VYC1 Chapter 2

Specialty Import Co. has no liabilities. The asset and owner's equity balances are as follows. What is the balance of "Supplies"? (Cash $25,000; Office Equipment $15,000; Supplies ????; Jason Ogden Capital $50,000)

$10,000

Haden Hardware had revenues of $55,000 and expenses of $26,000. How does this affect owner's equity?

$29,000 increase

Interior Designs has assets of $90,000 and liabilities of $35,000. What is the owner's equity?

$55,000

Quick Copy had the transactions listed below during the month of April. Show how each transaction would be recorded in the accounting equation. Compute the totals at the end of the month. The headings to be used in the equation follow. 1. Amos Roberts started the business with a cash investment of $50,000. 2. Purchased equipment for $17,000 on credit. 3. Performed services for $2,100 in cash. 4. Purchased additional equipment for $3,600 in cash. 5. Performed services for $4,550 on credit. 6. Paid salaries of $3,950 to employees. 7. Received $2,200 cash from charge account customers. 8. Paid $9,000 to a creditor on account.

1. Cash +50,000 Owners Equity +50,000 2. Equipment +17,000 Accounts Payable +17,000 3. Cash +2,100 Owner's Equity +2,100 4. Cash -3,600 Owners Equity -3,600 5. Revenue +4,550 Accounts Receivable +4,550 6. Cash - 3,950 Expenses +3,950 7. Cash + 2,200 Accounts Receivable -2,200 8. Cash -9,000 Accounts Payable -9,000 Total $59,300

What are the steps to analyze the effect of a business transaction?

1. Describe the financial event. a. Identify the property. b. Identify who owns the property. c. Determine the amount of increase or decrease. 2. Make sure the equation is in balance. a. PROPERTY=FINANCIAL INTEREST

What is the fundamental accounting equation?

1. It's the relationship between assets and liabilities plus owner's equity. 2. Assets=Liabilities+Owner's Equity

In what order are the financial statements prepared? Why?

1. The income statement is prepared first because the net income or loss is needed to complete the statement of owner's equity. 2. The statement of owner's equity is prepared next to update the change in owner's equity. 3. The balance sheet is prepared last.

The following financial data are for the dental practice of Dr. Donna Wells when she began operations in July. Determine the amounts that would appear in Dr. Wells' balance sheet. 1. Owes $18,000 to the Jones Equipment Company. 2. Has cash balance of $12,500. 3. Has dental supplies of $3,150. 4. Owes $3,680 to Ace Furniture Supply. 5. Has dental equipment of $25,550. 6. Has office furniture of $7,000.

Assets: Cash $12,500 Supplies $3,150 Equipment $25,550, $7,000 Total Assets $48,200 Liabilities: Accounts Payable $18,000, $3,680 Owner's Equity: Dr. Wells Capital $48,200 Total Liabilities & Owners Equity: $26,520

If an owner gives personal tools to the business, how is the transaction recorded?

as an additional investment by the owner recorded on the basis of fair market value.

What goes on the PROPERTY side of the equation?

assets, cash, supplies, prepaid rent, and equipment.

Teresa Wells purchased a computer for $3,250 on account for her business. What is the effect of this transaction?

equipment is increased by $3,250 and accounts payable is increased by $3,250.

How does net income affect owner's equity?

it increases it

Describe the effects of each of the following business transactions on assets, liabilities, and owner's equity. a. Sold services on credit. b. Bought furniture for cash. c. Paid cash to a creditor. d. Sold services for cash. e. Paid salaries to employees. f. Bought equipment on credit.

a. + accounts receivable/+owner's equity b. - cash/+ equipment c. - cash/- accounts payable d. + cash/+ owner's equity e. - cash/+ expenses f. + equipment/+ accounts payable

What goes on the FINANCIAL INTEREST side of the equation?

liabilities, accounts payable, owner's equity,

John Amos began a new business by depositing $75,000 in the business bank account. He wrote two checks from the business account: $12,000 for office furniture and $4,000 for office supplies. What is his financial interest in the company?

$75,000

On December 1, Doris Turner opened a speech and hearing clinic. During December, her firm had the following transactions involving revenue and expenses. Did the firm earn a net income or incur a net loss for the period? What was the amount? -Paid $2,600 for advertising. -Provided services for $2,300 in cash. -Paid $700 for telephone service. -Paid salaries of $2,100 to employees. -Provided services for $2,500 on credit. -Paid $350 for office cleaning service.

-2,600 +2,300 -700 -2,100 +2,500 -350 Totals: -$950 so her firm experienced a net loss

What information does the statement of owner's equity contain?

