arc posted to the ledger. (This is an unadjusted trial balance. Chapter 3 explains adjustments.) Preparing a Trial Balance Preparing a trial balance has three steps. 1. List each account title and its amount (from the ledger) in the trial balance. 2. Compute the total of debit balances and the total of credit balances. 3. Verity (prove) total debit balances equal total credit balances. P1 Prepare financial statements from a trial balance.
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60 EXHIBIT 2.14 Trial Balance (Unadjusted) Example: If a c Re TILE Wi EXHIBIT 2.15 Links between Financial Statements across Time Statement of Retained Earnings| | Chapter 2 Financial Slatements and the Accounting System The total of debit balances equals the total of credit balances for the trial bal- ance in Exhibit 2.14. Equality of these two totals does not guarantee that no errors were made. For example, the column totals will be equal when a debit or credit of a correct Accounts receivable ............ 0 % Siinglies. 9.720 amount is {nade‘ tg awrong accpunt. Anothe‘:r Prepaid insitanee 2,400 error not 1dcnuljlcd with a .Lnal balal}ce is Eqiient 26000 when equal debits and credits of an incor- A Gt paable § 6200 rect amount are entered. Unearned consulting revenue . . . 3,000 Common stock . 30,000 Searching for Errors If the trial Dividends 200 balance does not balance (when its col- Consilting revenue ........... 5,800 umns are not equal), the error(s) must be Rental revenue , .............. 300 found and corrected. An efficient way to 1,400 search for an error is to check the journal- 1,000 izing, posting, and trial balance preparation 305 in reverse order. Step 1 is to verify that the Totals. ..o $45300 $45300 trial balance columns are correctly added. If step 1 does not find the error, step 2 is to verify that account balances are accurately entered from the ledger. Step 3 is to see whether a debit (or credit) balance is mistakenly listed in the trial balance as a credit (or debit). A clue to this error is when the difference between total debits and total credits equals twice the amount of the incorrect account balance. Step 4 is to recompute each account balance in the ledger. Step 5 is to verify that each journal entry is properly posted. Step 6 is to verify that the original journal entry has equal debits and credits. At this point, the errors should be uncovered. Financial Statements Prepared from Trial Balance Financial Statements across Time How financial statements are linked in time is shown in Exhibit 2.15. A balance sheet reports an organization’s financial position at a point in time. The income statement, statement of retained earnings, and statement of cash flows report financial performance over a period of time. The three statements in the middle column of Exhibit 2.15 explain how financial position changes from the beginning to the end of a reporting period. A one-year (annual) reporting period is Income Statement common, as are semiannual, quarterly, and Oties ety 0 Euity Tow asers $000 Towl 520000 f Revenues $h.100 Expeiney 2705 Netincome 53395 Cash s Linbilities $ 9, Obierasets B10 Eoury i1 | Totlassets $42305 ot 842305 monthly periods. The one-year reporting period is called the accounting, or fiscal, year. Businesses whose accounting year b Point: An incor begins on January 1 and ends on December 31 are called calendar-year companies. — Financial Statement Preparation This section shows how to prepare financial statements from the trial balance. (These are unadjusted statements. Chapter 3 explains adjust- ments.) We prepare these statements in the following order. © Income Statement An income statement reports revenues earned minus expenses incurred over a period of time. FastForward’s income statement for December is shown at the top right side of Exhibit 2.16. Information about revenues and expenses is taken from the trial
Chapter 2 Financial Statements and the Accounting System 61 balance on the left side. Net income of $3,395 is the bottom line for the income statement. Owner investments and dividends are not part of income, @ Statement of Retained Earnings The statement of retained earnings reports how retained earnings changes over the reporting period. FastForward’s statement of retained carnings is the second report in Exhibit 2,16, It shows the $3,395 of net income, the $200 divi- dend, and the $3,195 end-of-period balance. (The beginning balance in the statement of retained earnings is rarcly zero, except in the first period of operations. The beginning balance in January 2021 is $3.195, which is December 2020’s ending balance.) © Balance Sheet The balance sheet reports the financial position of a company at a point in time. FastForward’s balance sheet is the third report in Exhibit 2.16, This statement shows financial condition at the close of business on December 31, The left side of the EXHIBIT 2.16 Financial Statemenls Prepared from Trial Balance Accounts receivable 3 Spplles BT E T L 9,720 Prepaid insurance: 2,400 Equipment. ... 26,000 Accounts payable ........... Unearned consulting revenue . . . Common stock Dividends 200 Consulting revenue .. Rental revenue . . Salaries expense. Rent expense Utilities expense . Totals Revenues Consulting revenue ($4,200 + $1,600) ............. $5,800 Rental revenue . 300 Total revenues. . $ 6,100 . Expenses Salaries expense. 1,400 Rent expense .. 1,000 Utilities expense.. . 305 Total expenses . 2,705 Netincome ... $3,395—— $ 6,200 3,000 30,000 5,800 s 300 Retained earnings, December 1,2020 . ....... uvvvveeeeeeniinnns $ 0 Plust NELIEOMES i o e mrecntswiow e sis G eesbiesie s s B 4 sie 3,395 <« 3,395 el 0es R RiIVIdends ST S Bt n e s S e 200 $45,300 Retained earnings, December 31,2020 .. ............ ooovvenee... $3195—— Each account on the trial balance is either an asset (to balance sheet), liability (to balance sheet), or equity (to income statement or to statement of retained earnings). (T T e e = $ 4,275 Accounts payable ............ $ 6,200 Supplies ........... 9,720 Unearned consulting revenue . . . 3,000 Prepaid insurance ... 2,400 Total liabilities ............... 9,200 Equipment ......... 26,000 Equity Total equity . . Total assets $42,395 Total liabilities and equit $42,395
62 mm 24 Preparing Trial Balance P1 Do More: QS 2-12 through QS2-17,E2-12,E 2-14, E 2-20 through E 2-28 Chapter 2 Financial Statements and the Accounting System balance sheet lists its assets: cash, supplies, prepaid insurance, and equipment. The liabili- ties section of the balance sheet shows that it owes $6,200 to creditors and $3.000 in ser- vices to customers who paid in advance. The equity section shows an ending balance of $33,195. Note the link between the ending balance of the statement of retained earnings and the retained earnings balance. (This presentation of the balance sheet is called the account Jorm: assets on the left and liabilities and equity on the right. Another presentation is the report form: assets on top, followed by liabilities and then equity. Either presentation is acceptable.) Presentation Issues Dollar signs are not used in journals and ledgers. They do appear in financial statements and other reports such as trial balances. We usually put dollar signs beside only the first and last numbers in a column. Ethical Risk ——-*\ Accounting Quality Recording valid and accurate transactions enhances the quality of financial statements. Roughly 30% of employees in IT report observing misconduct such es falsifying accounting data. They also report increased incidences of such misconduct in recent years. Source: KPMG. B Prepare a trial balance for Accel using the following information from its current year ended December 31. fi } Common stock ... . $32,000 DIVIBHOS 5 LS st i s s i $12,500 1‘ | Accounts payable ................. 7,500 [T T R A = N g 30,000 | ; Wages payable ............ ooooue 13,000 Equipments 0. mb LRt it 27,000 : | Rent expense 7,000 Wages expense 21,000 i ; 17,000 Accounts receivable .. 5000 | 4 41,000 Retained eamnings, Dec. 31, prior year ... 26,000 § Solution $ 17,000 5,000 27,000 30,000 Accounts payable . $ 7500 Wages payable 13,000 Common stock 32,000 Retained earnings, Dec. 31, prior year . 26,000 Dividends 12,500 41,000 Rent expense . . Wages expense. Totals
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Chapter 2 Financial Statements and the Accounting System It is important to assess a company’s risk of failing to pay its debts. Companies finance their assets with either liabilities or equity. A company that finances a relatively large portion of its assets with liabilities is said to have higher financial leverage. Higher financial leverage means greater risk because liabilities must be repaid and often require regular interest payments (equity financing does not). One measure of the risk associated with liabilities is the debt ratio as defined in Exhibit 2.17. Total liabilities Debt ratio = ki Total assets Costeo’s total liabilities, total assets, and debt ratio for the past three ycars arc shown in Exhibit 2.18. Costco’s debt ratio ranges from a low of 0.63 to a high of 0.70. Its ratio exceeds Walmart’s in each of the last three years, suggesting a higher than average risk from financial leverage. So, is financial leverage good or bad for Costco? The answer: If Costco is making more money with this debt than it is paying the lenders, then it is successfully borrowing money to make more money. A company’s use of debt can turn unprofitable quickly if its return from that money drops below the rate it is paying lenders. Costco Total liabilities. . . . . $25,268 $20.831 $22,174 Total assets. ...... $36,347 $33,163 $33,017 Debtratio. ....... 0.70 0.63 0.67 Walmart Debtratio ........ 0.59 0.58 0.58 @ Decision Maker eEmcEsEART RS R R Investor You consider buying stock in Converse. As part of your analysis, you compute the company’s debt ratio for 2018, 2019, and 2020 as 0.35, 0.74, and 0.94, respectively. Based on the debt ratio, is Converse a low-risk investment? Has the risk of buying Converse stock changed over this period? (The industry debt ratio averages 0.40.) @ Answer The debt ratio suggests that Converse's stock is of higher risk than normal and that this risk is rising. The average industry ratio of 0.40 supports this conclusion. The 2020 debt ratio for Converse is twice the industry norm. Also, a debt ratio approaching 1 0 indicates little to no equity Jasmine Worthy started a haircutting business called Expressions. The following events occurred during its first month. Dec. 1 Worthy invested $3,000 cash and $15,000 of equipment in Expressions in exchange for com- mon stock. 2 Expressions paid $600 cash for furniture for the shop. 3 Expressions paid $500 cash to rent space in a strip mall for December. 4 Expressions purchased $1,200 of equipment on credit (recorded as accounts payable). 5 Expressions opened for business on December 5. Cash received from haircutting services in the first week and a half of business (ended December 15) was $825. 16 Expressions provided $100 of haircutting services on credit. 17 Expressions received a $100 check for services previously rendered on credit. 18 Expressions paid $125 to an assistant for hours worked for the grand opening. 31 Cash received from services provided during the second half of December was $930. 31 Expressions paid $400 cash toward the account payable from December 4. 31 Expressions paid a $900 cash dividend to Worthy (sole sharcholder). [continued on next page] Decision Analysis A2 Compute the debt ratioc and describe its use in analyzing financial condition. EXHIBIT 2.17 Debt Retio EXHIBIT 2.18 Computation and Analysis of Debt Ratio NEED-TO-KNOW P23 COMPREHENSIVE Journalizing and Posting Transactions, Statement Preparation, and Debt Ratio
Chapter 2 Financial Statements and the Accounting System [continued from previous page] Required 1. Prepare general journal entries for the transactions. Account numbers are taken from the Chart of Accounts near the end of the text. 2. Post the journal entries from part 1 to ledger accounts. 3. Prepare a trial balance as of December 31. 4. Prepare an income statement for December. 5. Prepare a statement of retained earnings for December. 6. Prepare a balance sheet as of December 31. 7. Determine the debt ratio as of December 31. Extended Analysis 8. In the coming months, Expressions will have new business transactions. Identify which accounts are dehited and which are credited for the following transactions. a. Purchase supplies with cash. b. Pay cash for future insurance coverage. c. Receive cash for services to be provided in the [uture. d. Purchase supplies on credit. SOLUTION 1. General journal entries. Dec. 1 101 3,000 Equipment. .. 165 15,000 Common Stock . 307 18,000 Owner’s investment in exchange for stock. 2. Bnitie s 2l e s e s e 161 600 CEl A v s R I T G B e B eI S 101 600 Purchased furniture for cash. 3= RentEXnense’ T s ST E s e N N S e 640 500 U3 A e R L SR S I e i U 101 500 Paid rent for December. 4 EQUIPITENT: < . s Garsm ain ks sfice b A bos B o e a2 165 1,200 Accounts Payable . s sisesmars i saimmiil shalkish s oo 201 1,200 Purchosed additional equipment on credit. 15 101 825 Services Revenue . .. 403 825 Cash receipts from first holf of December. 16 Accouits Receivabile . 5w ke sieilive s sinad ol s el oy 102 100 Seivices ReVemie o oo oo s S S T 403 100 Record revenue for services provided on credit. AT -Gl Gire dime s T b e S D ek o 101 100 Accounts Recelvalile . .ot o st e e 102 100 Record cash received as payment on credit.
