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Assignment (1)
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Assignment Question(s):
(Marks 30)
Q1. Choose two accounting principles and two accounting assumptions and explain them in your
word.
(4 Marks)
Answer:
Q2. Explain the concept of double entry system and its relationship with accounting
equation.
(3 Marks)
Answer:
Q3. Al-Ahmad Accounting Services completed these transactions in July:
a. Purchased office supplies on account, SAR 450
b. Completed work for a client on credit, SAR 1,500
1
c. Paid cash for the office supplies purchased in (a)
d. Completed work for a client and received SAR 800 cash
e. Received SAR 1,500 cash for the work described in (b).
f. Received SAR 3,000 in advance from a client for accounting services to be performed in
September.
Prepare journal entries to record the above transactions. Explanations are not
necessary.
(7 Marks).
Answer:
Q4. Explain the purpose and the importance of the income statement, and prepare the income
statement for ABC company based on the following information taken from the trial balance in
2021
(4 Marks)
Consulting revenue
SAR100,000
Rental revenue
40,000
Supplies expense
10,000
Rent expense
60,000
Wages expense
30,000
Answer:
Q5. On October 1, Saad Co. sold merchandise in the amount of SAR 5,800 to Neom Co., with credit
terms of 2/10, n/30. The cost of the items sold is SAR 4,000. Saad Co. uses the perpetual inventory
system. On October 4, Neom Co. returns some of the merchandise. The selling price of the
merchandise is SAR 1,500, and the cost of the merchandise returned is SAR 1,050.
Record the entry or entries that Saad Co. must make on October 4th.
2
(4 Marks)
Answer:
Q6.
a. Explain in your own words four costing methods of inventory with a numerical example for
each
(4 Marks)
b. A company that uses a perpetual inventory system made the following cash purchases and sales.
There was no beginning inventory.
January 1:
Purchased 550 units at SAR 55 per unit
February 5:
Purchased 350 units at SAR 65 per unit
March 16:
Sold 250 Units for SAR 85 per unit
Prepare general journal entries to record the March 16 sale using the FIFO inventory valuation
method and the LIFO inventory valuation method.
(4 Marks)
Answer:
3
Financial Accounting
John J. Wild
Sixth Edition
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 01
Introducing Accounting in
Business
Conceptual Chapter Objectives
C1: Explain the purpose and importance of
accounting.
C2: Identify users and uses of accounting.
C3: Explain why ethics are crucial to
accounting.
C4: Explain generally accepted accounting
principles and define and apply
several accounting principles.
C5: Appendix 1B – Identify and describe the
three major activities of organizations.
1-3
Analytical Chapter Objectives
A1: Define and interpret the accounting
equation and each of its components.
A2: Compute and interpret return on assets.
A3: Appendix 1A – Explain the relation
between return and risk.
1-4
Procedural Chapter Objectives
P1: Analyze business transactions using
the accounting equation.
P2: Identify and prepare basic financial
statements and explain how they
interrelate.
1-5
C1
Importance of Accounting
is a
Accounting
system that
Identifies
Records
information
Relevant
that is
Communicates
Reliable
Comparable
about an
organization’s
business activities.
1-6
C1
Accounting Activities
 Identifying
Business
Activities
 Recording
Business
Activities
ï‚Ž
Communicating
Business
Activities
1-7
Users of Accounting
Information
C2
Internal Users
External Users
•Lenders
•Consumer Groups
•Managers
•Sales Staff
•Shareholders •External Auditors
•Officers
•Budget Officers
•Governments •Customers
•Internal Auditors •Controllers
1-8
C2
Users of Accounting
Information
External Users
Internal Users
Financial accounting provides
external users (shareholders,
lenders, etc.) with financial
statements.
Managerial accounting provides
information needs for internal
decision makers (officers,
managers, etc.).
1-9
C2
Opportunities in Accounting
Financial
•Preparation
•Analysis
•Auditing
•Regulatory
•Consulting
•Planning
•Criminal
investigation
Accountingrelated
Managerial
Taxation
•General accounting
•Cost accounting
•Budgeting
•Internal auditing
•Consulting
•Controller
•Treasurer
•Strategy
•Preparation
•Planning
•Regulatory
•Investigations
•Consulting
