Porter SM Ch. 03_2pp

5/27/2018 Porter SM Ch. 03_2pp

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CHAPTER 3

Processing AccountingInformation

OVERVIEW OF EXERCISES, PROBE!S, A"# CASES

Estimate$Time in

earning O%&ecti'e E(ercises !inutes e'e)

*+ Explain the difference between an external and aninternal event. 1 10 Easy

+ Explain the role of source documents in an accounting

system. 2 10 Easy

3+ Analyze the effects of transactions on the accountingequation. 1! "od

# 1! "od! 20 "od

10$ 10 "od11$ 10 "od12$ 20 "od1#$ 20 "od1!$ 0 "od

-+ %escribe the use of the account and the general ledger to & 10 Easyaccumulate amounts for financial statement items. 10$ 20 "od

11$ 10 "od12$ 20 "od1$ 10 "od

.+ Explain the rules of debits and credits. ' 10 Easy( 10 %iff

12$ 20 "od1#$ 20 "od1!$ 0 "od1&$ 1! "od

/+ Explain the purposes of a )ournal and the posting process. 1#$ 20 "od

1!$ 0 "od1&$ 1! "od

0+ Explain the purpose of a trial balance. * 2! "od1$ 10 "od

$Exercise+ problem+ or case covers two or more learning ob)ectives,evel - %ifficulty levels Easy/ "oderate "od/ %ifficult %iff

31*


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Pro%)ems Estimate$an$ Time in

earning O%&ecti'e A)ternates !inutes e'e)

*+ Explain the difference between an external and aninternal event. 1 20 Easy

!$ #! "od

&$ '! "od'$ '! "od

+ Explain the role of source documents in an accountingsystem. !$ #! "od

3+ Analyze the effects of transactions on the accountingequation. 2 &0 "od

&0 "od# &0 %iff &$ '! "od'$ '! "od($ 20 "od*$ &0 "od

11$ 0 "od12$ #! "od1$ 0 %iff 1#$ '! "od1!$ '! "od

-+ %escribe the use of the account and the general ledger to *$ &0 "odaccumulate amounts for financial statement items. 10$ &0 "od

12$ #! "od1$$ 0 %iff

.+ Explain the rules of debits and credits. ($ 20 "od*$ &0 "od

11$ 0 "od12$ #! "od1$ 0 %iff 1#$ '! "od1!$ '! "od

/+ Explain the purposes of a )ournal and the posting process. 11$ 0 "od1#$ '! "od1!$ '! "od

0+ Explain the purpose of a trial balance. 10$ &0 "od12$$ #! "od1$ 0 %iff

1#$ '! "od1!$; '! "od

$Exercise+ problem+ or case covers two or more learning ob)ectives$$Alternate problem only; 6riginal problem only,evel - %ifficulty levels Easy/ "oderate "od/ %ifficult %iff


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5 =>65E::349 A556748349 346>"A8364 313

Estimate$Time in

earning O%&ecti'e Cases !inutes e'e)

*+ Explain the difference between an external and aninternal event. $ 20 "od

!$ &0 "od

&$ 0 "od

+ Explain the role of source documents in an accountingsystem. #$ &0 %iff

3+ Analyze the effects of transactions on the accountingequation. 2 1! "od

$ 20 "od#$ &0 %iff !$ &0 "od&$ 0 "od'$ 0 "od

-+ %escribe the use of the account and the general ledger to 1 0 "odaccumulate amounts for financial statement items. !$ &0 "od

.+ Explain the rules of debits and credits. '$ 0 "od

/+ Explain the purposes of a )ournal and the posting process. '$ 0 "od

0+ Explain the purpose of a trial balance.

$Exercise+ problem+ or case covers two or more learning ob)ectives,evel - %ifficulty levels Easy/ "oderate "od/ %ifficult %iff


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2 E S T I O " S

*+ ?oth external and internal events affect an entity. An external event involvesinteraction with someone outside of the entity. or example+ the purchase of landis an external event. An internal event ta@es place entirely within the entity+ with

no interaction with anyone outside of the company. 8he transfer of raw materialsinto production is an internal event.

+ :ource documents are the basis for recording transactions. 8hey provide theevidence+ or documentation+ needed to recognize an event for accountingpurposes. =urchase invoices+ time cards+ and cash register tapes are allexamples of source documents.

3+ 5ash can ta@e many different forms. 6ne of the most common forms is achec@ing account. 6ther forms include coin and currency on hand+ savingsaccounts+ money orders+ certified chec@s+ and cashiers chec@s.

-+ An account receivable is an open account with a customer. 8hat is+ the customeris not required to have prior written approval each time a purchase is made+ andno interest is charged. "ost open accounts must be paid in a short period of time+such as 0 or &0 days. A note receivable+ however+ involves a written promisefrom the customer to repay a specified amount+ with interest+ at a specified date.5ompanies usually require customers to sign promissory notes for relatively largedollar amounts of purchases.

.+ Assets and liabilities are opposites. An asset represents a future benefit+ and aliability is an obligation to relinquish benefits in the future. 8herefore+ an accountpayable is the opposite of an account receivable. 3f Ace 5orp. provides a serviceto ?lue 5orp.+ Ace records an account receivable on its boo@s. ?lue will record an

account payable on its boo@s.

/+ According to the accounting equation+ assets are equal to liabilities plus ownersBequity. Assets are future economic benefits. 8he right side of the equation ismerely a representation of the claims of various groups on the assets. 8he claimsof the owners+ as represented by ownersB equity+ are divided into two typescapital stoc@ and retained earnings. 8he former arises from amounts contributedby the owners to the business. >etained earnings represents the claims of theowners on the assets from the undistributed incomeof the business. 8hat is+ itrepresents the accumulated earnings over the life of the business that have notbeen returned to the owners in the form of dividends.

0+ 8he term CdoubleDentry system of accounting means that every transaction isentered in at least two accounts on opposite sides of 8 accounts. 3n this system+every transaction is recorded in such a way that the equality of debits and creditsis maintained+ and in the process the accounting equation is @ept in balance.


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4+ Assets and liabilities appear on different sides of the accounting equation and aretherefore opposites. 3t is logical that if an asset is increased with a debit+ a liabilityis increased with a credit.

5+ Assets are positive in that they represent future economic benefits. 3t is merely amatter of convention that an asset is increased with a debit. An expense is

negative in the sense that it reduces net income+ which in turn reduces retainedearnings+ one of the two elements of ownersB equity. ?ecause ownersB equity ison the opposite side of the accounting equation from assets+ it is increased with acredit. 8herefore+ any item that reduces ownersB equity+ li@e an expense+ is itselfincreased with a debit.

*6+ 8here are two sides to every transaction. 8he two sides of the transaction when adividend is paid are the decrease in cash and the decrease in ownersB equityownersB equity is reduced because money is being returned to owners+ and theyhave a smaller claim on the assets of the business. Assets are increased withdebits and decreased with credits. 5ash is an asset and is therefore decreased

with a credit. >etained earnings is on the opposite side of the accountingequation from assets and is therefore increased with a credit. >etained earningsare decreased with a debit. ?ecause dividends are a decrease in retainedearnings+ they are increased with a debit.

**+ Fhen you deposit money in your account+ the ban@ has a liability. 8he entry onthe ban@Bs boo@s consists of a debit to 5ash and a credit to some type of liabilityaccount+ such as 5ustomers %eposits. 8herefore+ when you ma@e a deposit+ theban@ GcreditsG your account/ that is+ it increases its liability.

*+ A business actually saves time by first recording transactions in a )ournal andthen posting them to the ledger. ?ecause of the sheer volume of transactions it

would be impractical to prepare financial statements directly from the )ournal. orexample+ without the use of ledger accounts+ it would be necessary at the end ofthe period to go bac@ and scan the )ournal to find every debit and credit to the5ash account in order to prepare a balance sheet. Fhereas the )ournal serves asa boo@ of original entry+ the ledger accounts are the basis for preparing a trialbalance+ which in turn is used to prepare the financial statements.

*3+ 8he 8 account is a simple device used in the study of accounting as well as byaccountants in analyzing transactions. 8he left side of the account is used torecord debits and the right side to record credits. 8he running balance form for anaccount is more formal and includes not only columns for debits and credits+ butalso a column for the balance in the account. Another important element of the

running balance form is a posting reference column. 8he accountant places thepage number of the general )ournal in this column so that each entry in theaccount can be traced bac@ to the relevant page in the )ournal.


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*-+ At the time of posting+ the posting reference column of the account in the ledgeris filled in with the page number of the )ournal entry. At the same time+ theaccount number is placed in the posting reference column of the )ournal. 8hiscrossDreferencing system used in posting allows the accountant to trace an entrymade in the )ournal to the account it was posted to+ or+ conversely+ to trace from

an account bac@ to the entry in the )ournal.*.+ 8here is no standard rule about the frequency of posting entries from the )ournal

to the ledger. 8he size of the company and the extent to which the accountingsystem is computerized will affect how often entries are posted. or example+ in acomputerized system+ it is possible for entries to be posted instantaneously to theledger at the time they are recorded in the )ournal.

*/+ A trial balance proves the equality of debits and credits. 3t does not prove that thecorrect accounts were debited and credited or that the correct amounts werenecessarily recorded. 3t simply ensures that the balance of all of the debits in theledger accounts is equal to the balance of all of the credits at any point in time.

E X E R C I S E S

O * EXERCISE 31* T7PES OF EVE"TS

*+ E .+ 3+ E /+ 4>3+ 4> 0+ E-+ E 4+ 3$

$8his can be used as an introduction to the concept of ad)ustments in 5hapter #H3t isan internal event if the accountant accrues the taxes owed but not yet paid/alternatively+ it is an external transaction if the taxes are paid at the time theaccountant determines the amount due.

O EXERCISE 31 SORCE #OC!E"TS !ATCHE# WITHTRA"SACTIO"S

*+ g .+ c+ h /+ a3+ f 0+ b-+ d 4+ e


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O 3 EXERCISE 313 THE EFFECT OF TRA"SACTIO"S O" THEACCO"TI"8 E2ATIO"

Assets 9 ia%i)ities : Stoc;uit?

*+ 4E 4E 4E+ 3 4E 33+ 3 4E 3-+ % % 4E.+ 4E 4E 4E/+ 3 3 4E0+ % 4E %4+ % 4E %5+ 3 4E 3

O 3 EXERCISE 31- T7PES OF TRA"SACTIO"S

T?@e E(am@)e

*+ a+ =urchase inventory on credit.

%+ =urchase land in exchange for promissory note.

+ a+ 3ssuance of stoc@ in exchange for cash.

%+ =rovide service in exchange for cash.

3+ a+ >epay ban@ loan with cash.

%+ =ay supplier amount owed on open account.

-+ a+ =ay dividend to stoc@holders.

%+ =ay wages to employees.

.+ a+ 5ollect amount owed from customer on open account.

%+ =urchase inventory with cash.