Chapter 2 Financial Statements and the Accounting System 18 623 125 101 125 N 101 930 403 930 = ACCOUMS ROYANIE . 1 5 e i s e iz 201 400 (01 A P e AR e 2 e s B 101 400 Paid cash toward accounts payable. L T e e R e e e e T 319 900 (SR At RN, 0w o TR e 101 900 Paid a cash dividend. 2. Post journal entries from part | to the ledger accounts (in balance column format). Cash Account No. 101 Accounts Payable Account No. 201 Date PR Debit Credit Balance Date PR Debit Credit Balance Dec. 1 G1 3,000 3,000 Dec. 4 | G1 1,200 1,200 2| & 600 2,400 nie 400 800 5i=ol S0 15500 Common Stock Account No. 307 15 | 61 825 2,725 17 | 61 100 2,825 Date PR Debit Credit Balance B 23 s Dec. 11 61 18,000 | 18,000 31 G1 930 3,630 31 G1 400 3,230 Dividends Account No. 319 el 51 1 2330 Date PR Debit Credit Balance Accounts Receivable Account No. 102 Dec. 31 61 200 900 bate ER et Al Bolines Services Revenue Account No. 403 Dee Sloh e 1o 100 Date | PR | Debit | Credit | Balance 17 G1 100 [¢) Dec. 15 G1 825 825 Furniture Account No. 161 16 | 61 100 925 Date PR Debit Credit | Balance S o0 1823 E A . 623 e 341 e 500 600 Wages Expense ccount No. 6 1t Debit dit B Equipment Account No. 165 pae i < Sre slance Date PR Debit Credit Balance Deg gl @l i e . 641 P o1 15,000 15.000 Rent Expense Account No. 640 41 61 1,200 16,200 Date PR Debit Credit Balance Dec. 3 | G1 500 500 |continued on next page]
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66 Chapter 2 Financial Statements and the Accounting System [continued from previous page] 3. Prepare a trial balance from the ledger—see how it feeds the financial statements. Accounts receivable . . . 0 Rl e e e G 600 Equipmients <. siwso el crmmmaties s 16,200 AcCountspayable i v fuun wimaiin $ 800 COMMONSIOTK - s x 4w wie bt wyivrilomibings 18,000 | Diyidepde— F = - & = = = o =l 900 SErvices revenue. ... ... venneuennnnn. 1,855 Wages eXpense. . ..c.uueeuiiiniaieinas 125 Rentierneise i lin Tl g 30 500 d Totals . 4. Revenues SerVICeS FeVenue . ......... ooveeeennns. $1.855 4 Expenses S L - RENEEXPENSE ..o .voveiiiiennmnirens $500 5 Wages eXpense .. .......... vveeeeiinns = Total EXpenses . .... oovuueneeeeaeeenns _ 625 ’ O e S R A e e s i $1.230—— & 5. < Retained earnings, December 1 ........... oooiiiiiinn $. =20 PlUss NeINEOMmIE s s el s S s B s el 1,230 «— 6. Assets Liabilities 2 Cashicr et $ 2330 Accounts payable ............. $ 800 Furnitire - tins aon o 600 Equity T s AR Equipment ........... 16,200 Common stock . . . 18.000 . Retained earnings 80— TotaleaUity . 5o/ o sammsmas o 18,330 Total assets ........... $19,130 Total liabilities and equity ... ... $19,130 Total liabilities _ $800 7. Debt ratio = = = 4.1 LD = el aiets $19,130 S 8a. Supplies debited 8c. Cash debited Cash credited Unearned Revenue credited 8b. Prepaid Insurance debired 8d. Supplies debited Cash credited Accounts Payable credited
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Chapter 2 Financial Statements and the Accounting System Summary: Cheat Sheet RECORDING TRANSACTIONS SYSTEM OF ACCOUNTS Asset Accounts Cash: A company’s cash balance. Accounts receivable: Held by a seller; promises of payment from custom- crs to sellers. Accounts receivable are increased by credit sales: often phrased as sales on account or on credit. Notes receivable: Held by a lender: a borrower’s written promise to pay the lender a specific sum of money on a specified future date. Prepaid accounts (or expenses): Assets that arise from prepayment of future expenses. Examples are prepaid insurance and prepaid rent. More assets: Supplies, equipment, buildings, and land. Liability Accounts Accounts payable: Held by a buyer; a buyer's promise (o pay a seller later for goods or services received. More generally, payables arisc from pur- chases of merchandise for resale, supplies, services, and other items. Notes payable: Held by a borrower; a written promissory note to pay a future amount at a future date. Unearned revenue: A liability to be scttled in the future when a company delivers its products or services. When a customer pays in advance for products or services, the seller records this reccipt as unearned revenue. Accrued liabilities: Amounts owed that are not yet paid. Examples are wages payable. laxes payable, and interest payable. Equity Accounts Common stock: When an owner invests in a company in exchange for stack, the company increases both assets and equity. Dividends: When a company pays dividends, it decreases both company assets and total equity. Revenue: Amounts received from sales of products and services o cus- tomers. Revenue increases equity. Expenses: Costs of providing products and services. Expenses decrease equity. DEBITS AND CREDITS The left side of an account is called the debit side, or Dr. The right side is called the credit side, or Cr. Double-entry accounting transaction rules: * At least two accounts are involved, with at least onc debit and one credit. + Total amount debited must equal total amount credited. Debits and credits in accounting equation: Equity I 1 A = F CommoSek -~ Didends + Rewws — Expenses Outar | Cofor Drfor Orfor | Crfor Dr.for | Crfor Dr.for | Crfor Dr.for | Crfor f esses emses ncresaes anses + |- - + =-p + + | - -1+ + | - Noemal | | Normai Normal Normal Nermal Notmal Net increases or decreases on one side have equal net cffects on the other side. Left side is the normal balance side for assets Right side is the normal balance side for liabi es and equity. Receive owner investment [or stock: Dot _sgcountThes st 06ttt ciesh {1} T Cash 7167 | 30,000 Common Stock 307 30,000 Purchase supplics for cash: O _hceoum Tl oo obrain P etk Credt @ | Supplies | 126 [ 2500 ‘ Cash 101 2500 Purchase equipment for cash: Dute Accoun s st bepsaten P fest Gt ) [ Equiament 767 | 26,000 | cash 101 26000 Purchase supplies on credit: to Aceiu s s Exoinnaion_ B bl g ) | Supplies 126 [ 7.400 Accounts Payable. | 201 7,100 Provide services for cash: Dte Ao s ard xpensior R pab G (5) ] Cash 101 [ 4200 | Consaltng Revenue | 403 4200 Payment of expenses in cash: Dule._ Accoum Ties and Bxpianation _pi Seuit Credn (6) | Rent Expense 640 1,000‘ Cash 101 | 1,000 Onte_Jeceunt Tos s S TR Dsbr _ cusar {7) T Salaries Expense 622 700 Cash 101 700 e dccoun ks ane xplawior 23 pokid il 05 Utiities Bxpense | 690 305 Casi 1o 05 FINANCIAL STATEMENTS Provide consulting and rental services on credit: o Aucoun s o bt PR Dol el @) | Accounts Receivable | 106 | 1900 Consulting Revense | 403 ‘ 1,600 Rental Reverue | 405, 300 Receipt of cash from receivable: e Meroue T 1o P Dbk g © T Cesh [ 101 T1,900 | Accounts Receivable | 106 1,900 Partial payment of accounts payable: e _ccour Tissanc Expliodlen b Dbt ces (10)‘ Accounts Payable 201 200 ‘ Cash 101 00 Payment of cash dividend: Dale ecoi Thas it glnston V% Dabt__Crad (m' Divicenas. EXE) 200 ‘ Cash 101 200 Receipt of cash for future services: Pay cash for future insurance coverage: Dele g s o Bl W Devt _cea (13)| Prepalc Insurance 128 | 2400 | Cash 101 1 2400 . Consabing reveras ($4,200 + $1,600; $5.800 et e ) 2 “m [ : s5im | Ewens | Salafies BRDORS. L ki sh e 1490 Cas. $42s 71 Rent axpenss. 1,000 Accounts recenvanle. .. a Ubibes ewouse ... 305 Supalie L. sam T Towewpenses . 2705 Pregelc nsurance. 2400 etticsron Prrr— Bt .. 26000 == | Sercunte payatic v § 5200 | Unersd conltn e o | Comron ok ... 000 | T ST Rt iy et ..., .. s oo | S s Netinzeme 3395t Salores expanne. Rent sxoense Utes eepense Toas Castt satamentl etined esmine Sinpie 820 Uneamsd comsuting rverise PrepatIneuanze 2400 Total bt Equpnent ... 26000 Eauty Comonsiock .. Retained camings Tota ey otal asets ot bl and ecuty. ... Aot Uatiites $ 4295 e payable Account (46) Debt ratio (63) Account balance (50) Debtors (48) Balance column account (52) Dividends (49) Chart of accounts (49) Compound journal entry (55) General journal (52) Credit (50) General ledger (46) Creditors (48) Journal (52) Debit (50) Journalizing (52) Double-entry accounting (50) Ledger (46) Posting (52) Posting reference (PR) column (52) Source documents (46) T-account (50) Trial balance (59) Unearned revenue (48)