•Enforcement
•Legal services
•Estate plans
•Lenders
•Consultants
•Analysts
•Traders
•Directors
•Underwriters
•Planners
•Appraisers
•FBI investigators
•Market researchers
•Systems designers
•Merger services
•Business valuation
•Forensic accountant
•Litigation support
•Entrepreneurs
1-10
C2
Accounting Jobs by Area
Private
accounting
60%
Public
accounting
24%
Government,
not-for-profit,
& education
16%
1-11
C3
Ethics—A Key Concept
Ethics
Beliefs that
distinguish
right from
wrong
Accepted
standards of
good and bad
behavior
1-12
C3
Guidelines for Ethical Decisions
 Identify
ethical concerns
 Analyze
options
Use personal Consider all good
ethics to
and bad
recognize an
consequences.
ethical concern.
ï‚Ž Make ethical
decision
Choose best
option after
weighing all
consequences.
1-13
C4
Generally Accepted Accounting
Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
Relevant
Information
Affects the decision of
its users.
Reliable Information
Is trusted by
users.
Comparable
Information
Used in comparisons
across years & companies.
1-14
C4
Setting Accounting Principles
In the United States, the Securities and Exchange
Commission, a government agency, has the legal authority
to establish reporting requirements and set GAAP for
companies that issue stock to the public.
The Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.
The International Accounting Standards Board (IASB) issues international standards that identify preferred accounting practices
in other countries. More than 100 countries now require or permit
companies to prepare financial reports following IFRS.
1-15
C4
Principles and Assumptions
of Accounting
Measurement principle (also called
cost principle) means that accounting
information is based on actual cost.
Going-concern assumption means
that accounting information reflects a
presumption the business will
continue operating.
Revenue recognition principle
provides guidance on when a
company must recognize revenue.
Monetary unit assumption means we
can express transactions in money.
Matching principle (expense
recognition) prescribes that a
company must record its expenses
incurred to generate the revenue.
Time period assumption presumes
that the life of a company can be
divided into time periods, such as
months and years.
Full disclosure principle requires a
company to report the details behind
financial statements that would impact
users’ decisions.
Business entity assumption means
that a business is accounted for
separately from its owner or other
business entities.
1-16
C4
Business Entity Forms
Sole
Proprietorship
Partnership
Corporation
1-17
C4
Sarbanes-Oxley Act
In response to a number of publicized accounting
scandals (Enron, WorldCom, Tyco, ImClone),
Congress passed the Sarbanes-Oxley Act (also
called SOX) in 2002 to help curb financial abuses
at companies that issue their stock to the public.
The act requires that public companies apply
both accounting oversight and stringent internal
controls. The desired results include more
transparency, accountability, and truthfulness in
reporting transactions.
1-18
A1
Accounting Equation
Assets
=
Liabilities
Assets
+
Equity
Liabilities
+ Equity
1-19
Assets
A1
Cash
Accounts
Receivable
Vehicles
Store
Supplies
Resources
owned or
controlled
by a
company
Notes
Receivable
Land
Buildings
Equipment
1-20
A1
Liabilities
Accounts
Payable
Notes
Payable
Creditors’
claims on
assets
Taxes
Payable
Wages
Payable
1-21
A1
Equity
Retained
Earnings
Contributed
Capital
Owner’s
claim on
assets
Dividends
1-22
A1
Expanded Accounting Equation
Assets
Assets
Contributed
Capital
=
=
_
Liabilities
Liabilities
Dividends
+
+
+
Equity
Equity
_
Revenues
Expenses
Retained Earnings
1-23
P1
Transaction Analysis
Business activities can be described in terms of
transactions and events. External transactions
are exchanges of value between two entities,
which yield changes in the accounting equation.
Internal transactions are exchanges within any
entity; they can also affect the accounting
equation. Events refer to happenings that affect
an entity’s accounting equation and can be
reliably measured. Transaction analysis is
defined as the process used to analyze
transactions and events.
1-24
P1
Transaction Analysis
J. Scott invests $20,000 cash to start the
business in return for stock.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
$ 20,000 $

