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Unformatted text preview: wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 46 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:A Look BackA Look at This ChapterA Look AheadChapter 1 defined accounting andintroduced financial statements. Wedescribed forms of organizationsand identified users and uses ofaccounting. We defined the accounting equation and applied it totransaction analysis.This chapter focuses on the accounting process.We describe transactions and source documents,and we explain the analysis and recording of transactions. The accounting equation, T-account, generalledger, trial balance, and debits and credits are keytools in the accounting process.Chapter 3 extends our focus onprocessing information. We explainthe importance of adjustingaccounts and the procedures inpreparing financial statements.2ChapterAnalyzing andRecordingTransactionsLearning ObjectivesCAPConceptualAnalyticalProceduralintransactionsjournalC1 Explain the steps48) processingA1 Analyze the impact ofstatements. (p.on P1 Record transactions in a (p. 54) andtransactions. (p.accounts and financial57)post entries to a ledger.sourcethe debt ratio andand explainC2 Describe (p. 48) documents and their A2 Compute analyzing financial describe P2 Prepare (p. 63) the use of a trialpurpose.its use inbalance.condition. (p. 66)C3 Describe an account and its use inP3 Prepare financial statements fromrecording transactions. (p. 49)business transactions. (p. 64)C4 Describe a(p.ledger and a chart ofaccounts. 52)explainC5 Define debits and credits and 53)double-entry accounting. (p.LP2wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 47 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Decision FeatureThe Bottom LineIt has been a dream come true Sara BlakelyATLANTAWorking as a sales trainer by day andSara expanded sales and struggled to stay profitable. I had noperforming stand-up comedy at night, I didn't know themoney to advertise, so I hit the road, laughs Sara. For the entirefirst thing about the pantyhose industry, admits Sarafirst year, I did in-store rallies . . . staying all day introducing customersBlakely. Except, I dreaded wearing most pantyhose. One night Sara cutthe feet out of her pantyhose to wear with white pants and open-toedto Spanx.In her first three months, Sara sold over 50,000 pairs of footlessshoes, and at that moment, Sara knew she had a unique idea. Sara tookpantyhose. Today, just seven short years from her launch, Sara reports$5,000 in savings and launched SPANX (Spanx.com), a manufacturerover $150 million in retail sales. We are still a small company ofof footless pantyhose, slimming intimates, hosiery, and other womenswomen, claims Sara, obsessed with inventing and improving comfort-apparel.able undergarments. Sara continues to track and account for allTo pursue her business ambitions, Sara studied business activitiesand learned the value of accounting information. She establishedrecordkeeping processes, transaction analysis, inventory accounting,revenues and expenses. She maintains that success requires proper accounting for and analysis of the financial side.The bigger message of Spanx, says Sara, is promoting comfort andand financial statement reporting. I had to get a handle on my financialconfidence for women. Insists Sara, We believe all women deservesituation, says Sara, as I wanted to remain self-funded. To this day,the opportunity to make the most of their assets!Sara remains self-funded and has a reliable accounting system to helpher make good business decisions.I had to account for product costs, office expenses, supplier payments, patent fees, and other expenses, says Sara. At the same time,[Sources: SPANX Website, January 2009; Entrepreneur, May 2007; SmartMoney, September 2002; TV Guide, July 2007; Financial Times, 2006; ABCTelevision, 2007]wiL79549_ch02_0046-0089 08/18/2008 9:55 am Page 48 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter PreviewFinancial statements report on the financial performance andcondition of an organization. Knowledge of their preparation,organization, and analysis is important. A main goal of thischapter is to illustrate how transactions are recorded, howthey are reflected in financial statements, and how theyimpact analysis of financial statements. Debits and credits areintroduced and identified as a tool in helping analyze andprocess transactions.Analyzing and Recording TransactionsAnalyzing andRecording Process Source documents The account and itsAnalyzing andProcessing Transactionsanalysis Types of accountsGeneral ledgerDouble-entry accountingJournalizing and postingAn illustrationTrial Balance Trial balance preparation Search for and correctionof errors Trial balance useAnalyzing and Recording ProcessC1Explain the steps inprocessing transactions.EXHIBIT 2.1The Analyzing and RecordingProcessServices ContractClient BillingNote PayablePurchase TicketBank StatementThe accounting process identifies business transactions and events, analyzes and records theireffects, and summarizes and presents information in reports and financial statements. These reports and statements are used for making investing, lending, and other business decisions. Thesteps in the accounting process that focus on analyzing and recording transactions and eventsare shown in Exhibit 2.1.JournalDec. 1 Cash30,000Taylor, Capital30,000Dec. 2 SuppliesCashTOTAL2,5002,50030,00Analyze eachtransactionand event fromsource documentsRecord relevanttransactionsand eventsin a journalPost journalinformationto ledgeraccountsPrepare andanalyze thetrial balanceBusiness transactions and events are the starting points. Relying on source documents, thetransactions and events are analyzed using the accounting equation to understand how theyaffect company performance and financial position. These effects are recorded in accountingrecords, informally referred to as the accounting books, or simply the books. Additional stepssuch as posting and then preparing a trial balance help summarize and classify the effects oftransactions and events. Ultimately, the accounting process provides information in usefulreports or financial statements to decision makers.Source DocumentsC2Describe source documents and their purpose.Source documents identify and describe transactions and events entering the accountingprocess. They are the sources of accounting information and can be in either hard copy orelectronic form. Examples are sales tickets, checks, purchase orders, bills from suppliers,wiL79549_ch02_0046-0089 08/18/2008 9:55 am Page 49 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactionsemployee earnings records, and bank statements. To illustrate, when an item is purchased oncredit, the seller usually prepares at least two copies of a sales invoice. One copy is given tothe buyer. Another copy, often sent electronically, results in an entry in the sellers information system to record the sale. Sellers use invoices for recording sales and for control; buyers use them for recording purchases and for monitoring purchasing activity. Many cashregisters record information for each sale on a tape or electronic file locked inside the register. This record can be used as a source document for recording sales in the accounting records.Source documents, especially if obtained from outside the organization, provide objective andreliable evidence about transactions and events and their amounts.49Point: To ensure that all sales are rungup on the register, most sellers requirecustomers to have their receipts toexchange or return purchased items.Decision EthicsCashier Your manager requires that you, as cashier, immediately enter each sale. Recently, lunch hourtraffic has increased and the assistant manager asks you to avoid delays by taking customers cash andmaking change without entering sales. The assistant manager says she will add up cash and enter sales afterlunch. She says that, in this way, the register will always match the cash amount when the manager arrives atthree oclock. What do you do? [Answerp. 71]The Account and Its AnalysisAn account is a record of increases and decreases in a specific asset, liability, equity, revenue,or expense item. Information from an account is analyzed, summarized, and presented in reports and financial statements. The general ledger, or simply ledger, is a record containing allaccounts used by a company. The ledger is often in electronic form. While most companiesledgers contain similar accounts, a company often uses one or more unique accounts becauseof its type of operations. Accounts are arranged into three general categories (based on the accounting equation), as shown in Exhibit 2.2.CashAccounts ReceivableInventorySuppliesAsset AccountsAccounts Payable Unearned Revenues Wages PayableLiability AccountsOwner, CapitalOwner, WithdrawalsEquity AccountsC3Describe an accountand its use in recordingtransactions.EXHIBIT 2.2Accounts Organized by theAccounting EquationAsset Accounts Assets are resources owned or controlled by a company and that haveexpected future benefits. Most accounting systems include (at a minimum) separate accountsfor the assets described here.A Cash account reflects a companys cash balance. All increases and decreases in cash arerecorded in the Cash account. It includes money and any medium of exchange that a bank accepts for deposit (coins, checks, money orders, and checking account balances).Accounts receivable are held by a seller and refer to promises of payment from customers tosellers. These transactions are often called credit sales or sales on account (or on credit). Accountsreceivable are increased by credit sales and are decreased by customer payments. A companyneeds a separate record for each customer, but for now, we use the simpler practice of recording all increases and decreases in receivables in a single account called Accounts Receivable.A note receivable, or promissory note, is a written promise of another entity to pay a definitesum of money on a specified future date to the holder of the note. A company holding a promissory note signed by another entity has an asset that is recorded in a Note (or Notes) Receivableaccount.Prepaid accounts (also called prepaid expenses) are assets that represent prepayments offuture expenses (not current expenses). When the expenses are later incurred, the amounts inprepaid accounts are transferred to expense accounts. Common examples of prepaid accountsinclude prepaid insurance, prepaid rent, and prepaid services (such as club memberships).Prepaid accounts expire with the passage of time (such as with rent) or through use (such aswith prepaid meal tickets). When financial statements are prepared, prepaid accounts areadjusted so that (1) all expired and used prepaid accounts are recorded as regular expenses and(2) all unexpired and unused prepaid accounts are recorded as assets (reflecting future use inPoint: Customers and others whoowe a company are called its debtors.Point: A college parking fee is aprepaid account from the studentsstandpoint. At the beginning of theterm, it represents an asset that entitlesa student to park on or near campus.The benefits of the parking fee expireas the term progresses. At term-end,prepaid parking (asset) equals zero as ithas been entirely recorded as parkingexpense.wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 50 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:50Chapter 2 Analyzing and Recording TransactionsPoint: Prepaid accounts that apply tocurrent and future periods are assets.These assets are adjusted at the endof each period to reflect only thoseamounts that have not yet expired, andto record as expenses those amountsthat have expired.future periods). To illustrate, when an insurance fee, called a premium, is paid in advance, thecost is typically recorded in the asset account Prepaid Insurance. Over time, the expiring portion of the insurance cost is removed from this asset account and reported in expenses on theincome statement. Any unexpired portion remains in Prepaid Insurance and is reported on thebalance sheet as an asset. (An exception exists for prepaid accounts that will expire or be usedbefore the end of the current accounting period when financial statements are prepared. In thiscase, the prepayments can be recorded immediately as expenses.)Supplies are assets until they are used. When they are used up, their costs are reported asexpenses. The costs of unused supplies are recorded in a Supplies asset account. Supplies areoften grouped by purposefor example, office supplies and store supplies. Office supplies include stationery, paper, toner, and