ACC120 Lecture Notes - Lecture 1: Accrual, Accounting Equation, Income Statement
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Rent and insurance payments are examples of
| A. | variable expenses. | |
| B. | fixed expenses. | |
| C. | long-term liabilities. | |
| D. | short-term liabilities. |
Matthew is concerned about his ability to save money regularlyand has prepared a budget. Which of the following budgetclassifications would be most appropriate for Matthew'sbudget?
| A. | Savings as a fixed expenditure | |
| B. | Saving whatever may be left over | |
| C. | Savings as a variable expenditure | |
Question 3
A successful financial plan includes
| A. | explicitly stated financial goals. | |
| B. | specified values that underlie the plan. | |
| C. | all of these. | |
| D. | logical and consistent financial strategies. |
Question 4
A cash-flow statement is also known as a(n) ____ statement.
| A. | taxable income | |
| B. | net worth | |
| C. | income and expense | |
| D. | asset-and-liability |
Question 5
A long-term goal is one that is projected to be acheived beyondhow much time?
| A. | five year | |
| B. | ten years | |
| C. | six months | |
| D. | one year |
Question 6
A balance sheet includes ____, ____, and ____.
| A. | income; expenses; net worth | |
| B. | assets; expenses; liabilities | |
| C. | income; liabilities; net worth | |
| D. | assets; liabilities; net worth |
Question 7
Disposable income is income
| A. | after all employer withholding including taxes. | |
| B. | minus fixed expenditures. | |
| C. | before taxes. | |
| D. | after all employer withholding except taxes. |
Question 8
Which of the following would be classified as a long-termliability?
| A. | Education loan balance | |
| B. | Credit card debt | |
| C. | Bank card debt | |
| D. | All of these |
Question 9
Stephen Scott's monthly pay stub indicates that his monthlygross income is $3,800. However, $800 is withheld for income andSocial Security taxes, $200 is withheld for his health anddisability insurance, and another $200 is contributed to hispension plan. How much is Stephen's disposable income?
| A. | $2,800 | |
| B. | $3,000 | |
| C. | $2,600 | |
| D. | $3,800 |
Question 10
Which of the following provides information about a person'sfinancial condition at a specific point in time?
| A. | Federal tax return | |
| B. | Balance sheet | |
| C. | All of these | |
| D. | Income and expense statement |
Question 11
The two most useful financial statements are ____ and____.
| A. | federal tax returns; income and expense statements | |
| B. | balance sheets; wills | |
| C. | cash-flow statements; balance sheets | |
| D. | wills; federal tax returns |
Question 12
Which of the following is the best example of awell-stated financial goal?
| A. | Pay off your credit cards as soon as possible | |
| B. | Purchase a three-bedroom home in five years | |
| C. | Buy a $3,000 computer in 18 months | |
| D. | Buy a $2,000 stereo |
Question 13
The first step in the budgeting process is
| A. | setting financial goals. | |
| B. | evaluating. | |
| C. | organizing. | |
| D. | decision making. |
Question 13
The first step in the budgeting process is
| A. | setting financial goals. | |
| B. | evaluating. | |
| C. | organizing. | |
| D. | decision making. |
Which of the following is a characteristic of a cash-flowstatement?
| A. | It shows if you were able to live within your income for theperiod covered. | |
| B. | All of these. | |
| C. | It covers a period of time, usually one month or one year. | |
| D. | The statement includes three sections: income, expenses, andsurplus (or deficit). |
Question 15
The formula for calculating net worth is
| A. | income minus liabilities. | |
| B. | assets minus expenses. | |
| C. | income minus expenses. | |
| D. | assets minus liabilities. |
Question 16
Food, clothing, and entertainment are examples of
| A. | long-term liabilities. | |
| B. | short-term liabilities. | |
| C. | fixed expenses. | |
| D. | variable expenses. |
Question 17
To construct a balance sheet, you need to compile dollar valuesfor your assets and liabilities. Good sources from which to beginare
| A. | checkbook or savings account records. | |
| B. | all of these. | |
| C. | investments. | |
| D. | receipts of various payments. |
Question 18
Discretionary income is used to pay for things like
| A. | housing. | |
| B. | vacations. | |
| C. | utilities. | |
| D. | food. |
Question 19
A short-term goal is one that is projected to be acheived withinhow much time?
| A. | one month | |
| B. | three months | |
| C. | one year | |
| D. | five years |
Question 20
The advantages of having organized financial records include
| A. | helping you take advantage of all available tax deductions. | |
| B. | all of these. | |
| C. | enabling you to review the results of financialtransactions. | |
| D. | helping you save money as well as make money. |
| Assets | = | Liabilities + Equity |
| The left side of the accounting equation shows the economic resources of the company (what the company has). | = | The right side of the accounting equation summarizes who provided those assets: Creditors or the owners. |
When a business is first formed, both sides of the equation are equal to zero. As transactions occur, they affect the accounting equation, but the accounting equation must always stay in balance. A transaction can increase both sides or decrease both sides. A transaction could also affect only one side by increasing and decreasing one side at the same time.