$ 20,000
$

Liabilities
Accounts
Notes
Payable Payable
$
=

$

$
20,000
+
Equity
Common
Stock
$ 20,000
$ 20,000
1-25
P1
Transaction Analysis
Purchased supplies paying $1,000 cash.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
$ 19,000 $ 1,000 $
$ 20,000

Liabilities
Accounts
Notes
Payable Payable
$
=

$

$
20,000
+
Equity
Common
Stock
$ 20,000
$ 20,000
1-26
P1
Transaction Analysis
Purchased equipment for $15,000 cash.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
$
4,000 $ 1,000 $
$ 20,000
15,000
Liabilities
Accounts
Notes
Payable Payable
$
=

$

$
20,000
+
Equity
Common
Stock
$ 20,000
$ 20,000
1-27
P1
Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Assets
(1)
(2)
(3)
(4)
=
Cash
Supplies Equipment
$ 20,000
(1,000) $ 1,000
(15,000)
$ 15,000
200
1,000
$
4,000 $ 1,200 $
$ 21,200
Liabilities
Accounts
Notes
Payable Payable
+
Equity
Common
Stock
$ 20,000
$ 1,200
16,000
$ 1,200 $
=
$

$ 20,000
21,200
1-28
P1
Transaction Analysis
Borrowed $4,000 from 1st American Bank.
Assets
(1)
(2)
(3)
(4)
(5)
=
Cash
Supplies Equipment
$ 20,000
(1,000) $ 1,000
(15,000)
$ 15,000
200
1,000
4,000
$ 8,000 $ 1,200 $ 16,000
$ 25,200
Liabilities
Accounts
Notes
Payable Payable
+
Equity
Common
Stock
$ 20,000
$ 1,200
=
$
$ 1,200 $
4,000
4,000
$
25,200
$ 20,000
1-29
P1
Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
$ 8,000 $
1,200 $
$ 25,200
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Common
Stock
$ 20,000
$
$ 20,000
1,200 $
4,000
$ 25,200
1-30
P1
Transaction Analysis
Now, let’s look at transactions
involving revenue, expenses, and
dividends.
1-31
P1
Transaction Analysis
Provided consulting services receiving
$3,000 cash.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
$ 11,000 $
1,200 $
$ 28,200
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Common
Stock
Revenue
$ 20,000
$ 3,000
$ 1,200 $ 4,000
$ 20,000 $ 3,000
$ 28,200
1-32
P1
Transaction Analysis
Paid salaries of $800 to employees.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
$ 10,200 $
1,200 $
$ 27,400
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Common
Stock
Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$ 1,200 $
$ 20,000 $ 3,000 $
4,000
(800)
$ 27,400
Remember that expenses decrease equity.
1-33
P1
Transaction Analysis
Dividends of $500 are paid to shareholders.
Assets
=
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
(8)
(500)
$ 9,700 $ 1,200 $ 16,000
$ 26,900
Liabilities
$ 1,200 $
=
4,000
+
Equity
Common
Stock
Dividends Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$
(500)
$ 20,000 $
(500) $ 3,000 $
(800)
$ 26,900
Remember that dividends decrease equity.
1-34
P2
Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have
recorded.
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows
1-35
P2
Income Statement
SCOTT COMPANY
Income Statement
For Month Ended December 31, 2011
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
$
3,000
$
800
2,200
Net income is the
difference
between
Revenues and
Expenses.
The income statement describes a
company’s revenues and expenses along
with the resulting net income or loss over a
period of time due to earnings activities.
1-36
P2
Statement of Retained Earnings
SCOTT COMPANY
Income Statement
For Month Ended December 31, 2011
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
$
3,000
$
800
2,200
The net income of
$2,200 increases
Retained Earnings by
$2,200.
SCOTT COMPANY
Statement of Retained Earnings
For Month Ended December 31, 2011
Retained Earnings, Dec. 1, 2011 $
Plus: Net income
Less: Dividends
Retained Earnings, Dec. 31, 2011 $
2,200
500
1,700
1-37
P2
Balance Sheet
The Balance Sheet describes
a company’s financial position
at a point in time.
SCOTT COMPANY
Statement of Retained Earnings
For Month Ended December 31, 2011
Retained Earnings, Dec. 1, 2011
Plus: Net income
Less: Dividends
SCOTT COMPANY
Retained Earnings, Dec. 31, 2011
Balance Sheet
December 31, 2011
Assets
$
Cash
Supplies
Equipment
Total assets
$
9,700
1,200
16,000
26,900
Liabilities
Accounts payable
Notes payable