pens. Store supplies include packaging materials, plastic andpaper bags, gift boxes and cartons, and cleaning materials. The costs of these unused suppliescan be recorded in an Office Supplies or a Store Supplies asset account. When supplies areused, their costs are transferred from the asset accounts to expense accounts.Equipment is an asset. When equipment is used and gets worn down, its cost is graduallyreported as an expense (called depreciation). Equipment is often grouped by its purposeforexample, office equipment and store equipment. Office equipment includes computers, printers, desks, chairs, and shelves. Costs incurred for these items are recorded in an Office Equipment asset account. The Store Equipment account includes the costs of assets used in a store,such as counters, showcases, ladders, hoists, and cash registers.Buildings such as stores, offices, warehouses, and factories are assets because they provideexpected future benefits to those who control or own them. Their costs are recorded in aBuildings asset account. When several buildings are owned, separate accounts are sometimeskept for each of them.The cost of land owned by a business is recorded in a Land account. The cost of buildingslocated on the land is separately recorded in one or more building accounts.Point: Some assets are described asintangible because they do not havephysical existence or their benefits arehighly uncertain. A recent balance sheetfor Coca-Cola Company showsnearly $1 billion in intangible assets.Decision InsightWomen Entrepreneurs The Center for Womens Business Research reportsthat women-owned businesses, such as SPANX, are growing and that they Total approximately 11 million and employ nearly 20 million workers. Generate $2.5 trillion in annual sales and tend to embrace technology. Are philanthropic70% of owners volunteer at least once per month. Are more likely funded by individual investors (73%) than venture firms (15%).Liabilities are claims (by creditors) against assets, which means theyare obligations to transfer assets or provide products or services to other entities. Creditorsare individuals and organizations that own the right to receive payments from a company. If acompany fails to pay its obligations, the law gives creditors a right to force the sale of thatcompanys assets to obtain the money to meet creditors claims. When assets are sold underthese conditions, creditors are paid first, but only up to the amount of their claims. Any remaining money, the residual, goes to the owners of the company. Creditors often use a balancesheet to help decide whether to loan money to a company. A loan is less risky if the borrowersliabilities are small in comparison to assets because this means there are more resources thanclaims on resources. Common liability accounts are described here.Accounts payable refer to oral or implied promises to pay later, which usually arise frompurchases of merchandise. Payables can also arise from purchases of supplies, equipment, andservices. Accounting systems keep separate records about each creditor. We describe these individual records in Chapter 5.A note payable refers to a formal promise, usually denoted by the signing of a promissorynote, to pay a future amount. It is recorded in either a short-term Note Payable account or along-term Note Payable account, depending on when it must be repaid. We explain details ofshort- and long-term classification in Chapter 3.Unearned Revenue refers to a liability that is settled in the future when a company deliversits products or services. When customers pay in advance for products or services (before revenueLiability AccountsPoint: Accounts Payable are alsocalled Trade Payables.wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 51 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions51is earned), the revenue recognition principle requires that the seller consider this payment asunearned revenue. Examples of unearned revenue include magazine subscriptions collected inadvance by a publisher, sales of gift certificates by stores, and season ticket sales by sportsteams. The seller would record these in liability accounts such as Unearned Subscriptions,Unearned Store Sales, and Unearned Ticket Revenue. When products and services are later delivered, the earned portion of the unearned revenue is transferred to revenue accounts such asSubscription Fees, Store Sales, and Ticket Sales.1Accrued liabilities are amounts owed that are not yet paid. Examples are wages payable,taxes payable, and interest payable. These are often recorded in separate liability accountsby the same title. If they are not large in amount, one or more ledger accounts can be addedand reported as a single amount on the balance sheet. (Financial statements often haveamounts reported that are a summation of several ledger accounts.)Point: If a subscription is canceled, thepublisher is expected to refund theunused portion to the subscriber.Decision InsightRevenue Spread The Chicago Bears have Unearned Revenues ofabout $60 million in advance ticket sales. When the team plays its homegames, it settles this liability to its ticket holders and then transfers theamount earned to Ticket Revenues.Equity Accounts The owners claim on a companys assets is called equity or owners equity. Equity is the owners residual interest in the assets of a business after deducting liabilities.Equity is impacted by four types of accounts: owners capital, owners withdrawals, revenues,and expenses. We show this visually in Exhibit 2.3 by expanding the accounting equation.CashAccounts ReceivableInventorySuppliesAssetAccountsAccount PayableUnearned RevenuesWages PayableLiabilityAccountsEXHIBIT 2.3Owner, WithdrawalsOwner, CapitalExpanded Accounting EquationEquity AccountsOwner, CapitalOwnersCapitalOwner, WithdrawalsOwnersWithdrawalsRevenuesRevenuesExpensesExpensesWhen an owner invests in a company, the invested amount is recorded in an account titledOwner, Capital (where the owners name is inserted in place of owner). The account titled C. Taylor, Capital is used for FastForward. Any further owner investments are recordedin this account. When an owner withdraws assets for personal use it decreases both companyassets and total equity. Withdrawals are not expenses of the business; they are simply the opposite of owner investments. The Owner, Withdrawals account is used to record asset distributions to the owner. The account titled C. Taylor, Withdrawals is used for FastForward.(Owners of proprietorships cannot receive company salaries because they are not legally separate from their companies; and they cannot enter into company contracts with themselves.)Revenues and expenses also impact equity. Examples of revenue accounts are Sales,Commissions Earned, Professional Fees Earned, Rent Earned, and Interest Revenue. Revenuesincrease equity and result from products and services provided to customers. Examples of expense accounts are Advertising Expense, Store Supplies Expense, Office Salaries Expense,Office Supplies Expense, Rent Expense, Utilities Expense, and Insurance Expense. Expensesdecrease equity and result from assets and services used in a companys operations. The varietyof revenues and expenses can be seen by looking at the chart of accounts that follows the index1Point: Equity is also called net assets.In practice, account titles vary. As one example, Subscription Fees is sometimes called Subscription Fees Revenue,Subscription Fees Earned, or Earned Subscription Fees. As another example, Rent Earned is sometimes calledRent Revenue, Rental Revenue, or Earned Rent Revenue. We must use good judgment when reading financialstatements because titles can differ even within the same industry. For example, product sales are called revenueat Best Buy, but net sales and operating revenues at Circuit City. Generally, the term revenues or fees is more commonly used with service businesses, and net sales or sales with product businesses.Point: The Owners Withdrawalsaccount is a contra equity accountbecause it reduces the normal balanceof equity.Point: The withdrawal of assets bythe owners of a corporation is called adividend.wiL79549_ch02_0046-0089 08/18/2008 10:13 am Page 52 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions52at the back of this book. (Different companies sometimes use different account titles than thosein this books chart of accounts. For example, some might use Interest Revenue instead ofInterest Earned, or Rental Expense instead of Rent Expense. It is important only that an account title describe the item it represents.)Decision InsightSporting Accounts The San Antonio Spurs have the followingmajor revenue and expense accounts:RevenuesExpensesBasketball ticket salesTV & radio broadcast feesAdvertising revenuesBasketball playoff receiptsTeam salariesGame costsNBA franchise costsPromotional costsAnalyzing and Processing TransactionsThis section explains several tools and processes that comprise an accounting system. These include a ledger, T-account, debits and credits, double-entry accounting, journalizing, and posting.Ledger and Chart of AccountsC4Describe a ledger and achart of accounts.The collection of all accounts for an information system is called a ledger (or general ledger).If accounts are in files on a hard drive, the sum of those files is the ledger. If the accounts arepages in a file, that file is the ledger. A companys size and diversity of operations affect thenumber of accounts needed. A small company can get by with as few as 20 or 30 accounts; alarge company can require several thousand. The chart of accounts is a list of all accounts acompany uses and includes an identification number assigned to each account. A small business might use the following numbering system for its accounts:101199201299301399401499501699Asset accountsLiability accountsEquity accountsRevenue accountsExpense accountsThese numbers provide a three-digit code that is useful in recordkeeping. In this case, the firstdigit assigned to asset accounts is a 1, the first digit assigned to liability accounts is a 2, andso on. The second and third digits relate to the accounts subcategories. Exhibit 2.4 shows apartial chart of accounts for FastForward, the focus company of Chapter 1. (Please review themore complete chart of accounts that follows the index at the back of this book.)EXHIBIT 2.4Partial Chart of Accountsfor FastForwardAccount NumberAccount NameAccount NumberAccount Name101106126128167201236CashAccounts receivableSuppliesPrepaid insuranceEquipmentAccounts payableUnearned consultingrevenue301302403406622637640652690C. Taylor, CapitalC. Taylor, WithdrawalsConsulting revenueRental revenueSalaries expenseInsurance expenseRent expenseSupplies expenseUtilities expensewiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 53 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions53Debits and CreditsA T-account represents a ledger account and is a tool used to understand the effects of oneor more transactions. Its name comes from its shape like the letter T. The layout of a T-account,shown in Exhibit 2.5, is (1) the account title on top, (2) a left, or debit side, and (3) a right, orcredit, side.The left side of an account is called theAccount Titledebit side, often abbreviated Dr. The right side(Left side)(Right side)is called the credit side, abbreviated Cr.2 ToDebitCreditenter amounts on the left side of an account isto debit the account. To enter amounts on theright side is to credit the account. Do not make the error of thinking that the terms debit andcredit mean increase or decrease. Whether a debit or a credit is an increase or decrease depends on the account. For an account where a debit is an increase, the credit is a decrease; foran account where a debit is a decrease, the credit is an increase. The difference between totaldebits and total credits for an account, including any beginning balance, is the account balance. When the sum of debits exceeds the sum of credits, the account has a debit balance.It has a credit balance when the sum of credits exceeds the sum of debits. When the sum ofdebits equals the sum of credits, the account has a zero balance.C5Define debits and creditsand explain double-entryaccounting.EXHIBIT 2.5The T-AccountPoint: Think of debit and credit asaccounting directions for left and right.Double-Entry AccountingDouble-entry accounting requires that each transaction affect, and be recorded in, at leasttwo accounts. It also means the total amount debited must equal the total amount creditedfor each transaction. Thus, the sum of the debits for all entries must equal the sum of thecredits for all