Chapter 4 - In Class Demo Questions - W2023

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Toronto Metropolitan University *

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100

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Accounting

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Apr 3, 2024

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In Class Demo Questions ICDQ4-1 Below are listed the June 30th balances for GlamPhoto, a photography business in Oakville that started on June 1, Year 1. All the accounts and items are listed in random order. FIRST, without looking at any of the previous pages of this textbook OR your notes determine if the description is an account or an activity. If it is an account indicate the element and the sub-element if applicable (for example, current or long-term liabilities). If it is an activity indicate what type of activity it is (financing, investing, or operating). You may wish to use the following short forms for the elements: A for assets, L for liabilities, E for equity, R for revenues, and X for expenses. For the financial statements you may wish to use the following short forms: IS for income statement, RE for statement of retained earnings, BS for balance sheet, CF for statement of cash flows. For each activity you may wish to use the following short forms: O for operating, I for investing, and F for financing. Remember to indicate for each activity if it is an inflow (+) or an outflow (-). Description Amount Which Element or Activity Which Financial Statement Cash receipts from customers 2,295 O+ CF Rent expense 1,100 X IS Website expense 27 X IS Supplies expense 259 X IS Accounts payable 1,041 L - current BS Service revenue 2,221 R IS Owner's capital 2,550 E BS Deferred Revenue 950 L – current BS Cash payments to suppliers 2,395 O- CF Accounts receivable 876 A – current BS Advertising expense 508 X IS Purchase of intangibles 750 I- CF Website design 750 A-intangible BS Prepaid expense 246 A-current BS Business licence 60 A-intangible CF Capital contributions by owners 2,550 F+ CF Cash, end of period 5,390 A – Current BS Prepaid insurance 1,296 A-current BS Cash received from debt 3,750 F+ CF Loan payable (due in Year 3) 3,750 L-long term BS

Create the income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows in good form, with proper headings and format. You have been given 3 pages, including this one, to create the statements. G lam Photos Income Statement Period ending June 30, year 1 Revenues Service Revenue $2221 Operating expenses Rent $1100 Advertising 508 Supplies 254 Website 27 Total Operating Expense 1894 Profit before income tax 327 Income tax 0 Profit $327 In the income statement you order expenses by ‘largest to smallest value’ Glam Photos Statement of Retained Earnings Period ending June 30, Year 1 Opening Retained Earnings, June 1 0 Add Profit 327 Deduct Dividends 0 Closing retained earnings, June 30 $327 Balance sheet on the next page.

Glam Photos Balance Sheet June 30, Year 1 Assets Cash 5390 Accounts receivable 876 Prepaid expenses 246 Prepaid Insurance 1296 Total Current Assets 7808 Intangibles Website design 750 Business License 60 Total Intangibles 810 Total Assets 8618 Liabilities Current Liabilities Accounts Payable $1041 Deferred Revenue 950 Total Current Liabilities $1991 Long-term Liabilities Loan Payable 3750 Total Liabilities 5741 Equity Owners Capital 2550 Retained Earnings 327 Total Equites 2877 Total Liabilities and Equity 8618 In the balance sheet under assets and liabilities you order each transaction by “fastest to cash” Statement of cash flows on the next page.

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Glam Photos Statement of Cash Flows Period ending June 30, Year 1 Cash flows from operating activities Cash receipts from customers $2295 Cash Payments to suppliers -2395 Cash Outflow from operating activities $-100 Cash flows from Investing Activities Purchase of Intangibles 810 Cash outflow from investing activities $810 Cash flows from financing Activities Capital Contribution by owners $2550 Cash received from debt 3750 Cash inflow from financing activities $6300 Net Inflow of Cash 5390 Beginning cash June 1 0 Ending cash June 30 5390 Was GlamPhotos profitable? Was the profit high enough in comparison to the revenues earned? What were the major expenses and was there a way the company might have reduced those expenses? Gross Profit Ratio = 327(profit) / 2221(revenue) = 14.7% Yes it was profitable. The major expense was rent of $1100, and we need more information to determine if the company can reduce the expense. Additional questions on the next page.