1. The first line is the (capital balance) at the beginning of the period. 2. (Net income) is an increase to owner's equity; (net loss) is a decrease to owner's equity. 3. (Withdrawals) by the owner are a decrease to owner's equity. 4. (Additional investments) by the owners are an increase to owner's equity. 5. The (total of changes in equity) is reported on the line "Increase in Capital" or "Decrease in Capital.". 6. The last line of the statement of owner's equity is the (capital balance at the end of the period).

What information is shown in the heading of a financial statement?

1. Who—the business name appears on the first line. 2. What—the report title appears on the second line. 3. When—the period covered appears on the third line

What information does the income statement contain?

1. it shows the results of business operations for a specific period of time such as a month, a quarter, or a year. 2. shows the revenue earned and the expenses of doing business for that time period. 3. also called a profit/loss statement or statement of income & expenses.

How is net income determined?

1. on the income statement 2. it results when revenue is greater than the expenses for the period

What information does the balance sheet contain?

1. the amounts and types of property the business owns. 2. the amount owed to creditors. 3. the owner's interest. *it gives a complete picture

What is revenue?

1. the inflow of money or assets (income) 2. results from the sales of goods or services 3. results from the use of money or property

What are expenses?

1. the outflow of money (costs) 2. the use of other assets 3. incurring of liabilities 4. includes- cost of materials, labor, supplies, services used to produce revenue 5. cause a decrease in owner's equity

What are: Assets Liabilities Owner's Equity

1. the types and amounts of property that the business owns 2. the amounts owed to creditors 3. owner's financial interest in a company

Why should managers be concerned with changes in the amount of creditors' claims against the business?

?

Indicate the impact of each of the transactions below on the fundamental accounting equation (Assets = Liabilities = Owner's Equity) 1. Owner invested $90,000 in the business. 2. Purchased $26,700 supplies on account. 3. Purchased equipment for $21,000 cash. 4. Paid $6,000 for rent (in advance). 5. Performed services for $7,800 cash. 6. Paid $2,160 for utilities. 7. Performed services for $10,500 on account. 8. Received $6,600 from charge customers. 9. Paid salaries of $4,500 to employees. 10. Paid $6,000 to a creditor on account.

Assets = Liabilities = Owner's Equity 1. +Asset/+Owner's Equity 2. +Asset/+Liability 3. +Asset/-Owner's Equity 4. 5. +Asset/+Owner's Equity 6. 7. +Asset/+Owner's Equity 8. +Asset/-Liability 9. -Asset/+Liability 10. -Asset/-Liability

How does an accounting system help managers control operations and make sound decisions?

It gives them all the financial health of their business.

Is it reasonable to expect that all new businesses will have a net income from the first month's operations? From the first year's operations?

Maybe not from the first month, but yes for the first year.

After examining financial data for a monthly period, the owner of a small business expressed surprise that the firm's cash balance had decreased during the month even though there was substantial net income. Do you think this owner is right to expect cash to increase because of a substantial net income? Why or why not?

Yes, because that means they had revenue coming in. So there should be an increase in cash, unless people are purchasing on account.

What is a business transaction?

a financial event that changes the resources of the firm.

Just before Anderson Laboratories opened for business, Roy Anderson, the owner, had the following assets and liabilities. Determine the totals that would appear in the firm's fundamental accounting equation (Assets = Liabilities = Owner's Equity). a. Cash $40,500 b. Lab Equipment $75,600 c. Lab Supplies $6,800 d. Loan Payable $15,100 e. Accounts Payable $9,875

a. +cash/+owner's equity b. -cash/+equipment c. - cash/+supplies d. e. -cash/-accounts payable

What does the term "accounts payable" mean?

amounts that a company must pay to creditors in the future.

Describe a transaction that increases an asset and the owner's equity.

an example is the initial investment of cash in a business by the owner.

Why does the third line of the headings differ on the balance sheet and the income statement?

because the dates might be different. A balance sheet could just be for 1 day, where a income statement is for a period of time.

What is the difference between buying for cash and buying on account?

buying for cash results in an immediate decrease in cash; buying on account results in a liability recorded as accounts payable.

What are withdrawals and how do they affect the basic accounting equation?

funds taken from the business to pay for personal expenses. They decrease the owner's equity in the business.

What information is contained in the income statement?

revenue and expenses for a period of time

What effect do revenue and expenses have on owner's equity?

revenue increases owner's equity. Expenses decrease owner's equity.

What information is included in the financial statement headings?

the firm's name (who), the title of the statement (what), and the time period covered by the report (when).

If one side of the fundamental accounting equation is decreased, what will happen to the other side? Why?

the opposite side of the accounting equation will decrease because a decrease in assets results in a corresponding decrease in either a liability or the owner's equity.

Describe a transaction that will cause Accounts Payable and Cash to decrease by $700.

the payment of $700 to a creditor on account.