entries, and the sum of debit account balances in the ledger must equal thesum of credit account balances.The system for recording debits and credits follows from the usual accounting equationsee Exhibit 2.6. Two points are important here. First, like any simple mathematical relation,net increases or decreases on one side have equal net effects on the other side. For example, anet increase in assets must be accompanied by an identical net increase on the liabilities andTotal debitsequal totalcredits foreach entry.EXHIBIT 2.6AssetsDebit forincreasesCredit fordecreasesLiabilitiesDebit fordecreasesCredit forincreasesEquityDebit fordecreasesCredit forincreasesequity side. Recall that some transactions affect only one side of the equation, meaning thattwo or more accounts on one side are affected, but their net effect on this one side is zero.Second, the left side is the normal balance side for assets, and the right side is the normalbalance side for liabilities and equity. This matches their layout in the accounting equationwhere assets are on the left side of this equation, and liabilities and equity are on the right.Recall that equity increases from revenues and owner investments and it decreases from expensesand owner withdrawals. These important equity relations are conveyed by expanding the accountingequation to include debits and credits in double-entry form as shown in Exhibit 2.7.Increases (credits) to owners capital and revenues increase equity; increases (debits) to withdrawals and expenses decrease equity. The normal balance of each account (asset, liability,capital, withdrawals, revenue, or expense) refers to the left or right (debit or credit) side whereincreases are recorded. Understanding these diagrams and rules is required to prepare, analyze,and interpret financial statements.2These abbreviations are remnants of 18th-century English recordkeeping practices where the terms debitor andcreditor were used instead of debit and credit. The abbreviations use the first and last letters of these terms, justas we still do for Saint (St.) and Doctor (Dr.).Debits and Credits in theAccounting EquationPoint: Debits and credits do notmean favorable or unfavorable. A debitto an asset increases it, as does a debitto an expense. A credit to a liabilityincreases it, as does a credit to arevenue.wiL79549_ch02_0046-0089 08/18/2008 9:55 am Page 54 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions54EXHIBIT 2.7Debit and Credit Effects for Component AccountsEquityAssetsDr. forCr. forincreases decreasesLiabilitiesOwner, CapitalDr. forCr. fordecreases increasesNormalDr. fordecreasesNormalOwner, WithdrawalsCr. forincreasesDr. forincreasesNormalCr. fordecreasesRevenuesDr. forCr. fordecreases increasesNormalNormalExpensesDr. forCr. forincreases decreasesNormalThe T-account for FastForwards Cash account, reflecting its first 11 transactions (fromExhibit 1.9), is shown in Exhibit 2.8. The total increases in its Cash account are $36,100, thetotal decreases are $31,300, and the accounts debit balance is $4,800. (We illustrate use ofT-accounts later in this chapter.)EXHIBIT 2.8Computing the Balance fora T-AccountCashInvestment by ownerConsulting services revenue earnedCollection of account receivable30,0004,2001,900Purchase of suppliesPurchase of equipmentPayment of rentPayment of salaryPayment of account payable2,50026,0001,000700900Withdrawal by ownerPoint: The ending balance is on theside with the larger dollar amount.Balance2004,800Quick CheckAnswersp. 721. Identify examples of accounting source documents.2. Explain the importance of source documents.3. Identify each of the following as either an asset, a liability, or equity: (a) Prepaid Rent,(b) Unearned Fees, (c) Building, (d ) Wages Payable, and (e ) Office Supplies.4. What is an account? What is a ledger?5. What determines the number and types of accounts a company uses?6. Does debit always mean increase and credit always mean decrease?7. Describe a chart of accounts.Journalizing and Posting TransactionsP1Record transactions in ajournal and post entriesto a ledger.Processing transactions is a crucial part of accounting. The four usual steps of this processare depicted in Exhibit 2.9. Steps 1 and 2involving transaction analysis and double-entryaccountingwere introduced in prior sections. This section extends that discussion and focuses on steps 3 and 4 of the accounting process. Step 3 is to record each transaction in a journal. A journal gives a complete record of each transaction in one place. It also shows debitsand credits for each transaction. The process of recording transactions in a journal is calledjournalizing. Step 4 is to transfer (or post) entries from the journal to the ledger. The processof transferring journal entry information to the ledger is called posting.The process of journalizing transactions requires an understanding of a journal. While companies can use various journals, every company uses a generaljournal. It can be used to record any transaction and includes the following information abouteach transaction: (1) date of transaction, (2) titles of affected accounts, (3) dollar amount of eachJournalizing TransactionswiL79549_ch02_0046-0089 08/18/2008 9:55 am Page 55 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsStep 1: Analyze transactions andsource documents.55EXHIBIT 2.9Step 2: Apply double-entry accounting.Steps in Processing TransactionsServices ContractClient BillingNote PayablePurchase TicketBank Statement30,0001 DepositEquitysLiabilitieAssetsDebit forincreaseshCasCredit foresdecreasDebit foresdecreasDebit foresCredit forincreasesdecreasCredit forincreasesAssets = Liabilities +EquityTOTALStep 3: Record journal entry.Step 4: Post entry to ledger.General JournalDec. 1 Cash30,000Taylor, Capital30,000Dec. 2 SuppliesCashnalGeneral JourLedger2,5002,500debit and credit, and (4) explanation of the transaction. Exhibit 2.10 shows how the first twotransactions of FastForward are recorded in a general journal. This process is similar for manualand computerized systems. Computerized journals are often designed to look like a manual journal page, and also include error-checking routines that ensure debits equal credits for each entry.Shortcuts allow recordkeepers to select account names and numbers from pull-down menus.EXHIBIT 2.10DateAccount Titles and ExplanationPRDebitPage 1Credit2009Dec. 1Cash30,00030,000C. Taylor, CapitalInvestment by owner.Dec. 2SuppliesCashPurchased supplies for cash.Partial General Journal forFastForward2,5002,500To record entries in a general journal, apply these steps; refer to the entries in Exhibit 2.10 whenreviewing these steps. 1 Date the transaction: Enter the year at the top of the first column andthe month and day on the first line of each journal entry. 2 Enter titles of accounts debited andthen enter amounts in the Debit column on the same line. Account titles are taken from the chartof accounts and are aligned with the left margin of the Account Titles and Explanation column.3 Enter titles of accounts credited and then enter amounts in the Credit column on the same line.Account titles are from the chart of accounts and are indented from the left margin of the AccountTitles and Explanation column to distinguish them from debited accounts. 4 Enter a brief explanation of the transaction on the line below the entry (it often references a source document). Thisexplanation is indented about half as far as the credited account titles to avoid confusing it withaccounts, and it is italicized.Decision InsightIFRSs IFRSs require that companies report the following four financial statements with explanatory notes:Balance sheetStatement of changes in equity (or statement of recognized revenue and expense)Income statementStatement of cash flowsIFRSs do not prescribe specific formats; and comparative information is required for the preceding period only.Point: There are no exact rules forwriting journal entry explanations.An explanation should be short yetdescribe why an entry is made.wiL79549_ch02_0046-0089 07/26/2008 1:35 am Page 56 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:56Chapter 2 Analyzing and Recording TransactionsA blank line is left between each journal entry for clarity. When a transaction is first recorded,the posting reference (PR) column is left blank (in a manual system). Later, when postingentries to the ledger, the identification numbers of the individual ledger accounts are enteredin the PR column.Balance Column Account T-accounts are simple and direct means to show how theaccounting process works. However, actual accounting systems need more structure and therefore use balance column accounts, such as that in Exhibit 2.11.EXHIBIT 2.11Cash Account in BalanceColumn FormatPoint: Explanations are typicallyincluded in ledger accounts only forunusual transactions or events.ExplanationCashPRDebitAccount No. 101CreditBalanceG1G1G1G1Date2,50026,0002009Dec. 1Dec. 2Dec. 3Dec. 1030,00030,00027,5001,5005,7004,200The balance column account format is similar to a T-account in having columns for debitsand credits. It is different in including transaction date and explanation columns. It also has acolumn with the balance of the account after each entry is recorded. To illustrate, FastForwardsCash account in Exhibit 2.11 is debited on December 1 for the $30,000 owner investment,yielding a $30,000 debit balance. The account is credited on December 2 for $2,500, yieldinga $27,500 debit balance. On December 3, it is credited again, this time for $26,000, and itsdebit balance is reduced to $1,500. The Cash account is debited for $4,200 on December 10,and its debit balance increases to $5,700; and so on.The heading of the Balance column does not show whether it is a debit or credit balance.Instead, an account is assumed to have a normal balance. Unusual events can sometimesEXHIBIT 2.12Posting an Entry to the LedgerGENERAL JOURNAL2009Dec. 1101301CashC. Taylor, CapitalInvestment by owner130,00030,0002LEDGER32009Dec. 1G130,00030,0004C. Taylor, Capital3012009Dec. 1Point: The fundamental concepts of amanual (pencil-and-paper) system areidentical to those of a computerizedinformation system.Key:1234G130,00030,000Identify debit account in Ledger: enter date, journal page, amount, and balance.Enter the debit account number from the Ledger in the PR column of the journal.Identify credit account in Ledger: enter date, journal page, amount, and balance.Enter the credit account number from the Ledger in the PR column of the journal.wiL79549_ch02_0046-0089 08/18/2008 9:55 am Page 57 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions57temporarily give an account an abnormal balance. An abnormal balance refers to a balance onthe side where decreases are recorded. For example, a customer might mistakenly overpay abill. This gives that customers account receivable an abnormal (credit) balance. An abnormalbalance is often identified by circling it or by entering it in red or some other unusual color. Azero balance for an account is usually shown by writing zeros or a dash in the Balance columnto avoid confusion between a zero balance and one omitted in error.Posting Journal Entries Step 4 of processing transactions is to post journal entries toledger accounts (see Exhibit 2.9). To ensure that the ledger is up-to-date, entries are posted assoon as possible. This might be daily, weekly, or when time permits. All entries must be postedto the ledger before financial statements are prepared to ensure that account balances are upto-date. When entries are posted to the ledger, the debits in journal entries are transferred intoledger accounts as debits, and credits are transferred into ledger accounts as credits. Exhibit2.12 shows the four steps to post a journal entry. First, identify the ledger account that is debited in the entry; then, in the ledger, enter the entry date, the journal and page in its PR column, the debit amount, and the new balance of the ledger account. (The letter G shows it camefrom the General Journal.) Second, enter the ledger account number in the PR column of thejournal. Steps 3 and 4 repeat the first two steps for credit entries and amounts. The postingprocess creates a link between the ledger and the journal entry. This link is a useful crossreference for tracing an amount from one record to another.Point: Computerized systems oftenprovide a code beside a balance such asdr. or cr. to identify its balance. Posting isautomatic and immediate with accountingsoftware.Point: A journal is often referred toas the book of original entry. The ledgeris referred to as the book of final entrybecause financial statements are prepared from it.Analyzing