Quiz 1: Introduction to Accounting and Business
Liability to Stockholder's equity Ratio This ratio depicts the link between the liabilities of a corporation and the equity of the owners of the corporation. This ratio is used by bankers, stockholders and creditors for analyzing the performance of the corporation financially. This ratio is calculated by using the below mentioned equation. A.Total liabilities in case of A Inc. are $43,764 and the stockholder's equity is $10,741. The ratio for A Inc. can be calculated as shown below. The ratio of liabilities to stockholder's equity in case of A Inc. is . Total liabilities in case of BB Inc. are $10,024 and the stockholder's equity is $3,989. The ratio for BB Inc. can be calculated as shown below. The ratio of liabilities to stockholder's equity in case of BB Inc. is . B. Looking to the ratios of A Inc, it can be concluded that the ratio of liabilities to stockholders' is very high of 4.07 compared to normal ratio of 2. It indicates that the company is having a large amount of outsiders' funds than its own. Looking to the ratios of A Inc, it can be concluded that the ratio of liabilities to stockholders' is not very high compared to normal ratio of 2. It is 2.51 which indicate that the company is having sufficient amount of stockholders' funds.
Cost Principle This principle is the main pillar on which accounting is based. This principle requires the recognition of a transaction in the books at the cost that was incurred during the initial transaction. As per this principle this recorded cost will remain the same unless any other transaction takes place. In the given case of RR, the initial cost that was incurred or at which the land was purchased on July 9 is $275,000. However, the same land had an assessed value of $280,000 for tax purposes. RR also received an offer on 22 nd December of $305,000 from one national retail chain for the same land. But these events cannot be considered as a transaction. According to the Cost Principle concept, the historical cost will only be changed in case where another transaction takes place and in the present case there is no transaction that took place to change the value of the land.The land will be recorded in the books of RR at historical cost of .
Accounts payables defined as the amounts owed to outsiders or creditors due to credit purchase. Accounts Payable is shown under the broad head liability (L). Whereas, Accounts receivable defined as the amounts that debtors of the company owes that is generally represented as amount of credit sales. Accounts receivables are shown under the head assets (A). Amount of loan approved from the bank in respect of promissory notes is known as Notes payable. It is shown under head liability (L) in balance sheet (B/S). Generation of income by selling goods or services in the market is known as sales revenue. It is shown in income statement (I/S) as a Revenue (R). Amount paid to government authorities is represented as tax on net income is known as income tax expense. It is shown under Income statement (I/S) as an Expense (E). Retained earnings (R/E) refer to the amount of net income which is retained by the company for future investments or business expansion. It is shown under the head stockholder equity (SE) 1.Accounting equation refers to an arithmetic expression used to illustrate the relationship between the assets, liabilities and shareholder's equity of the company. Accounting equation effects of adjusting entries are shown as below: 2.Income statement also known as statement of operation refers to the financial statement which depicts the specified summary of how the corporation earns its revenues and incur the expenses to generate the revenue. Income statement of PS for the year ended June 30 is given as below: 3.Retained earnings (R/E) refer to the amount of net income which is retained by the company for future investments or in order to stronger the financial position of the company. Statement of retained earnings of PS Corporation for the year ended June 30: 4.Balance sheet refers to the type of statement which represents the financial position of the company for a given period of time. Balance sheet of the company is divided into three segments that are Liabilities, Assets and shareholder's Equity.