Total liabilities
Equity
Common stock
Retained earnings
Total liabilities and equity
$
$
$
2,200
500
1,700
1,200
4,000
5,200
20,000
1,700
$
26,900
1-38
P2
Statement of Cash Flows
SCOTT COMPANY
Statement of Cash Flows
For Month Ended December 31, 2011
Cash flows from operating activities:
Cash received from clients
$ 3,000
Purchase of supplies
(1,000)
Cash paid to employees
(800)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of equipment
(15,000)
Net cash used in investing activities
Cash flows from financing activities:
Investment by Shareholders
20,000
Borrowed at bank
4,000
Dividends Paid
(500)
Net cash provided by financing activities
Net increase in cash
Cash balance, December 1, 2011
Cash balance, December 31, 2011
$
1,200
(15,000)
$
$
23,500
9,700
9,700
1-39
A2
Return on Assets (ROA)
Return
on
assets
Net income
=
Average total assets
ROA is a profitability
measure.
1-40
End of Chapter 01
1-41
Financial Accounting
John J. Wild
Sixth Edition
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 02
Analyzing and Recording
Transactions
Conceptual Learning Objectives
C1: Explain the steps in processing
transactions.
C2: Describe an account and its use in
recording transactions.
C3: Describe a ledger and a chart of accounts.
C4: Define debits and credits and explain
double-entry accounting.
2-3
Analytical Learning Objectives
A1: Analyze the impact of transactions
on accounts and financial statements.
A2: Compute the debt ratio and describe
its use in analyzing financial
condition.
2-4
Procedural Learning Objectives
P1: Record transactions in a journal and
post entries to a ledger.
P2: Prepare and explain the use of a trial
balance.
P3: Prepare financial statements from
business transactions.
2-5
C1
Analyzing and Recording
Process
Exchanges of economic consideration
between two parties.
External Transactions
occur between the
organization and an
outside party.
Internal Transactions
occur within the
organization.
2-6
C1
Analyzing and Recording
Process
Analyze each transaction and
event from source documents
Prepare and analyze
the trial balance
Record relevant transactions
and events in a journal
Post journal
information
to ledger
accounts
2-7
C1
Source Documents
Checks
Employee
Earnings
Records
Bills from
Suppliers
Purchase
Orders
Bank
Statements
Sales
Tickets
2-8
C2
The Account and its Analysis
An account is a
record of
increases and
decreases in a
specific asset,
liability, equity,
revenue, or
expense item.
The general
ledger is a record
containing all
accounts used by
the company.
2-9
C2
The Account and Its Analysis
Assets
Assets
Asset
Accounts
Accounts
Accounts
=
Liability
Liability
Liability
Accounts
Accounts
Accounts
+
Equity
Equity
Equity
Accounts
Accounts
Accounts
2-10
C3
Asset Accounts
Cash
Land
Buildings
Asset
Accounts
Accounts
Receivable
Notes
Receivable
Prepaid
Accounts
Equipment
Supplies
2-11
C3
Liability Accounts
Accounts
Payable
Notes
Payable
Liability
Accounts
Accrued
Liabilities
Unearned
Revenue
2-12
C3
Equity Accounts
Retained
Earnings
Common
Stock
Dividends
Equity
Accounts
Revenues
Expenses
2-13
C3
The Account and Its Analysis
Assets
+
Common
Stock
=
Liabilities
+
Equity
–
+
–
Dividends
Revenues
Expenses
2-14
C3
Ledger and Chart of Accounts
The ledger is a collection of all accounts for
an information system. A company’s size and
diversity of operations affect the number
of accounts needed.
The chart of accounts is a list of all accounts and
includes an identifying number for each account.
101
106
126
128
167
201
236
307
318
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accounts payable
Unearned revenue
Common stock
Retained earnings
319
403
406
622
637
640
652
690
Dividends
Consulting revenues
Rental revenue
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
2-15
C4
Debits and Credits
A T-account represents a ledger account
and is a tool used to understand the effects
of one or more transactions.
T- Account
(Left side)
(Right side)
Debit
Credit
2-16
C4
Double-Entry Accounting
Assets
ASSETS
Debit
+
Credit