Did the business pay any dividends to the owners? Given its profit position, what would be the maximum amount of dividends that could be paid? If the company retained all of its profits, why would it do that? No. From retained earnings statement. The maximum amount of dividends that could be paid is $327(total profit) The business would retain all its profits so that it can invest back into the business, and you can payback debt. What is the breakdown of the assets on the balance sheet? If the business discontinued operations immediately, would it be able to pay its outstanding liabilities? When are the debts due? What are the total liabilities in relationship to the total assets? How much of the business is funded through debt (total liabilities) compared to equity (total equity)? Mostly current assets Cannot pay all liabilities unless all AR is collected. 3 years. 5741(liabilities) to 8618(assets) 5741(liabilities) to 2877(equity) Questions continue on the next page.

Was the business able to generate cash from its day to day operations? If the business was to purchase new equipment worth $5,000 next month, would it be able to do so or would it have to borrow from creditors (the bank, for instance)? Can any predictions be made on future cash flows given the current statement of cash flows? No. No.

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ICDQ4-2 Below are listed the balances for Shalini DiVinto, Lawyer. It is the end of the month, April 30, Year 1. All of the accounts and items are listed in random order. FIRST, without looking at any of the previous pages of this textbook OR your notes determine if the description is an account or an activity. If it is an account, indicate the element and the sub-element if applicable (for example, current or long-term liabilities). If it is an activity, indicate what type of activity it is (financing, investing, or operating). You may wish to use the following short forms for the elements : A for assets, L for liabilities, E for equity, R for revenues, and X for expenses. For the financial statements you may wish to use the following short forms: IS for income statement, RE for statement of retained earnings, BS for balance sheet, CF for statement of cash flows. For each activity you may wish to use the following short forms: O for operating, I for investing, and F for financing. Remember to indicate for each activity if it is an inflow (+) or an outflow (-). Account/Activity Name Amount Element/Activity Financial Statement Capital contributions by owners 20,000 F+ CF Rent expense 1,250 X IS Office supplies 175 A BS Website expense 20 X IS Purchase of intangibles 1,000 I- CF Website design 1,000 A-intangible BS Insurance expense 175 X IS Service revenue 5,130 R IS Accounts receivable 780 A-current BS Cash payments to suppliers 6,669 O- CF Telephone expense 192 X IS Owner's capital 20,000 E BS Business licence 60 A-intangible BS Cash 17,821 A-current BS Cash receipts from customers 5,550 O+ CF Utilities expense 172 X IS Income tax payable 59 L-current BS Income tax expense 59 X IS Office supplies expense 310 X IS Prepaid Insurance 1,925 A-current BS Deferred Revenue 1,200 L-current BS Bank charges expense 15 X IS Advertising expense 2,760 X IS Prepaid rent 2,500 A-current BS Accounts payable 2,825 L-current BS

Create the financial statements (all four of them) in good form (meaning proper format, headings, subheadings, totals and subtotals). Answer the questions that follow. S halini DiVinto Lawyer Income Statement Period ending April 30, Year 1 Revenues Service Revenue Operating Expenses Rent Advertising Bank charges Office supplies Utilities Telephone Insurance Website Total Operating Expense Profit before Income Tax Income Tax Profit After Income Tax S halini DiVinto Lawyer Statement of Retained Earnings Period Ending April 30, Year 1 Opening Retained earnings Add Profit Deduct Dividends Closing Retained Earnings Balance sheet on the next page.

Shalini DiVinto Lawyer Balance Sheet Period Ending April 30, Year 1 Assets Cash Accounts Receivable Prepaid Insurance Prepaid Rent Total Current Assets Intangibles Business license Website Design Total Intangibles Total Assets Liabilities Current Liabilities Deferred Revenue Accounts payable Income Tax payable Total Current Liabilities Long Term Liabilities - Total Liabilities Equity Owners Capital Retained Earnings Total Equity Total Liabilities and Equity Statement of Cash Flows is on the next page.

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Shalini DiVinto Lawyer Statement Of Cash Flows Period Ending April 30, Year 1 What questions can you answer by using the financial statements that you are not able to answer when you analyze transactions using the basic accounting equation (see Chapter 2 for the analysis of transactions using the basic accounting equation)? How much of profit – income statement Balance sheet – financial position of the business Retained earnings – where your retained earnings came from and how they changed through the year Cash flows – shows how much cash the business has and how cash was spent Questions continue on the next page.

Can you (remember that you are Shalini DiVinto) pay off your credit card bill when it comes in? How do you know that? Which statement did you look at? Yes. I know it using the balance sheet or cash flow statement. Does the current cash position of the company come from the cash you generated from your operations or another source (HINT: look at the statement of cash flows!) Mainly comes from financing activities. (from the owner)

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