AC 210 Lecture Notes - Lecture 9: Capital Account, Multinational Corporation, Sole Proprietorship

8 views2 pages

silvercicada472

5 Jun 2018

School

University of Alabama

Department

Accountancy

Course

AC 210

Professor

Lisa Mc Kinney

For unlimited access to Class Notes, a Class+ subscription is required.

Analyzing Transactions

The first step in the accounting process is to analyze every transaction (economic

event) that affects the business. The accounting equation (Assets = Liabilities + Owner's

Equity) must remain in balance after every transaction is recorded, so accountants must

analyze each transaction to determine how it affects owner's equity and the different

types of assets and liabilities before recording the transaction.

Assume Mr. J. Green invests $15,000 to start a landscape business. This transaction

increases the company's assets, specifically cash, by $15,000 and increases owner's

equity by $15,000. Notice that the accounting equation remains in balance.

Mr. Green uses $5,000 of the company's cash to place a down‐payment on a used truck

that costs $15,000, and he signs a note payable that requires him to pay the remaining

$10,000 in eighteen months. This transaction decreases one type of asset (cash) by

$5,000, increases another type of asset (vehicles) by $15,000, and increases a liability

(notes payable) by $10,000. The accounting equation remains in balance, and Mr.

Green now has two types of assets ($10,000 in cash and a vehicle worth $15,000), a

liability (a $10,000 note payable), and owner's equity of $15,000.

Given the large number of transactions that companies usually have, accountants need

a more sophisticated system for recording transactions than the one shown on the

previous page. Accountants use the double‐entry bookkeeping system to keep the

accounting equation in balance and to double‐check the numerical accuracy of

find more resources at oneclass.com

Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Document Summary

The first step in the accounting process is to analyze every transaction (economic event) that affects the business. The accounting equation (assets = liabilities + owner"s. Equity) must remain in balance after every transaction is recorded, so accountants must analyze each transaction to determine how it affects owner"s equity and the different types of assets and liabilities before recording the transaction. Green invests ,000 to start a landscape business. This transaction increases the company"s assets, specifically cash, by ,000 and increases owner"s equity by ,000. Notice that the accounting equation remains in balance. Mr. green uses ,000 of the company"s cash to place a down payment on a used truck that costs ,000, and he signs a note payable that requires him to pay the remaining. This transaction decreases one type of asset (cash) by. ,000, increases another type of asset (vehicles) by ,000, and increases a liability (notes payable) by ,000. The accounting equation remains in balance, and mr.

Related Questions

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
$	=	$	+	$

cyanbee498

Part A - Inventory and Depreciation

Consider this Balance Sheet situation:

Three years ago Mr. Jones bought a new machine that insertspimentos into

green olives. He paid $10,000 for the machine, and it wenthappily to work

and has been filling 5,000 green olives per day with bright redpimentos.

At the time of purchase, Mr. Jonesï¿½ accountant told him that thestandard

useful life for this type of equipment was 10 years. Mr. Jonesdecided to use

the straight-line method to calculate depreciation.

Please answer the following questions:

1. What amount would go on the Balance Sheet at the time of

purchase?

2. Where would this amount have been posted on the Balance

Sheet?

3. What is the current book value of the equipment?

4. How much accumulated depreciation is posted?

Consider this Income Statement situation:

Mr. Jones started the year with no olives in inventory. Hebought 5,000

green olives at 25 cents each in March, 10,000 at 50 cents eachin July, and

10,000 at 75 cents each in November. At year end he had 2,000olives left

in inventory.

Calculate his ending inventory value using:

5. Average cost method

6. FIFO

7. LIFO

8. Which method should he use when he prepares his Income

Statement to show the bank?

Part B - Financial Statement Analysis

Please solve the following Financial Statement Ratios using

the Balance Sheet and Income Statement found below.

Also tell me, in a sentence or two, what we have learned

from each one.

1. CURRENT RATIO

2. QUICK, OR ACID TEST RATIO

3. WORKING CAPITAL

4. DEBT TO WORTH (or Owners Equity) RATIO

5. ROI (Return on Investment).

6. EARNINGS PER SHARE

7. INVENTORY TURNOVER

FIGURE A

Jim Jones, dba Jimï¿½s Cool Stuff

BALANCE SHEET

As of December 31, 2009

ASSETS LIABILITIES

Current Assets Current Liabilities

Cash 250 Accounts Payable 500

Accts. Receivable 550 Notes Payable 600

Inventory 750 Contracts Payable 300

Prepaid Expenses 1,000 Total Curr. Liabilities 1,100

Total Curr. Assets 2,550

Long-Term Liabilities

Fixed Assets Mortgage 15,000

Land 40,000 Long Term Contract 1,500

Truck 2,000 Total LT Liabilities 16,500

Accum. Dep. (250) 1,750 TOTAL LIABILITIES 17,600

Total Fixed Assets 41,750

TOTAL ASSETS: 44,300 EQUITY

Common Stock

(1,000 shares)

