Learning Module #1 - Ohio Universityaspnet.cob.ohio.edu/isms/upload/documents/162... · our worker...

Learning Module 1The Accounting Equation

Hot Dogs, Inc.

It is January 1, 2015 and we are going to start a corporation to sell hot dogs in a cart

on the corner of Court and Union. We form a corporation, Hot Dogs, Inc., and you

and everyone in the class invests $100 and we each get one share of stock for that

$100. Assume there are 90 of us. We elect a Board of Directors, a COO and start to

do business. In January, we borrow $10,000 from the bank and buy a new cart for

that amount. Next we buy 1,000 hot dogs and 1,000 buns. Dogs cost $0.15 and

buns are $0.05 each. For our first month, we sell 900 hot dogs for $2 each. We pay

our worker $600 and our other expenses are $300. How did we do for January?

Are we rich yet? Was it a good investment?

The Accounting Equation

= + + -

Balance Sheet Income Statement

Assets Liabilities Owners' Equity Revenue Expenses

= + + -Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Hot Dogs, Inc.

and everyone in the class invests $100 and we each get one share of stock for

that $100. Assume there are 90 of us. We elect a Board of Directors, a COO and

start to do business. In January, we borrow $10,000 from the bank and buy a new

cart for that amount. Next we buy 1,000 hot dogs and 1,000 buns. Dogs cost $0.15

and buns are $0.05 each. For our first month, we sell 900 hot dogs for $2 each. We

pay our worker $600 and our other expenses are $300. How did we do for

January? Are we rich yet? Was it a good investment?

Hot Dogs, Inc. – Issue Stock (1)

1 9,000

9,000 1

Common Stock

Hot Dogs, Inc.

Hot Dogs, Inc. – Borrow Money (2)

1 9,000

2 10,000

10,000 2

Note Payable

Hot Dogs, Inc.

Hot Dogs, Inc. – Purchase Cart (3)

1 9,000 10,000 3

2 10,000

3 10,000

Hot Dogs, Inc.

Hot Dogs, Inc. – Buy Hot Dogs & Buns (4)

1 9,000 10,000 3

2 10,000 200 4

Inventory

Hot Dogs, Inc.

buns are $0.05 each. For our first month, we sell 900 hot dogs for $2 each. We

pay our worker $600 and our other expenses are $300. How did we do for

January? Are we rich yet? Was it a good investment?

Hot Dogs, Inc. – Sell Hot Dogs (5+6)

1 9,000 10,000 3

2 10,000 200 4

5 1,800

4 200 180 6

Inventory

1,800 5

Cost of Goods Sold

Hot Dogs, Inc.

Hot Dogs, Inc. – Pay Wages (7)

1 9,000 10,000 3

2 10,000 200 4

5 1,800 600 7

Wage Expense

Hot Dogs, Inc.

Hot Dogs, Inc. – Pay Other Expenses (8)

1 9,000 10,000 3

2 10,000 200 4

5 1,800 600 7

Other Expenses

Homework

Read the syllabus and the general rules of ACCT 1010 posted on website

Complete your biography

Read “What It Takes to Be Great” article posted on website

Hot Dogs, Inc.

Sales 1,800$

Cost of Goods Sold 180

Gross Profit 1,620

Operating Expenses

Wage Expense 600$

Other Expenses 300

Total Operating Expenses 900

Operating Income 720

Other Revenue & (Expenses)

None -

Income before Taxes 720

Tax Expense -

Net Income 720$

Earnings per share 8.00$

Hot Dogs, Inc.

Income Statement

For the Month Ended January 31, 2015

Common Retained

Stock Earnings Total

Beginning Balance, December 31, 2014 -$ -$ -$

Common Stock Issued 9,000 9,000

Net Income 720 720

Less: Dividends Declared - -

Ending Balance, January 31, 2015 9,000$ 720$ 9,720$

Hot Dogs, Inc.

Statement of Owners' Equity

Assets Liabilities & Owners' Equity

Liabilities

Current Assets Current Liabilities

Cash 9,700$ None -$

Inventory 20

Total Current Assets 9,720 Total Current Liabilities -

Long-Term Debt

Fixed Assets Note Payable 10,000$

Cart 10,000$ Total Liabilities 10,000

Net Fixed Assets 10,000 Owners' Equity

Common Stock 9,000$

Other Assets Retained Earnings 720

None -$ Total Owners' Equity 9,720

Total Assets 19,720$ Total Liabilities & Owners' Equity 19,720$

Hot Dogs, Inc.

Balance Sheet

January 31, 2015

The Matching Concept

Expenses must be recognized in the same accounting period as the revenues they

helped to generate, even if no payment has been made. For indirect costs that are

difficult to match to specific revenues, expenses are recorded when incurred.

How would the Hot Dogs, Inc. financials have changed if we owed our worker $100

at the end of January for work she did the last week of the month?

Hot Dogs, Inc. – Wages Owed (9)

Wages Payable

Wage Expense

Sales 1,800$

Cost of Goods Sold 180

Gross Profit 1,620

Operating Expenses

Wage Expense 700$

Other Expenses 300

Total Operating Expenses 1,000

Operating Income 620

None -

Income before Taxes 620

Tax Expense -

Net Income 620$

Hot Dogs, Inc.