TransactionsAn IllustrationWe return to the activities of FastForward to show how double-entry accounting is useful in analyzing and processing transactions. Analysis of each transaction follows the four steps of Exhibit2.9. First, we review the transaction and any source documents. Second, we analyze the transaction using the accounting equation. Third, we use double-entry accounting to record the transaction in journal entry form. Fourth, the entry is posted (for simplicity, we use T-accounts torepresent ledger accounts). Study each transaction thoroughly before proceeding to the next. Thefirst 11 transactions are from Chapter 1, and we analyze five additional December transactionsof FastForward (numbered 12 through 16) that were omitted earlier.1. Investment by Owner1 IDENTIFY2 ANALYZEChuck Taylor invests $30,000 cash inFastForward.Assets0C.Taylor,Capital30,000Cash30,0003 RECORD(1)CashEquityCashC.Taylor, Capital101301(1)10130,000C.Taylor, Capital301(1)30,000Supplies12630,00030,0002. Purchase Supplies for Cash1 IDENTIFY FastForward pays $2,500 cash for supplies.2 ANALYZEAssetsLiabilitiesEquityCash2,500Supplies2,5004 POST(2)02,500(1)30,0000Changes the composition of assets but not the total.3 RECORD(2)SuppliesCash1261012,5002,500Analyze the impact oftransactions on accountsand financial statements.FASTForward4 POSTLiabilitiesA1Cash(2)1012,500wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 58 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:58Chapter 2 Analyzing and Recording Transactions3. Purchase Equipment for Cash1 IDENTIFY2 ANALYZEFastForward pays $26,000 cash for equipment.AssetsLiabilities04 POSTEquipmentEquity0(3)Cash Equipment26,00026,00026,000Changes the composition of assets but not the total.3 RECORD(3)167EquipmentCash167 26,00010126,000Cash(1)30,000101(2)(3)2,50026,000Supplies1264. Purchase Supplies on Credit1 IDENTIFY4 POSTFastForward purchases $7,100 of supplies oncredit from a supplier.AssetsLiabilitiesEquitySupplies2 ANALYZEAccountsPayable7,10007,1003 RECORD(4)SuppliesAccounts Payable126201(2)(4)2,5007,100Accounts Payable7,100(4)7,1002017,1005. Provide Services for Cash1 IDENTIFY2 ANALYZEAssetsEquity0ConsultingRevenue4,2004,200(5)CashLiabilitiesCash3 RECORD4 POSTFastForward provides consulting services andimmediately collects $4,200 cash.CashConsulting Revenue101403(1)(5)30,0004,200(2)(3)1012,50026,000Consulting Revenue 403(5)4,2004,2004,2006. Payment of Expense in Cash1 IDENTIFY2 ANALYZEFastForward pays $1,000 cash for December rent.AssetsLiabilitiesCash1,0003 RECORD(6)0Rent ExpenseCash6401014 POSTRent ExpenseEquityRentExpense1,0001,0001,000(6)1,000(1)(5)30,0004,200640Cash(2)(3)(6)1012,50026,0001,0007. Payment of Expense in CashPoint: Salary usually refers tocompensation for an employee whoreceives a fixed amount for a given timeperiod, whereas wages usually refers tocompensation based on time worked.1 IDENTIFYFastForward pays $700 cash for employee salary.4 POSTSalaries Expense2 ANALYZEAssetsLiabilitiesEquity0SalariesExpense700Cash7003 RECORD(7)Salaries ExpenseCash622101700700(1)(5)700(7)30,0004,200622Cash(2)(3)(6)(7)1012,50026,0001,000700wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 59 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions598. Provide Consulting and Rental Services on Credit1 IDENTIFY FastForward provides consulting services of $1,600and rents its test facilities for $300. The customer isbilled $1,900 for these services.2 ANALYZEAssetsLiabilities(8)(8)1,900Consulting RentalRevenue Revenue1,600300AccountsReceivable1,9003 RECORDAccounts Receivable 106Equity04 POSTAccounts ReceivableConsulting RevenueRental Revenue106403406Consulting Revenue 403(5)(8)1,900Rental Revenue1,600300(8)4,2001,600406Point: Transaction 8 is a compoundjournal entry, which affects three ormore accounts.3009. Receipt of Cash on Account1 IDENTIFYFastForward receives $1,900 cash from the clientbilled in transaction 8.2 ANALYZEAssetsCash1,9003 RECORD(9)LiabilitiesEquity04 POSTCash(1)(5)(9)30,0004,2001,9000AccountsReceivable1,900CashAccounts Receivable1011061,900(2)(3)(6)(7)1012,50026,0001,000700Accounts Receivable 1061,900(8)1,900(9)1,90010. Partial Payment of Accounts Payable1 IDENTIFY2 ANALYZE4 POSTFastForward pays CalTech Supply $900 cashtoward the payable of transaction 4.Accounts PayableLiabilitiesEquityCash9003 RECORDAssetsAccounts Payable900(10)0(10)Accounts PayableCash201101900900900(4)Cash(1)(5)(9)30,0004,2001,900(2)(3)(6)(7)(10)2017,1001012,50026,0001,00070090011. Withdrawal of Cash by Owner1 IDENTIFY2 ANALYZEAssets200C.Taylor, Withdrawals 302LiabilitiesEquity0C.Taylor,Withdrawals200Cash3 RECORD4 POSTChuck Taylor withdraws $200 cash fromFastForward for personal use.(11) C.Taylor,WithdrawalsCash302101200200(11)200Cash(1)(5)(9)30,0004,2001,900(2)(3)(6)(7)(10)(11)1012,50026,0001,000700900200Point: The revenue recognition principlerequires revenue to be recognized whenearned, which is when the companyprovides products and services to acustomer. This is not necessarily thesame time that the customer pays.A customer can pay before or afterproducts or services are provided.wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 60 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:60Chapter 2 Analyzing and Recording Transactions12. Receipt of Cash for Future Services1 IDENTIFYFastForward receives $3,000 cash in advance ofproviding consulting services to a customer.AssetsLiabilitiesEquityCash3,0002 ANALYZEUnearnedConsulting Revenue3,00004 POSTCash(1)(5)(9)(12)30,0004,2001,9003,000Accepting $3,000 cash obligates FastForward toperform future services and is a liability. Norevenue is earned until services are provided.Point: Luca Pacioli, a 15th-centurymonk, is considered a pioneer inaccounting and the first to devisedouble-entry accounting.3 RECORD(12)CashUnearned ConsultingRevenue1011012,50026,0001,000700900200Unearned ConsultingRevenue2363,000236(2)(3)(6)(7)(10)(11)(12)3,0003,00013. Pay Cash for Future Insurance Coverage1 IDENTIFYFastForward pays $2,400 cash (insurance premium)for a 24-month insurance policy. Coverage beginson December 1.Assets2 ANALYZECash2,400Liabilities(13)Prepaid Insurance(13)Equity0Prepaid InsuranceCash1281011282,400CashPrepaidInsurance2,4000Changes the composition of assets from cash toprepaid insurance. Expense is incurred as insurance coverage expires.3 RECORD4 POST(1)(5)(9)(12)30,0004,2001,9003,0002,4002,400(2)(3)(6)(7)(10)(11)(13)1012,50026,0001,0007009002002,40014. Purchase Supplies for Cash1 IDENTIFYAssets2 ANALYZECash1203 RECORD4 POSTFastForward pays $120 cash for supplies.(14)Supplies120SuppliesCashLiabilitiesEquity00126101Supplies(2)(4)(14)2,5007,100120(1)(5)(9)(12)30,0004,2001,9003,000126120Cash120(2)(3)(6)(7)(10)(11)(13)(14)1012,50026,0001,0007009002002,400120wiL79549_ch02_0046-0089 07/25/2008 6:51 pm Page 61 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions6115. Payment of Expense in Cash1 IDENTIFY2 ANALYZEFastForward pays $230 cash for December utilities expense.Assets3 RECORD(15)Utilities ExpenseCashEquity0Cash230LiabilitiesUtilitiesExpense2306901012302304 POSTUtilities Expense(15)690230Cash(1)(5)(9)(12)30,0004,2001,9003,000(2)(3)(6)(7)(10)(11)(13)(14)(15)1012,50026,0001,0007009002002,40012023016. Payment of Expense in Cash1 IDENTIFY2 ANALYZEFastForward pays $700 cash in employee salaryfor work performed in the latter part of December.AssetsLiabilitiesEquity0SalariesExpense700Cash7003 RECORD(16)Salaries ExpenseCash6221017007004 POSTSalaries Expense(7)(16)Point: We could merge transactions15 and 16 into one compound entry.700700Cash(1)(5)(9)(12)62230,0004,2001,9003,000(2)(3)(6)(7)(10)(11)(13)(14)(15)(16)1012,50026,0001,0007009002002,400120230700Debit and Credit RulesAccountsIncrease(normal bal.)DecreaseAsset . . . . . . . . . . . .DebitCreditLiability . . . . . . . . . .CreditDebitCapital . . . . . . . . . . .CreditDebitWithdrawals . . . . . . .DebitCreditRevenue . . . . . . . . . .CreditDebitExpense . . . . . . . . . .DebitCreditAccounting Equation AnalysisExhibit 2.13 shows the ledger accounts (in T-account form) of FastForward after all 16 transactionsare recorded and posted and the balances computed. The accounts are grouped into threemajor columns corresponding to the accounting equation: assets, liabilities, and equity. Noteseveral important points. First, as with each transaction, the totals for the three columns mustobey the accounting equation. Specifically, assets equal $42,470 1 $4,350 $0 $9,720$2,400 $26,000 2 ; liabilities equal $9,200 1 $6,200 $3,000 2 ; and equity equals $33,2701 $30,000 $200 $5,800 $300 $1,400 $1,000 $230 2 . These numbers prove theaccounting equation: Assets of $42,470 Liabilities of $9,200 Equity of $33,270. Second,the capital, withdrawals, revenue, and expense accounts reflect the transactions that change equity. These account categories underlie the statement of owners equity. Third, the revenue andexpense account balances will be summarized and reported in the income statement. Fourth,increases and decreases in the cash account make up the elements reported in the statement ofcash flows.Point: Technology does not providethe judgment required to analyze mostbusiness transactions. Analysis requiresthe expertise of skilled and ethicalprofessionals.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 62 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions62EXHIBIT 2.13Ledger for FastForward (in T-Account Form)AssetsCash(1)(5)(9)(12)30,0004,2001,9003,000(2)(3)(6)(7)(10)(11)(13)(14)(15)(16)LiabilitiesAccounts Payable1012,50026,0001,0007009002002,400120230700Equity(10)900(4)Balance201C.Taylor, Capital7,1006,200(1)C.Taylor, WithdrawalsUnearned Consulting Revenue 236(12)(11)30130,0003022003,000Consulting Revenue4031,9000(9)Supplies(2)(4)(14)Balance4064,350Accounts Receivable(8)Balance4,2001,6005,800Rental RevenueBalance(5)(8)Balance106(8)Salaries Expense(7)(16)Balance(13)(3)128Utilities Expense26,000Equipment1,000Rent Expense2,4006227007001,400(6)1262,5007,1001209,720Prepaid Insurance3001,900(15)640690230167Accounts in this white area reflect thosereported on the income statement.$42,470$9,200$33,270Quick CheckAnswersp. 728. What types of transactions increase equity? What types decrease equity?9. Why are accounting systems called double-entry?10. For each transaction, double-entry accounting requires which of the following? (a) Debits toasset accounts must create credits to liability or equity accounts, (b) a debit to a liabilityaccount must create a credit to an asset account, or (c) total debits must equal total credits.11. An owner invests $15,000 cash along with equipment having a market value of $23,000 in acompany. Prepare the necessary journal entry.12. Explain what a compound journal entry is.13. Why are posting reference numbers entered in the journal when entries are posted to ledgeraccounts?wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 63 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions63Trial BalanceDouble-entry accounting requires the sum of debit account balances to equal the sum of creditaccount balances. A trial balance is used to verify this. A trial balance is a list of accountsand their balances at a point in time. Account balances are reported in the appropriate debit orcredit column of a trial balance. Exhibit 2.14 shows the trial balance for FastForward after its16 entries have been posted to the ledger. (This is an unadjusted trial balanceChapter 3 explains the necessary adjustments.)Video2.1EXHIBIT 2.14Trial Balance (Unadjusted)FASTFORWARDTrial BalanceDecember 31, 2009CreditDebitCash$4,3500Accounts receivable9,720Supplies2,400Prepaid insurance26,000Equipment$Accounts payable6,2003,000Unearned consulting revenue30,000C. Taylor, CapitalC. Taylor, Withdrawals2005,800Consulting revenue300Rental revenueSalaries expense1,400Rent expense1,000230Utilities expenseTotals$45,300 $45,300Point: The ordering of accounts ina trial balance typically follows theiridentification number from the chartof accounts.Preparing a Trial BalancePreparing a trial balance involves three steps:1. List each account title and its amount (from ledger) in the trial balance. If an account hasa zero balance, list it with a zero in its normal balance column (or omit it entirely).2. Compute the total of debit balances and the total of credit balances.3. Verify ( prove) total debit balances equal total credit balances.The total of debit balances equals the total of credit balances for the trial balance in Exhibit2.14. Equality of these two totals does not guarantee that no errors were made. For example,the column totals still will be equal when a debit or credit of a correct amount is made to awrong account. Another error that does not cause unequal column totals is when equal debitsand credits of an incorrect amount are entered.If the trial balance does not balance (whenits columns are not equal), the error (or errors) must be found and corrected. An efficientSearching for and Correcting ErrorsP2Prepare and explain theuse of a trial balance.Point: A trial balance is not a financialstatement but a mechanism for checkingequality of debits and credits in theledger. Financial statements do not havedebit and credit columns.