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Final Review Part I

# Final Review Part I - Financial Statements Starting Off...

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Page 1 Balance Sheet Report financial position at a particular point in time (at the end of month, quarter, year) Comprised of assets (“stuff”, economic resources) and liabilities & equities (“claims to stuff”, sources of financing) Basic Accounting Equation: Assets = Liabilities + Equity Income Statement Report financial performance during a particular period of time (for the month, quarter, year) Comprised of revenues and expenses How do we build these statements? Start with the proper reporting of transactions Double-entry accounting system Assumptions used Separate-entity Unit-of-measure Continuity Historical cost principle Financial Statements – Starting Off

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Page 2 Douglas Corporation had the following transactions during the month of June: June 1 st - Owners started the company by investing \$350,000 in cash. June 3 rd - Purchased \$200,000 of equipment by making a \$50,000 cash down payment and signing a note payable for the balance. June 10 th - Performed \$30,000 worth of services to customers of which \$20,000 was paid in cash with the balance owed by customers. June 28 th - Received a bill for utilities used of \$500 that will be paid next month. What are the total assets and total liabilities for Douglas at the end of June? Assets Liabilities a) 520,000 149,500 b) 530,000 150,500 c) 529,500 150,000 d) 530,500 160,500 e) none of the above Financial Statements – Starting Off
Page 3 On January 1, 2005, two individuals invested \$200,000 each to form Reiner Corporation. Reiner had total revenues of \$20,000 during 2005 and \$50,000 during 2006. Total expenses for the same periods were \$12,000 and \$36,000, respectively. Cash dividends paid out to stockholders totaled \$6,000 in 2005 and \$10,000 in 2006. What was Reiner’s total stockholders’ equity at the end of 2005 and 2006? a)\$402,000 and \$406,000 respectively. b)\$8,000 and \$14,000 respectively. c)\$8,000 and \$22,000 respectively. d)\$402,000 and \$404,000 respectively. e)None of the above is correct Financial Statements – Starting Off

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Page 4 Let’s talk Revenues & Expenses Revenue is generated when we sell things to customers (inventory, consulting services, electricity, etc.) Revenue is what the customer pays for our goods and/or services Naturally have a credit balance; increase an owner’s claim (right side) To increase revenue, we credit Expenses are the consumption of resources to generate operational activity (hopefully at a profit) Consumption of Inventory is shown at cost (what you paid for it) as Cost of Goods Sold Wages paid to employees show up as Wage Expense Rents paid show up as Rent Expense Etc. Naturally have a debit balance; decrease an owner’s claim (left side) To increase expense, we debit Operational Transactions
Page 5 Now that we know what the income statement looks like, let’s take a look at how operating results end up on the income statement?

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Final Review Part I - Financial Statements Starting Off...

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