Income Statement

Common Retained

Net Income 620 620

Ending Balance, January 31, 2015 9,000$ 620$ 9,620$

Hot Dogs, Inc.

Liabilities

Cash 9,700$ Wages Payable 100$

Inventory 20

Total Current Assets 9,720 Total Current Liabilities 100

Long-Term Debt

Cart 10,000$ Total Liabilities 10,100

Common Stock 9,000$

Other Assets Retained Earnings 620

None -$ Total Owners' Equity 9,620

Hot Dogs, Inc.

Balance Sheet

January 31, 2015

Homework

Read pages 13-19 of The Map

Complete problem 1 (BBBB, Inc.) on page 10 of The Map – use T accounts to

prepare income statement, statement of owners’ equity, and balance sheet

BBBB, Inc.

Everyone in the class invested $50 each in Billy Bob’s Bodacious Biffs. For your

investment, you each got one share of common stock. Assume there are 100 of

you. During 2015, BBBB, Inc. borrowed $100,000 to be repaid in five years with

interest of 10% to be paid yearly and bought a piece of land for future expansion of

the business for $30,000 ($2,000 down and the rest to be paid next year). Also

during the year, the company purchased 10,000 Biffs for $8 each and sold 9,000 for

$20 each. The company also paid a security deposit of $6,000 on the building it is

renting, rent of $12,000, salaries of $24,000, and the interest on the loan of

$10,000. Taxes for 2015 were 30% and these will be paid in 2016. How did you do?

BBBB, Inc.

BBBB, Inc. – Issue Stock (1)

1 5,000

5,000 1

Common Stock

BBBB, Inc.

BBBB, Inc. – Borrow Money (2)

1 5,000

2 100,000

100,000 2

Note Payable

BBBB, Inc.

interest of 10% to be paid yearly and bought a piece of land for future expansion

of the business for $30,000 ($2,000 down and the rest to be paid next year). Also

BBBB, Inc. – Purchase Land (3)

1 5,000 2,000 3

2 100,000

3 30,000

28,000 3

Land Payable

BBBB, Inc.

during the year, the company purchased 10,000 Biffs for $8 each and sold 9,000

for $20 each. The company also paid a security deposit of $6,000 on the building it

is renting, rent of $12,000, salaries of $24,000, and the interest on the loan of

BBBB, Inc. – Buy Biffs (4)

1 5,000 2,000 3

2 100,000 80,000 4

4 80,000

Inventory

BBBB, Inc.

BBBB, Inc. – Sell Biffs (5+6)

1 5,000 2,000 3

2 100,000 80,000 4

5 180,000

180,000 5

4 80,000 72,000 6

Inventory

6 72,000

Cost of Goods Sold

BBBB, Inc.

BBBB, Inc. – Pay Security Deposit (7)

1 5,000 2,000 3

2 100,000 80,000 4

5 180,000 6,000 7

7 6,000

Security Deposit

BBBB, Inc.

BBBB, Inc. – Pay Rent (8)

1 5,000 2,000 3

2 100,000 80,000 4

5 180,000 6,000 7

12,000 8

8 12,000

Rent Expense

BBBB, Inc.

BBBB, Inc. – Pay Salaries (9)

1 5,000 2,000 3

2 100,000 80,000 4

5 180,000 6,000 7

12,000 8

24,000 9

9 24,000

Salary Expense

BBBB, Inc.

BBBB, Inc. – Pay Interest (10)

1 5,000 2,000 3

2 100,000 80,000 4

5 180,000 6,000 7

12,000 8

24,000 9

10,000 10

10 10,000

Interest Expense

BBBB, Inc.

$10,000. Taxes for 2015 were 30% and these will be paid in 2016. How did you

BBBB, Inc. – Income Taxes Owed (11)

11 18,600

Tax Expense

18,600 11

Taxes Payable

Sales 180,000$

Cost of Goods Sold 72,000

Gross Profit 108,000

Operating Expenses

Salary Expense 24,000$

Rent Expense 12,000

Total Operating Expenses 36,000

Operating Income 72,000

Interest Expense (10,000)

Income before Taxes 62,000

Tax Expense 18,600

Net Income 43,400$

BBBB, Inc.

Income Statement

For the Year Ended December 31, 2015

Common Retained

Net Income 43,400 43,400

Ending Balance, December 31, 2015 5,000$ 43,400$ 48,400$

BBBB, Inc.

For the Year Ended December 31, 2015

Liabilities

Cash 151,000$ Taxes Payable 18,600$

Inventory 8,000 Land Payable 28,000

Total Current Assets 159,000 Total Current Liabilities 46,600

Long-Term Debt

Land 30,000$ Total Liabilities 146,600

Common Stock 5,000$

Other Assets Retained Earnings 43,400

Security Deposit 6,000$ Total Owners' Equity 48,400

BBBB, Inc.

Balance Sheet

December 31, 2015

Learning Module #1 - Ohio Universityaspnet.cob.ohio.edu/isms/upload/documents/162... · our worker...

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