College Accounting Study Set 7

Business

Quiz 3 :

Analyzing Business Transactions Using T Accounts

Quiz 3 :

Analyzing Business Transactions Using T Accounts

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How do the income statement and the balance sheet help management make sound decisions?
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Financial statements:
Income statement reports the financial performance of a business for a specified period. It reports all revenues and expenses incurred for that specific period.
Net income is the excess of revenues over expenses.
The following is the formula for calculating net income:
img Revenue is defined as the amount that an organization actually receives over a period of time in exchange of transactions or rendering its services or by selling goods. For example, when a professional firm renders its services of advising to its clients, the clients gives the firm fees which accounts as revenue for the firm.
Expenses are defined as the amount that the organization spends over a period of time.
For example, the expenses of a professional firm would be salaries, stationery etc.
When one looks at the income statement, he can ascertain the income or loss that the entity has incurred during the period under consideration. When one does that, he can know the reasons for the results. And work and plan accordingly.
A balance sheet reports the financial position of the business on a specific date. It is the result of the transactions that have been entered into during the prior period.
By comparing the balance sheets at two different periods of time, one can ascertain the financial position of the entity and plan and work accordingly.
It is to be noted that income statement is for a specified period and balance sheet is for a specified date.
By knowing the financial performance and position only, management can take any decisions regarding the business. Management should first of all know the fields in which the organizations is doing well and in which still improvement is needed. By analyzing the financial statements only the position and performance of a business can be known.

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How can management find out, at any time, whether a firm can pay its bills as they become due?
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Financial statements:
In general bills payable are current liabilities. The ratio which is used to find out whether the company can met its short term liabilities are Current ratio and quick ratio.
Current ratio is the ratio that shows the ratio of the assets that can be converted into cash in a short period of time to the liabilities that are payable within the same short period of time.
The calculation of the ratio would also help in ascertaining as to whether an entity is capable of meeting its current liabilities as and when they become due.
It is calculated by using the following formula:
Current ratio =
img Quick ratio is the ratio of quick assets and current liabilities.
Quick assets are more liquid in nature. All current assets are quick assets except stock.

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Annual reports released by publicly held companies include a letter to the stockholders written by the chief executive officer, chairman of the board, or president. Analyze Online: Locate the Adobe Systems Incorporated Web site (www.adobe.com). Within Investor Relations in the About Adobe link, find the annual report for the current year. Read the letter to the stockholders within the annual report. What types of information can a company's management deliver using the letter to stockholders?
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Letter to shareholders:
Letter to the shareholders is written once in a year by the top executives of the company to the shareholders. The letter contains the following:
a. Financial position and performance of the company.
b. Current position in the market.
c. The group revenue.
d. The operating income from the recurring activities.
e. The net cash position.
f. A position of the company on governance.