APPLYING THE CONCEPTS: Analyzing Changes to Assets, Liabilities and Equity
Thomas Company: The table below demonstrates the effect of the first three transactions for Thomas Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers. If an updated balance is zero, enter "0".
| Transaction | Assets | = | Liabilities | + | Equity |
| Beginning | $0 | = | $0 | + | $0 |
| Investment in the Business The owner of the company has invested $26,000 cash into the business. This increases the assets of the business from its zero balance. The owner has a claim on the assets, so equity also increases from its zero balance. Make sure the equation stays in balance. | $ | = | $ | + | $ |
| Borrow Cash The company borrows $13,000 cash from the local bank. This increases the assets from its balance after the first transaction. The company now owes the bank; therefore, the bank also has a claim on the assets. Thus, liabilities increase from their zero balance. Notice this transaction did not affect equity. The equation still needs to balance. | $ | = | $ | + | $ |
| Purchase equipment The company pays cash for a piece of equipment costing $10,000. Make sure that the equation stays in balance. Remember, the left side of the equation summarizes the total assets. The company has merely exchanged one asset (cash) for another asset (equipment); the value of each asset is the same. | $ | = | $ | + | $ |
Jones Company: Analyze the accounting equation for another business, Jones Company. Assume that the assets are $66,000 and the liabilities are $26,400. By rearranging the accounting equation, you determine that equity is $.
During the year, the owner invested an additional $4,000 in the business. The company also paid off $2,500 of its debt. What would the accounting equation look like at the end of the year for Jones Company? Enter the updated amounts for Jones' accounting equation below.
| Assets | = | Liabilities | + | Equity |
| $ | = | $ | + | $ |
APPLYING THE CONCEPTS: Analyzing the Effect of Revenues and Expenses
The equity component of the accounting equation can be affected by more than owner contributions. In any form of business, the owners take all revenues and expenses. Therefore, equity increases for revenue earned and decreases for expenses incurred. Also in any form of business, money can be distributed from the business to the owners. Distributions (in the form of cash or other assets) to the owner decrease the equity account. Smith Company had transactions affecting equity during the past year. The table below demonstrates the effect of these transactions for Smith Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers.
| Transaction | Assets | = | Liabilities | + | Equity |
| Beginning of the year | $320,000 | = | $96,000 | + | $224,000 |
| Revenues earned: During the year, Smith Company earned revenues totalling $192,000. The cash has been collected from the customers for all revenue earned this year. | $ | = | $ | + | $ |
| Expenses incurred: Smith Company incurred expenses totalling $134,400 during that same year. All of the expenses incurred this year were paid in cash. | $ | = | $ | + | $ |
| Distributions: At the end of each quarter, the owner withdraws cash from Smith Company. The sum of those quarterly distributions was $5,760. | $ | = | $ | + | $ |
APPLYING THE CONCEPTS: Putting it all together
Letâs put all the pieces together now. Suppose that you are analyzing Martin Company. You know that at the beginning of the year, the assets equaled $320,000 and the liabilities equaled $176,000. During the year, assets increased by $48,000 and equity increased by $74,400. The change in equity includes all increases and decreases. Further analysis reveals that the changes in equity were caused by revenues of $172,800 and expenses totaling $112,320 during the year, and additional ownersâ investments of $50,400 in the first half of the year. Because of your understanding of the accounting equation, you realize that distributions (withdrawals) to the owner must have also occurred during the year. However, you must determine the amountfor those distributions.
What is the amount of distributions made to the owner of Martin Company during the year? $
Complete the equation below with amounts for the end of the year.
| Assets | = | Liabilities | + | Equity |
| $ | = | $ | + | $ |
In addition to presenting the computed answers, please also discuss how you arrived at each answers the accounting problem asks. The accounting problem presents a companyâs balance sheet and income statement. The Diamond Gem Cleaning and Maintenance Service Company is in the business of contracting its cleaning and maintenance services to office buildings. The balance sheet and income statement have blank lines. Determine the values that would be appropriate for each blank line. Provide a narrative of how you arrived at each value. In doing so, explain the account being valued and its relationship to the other financial data. For example, if the accounts payable line was missing, explain that you can derive its value based on knowing all the other values of the current liabilities section. Then explain what an account liability is, as well as why it would belong in the current liabilities section of the balance sheet
Please refer to the income statement and balance sheet of the Diamond Gem Cleaning and Maintenance Service Company available down:
Superior papers will mention and explain the following elements when responding to the assignment question:
Provide correct balances for the blank financial account lines.
Provide a narrative about how the values were determined.
Provide a definition and explanation of each account line that was completed
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