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S R Chapter 2 Financial Statements and the Acceunting System Select Quick Study and Exercise assignments feature Guided Example videos, called “Hints" in Connect. Hints use different numbers, and instructors can turn this feature on or off. QUICK STUDY QS 2-1 Identifying source documents C1 Qs 2-2 Identifying financial statement accounts c1 connect i Tdentify the items from the following list that are likely to serve as source documents. a. Sales receipt b, Trial balance c. Balance sheet d. Prepaid insurance account g. Income statement h. Bank statement i. Telephone bill e. Invoice from supplier . Company revenue account Classify each of the following accounts as an Asset, Liability, or Equity account. a. Cash b. Prepuid Rent c. Office Supplies d. Prepaid Insurance e. Office Equipment f. Common Stock g. Accounts Payable h. Unearned Rent Revenue i. Dividends Qs 2-3 Reading a chart of accounts C1 Qs 2-4 Identifying normal balance C2 A chart of accounts is a list of all ledger accounts and an identification number for each. One example of a chart of accounts is near the end of the book on pages CA and CA-1. Using that chart, identify the follow- ing accounts as either an Asset, Liability, Equity, Revenue. or Expense account, along with its identifica- tion number. a. Advertising Expense d. Machinery g. e. Accounts Payable h. f. Furniture Notes Payable Common Stock . Utilities Expense b. Rent Revenue c. Rent Receivable Identify the normal balance (debit or credit) for each of the following accounts. a. Rideshare Revenue d. Wages Expense g. Wages Payable b. Office Supplics e. Accounts Receivable h. Building c. Dividends f. Prepaid Rent i. Common Stock Qs 2-5 Indicate whether a debit or credit decreases the normal balance of each of the following accounts. Linking debit or credit with a, Tnterest Payable e. Common Stock i. Dividends peeinges b. Services Revenue f. Prepaid Insurance j. Unearned Revenue 2 c. Salaries Expense g. Buildings k. Accounts Payable d. Accounts Receivable h. Interest Revenue I. Land Qs 2-6 Identify whether a debit or credit results in the indicated change for each of the following accounts. Analyzing debit or credit by a. To increase Land f. To decrease Prepaid Rent account b. To decrease Cash g. To increase Notes Payable €2 ¢. To increase Consulting Revenue h. To decrease Accounts Receivable d. To increase Salaries Expense i. To increase Common Stock e. To decrease Unearned Revenue j- To increase Store Equipment Qs 2.7 Determine the ending balance of each of the following T-accounts. Computing T-account balance €2 a. b. - Cash Accounts Payable Supplies 100 50 2,000 8,000 10,000 3,800 300 60 2,700 1,100 20
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Chapter 2 Financial Statements and the Accounting System d. e. f. Accounts Receivable =5 Wages Payable = Cash = 600 150 700 11,000 4,500 150 700 800 6,000 150 100 1,300 100 69 For cach transaction, (1) analyze the transaction using the accounting equation, (2) record the transaction in journal entry form, and (3) post the entry using T-accounts to represent ledger accounts. Use the follow- ing partial chart of accounts—account numbers in parentheses: Cash (101): Accounts Receivable (106); Office Supplies (124); Trucks (153); Equipment (167); Accounts Payable (201); Unearned Landscaping Revenue (236); Common Stock (307); Dividends (319); Landscaping Revenue (403); Wages Expense (601), and Landscaping Expense (696). a. On May 15, DeShawn Tyler opens a landscaping company called Elegant Lawns by investing $7,000 in cash along with equipment having a $3.000 value in exchange for common stock. b. On May 21, Elegant Lawns purchascs office supplies on credit for $500. . On May 25, Elegant Lawns receives $4.000 cash for performing landscaping services. d. On May 30, Elegant Lawns receives $1,000 cash in advance of providing landscaping services to a customer. Qs 2-8 Analyzing transactions and preparing journal entries Al Prepare general journal entries for the following transactions of Green Energy Company. Use the follow- ing partial chart of accounts: Cash; Accounts Receivable; Supplies; Accounts Payable; Consulting Revenue; and Utilities Expense. May The company provided $2,000 of sustainability consulting services on credit to a customer. The company purchased $300 of energy-efficient supplies on credit. The company collected $500 cash as partial payment of the May 1 consulting revenue. The company paid $300 cash toward the payable for energy-efficient supplies. The company paid $100 cash for May’s renewable energy utilities. —_—C O W - L b Qs 2.9 Preparing journal entries A Analyze each transaction in QS 2-9 by showing its effects on the accounting equation—specifically, iden- lify the accounts and amounts (including + or —) for each transaction. Qs 2-10 Analyzing transactions using accounting equation M Prepare compound journal entries for each transaction. a. The owner invests $6,500 cash and $3,500 of equipment in the company in exchange for common stock. b. The company acquires $2,000 of supplies by paying $500 cash and putting $1.500 on credit (accounts payable). Qs 2-11 Preparing compound journal entries A1 A trial balance has total debits of $20,000 and total credits of $24,500. Which one of the following errors would create this imbalance? a. A 82,250 debit to Utilities Expense in a journal entry was incorrectly posted to the ledger as a $2,250 credit, leaving the Utilities Expense account with a $3,000 debit balance. A $4,500 debit to Salarics Expense in a journal entry was incorrectly posted to the ledger as a $4.500 credit, leaving the Salaries Expense account with a $750 debit balance. €. A $2,250 credit to Consulting Revenue in a journal entry was incorrectly posted to the ledger as a $2,250 debit, leaving the Consulting Revenue account with a $6,300 credit balance. d. A $2.250 debit posting to Accounts Receivable was posted mistakenly (o Land. e. A $4,500 debit posting to Equipment was posted mistakenly to Cash. f. An entry debiting Cash and crediting Accounts Payable for $4.500 was mistakenly not posted. b. Qs 2-12 Identifying a posting error P1
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Chapter 2 Financial Statements and the Accounting System Qs 2-13 Indicate the (inancial statement on which each of the following items appears: income statcment, statc- Classifying accounts in ment of retained earnings, or balance sheet. financial statements a. Services Revenue e. Equipment i. Dividends P b. Interest Payable f. Prepaid Insurance j. Office Supplies c. Accounts Receivable g. Buildings k. Interest Expense d. Salaries Expense h. Rental Revenue I. Insurance Expense Qs 2-14 Lawson Consulting had the following accounts and amounts on December 31. Prepare a December 31 Preparing a trial balance trial balance. P1 o —— - . . $5,000 Accounts payable . $ 3000 Servicesrevenue ... .. $12,000 Accounts receivable . .. 4500 Common stock . 10,500 Rentexpense ........... 2,000 Equipment. . .............. 6,500 Dividends ... 1,500 Wagesexpense ......... 6,000 Qs 2-15 Preparing an income company began operations on December 1. statement P1 Qs 2-16 Use the information in QS 2-14 to prepare a December statement of retained earnings for Lawson Con- Preparing a statement of sulting. The Retained Earnings account balance at December 1 was $0. Hint: Net income for December is retained earnings P1 $4,000. Qs 2-17 Use the information in QS 2-14 to prepare a December 31 balance sheet for Lawson Consulting. Hint: The Preparing a balance sheet ending Retained Earnings account balance as of December 31 is $2.500. P1 Qs 2-18 The debt ratio for Deutsche Auto for each of the last three years follows. Over this three-year period, did Interpreting debt ratio the company’s risk from financial leverage increase or decrease? A2 Debt ratio Qs 2-19 In a recent year’s financial statements, Home Depot reported the following: Total liabilitics = $38,633 Computing and using the million and Total assets = $42,966 million. (a) Compute Home Depot’s debt ratio. (b) Assuming Lowe’s debt ratio A2 (a competitor) has a debt ratio of 60.0%, which company has higher risk from financial leverage? ; @ connect EXERCISES Order the following steps in the accounting process that focus on analyzing and recording transactions. a. Prepare and analyze the trial balance. Exercise 2-1 Steps in analyzing and recording transactions 1 b. Analyze each transaction from source documents. c. Record relevant transactions in a journal. d. Post journal information to ledger accounts. Exercise 2-2 Identify the source document for NDX Company in each of the following accounting processes. Identifying source a. A customer purchases merchandise with a credit card. NDX uses the electronic sales receipt to record documents from transaction details in its accounting system. dEEOUNHing processes b. NDX purchases goods and receives a bill from the supplier. Details from the bill arc captured and 4] entered in the accounting database, which is stored in the cloud. c. An NDX employee receives a bank statement each month on her company e-mail. The statement is used to record bank fees incurred for that month.