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Using T accounts to analyze transactions. Donna Wells decided to start a dental practice. The first five transactions for the business follow. For each transaction, (1) determine which two accounts are affected, (2) set up T accounts for the affected accounts, and (3) enter the debit and credit amounts in the T accounts. 1. Donna invested $80,000 cash in the business. 2. Paid $20,000 in cash for equipment. 3. Performed services for cash amounting to $8,000. 4. Paid $2,800 in cash for advertising expense. 5. Paid $2,000 in cash for supplies.
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What are accounts?
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Using T accounts to record transactions involving assets, liabilities, and owner's equity. The following transactions took place at Professional Counseling Services, a business established by Greta Davis. INSTRUCTIONS For each transaction, set up T accounts from this list: Cash; Office Furniture; Office Equipment; Automobile; Accounts Payable; Greta Davis, Capital; and Greta Davis, Drawing. Analyze each transaction. Record the amounts in the T accounts affected by that transaction. Use plus and minus signs to show increases and decreases in each account. TRANSACTIONS 1. Greta Davis invested $60,000 cash in the business. 2. Purchased office furniture for $16,000 in cash. 3. Bought a fax machine for $950; payment is due in 30 days. 4. Purchased a used car for the firm for $16,000 in cash. 5. Davis invested an additional $10,000 cash in the business. 6. Bought a new computer for $3,000; payment is due in 60 days. 7. Paid $950 to settle the amount owed on the fax machine. 8. Davis withdrew $4,000 in cash for personal expenses. Analyze: Which transactions affected asset accounts?
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How is the balance of an account determined?
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Using T accounts to record transactions involving revenues and expenses. The following occurred during June at Carter's Professional Counseling. INSTRUCTIONS Analyze each transaction. Use T accounts to record these transactions and be sure to put the name of the account on the top of each account. Record the effects of the transaction in the T accounts. Use plus and minus signs before the amounts to show the increases and decreases. TRANSACTIONS 1. Purchased office supplies for $2,000. 2. Delivered monthly statements, collected fee income of $21,000. 3. Paid the current month's office rent of $4,000. 4. Completed professional counseling, billed client for $3,000. 5. Client paid fee of $1,000 for weekly counseling, previously billed. 6. Paid office salary of $3,600. 7. Paid telephone bill of $480. 8. Billed client for $2,000 fee for preparing a counseling memorandum. 9. Purchased office supplies of $1,000 on account. 10. Paid office salary of $3,600. 11. Collected $2,000 from client who was billed. 12. Clients paid a total of $8,100 cash in fees. Analyze: How much cash did the business spend during the month?
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Indicate whether each of the following types of accounts would normally have a debit balance or a credit balance: a. An asset account b. A liability account c. The owner's capital account d. A revenue account e. An expense account
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Setting up T accounts. Williams Cleaning Service has the following account balances on December 31, 2013. Set up a T account for each account and enter the balance on the proper side of the account. img
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If a firm's expenses equal or exceed its revenue, what actions might management take?
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Using T accounts to record transactions involving revenue and expenses. The following transactions took place at China Express Laundry and Cleaners. INSTRUCTIONS Analyze each of the transactions. For each transaction, decide what accounts are affected and set up T accounts. Record the effects of the transaction in the T accounts. Use plus and minus signs before the amounts to show the increases and decreases. TRANSACTIONS 1. Paid $3,800 for the current month's rent. 2. Performed services for $8,000 in cash. 3. Paid salaries of $5,600. 4. Performed additional services for $10,800 on credit. 5. Paid $1,200 for the monthly telephone bill. 6. Collected $4,000 from accounts receivable. 7. Received a $190 refund for an overcharge on the telephone bill. 8. Performed services for $5,200 on credit. 9. Paid $850 in cash for the monthly electric bill. 10. Paid $1,200 in cash for gasoline purchased for the firm's van during the month. 11. Received $4,200 from charge account customers. 12. Performed services for $8,600 in cash. Analyze: What total cash was collected for Accounts Receivable during the month?
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Using T accounts to record transactions involving assets, liabilities, and owner's equity. The following transactions took place at Windmill Equipment Service. INSTRUCTIONS For each transaction, set up T accounts from the following list: Cash ; Shop Equipment; Store Equipment; Truck; Accounts Payable; Joseph Tejan, Capital; and Joseph Tejan, Drawing. Analyze each transaction. Record the effects of the transactions in the T accounts. Use plus and minus signs before the amounts to show the increases and decreases. TRANSACTIONS 1. Joseph Tejan invested $20,000 cash in the business. 2. Purchased shop equipment for $1,800 in cash. 3. Bought store fixtures for $1,200; payment is due in 30 days. 4. Purchased a used truck for $10,000 in cash. 5. Tejan gave the firm his personal tools that have a fair market value of $3,000. 6. Bought a used cash register for $2,500; payment is due in 30 days. 7. Paid $400 in cash to apply to the amount owed for store fixtures. 8. Tejan withdrew $1,600 in cash for personal expenses. Analyze: Which transactions affect the Cash account?
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What is the purpose of a chart of accounts?
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Using T accounts to record transactions involving assets, liabilities, and owner's equity. The following transactions occurred at several different businesses and are not related. INSTRUCTIONS Analyze each of the transactions. For each, decide what accounts are affected and set up T accounts. Record the effects of the transaction in the T accounts. Use plus and minus signs before the amounts to show the increases and decreases. TRANSACTIONS 1. James Walker, an owner, made an additional investment of $16,000 in cash. 2. A firm purchased equipment for $9,000 in cash. 3. A firm sold some surplus office furniture for $1,200 in cash. 4. A firm purchased a computer for $2,700, to be paid in 60 days. 5. A firm purchased office equipment for $10,200 on credit. The amount is due in 60 days. 6. Carol Rose, owner of Rose Travel Agency, withdrew $5,000 of her original cash investment. 7. A firm bought a delivery truck for $32,000 on credit; payment is due in 90 days. 8. A firm issued a check for $2,500 to a supplier in partial payment of an open account balance. Analyze: List the transactions that directly affected an owner's equity account.
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Using T accounts to record transactions involving assets, liabilities, and owner's equity. The following transactions occurred at several different businesses and are not related. INSTRUCTIONS Analyze each of the transactions. For each transaction, set up T accounts. Record the effects of the transaction in the T accounts. Use plus and minus signs to show the increases and decreases. TRANSACTIONS 1. A firm purchased equipment for $16,000 in cash. 2. The owner, Angie Carvajal, withdrew $4,000 cash. 3. A firm sold a piece of surplus equipment for $3,000 in cash. 4. A firm purchased a used delivery truck for $12,000 in cash. 5. A firm paid $3,600 in cash to apply against an account owed. 6. A firm purchased office equipment for $5,000. The amount is to be paid in 60 days. 7. Chuck Vinson, owner of the company, made an additional investment of $20,000 in cash. 8. A firm paid $1,500 by check for office equipment that it had previously purchased on credit. Analyze: Which transactions affect liability accounts?
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Determining debit and credit balances. Indicate whether each of the following accounts normally has a debit balance or a credit balance: 1. Ted Wilson, Capital 2. Cash 3. Fees Income 4. Accounts Payable 5. Supplies 6. Salaries Expense 7. Accounts Receivable 8. Equipment
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Annual reports released by publicly held companies include a letter to the stockholders written by the chief executive officer, chairman of the board, or president. Analyze Online: Locate the Adobe Systems Incorporated Web site (www.adobe.com). Within Investor Relations in the About Adobe link, find the annual report for the current year. Read the letter to the stockholders within the annual report. What annual revenue did Adobe Systems Incorporated report for fiscal 2009?
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Annual reports released by publicly held companies include a letter to the stockholders written by the chief executive officer, chairman of the board, or president. Analyze Online: Locate the Adobe Systems Incorporated Web site (www.adobe.com). Within Investor Relations in the About Adobe link, find the annual report for the current year. Read the letter to the stockholders within the annual report. What amount of cash, cash equivalents, and short term investments did Adobe have on hand at the end of 2009?
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Identifying debits and credits. In each of the following sentences, fill in the blanks with the word debit or credit: 1. Revenue accounts normally have img balances. These accounts increase on the img side and decrease on the img side. 2. Asset accounts normally have img balances. These accounts increase on the img side and decrease on the img side. 3. Liability accounts normally have img balances. These accounts increase on the img side and decrease on the img side. 4. Expense accounts normally have img balances. These accounts increase on the img side and decrease on the img side. 5. The owner's capital account normally has a img balance. This account increases on the img side and decreases on the img side.
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