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Week 4 Preparation Questions Solutions

Week 4 Preparation Questions Solutions - Week 4 Preparation...

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Week 4 Preparation Questions Solutions Preparation Questions: Discussion Question 3.3, 3.4; Problems 3.1*, 3.25, 3.30 3. Revenues increase profit, and profit increases retained profits, which is a part of shareholders’ equity. It is likely that revenues (sales) also increase an asset, such as cash, or accounts receivable. 4. Expenses decrease profit. A decrease in profit results in a decrease in retained profits. Retained profits are a category of owners’ equity, therefore, a decrease in expenses, decreases shareholders equity. The other parts of the accounting equation likely to be affected will either be an increase in liabilities (for example an increase in a payable when an expense is incurred) or a decrease in an asset (for example, when cash is paid out upon occurrence of an expense. Problem 3.1* 1. ASSETS = LIABILITIES + OWNERS’ EQUITY Cash AR Inventor y AP Rent payable Tax payable Retained profits Revenu e Expenses $ $ $ $ $ $ $ $ $ A +10,000 +10,000 B +9,600 -9,600 C +6,100 +6,100 D -6,300 -6,300 E -6,400 -6,400 F 2,400 -2,400 G -2,900 -2,900 H 350 -350 I -450 -450 Sum -50 400 -300 -200 -500 350 -450 10,000 -9,150 50 = 50 NB. Increases in expenses have been entered as minus figures.
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