= Liabilities +
Equity
LIABILITIES
EQUITIES
Debit

Credit
+
Debit

Credit
+
2-17
Double-Entry Accounting
C4
Equity
Common
Stock
_
Dividends
+
_
Revenues
Expenses
Stock
Dividends
Revenues
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit

+
+


+
+

2-18
C4
Double-Entry Accounting
An account balance is the difference between the
increases and decreases in an account.
Notice the T-Account
Cash
Investment by owner for stock
Consulting services revenues earned
Collection of accounts receivable
Total increases
Balance
30,000 Purchase of supplies
4,200 Purchase of equipment
1,900 Payment of rent
Payment of salary
Payment of accounts payable
Payment of cash dividend
36,100 Total decreases
4,800
2,500
26,000
1,000
700
900
200
31,300
2-19
Journalizing and
Posting Transactions
P1
Assets
= Liabilities +
Equity
T- Account
(Left side)
(Right side)
Debit
Credit
Step 1: Analyze
transactions and source
documents.
ACCOUNT NAME:
Date
Step 2: Apply doubleentry accounting
GENERAL JOURNAL
ACCOUNT No.
Description
PR
Debit
Credit
Balance
Step 4: Post entry to ledger
Date
Description
Post.
Ref.
Page
123
Debit
Credit
Step 3: Record journal entry
2-20
P1
Journalizing Transactions
ï‚ŒTransaction
Date
Titles of Affected
Accounts
GENERAL JOURNAL
Date
Account Titles and Explanations PR
2011
Dec. 1 Cash
Common stock
Investment by shareholders
Dec. 2 Transaction
Supplies
explanation
Cash
Page 1
Debit
Credit
30,000
30,000
ï‚ŽDollar amount of debits
2,500
and credits
2,500
2-21
P1
Balance Column Account
T-accounts are useful illustrations, but
balance column accounts are used in
practice.
CASH
Date
ACCOUNT No. 101
Explanation
PR
Debit
Credit
Balance
2,500
26,000
30,000
27,500
1,500
5,700
2011
Dec. 1
Dec. 2
Dec. 3
Dec. 10
Initial investment
Purchased supplies
Purchased equipment
Collection from customer
30,000
4,200
2-22
P1
Posting Journal Entries
GENERAL JOURNAL
Date
Account Titles and Explanation
2011
Dec. 1 Cash
Common stock
Investment by shareholders
Page 1
PR
30,000
CASH
Explanation
PR
Credit
30,000
Dec. 2 Supplies
Cash
1 Identify the
debit account in ledger.
Purchased store supplies
for cash
Date
Debit
Debit
2,500
2,500
ACCOUNT No.
Credit
101
Balance
2011
Dec. 3
Purchased equipment
G1
20,000.00
######## 2-23
P1
Posting Journal Entries
GENERAL JOURNAL
Date
Account Titles and Explanation
2011
Dec. 1 Cash
Common stock
Investment by shareholders
Page 1
PR
Explanation
Credit
30,000
30,000
Dec. 2 Supplies
2
Enter
the date.
Cash
Purchased store supplies
CASH for cash
Date
Debit
2,500
2,500
ACCOUNT No.
PR
Debit
Credit
101
Balance
2011
Dec. 1
Dec. 3
Purchased equipment
G1
20,000.00
######## 2-24
P1
Posting Journal Entries
GENERAL JOURNAL
Page 1
Date
Account Titles & Elxplanations
PR
2011
Dec. 1 Cash
Common stock
Investment by shareholders
Dec. 2 Supplies
3 Enter the
amount and description.
Cash
Purchased store supplies
CASH for cash
Date
Explanation