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O 3 EXERCISE 31. A"A7I"8 TRA"SACTIO"S

Assets 9 ia%i)ities : Stoc;uit?Trans+ Accounts Accounts "otes Ca@ita) Retaine$

"o+ Cas< Recei'a%)e Su@@)ies E>ui@ment an$ Pa?a%)e Pa?a%)e Stoc; Earnings

1. I 1+!0 I 1+!0

2. I 1+&! I 1+&!

?al. I 1+!0 I 1+&! I 1+&! I 1+!0

. I '!0 '!0

?al. I '!0 I 1+!0 I 1+&! I 1+&! I 2+2(0

#. J#+2#0 I #+2#0

?al. I +#*0 I 1+!0 I 1+&! I #+2#0 I 1+&! I 2+2(0

!. 2+!00 I 2+!00

?al. I **0 I 1+!0 I 1+&! I #+2#0 I 1+&! I 2+!00 I 2+2(0

&. (*0 J(*0

?al. I 100 I I 1+&! I #+2#0 I 1+&! I 2+!00 I 2+2(0

'. I !0+000 I !0+000

?al. I 100 I I 1+&! I #+2#0 I !0+000 I 1+&! I 2+!00 I !0+000 I 2+2(0

(. J#+000 J#+000

?al. I #+100 I I 1+&! I #+2#0 I !0+000 I 1+&! I 2+!00 I !0+000 I 1+'20

*. J!00 J!00

?al. I #+&00 I I 1+&! I #+2#0 I !0+000 I (&! I 2+!00 I !0+000 I 1+'20

TOTA ASSETS D.*,/-. TOTA IABIITIES A"#STOCHO#ERS E2IT7 D.*,/-.


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5 =>65E::349 A556748349 346>"A8364 315O - EXERCISE 31/ BAA"CE SHEET ACCO"TS A"# THEIR SE

*+ 4otes =ayable 0+ Accounts =ayable+ 3nvestments 4+ 5ash3+ Accounts >eceivable 5+ ?uildings-+ 8axes =ayable *6+ >etained Earnings.+ =referred :toc@ **+ =repaid Asset/+ ,and

O . EXERCISE 310 "OR!A ACCO"T BAA"CES APPE"#IXG

*+ %ebit 0+ 5redit+ %ebit 4+ %ebit3+ 5redit 5+ 5redit-+ 5redit *6+ %ebit.+ %ebit **+ %ebit/+ 5redit

O . EXERCISE 314 #EBITS A"# CRE#ITS APPE"#IXG

8he debits and credits are reversed in this entry. 8he correct entry is

Kune ! 5ash 12+#!0Accounts >eceivable 10+000:ales >evenue 2+#!0

8o record cash received on Kune ! I10+000 onaccount and I2+#!0 in cash sales.

Assets 9 ia%i)ities : Stoc;uit?:*,-.6 :,-.6*6,666

rom the ban@s perspective+ a customers account is a liability because the ban@ owesthat amount to the customer. 8hus+ when the liability account is increased+ it isincreased with a credit. At the same time+ the cash received from the customer is anincrease in the ban@s cash and+ as an asset+ cash is increased with a debit.

31*


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O 0 EXERCISE 315 TRIA BAA"CE APPE"#IXG

SPE"CER CORPORATIO"TRIA BAA"CE

#ECE!BER 3*, 660

#r+ Cr+5ash I 10+!00

Accounts >eceivable !+2!6ffice :upplies !00,and !0+000

Automobiles *+200?uildings 1!0+000Equipment (!+000

Accounts =ayable I '+&!03ncome 8axes =ayable 2+!004otes =ayable *0+0005apital :toc@ 100+000>etained Earnings 110+02!5ommissions >evenue 12+'!03nterest >evenue 1+005ommissions Expense 2+&00


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O 3,- EXERCISE 31** RECO"STRCTI"8 ABE8I""I"8 ACCO"T BAA"CE

?eginning balance M :ervices on account J 5ollections - Ending balance?eginning balance M I'+!00 J I&+000 - I2+!00?eginning balance - I1+000

O 3,-,. EXERCISE 31* OR"A E"TRIES RECOR#E##IRECT7 I" T ACCO"TS APPE"#IXG

Cas


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O 3,.,/ EXERCISE 31*- OR"A E"TRIES APPE"#IXG

*+ Accounts >eceivable 1+!0:ales >evenue 1+!0

"ade sales on open account.

Assets 9 ia%i)ities : Stoc;uit?:*,.36 :*,.36

+ :upplies 1+&!Accounts =ayable 1+&!

=urchased supplies on open account.

Assets 9 ia%i)ities : Stoc;uit?:*,3/. :*,3/.

3+ 5ash '!0

:ales >evenue '!0"ade cash sales.

Assets 9 ia%i)ities : Stoc;uit?:0.6 :0.6

-+ Equipment #+2#05ash #+2#0

=urchased equipment with cash.


:-,-6-,-6

.+ 5ash 2+!004otes =ayable 2+!00

3ssued promissory note for cash.

Assets 9 ia%i)ities : Stoc;uit?:,.66 :,.66

/+ 5ash (*0

Accounts >eceivable (*05ollected open accounts.

Assets 9 ia%i)ities : Stoc;uit?:456456

EXERCISE 31*- Conc)u$e$G


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0+ ,and !0+0005apital :toc@ !0+000

3ssued capital stoc@ in exchange for land.

Assets 9 ia%i)ities : Stoc;uit?:.6,666 :.6,666

4+ :alary and Fage Expense #+0005ash #+000

=aid salaries and wages.

Assets 9 ia%i)ities : Stoc;uit?-,666 -,666

5+ Accounts =ayable !005ash !00

=aid open account.

Assets 9 ia%i)ities : Stoc;uit?.66 .66

O 3,.,/ EXERCISE 31*. OR"A E"TRIES APPE"#IXG

April 1 5ash 100+0005apital :toc@ 100+000

3ssued 100+000 shares of capital stoc@.

Assets 9 ia%i)ities : Stoc;uit?:*66,666 :*66,666

April # 5ash !0+0004otes =ayable !0+000

3ssued &Dmonth+ *O promissory note for cash.


April ( ,and 20+000?uildings &0+000

5ash (0+000

=urchased land and a storage shed.

Assets 9 ia%i)ities : Stoc;uit?:6,666:/6,66646,666


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EXERCISE 31*. Conc)u$e$G

April 10 "owing Equipment 2!+0005ash 10+000

Accounts =ayable 1!+000

=urchased mowing equipment with downpayment and remainder due by end of month.

Assets 9 ia%i)ities : Stoc;uit?:.,666 :*.,666*6,666

April 1( Accounts >eceivable !+!00:ervice >evenue !+!00

?illed customers for services provided onaccount/ amounts due within 10 days.

Assets 9 ia%i)ities : Stoc;uit?:.,.66 :.,.66

April 2' Accounts =ayable 1!+0005ash 1!+000

=aid remaining balance due on open accountfor purchase of mowing equipment.

Assets 9 ia%i)ities : Stoc;uit?*.,666 *.,666

April 2( 5ash !+!00

Accounts >eceivable !+!005ollected cash on open accounts.

Assets 9 ia%i)ities : Stoc;uit?:.,.66.,.66

April 0 Accounts >eceivable *+(!0:ervice >evenue *+(!0

?illed customers for services provided onaccount.

Assets 9 ia%i)ities : Stoc;uit?:5,4.6 :5,4.6

April 0 :alary and Fage Expense #+&!05ash #+&!0

=aid April payroll.



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-,/.6 -,/.6

O .,/ EXERCISE 31*/ THE PROCESS OF POSTI"8 OR"AE"TRIES TO 8E"ERA E#8ER ACCO"TS APPE"#IXG

8enera) ourna) Page "o+ 0Post+

#ate Account Tit)e an$ E(@)anation Ref+ #e%it Cre$itKune 1 ,and 1' !0+000

4otes =ayable ! !0+000=urchased land in exchange for note.

8enera) e$geran$ Account "o+ *0

Post+#ate E(@)anation Ref+ #e%it Cre$it Ba)ance

Kune 1 9K ' !0+000 !0+000

"otes Pa?a%)e Account "o+ 3.Post+

#ate E(@)anation Ref+ #e%it Cre$it Ba)anceKune 1 9K ' !0+000 !0+000

8he purpose of the )ournal is to provide a chronological record of the entries. 3naddition+ it shows the complete transaction in one place. 8hus+ if you wanted to reviewthis particular transaction+ you would loo@ at the general )ournal.

P R O B E ! S

O * PROBE! 31* EVE"TS TO BE RECOR#E# I" ACCO"TS

*+ E 4ot recorded

+ E >ecorded 3nventory+ Accounts =ayable

3+ 3 4ot recorded

-+ E 4ot recorded

.+ 3 4ot recorded

/+ E >ecorded 5ash+ :ales >evenue

0+ E 4ot recorded

4+ E >ecorded :alaries and Fages Expense+ 5ash


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5+ E >ecorded Accounts =ayable+ 5ash


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O 3 PROBE! 31 TRA"SACTIO" A"A7SIS A"# FI"A"CIASTATE!E"TS

*+ Kust >olling Along 3nc. 8ransactions for the month of "ay 200'

Assets 9 ia%i)ities :Stoc;uit?Accounts Accounts Ca@ita) Retaine$

#ate Cas< Recei'a%)e E>ui@ment Su@@)ies Pa?a%)e Stoc; Earnings!P1 I 1(+000 I1(+000

!P1 I +000 I +000

?al. I 1(+000 I+000 I+000 I1(+000

!P! J1! I J1!

?al. I 1'+*(! I+000 I+000 I1(+000 I 1!

!P* J#+#00 #+#00

?al. I 1+!(! I'+#00 I+000 I1(+000 I 1!

!P10 I 100 100?al. I 1+!(! I'+#00 I 100 I+100 I1(+000 I 1!

!P1! J12! J12!

?al. I 1+#&0 I'+#00 I 100 I+100 I1(+000 I 1#0

!P1' 1+(00 1+(00

?al. I 1!+2&0 I'+#00 I 100 I+100 I1(+000 I 1+&&0

!P2# I 1+200 1+200

?al. I 1!+2&0 I 1+200 I'+#00 I 100 I+100 I1(+000 I 2+(&0

!P2* &00 J&00

?al. I 1!+(&0 I &00 I'+#00 I 100 I+100 I1(+000 I 2+(&0

!P0 +000 +000

?al. I 1(+(&0 I &00 I'+#00 I 100 I+100 I1(+000 I !+(&0

!P0 J1&0 J1&0

?al. I 1(+'00 I &00 I'+#00 I 100 I+100 I1(+000 I !+'00

!P1 J+000 J+000

?al. I 1!+'00 I &00 I '+#00 I 100 I 100 I 1(+000 I !+'00

TOTA ASSETS D3,466 TOTA IABIITIES A"#STOCHO#ERS E2IT7 D3,466


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PROBE! 31 Conc)u$e$G

+ ST ROI"8 AO"8 I"C+I"CO!E STATE!E"T

FOR THE !O"TH E"#E# !A7 3*, 660

>evenues>ental fees$ I #+(00

,essons 1+200 I &+000Expenses

>egistration fee I 1!Advertising 12!:alaries and wages 1&0 00

4et income I !+'00

$I1+(00 M I+000

3+ ST ROI"8 AO"8 I"C+BAA"CE SHEET

!A7 3*, 660Assets

5urrent assets5ash I1!+'00

Accounts receivable &00:upplies 100

8otal current assets I1&+#00=roperty+ plant+ and equipment

Equipment '+#008otal assets I 2+(00

ia%i)ities an$ Stoc;uit?5urrent liabilities

Accounts payable I 1005apital stoc@ I1(+000>etained earnings !+'00

8otal stoc@holders equity 2+'008otal liabilities and stoc@holders equity I 2+(00

-+ 9iven the line of business that they are in+ the two college students may beconcerned about their liability. 6ne of the advantages of incorporating is the limitedliability of the stoc@holders. 9enerally+ a stoc@holder is liable only for the amountcontributed to the business.