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 64 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:64Chapter 2 Analyzing and Recording TransactionsExample: If a credit to UnearnedRevenue was incorrectly posted fromthe journal as a credit to the Revenueledger account, would the ledger stillbalance? Would the financial statementsbe correct? Answers: The ledger wouldbalance, but liabilities would be understated, equity would be overstated, andincome would be overstated (all because of overstated revenues).way to search for an error is to check the journalizing, posting, and trial balance preparationin reverse order. Step 1 is to verify that the trial balance columns are correctly added. Ifstep 1 fails to find the error, step 2 is to verify that account balances are accurately enteredfrom the ledger. Step 3 is to see whether a debit (or credit) balance is mistakenly listed inthe trial balance as a credit (or debit). A clue to this error is when the difference betweentotal debits and total credits equals twice the amount of the incorrect account balance.If the error is still undiscovered, Step 4 is to recompute each account balance in theledger. Step 5 is to verify that each journal entry is properly posted. Step 6 is to verifythat the original journal entry has equal debits and credits. At this point, the errors shouldbe uncovered.3If an error in a journal entry is discovered before the error is posted, it can be corrected ina manual system by drawing a line through the incorrect information. The correct informationis written above it to create a record of change for the auditor. Many computerized systems allow the operator to replace the incorrect information directly.If an error in a journal entry is not discovered until after it is posted, we do not strikethrough both erroneous entries in the journal and ledger. Instead, we correct this error by creating a correcting entry that removes the amount from the wrong account and records it tothe correct account. As an example, suppose a $100 purchase of supplies is journalized withan incorrect debit to Equipment, and then this incorrect entry is posted to the ledger. TheSupplies ledger account balance is understated by $100, and the Equipment ledger accountbalance is overstated by $100. The correcting entry is: debit Supplies and credit Equipment(both for $100).Point: The IRS requires companies tokeep records that can be audited.Using a Trial Balance to Prepare Financial StatementsP3Prepare financialstatements from businesstransactions.EXHIBIT 2.15Links between FinancialStatements across TimeThis section shows how to prepare financial statements from the trial balance in Exhibit 2.14and from information on the December transactions of FastForward. These statements differfrom those in Chapter 1 because of several additional transactions. These statements are alsomore precisely called unadjusted statements because we need to make somefurther accounting adjustments (described in Chapter 3).IncomestatementHow financial statements are linked intime is illustrated in Exhibit 2.15. A balance sheet reports on an organizationsStatementBeginningEndingoffinancial position at a point in time. Thebalancebalanceownerssheetsheetincome statement, statement of ownersequityequity, and statement of cash flows report on financial performance over aStatementof cashperiod of time. The three statements inflowsthe middle column of Exhibit 2.15 linkbalance sheets from the beginning to theend of a reporting period. They explainhow financial position changes from onePoint in timePeriod of timePoint in timepoint to another.3Transposition occurs when two digits are switched, or transposed, within a number. If transposition is the onlyerror, it yields a difference between the two trial balance totals that is evenly divisible by 9. For example, assumethat a $691 debit in an entry is incorrectly posted to the ledger as $619. Total credits in the trial balance are thenlarger than total debits by $72 ($691 $619). The $72 error is evenly divisible by 9 (72 9 8). The first digit ofthe quotient (in our example it is 8) equals the difference between the digits of the two transposed numbers (the9 and the 1). The number of digits in the quotient also tells the location of the transposition, starting from theright. The quotient in our example had only one digit (8), so it tells us the transposition is in the first digit.Consider another example where a transposition error involves posting $961 instead of the correct $691. The difference in these numbers is $270, and its quotient is 30 (270 9). The quotient has two digits, so it tells us to checkthe second digit from the right for a transposition of two numbers that have a difference of 3.wiL79549_ch02_0046-0089 08/18/2008 9:55 am Page 65 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsPreparers and users (including regulatory agencies) determine the length of the reporting period. A one-year, or annual, reporting period is common, as are semiannual, quarterly, and monthly periods. The one-year reporting period is known as the accounting, orfiscal, year. Businesses whose accounting year begins on January 1 and ends on December31 are known as calendar-year companies. Many companies choose a fiscal year ending ona date other than December 31. Best Buy is a noncalendar-year company as reflected inthe headings of its March 3 year-end financial statements in Appendix A near the end ofthe book.65Point: A statements heading lists the3 Ws: Whoname of organization,Whatname of statement, Whenstatements point in time or period oftime.Income Statement An income statement reports the revenues earned less the expensesincurred by a business over a period of time. FastForwards income statement for Decemberis shown at the top of Exhibit 2.16. Information about revenues and expenses is convenientlytaken from the trial balance in Exhibit 2.14. Net income of $3,470 is reported at the bottomof the statement. Owner investments and withdrawals are not part of income.The statement of owners equity reports informationabout how equity changes over the reporting period. FastForwards statement of ownersStatement of Owners EquityEXHIBIT 2.16FASTFORWARDIncome StatementFor Month Ended December 31, 2009RevenuesConsulting revenueRental revenue . . .Total revenues . . .ExpensesRent expense . . . .Salaries expense . .Utilities expense .Total expenses . . .Net income . . . . . . .($4,200$1,600) . . . . . . ...........................................................................................................................................................Financial Statements andTheir Links$ 5,800300$ 6,1001,0001,4002302,630$ 3,470Point: Arrow lines show how thestatements are linked.FASTFORWARDStatement of Owners EquityFor Month Ended December 31, 2009C. Taylor, Capital, December 1, 2009 . . . . . . . . . . .Plus: Investments by owner . . . . . . . . . . . . . . . .Net income . . . . . . . . . . . . . . . . . . . . . . . .$$30,0003,470Less: Withdrawals by owner . . . . . . . . . . . . . . . .C. Taylor, Capital, December 31, 2009 . . . . . . . . . .033,47033,470200$33,270FASTFORWARDBalance SheetDecember 31, 2009AssetsCash . . . . . . . . . . .Supplies . . . . . . . . .Prepaid insurance . .Equipment . . . . . . .$ 4,3509,7202,40026,000Total assets . . . . . .$42,470LiabilitiesAccounts payable . . . . . .Unearned revenue . . . . .Total liabilities . . . . . . . .EquityC. Taylor, Capital . . . . . . .Total liabilities and equity...$ 6,2003,0009,200..33,270$ 42,470Point: To foot a column of numbers isto add them.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 66 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions66equity is the second report in Exhibit 2.16. It shows the $30,000 owner investment, the$3,470 of net income, the $200 withdrawal, and the $33,270 end-of-period (capital) balance. (The beginning balance in the statement of owners equity is rarely zero; an exception is for the first period of operations. The beginning capital balance in January 2010 is$33,270, which is Decembers ending balance.)Point: An income statement is alsocalled an earnings statement, a statementof operations, or a P&L (profit and loss)statement. A balance sheet is also calleda statement of financial position.Point: While revenues increase equity,and expenses decrease equity, theamounts are not reported in detail inthe statement of owners equity. Instead,their effects are reflected through netincome.The balance sheet reports the financial position of a company at apoint in time, usually at the end of a month, quarter, or year. FastForwards balance sheetis the third report in Exhibit 2.16. This statement refers to financial condition at the closeof business on December 31. The left side of the balance sheet lists its assets: cash, supplies, prepaid insurance, and equipment. The upper right side of the balance sheet showsthat it owes $6,200 to creditors and $3,000 in services to customers who paid in advance.The equity section shows an ending balance of $33,270. Note the link between the endingbalance of the statement of owners equity and the capital balance here. (Recall that thispresentation of the balance sheet is called the account form: assets on the left and liabilitiesand equity on the right. Another presentation is the report form: assets on top, followed byliabilities and then equity. Either presentation is acceptable.)Balance SheetDecision MakerEntrepreneur You open a wholesale business selling entertainment equipment to retail outlets.Youfind that most of your customers demand to buy on credit. How can you use the balance sheets of thesecustomers to decide which ones to extend credit to? [Answerp. 71]Point: Knowing how financialstatements are prepared improvesour analysis of them.Dollar signs are not used in journals and ledgers. They do appearin financial statements and other reports such as trial balances. The usual practice is to putdollar signs beside only the first and last numbers in a column. Best Buys financial statements in Appendix A show this. When amounts are entered in a journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. However, commasare always used in financial statements. Companies also commonly round amounts in reportsto the nearest dollar, or even to a higher level. Best Buy is typical of many companies in thatit rounds its financial statement amounts to the nearest million. This decision is based on theperceived impact of rounding for users business decisions.Presentation IssuesQuick CheckAnswersp. 7214. Where are dollar signs typically entered in financial statements?15. If a $4,000 debit to Equipment in a journal entry is incorrectly posted to the ledger as a $4,000credit, and the ledger account has a resulting debit balance of $20,000, what is the effect of thiserror on the Trial Balance column totals?16. Describe the link between the income statement and the statement of owners equity.17. Explain the link between the balance sheet and the statement of owners equity.18. Define and describe revenues and expenses.19. Define and describe assets, liabilities, and equity.Decision AnalysisA2Compute the debt ratioand describe its use inanalyzing financialcondition.Debt RatioAn important business objective is gathering information to help assess a companys risk of failing topay its debts. Companies finance their assets with either liabilities or equity. A company that financesa relatively large portion of its assets with liabilities is said to have a high degree of financial leverage. Higher financial leverage involves greater risk because liabilities must be repaid and often requirewiL79549_ch02_0046-0089 8/25/08 11:24PM Page 67 ntt 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions67regular interest payments (equity financing does not). The risk that a company might not be able tomeet such required payments is higher if it has more liabilities (is more highly leveraged). One wayto assess the risk associated with a companys use of liabilities is to compute the debt ratio as inExhibit 2.17.Debt ratioEXHIBIT 2.17Total liabilitiesTotal assetsDebt RatioTo see how to apply the debt ratio, lets look at Skecherss liabilities and assets. The company designs, markets, and sells footwear for men, women, and children under the Skechers brand. Exhibit 2.18computes and reports its debt ratio at the end of each year from 2002 to 2006.