PR
Debit
Credit
30,000
30,000
2,500
2,500
ACCOUNT No.
Debit
101
Credit
Balance
20,000
(20,000) 2-25
2011
30,000
Dec. 1
Dec. 3
Purchased equipment
G1
P1
Posting Journal Entries
GENERAL JOURNAL
Page 1
Date
Account Titles and Explanation
PR
2011
Dec. 1 Cash
Common stock
Investment by shareholders
Dec.
2 Supplies
the journal reference.
4 Enter
Cash
Purchased store supplies
CASH for cash
Date
Explanation
Debit
Credit
30,000
30,000
2,500
2,500
ACCOUNT No.
PR
Debit
G1
30,000
Credit
101
Balance
2011
Dec. 1
2-26
P1
Posting Journal Entries
GENERAL JOURNAL
Date
Account Titles & Elxplanations
2011
Dec. 1 Cash
Common stock
Investment by shareholders
Page 1
PR
Debit
30,000
30,000
Dec.
2 Supplies
Compute the balance.
Cash
Purchased store supplies
CASH for cash
2,500
5
Date
Explanation
Credit
2,500
ACCOUNT No.
PR
Debit
G1
30,000
Credit
101
Balance
2011
Dec. 1
Dec. 3
Purchased equipment
G1
30,000
20,000
(20,000) 2-27
P1
Posting Journal Entries
GENERAL JOURNAL
Date
Account Titles and Explanation
2011
Dec. 1 Cash
Common stock
Investment by shareholders
Page 1
PR
Debit
101
2 Supplies
Enter Cash
the ledger reference.
Purchased store supplies
CASH for cash
2,500
6
Explanation
30,000
30,000
Dec.
Date
Credit
2,500
ACCOUNT No.
PR
Debit
G1
30,000
Credit
101
Balance
2011
Dec. 1
Dec. 3
Purchased equipment
G1
30,000
20,000
(20,000) 2-28
A1
Analyzing Transactions
Shareholder invested $30,000 in FastForward on Dec.
1.
Transaction:
Analysis:
Assets
=
Liabilities
Cash
30,000
+
Equity
Common
Stock
30,000
Double entry:
(1)
Cash
101
301
Common stock
30,000
30,000
Posting:
(1)
Cash
30,000
101
Common Stock
(1)
301
30,000
2-29
A1
Analyzing Transactions
Transaction:
FastForward purchases supplies by paying $2,500
cash.
Analysis:
Cash
Assets
Supplies
(2,500)
2,500
=
Liabilities
+
Equity
Common
Stock
Double entry:
(2)
Supplies
Cash
126
101
2,500
2,500
Posting:
(2)
Supplies
2,500
126
(1)
Cash
30,000
101
(2)
2,500
2-30
Analyzing Transactions
A1
Transaction:
FastForward purchases equipment by paying $26,000
cash.
Analysis:
Assets
Cash Equipment
(26,000)
=
Liabilities
+
Equity
Common
Stock
26,000
Double entry:
(3)
Equipment
Cash
167
101
26,000
26,000
Posting:
(3)
Equipment
26,000
167
(1)
Cash
30,000
101
(2)
(3)
2,500
26,000
2-31
A1
Analyzing Transactions
Transaction:
FastForward purchases $7,100 of supplies on credit.
Analysis:
Assets
=
Supplies
Liabilities
Accounts Payable
7,100
7,100
+
Equity
Common
Stock
Double entry:
(4)
Supplies
Accounts payable
126
201
7,100
7,100
Posting:
(2)
(4)
Supplies
26,000
7,100
126
Accounts Payable
(4)
201
7,100
2-32
A1
Analyzing Transactions
Transaction:
FastForward provides consulting services and
immediately collects $4,200 cash.
Analysis:
Assets
=
+
Liabilities
Cash
4,200
Equity
Revenue
4,200
Double entry:
(5)
Cash
101
403
Consulting Revenue
4,200
4,200
Posting:
403
Consulting Revenue
(5)
4,200
(1)
(5)
Cash
30,000
4,200