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O 3 PROBE! 313 TRA"SACTIO" A"A7SIS A"#FI"A"CIA STATE!E"TS

*+ EXPERT CO"STI"8 SERVICES I"C+TRA"SACTIO"S FOR THE !O"TH OF !ARCH 660

Assets 9 ia%i)ities : Stoc;uit?Accounts Accounts "otes Ca@ita) Retaine$

#ate Cas< Recei'a%)e Com@uter Su@@)ies Pa?a%)e Pa?a%)e Stoc; EarningsP2 I#0+000 I#0+000

P' 1!+000 I 1!+000

?al. I!!+000 I1!+000 I#0+000

P12 I '00 I '00

?al. I!!+000 I'00 I'00 I1!+000 I#0+000

P1* I #+000 I #+000

?al. I!!+000 I#+000 I'00 I'00 I1!+000 I#0+000 I #+000

P20 J1+00 J1+00

?al. I!+'00 I#+000 I'00 I'00 I1!+000 I#0+000 I 2+'00

P22 1+000 J1+000

?al. I!#+'00 I+000 I'00 I'00 I1!+000 I#0+000 I 2+'00

P2& 2+(00 2+(00

?al. I!'+!00 I+000 I'00 I'00 I1!+000 I#0+000 I !+!00

P2* J(+000 I (+000

?al. I#*+!00 I+000 I(+000 I'00 I'00 I1!+000 I#0+000 I !+!00

P0 J+00 J+00

?al. I#&+200 I+000 I(+000 I'00 I'00 I1!+000 I#0+000 I 2+200

P1 J1+#00 J1+#00

?al. I ##+(00 I +000 I (+000 I '00 I '00 I 1!+000 I #0+000 I (00

TOTA ASSETS D./,.66 TOTA IABIITIES A"#STOCHO#ERS= E2IT7 D./,.66


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+ EXPERT CO"STI"8 SERVICES I"C+I"CO!E STATE!E"T

FOR THE !O"TH E"#E# !ARCH 3*, 660

>evenues5omputer installation services I#+000:oftware selection services 2+(00 I &+(00

ExpensesAdvertising I1+00:alaries and wages +009as+ electric+ and water 1+#00 &+000

4et income I (00

3+ EXPERT CO"STI"8 SERVICES I"C+

BAA"CE SHEET!ARCH 3*, 660Assets

5urrent assets5ash I##+(00

Accounts receivable +000:upplies '00

8otal current assets I#(+!00=roperty+ plant+ and equipment

EquipmentH5omputer system (+0008otal assets I !&+!00


Accounts payable I '00,ongDterm debt

4otes payable 1!+0008otal liabilities I1!+'005apital stoc@ I#0+000>etained earnings (00

8otal stoc@holdersB equity #0+(008otal liabilities and stoc@holdersB equity I !&+!00

4. Trade accounts often have a 30-day collection or payment period. For

example, cash should be received from the accounts receivable and cashpaid for the accounts payable during the month of April.


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O 3 PROBE! 31- TRA"SACTIO"S RECO"STRCTE# FRO! FI"A"CIA STATE!E"TS

E! CORPORATIO"TRA"SACTIO"S FOR THE !O"TH OF "E 660

Assets 9 ia%i)ities : Stoc;uit?JJJJJ Cas< Accounts E>ui@ment Bui)$ing an$ Accounts "otes Ca@ita) Retaine$

Recei'a%)e Pa?a%)e Pa?a%)e Stoc; Earnings

1. I 0+000 I 0+000

2. I 1(+000 I 1(+000

?al. I 0+000 I 1(+000 I 1(+000 I 0+000

. I *0+000 I *0+000

?al. I 0+000 I 1(+000 I *0+000 I 1(+000 I *0+000 I 0+000

#. 2#+000 I 2#+000

?al. I &+000 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I 0+000

!. I *+&00 I *+&00

?al. I &+000 I *+&00 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I 0+000 I *+&00

&. '2+000 '2+000

?al. I '(+000 I 21+&00 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I 0+000 I *+&00

'. *+000 *+000?al. I &*+000 I 21+&00 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I 0+000 I (#+&00

(. 2'+*00 2'+*00

?al. I #1+100 I 21+&00 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I 0+000 I !&+'00

*.1+(00

1+(00

?al. I 2'+00 I 21+&00 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I 0+000 I #2+*00

10. #+!00 #+!00

?al. I 22+(00 I 21+&00 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I 0+000 I (+#00

TOTA ASSETS D*0/,-66 TOTA IABIITIES A"# STOCHO#ERS E2IT7 D*0/,-66

Assumptions 1. 8he land was acquired for cash.2. All sales were on account.. 5ash dividends were paid for the difference between the ending balance in >etained Earnings and 4et 3ncome.

31*


22/72

34A453A, A556748349 :6,78364: "A47A,

!TI1CO"CEPT PROBE!S

O *, PROBE! 31. I#E"TIFICATIO" OF EVE"TS WITHSORCE #OC!E"TS

All of these events would be recorded in the entityBs accounts.

a+ =ayment of the insurance policy would be recorded with the use of the invoicefrom the insurance company. 8he amount and period covered would be used torecord the event.

%+ :ource documents for the payroll include time cards or sheets and employmentcontracts. 8he time cards or sheets are normally used to record the payroll. 8hemain item needed from the time cards is the number of hours wor@ed during theperiod. 8he employment contracts may specify the hourly rate of pay or a periodicsalary.

c+ A sales invoice is used to record a sale of merchandise on account. 8he amountof the sale is ta@en from this source document.

$+ :ource documents are needed to record the reduction in supplies and theamount of loss from the fire. 3nvoices for supplies purchased+ and requisitionforms for supplies+ are important source documents for this purpose. ?ydeducting the amount used+ as shown on the requisition forms+ from the amountbought+ per the invoices+ one could determine the amount of loss.

e+ "any companies send periodic invoices to customers with a tearDoff portion thatis mailed bac@ to the company along with the chec@. 8he amount received andthe customer name is used to record the transactions.

f+ A bill of sale is normally generated from a purchase of land. 8he purchase priceand the amount paid+ including any part of this that was financed+ would beneeded to record the purchase.

g+ For@ papers and other documents generated by the tax department are used torecord the amount of taxes due. 8he amount due is needed to record thetransaction.


23/72

5 =>65E::349 A556748349 346>"A8364

O *,3 PROBE! 31/ TRA"SACTIO" A"A7SIS A"# FI"A"CIA STATE!E"TS

*+ BE A7 #EIVER7 SERVICE TRA"SACTIO"S FOR THE !O"TH OF A"AR7 660

Assets 9 ia%i)ities : Stoc;uit?Trans+ Accounts #e)i'er? Accounts "otes Ca@ita) Retaine$#ate Cas< Recei'a%)e an$ Ware


24/72

31- 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31/ Continue$G

+ BE A7 #EIVER7 SERVICEI"CO!E STATE!E"T

FOR THE !O"TH E"#E# A"AR7 3*, 660

:ervice revenue I1!+*009as and oil expense +204et income I 12+&'0

3+ BE A7 #EIVER7 SERVICEBAA"CE SHEETA"AR7 3*, 660

Assets

5urrent assets5ash I 2+#*0

Accounts receivable (+#108otal current assets I #0+*00=roperty+ plant+ and equipment

,and I 20+000Farehouse &0+000%elivery truc@s #!+000

8otal property+ plant+ and equipment 12!+0008otal assets I 1&!+*00

ia%i)ities an$ Stoc;uit?

5urrent liabilitiesAccounts payable I +20,ongDterm debt

4otes payable !0+0008otal liabilities I !+205apital stoc@ I 100+000>etained earnings 12+&'0

8otal stoc@holdersB equity 112+&'08otal liabilities and stoc@holdersB equity I 1&!+*00


25/72

5 =>65E::349 A556748349 346>"A8364

PROBE! 31/ Conc)u$e$G

-+ Additional information needed

an+ 3 3s the warehouse newQ


26/72

31/ 34A453A, A556748349 :6,78364: "A47A,

O *,3 PROBE! 310 TRA"SACTIO" A"A7SIS A"# FI"A"CIA STATE!E"TS

*+ "EVERA"ERROR, I"C+

TRA"SACTIO"S FOR THE !O"TH OF "E 660

Assets 9 ia%i)ities : Stoc;uit?Accounts Accounts "otes Rent Ca@ita) Retaine$

#ate Cas< Recei'a%)e Com@uter Pa?a%)e Pa?a%)e Pa?a%)e Stoc; Earnings

&P2 I0+000 I0+000

&P! J2+!00 I 12+000 I *+!00

?al. I2'+!00 I12+000 I *+!00 I0+000

&P( 20+000 I 20+000

?al. I#'+!00 I12+000 I *+!00 I20+000 I0+000

&P1! I 12+!0 I 12+!0

?al. I#'+!00 I12+!0 I12+000 I *+!00 I20+000 I0+000 I12+!0

&P1' J*00 J*00

?al. I#&+&00 I12+!0 I12+000 I *+!00 I20+000 I0+000 I11+#!0

&P2 12+!0 J12+!0

?al. I!(+*!0 I 0 I12+000 I *+!00 I20+000 I0+000 I11+#!0

&P2( J2+'00 J2+'00

?al. I!&+2!0 I 0 I12+000 I *+!00 I20+000 I0+000 I (+'!0

&P2* I 2+200 J2+200

?al. I!&+2!0 I 0 I12+000 I *+!00 I20+000 I 2+200 I0+000 I &+!!0

&P0 J!+&'0 J!+&'0

?al. I!0+!(0 I 0 I12+000 I *+!00 I20+000 I 2+200 I0+000 I ((0

&P0 1(+#00 1(+#00

?al. I!0+!(0 I1(+#00 I12+000 I *+!00 I20+000 I 2+200 I0+000 I1*+2(0

&P0 J&+000 J&+000

?al. I ##+!(0 I 1(+#00 I 12+000 I *+!00 I 20+000 I 2+200 I 0+000 I 1+2(0

TOTA ASSETS D0-,546 TOTA IABIITIES A"# STOCHO#ERS E2IT7D0-,546


27/72

5 =>65E::349 A556748349 346>"A8364

PROBE! 310 Continue$G

+a+ "EVERA"ERROR I"C+I"CO!E STATE!E"T

FOR THE !O"TH E"#E# "E 36, 660

:ervice revenue I0+'!0Expenses

Advertising I *007tilities 2+'00>ent 2+200:alaries and wages !+&'0 11+#'0

4et income I 1*+2(0

+%+ "EVERA"ERROR I"C+STATE!E"T OF RETAI"E# EAR"I"8S


?eginning balance+ Kune 1+ 200' I 0Add 4et income 1*+2(0%educt %ividends &+000 Ending balance+ Kune 0+ 200' I 1+2(0

+c+ "EVERA"ERROR I"C+BAA"CE SHEET

"E 36, 660

Assets5urrent assets

5ash I##+!(0Accounts receivable 1(+#00

8otal current assets I&2+*(0=roperty+ plant+ and equipment

5omputer 12+0008otal assets I '#+*(0


Accounts payable I *+!00>ent payable 2+200 I11+'00

,ongDterm debt

4otes payable 20+0008otal liabilities I1+'005apital stoc@ I0+000>etained earnings 1+2(0

8otal stoc@holdersB equity #+2(08otal liabilities and stoc@holdersB equity I '#+*(0

310


28/72

314 34A453A, A556748349 :6,78364: "A47A,


3+ Res+ the outloo@ for the company loo@s relatively appealing. 8he companyoperated profitably during the month of Kune and was able to generatesignificant revenues and control its costs. 8he profit margin for the month wasin excess of &0O. 3n addition+ it appears to be relatively liquid+ with a currentratio of over ! to 1.