$ in millions20062005200420032002Total liabilities . . . . . . . . . .Total assets . . . . . . . . . . . .Debt ratio . . . . . . . . . . .Industry debt ratio . . . . . . .$288$7370.390.48$238$5820.410.47$224$5190.430.48$211$4670.450.46$224$4830.460.45Skecherss debt ratio ranges from a low of 0.39 to a high of 0.46also, see graph in margin. Its ratiois slightly lower, and has been declining, compared with the industry ratio. This analysis implies alow risk from its financial leverage. Is financial leverage good or bad for Skechers? To answer thatquestion we need to compare the companys return on the borrowed money to the rate it is paying creditors. If the companys return is higher, it is successfully borrowing money to make more money. A companys success with making money from borrowed money can quickly turn unprofitable if its own returndrops below the rate it is paying creditors.Point: Compare the equity amount tothe liability amount to assess the extentof owner versus nonowner financing.EXHIBIT 2.18Computation and Analysis ofDebt RatioMillionsRatio$800$700$600$500$400$300$200$100$050%42%34%0.0%2006Skechers:20052004Liabilities($)2003Assets($)Decision MakerInvestor You consider buying stock in Converse. As part of your analysis, you compute its debt ratiofor 2006, 2007, and 2008 as: 0.35, 0.74, and 0.94, respectively. Based on the debt ratio, is Converse a lowrisk investment? Has the risk of buying Converse stock changed over this period? (The industry debt ratioaverages 0.40.) [Answerp. 71]Demonstration Problem(This problem extends the demonstration problem of Chapter 1.) After several months of planning,Jasmine Worthy started a haircutting business called Expressions. The following events occurred during its first month.a.b.c.d.e.f.g.h.i.j.k.On August 1, Worthy invested $3,000 cash and $15,000 of equipment in Expressions.On August 2, Expressions paid $600 cash for furniture for the shop.On August 3, Expressions paid $500 cash to rent space in a strip mall for August.On August 4, it purchased $1,200 of equipment on credit for the shop (using a long-term note payable).On August 5, Expressions opened for business. Cash received from haircutting services in the firstweek and a half of business (ended August 15) was $825.On August 15, it provided $100 of haircutting services on account.On August 17, it received a $100 check for services previously rendered on account.On August 17, it paid $125 to an assistant for hours worked during the grand opening.Cash received from services provided during the second half of August was $930.On August 31, it paid a $400 installment toward principal on the note payable entered into on August 4.On August 31, Worthy withdrew $900 cash for personal use.DP22002Debt ratio(%)wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 68 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:68Chapter 2 Analyzing and Recording TransactionsRequired1. Open the following ledger accounts in balance column format (account numbers are in parentheses):2.3.4.5.6.7.Cash (101); Accounts Receivable (102); Furniture (161); Store Equipment (165); Note Payable (240);J. Worthy, Capital (301); J. Worthy, Withdrawals (302); Haircutting Services Revenue (403); WagesExpense (623); and Rent Expense (640). Prepare general journal entries for the transactions.Post the journal entries from (1) to the ledger accounts.Prepare a trial balance as of August 31.Prepare an income statement for August.Prepare a statement of owners equity for August.Prepare a balance sheet as of August 31.Determine the debt ratio as of August 31.Extended Analysis8. In the coming months, Expressions will experience a greater variety of business transactions. Identifywhich accounts are debited and which are credited for the following transactions. (Hint: We must usesome accounts not opened in part 1.)a. Purchase supplies with cash.b. Pay cash for future insurance coverage.c. Receive cash for services to be provided in the future.d. Purchase supplies on account.Planning the Solution Analyze each transaction and use the debit and credit rules to prepare a journal entry for each. Post each debit and each credit from journal entries to their ledger accounts and cross-reference eachamount in the posting reference (PR) columns of the journal and ledger.Calculate each account balance and list the accounts with their balances on a trial balance.Verify that total debits in the trial balance equal total credits.To prepare the income statement, identify revenues and expenses. List those items on the statement,compute the difference, and label the result as net income or net loss.Use information in the ledger to prepare the statement of owners equity.Use information in the ledger to prepare the balance sheet.Calculate the debt ratio by dividing total liabilities by total assets.Analyze the future transactions to identify the accounts affected and apply debit and credit rules.Solution to Demonstration Problem1. General journal entries:Aug. 1234Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Store Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .J. Worthy, Capital . . . . . . . . . . . . . . . . . . . . . . . . . .Owners investment.Furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Purchased furniture for cash.Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Paid rent for August.Store Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Note Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Purchased additional equipment on credit.[continued on next page]......1011653013,00015,000....161101600....640101500....1652401,20018,0006005001,200wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 69 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions[continued from previous page]15151717313131Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Haircutting Services Revenue . . . . . . . . . . . . . . . . .Cash receipts from first half of August.Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .Haircutting Services Revenue . . . . . . . . . . . . . . . . .To record revenue for services provided on account.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . .To record cash received as payment on account.Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Paid wages to assistant.Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Haircutting Services Revenue . . . . . . . . . . . . . . . . .Cash receipts from second half of August.Note Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Paid an installment on the note payable.J. Worthy, Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . .Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cash withdrawal by owner.....101403825....102403100....101102100....623101125....101403930....240101400....3021019008251001001259304009002. Post journal entries from part 1 to the ledger accounts:General LedgerCashAccount No. 101DatePRDebitAug. 123151717313131G1G1G1G1G1G1G1G1G1Credit3,000600500825100125930400900Accounts ReceivableDatePRDebitAug. 1517G1G1DatePRDebit3,0002,4001,9002,7252,8252,7003,6303,2302,330Aug. 431G1G1400CreditBalance100Furniture1000Account No. 161DatePRDebitAug. 2G1600Store EquipmentCreditBalance600Account No. 165DatePRDebitAug. 14G1G115,0001,200CreditAccount No. 240BalanceAccount No. 102100Note PayableBalance15,00016,200DatePRAug. 1Balance1,200J. Worthy, CapitalCredit1,200800Account No. 301DebitG1DatePRDebitAug. 31G1Balance18,000J. Worthy, WithdrawalsCredit18,000Account No. 302Credit900Balance900Haircutting Services Revenue Account No. 403DatePRAug. 151531DebitG1G1G1Balance825100930Wages ExpenseCredit8259251,855Account No. 623DatePRDebitAug. 17G1125Rent ExpenseCreditBalance125Account No. 640DatePRDebitAug. 3G1500CreditBalance50069wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 70 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:70Chapter 2 Analyzing and Recording Transactions3. Prepare a trial balance from the ledger:EXPRESSIONSTrial BalanceAugust 31Cash . . . . . . . . . . . . . . . .Accounts receivable . . . . . .Furniture . . . . . . . . . . . . .Store equipment . . . . . . . .Note payable . . . . . . . . . .J. Worthy, Capital . . . . . . . .J. Worthy, Withdrawals . . . .Haircutting services revenueWages expense . . . . . . . . .Rent expense . . . . . . . . . .Totals . . . . . . . . . . . . . . . .............................................................................Debit$ 2,330060016,200...........Credit$80018,0009001,855125500$20,655$20,6554.EXPRESSIONSIncome StatementFor Month Ended August 31RevenuesHaircutting services revenueOperating expensesRent expense . . . . . . . . . .Wages expense . . . . . . . . .Total operating expenses . .Net income . . . . . . . . . . . . ........................................$1,855$500125625$1,2305.EXPRESSIONSStatement of Owners EquityFor Month Ended August 31J. Worthy, Capital, August 1 . . . . . . . . . .Plus: Investments by owner . . . . . . . .Net income . . . . . . . . . . . . . . . .Less: Withdrawals by owner . . . . . . . .J. Worthy, Capital, August 31 . . . . . . . . .$$18,0001,230019,23019,230900$18,3306.EXPRESSIONSBalance SheetAugust 31AssetsCash . . . . . . . .Furniture . . . . .Store equipmentTotal assets . . ................................$ 2,33060016,200$19,130LiabilitiesNote payable . . . . . . . . . . . . . . . .EquityJ. Worthy, Capital . . . . . . . . . . . . .Total liabilities and equity . . . . . . .$80018,330$19,130wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 71 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions7. Debt ratioTotal liabilitiesTotal assets$800$19,130714.18 %8a. Supplies debited8c. Cash debitedCash credited8b. Prepaid Insurance debitedCash creditedUnearned Services Revenue credited8d. Supplies debitedAccounts Payable creditedSummaryC1Explain the steps in processing transactions. The accounting process identifies business transactions and events, analyzes and records their effects, and summarizes and prepares information useful in making decisions. Transactions and events are thestarting points in the accounting process. Source documents help intheir analysis. The effects of transactions and events are recordedin journals. Posting along with a trial balance helps summarize andclassify these effects.C2Describe source documents and their purpose. Sourcedocuments identify and describe transactions and events.Examples are sales tickets, checks, purchase orders, bills, and bankstatements. Source documents provide objective and reliable evidence, making information more useful.C3Describe an account and its use in recording transactions.An account is a detailed record of increases and decreases ina specific asset, liability, equity, revenue, or expense. Informationfrom accounts is analyzed, summarized, and presented in reportsand financial statements for decision makers.C4Describe a ledger and a chart of accounts. The ledger (orgeneral ledger) is a record containing all accounts used by acompany and their balances. It is referred to as the books. Thechart of accounts is a list of all accounts and usually includes anidentification number assigned to each account.C5Define debits and credits and explain double-entry accounting. Debit refers to left, and credit refers to right. Debits increase assets, expenses, and withdrawals while credits decrease them.Credits increase liabilities, owner capital, and revenues; debits decrease them. Double-entry accounting means each transaction affects atleast two accounts and has at least one debit and one credit. The system for recording debits and credits follows from the accountingequation. The left side of an account is the normal balance for assets,withdrawals, and expenses, and the right side is the normal balancefor liabilities, capital, and revenues.Analyze the impact of transactions on accounts and financial statements. We analyze transactions using concepts ofdouble-entry accounting. This analysis is performed by determininga transactions effects on accounts. These effects are recorded injournals and posted to ledgers.Compute the debt ratio and describe its use in analyzingfinancial condition. A companys debt ratio is computed astotal liabilities divided by total assets. It reveals how much of theassets are financed by creditor (nonowner) financing. The higherthis ratio, the more risk a company faces because liabilities mustbe repaid at specific dates.Record transactions in a journal and post entries to aledger. Transactions are recorded in a