Exmas on Element Business Accounting Flashcards
Cover the very basic/ simple definition
Which of the following is the normal way to present the accounting equation?
Is each of the following equations correct?
What key point does each equation raise?
a. $250,000 Assets = $100,000 Liabilities +
$100,000 Owners’ equity
b. $2,345,000 Assets = $46,900 Liabilities +
$2,298,100 Owners’ equity
c. $26,450 Assets = $675,000 Liabilities –
$648,550 Owners’ equity
d. $4,650,000 Assets = $4,250,000 Liabilities +
$400,000 Owners’ equity
c. $26,450 Assets = $675,000 Liabilities –
$648,550 Owners’ equity
A business has $485,000 total liabilities and $1,200,000 total owners’ equity. What is the amount
of its total assets?
Total assets = $1,685,000, which is the total of $485,000 liabilities plus $1,200,000 owners’ equity.
A business has $250,000 total liabilities. When it was started the owners invested $500,000 in
the business. Unfortunately, the business has suffered a cumulative loss of $200,000 up to the
present time. What is the amount of its total assets at the present time?
Total assets = $550,000, which is the total of $250,000 liabilities plus $300,000 owners’ equity.
Notice that the original $500,000 that the owners invested in the business is reduced by the
$200,000 cumulative loss of the business, and owners’ equity is now only $300,000.
A business has $175,000 total liabilities. Originally, at the time of starting the business, the
owners invested $250,000 capital. The business has earned $190,000 cumulative profit since it
started. What is the total amount of its assets?
Total assets = $615,000, which is the total of $175,000 liabilities and $440,000 owners’ equity.
Notice that in addition to the original $250,000 capital invested by owners, the business has
earned $190,000 profit, so its total owners’ equity is $440,000.
You started a new business one year ago. You’ve been very busy dealing with so many problems that you haven’t had time to sit down and look at whether you made a profit or not. You haven’t run out of cash (which for a start-up venture is quite an accomplishment), but you understand that the sustainability of the business depends on making a profit. The following two summaries present cash flow information for the year and information about two assets and a liability at year-end: Revenue and Expense Cash Flows For First Year $558,000 cash receipts from sales $375,000 cash payments for purchases of products $340,000 cash payments for other expenses Two Assets and a Liability at Year-End $52,000 receivables from customers for sales made to them during the year $85,000 cost of products in ending inventory that hasn’t yet been sold $25,000 liability for unpaid expenses Compare the profit or loss of your business for its first year according to the cash- and accrual-basis accounting methods.
You started a new business one year ago. You’ve been very busy dealing with so many problems that you haven’t had time to sit down and look at whether you made a profit or not. You haven’t run out of cash (which for a start-up venture is quite an accomplishment), but you understand that the sustainability of the business depends on making a profit. The following two summaries present cash flow information for the year and information about two assets and a liability at year-end: Revenue and Expense Cash Flows For First Year $558,000 cash receipts from sales $375,000 cash payments for purchases of products $340,000 cash payments for other expenses Two Assets and a Liability at Year-End $52,000 receivables from customers for sales made to them during the year $85,000 cost of products in ending inventory that haven’t yet been sold $25,000 liability for unpaid expenses Compare the profit or loss of your business for its first year according to the cash- and accrual-basis accounting methods.
1)What would be the amount of accrual-basis
sales revenue for the year if the business’s
had year-end receivables been $92,000?
2)What would be the amount of accrual-basis
cost of products sold expense for the year
if the business’s cost of products held in
inventory at year-end had been $95,000?
3)What would be the amount of accrual-basis
other expenses for the year if the business’s liability for unpaid expenses at yearend had been $30,000
4)Based on the changes for the example
given in Questions 5, 6, and 7, determine
the profit or loss of the business for its
first year.
1) Sales revenue ($558,000 cash receipts + $92,000 year-end receivables) = $650,000
2) Cost of products sold ($375,000 cash payments – $95,000 year-end inventory) = $280,000
3) Other expenses ($340,000 cash payments + $30,000 year-end liability) = $370,000
Based on the changes to the example given in Questions 1, 2, and 3, determine the profit or loss
of the business for its first year.
Can you tell the amount of profit the business earned in the period that just ended?
No, a balance sheet doesn’t report profit (net income) for the most recent period. You look to
its income statement for this key figure
In a balance sheet, assets usually are listed in the order of their “nearness” to cash. Cash is
listed first, followed by the asset closest to being converted into cash, and so on. Is the
sequence of assets according to normal rules for presenting assets in balance sheets?
Yes, the sequence is correct according to conventional rules for reporting assets in a balance
sheet. Cash is listed first, followed by assets according to their “nearness” to cash. In the example, the business doesn’t have short-term investments in marketable securities. So, its accounts
receivable asset is listed second, after cash, because these receivables will be collected in the
short-term. Inventory is listed after accounts receivable because this asset consists of products
that have to be sold before they can be converted into cash
No specific rule governs income statement
disclosure of advertising expense. Suppose
the $10,010,000 “Other expenses” in the
income statement for the answer to the
example question includes $5,000,000 of
advertising expense. Would you favor
reporting this as a separate expense in the
income statement? Hint: This question calls
for your opinion only.
Well, there’s no rule against disclosure of advertising expense — that’s for sure. Because it’s
such a large expense, I favor disclosing it in the income statement. But most businesses are
very sensitive about disclosing their advertising expense and, in fact, don’t disclose this
expense in their income statements.
Balance sheet:
Summarizes the business’s assets, liabilities, and owners’ equity at the
end of a period
Income statement:
Summarizes the profit-making transactions of the business for a
period of time; also known as the profit and loss (P&L) statement
Statement of cash flows:
Summarizes the business’s cash transactions for the same
period of time
Set-up and follow-up transactions for sales and expenses:
includes collecting cash
from customers after sales made on credit are recorded; the purchase of products
(goods) that are held for some time before being sold, at which time the expense is
recorded; and making cash payments for expenses some time after the expenses are
recorded
Financing activities (transactions):
Includes borrowing money and repaying amounts
borrowed; owners investing capital in the business and the business returning capital
to them; and making cash distributions to owners based on the profit earned by the
business
Set-up and follow-up transactions for sales and expenses:
Includes collecting cash
from customers after sales made on credit are recorded; the purchase of products
(goods) that are held for some time before being sold, at which time the expense is
recorded; and making cash payments for expenses some time after the expenses are
recorded
Investing activities (transactions):
includes the purchase, construction, and disposals
of long-term operating assets such as buildings, machinery, equipment, and tools
