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Chapter 2

Chapter 2 Student Worksheets.docx

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ACC 110
Marla Spergel

Chapter 2 Student Worksheets: Exercise 2-10: Purpose of the question: teach students how to categorize accounts into their proper element (remember - elements = A, L, SHE, R, E). How do you do this? Consider: if you were given a large amount of change (quarters, nickels, dimes, etc.) what is the first thing you would do with it? Start counting it OR DIVIDE IT INTO DIFFERENT CATEGORIES??!! That is what you should do with ANY financial statement question, regardless of what format it is provided. For example, if you are given financial statements that are complete but incorrect, STOP trying to look for the errors. Instead, CATEGORIZE each account into the different ELEMENTS (assets, liabilities, shareholders' equity, revenue, expenses). Can't figure out which element an account goes into? Leave that one and do everything else. When you are finished everything else come back to the one you don't understand and DEFINE the ACCOUNT (what does it mean? What does it show?) Once you have a definition of the account look for the definition of the element that matches. Remember - any F/S question is just a CATEGORIZING question - treat it as such and you will do much better. To categorize: put a code next to the account. For instance, CA = current assets, CL - current liabilities, etc. Once you have developed it always use the same codes for other questions. A good example of the proper format for the balance sheet is on page 69. Remember - always provide an appropriate title for your financial statements. Financial statement must be in "good form", which means that they must be provided in the same format that they would be published in. Exercise 2-1, pg. 63: Purpose of the question: In order to be able to analyze the impact of transaction on the financial statements students must know how to manipulate the accounting equation (A = L + SHE). For instance, if you do not understand what happens when you sell products (assets increase, revenues increase, which causes shareholders' equity to increase) then you are not going to get very far in accounting. The easiest way to think about the accounting equation is to use a matrix: Assets = Liabilities + Shareholders' equity Beginning balances: What happened during the year: Ending balances: Example: a company had assets of $120,000 and liabilities of $50,000. During the year assets decrease by $10,000 and liabilities increase by $30,000. What is the ending balance of shareholders' equity? When you read this question INPUT all the KNOWN amounts. Then, using the equation, SOLVE for the unknown ON EACH LINE (first beginning, then During the Year. You can't solve Ending Balance yet because there are 2 unknowns BUT once you have the Beginning and During done you can simply do the math from top to bottom for each element and determine your answer. Try it now. Did you get SHE of $30,000? Remember - always use this format, even during an exam. It helps to clarify what has to be calculated and how to do it. Assets = Liabilities + Shareholders' equity Situation 1: $425,000 $189,000 Situation 2: $730,000 $620,000 Situation 3: $20,000 $50,000 Situation 4: $420,000 $350,000 Additional practice: ABC Corp. Had assets of $50,000 and liabilities of $30,000. D
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