O 3,. PROBE! 314 ACCO"TS SE# TO RECOR#TRA"SACTIO"S APPE"#IXG

AccountsAccounts#e%ite$ Cre$ite$ #e%ite$ Cre$ite$

a+ 1 10 f+ 1 2

%+ ! 1+ * g+ 1 1c+ & *


29/72

5 =>65E::349 A556748349 346>"A8364

O 3,-,. PROBE! 315 TRA"SACTIO" A"A7SIS A"# OR"A E"TRIES RECOR#E# #IRECT7 I" T ACCO"TS APPE"#IXG

*+ ?everly Entertainment Enterprises transactions for the month of 6ctober+ 200'

Assets 9 ia%i)ities : Stoc;uit?Accounts Concession Accounts "otes Ca@ita)Retaine$

Cas< Recei'a%)e an$ Bui)$ing Su@@)ies Pa?a%)e Pa?a%)e Stoc; Earnings

10P1 I #0+000 I #0+000

10P2 J12+!00 I !+000 I *0+000 I 112+!00

?al. I 2'+!00 I !+000 I*0+000 I112+!00 I #0+000

10P J2+!00 !+000 I 2+!00 L LLLLL

?al. I 2!+000 I !+000 I*!+000 I2+!00 I112+!00 I#0+000

10P12 LLLLLL I +'00 +'00

?al. I 2!+000 I !+000 I*!+000 I +'00 I&+200 I112+!00 I #0+000

10P1 #+200 I 1+(00

LLLLL L 2+#00

?al. I 2*+200 I !+000 I*!+000 I +'00 I&+200 I112+!00 I#0+000 I #+200

10P1' I 1+!00 LLLLL L L LLLL 1+!00

?al. I 2*+200 I 1+!00 I !+000 I*!+000 I +'00 I&+200 I112+!00 I #0+000 !+'00

10P2 '!0 J'!0 LLLLLL LLLLL L LLLLLL LLLL

?al. I 2*+*!0 I '!0 I !+000 I*!+000 I +'00 I&+200 I112+!00 I #0+000 I !+'00

10P2# #+(00 2+000

LLLLLL 2+(00

?al. I #+'!0 I '!0 I !+000 I*!+000 I +'00 I&+200 I112+!00 I #0+000 I 10+!00

10P2& J+000 LLLLLL LLLLLL J+000

?al. I1+'!0 I '!0 I !+000 I*!+000 I +'00 I&+200 I112+!00 I #0+000 I '+!0010P2' J!00 LLL LLL LLLLLL J!00

?al. I 1+2!0 I '!0 I !,000 I*!+000 I +'00 I&+200 I112+!00 I #0+000 I '+000

10P0 J2+#00 J2+#00

?al. I 2(+(!0 I '!0 I !+000 I*!+000 I +'00 I&+200 I112+!00 I #0+000 I #+&0010P1 #+00 1+(00

2+!00

?al. I +1!0 I '!0 I !+000 I *!+000 I +'00 I&+200 I 112+!00 I #0+000 I (+*00

TOTA ASSETS D*/0,/66 TOTA IABIITIES A"# STOCHO#ERS E2IT7 D*/0,/66

315


30/72

3136 34A453A, A556748349 :6,78364: "A47A,


+ Cas< Accounts Recei'a%)e10P1 #0+000 12+!00 10P2 10P1' 1+!00 '!0 10P210P1 #+200 2+!00 10P

10P2 '!0 +000 10P2&10P2# #+(00 !00 10P2'10P1 #+00 2+#00 10P0

!#+0!0 20+*00 ?al. '!0?al. +1!0

an$ Bui)$ing10P2 !+000 10P2 *0+000

10P !+000?al. *!+000

Concession Su@@)ies Accounts Pa?a%)e10P12 +'00 2+!00 10P

+'00 10P12

&+200 ?al.

"otes Pa?a%)e Ca@ita) Stoc;112+!00 10P2 #0+000 10P1

Retaine$ Earnings10P2& +000 1+(00 10P110P2' !00 2+#00 10P110P0 2+#00 1+!00 10P1'

2+000 10P2#2+(00 10P2#1+(00 10P1

2+!00 10P1!+*00 1#+(00

(+*00 ?al.


31/72

5 =>65E::349 A556748349 346>"A8364

O -,0 PROBE! 31*6 TRIA BAA"CE A"# FI"A"CIASTATE!E"TS APPE"#IXG

*+ BEVER7 E"TERTAI"!E"T E"TERPRISESTRIA BAA"CE

OCTOBER 3*, 660

#r+ Cr+5ash I +1!0

Accounts >eceivable '!0,and !+000?uilding *!+0005oncession :upplies +'00

Accounts =ayable I &+2004otes =ayable 112+!005apital :toc@ #0+000

>etained Earnings (+*008otals I 1&'+&00 I 1&'+&00

+ BEVER7 E"TERTAI"!E"T E"TERPRISESI"CO!E STATE!E"T

FOR THE !O"TH E"#E# OCTOBER 3*, 660

>evenues8ic@et sales I !+&00$5oncession sales '+'00$$>ental revenue 1+!00 I1#+(00

Expenses7tilities I !00:alaries and wages 2+#00 2+*00

4et income I 11+*00

$I1+(00 M I2+000 M I1+(00

$$I2+#00 M I2+(00 M I2+!00

3+ BEVER7 E"TERTAI"!E"T E"TERPRISESSTATE!E"T OF RETAI"E# EAR"I"8S


?eginning balance+ 6ctober 1+ 200' I 0Add 4et income 11+*00%educt %ividends +000Ending balance+ 6ctober 1+ 200' I (+*00

313*


32/72

313 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*6 Conc)u$e$G

-+ BEVER7 E"TERTAI"!E"T E"TERPRISESBAA"CE SHEET

OCTOBER 3*, 660


5ash I +1!0Accounts receivable '!05oncession supplies +'00

8otal current assets I '+&00=roperty+ plant+ and equipment

,and I !+000?uilding *!+000 10+000

8otal assets I 1&'+&00

ia%i)ities an$ Stoc;uit?5urrent liabilitiesAccounts payable I &+200

,ongDterm debt4otes payable 112+!00

5apital stoc@ I #0+000>etained earnings (+*00

8otal stoc@holders equity #(+*008otal liabilities and stoc@holders equity I 1&'+&00

O 3,.,/ PROBE! 31** OR"A E"TRIES APPE"#IXG

a+ 5ash 200+0005apital :toc@ 200+000

3ssued 100+000 shares of capital stoc@ for cash.Assets 9 ia%i)ities : Stoc;uit?

:66,666 :66,666

%+ ?uildings 110+000,and #0+000

5ash 1!0+000Acquired building and land for cash.


:**6,666:-6,666

*.6,666

c+ 5ash 12!+0004otes =ayable 12!+000

:igned threeDyear promissory note.Assets 9 ia%i)ities : Stoc;uit?

:*.,666 :*.,666


33/72

5 =>65E::349 A556748349 346>"A8364

PROBE! 31** Conc)u$e$G

$+ 6ffice Equipment !0+0005ash 10+000

Accounts =ayable #0+000=urchased equipment+ with down payment and

balance due in 10 days.Assets 9 ia%i)ities : Stoc;uit?:.6,666 :-6,666*6,666

e+ Fage and :alary Expense 1+0005ash 1+000

=aid payroll for first half of month.Assets 9 ia%i)ities : Stoc;uit?

*3,666 *3,666

f+ Accounts =ayable #0+0005ash #0+000

=aid balance due on purchase of equipment.Assets 9 ia%i)ities : Stoc;uit?

-6,666 -6,666

g+ Accounts >eceivable 2#+000Advertising >evenue 2#+000

:old advertising during Kanuary+ due byebruary 1!.


:-,666 :-,666


34/72

313- 34A453A, A556748349 :6,78364: "A47A,

O3,-,.,0

PROBE! 31* OR"A E"TRIES RECOR#E# #IRECT7 I" TACCO"TS APPE"#IXG

*+ 8 Accounts

Cas< Accounts Recei'a%)eaG 200+000 1!0+000 %G gG 2#+000cG 12!+000 10+000 $G

1+000 eG#0+000 fG1!+000


35/72

5 =>65E::349 A556748349 346>"A8364

PROBE! 31* Conc)u$e$G

+ ATI"S A#VERTISI"8 A8E"C7TRIA BAA"CE

A"AR7 3*, 660

#r+ Cr+5ash I *'+000

Accounts >eceivable 2#+000,and #0+000?uilding 110+0006ffice Equipment !0+0005ommissions =ayable I +!004otes =ayable 12!+0005apital :toc@ 200+000

Advertising >evenue 2#+000Fage and :alary Expense 2(+000

5ommissions Expense +!008otals I !2+!00 I !2+!00

O 3,.,0 PROBE! 31*3 THE #ETECTIO" OF ERRORS I" ATRIA BAA"CE A"# PREPARATIO" OF ACORRECTE# TRIA BAA"CE APPE"#IXG

*+ 8he trial balance is out of balance by I220+ J I20(+(#0+ or I11+(00. 8hedifference can be accounted for as follows

Amount by which trial balance is out of balance I 11+(00%ividends account should be a debit balance+ not

a credit balance/ removing a credit balance andreplacing it with a debit balance will result ina difference in the trial balance totals of twicethe I!+000 difference+ or 10+000

>emaining difference I 1+(004otes =ayable has a credit balance of I'!+00+ but

the total balance in ?uilding and Equipment isonly I'+!00/ this is a difference of 1+(00

>emaining difference I 0

8he %ividends error may have simply been the result of posting a debit in the)ournal entry incorrectly as a credit to the ledger account. 6r+ it is possible that%ividends was incorrectly credited in the )ournal entry. 8he transpositionerror inthe acquisition of the building and equipment in exchange for the note mayhave resulted from posting I2+!00 to the Equipment account instead of thecorrect amount of I2!+00. 6r+ as was the case with the dividends error+ it ispossible that the entry to record the acquisition was incorrectly recorded as adebit to Equipment for I2+!00.

313.


