ACTG 2011 Chapter Notes - Chapter 10: Limited Liability Partnership, Dividend, Retained Earnings
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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 |
$ | = | $ | + | $ |
Regulations are
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2) Which of the followingstatements regarding proposed regulations is not correct?
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3) Identify which of thefollowing statements is false.
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4) Which of the followingstatements about a partnership is true?
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5) Which of the followingstatements is incorrect?
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6) Which of the followingstatements is incorrect?
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7) Three members form an LLC inthe current year. Which of the following statements is incorrect?
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8) Identify which of thefollowing statements is false.
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9) Identify which of thefollowing statements is true.
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10) For Sec. 351 purposes theterm property does not include
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11) Identify which of thefollowing statements is true.
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12) Barry, Dan, and Edithtogether form a new corporation; Barry and Dan each contributeproperty in exchange for stock. Within 2 weeks after the formation,the corporation issues additional stock to Edith in exchange forproperty. Barry and Dan each hold 10,000 shares and Edith willreceive 9,000 shares. Which transactions will qualify fornonrecognition?
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The independent auditor is allowed to use a specialist for evaluating a complicated financial transaction provided the specialist is
knowledgeable and independent of the audit client. |
approved by the client's board of directors. |
all of the above. |
acceptable to the PCAOB. |
Inappropriately dating transfers of funds between bank accounts to cover shortages of cash is properly referred to as
lapping. |
reconciling. |
kiting. |
embezzling. |
Cash equivalents
represent current assets that can be converted to cash within a year or an operating cycle, whichever is shorter. |
include only cash and highly liquid investments that are virtually free of risk. |
should be reported as investments and not be included as cash on the balance sheet. |
typically exclude money market funds and treasury bills. |
A cut-off bank statement primarily is used to
determine whether reconciling items on the year-end bank reconciliation have cleared the bank. |
prepare a year-end bank reconciliation. |
test for kiting. |
confirm the year-end balance of cash. |
An imprest cash account
typically is used for many large miscellaneous disbursements. |
typically earns large amounts of interest. |
is another name for the general cash account of an organization. |
is an account containing a stipulated amount of money to be used for a specific purpose. |
An auditor may estimate the appropriate amount of interest expense to be recorded by an audit client by multiplying the average debt by the average interest rate. If the auditor's estimate is considerably larger than the client's recorded interest expense this would be evidence of a potential
failure of the client to accrue interest expense at year end. |
the violation of significant loan covenants. |
overstatement of recorded interest expense. |
understatement of long-term debt. |
Internal controls over fixed assets in a smaller entity
usually include authorization by the board of directors. |
typically will be very similar to internal controls over other assets within the entity. |
must be the same as in larger entities. |
are of little importance since fixed assets are not subject to theft or misuse. |
A change in depreciation methods employed by an audit client resulting in a material change in depreciation expense
is not necessarily a violation of generally accepted accounting principles. |
requires disclosure by the audit client in the footnotes to the financial statements. |
must be noted in the audit opinion due to lack of consistency. |
is properly described by all of the listed statements. |
Auditors typically assess inherent risk for material accounts requiring significant estimates as
low. |
high. |
zero. |
moderate. |
Which of the following loans from an audit client, which is a financial institution, made in accordance with the normal lending practices of the financial institution would impair the CPA's independence?
A loan fully secured by certificates of deposit from the same financial institution. |
A credit card loan in which the balance carried forward each month does not exceed $9,000. |
An automobile loan secured by the automobile. |
A home loan equal to less than 50% of the home's value and collateralized by the home. |
A CPA has obtained some original records from a client during the course of an audit engagement. At the completion of her audit according to the proper professional standards the client fired the CPA and demanded that the CPA return all of his original records immediately. Under these circumstances which of the following statements is most correct according to the AICPA Code of Professional Conduct?
The CPA may hold the original records she obtained until the client pays for the services she has completed. |
The CPA must return only the original records of the client upon demand regardless of the circumstances. |
The CPA must return all original records and all copies of original records of the client upon demand regardless of the circumstances. |
This is a matter of state law and not a matter covered by the AICPA Code of Professional Conduct. |