26,700

TOTAL EQUITY 26,700

LIABILITIES & EQUITY 44,300

FIGURE B

Jim Jones, dba Jimï¿½s Cool Stuff

INCOME STATEMENT

For the 12 months ending December 31, 2009

REVENUE $1,000,000

EXPENSES

Cost of Goods Sold:

Beginning Inventory 125,000

Plus Purchases 550,000

Less Ending Inventory (100,000)

= Cost of Goods Sold $575,000

Gross Profit $425,000

Operating Expenses

Rent 175,000

Payroll 217,700

Utilities 11,000

Office Expenses 500

Depreciation 50

Local Taxes 250

Legal Fees 500

Total Operating Expenses 405,000

NET INCOME BEFORE TAX 20,000

Federal Income Taxes (25%) 5,000

NET INCOME 15,000

pearwhale985

Consider this Balance Sheet situation:

Three years ago Mr. Jones bought a new machine that insertspimentos into

green olives. He paid $10,000 for the machine, and it wenthappily to work

and has been filling 5,000 green olives per day with bright redpimentos.

At the time of purchase, Mr. Jonesï¿½ accountant told him that thestandard

useful life for this type of equipment was 10 years. Mr. Jonesdecided to use

the straight-line method to calculate depreciation.

Please answer the following questions:

1. What amount would go on the Balance Sheet at the time of

purchase?

2. Where would this amount have been posted on the Balance

Sheet?

3. What is the current book value of the equipment?

4. How much accumulated depreciation is posted?

Consider this Income Statement situation:

Mr. Jones started the year with no olives in inventory. Hebought 5,000

green olives at 25 cents each in March, 10,000 at 50 cents eachin July, and

10,000 at 75 cents each in November. At year end he had 2,000olives left

in inventory.

Calculate his ending inventory value using:

5. Average cost method

6. FIFO

7. LIFO

8. Which method should he use when he prepares his Income

Statement to show the bank?

Part B - Financial Statement Analysis

Please solve the following Financial Statement Ratios using

the Balance Sheet and Income Statement found below.

Also tell me, in a sentence or two, what we have learned

from each one.

1. CURRENT RATIO

2. QUICK, OR ACID TEST RATIO

3. WORKING CAPITAL

4. DEBT TO WORTH (or Owners Equity) RATIO

5. ROI (Return on Investment).

6. EARNINGS PER SHARE

7. INVENTORY TURNOVER

FIGURE A

Jim Jones, dba Jimï¿½s Cool Stuff

BALANCE SHEET

As of December 31, 2009

ASSETS LIABILITIES

Current Assets Current Liabilities

Cash 250 Accounts Payable 500

Accts. Receivable 550 Notes Payable 600

Inventory 750 Contracts Payable 300

Prepaid Expenses 1,000 Total Curr. Liabilities 1,100

Total Curr. Assets 2,550

Long-Term Liabilities

Fixed Assets Mortgage 15,000

Land 40,000 Long Term Contract 1,500

Truck 2,000 Total LT Liabilities 16,500

Accum. Dep. (250) 1,750 TOTAL LIABILITIES 17,600

Total Fixed Assets 41,750

TOTAL ASSETS: 44,300 EQUITY

Common Stock

(1,000 shares)

26,700

TOTAL EQUITY 26,700

LIABILITIES & EQUITY 44,300

FIGURE B

Jim Jones, dba Jimï¿½s Cool Stuff

INCOME STATEMENT

For the 12 months ending December 31, 2009

REVENUE $1,000,000

EXPENSES

Cost of Goods Sold:

Beginning Inventory 125,000

Plus Purchases 550,000

Less Ending Inventory (100,000)

= Cost of Goods Sold $575,000

Gross Profit $425,000

Operating Expenses

Rent 175,000

Payroll 217,700

Utilities 11,000

Office Expenses 500

Depreciation 50

Local Taxes 250

Legal Fees 500

Total Operating Expenses 405,000

NET INCOME BEFORE TAX 20,000

Federal Income Taxes (25%) 5,000

NET INCOME 15,000

pinkgoose788

AC 210 Lecture Notes - Lecture 9: Capital Account, Multinational Corporation, Sole Proprietorship

Document Summary

Get access

Related Documents

AC 210 Lecture Notes - Lecture 7: Promissory Note, Matching Principle, Deferral

AC 210 Lecture Notes - Lecture 15: Deferral, General Ledger, Trial Balance

AC 210 Lecture Notes - Lecture 5: Promissory Note, Accounting Equation, Bookkeeping

Related Questions