Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 80

Transaction analysis—quantitative; analyze results Kenisha Morgan owns and operates Morgan’s Furniture Emporium, Inc. The balance sheet totals for assets, liabilities, and owner’s equity at August 1, 2010, are as indicated. Described here are several transactions entered into by the company throughout the month of August.

Required:

a. Indicate the amount and effect (+ or –) of each transaction on total assets, total liabilities, and total owner’s equity, and then compute the new totals for each category. The first transaction is provided as an illustration.

	Assets =	Liabilities	Owner’s+ Equity
August 1, 2010, totals	$700,000	$550,000	$150,000
August 3, borrowed $24,000 in cash from the bank	+ 24,000	+ 24,000
New totals	$724,000	$574,000	$150,000
August 7, bought merchandise inventory valued at $38,000 on account
New totals
August 10, paid $14,000 cash for operating expenses . . . .
New totals
August 14, received $100,000 in cash from sales of merchandise that had cost $66,000
New totals
August 17, paid $28,000 owed on accounts payable
New totals
August 21, collected $34,000 of accounts receivable
New totals
August 24, repaid $20,000 to the bank plus $400 interest New totals
August 29, paid Kenisha Morgan a cash dividend of $10,000 New totals

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b. What was the amount of net income (or loss) during August? How much were total revenues and total expenses during August?

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c. What were the net changes during the month of August in total assets, total liabilities, and total owner’s equity?

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d. Explain to Kenisha Morgan which transactions caused the net change in her owner’s equity during August.

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e. Explain why dividend payments are not an expense, but interest is an expense.

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f. Explain why the money borrowed from the bank increased assets but did not increase net income.

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g. Explain why paying off accounts payable and collecting accounts receivable do not affect net income.

Step 1 of 9

Transaction analysis–quantitative; Results

a) The transaction analysis of the provided transactions is shown in the following table:

Table 1: Transaction analysis

Date	Particulars	($)	($)	($) Owner’s Equity
August 1, 2010	Totals	700,000	550,000	150,000
August 3	Borrowed $12,000 in cash from the bank			-
	New totals	724,000	574,000	150,000
August 7	Bought merchandise inventory valued at $38,000 on account			-
	New totals	762,000	612,000	150,000
August 10	Paid $14,000 cash operating expenses		-
	New totals	748,000	612,000	136,000
August 14	Received $100,000 in cash from sales		-
	sales of merchandise that had cost $66,000		-
	New totals	782,000	612,000	170,000
August 17	Paid $28,000 owed on accounts payable			-
	New totals	754,000	584,000	170,000
August 21	Collected $34,000 of accounts receivable	0	-	-
	New totals	754,000	584,000	170,000
August 24	Repaid $20,000 to the bank, plus $400 interest			-400
	New totals	733,600	564,000	169,600
August 29	Paid Kenisha Morgan a $10,000 cash dividend		-
August 31, 2010	Totals	723,600	564,000	159,600