m06 chapter 15 mini sim on accounting and accounting information

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Ivy Tech Community College, Indianapolis *

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Finance

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Feb 20, 2024

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m06 chapter 15 mini sim on accounting and accounting information Decision Point: The First Meeting At your first meeting with Alex, you ask to see his most recent financial statements so that you can get an overall assessment of the restaurant's financial health. Alex looks at you blankly and says, "I'm a chef, not an accountant, and I don't know what financial statements you're talking about. Can you explain to me?" What should your response be? Select an option from the choices below and click Submit. The financial statements for your restaurant summarize its financial information for a given period of time. The three most important statements are the statement of cash flows, the income statement, and the budget. The financial statements for your restaurant summarize its financial information for a given period of time. The three most important statements are the balance sheet, the statement of cash flows, and the income statement. The financial statements for your restaurant summarize its financial information for a given period of time. The three most important statements are the statement of cash flows, the balance sheet, and the budget. You chose that the three most important statements are the balance sheet, the statement of cash flows, and the income statement. That was the best choice. The restaurant's financial statements summarize its financial information for a given

period of time, and the three most important statements are the balance sheet, the income statement, and the statement of cash flows. Decision Point: The Balance Sheet: Assets "Let's start out slowly," you suggest to Alex. "We'll put together a balance sheet first and see where we stand. The first section of the balance sheet lists your assets, so let's start with those. Assets are things that the restaurant owns. Do you have that information?" Alex tells you that he had to prepare a list of equipment for his insurance agent, and he has a pretty good idea of his inventory. "That's a good start," you tell Alex, "but don't forget about the cash you have on hand, how much you have in checking or savings accounts, and any accounts receivable -- money you're owed from customers." Alex turns to his computer and after a few minutes, he hands you a list. "This is exactly what I need," you tell him. "Now we're going to list these assets as current assets or fixed assets, and we'll put the current assets in the order of liquidity -- in other words, how easily they can be converted into cash. Then we'll have the first part of our balance sheet." Accounting Assets Assets Amount Assets Amount Cash on hand $2000 Office equipment $11,400 Checking account balance $13,240 Restaurant furniture/fixtures $37,000 Certificate of deposit at bank $25,000 Kitchen/bar equipment $68,900

Assets Amount Assets Amount Accounts receivable from catering $3,000 Building $300,000 Food/beverage inventory $28,000 Drag each of the assets listed into the correct category in the asset portion of Alex's Ristorante's balance sheet. Remember, the current assets should be listed in order of liquidity, with the most liquid assets at the top. Alex's Ristorante Balance Sheet Current Assets: Current Assets: Droppable Current Assets: Droppable Cash on hand $2500 Checking account balance $13240 Certificate of deposit at bank $25000 Accounts receivable from catering $3000 Food/beverage inventory $28000 Total current assets $

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71740 Fixed Assets: Fixed Assets: Droppable Fixed Assets: Droppable Building $300000 Kitchen/bar equipment $68900 Restaurant furniture/fixtures $37000 Office equipment $11400 Total fixed assets $ 417300 Total Assets $ 489040 When asked to list current and fixed assets for Alex's Ristorante, you correctly categorized all items. Great job! Decision Point: The Balance Sheet: Liabilities

You explain to Alex that the second part of the balance sheet lists his liabilities -- amounts that the restaurant owes to other parties. After some digging, Alex puts together a list of what he owes. Alex's Ristorante Balance Sheet Liability Amount Accounts payable $14,344 Sales and liquor tax payable $8,200 Mortgage on building $55,300 Payroll taxes payable $15,600 Note payable (due in November) $27,500 You look over the list and tell Alex, "Now we're going to separate these liabilities into two categories -- current liabilities, which need to be paid within a year, and long-term liabilities." Drag each of the liabilities listed into the correct category in the liabilities section of Alex's Ristorante's balance sheet. Alex's Ristorante Balance Sheet Current Liabilities Current Liabilities Droppable Current Liabilities Droppable Payroll taxes payable $15600 Accounts payable $14344

Sales and liquor tax payable $8200 Note payable $27500 Total current liabilities $ 65644 Long-Term Liabilities Long-Term Liabilities Droppable Long-Term Liabilities Droppable Mortgage on building $255300 Total long-term liabilities $ 255300 Total liabilities $ 320944 When asked to list current and long-term liabilities for Alex's Ristorante, you correctly categorized all the items. Great job! Decision Point: The Balance Sheet: Owners' Equity You tell Alex that you're almost done with the balance sheet. Because his restaurant is a sole proprietorship, there's only one section that still needs to be completed: owners' equity. He asks what that is and how you calculate it.

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How should you respond to Alex? Select an option from the choices below and click Submit. Owners' equity is the total assets of the restaurant, plus its total liabilities. It's calculated as: Assets + Liabilities = Owners' Equity Owners' equity is the total assets of the restaurant plus paid-in capital (how much Alex put into the restaurant to get it started), less the liabilities. It's calculated as: Assets + Paid-in Capital - Liabilities = Owners' Equity Owners' equity on the balance sheet is the difference between the assets and liabilities. It's calculated as: Assets = Liabilities + Owners' Equity You chose Assets = Liabilities + Owners' Equity. That was the best choice. The layout of a balance sheet reflects this basic accounting equation. The acronym to remember is: A = L + E Decision Point: How to Show Dividends If Alex's Ristorante were a corporation, and instead of paying out dividends to its shareholders, it kept the profits to be used for future growth, how would this amount be shown on the balance sheet?