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Chapter 2 Financial Statements and the Accounting System 71 Identify the item that best completes each of the descriptions below. Exercise 2-3 1. Asset 2. Equity 3. Account 4. Liability 5. Three Identifying and classifying a. Balance sheet accounts are arranged into general categories. accounts b. Common Stock and Dividends are examples of accounts. 3 ¢. Accounts Payable and Notes Payable arc examples of accounts. d. Accounts Receivable, Prepaid Accounts, Supplies, and Land are examples of accounts. e. A(n) is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Identify the item that best completes each of the descriptions below. Exercise 2-4 1. Chart 2. Generalledger 3. Journal 4. Account 5. Source document Identifying & ledgerand a. A(n) of accounts is a list of all accounts a company uses, not including account balances. ehatofaccalints b. The is a record containing all accounts used by a company, including account balances. “ c. A(n) describes transactions entering an accounting system, such as a purchase order. d. Increases and decreases in a specific asset, liability, equity, revenue, or expense are recorded in a(n) : e. A(n) has a complete record of every transaction recorded. For each of the following, (1) identify the account as an assct, liability, equity, revenue, or expense; Exercise 2-5 (2) identify the normal balance of the account; and (3) enter debit or credif to identify the kind of entry that would increase the account balance. a. Land b. Cash c. Legal Expense d. Prepaid Insurance e. Accounts Receivable i. Services Revenue f. Dividends g. Tour Service Revenue j- Equipment k. Notes Payable h. Unearned Revenue I. Common Stock Identifying type and normal balances of accounts €2 Groro Co. bills a client $62.000 for services provided and agrees to accept the following three items in full payment: (1) $10,000 cash, (2) $80.000 of equipment, and (3) $28,000 note payable owed on the equipment. For this transaction, (@) analyze the transaction using the accounting equation, (b) record the transaction in journal entry form, and (c) post the entry using T-accounts (o represent ledger accounts. Use the following partial chart of accounts—account numbers in parentheses: Cash (101); Supplies (124); Equipment (167); Accounts Payable (201); Note Payable (245); Common Stock (307); and Services Revenue (403). Exercise 2-6 Analyzing effects of a compound entry A Use the information in each of the following separate cases to calculate the unknown amount. a. Corentine Co. had $152,000 of accounts payable on September 30 and $132,500 on October 31. Total purchases on credit during October were $281.000. Determine how much cash was paid on accounts payable during October. b. On September 30, Valerian Co. had a $102,500 balance in Accounts Receivable. During October, the company collected $102,890 from its credit customers. The October 31 balance in Accounts Receiv- able was $89.000. Determine the amount of sales on credit that occurred in October. ¢. During October, Alameda Company had $102,500 of cash receipts and $103,150 of cash disburse- ments. The October 31 Cash balance was $18,600. Determine how much cash the company had at the close of business on September 30. Exercise 2-7 Analyzing account entries and balances Al Prepare general journal entries for the following transactions of Sustain Company. June 1 T.James, owner, invested $11,000 cash in Sustain Company in exchange for common stock. 2 The company purchased $4,000 of furniture made from reclaimed wood on credit. 3 The company paid $600 cash for a 12-month prepaid insurance policy on the reclaimed furniture. 4 The company billed a customer $3,000 for sustainability services provided. 2 The company paid $4,000 cash toward the payable from the June 2 furniture purchase. 20 The company collected $3,000 cash for services billed on June 4. 21 T.James invested an additional $10,000 cash in Sustain Company in exchange for common stock. 30 The company received $5,000 cash in advance of providing sustainability services to a customer. Exercise 2-8 Preparing journal entries M
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72 Chaptler 2 Financial Statements and the Accounting System Exercise 2-9 Preparing general journal entries M Prepare general journal entries for the following transactions of a new company called Pose-for-Pics. Use the following partial chart of accounts: Cash; Supplies; Prepaid Insurance; Equipment; Common Stock; Services Revenue; and Utilities Expense. Aug. 1 Madison Harris, the owner, invested $6,500 cash and $33,500 of photography equipment in the company in exchange for common stock. 2 The company paid $2,100 cash for an insurance policy covering the next 24 months. 5 The company purchased supplies for $880 cash. 20 The company received $3,331 cash from taking photos for customers. 31 The company paid $675 cash for August utilities. Exercise 2-10 Recording transactions in balance column accounts M Open a ledger account for Cash in balance column format. Post general journal entries that impact cash from Exercise 2-9 to the ledger account for Cash, and enter the balance after each posting. Exercise 2-11 Analyzing transactions using accounting equation A1 Analyze each transaction in Exercise 2-9 by showing its effects on the accounting equation—specifically, identify the accounts and amounts (including + or —) for each transaction. Exercise 2-12 Preparing T-accounts (ledger) and a trial balance P1 Use the information in Exercise 2-9 to prepare a trial balance for Posc-for-Pics. Begin by opening these T-accounts: Cash; Supplies; Prepaid Tnsurance; Equipment; Common Stock: Services Revenue; and Utilities Expense. Then, (1) post the general journal entries to these T-accounts (which will serve as the ledger) and (2) prepare the August 31 trial balance. Exercise 2-13 Recording effects of transactions in T-accounts At Check balance, $94,850 For the following transactions of Spade Company, (1) prepare general journal entries and (2) post entries to T-accounts and calculate the ending balance of each T-account. Use the following accounts: Cash; Accounts Receivable; Supplies; Equipment; Accounts Payable: Common Stock; Dividends: Services Revenue: and Rent Expense. a. Kacy Spade, owner, invested $100,750 cash in the company in exchange for common stock. b. The company purchased supplies for $1,250 cash. c. The company purchased $10,050 of equipment on credit. d. The company received $15,500 cash for services provided to a customer. e. The company paid $10,050 cash to settle the payable for the equipment purchased in transaction ¢. f. The company billed a customer $2,700 for services provided. g. The company paid $1,225 cash for the monthly rent. h. . The company collected $1,125 cash as partial payment for the account receivable created in transaction f. i. The company paid a $10,000 cash dividend to the owner (sole shareholder). Exercise 2-14 Preparing a trial balance P1 Exercise 2-15 Analyzing and journalizing transactions involving cash payments Al After recording the transactions of Exercise 2-13 in T-accounts and calculating the balance of each account, prepare a trial balance. Use May 31 as its report date. 1. Prepare general journal entries for the following transactions of Valdez Services. a. The company paid $2,000 cash for payment on a 6-month-old account payable for office supplies. b. The company paid $1,200 cash [or the just-completed two-week salary of the receptionist. ¢. The company paid $39,000 cash for equipment purchased. d. The company paid $800 cash for this month’s utilities. e. The company paid a $4,500 cash dividend to the owner (sole shareholder). Transactions a, ¢, and e did not result in an expense. Match each transaction (g, ¢, and ¢) with one of the following reasons for not recording an expense. 2 This transaction is a distribution of cash to the owner. Even though equity decreased, that decrease did not occur in the process of providing goods or services to customers. This transaction decreased cash in settlement of a previously existing liability (equity did not change). Supplies expense is recorded when assets are used, not necessarily when cash is paid. __ This transaction involves the purchase of an assel. The form of the company’s assets changed, but total assets did not (and neither did equity).
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Chapter 2 Financial Statements and the Accounting System 73 1. Prepare general journal entries for the following transactions of Valdez Services. a. Brina Valdez invested $20.000 cash in the company in exchange for common stock. b. The company provided services to a client and immediately received $900 cash. ¢. The company received $10,000 cash from a client in advance for services Lo be provided next year. d. The company received $3,500 cash from a client in partial payment of accounts receivable. 2. Transactions a, ¢, and d did not yield revenue. Match each transaction (a, ¢, and d) with one of the following reasons for not recording revenue. This transaction changed the form of an asset from a receivable to cash. Total assets were not increased (revenue was recognized when the services were originally provided). This transaction brought in cash, but this is an owner investment. This transaction brought in cash, but it created a liability to provide services to the client in the next year. Exercise 2-16 Analyzing and journalizing transactions involving receipt of cash M Fill in each of the following T-accounts for Belle Co.’s seven transactions listed here. The T-accounts repre- sent Belle Co.'s general ledger. Code each entry with transaction numbers / through 7 (in order) for reference. 1. D. Belle created a new business and invested $6,000 cash, $7.600 of equipment, and $12,000 in web servers in exchange for common stock. 2. The company paid $4,800 cash in advance for prepaid insurance coverage. 3. The company purchased $900 of supplies on credit. 4. The company paid $800 cash for selling expenses. 5. The company received $4,500 cash for services provided. 6. The company paid $900 cash toward accounts payable. 7. The company paid $3.400 cash for equipment. Cash T Equipment I Common Stock Services Revenue Selling Expenses [ T T Supplies Prepaid Insurance I | Web Servers T Accounts Payable T Exercise 2-17 Entering transactions into T-accounts M Use information from Exercise 2-17 to prepare the general journal entries for Belle Co.’s first seven transactions. Exercise 2-18 Preparing general journal entries A1 Workfit posted transactions (a through f) in the following T-accounts in December, its first month of operations, Prepare the six journal entries from which the postings were made. Cash Supplies Accounts Payable a. 6,000 b. 2,000 b. 2,000 f. 1,000 d. 1,500 <. 5,000 e. 3,000 d. 1,500 f. 1,000 Common Stock Services Revenue Rent Expense a. 6,000 €. 5,000 e. 3,000 Exercise 2-19 Identifying transactions from T-accounts M Use the T-accounts in Exercise 2-19 from Workfit's first month of operations to prepare its December 31 trial balance. Exercise 2-20 Preparing a trial balance from T-accounts P1 Prepare a December 31 trial balance for TLX Co. using the following information and fill in the missing amount for Equipment (assume all data are correct). Cash . $ 8,000 Equipment .. $_7__ Wagesexpense ......... Accounts payable . . 4,000 Dividends ... = 500 Accounts receivable. . .. .. 1.000 Services revenue ....... 20,000 Commonstock ............ 16,500 Unearned revenue ....... 2,000 Rentexpense .......... 3,000 Exercise 2-21 Preparing a trial balance from data with a missing value P1