36/72

313/ 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*3 Conc)u$e$G

+ !ACO! I"C+REVISE# TRIA BAA"CE

A"AR7 3*, 660

#r+ Cr+5ash I *+*(0

Accounts >eceivable (+,and (0+000?uilding !0+000Equipment 2!+004otes =ayable I '!+005apital :toc@ *0+000:ervice >evenue !0+#0Fage and :alary Expense 2+'00

Advertising Expense #+&007tilities Expense (+#20%ividends !+000

8otals I 21!+ I 21!+

O 3,.,/,0 PROBE! 31*- OR"A E"TRIES, TRIABAA"CE, A"# FI"A"CIA STATE!E"TSAPPE"#IXG

*+ Kournal entries

Kan. 2 5ash 100+000

5apital :toc@ 100+0003ssued 100+000 shares of capitalstoc@ for cash.


Kan. Farehouse &0+000,and 20+000

5ash (0+000=urchased warehouse and land forcash.


:/6,666:6,66646,666

Kan. # 5ash !0+0004otes =ayable !0+000

:igned threeDyear promissory note at8hird :tate ?an@.



37/72

5 =>65E::349 A556748349 346>"A8364

PROBE! 31*- Continue$G

Kan. & %elivery 8ruc@s #!+0005ash #!+000

=urchased five new delivery truc@sfor cash.

Assets 9 ia%i)ities : Stoc;uit?:-.,666-.,666

Kan. 1 Accounts >eceivable 1!+*00:ervice >evenue 1!+*00

=erformed services during monthon account.

Assets 9 ia%i)ities : Stoc;uit?:*.,566 :*.,566

Kan. 1 5ash '+#*0Accounts >eceivable '+#*0

>eceived cash from customers onaccount.

Assets 9 ia%i)ities : Stoc;uit?:0,-560,-56

Kan. 1 9as and 6il Expense +20Accounts =ayable +20

=urchased gas and oil on account.

Assets 9 ia%i)ities : Stoc;uit?:3,36 3,36

+ BE A7 #EIVER7 SERVICETRIA BAA"CE

A"AR7 3*, 660

#r+ Cr+5ash I 2+#*0Farehouse &0+000,and 20+000%elivery 8ruc@s #!+000

Accounts >eceivable (+#10Accounts =ayable I +205apital :toc@ 100+0004otes =ayable !0+000:ervice >evenue 1!+*009as and 6il Expense +20

8otals I1&*+10 I 1&*+10

3130


38/72

3134 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*- Continue$G

3+ BE A7 #EIVER7 SERVICEI"CO!E STATE!E"T

FOR THE !O"TH E"#E# A"AR7 3*, 660

:ervice revenue I1!+*009as and oil expense +204et income I 12+&'0

-+ BE A7 #EIVER7 SERVICEBAA"CE SHEETA"AR7 3*, 660


5ash I 2+#*0Accounts receivable (+#10

8otal current assets I #0+*00=roperty+ plant+ and equipment

,and I 20+000Farehouse &0+000%elivery truc@s #!+000

8otal property+ plant+ and equipment 12!+0008otal assets I 1&!+*00


Accounts payable I +20

,ongDterm debt4otes payable !0+000

8otal liabilities I !+205apital stoc@ I 100+000>etained earnings 12+&'0

8otal stoc@holdersB equity 112+&'08otal liabilities and stoc@holdersB equity I 1&!+*00

.+ Additional information needed

an+ 3 3s the warehouse newQ


39/72

5 =>65E::349 A556748349 346>"A8364

PROBE! 31*- Conc)u$e$G

an+ / eceivable 12+!0:ervice >evenue 12+!0

?illed customers for servicesrendered in first half of month/balance due in 10 days.

Assets 9 ia%i)ities : Stoc;uit?:*,3.6 :*,3.6

3135


40/72

31-6 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*. Continue$G

Kune 1' Advertising Expense *005ash *00

=aid for Kune advertising.

Assets 9 ia%i)ities : Stoc;uit?566 566

Kune 2 5ash 12+!0Accounts >eceivable 12+!0

>eceived amounts due from customers.Assets 9 ia%i)ities : Stoc;uit?:*,3.6*,3.6

Kune 2( 7tility Expense 2+'005ash 2+'00

=aid gas+ electric+ and water bills.Assets 9 ia%i)ities : Stoc;uit?,066 ,066

Kune 2* >ent Expense 2+200>ent =ayable 2+200

>eceived bill for Kune rent to bepaid by Kuly 10.

Assets 9 ia%i)ities : Stoc;uit?:,66 ,66

Kune 0 :alaries and Fages Expense !+&'05ash !+&'0

=aid Kune salaries and wages.Assets 9 ia%i)ities : Stoc;uit?.,/06 .,/06

Kune 0 Accounts >eceivable 1(+#00:ervice >evenue 1(+#00

?illed customers for services renderedduring the second half of Kune.


:*4,-66 :*4,-66

Kune 0 %ividends &+0005ash &+000

%eclared and paid dividends.Assets 9 ia%i)ities : Stoc;uit?/,666 /,666


41/72

5 =>65E::349 A556748349 346>"A8364

PROBE! 31*. Continue$G

+ "EVERA"ERROR I"C+TRIA BAA"CE"E 36, 660

#r+ Cr+5ash I##+!(0

Accounts >eceivable 1(+#005omputer 12+000

Accounts =ayable I *+!004otes =ayable 20+000>ent =ayable 2+2005apital :toc@ 0+000:ervice >evenue 0+'!0

Advertising Expense *007tility Expense 2+'00

>ent Expense 2+200:alaries and Fages Expense !+&'0%ividends &+000

8otals I *2+#!0 I *2+#!0

3+a+ "EVERA"ERROR I"C+I"CO!E STATE!E"T


:ervice revenue I0+'!0

ExpensesAdvertising I *007tilities 2+'00>ent 2+200:alaries and wages !+&'0 11+#'0

4et income I 1*+2(0

31-*


42/72

31- 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*. Conc)u$e$G

3+%+ "EVERA"ERROR I"C+STATE!E"T OF RETAI"E# EAR"I"8S


?eginning balance+ Kune 1+ 200' I 0Add 4et income 1*+2(0%educt %ividends &+000 Ending balance+ Kune 0+ 200' I 1+2(0

3+c+ "EVERA"ERROR I"C+BAA"CE SHEET

"E 36, 660

Assets

5urrent assets5ash I##+!(0

Accounts receivable 1(+#008otal current assets I&2+*(0=roperty+ plant+ and equipment

5omputer 12+0008otal assets I '#+*(0


Accounts payable I *+!00>ent payable 2+200 I11+'00

,ongDterm debt4otes payable 20+000

8otal liabilities I1+'005apital stoc@ I0+000>etained earnings 1+2(0

8otal stoc@holdersB equity #+2(08otal liabilities and stoc@holdersB equity I '#+*(0

-+ Res+ the outloo@ for the company loo@s relatively appealing. 8he companyoperated profitably during the month of Kune and was able to generatesignificant revenues and control its costs. 8he profit margin for the month wasin excess of &0O. 3n addition+ it appears to be relatively liquid+ with a currentratio of over ! to 1.


43/72

5 =>65E::349 A556748349 346>"A8364

A T E R " A T E P R O B E ! S

O * PROBE! 31*A EVE"TS TO BE RECOR#E# I" ACCO"TS

*+ E 4ot recorded

+ E >ecorded :upplies+ Accounts =ayable

3+ E 4ot recorded

-+ E >ecorded 5ash+ 5omputer :ystem

.+ E >ecorded Accounts >eceivable+ :ervice >evenue

/+ E 4ot recorded

0+ E >ecorded :alaries and Fages Expense+ 5ash

4+ E >ecorded Accounts =ayable+ 5ash

31-3


44/72

31-- 34A453A, A556748349 :6,78364: "A47A,

O 3 PROBE! 31A TRA"SACTIO" A"A7SIS A"# FI"A"CIA STATE!E"TS

*+ ?eachway Enterprises 8ransactions for the month of Kune 200' Assets - ia%i)ities : Stoc;uit?

Accounts Accounts Ca@ita) Retaine$#ate Cas< Recei'a%)e E>ui@ment Su@@)ies Pa?a%)e Stoc; Earnings&P1 I#+000 I#+000

&P1 I &+2!0 I &+2!0

?al. I#+000 I &+2!0 I&+2!0 I#+000

&P! J! I J!

?al. I+*&! I &+2!0 I&+2!0 I#+000 I !

&P10 I !0 !0

?al. I+*&! I &+2!0 I !0 I&+00 I#+000 I !

&P1! J'0 J'0

?al. I+(*! I &+2!0 I !0 I&+00 I#+000 I 10!

&P1' 1+000 1+000

?al. I#+(*! I &+2!0 I !0 I&+00 I#+000 I (*!

&P2# I 2+000 2+000

?al. I#+(*! I 2+000 I &+2!0 I !0 I&+00 I#+000 I2+(*!

&P2* 1+000 J1+000

?al. I!+(*! I 1+000 I &+2!0 I !0 I&+00 I#+000 I2+(*!

&P0 1+!00 1+!00

?al. I'+*! I 1+000 I &+2!0 I !0 I&+00 I#+000 I#+*!

&P0 J*0 J*0

?al. I'+0! I 1+000 I &+2!0 I !0 I&+00 I#+000 I#+0!

&P0 J&+2!0 J&+2!0

?al. I 1+0!! I 1+000 I &+2!0 I !0 I !0 I #+000 I #+0!

TOTA ASSETS D4,3.. TOTA IABIITIES A"# STOCHO#ERS E2IT7 D4,3..

+ BEACHWA7 E"TERPRISESI"CO!E STATE!E"T


>ental fee revenue I #+!00$Expenses

>egistration fee I !Advertising '0:alaries and wages *0 1*!

4et income I #+0!

$I1+000 M I2+000 M I1+!00


45/72

5 =>65E::349 A556748349 346>"A8364 31-.


46/72

31-/ 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31A Conc)u$e$G

3+ BEACHWA7 E"TERPRISESBAA"CE SHEET"E 36, 660


5ash I 1+0!!Accounts receivable 1+000:upplies !0

8otal current assets I 2+10!=roperty+ plant+ and equipment

Equipment &+2!08otal assets I (+!!


Accounts payable I !05apital stoc@ I #+000>etained earnings #+0!

8otal stoc@holders equity (+0!8otal liabilities and stoc@holders equity I (+!!