journal. Each entry in ajournal is posted to the accounts in the ledger. This provides information that is used to produce financial statements. Balance column accounts are widely used and include columns for debits,credits, and the account balance.Prepare and explain the use of a trial balance. A trial balance is a list of accounts from the ledger showing their debitor credit balances in separate columns. The trial balance is a summary of the ledgers contents and is useful in preparing financialstatements and in revealing recordkeeping errors.Prepare financial statements from business transactions.The balance sheet, the statement of owners equity, theincome statement, and the statement of cash flows use data fromthe trial balance (and other financial statements) for theirpreparation.A1A2P1P2P3Guidance Answers to Decision Maker and Decision EthicsThe advantages to the process proposed by the assistantmanager include improved customer service, fewer delays, and lesswork for you. However, you should have serious concerns about internal control and the potential for fraud. In particular, the assistantmanager could steal cash and simply enter fewer sales to match theremaining cash. You should reject her suggestion without the managers approval. Moreover, you should have an ethical concern aboutthe assistant managers suggestion to ignore store policy.CashierWe can use the accounting equation (AssetsEquity) to help us identify risky customers to whom weEntrepreneurLiabilitieswould likely not want to extend credit. A balance sheet providesamounts for each of these key components. The lower a customersequity is relative to liabilities, the less likely you would extend credit.A low equity means the business has little value that does not alreadyhave creditor claims to it.Investor The debt ratio suggests the stock of Converse is of higherrisk than normal and that this risk is rising. The average industry ratio of 0.40 further supports this conclusion. The 2008 debt ratio forConverse is twice the industry norm. Also, a debt ratio approaching1.0 indicates little to no equity.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 72 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions72Guidance Answers to Quick Checks1. Examples of source documents are sales tickets, checks, purchase2.3.4.5.6.7.8.9.10.11.orders, charges to customers, bills from suppliers, employee earnings records, and bank statements.Source documents serve many purposes, including recordkeeping and internal control. Source documents, especially ifobtained from outside the organization, provide objective andreliable evidence about transactions and their amounts.EquityAssetsLiabilitiesa,c,eb,dAn account is a record in an accounting system that records andstores the increases and decreases in a specific asset, liability,equity, revenue, or expense. The ledger is a collection of all theaccounts of a company.A companys size and diversity affect the number of accountsin its accounting system. The types of accounts depend on information the company needs to both effectively operate and report its activities in financial statements.No. Debit and credit both can mean increase or decrease. Theparticular meaning in a circumstance depends on the type ofaccount. For example, a debit increases the balance of asset,withdrawals, and expense accounts, but it decreases the balanceof liability, capital, and revenue accounts.A chart of accounts is a list of all of a companys accounts andtheir identification numbers.Equity is increased by revenues and by owner investments.Equity is decreased by expenses and owner withdrawals.The name double-entry is used because all transactions affect atleast two accounts. There must be at least one debit in one account and at least one credit in another account.The answer is (c).Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Equipment . . . . . . . . . . . . . . . . . . . . . . . . .Owner, Capital . . . . . . . . . . . . . . . . . . .Investment by owner of cash and equipment.12. A compound journal entry affects three or more accounts.13. Posting reference numbers are entered in the journal when post-14.15.16.17.18.19.ing to the ledger as a cross-reference that allows the recordkeeper or auditor to trace debits and credits from one record toanother.At a minimum, dollar signs are placed beside the first and lastnumbers in a column. It is also common to place dollar signsbeside any amount that appears after a ruled line to indicate thatan addition or subtraction has occurred.The Equipment account balance is incorrectly reported at$20,000it should be $28,000. The effect of this error understates the trial balances Debit column total by $8,000. Thisresults in an $8,000 difference between the column totals.An income statement reports a companys revenues and expenses along with the resulting net income or loss. A statementof owners equity reports changes in equity, including that fromnet income or loss. Both statements report transactions occurring over a period of time.The balance sheet describes a companys financial position (assets, liabilities, and equity) at a point in time. The capital amountin the balance sheet is obtained from the statement of ownersequity.Revenues are inflows of assets in exchange for products orservices provided to customers as part of the main operationsof a business. Expenses are outflows or the using up of assetsthat result from providing products or services to customers.Assets are the resources a business owns or controls that carryexpected future benefits. Liabilities are the obligations of a business, representing the claims of others against the assets of abusiness. Equity reflects the owners claims on the assets of thebusiness after deducting liabilities.15,00023,00038,000mhhe.com/wildFAP19eKey TermsKey Terms are available at the books Website for learning and testing in an online Flashcard Format.Account (p. 49)Account balance (p. 53)Balance column account (p. 56)Chart of accounts (p. 52)Compound journal entry (p. 59)Credit (p. 53)Creditors (p. 50)Debit (p. 53)Debtors (p. 49)Debt ratio (p. 67)Double-entry accounting (p. 53)General journal (p. 54)General ledger (p. 49)Journal (p. 54)Journalizing (p. 54)Ledger (p. 49)Posting (p. 54)Posting reference (PR) column (p. 56)Source documents (p. 48)T-account (p. 53)Trial balance (p. 63)Unearned revenue (p. 50)wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 73 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsMultiple Choice QuizAnswers on p. 8973mhhe.com/wildFAP19eAdditional Quiz Questions are available at the books Website.d. L. Shue, Capital . . . 750,0001. Amalia Company received its utility bill for the current periodof $700 and immediately paid it. Its journal entry to recordthis transaction includes aa. Credit to Utility Expense for $700.b. Debit to Utility Expense for $700.c. Debit to Accounts Payable for $700.d. Debit to Cash for $700.e. Credit to capital for $700.2. On May 1, Mattingly Lawn Service collected $2,500 cash froma customer in advance of five months of lawn service. Mattinglysjournal entry to record this transaction includes aa. Credit to Unearned Lawn Service Fees for $2,500.b. Debit to Lawn Service Fees Earned for $2,500.c. Credit to Cash for $2,500.d. Debit to Unearned Lawn Service Fees for $2,500.e. Credit to capital for $2,500.3. Liang Shue contributed $250,000 cash and land worth $500,000to open his new business, Shue Consulting. Which of the following journal entries does Shue Consulting make to recordthis transaction?a. Cash Assets . . . . . . . . . . 750,000L. Shue, Capital . . . . .750,000b. L. Shue, Capital . . . . . . . 750,000Assets . . . . . . . . . . . .750,000c. Cash . . . . . . . . . . . . . . . 250,000Land . . . . . . . . . . . . . . . 500,000L. Shue, Capital . . . . .750,000Quiz2Cash . . . . . . . . .250,000Land . . . . . . . . .500,0004. A trial balance prepared at year-end shows total credits exceed total debits by $765. This discrepancy could have beencaused bya. An error in the general journal where a $765 increase inAccounts Payable was recorded as a $765 decrease inAccounts Payable.b. The ledger balance for Accounts Payable of $7,650 beingentered in the trial balance as $765.c. A general journal error where a $765 increase in AccountsReceivable was recorded as a $765 increase in Cash.d. The ledger balance of $850 in Accounts Receivable wasentered in the trial balance as $85.e. An error in recording a $765 increase in Cash as a credit.5. Bonaventure Company has total assets of $1,000,000, liabilities of $400,000, and equity of $600,000. What is its debt ratio (rounded to a whole percent)?a. 250%b. 167%c. 67%d. 150%e. 40%Discussion Questions1. Provide the names of two (a) asset accounts, (b) liability2.3.4.5.6.7.8.9.10.11.accounts, and (c) equity accounts.What is the difference between a note payable and an accountpayable?Discuss the steps in processing business transactions.What kinds of transactions can be recorded in a general journal?Are debits or credits typically listed first in general journal entries? Are the debits or the credits indented?If assets are valuable resources and asset accounts havedebit balances, why do expense accounts also have debitbalances?Should a transaction be recorded first in a journal or the ledger?Why?Why does the recordkeeper prepare a trial balance?If an incorrect amount is journalized and posted to the accounts, how should the error be corrected?Identify the four financial statements of a business.What information is reported in an income statement?12.13.14.15.16.17.18.19.Why does the user of an income statement need to knowthe time period that it covers?What information is reported in a balance sheet?Define (a) assets, (b) liabilities, (c) equity, and (d ) net assets.Which financial statement is sometimes called the statementof financial position?Review the Best Buy balance sheet in AppendixA. Identify three accounts on its balance sheet thatcarry debit balances and three accounts on its balance sheetthat carry credit balances.Refer to Circuit Citys balance sheet in Appendix A.What does Circuit City title its current liability for thepurchase of merchandise?Review the RadioShack balancesheet in Appendix A. Identify an asset with the word receivable in its account title and a liabilitywith the word payable in its account title.Locate Apples income statement in Appendix A. Whatis the title of its revenue account?Denotes Discussion Questions that involve decision making.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 74 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:74Chapter 2 Analyzing and Recording TransactionsQUICK STUDYIdentify the items froma. Trial balanceb. Telephone billc. Sales ticketAvailable with McGraw-Hills Homework ManagerQS 2-1Identifying source documentsthe following list that are likely to serve as source documents.d. Income statementg. Prepaid insurancee. Company revenue accounth. Bank statementf. Invoice from supplieri. Balance sheetC2QS 2-2Identifying financialstatement itemsC3 P3QS 2-3Identifying normal balanceC5QS 2-4Linking debit or credit withnormal balanceC5QS 2-5Analyzing debit or creditby accountC5 A1QS 2-6Preparing journal entriesP1QS 2-7Identifying a posting errorP2Identify the financial statement(s) where each of the following items appears. Use I for income statement, E for statement of owners equity, and B for balance sheet.a. Service fees earnedd. Accounts payableg. Office suppliesb. Cash withdrawal by ownere. Cashh. Prepaid rentc. Office equipmentf. Utilities expensesi. Unearned feesIdentify the normal balance (debit or credit) for each of the following accounts.a. Office suppliesd. Wages Expenseg. Wages Payableb. Owner Withdrawalse. Cashh. Buildingc. Fees Earnedf. Prepaid Insurancei. Owner CapitalIndicate whether a debit or credita. Repair Services Revenueb. Interest Payablec. Accounts Receivabled. Salaries Expensedecreases the normal balance of each of the following accounts.e. Owner Capitali. Owner Withdrawalsf. Prepaid Insurancej. Unearned Revenueg. Buildingsk. Accounts Payableh. Interest Revenuel. Office SuppliesIdentify whether a debit or credit yieldsa. To increase Landb. To decrease Cashc. To increase Utilities Expensed. To increase Fees Earnede. To decrease Unearned Revenuethe indicated change for each of the following accounts.f. To decrease Prepaid Insuranceg. To increase Notes Payableh. To decrease Accounts Receivablei. To increase Owner Capitalj. To increase Store EquipmentPrepare journal entries for each of the following selected transactions.a. On January 13, DeShawn Tyler opens a landscaping company called Elegant Lawns by investing$80,000 cash along with equipment having a $30,000 value.b. On January 21, Elegant Lawns purchases office supplies on credit for $820.c. On January 29, Elegant Lawns receives $8,700 cash for performing landscaping services.d. On January 30, Elegant Lawns receives $4,000 cash in advance of providing landscaping services toa customer.A trial balance has total debits of $20,000 and total credits of $24,500. Which one of the following errors would create this imbalance? Explain.a. A $2,250 credit to Consulting Fees Earned in a journal entry is incorrectly posted to the ledger as a$2,250 debit, leaving the Consulting Fees Earned account with a $6,300 credit balance.b. A $4,500 debit to Salaries Expense in a journal entry is incorrectly posted to the ledger as a $4,500credit, leaving the Salaries Expense account with a $750 debit balance.c. A $2,250 debit to Rent Expense in a journal entry is incorrectly posted to the ledger as a $2,250credit, leaving the Rent Expense account with a $3,000 debit balance.d. A $2,250 debit posting to Accounts Receivable was posted mistakenly to Cash.e. A $4,500 debit posting to Equipment was posted mistakenly to Supplies.f. An entry debiting Cash and crediting Notes Payable for $4,500 was mistakenly not posted.