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74 Chapter 2 Financial Statements and the Accounting System Exercise 2-22 Identifying effects of posting errors on the trial balance P1 Posting errors are identified in the following table. Tn column (1), enter the amount of the difference between the two trial balance columns (debit and credit) due to the error. In column (2), identity the trial balance column (debit or eredit) with the larger amount if they are not equal. In column (3), identify the account(s) affected by the error. In column (4), indicate the amount by which the account(s) in column (3) is under- or overstated. Item (a) is completed as an example. a. $3,600 debit to Rent Expense is $2,260 Credit Rent Expense Rent Expense posted as a $1,340 debit. understated $2,260 b. $6,500 credit to Cash is posted twice as two credits to Cash. ¢. | $10,900 debit to the Dividends account is debited to Common Stock. d. $2,050 debit to Prepaid Insurance is posted as a debit to Insurance Expense. e $38,000 debit to Machinery is posted as a debit to Accounts Payable. # 5,850 credit to Services Revenue is posted as a $585 credit. g. | $1.390 debit to Store Supplies is not posted. Exercise 2-23 Analyzing a trial balance error P1 You are told the column totals in a trial balance are not equal. After carcful analysis, you discover only one error. Specifically, a correctly journalized credit purchase of an automobile for $18,950 is posted from the journal to the ledger with an $18,950 debit to Automobiles and another $18,950 debit to Accounts Payable. The Automobiles account has a debit balance of $37,100 on the trial balance. (1) Answer each of the following questions and (2) compute the dollar amount of any misstatement for parts a through d. a. Is the Debit column total of the trial balance overstated, understated, or correctly stated? b. Is the Credit column total of the trial balance overstated, understated, or correctly stated? c. Is the Automobiles account balance overstated, understated, or correctly stated in the trial balance? d. Is the Accounts Payable account balance overstated, understated, or correctly stated in the trial balance? e. If the Debit column total of the trial balance is $200,000 before correcting the error, what is the total of the Credit column before correction? Exercise 2-24 Computing net income P A company had the following assets and liabilities at the beginning and end of this year. $ 60,000 105,000 $20,000 36,000 Beginning of the year. ........... End of the year . . Determine net income or net loss for the business during the year for cach ol the following separate cases. a. Owner made no investments in the business, and no dividends were paid during the year. b. Owner made no investments in the business, but dividends were $1,250 cash per month. ¢. No dividends were paid during the year, but the owner did invest an additional $55.000 cash in exchange for common stock. d. Dividends were $1,250 cash per month, and the owner invested an additional $35,000 cash in exchange for common stock. Exercise 2-25 Preparing an income statement P1 Check Net $10,470 Carmen Camry operates a consulting firm called Help Today. which began operations on December 1. On December 31, the company’s records show the following selected accounts and amounts for the month of December. Use this information to prepare a December income statement for the business. $5,600 Cash voeiiiieeinns $25,360 Accounts payable ........... $ 10,500 Salaries expense ... Accounts receivable . 22,360 Common stock . 102,000 Telephone expense . 860 Office supplies . .. 5,250 Dividends ....... 6,000 Miscellaneous expenses . .. . 520 Office equipment . 20.000 Consulting revenue . 4 27,000 L s ———— 44,000 Rentexpense .............. 9,550
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Chapter 2 Finencial Statements and the Accounting System Use the information in Exercise 2-25 to prepare a December statement of retained earnings for Help Today. The Retained Earnings account balance at December 1 was $0. Hint: Net income for December is $10,470. Exercise 2-26 Preparing a statement of retained earnings P1 Use the information in Exercise 2-25 to prepare a December 31 balance sheet for Help Today. Hint: The ending Retained Earnings account balance as of December 31 is $4,470. Exercise 2-27 Preparing a balance sheet P1 Compute the missing amount for each of the following separate companies in columns B through E. Exercise 2-28 Analyzing changes in a company’s equity |1 P1 2 | Equity, beginning of year 3 | Owner investments during the year 4 ? |5 | Netincome (oss) fortheyear | 22,000 90, (4,000)| ? 6 | Equity, end of year [ 104.000__85000 21 110.000 i Cabipany Exercise 2-29 %, DreamWorks | $22,000 | $40,000 | $19,000 i 27,000 | 5000 17,000 Pixar | 67000 | 150,000 Universal | 12,000 | 68,000 a. Compute the debt ratio for each of the three companies. b. Which company has the most financial leverage? Karla Tanner opened a web consulting business called Linkworks and completed the following transac- tions in its first month of operations, Apr. 1 Tanner invested $80,000 cash along with office equipment valued at $26,000 in the company in exchange for common stock. 2 The company prepaid $9,000 cash for 12 months’ rent for office space. Hint: Debit Prepaid Rent for $9,000. 3 The company made credit purchases for $8,000 in office equipment and $3,600 in office sup- plies. Payment is due within 10 days. 6 The company completed services for a client and immediately received $4,000 cash. 9 The company completed a $6,000 project for a client, who must pay within 30 days. 13 The company paid $11,600 cash to settle the account payable created on April 3, 19 The company paid $2,400 cash for the premium on a 12-month prepaid insurance policy. Hint: Debit Prepaid Insurance for $2.400. 22 The company received $4,400 cash as partial payment for the work completed on April 9. 25 The company completed work for another client for $2,890 on credit, 28 The company paid a $5,500 cash dividend. 29 The company purchased $600 of additional office supplies on credit. 30 The company paid $435 cash for this month's utility bill. Required 1. Prepare general journal entries to record these transactions (use account titles listed in part 2). 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance col- umn format): Cash (101); Accounts Receivable (106); Office Supplies (124):; Prepaid Insurance (128); Prepaid Rent (131): Office Equipment (163); Accounts Payable (201); Common Stock (307); Divi- dends (319); Services Revenue (403); and Utilities Expense (690). Post journal entries from part 1 to the ledger accounts and enter the balance after each posting. 3. Prepare a trial balance as of April 30. PROBLEM SET A Calculating and interpreting the debt ratio A2 © Problem 2-1A Preparing and posting Journal entries; preparing a trial balance P1 M Check (2) Ending (3) Total debits, $119,490
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i 5 PO o 76 Chapter 2 Financial Statements and the Accounting System Problem 2-2A Preparing and posting journal entries; preparing a trial balance PoM Check bal ) Ending s Payable, $1,333 (3) Trial balance totals, Problem 2-3A Preparing and posting journal entries; preparing a trial balance P M Check (2) Ending balar P $136,700; Accounts Re Accounts Payable, $600 (3) Total debits, $187,920 ble, $7,820; Aracel Engincering completed the following transactions in the month of June. a. Jenna Aracel, the owner, invested $100,000 cash, office equipment with a value of $5.000, and $60,000 of drafting equipment to launch the company in exchange for common stock. b. The company purchased land worth $49,000 for an office by paying $6,300 cash and signing a long- term note payable for $42,700. ¢. The company purchased & portable building with $55,000 cash and moved it onto the land acquired in b. d. The company paid $3.000 cash for the premium on an 18-month insurance policy. e. The company provided services to a client and collected $6.200 cash. f. The company purchased $20,000 of additional drafting equipment by paying $9.500 cash and signing a long-term note payable for $10,500. g. The company completed $14,000 of services for a client. This amount is to be received in 30 days. h. The company purchased $1,150 of additional office equipment on credit. i. The company completed $22,000 of services for a customer on credit. J. The company purchased $1,333 of TV advertising on credit. k. The company collected $7,000 cash in partial payment from the client described in transaction g. I. The company paid $1,200 cash for employee wages. m. The company paid $1,150 cash to settle the account payable created in transaction . n. The company paid $925 cash for repairs. 0. The company paid a $9,480 cash dividend. p. The company paid $1,200 cash for employee wages. q. The company paid $2.500 cash for advertisements on the web during June. Required 1. Prepare general journal entries to record these transactions (use the account titles listed in part 2). 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance col- umn format): Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment (163); Drafting Equipment (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250); Common Stock (307); Dividends (319); Services Revenue (403); Wages Expense (601); Advertising Expense (603); and Repairs Expense (604). Post the journal entries from part 1 to the accounts and enter the balance after each posting. 3. Prepare a trial balance as of the end of June. Denzel Brooks opened a web consulting business called Venture Consultants and completed the following transactions in March. Mar. 1 Brooks invested $150,000 cash along with $22,000 in office equipment in the company in exchange for common stock. 2 The company prepaid $6,000 cash for six months’ rent for an office. Hinz: Debit Prepaid Rent for $6,000. 3 The company made credit purchases of office equipment for $3,000 and office supplies for $1,200. Payment is due within 10 days. 6 The company completed services for a client and immediately received $4,000 cash. 9 The company completed a $7,500 project on credit for a client, who must pay within 30 days. 12 The company paid $4,200 cash to settle the account payable created on March 3. 19 The company paid $5,000 cash for the premium on a 12-month insurance policy. Hint: Debit Prepaid Insurance for $5,000. 22 The company received $3,500 cash as partial payment for the work completed on March 9. 25 The company completed work for another client for $3,820 on credit. 29 The company paid a $5,100 cash dividend. 30 The company purchased $600 of additional office supplies on credit. 31 The company paid $300 cash for this month’s utility bill. Required 1. Prepare general journal entries to record these transactions (use the account titles listed in part 2). 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance col- umn format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance (128); Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); Common Stock (307); Divi- dends (319); Services Revenue (403); and Utilities Expense (690). Post the journal entries from part 1 to the ledger accounts and enter the balance after each posting. 3. Prepare a trial balance as of the end of March.