47/72

5 =>65E::349 A556748349 346>"A8364

O 3 PROBE! 313A TRA"SACTIO" A"A7SIS A"#FI"A"CIA STATE!E"TS

*+ #7"A!IC SERVICES I"C+

TRA"SACTIO"S FOR THE !O"TH OF !ARCH, 660


Accounts Accounts "otes Ca@ita) Retaine$#ate Cas< Recei'a%)e Com@uter Su@@)ies Pa?a%)e Pa?a%)e Stoc; EarningsP2 I20+000 I20+000

P' '+!00 I '+!00

?al. I2'+!00 I '+!00 I20+000

P12 I !0 I !0

?al. I2'+!00 I!0 I!0 I '+!00 I20+000

P1* I 2+000 I 2+000?al. I2'+!00 I2+000 I!0 I!0 I '+!00 I20+000 I 2+000

P20 J&!0 J&!0

?al. I2&+(!0 I2+000 I!0 I!0 I '+!00 I20+000 I 1+!0

P22 !00 J!00

?al. I2'+!0 I1+!00 I!0 I!0 I '+!00 I20+000 I 1+!0

P2& 1+#00 1+#00

?al. I2(+'!0 I1+!00 I!0 I!0 I '+!00 I20+000 I 2+'!0

P2* J#+000 I #+000

?al. I2#+'!0 I1+!00 I#+000 I!0 I!0 I '+!00 I20+000 I 2+'!0P0 J1+&!0 J1+&!0

?al. I2+100 I1+!00 I#+000 I!0 I!0 I '+!00 I20+000 I 1+100

P1 J'00 J'00

?al. I 22+#00 I 1+!00 I #+000 I !0 I !0 I '+!00 I 20+000 I #00

TOTA ASSETS D4,.6 TOTA IABIITIES A"#STOCHO#ERS E2IT7 D4,.6

31-0


48/72

31-4 34A453A, A556748349 :6,78364: "A47A,


+ #7"A!IC SERVICES I"C+I"CO!E STATE!E"T

FOR THE !O"TH E"#E# !ARCH 3*, 660

8ax preparation revenue I +#00$Expenses

Advertising I &!0:alaries and wages 1+&!09as+ electricity+ and water '00 +000

4et income I #00

$I2+000 M I1+#00

3+ #7"A!IC SERVICES I"C+BAA"CE SHEET

!ARCH 3*, 660


5ash I22+#00Accounts receivable 1+!00:upplies !0

8otal current assets I2#+2!0=roperty+ plant+ and equipment

EquipmentHcomputer system #+0008otal assets I 2(+2!0


Accounts payable I !0,ongDterm debt

4otes payable '+!008otal liabilities I '+(!05apital stoc@ I20+000>etained earnings #00

8otal stoc@holders equity 20+#008otal liabilities and stoc@holders equity I 2(+2!0

-+ 8rade accounts often have a 0Dday collection or payment period. orexample+ cash should be received from the accounts receivable and cash paidfor the accounts payable during the month of April.


49/72

5 =>65E::349 A556748349 346>"A8364

O 3 PROBE! 31-A TRA"SACTIO"S RECO"STRCTE# FRO!FI"A"CIA STATE!E"TS

S :ales on credit

S 5ollected cash from customersS =urchase of equipment+ furniture+ and landS 3ncurrence of salary and wage expense/ I&+000 remains unpaidS >eceived deposits from customers unearned revenueS 5apital stoc@ issuedS %ividends paid net income for the first month is more than the ending balance

in retained earningsS ?orrowed money on a promissory noteS 3ncurred rent expenseS 3ncurred utility expense

ATER"ATE !TI1CO"CEPT PROBE!S

O *, PROBE! 31.A I#E"TIFICATIO" OF EVE"TS WITHSORCE #OC!E"TS

a+ 8he chec@ paid for the security deposit and rent as well as a deposit receiptwould be generated from this event. 8he deposit receipt would be used torecord the amount involved.

%+ 8his event would not be recorded.

c+ A sales invoice would be used to record the amount of the sale of merchandiseto a customer for cash.

$+ 8his event would not be recorded.

e+ A remittance copy of the bills would be used to record the amount remitted+ thecustomer name and account number+ and the specific invoices that were paid.

f+ :toc@ certificates and chec@s would be generated by this event. 8he chec@would be used to record the amount of stoc@ purchased.

g+ A loan agreement and other ban@ documents for the receipt of cash would be

generated by this event. 8he loan agreement would be used to record theamount of the loan and the various terms such as the due date+ the interestrate+ and any collateral.


50/72

31.6 34A453A, A556748349 :6,78364: "A47A,

O *,3 PROBE! 31/A TRA"SACTIO" A"A7SIS

*+

Stoc;uit?Accounts Accounts Wages Retaine$

#ate Cas< Recei'a%)e Pa?a%)e Pa?a%)e Earnings

2P2 I J#00 I J#00

?al. I J#00 I J#00

2P J+20 I J+20

?al. I J+&0 I J+20 I J#00

2P# J2+000 I J2+000

?al. I J!+&0 I J+20 I J#00 I J2+000

2P1! (+000 I J(+000?al. I 2+'0 I J(+000 I J+20 I J#00 I J2+000

2P2& 1&+(00 1&+(00

?al. I 2+'0 I (+(00 I J+20 I J#00 I 1#+(00

2P2' +#00 J+#00

?al. I 2+'0 I (+(00 I 1'0 I J #00 I 11+#00

+ eb. 2 Kanuary expense

eb. Kanuary expenseeb. # 4ot an expense

eb. 2' ebruary expense


51/72

5 =>65E::349 A556748349 346>"A8364

O *,3 PROBE! 310A TRA"SACTIO" A"A7SIS A"# ABAA"CE SHEET

*+ RITTERSBE8O"E I"C+

TRA"SACTIO"S FOR THE !O"TH OF 7 660

Assets 9 ia%i)ities : Stoc;uit?nearne$

Accounts Pre@ai$ Accounts Ser'ice Ca@ita) Retaine$#ate Cas< Recei'a%)e Rent E>ui@ment Pa?a%)e Re'enue Stoc; Earnings

'P2 I1(+000 I1(+000

'P J1+000 I J1+000

?al. I1'+000 I1(+000 IJ1+000

'P! J!+000 I 1(+000 I 1+000

?al. I12+000 I1(+000 I1+000 I1(+000 IJ1+000

'P1' J200 J200

?al. I11+(00 I1(+000 I1+000 I1(+000 IJ1+200

'P2( J1+#!0 I 1+000 J#!0

?al. I10+!0 I1+000 I1(+000 I1+000 I1(+000 IJ1+&!0

'P0 (+000 I '+!00 1!+!00

?al. I1(+!0 I'+!00 I1+000 I1(+000 I1+000 I1(+000 I1+(!0

'P0 J*+!00 J*+!00

?al. I (+(!0 I'+!00 I1+000 I1(+000 I1+000 I1(+000 I #+!0

'P1 &00 I &00?al. I *+#!0 I '+!00 I 1+000 I 1(+000 I 1+000 I &00 I 1(+000 I #+!0

TOTA ASSETS D3.,5.6 TOTA IABIITIES A"#STOCHO#ERS

E2IT7 D3.,5.6

31.*


52/72

31. 34A453A, A556748349 :6,78364: "A47A,


+ RITTERSBE8O"E I"C+BAA"CE SHEET

7 3*, 660


5ash I *+#!0$Accounts receivable '+!00=repaid rent 1+000

8otal current assets I1'+*!0=roperty+ plant+ and equipment

Equipment 1(+0008otal assets I !+*!0


Accounts payable I1+0007nearned service revenue &008otal current liabilities I1+&005apital stoc@ I1(+000>etained earnings #+!0 $$

8otal stoc@holdersB equity 22+!08otal liabilities and stoc@holdersB equity I !+*!0

$I1(+000 J I1+000 J I!+000 J I200 J I1+#!0 M I(+000 J I*+!00 M I&00

$$JI1+000 J I200 J I#!0 M I1!+!00 J I*+!00

3n the month of August+ the company should have a cash inflow of I'+!00 fromcustomers for services provided during Kuly. Also+ the company should have acash outflow of I1+000 to pay the balance due on the purchase of theequipment. 8his cash flow information is useful to investors and creditorsbecause it helps them understand the prospects for the company in the future.8his type of information is particularly useful to ban@ers.

O 3,. PROBE! 314A ACCO"TS SE# TO RECOR#TRA"SACTIO"S APPE"#IXG

AccountsAccounts

#e%ite$ Cre$ite$ #e%ite$ Cre$ite$a+ 1 10 g ' 1%+ ! *


53/72

5 =>65E::349 A556748349 346>"A8364

O 3,-,. PROBE! 315A TRA"SACTIO" A"A7SIS A"# OR"A E"TRIES RECOR#E# #IRECT7 I" T1ACCO"TS APPE"#IXG

*+ >apid 5ity >oller >in@ transactions for the month of 6ctober 200'

Assets 9 ia%i)ities : Stoc;uit?Accounts Concession Accounts "otes Ca@ita) Retaine

#ate Cas< Recei'a%)e Su@@)ies an$ Bui)$ing E>ui@ment Pa?a%)e Pa?a%)e Stoc; Earnin10P1 I &&+000 I &&+00010P2 J*+000 I1!+000 I '!+000 I (1+000?al. I !'+000 I1!+000 I '!+000 I (1+000 I &&+000

10P J!+000 LLLLLLL I 2!+000 I 20+000?al. I !2+000 I1!+000 I '!+000 I 2!+000 I 20+000 I (1+000 I &&+00010P* J+!00 LLLL LL +!00?al. I #(+!00 I1!+000 I '!+000 I 2(+!00 I 20+000 I (1+000 I &&+00010P12 I 2+!00 2+!00?al. I #(+!00 I 2+!00 I1!+000 I '!+000 I 2(+!00 I 22+!00 I (1+000 I &&+010P1 1+1!0 I #

'?al. I#*+&!0 I 2+!00 I1!+000 I '!+000 I 2(+!00 I22+!00 I(1+000 I &&+000 I 1+10P1' I '!0 '?al. I#*+&!0 I '!0 I 2+!00 I1!+000 I '!+000 I 2(+!00 I22+!00 I(1+000 I&&+000 I 1+*10P2 '! J'!?al. I !0+02! I '! I 2+!00 I1!+000 I '!+000 I 2(+!00 I22+!00 I(1+000 I&&+000 I 1+*10P2# 1+'00 !

1+2?al. I!1+'2! I '! I 2+!00 I1!+000 I'!+000 I 2(+!00 I 22+!00 I(1+000 I &&+000 I +&10P2& J'!0 J'?al. I!0+*'! I'! I 2+!00 I1!+000 I '!+000 I 2(+!00 I22+!00 I(1+000 I&&+000 I 2+(10P2' J1+2'! J1+2

?al. I#*+'00 I'! I 2+!00 I1!+000 I '!+000 I 2(+!00 I 22+!00 I(1+000 I&&+000 I 1+!10P0 J2+2!0 J2+2?al. I#'+#!0 I '! I 2+!00 I1!+000 I '!+000 I 2(+!00 I 22+!00 I(1+000 I&&+000 I &10P1 2+000 '

1+?al. I #*+#!0 I '! I 2+!00 I 1!+000 I '!+000 I 2(+!00 I 22+!00 I (1+000 I &&+000 I 1+

TOTA ASSETS D*06,4. TOTA IABIITIES A"# STOCHO#ERS E2D*06,4.


54/72

31.- 34A453A, A556748349 :6,78364: "A47A,


+ Cas< Accounts Recei'a%)e10P1 &&+000 *+000 10P2 10P1' '!0 '! 10P210P1 1+1!0 !+000 10P

10P2 '! +!00 10P*10P2# 1+'00 '!0 10P2&10P1 2+000 1+2'! 10P2'

2+2!0 10P0

'1+22! 21+''! ?al. '!?al. #*+#!0

Concession Su@@)ies an$10P12 2+!00 10P2 1!+000

Bui)$ing E>ui@ment10P2 '!+000 10P 2!+000

10P* +!00?al. 2(+!00

Accounts Pa?a%)e "otes Pa?a%)e20+000 10P (1+000 10P22+!00 10P12

22+!00 ?al.