101
(2)
(3)
2,500
26,000
2-33
P2
Trial Balance
FastFoward
Trial Balance
December 31, 2011
Cash
Accounts receivable
Supplies
Prepaid Insurance
Equipment
Accounts payable
Unearned consulting revenue
Common stock
Dividends
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Total
Debits
$ 4,350
9,720
2,400
26,000
Credits
$
6,200
3,000
30,000
200
5,800
300
1,400
1,000
230
$ 45,300 $ 45,300
After processing its
remaining transactions
for December,
FastForward’s trial
balance is prepared.
The trial balance lists
all account balances in
the general ledger. If
the books are in
balance, the total
debits will equal the
total credits.
2-34
P2
Six Steps for Searching for
and Correcting Errors
If the trial balance does not balance, the
error(s) must be found and corrected.
ï‚ŒVerify that the trial balance
columns are correctly added.
Recompute each account
balance in the ledger.
Verify that account balances
are correctly entered from the
ledger.
Verify that each journal
entry is properly posted.
ï‚ŽSee whether a debit (or
credit) balance is mistakenly
listed as a credit (or debit).
ï‚‘Verify that each original
journal entry has equal
debits and credits.
2-35
P3
Using a Trial Balance to
Prepare Financial Statements
Point in
Time
Period of Time
Point in
Time
Income Statement
Statement of Retained Earnings
Beginning
Balance
Sheet
Statement of Cash
Flows
Ending
Balance
Sheet
2-36
P3
Income Statement
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue
$ 5,800
Rental revenue
300
Total revenues
$ 6,100
Expenses:
Salaries expense
1,400
Rent expense
1,000
Utilities expense
230
Total expenses
2,630
Net income
$ 3,470
2-37
P3
Statement of Retained Earnings
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2011
Balance, 12/1/11
$
Net income for December
3,470
3,470
Less: Dividends
(200)
Balance, 12/31/11
$
3,270
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue
$
5,800
Rental revenue
300
Total revenues
$
6,100
Expenses:
Rent expense
1,000
Salaries expense
1,400
Utilities expense
230
Total expenses
2,630
Net income
$
3,470
2-38
P3
Balance Sheet
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2011
Balance, 12/1/11
$
Net income for December
3,470
3,470
Less: Dividends
200
Balance, 12/31/11
$
3,270
FASTFORWARD
Balance Sheet
December 31, 2011
Assets
Cash
Supplies
Prepaid insurance
Equipment
Total assets
Liabilities
Accounts payable
Unearned revenue
Total liabilities
Equity
Common stock
Retained earnings
Total equity
Total liabilities and equity
$ 4,350
9,720
2,400
26,000
$ 42,470
$ 6,200
3,000
9,200
30,000
3,270
33,270
$ 42,470
2-39
A2
Debt Ratio
o
Describes the relationship between the
amounts of the company’s liabilities
and assets.
Total Liabilities
Debt Ratio =
Total Assets
o
Helps to assess the risk that a
company will fail to pay its debts.
2-40
End of Chapter 02
2-41

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