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Chapter 2 Financial Stetements and the Accounting System Business transactions completed by Hannah Venedict during the month of September are as follows. a. Venedict invested $60.000 cash along with office equipment valued at $25,000 in a new business named HV Consulting in exchange for common stock. b. The company purchased land valued at $40,000 and a building valued at $160,000. The purchase is paid with $30,000 cash and a long-term note payable for $170,000. €. The company purchased $2,000 of office supplies on credit. d. Venedict invested an automobile in the company in exchan, ge for more common stock. The automobile has a value of $16,500. e. The company purchased $5.600 of additional office equipment on credit. f. The company paid $1,800 cash salary to an assistant. 9. The company provided services to a client and collected $8,000 cash. h. The company paid $635 cash for this month’s utilities. i. The company paid $2,000 cash to settle the account payable created in transaction c. j- The company purchased $20,300 of new office equipment by paying $20,300 cash. k. The company completed $6,250 of services on credit for a client, who must pay within 30 days. I. The company paid $1,800 cash salary to an assistant. m. The company received $4,000 cash in partial payment on the receivable created in transaction k. n. The company paid a $2,800 cash dividend. Required 1. Prepare general journal entries to record these transactions (use account titles listed in part 2). 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance column format): Cash (101); Accounts Receivable ( 106); Office Supplies (108); Office Equipment (163); Auto- mobiles (164): Building (170): Land (172); Accounts Payable (201); Notes Payable (250); Common Stock (307); Dividends (319); Consulting Revenue (403); Salaries Expense (601): and Utilities Expense (602). Post the journal entries from part 1 to the ledger accounts and enter the balance after each posting. 3. Prepare a trial balance as of the end of September. Problem 2-4A Recording transactions; posting to ledger; preparing a trial balance P M Check (2)Ending balances: Cash, $12,665; Office Equipment, $50,900 (3) Trial balance totals, $291,350 The accounting records of Nettle Distribution show the following assets and liabilities as of December 31 for Year I and Year 2. Year 1 Year 2 December 31 Year1 Year2 $ 64,300 $ 15,640 Building . $ 0 $80,000 26,240 19,100 Land .... 0 60,000 3,160 1,960 Accounts payable 3,500 33,500 44,000 44,000 Note payable. ... .. ity 0 40,000 148,000 157,000 Required 1. Prepare balance sheets for the business as of December 31 for Year 1 and for Year 2. Hint: Report only total equity on the balance sheet and remember that total equity equals the difference between assets and liabilities. 2. Compute net income for Year 2 by comparing total equity amounts for these two years and using the following information: During Year 2, the owner invested $35.000 additional cash in the business (in exchange for common stock) and the company paid a $19,000 cash dividend. 3. Compute the Year 2 year-end debt ratio. Problem 2-5A Computing net income from equity analysis, preparing a balance sheet, and computing the debt ratio P1 A2 Check (2) Net income, $6,000 (3) Debt ratio, 19.5% Yi Min started an engineering firm called Min Engineering. He began operations and completed seven transactions in May, which included his initial investment of $18,000 cash. After those seven transactions, the ledger included the following accounts with normal balances. $12,900 Dividends L R $37,600 Office equipment .. ... $ 3,370 Office supplies . ... 890 Accounts payable .. ... 12,900 Services revenue. . .. 5x 36,000 Prepaid insurance. . 4,600 Commonstock ....... 18,000 Rentexpense ............... 7.540 [continued on next page] Problem 2-6A Analyzing account balances and reconstructing transactions P1 M
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Chapler 2 Financial Statements and the Accounting System [continued from previous page| Required 1. Prepare a trial balance for this business as of the end of May. 2. The following seven transactions produced the account balances shown above. a. Y. Min invested $18.000 cash in the business in exchange for common stock. b. Paid $7.540 cash for monthly rent expensc for May. c. Paid $4,600 cash in advance for the annual insurance premium beginning the next period. d. Purchased office supplies for $890 cash. e. Purchased $12,900 of office equipment on credit (with accounts payable). . Reccived $36,000 cash for services provided in May. g. The company paid a $3,370 cash dividend. Prepare a Cash T-account, enter the cash effects (if any) of each transaction, and compute the ending Cash balance. Code each entry in the T-account with one of the transaction codes a through g. Problem 2-7A Angela Lopez owns and manages a consulting firm called Metrix, which began operations on Decem- Preparing an income ber 1. On December 31, Metrix shows the following selected accounts and amounts for the month of statement, statement of December. retained earnings, and balance sheet CHEH, 0% s e vableilicin $8,000 Accounts payable P Rental revenue $ 500 Accounts receivable. . . . 3,500 Notespayable ............ Salaries expense 3,000 Notes receivable. 2,500 Unearned revenue ........ 300 Rentexpense 2,000 Office supplies 1,500 Common stock 11,600 Advertising expense. ...... 400 Prepaid insurance. . . .. 1,000 Dividends .... 2,000 Utilities expense. .......... 200 Equipment. ... ...ooevennns 4,000 Consulting revenue ....... 12,000 Required 1. Prepare a December income statement for the business. 2. Prepare a December statement of retaincd earnings. The Retained Earnings account balance at December 1 was $0. and the owner invested $11,600 cash in the company on December 2 in exchange for common stock. 3. Prepare a December 31 balance sheet. Hint: Use the Retained Earnings account balance calculated in part 2. PROBLEM SET B Humble Management Services opened for business and completed these transactions in September. Sep. 1 Henry Humble, the owner, invested $38,000 cash along with office equipment valued at Problem 2-1B $15,000 in the company in exchange for common stock. Preparing and posting 2 The company prepaid $9,000 cash for 12 months’ rent for office space. Hint: Debit Prepaid journal entries; preparing Rent for $9.000. a trial balance 4 The company made credit purchases for $8,000 in office equipment and $2,400 in office sup- P11 A plies. Payment is due within 10 days. § The company completed work for a client and immediately reccived $3,280 cash. 12 The company completed a $15,400 project for a client, who must pay within 30 days. 13 The company paid $10,400 cash to settle the payable created on September 4. 19 The company paid $1,900 cash for the premium on an 18-month insurance prepaid policy. Hint: Debit Prepaid Insurance for $1,900. 22 The company received $7,700 cash as partial payment for the work completed on September 12. 24 The company completed work for another client for $2,100 on credit. 28 The company paid a $5,300 cash dividend. 29 The company purchased $550 of additional office supplies on credit. 30 The company paid $860 cash for this month’s utility bill. Required 1. Prepare general journal entries to record these transactions (use account titles listed in part 2).
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Chapter 2 Financisl Statements and the Accounting System 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance col- umn format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance (128); Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); Common Stock (307); Divi- dends (319): Services Revenue (401); and Utilities Expense (690). Post journal entries from part 1 to the ledger accounts and enter the balance after each posting. 3. Prepare a trial balance as of the end of September. (2) Ending n $2 eiv nts Payab (3) Total debits, $74,330 At the beginning of April, Bernadette Grechus launched a custom computer solutions company called Softworks. The company had the following transactions during April. a. Bernadette Grechus invested $65,000 cash, office equipment with a value of 85,750, and $30,000 of compuler equipment in the company in exchange for common stock. b. The company purchased land worth $22,000 for an office by paying $5,000 cash and signing a long- term note payable for $17,000. ¢. The company purchased a portable building with $34,500 cash and moved it onto the land acquired in b. d. The company paid $5,000 cash for the premium on a two-year insurance policy, e. The company provided services (o a client and immediately collected $4,600 cash. t. The company purchased $4.500 of additional computer equipment by paying $800 cash and signing a long-term note payable for $3,700. 9. The company completed $4,250 of services for a client, This amount is to be received within 30 days. h. The company purchased $950 of additional office equipment on credit. i. The company completed $10,200 of services for a customer on credit, J. The company purchased $580 of TV advertising on credit. k. The company collected $5,100 cash in partial payment from the client described in transaction i. I The company paid $1,800 cash for employee wages. m. The company paid $950 cash to settle the payable created in transaction h. n. The company paid S608 cash for repairs. o. The company paid a $6,230 cash dividend. P. The company paid $1,800 cash for employee wages. 9. The company paid $750 cash for advertisements on the web during April. Required 1. Prepare general journal entries to record these transactions (use account titles listed in part 2). 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance col- umn format): Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment (163); Computer Equipment (164); Building (170); Land (172); Accounts Payable (201); Notes Pay- able (250); Common Stock (307); Dividends (319); Services Revenue (403); Wages Expense (601); Advertising Expense (603); and Repairs Expense (604). Post the journal entries from part 1 to the accounts and enter the balance after each posting. 3. Prepare a trial balance as of the end of April. Problem 2-28 Preparing and posting Jjournal entries; preparing a trial balance P1 A1 $17, (3) Trial balance tolals. $141,080 Zucker Management Services opened for business and completed these transactions in November. Nov. 1 Matt Zucker, the owner, invested $30,000 cash along with $15,000 of office equipment in the company in exchange for common stock. 2 The company prepaid $4.500 cash for six months’ rent for an office. Hint: Debit Prepaid Rent for $4,500. 4 The company made credit purchases of office equipment for $2,500 and office supplies for $600. Payment is due within 10 days. 8 The company completed work for a client and immediately received $3,400 cash. 12 The company completed a $10,200 project on credit for a client, who must pay within 30 days. 13 The company paid $3.100 cash to settle the payable created on November 4. 19 The company paid $1,800 cash for the premium on a 24-month insurance policy. 22 The company received $5,200 cash as partial payment for the work completed on November 12. 24 The company completed work for another client for $1,750 on credit. 28 The company paid 2 $5,300 cash dividend. 29 The company purchased $249 of additional office supplies on credit. 30 The company paid $831 cash for this month’s utility bill. [continued on next page] Problem 2-38 Preparing and posting Journal entries; preparing a trial balance P1 A1
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Chapter 2 Financial Statements and the Accounting System [continued from previous page] ’% Required :\V 1. Prepare general journal entries to record these transactions (use account titles listed in part 2). & Check (2)Ending 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance col- ] $23,069; umn format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance (128); eivable, $8.750; Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); Common Stock (307); Dividends (319); Services Revenue (403); and Utilities Expense (690). Post the journal entries from part | to the ledger accounts and enter the balance after each posting. 3. Prepare a trial balance as of the end of November. Problem 2-4B Nuncio Consulting completed the following transactions during June. Recording transactions; a. Armand Nuncio, the owner, invested $35,000 cash along with office equipment valued at $11,000 in posting to ledger; the new company in exchange for common stock. preparing a trial balance b. The company purchased land valued at $7,500 and a building valued at $40,000. The purchase is paid P11 M with $15,000 cash and a long-term note payable for $32,500. ¢. The company purchased $500 of office supplies on credit. d. A. Nuncio invested an automobile in the company in exchange for more common stock. The automo- bile has a value of $8,000. e. The company purchased $1,200 of additional office equipment on credit. f. The company paid $1,000 cash salary to an assistant. g. The company provided services to a client and collected $3,200 cash. h. The company paid $540 cash for this month’s utilities. I. The company paid $500 cash to settle the payable created in transaction c. jo The company purchased $3,400 of new office equipment by paying $3,400 cash. k. The company completed $4,200 of services on credit for a client, who must pay within 30 days. I. The company paid $1,000 cash salary to an assistant. m. The company received $2,200 cash in partial payment on the receivable created in transaction k. n. The company paid a $1,100 cash dividend. Required 1. Prepare general journal entries to record these transactions (use account titles listed in part 2). Check (2) Ending 2. Open the following ledger accounts—their account numbers are in parentheses (use the balance column balan Cash, $17,860; format): Cash (101); Accounts Receivable (106); Office Supplies (108); Office Equipment (163); Auto- Office Equipment, $15,600 mobiles (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250); Common Stock (307); Dividends (319); Consulting Revenue (403); Salaries Expense (601); and Utilities Expense (602). Post the journal entries from part 1 to the ledger accounts and enter the balance after each posting. iotes, 595100 3. Prepare a trial balance as of the end of June. (3) Trial bala Problem 2-5B The accounting records of Tama Co. show the following assets and liabilities as of December 31 for Year 1 Computing net income and for Year 2. from equity analysis, preparing a balance Year1 Year2 December3t December 31 ‘5% sheet, and computing % the d(‘?bt ratio $30,000 $ 5,000 Building. . $ 0 $250,000 . Accounts receivable. 35,000 25,000 Lang . oidis e 0 50,000 % P1 A2 Office supplies . . 8,000 13,500 Accounts payable . 4,000 12,000 < Office equipment 40,000 40,000 Note payable ............. 0 250,000 Machinery 28,000 28,500 Required 1. Prepare balance sheets for the business as of December 31 for Year 1 and Year 2. Hint: Report only total equity on the balance sheet and remember that total equity equals the difference between assets and liabilities. Check (2) Netincome, 2. Compute net income for Year 2 by comparing total equity amounts for these two years and using the $11.000 following information: During Year 2, the owner invested $5,000 additional cash in the business (in exchange for common stock) and the company paid a $3,000 cash dividend. tratio, 63.6% 3. Compute the Year 2 debt ratio.