Select an option from the choices below and click Submit. Retained earnings Paid-in capital Contributed capital You chose retained earnings. That was the best choice. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to shareholders. They accumulate when profits, which can be distributed to shareholders, are kept instead for the company's use. Decision Point: The Difference Between an Income Statement and a Balance Sheet You tell Alex that the two of you are off to a great start. The balance sheet is completed, and it's time to start putting together an income statement for the restaurant. Alex doesn't understand why you need to put together both an income statement and a balance sheet. What's the difference between them? What's the best way to respond to him? Select an option from the choices below and click Submit.

The statements show two different things. The income statement provides the most detail about how the restaurant generates and uses cash, whereas the balance sheet is like a snapshot of the restaurant's financial condition at a specific point in time. The statements show two different things. The balance sheet shows the financial results of the restaurant during a specific period of time, whereas the income statement shows the financial condition of the firm at a specific point in time. The statements show two different things. The income statement takes all income and expenses into account and shows how the restaurant performs over a period of time, whereas the balance sheet is like a snapshot of the restaurant's financial condition at a specific point in time. You chose that the income statement shows how the restaurant performs over a period of time, whereas the balance sheet is like a snapshot of the restaurant's financial condition at a specific point in time. That was the best choice. The income statement is sometimes called a profit-and-loss statement because it shows how a business performs over a period of time, taking into account all income and expenses. The income statement reveals whether the business is making a profit. The balance sheet, also known as a statement of financial position, is a snapshot of a business's financial condition at a specific point in time and reveals the business's assets, liabilities, and owners' or shareholders' equity. Decision Point: The Income Statement You explain the basic format of the income statement to Alex. When he sells a meal or a drink in his restaurant, he receives revenues -- funds that flow into his business from the sale of goods or services. On the income statement, he then needs to subtract the cost of revenues (or cost

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of goods sold) -- the cost to his restaurant of the food and beverages it sells. When he subtracts the cost of revenues from revenues, the result is his gross profit. He then needs to subtract his operating expenses. These are expenses incurred in running the restaurant, such as utilities, insurance, payroll, cleaning supplies, and the like. Alex also needs to then subtract approximated taxes in order to arrive at his net income. Consider the items shown below and drag them to the appropriate section of the income statement template. Revenues (Gross Sales) Droppable Revenues (Gross Sales) Droppable Revenues (Gross Sales) Food/beverage sales Cost of Revenues Droppable Cost of Revenues Droppable Cost of Revenues Purchase of wine Purchase of eggs, dairy, and cheese Purchase of fruit and vegetables Purchase of meat/poultry Operating Expenses Droppable Operating Expenses Droppable Operating Expenses Laundry service Mortgage payment Labor Replacement of glassware Business insurance Air conditioning repair Monthly utilities

When asked to categorize items as either revenues, cost of revenues, or operating expenses, you correctly identified all 12 items. Great job! Decision Point: The Parts of the Statement of Cash Flows Alex seems to be catching on faster than you thought he would, so you go on to try to explain the last major financial statement to him -- the statement of cash flows. You tell Alex that the statement of cash flows shows the effect of cash on three aspects of a business. Which three aspects are they? Select an option from the choices below and click Submit. Assets, liabilities, and owners' equity Operating, investing, and financing Current, fixed, and intangible operations Revenues, expenses, and profit/loss You chose operating, investing, and financing. That was the best choice. The statement of cash flows shows the effects of cash on a business's operating, investing, and financing activities.

Decision Point: The Statement of Cash Flows It doesn't surprise you at all that Alex is a bit confused by what these activities mean. You explain the following:  Cash flows from operations are cash inflows and outflows caused by the restaurant's main business -- selling food and beverages and catering.  Cash flows from investing are payments made to acquire long-term assets or cash received from the sale of long-term assets.  Cash flows from financing reflect changes in debt, loans, or dividends. You're still getting a blank look from Alex, so you give him a series of examples to help him understand the different categories. Consider each of the following items and determine whether it affects cash flows from operating, investing, or financing, and whether it is a cash inflow or a cash outflow. Then drag and drop that item into the correct bucket and click Submit. Cash Inflow from Operations Droppable Cash Inflow from Operations Droppable Cash Inflow from Operations 6. A customer pays her lunch bill in cash. 9. A catering customer pays you by check. Cash Outflow from Operations Droppable Cash Outflow from Operations Droppable Cash Outflow from Operations 4. You pay the supplier for a shipment of beer and wine. 7. You send in the quarterly payment for payroll taxes. 5. You buy a supply of linens to be used in your catering business. Cash Inflow from Investing Droppable Cash Inflow from Investing Droppable Cash Inflow from Investing 1. You sell a used 10-burner range and convection oven. Cash Outflow from Investing Droppable Cash Outflow from Investing Droppable Cash Outflow from Investing 8. You buy a new delivery truck for your growing catering business.

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Cash Inflow from Financing Droppable Cash Inflow from Financing Droppable Cash Inflow from Financing 2. You take out a second mortgage on the building. 10. You incorporate the restaurant and sell shares of stock. Cash Outflow from Financing Droppable Cash Outflow from Financing Droppable Cash Outflow from Financing 3. You pay off the note payable that was originally due in November When asked to categorize items as cash inflows or outflows as a result of operating, investing, or financing activities, you correctly identified all 10 items. Great job!.