Ca@ita) Stoc; Retaine$ Earnings&&+000 10P1 10P2& '!0 #00 10P1

10P2' 1+2'! '!0 10P110P0 2+2!0 '!0 10P1'

!00 10P2#1+200 10P2#'00 10P1

1+00 10P1

#+2'! !+&001+2! ?al.


55/72

5 =>65E::349 A556748349 346>"A8364 31..

O -,0 PROBE! 31*6A TRIA BAA"CE A"# FI"A"CIASTATE!E"TS APPE"#IXG

*+ RAPI# CIT7 ROER RI"TRIA BAA"CE

OCTOBER 3*, 660

#r+ Cr+5ash I #*+#!0

Accounts >eceivable '!5oncession :upplies 2+!00,and 1!+000?uilding '!+000Equipment 2(+!00

Accounts =ayable I 22+!004otes =ayable (1+0005apital :toc@ &&+000

>etained Earnings 1+2!8otals I 1'0+(2! I 1'0+(2!

+ RAPI# CIT7 ROER RI"I"CO!E STATE!E"T


>evenues8ic@et sales I 1+&00$5oncession sales +2!0$$>ental revenue '!0 I !+&00

Expenses7tilities I 1+2'!:alaries and wages 2+2!0 +!2!

4et income I 2+0'!

$I#00 M I!00 M I'00

$$I'!0 M I1+200 M I1+00

3+ RAPI# CIT7 ROER RI"STATE!E"T OF RETAI"E# EAR"I"8S


?eginning balance+ 6ctober 1+ 200' I 0Add 4et income 2+0'!%educt %ividends '!0 Ending balance+ 6ctober 1+ 200' I 1+2!


56/72

31./ 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*6A Conc)u$e$G

-+ RAPI# CIT7 ROER RI"BAA"CE SHEET

OCTOBER 3*, 660


5ash I #*+#!0Accounts receivable '!5oncession supplies 2+!00

8otal current assets I !2+2!=roperty+ plant+ and equipment

,and I 1!+000?uilding '!+000Equipment 2(+!00

8otal property+ plant+ and equipment 11(+!008otal assets I 1'0+(2!


Accounts payable I 22+!00,ongDterm debt

4otes payable (1+0008otal liabilities I 10+!005apital stoc@ I &&+000>etained earnings 1+2!

8otal stoc@holders equity &'+2!

8otal liabilities and stoc@holders equity I 1'0+(2!

O 3,.,/ PROBE! 31**A OR"A E"TRIES APPE"#IXG

a+ 5ash 1!0+0005apital :toc@ 1!0+000

3ssued 10+000 shares of capital stoc@ for cash.Assets 9 ia%i)ities : Stoc;uit?

:*.6,666 :*.6,666

%+ >ent Expense #005ash #00

=aid ebruary rent.Assets 9 ia%i)ities : Stoc;uit?-66 -66


57/72

5 =>65E::349 A556748349 346>"A8364 31.0

PROBE! 31**A Conc)u$e$G

c+ 5ash 100+0004otes =ayable 100+000

:igned fiveDyear promissory note.


$+ 5ash !+0007nearned :ervice >evenue !+000

>eceived cash for services to be performedover the next two months.

Assets 9 ia%i)ities : Stoc;uit?:.,666 :.,666

e+ 5omputer :oftware *!0

5ash *!0=urchased software to be used over nexttwo years.

Assets 9 ia%i)ities : Stoc;uit?:5.65.6

f+ Accounts >eceivable 12+!005onsulting >evenue 12+!00

?illed customers for wor@ performed duringmonth.

Assets 9 ia%i)ities : Stoc;uit?:*,.66 :*,.66

g+ :alaries and Fages Expense +0005ash +000

=aid office personnel for wor@ performedduring month.

Assets 9 ia%i)ities : Stoc;uit?3,666 3,666

eceived utility bill to be paid within10 days.

Assets 9 ia%i)ities : Stoc;uit?:*66 *66


58/72

31.4 34A453A, A556748349 :6,78364: "A47A,

O3,-,.,0

PROBE! 31*A OR"A E"TRIES RECOR#E# #IRECT7 I" TACCO"TS APPE"#IXG

*+ 8 Accounts

Cas< Accounts Recei'a%)eaG 1!0+000 #00 %G fG 12+!00cG 100+000 *!0 eG$G !+000 +000 gG

2!!+000 #+!0?al. 2!0+&!0

Com@uter SoftKare Accounts Pa?a%)eeG *!0 100


59/72

5 =>65E::349 A556748349 346>"A8364 31.5

PROBE! 31*A Conc)u$e$G

+ CASTE CO"STI"8 A8E"C7TRIA BAA"CE

FEBRAR7 4, 660

#r+ Cr+5ash I 2!0+&!0

Accounts >eceivable 12+!005omputer :oftware *!0

Accounts =ayable I 1007nearned :ervice >evenue !+0004otes =ayable 100+0005apital :toc@ 1!0+0005onsulting >evenue 12+!00:alaries and Fages Expense +000>ent Expense #007tilities Expense 100

8otals I 2&'+&00 I 2&'+&00

O 3,-,.,0 PROBE! 31*3A E"TRIES PREPARE# FRO! A TRIABAA"CE A"# PROOF OF THE CASH BAA"CEAPPE"#IXG

*+ 5ash M All other debits - 8otal debits

5ash M I122+(00 I2#0+!00$

5ash - I2#0+!00 J I122+(00 - I11'+'00

$8otal debits must equal total credits+ which total I2#0+!00.

+ All transactions involving cash during the month

Cas


60/72

31/6 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*3A Conc)u$e$G

cG :alaries and wages paid8otal salary and wage expense I 2#+&004ot yet paid+ salaries and wages payable 10+000

5ash paid I 1#+&00

$G Advertising paidHmust have been the amount paid because there is noaccounts payable or advertising payable.

eG >ent paidHmust have been the amount paid because there is no accountspayable or rent payable.

O 3,.,/ PROBE! 31*-A OR"A E"TRIES APPE"#IXG

*+ Kournal entries

eb. 2 Fages =ayable #00

5ash #00=aid wages owed employees.

Assets 9 ia%i)ities : Stoc;uit?-66 -66

eb. Accounts =ayable +205ash +20

=aid for oil and gas billed in Kanuary.Assets 9 ia%i)ities : Stoc;uit?3,36 3,36

eb. # %ividends 2+000

5ash 2+000%eclared and paid cash dividends.

Assets 9 ia%i)ities : Stoc;uit?,666 ,666

eb. 1! 5ash (+000Accounts >eceivable (+000

>eceived cash on open accounts.Assets 9 ia%i)ities : Stoc;uit?:4,6664,666

eb. 2& Accounts >eceivable 1&+(00:ervice >evenue 1&+(00

=rovided services on accountduring ebruary.

Assets 9 ia%i)ities : Stoc;uit?:*/,466 :*/,466


61/72

5 =>65E::349 A556748349 346>"A8364 31/*

PROBE! 31*-A Conc)u$e$G

eb. 2' 9as and 6il Expense +#00Accounts =ayable +#00

>eceived gas and oil bill for ebruary.

Assets 9 ia%i)ities : Stoc;uit?:3,-66 3,-66

+ eb. 2 Kanuary expense

eb. Kanuary expense

eb. # 4ot an expense

eb. 2' ebruary expense

O 3,.,/ PROBE! 31*.A OR"A E"TRIES A"# ABAA"CE SHEET APPE"#IXG

*+ Kournal entries

Kuly 2 5ash 1(+0005apital :toc@ 1(+000

3ssued capital stoc@ to six ownersin exchange for I+000 each.


Kuly >ent Expense 1+000

5ash 1+000=aid Kuly rent.

Assets 9 ia%i)ities : Stoc;uit?*,666 *,666

Kuly ! Equipment 1(+0005ash !+000

Accounts =ayable 1+000=urchased equipment with down payment/balance due in 0 days.


:*4,666 :*3,666.,666

Kuly 1' Advertising Expense 2005ash 200

=aid for doorDtoDdoor advertising.Assets 9 ia%i)ities : Stoc;uit?66 66


62/72

31/ 34A453A, A556748349 :6,78364: "A47A,

PROBE! 31*.A Continue$G

Kuly 2( =repaid >ent 1+0007tilities Expense #!0

5ash 1+#!0

=aid August rent and Kuly utilities.Assets 9 ia%i)ities : Stoc;uit?:*,666 -.6*,-.6

Kuly 0 5ash (+000Accounts >eceivable '+!00

:ervice >evenue 1!+!00>ecord cash received for Kuly servicesand sales on account for Kuly+ due in0 days.

Assets 9 ia%i)ities : Stoc;uit?:4,666 :*.,.66:0,.66

Kuly 0 5ommissions Expense *+!005ash *+!00

=aid Kuly commissions expense.Assets 9 ia%i)ities : Stoc;uit?5,.66 5,.66

Kuly 1 5ash &007nearned :ervice >evenue &00

>eceived cash from client for servicesto be performed over next two months.

Assets 9 ia%i)ities : Stoc;uit?:/66 :/66

PROBE! 31*.A Conc)u$e$G


63/72

5 =>65E::349 A556748349 346>"A8364 31/3

+ RITTERSBE8O"E I"C+BAA"CE SHEET

7 3*, 660

Assets5urrent assets5ash I *+#!0$

Accounts receivable '+!00=repaid rent 1+000

8otal current assets I1'+*!0=roperty+ plant+ and equipment

Equipment 1(+0008otal assets I !+*!0


Accounts payable I1+0007nearned service revenue &008otal current liabilities I1+&005apital stoc@ I1(+000>etained earnings #+!0 $$

8otal stoc@holders equity 22+!08otal liabilities and stoc@holders equity I !+*!0

$I1(+000 J I1+000 J I!+000 J I200 J I1+#!0 M I(+000 J I*+!00 M I&00

$$JI1+000 J I200 J I#!0 M I1!+!00 J I*+!00

3n the month of August+ the company should have a cash inflow of I'+!00 fromcustomers for services provided during Kuly. Also+ the company should have acash outflow of I1+000 to pay the balance due on the purchase of theequipment. 8his cash flow information is useful to investors and creditorsbecause it helps them understand the prospects for the company in the future.8his type of information is particularly useful to ban@ers.


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31/- 34A453A, A556748349 :6,78364: "A47A,

# E C I S I O " C A S E S

REA#I"8 A"# I"TERPRETI"8 FI"A"CIA STATE!E"TS

O - #ECISIO" CASE 31* CO!PARI"8 TWO CO!PA"IES I"THE SA!E I"#STR7 FI"ISH I"E A"# FOOT OCER

*+ 8he largest expense for each company in the most recent year is C5ost ofsales. 8he dollar amount of inish ,ines cost of sales for the year endedebruary 2!+ 200&+ is I(*#+'2#+000. oot ,oc@ers cost of sales for the yearended Kanuary 2(+ 200&+ is I+*##+000+000. 3t is logical that cost of sales is thelargest expense for each of these companies because they are merchandisers.8hat is+ they purchase products for resale to customers and cost of sales

represents the cost of those products sold during the current period.

+ 8he ratio of selling+ general and administrative expenses to sales for eachcompany is as follows

Finis< ine 7ear En$e$L.L6/ L/L6.

in t


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5 =>65E::349 A556748349 346>"A8364 31/.