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Chapter 2 Financial Statements and the Accounting System Roshaun Gould started a web consulting firm called Gould Solutions. He began operations and completed seven transactions in April that resulted in the following accounts, which all have normal balances. $20,000 Office equipment Dividends. ................. Cash \voovoooiinoon.. $20,000 Office equipment . ... . $12,250 Office supplies ........ 750 Accounts payable ... .. 12,250 Consulting revenue, . ........ 20,400 Prepaidrent . .. 1,800 Common stock ....... 15,000 Miscellaneous expenses. ... .. 7,650 Required 1. Prepare a trial balance for this business as of the end of April. 2. The following seven transactions produced the account balances shown ahove. a. Gould invested $15,000 cash in the business in exchange for common stock. b. Paid $1,800 cash in advance for next month’s rent expense. c. Paid $7.650 cash for miscellaneous expenses. d. Purchased office supplies for $750 cash. e. Purchased $12.250 of office equipment on credit (with accounts payable). f. Received $20,400 cash for consulting services provided in April. g. The company paid a $5,200 cash dividend. Prepare a Cash T-account, enter the cash effects (if any) of each transaction, and compute the ending Cash balance. Code each entry in the T-account with one of the transaction codes a through g. Victoria Rivera owns and manages a consulting firm called Prisek, which began operations on July 1. On $24,000 Accounts payable ......... Rentalrevenue ......... $1,500 Accounts receivable 10,500 Notes payable. . . . Salaries expense 9,000 Notes receivable. 7.500 Unearned revenue Rent expense . . 6,000 Office supplies 4,500 Common stock . 34,800 Advertising expense. 1,200 Prepaid insuranc 3,000 Dividends . .. 6,000 Utilities expense. . . 600 Equipment. . 12,000 Consulting revenue ....... 36,000 Required 1. Prepare a July income statement for the business. 2. Prepare a July statement of retained carnings. The Retained Earnings account balance at July 1 was $0, and the owner invested $34,800 cash in the company on July 2 in exchange for common stock. 3. Preparc a July 31 balance sheet. Hint: Use the Retained Earnings account balance calculated in part 2. i connect’ Serial problem started in Chapter 1. If the Chapter 1 segment was not completed, the problem can begin at this point. It is available in Connect with an algorithmic option. SP 2 On October 1, 2020, Santana Rey launched a computer services company called Business Solutions, which provides consulting services, computer system installations, and custom program devel- opment. The company’s initial chart of accounts follows. Cash. . 101 Common Stock . . 307 Accounts Receivable . 106 Dividends ...... 319 Computer Supplies .............. 126 Computer Services Revenue 403 Prepaid Insurance 128 Wages Expense .. .. 623 PrERRIdRBIN s et sninnn s 131 Advertising Expense, 655 Office Equipment ............... 163 Mileage Expense .. . 676 Computer Equipment ............ 167 Miscellaneous Expenses ................ 677 Accounts Payable ............... 201 Repairs Expense—Computer 684 [continued on next page] Problem 2-6B Analyzing account balances and reconstructing transactions PT M Check (1) Trial balance totals, $47,6! Problem 2-7B Preparing an income statement, statement of retained earnings, and balance sheet P1 SERIAL PROBLEM Business Solutions Alexander Image/Shutterstock
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Check (2) Cash, Nov. 30 bal., $38 (3) Trial ba $8,659 P TABLEAU DASHBOARD ACTIVITIES B GENERAL LEDGER Chapter 2 Financial Statements and the Accounting System [continued from previous page] Required 1. Prepare journal entries to record each of the following transactions for Business Solutions. Oct. 1 8. Rey invested $45,000 cash, a $20,000 computer system, and $8,000 of office equipment in the company in exchange for common stock. 2 The company paid $3,300 cash for four months’ rent. Hint: Debit Prepaid Rent for $3,300. The company purchased $1,420 of computer supplies on credit from Harris Office Products. 5 The company paid $2,220 cash for one year’s premium on a property and liability insurance policy. Hint: Debit Prepaid Insurance for $2,220. 6 The company billed Easy Leasing $4,800 for services performed in installing a new web server. 8 The company paid $1,420 cash for the computer supplies purchased from Harris Office Prod- ucts on October 3. 10 The company hired Lyn Addie as a part-time assistant. 12 The company billed Easy Leasing another $1,400 for services performed. 15 The company received $4,800 cash from Easy Leasing as partial payment on its account. 17 The company paid $803 cash to repair computer equipment that was damaged when moving it. 20 The company paid $1,728 cash for advertisements. 22 The company received $1,400 cash from Easy Leasing on its account. 28 The company billed IFM Company $5,208 for services performed. 31 The company paid $875 cash for Lyn Addie’s wages for seven days’” work. 31 The company paid a $3,600 cash dividend. Nov. 1 The company paid $320 cash for mileage expenses. 2 The company received $4,633 cash from Liu Corporation for computer services performed. 5 The company purchased computer supplics for $1.125 cash from Harris Office Products. & The company billed Gomez Co. $5,668 for services performed. 13 The company agreed to perform future services for Alex’s Engineering Co. No work has yet been performed. 18 The company received $2,208 cash from IFM Company as partial payment of the October 28 bill. 22 The company paid $250 cash for miscellaneous expenses. Hinz: Debit Miscellaneous Expenses for $250. 24 The company completed work and sent a bill for $3,950 to Alex’s Engineering Co. 25 The company sent another bill to IFM Company for the past-duc amount of $3,000. 28 The company paid $384 cash for mileage expenses. 30 The company paid $1,750 cash for Lyn Addie’s wages for 14 days” work. 30 The company paid a $2,000 cash dividend. 2. Open ledger accounts (in balance column format) and post the journal entries from part | to them. 3. Prepare a trial balance as of the end of November. w Tableau Dashboard Activities expose students (o accounting analytics using visual displays. These assignments (1) do not require instructors to know Tableau, (2) are accessible to introductory students, (3) do not require Tableau software, and (4) run in Connect. All arc auto-gradable. Tableau DA 2-1 Quick Study, Identifying normal balance, C2—similar to QS 2-4 and 2-5. Tableau DA 2-2 Exercise, Preparing an income statement, P1—similar to QS 2-15. Tableau DA 2-3 Mini-Case, Preparing an income statement, statement of retained earnings, and balance sheet, P1—similar to Exercises 2-25, 2-26, and 2-27. General Ledger (GL) Assignments expose students to general ledger software similar to that in practice. GL i part of Connect. and GL assignments arc aulo-gradable and have algorithmic options. For the following GL assignments, we prepare journal entries and identify the financial statement impacts of each entry. Financial statements are automatically generated based on the journal entries recorded—this feature can be turned off. GL 2-1 Based on FastForward GL 2-3 Based on Exercise 2-16 GL 2-2 Based on Exercise 2-13 GL 2-4 Based on Problem 2-1A For the following GL assignments, we record journal cntries, create financial statements, and assess the impact of each transaction on [inancial statements. GL 2-5 Based on Problem 2-2A GL 2-7 Based on Problem 2-4A GL 2-6 Based on Problem 2-3A GL 2-8 Based on the Serial Problem SP 2
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Chapter 2 Financial Statements and the Accounting System Financial Statement Analysis - FSA 2-1 Refer to Apple’s financial statements in Appendix A for the following questions. COMPANY Required ANALYSIS 1. What amount of (otal liabilities does Apple report for each of the fiscal years ended (a) September 29, A2 2018, and (b) September 30, 20177 2. What amount of total assets does it report for each of the fiscal years ended (a) September 29, 2018, and (b) September 30, 2017? 3. Compute its debt ratio for each of the fiscal years ended (a) September 29, 2018, and (b) September 30, 2017. (Report ratio in percent and round it to one decimal.) 4. Tn which fiscal year did it employ more financial leverage: the year ending September 29, 2018, or September 30, 20172 Explain. FSA 2.2 Key comparative figures for Apple and Google follow. COMPARATIVE » o o ; ANALYSIS A2 Total liabilities .. ................. $258,578 $241,272 $ 55,164 § 44,793 Total dssets vl e saiaon 365,725 375,319 232,792 197,295 1. What is the debt ratio for Apple in the current year and for the prior year? 2. What is the debt ratio for Google in the current year and for the prior year? 3. Which of the two companies has the higher degree of financial leverage in the current year? FSA 2-3 Key comparative figures for Apple, Google, and Samsung follow. GLOBAL ANALYSIS R W 91,604,067 W 87,260,662 $258,578 $ 55,164 339,357.244 301,752,090 365,725 232,792 Total liabilities. . . . Total assets Required 1. Compute Samsung’s debt ratio for the current year and prior year. 2. Did Samsung’s financial leverage increase or decrease in the current year? 3. Looking at the current-year debt ratio, is Samsung a more risky or less risky investment than (a) Apple and (b) Google? [P IETTETLT Re TV () Y : ‘ : 1. Provide the names of two (a) asset accounts, (b) liability 7. If assets are valuable resources and asset accounts have accounts, and (c) equity accounts. debil balances, why do expense accounts also have debit 2. What is the difference between a note payable and an balances? account payable? 8. Why does the recordkeeper prepare a trial balance? 3. Discuss the steps in processing business transactions. 9. If an incorrect amount is journalized and posted to the 4. What kinds of transactions can be recorded in a general accounts, how should the error be corrected? journal? 10. Identify the four financial statements of a business. Are debits or credits typically listed first in general journal ~ 11. What information is reported in a balance sheet? entries? Are the debits or the credits indented? 12. What information is reported in an income statement? Should a transaction be recorded first in a journal or the 43, Why does the user of an income statement need to know the ledger? Why? time period that it covers? e