#ECISIO" CASE 31* Conc)u$e$G

3+ inish ,ine reports income tax expense in each of the two most recent years ofI&+(0+000 and I&+'&0+000. oot ,oc@ers income tax expense is

I1#2+000+000 and I11*+000+000. 8he ratio of income tax expense to incomebefore taxes for each company is as follows

Finis< ine 7ear En$e$

L.L6/ L/L6.in t


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31// 34A453A, A556748349 :6,78364: "A47A,

O 3 #ECISIO" CASE 31 REA#I"8 A"# I"TERPRETI"8FOOT OCERS STATE!E"T OF CASH FOWS

*+ or the year ended Kanuary 2(+ 200&+ oot ,oc@er spent I1!!+000+000 onpurchases of property and equipment. 8he effect on the accounting equation is

Assets 9 ia%i)ities : Stoc;uit?:*..,666,666*..,666,666

+ or the year ended Kanuary 2(+ 200&+ oot ,oc@er paid I#*+000+000 individends. 8he effect on the accounting equation is


-5,666,666

-5,666,666

O *,3 #ECISIO" CASE 313 REA#I"8 A"# I"TERPRETI"8SOTHWEST AIRI"ES BAA"CE SHEET

*+ :outhwest Airlines regularly sells tic@ets in advance of when customers fly. Atthe time of a sale+ :outhwest records a liability Air 8raffic ,iability. 8his is an

external event because it involves someone outside the entity.

+ 8he effect on the accounting equation from an advance sale isAssets 9 ia%i)ities : Stoc;uit?

Increase Increase

3+ 8he effect on the accounting equation from the purchase by a customer of aI!00 tic@et is

Assets 9 ia%i)ities : Stoc;uit?:.66 :.66

-+ 8he liability is reduced when customers use their tic@ets. At this point+:outhwest Airlines will reduce the liability account+ Air 8raffic ,iability+ andincrease a revenue account. 8his is an external event.


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5 =>65E::349 A556748349 346>"A8364 31/0

!AI"8 FI"A"CIA #ECISIO"S

O ,3 #ECISIO" CASE 31- CASH FOW VERSS "ET I"CO!E

*+ 7O"8 PROPERTIES

I"CO!E STATE!E"TFOR THE !O"TH OF A"AR7

5ommission revenue I0+000$Expenses

5ommissions I1&+000$$7tilities !00:alaries and wages 2+200>ent 1+2009as and oil 100 20+000

4et income I 10+000

$I&00+000 T !O$$I#00+000 T #O

+ 7O"8 PROPERTIESSTATE!E"T OF CASH FOWSFOR THE !O"TH OF A"AR7

5ash flows from operating activities5ash collected in commissions I22+0005ash paid for

5ommissions I1&+0007tilities !00:alaries and wages 2+200>ent 1+2009as and oil 100 20+000

4et cash provided by operating activities I 2+0005ash flows from investing activities

=urchase of office equipment I 2+000%own payment on automobile +000

4et cash used by investing activities !+0005ash flows from financing activities

5ash contributed by owner 20+0004et increase in cash I 1'+000


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31/4 34A453A, A556748349 :6,78364: "A47A,

#ECISIO" CASE 31- Conc)u$e$G

3+ 86 :helia Roung

>6" :tudents name

%A8E Kanuary 1

:7?KE58 irst monthBs results

As you requested+ 3 reviewed the results of your operations for the first monthof business. ortunately+ your concerns about being Cin the hole are really not

)ustified. Rou did in fact have a good first month of sales and have every reasonto be encouraged about the future. 3 have enclosed copies of an incomestatement and a statement of cash flows for Kanuary+ which should significantlyalleviate any concerns you may have.

irst+ Kanuarys net income of I10+000 is quite favorable+ especially whencompared with the months sales of I0+000. Rou have been successful so far

in containing costs while running a viable operation. :econd+ the statement ofcash flows provides the specific explanations as to why the I20+000 in cash thatyou started with is now down to I1'+000. 6ne ma)or reason is that even thoughyour commissions revenue was I0+000+ you still have I(+000 to collect fromthese sales. Rou also had fairly significant cash drains up front for downpayments on the office equipment and the car. Fithout these expenditures+your cash balance would have been I!+000 higher. Rou should @eep in mindthat the remaining balance on the office equipment of I+000 will be due onebruary 1!. 8he remainder of I12+000 is due on the car in one year from thedate of the note.

3 hope 3 have been able to alleviate your concerns about your new business.

=lease let me @now if 3 can be of any further assistance.

-+ Assets are essentially unexpired costs and represent future benefits. 6ncethose benefits have been used up+ the costs become expired and the asset isno longer of any value. 3n accounting+ the periodic process of recognizing theexpiration of benefits from tangible longDterm assets+ such as office equipmentand automobiles+ is called depreciation. %epreciation is recognized over the lifeof these assets as an expense on the income statement. 8he process ofrecognizing depreciation will be examined in detail in later chapters.

O *,3,- #ECISIO" CASE 31. OA" RE2EST

*+ 3t appears that :imon too@ the I20+000 cash he originally contributed to thebusiness and used it to buy mowing equipment and a truc@. 8he effect on theaccounting equation would be

Assets 9 ia%i)ities : Stoc;uit?:.,666

:*.,6666,666


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5 =>65E::349 A556748349 346>"A8364 31/5

#ECISIO" CASE 31. Continue$G

+ FRASER A"#SCAPI"8I"CO!E STATE!E"T

FOR THE SIX !O"THS E"#E# SEPTE!BER 36, 660

>evenues,andscaping I+#00,awn care 2#+000 I!'+#00

Expenses9as and oil I1!+'003nsurance 2+!00>ent &+000:alaries 22+000 #&+200

4et income I 11+200

3+ ?oth the mowing equipment and the truc@ will benefit rasers business forseveral years+ and he should attempt to allocate their cost over their estimateduseful lives. etained earnings 11+200

8otal stoc@holders equity 1+200 $8otal liabilities and stoc@holders equity I ##+200

$4et income I11+200 M 6wners investments I20+000.

8he two items of most concern on the balance sheet are the large Accounts>eceivable and Accounts =ayable. 6ver #0O of rasers revenues remainuncollected at the end of the season I2+000 of accounts receivable on totalrevenues of I!'+#00. 3f a significant portion of this amount becomesuncollectible+ raser may experience trouble in paying his open accounts.


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3106 34A453A, A556748349 :6,78364: "A47A,

#ECISIO" CASE 31. Conc)u$e$G

.+ "emorandum to the request for a loan

86 :imon raser

>6" :tudents name%A8E 6ctober 1!+ 200'

:7?KE58 ,oan request

5ongratulations on a very successful first year in your new business. 3ncon)unction with the business+ 3 have reviewed your recent request for aI20+000 loan to expand your fleet of truc@s and mowing equipment.

Rour income statement for the first year shows a profitable operation. 3 amconcerned+ however+ that because you did not recognize depreciation on thelongDterm assets+ the income reported of I11+200 may overstate the actualprofitability of your business. 3f we were conservative and estimated a fiveDyear

life for each of these assets+ depreciation would amount to a total of I#+000 forthe year.

8he balance sheet also presents some concerns to me. irst+ #0O of youraccounts receivable remains uncollected at the end of the season. ?eforeextending a loan+ 3 would need to feel assured that a very high percentage ofthis amount will be realized in the near future. :econd+ you have a sizableamount of accounts payable outstanding at the present time. 9iven the smallcash balance of I1+200+ your ability to repay the creditors is very directly tied towhether you will be able to collect the amounts due from your customers.

9iven my concerns regarding the large balances in both accounts receivableand accounts payable+ 3 will not be able to approve your request for a loan at

this time. 3 would be happy to meet with you to discuss further your request andspecifically to review your plans for collection of your open accounts.

ETHICA #ECISIO" !AI"8

O *,3 #ECISIO" CASE 31/ REVE"E RECO8"ITIO"

*+ 4o+ the boo@@eeper did not account for the clientBs deposit correctly. ?ecausethe amount received from the client is a deposit for wor@ to be done next year+ itrepresents a liability at the end of the year rather than revenue.

+ As controller for the firm+ you are responsible for the accuracy and fairness ofthe financial statements. Rou do have a moral and ethical responsibility tocorrect the boo@s+ even though in so doing the income for the year will bereduced. A reduction in the reported income will affect your yearDend bonus+ butyou have a responsibility on your part to the users of the financial statementsthat supersedes any concerns over your personal financial situation.


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5 =>65E::349 A556748349 346>"A8364 310*

O 3,.,/ #ECISIO" CASE 310 #EA7 I" THE POSTI"8OF A OR"A E"TR7 APPE"#IXG

*+ Entries entered into the )ournal but not posted to the ledger accounts will not be

reflected in the financial statements. ailure to post the expensePcashdisbursement entry will mean that cash will be higher on the trial balanceprepared by the controller+ and expenses will be lower. ?y ignoring a total ofI'&+!00 in various expenses+ net income will be increased by the sameamount.

+ 8he controller is not correct in saying that the omission of the expense entryCwill not hurt anyone. irst+ there is the basic issue whether the companyshould rightfully be required to pay bonuses on a profit level that was notattained. :econd+ there is the related issue the effect of this deceptive practiceon various constituencies of the company. Fhat about the stoc@holdersQ 8hey

have entrusted responsibility for managing the business in a fair and ethicalmanner to the officers of the corporation. 8his particular practice would be aserious violation of this trust. inally+ any number of outside users of thefinancial statements could be misled by this practice. or example+ a ban@errelies on the income statement of a company to provide a clear and accuratepicture of the results of operations. 8he failure to accurately reflect theexpenses of the period results in information that is not free from bias and iscertainly misleading.

3+ 8he assistant controller has a definite moral and ethical responsibility toconfront the controller about the suggestion. A direct confrontation in thisparticular case may be warranted. 8he assistant controller should point out that

this practice not only violates accounting principles but also is a very seriousviolation of the trust shown in both individuals by the stoc@holders. 8heassistant controller should explain why this practice is not acceptable. 3f thesituation becomes confrontational+ and the controller orders the assistant not toma@e the entry+ the assistant has a responsibility to tal@ to the controllerBs bossabout the problem. 8his situation does present the assistant controller with anethical dilemma since that person understands that the request by the controllerwould result in information that is not acceptable practice and is not free frombias.


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310 34A453A, A556748349 :6,78364: "A47A,

REA WOR# PRACTICE 3+*

8he purchase of furniture and fixtures is an external event for oot ,oc@er. 8herecording of depreciation on the assets is an internal event.

REA WOR# PRACTICE 3+

inish ,ines has five current asset accounts on its balance sheet. "erchandiseinventories+ net in the amount of I2&(+!*0+000 is the largest of these accounts.oot ,oc@er reports four current assets+ and the largest of them is also merchandiseinventories. 8he balance in this account is I1+2!#+000+000.

REA WOR# PRACTICE 3+3

8he )ournal entry to record the sale of a pair of running shoes for I100 cash wouldbe

5ash and 5ash Equivalents 100:ales 100

:old running shoes for cash.

Assets 9 ia%i)ities : Stoc;uit?:*66 :*66

Documents

Porter SM Ch. 03_2pp