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84 Chapter 2 Financial Statements and the Accounting System 14. Define (a) assets, (b) liabilities, and (c) equity. 17. Review the Google balance sheet in GOOGLE 15. Which financial statement is sometimes called the stare- Appendix A. Tdentify an asset with the ] ment of financial position? word receivable in its account title and a liability with the ~ 16. Review the Apple balance sheet in Appendix A. APPLE word payable in its account title. Identify three accounts on its balance sheet that 18. Review the Samsung balance sheet in s i i Appendix A. Identify three current liabil- 2 8MSUNgG carry debit balances and three accounts on its balance sheet ppendix A. Identity three current liabil- that carry credit balances. ities and three noncurrent liabilities in its balance sheet. Beyond the Numbers -:f ETHICS BTN 2-1 Assume that you are a cashier and your manager requires that you immediately enter each sale 2 b Y g qt 2 CHALLENGE when it occurs. Recently, lunch hour traffic has increased and the assistant manager asks you to avoid 1 delays by taking customers’ cash and making change without entering sales. The assistant manager says she will add up cash and enter sales after lunch. She says that, in this way, customers will be happy and the register record will always match the cash amount when the manager arrives at three o’clock. The advantages to the process proposed by the assistant manager include improved customer service, fewer delays, and less work for you. The disadvantage is that the assistant manager could steal cash by simply recording less sales than the cash received and then pocketing the excess cash. You decide to reject her suggestion without the manager’s approval and to confront her on the ethics of her suggestion. Required Propose and evaluate two other courses of action you might consider, and explain why. COMMUNICATING eTn2-2 Lila Corentine is an aspiring entrepreneur and your friend. She is having difficulty understand- IN PRACTICE ing the purposes of financial statements and how they fit together across time. [l Required Write a one-page memorandum to Corentine explaining the purposes of the four financial statements and how they are linked across time. TAKING IT TO BTN 2.3 Access EDGAR online (sec.gov/edgar) and locate the 2018 10-K report of Amazon.com THE NET (ticker: AMZN) filed on February 1, 2019, Review its financial statements reported for years ended 2018, P 2017, and 2016 to answer the following questions. Required 1. What are the amounts of Amazon’s net income or net loss reported for each of these three years? 2. Do Amazon’s operating activities provide cash or use cash for each of these three years? Hinz: See the statement of cash flows. 3. If Amazon has 2018 net income of $10,073 million and 2018 operating cash {lows of $30,723 million, how is it possible that its cash balance at December 31, 2018, increases by only $10,317 million rela- tive to its balance at December 31, 20177 TEAMWORK IN BTN 2-4 The expanded accounting equation consists of assets, liabilities, common stock, dividends, ACTION revenues, and expenses. Tt can be used to reveal insights into changes in a company’s financial position. ¢ M Required 1. Form learning teams of six (or more) members. Each team member must select one of the six compo- nents, and each teamn must have at least one expert on each component: (@) assets, (b) liabilities, (¢) common stock, (d) dividends, (¢) revenues, and (f) expenses.
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Chapter 2 Financial Statements and the Accounting System 2. Form expert teams of individuals who selected the same component in part |. Expert teams are to draft a report that each expert will present to his or her learning team addressing the following: Identify for its component the (i) increase and decrease side of the account and (i) normal balance side of the account. T Describe a transaction, with amounts, that increases its component. Using the transaction and amounts in (b), verify the equality of the accounting equation and then explain any effects on the income statement and statement of cash flows. Describe a transaction, with amounts, that decreases its component. Using the transaction and amounts in (d), verify the equality of the accounting equation and then explain any effects on the income statement and statement of cash flows. Each expert should return to his/her learning team. In rotation, each member presents his/her expert team’s report to the learning team. Team discussion is encouraged. n (o BTN 2.5 Assume that Katrina Lake of Stitch Fix plans to expand her business to accommodate more ENTREPRENEURIAL product lines. She is considering financing expansion in one of two ways: (1) contributing more of her DECISION own funds to the business or (2) borrowing the funds from a bank. Pl A2 Required Identify at least two issues that Katrina should consider when trying to decide on the method for financing the expansion, BTN 2.6 Angel Martin is a young entrepreneur who operates Martin Music Services, offering singing ENTREPRENEURIAL lessons and instruction on musical instruments. Martin wishes to expand but needs a $30,000 loan. The DECISION bank requests that Martin prepare a balance sheet and key financial ratios. Martin has not kept formal P A2 records but is able to provide the following accounts and their amounts as of December 31. Cash .... $ 3,600 Accounts receivable ... ... $ 9,600 Prepaid insurance ....... $ 1,500 Prepaid rent. . 9,400 Store supplies ........... 6,600 Equipment .. 50,000 Accounts payable . 2,200 Unearned lesson fees ..... 15,600 Total equity*. 62,900 Annual net income, 40,000 *The total equity amount reflects all owner investments, dividends, revenues, and expenses as of December 31. Required 1. Prepare a balance sheet as of December 31 for Martin Music Services. (Report only the total equity amount on the balance sheet.) 2. Compute Martin’s debt ratio and its return on assets (the latter ratio is defined in Chapter 1). Assume average assets equal its ending balance. 3. Do you believe the prospects of a $30,000 bank loan are good? Why or why not? BTN 2-7 Obtain a recent copy of the most prominent newspaper distributed in your area. Research the HITTING THE classified section and prepare a report answering the following questions (attach relevant printouts to your ~ROAD report). Alternatively, you may want to search the web for the required information. One suitable website I is CareerOneStop (CareerOneStop.org). For documentation, print copies of websites accessed. 1. Identify the number of listings for accounting positions and the various accounting job titles. 2. Identify the number of listings for other job titles, with examples, that require or prefer accounting knowledge/experience but are not specifically accounting positions. 3. Specify the salary range for the accounting and accounting-related positions if provided. 4. Indicate the job that appeals most to you, the reason for its appeal, and its requirements. Design Element: ©Danil Melekhin/Getty Images
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Chapter Preview DEFERRAL DEFERRAL ~ ACCRUED | ACCRUED I REPORTING OF EXPENSE OF REVENUE EXPENSE ' REVENUE Ff C1 Timing | P2 Framework | P3 Framework P4 Framework || P5 Adjusted trial et Accrual vs. cash | | Examples | | Examples Examples palence g | 1 1 Financial i 3-Step process | i i Stmmary statements : P1 Framework | P6 Closing process ; Examples ' | C2 Classified | % | balance sheet | t A1 Profit margin & ‘ i current ratio | [ | |1 | NTK 3-1 NTK 3-2 ) NTK 3-3 \ NTK 3-4 ) NTK 3-5,6,7 | S . S/ < Learning Objectives CONCEPTUAL PROCEDURAL P5 pPrevare financial statements from an C1 Explain the importance of periodic P1 Prepare adjusting entries for deferral of adjusted tral balance. reperting and the role of accrual expenses. P& Prepare closing entries and a post- accounting. P2 Prepare adjusting entries for deferral of closing triel balance. C2 Explain and prepare & classified balence revenues. P7 Appendix 3A—Explain the allernatives in sheet. i } P3 Prepare adjusting entries for accrued aceounting for prepaids ANALYTICAL expenses: P8 Appendix 3B—Prepare a work sheet and A1 Compute and analyze profit margin and P4 Prepare adjusting entries for accrued explain ts usefuiness. current ratio. revenues P9 Appendix 3C—Prepare reversing entries and explain their purpose.
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Once upon a  time,  there was an amazing group of  students who  studied at Cronfwoman University.   News had spread about how good these students were – both at school work, and at working with each  other.  They chit‐chatted with  their neighbors in class, collaboratively worked with  them and shared  many a smiles with them.  The amazing students were approached by an investor, Ms Finn Ance Major,  who asked for their help.  The investor was contemplating setting up a Sandwich Shop at the University  and wondered if that was a good investment.    What is your recommendation to Ms Finn Ance Major?  Here is some information to get you started:  1. The Sandwich Shop will sell made‐to‐order cold and hot sandwiches, and non‐alcoholic beverages  only  2. The University has an intake of 6,000 students  for  the 3‐year Undergraduate program and 1,000  students for the 2‐year Master’s Program per year  3. There are a 4 other food options on campus  – but none of these offer sandwiches   4.…
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Mini Case Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Your product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have established your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO and then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you need to answer for yourself, and potential investors, the following questions. What is an agency relationship? When you first begin operations, assuming you are the only employee and only your money is invested in the business, would any agency conflicts exist? If you expanded and hired…
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