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 75 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsIndicate the financial statement on which each of the following items appears. Use I for income statement, E for statement of owners equity, and B for balance sheet.a. Rental Revenuee. Accounts Receivablei. Buildingsb. Insurance Expensef. Salaries Expensej. Interest Revenuec. Services Revenueg. Equipmentk. Owner Withdrawalsd. Interest Payableh. Prepaid Insurancel. Office Supplies75QS 2-8Classifying accounts infinancial statementsP3Available with McGraw-Hills Homework ManagerFor each of the following (1) identify the type of account as an asset, liability, equity, revenue, or expense, (2) enter debit (Dr.) or credit (Cr.) to identify the kind of entry that would increase the accountbalance, and (3) identify the normal balance of the account.a. Owner Capitale. Equipmenti. Accounts Payableb. Accounts Receivablef. Fees Earnedj. Postage Expensec. Owner Withdrawalsg. Wages Expensek. Prepaid Insuranced. Cashh. Unearned Revenuel. LandEXERCISESUse the information in each of the following separate cases to calculate the unknown amount.a. During October, Alcorn Company had $104,750 of cash receipts and $101,607 of cash disbursements.The October 31 Cash balance was $17,069. Determine how much cash the company had at the closeof business on September 30.b. On September 30, Mordish Co. had a $83,250 balance in Accounts Receivable. During October, thecompany collected $75,924 from its credit customers. The October 31 balance in Accounts Receivablewas $85,830. Determine the amount of sales on account that occurred in October.c. Strong Co. had $148,000 of accounts payable on September 30 and $137,492 on October 31. Totalpurchases on account during October were $271,876. Determine how much cash was paid on accountspayable during October.Exercise 2-2Nology Co. bills a client $65,000 for services provided and agrees to accept the following three itemsin full payment: (1) $12,000 cash, (2) computer equipment worth $90,000, and (3) to assume responsibility for a $37,000 note payable related to the computer equipment. The entry Nology makes to recordthis transaction includes which one or more of the following?a. $37,000 increase in a liability accountd. $65,000 increase in an asset accountb. $12,000 increase in the Cash accounte. $65,000 increase in a revenue accountc. $12,000 increase in a revenue accountf. $37,000 increase in an equity accountExercise 2-3Prepare general journal entries for the following transactions of a new company called Special Pics.Exercise 2-4Aug. 1Preparing general journalentries252031Madison Harris, the owner, invested $14,250 cash and $61,275 of photography equipment inthe company.The company paid $3,300 cash for an insurance policy covering the next 24 months.The company purchased office supplies for $2,707 cash.The company received $3,250 cash in photography fees earned.The company paid $871 cash for August utilities.Use the information in Exercise 2-4 to prepare an August 31 trial balance for Special Pics. Begin byopening these T-accounts: Cash; Office Supplies; Prepaid Insurance; Photography Equipment;M. Harris, Capital; Photography Fees Earned; and Utilities Expense. Then, post the general journalentries to these T-accounts (which will serve as the ledger), and prepare the trial balance.Exercise 2-1Identifying type and normalbalances of accountsC3 C5Analyzing account entriesand balancesA1Analyzing effects oftransactions on accountsA1A1 P1Exercise 2-5Preparing T-accounts (ledger)and a trial balanceC3 P2wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 76 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:76Chapter 2 Analyzing and Recording TransactionsExercise 2-6Record the transactions below for Amena Company by recording the debit and credit entries directlyin the following T-accounts: Cash; Accounts Receivable; Office Supplies; Office Equipment; AccountsPayable; S. Amena, Capital; S. Amena, Withdrawals; Fees Earned; and Rent Expense. Use the letters beside each transaction to identify entries. Determine the ending balance of each T-account.a. Sergey Amena, owner, invested $14,000 cash in the company.b. The company purchased office supplies for $406 cash.c. The company purchased $7,742 of office equipment on credit.d. The company received $1,652 cash as fees for services provided to a customer.e. The company paid $7,742 cash to settle the payable for the office equipment purchased in transaction c.f. The company billed a customer $2,968 as fees for services provided.g. The company paid $510 cash for the monthly rent.h. The company collected $1,246 cash as partial payment for the account receivable created in transaction f.i. S. Amena withdrew $1,200 cash from the company for personal use.Recording effects of transactionsin T-accountsC5 A1Check Cash ending balance, $7,040Exercise 2-7Preparing a trial balance P2Exercise 2-8After recording the transactions of Exercise 2-6 in T-accounts and calculating the balance of each account,prepare a trial balance. Use May 31, 2009, as its report date.Examine the following transactions and identify those that create expenses for Thomas Services. Preparegeneral journal entries to record those expense transactions and explain why the other transactions didnot create expenses.a. The company paid $12,200 cash for office supplies that were purchased more than 1 year ago.b. The company paid $1,233 cash for the just completed two-week salary of the receptionist.c. The company paid $39,200 cash for equipment purchased.d. The company paid $870 cash for this months utilities.e. Owner (Thomas) withdrew $4,500 cash from the company for personal use.Analyzing and journalizingexpense transactionsA1 P1Exercise 2-9Examine the following transactions and identify those that create revenues for Thomas Services, a company owned by Brina Thomas. Prepare general journal entries to record those revenue transactions andexplain why the other transactions did not create revenues.a. Brina Thomas invests $39,350 cash in the company.b. The company provided $2,300 of services on credit.c. The company provided services to a client and immediately received $875 cash.d. The company received $10,200 cash from a client in payment for services to be provided next year.e. The company received $3,500 cash from a client in partial payment of an account receivable.f. The company borrowed $120,000 cash from the bank by signing a promissory note.Analyzing and journalizingrevenue transactionsA1 P1Exercise 2-10On October 1, Diondre Shabazz organized a new consulting firm called Tech Talk. On October 31, thecompanys records show the following accounts and amounts. Use this information to prepare an Octoberincome statement for the business.Preparing an incomestatementC4 P3Cash . . . . . . . . . . .Accounts receivableOffice supplies . . . .Land . . . . . . . . . . . .Office equipment . .Accounts payable . .D. Shabazz, Capital . .Check Net income, $5,516Exercise 2-11........................................................$ 12,61425,6484,90369,38827,14712,070124,114D. Shabazz, WithdrawalsConsulting fees earned .Rent expense . . . . . . .Salaries expense . . . . .Telephone expense . . .Miscellaneous expenses..........................................$ 2,00025,6206,85912,405560280Use the information in Exercise 2-10 to prepare an October statement of owners equity for Tech Talk.(The owner invested $124,114 to launch the company.)Preparing a statementof owners equity P3Exercise 2-12Preparing a balance sheet.......P3Use the information in Exercise 2-10 (if completed, you can also use your solution to Exercise 2-11) toprepare an October 31 balance sheet for Tech Talk.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 77 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions77Exercise 2-13A company had the following assets and liabilities at the beginning and end of a recent year.Computing net incomeAssets$131,000180,000Beginning of the year . . . . . . . .End of the year . . . . . . . . . . . .Liabilities$56,15972,900A1 P3Determine the net income earned or net loss incurred by the business during the year for each of the following separate cases:a. Owner made no investments in the business and no withdrawals were made during the year.b. Owner made no investments in the business but withdrew $650 cash per month for personal use.c. No withdrawals were made during the year but the owner invested an additional $45,000 cash.d. Withdrew $650 cash per month for personal use and the owner invested an additional $25,000 cash.Exercise 2-14Compute the missing amount in each of the following separate companies a through d.Analyzing changes in acompanys equity(a)123456Equity, December 31, 2008Owner investments during the yearOwner withdrawals during the yearNet income (loss) for the yearEquity, December 31, 2009$(b)(c)(d)C5 P30$00$0$201,871?85,347112,500(51,000)(8,000)(53,000)?(6,000)?78,00027,000?101,87191,66594,5007Assume the following T-accounts reflect Belle Co.s general ledger and that seven transactions a through gare posted to them. Provide a short description of each transaction. Include the amounts in your descriptions.Cash(a)(e)12,0009,000(b)(c)(f )(g)Automobiles4,8002,0004,600820(a)Interpreting and describingtransactions from T-accountsC1 A124,000Accounts Payable(f )Office Supplies(c)(d)Exercise 2-154,600(d)10,000D. Belle, Capital2,000300(a)51,200Delivery Services RevenuePrepaid Insurance(b)(e)9,0004,800Gas and Oil ExpenseEquipment(a)(d)(g)82015,2009,700Use information from the T-accounts in Exercise 2-15 to prepare general journal entries for each of theseven transactions a through g.Exercise 2-16Several posting errors are identified in the following table. In column (1), enter the amount of the difference between the two trial balance columns (debit and credit) due to the error. In column (2), identifythe trial balance column (debit or credit) with the larger amount if they are not equal. In column (3), identify the account(s) affected by the error. In column (4), indicate the amount by which the account(s) incolumn (3) is under- or overstated. Item (a) is completed as an example.Exercise 2-17Preparing generaljournal entries A1 P1Identifying effects ofposting errors on thetrial balance A1 P2wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 78 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions78Description of Posting Errora.b.c.d.e.f.g.(1)Difference betweenDebit and CreditColumns(2)Column withthe LargerTotal(3)IdentifyAccount(s)IncorrectlyStated(4)Amount thatAccount(s) isOver- orUnderstated$90CreditRent ExpenseRent Expenseunderstated $90$1,870 debit to Rent Expense isposted as a $1,780 debit.$3,560 credit to Cash is postedtwice as two credits to Cash.$7,120 debit to the Withdrawals account isdebited to Owners Capital.$1,630 debit to Prepaid Insuranceis posted as a debit to Insurance Expense.$31,150 debit to Machinery isposted as a debit to Accounts Payable.$4,460 credit to Services Revenueis posted as a $446 credit.$820 debit to Store Supplies isnot posted.Exercise 2-18Analyzing a trialbalance errorA1 P2Exercise 2-19You are told the column totals in a trial balance are not equal. After careful analysis, you discover onlyone error. Specifically, a correctly journalized credit purchase of a computer for $11,250 is posted fromthe journal to the ledger with a $11,250 debit to Office Equipment and another $11,250 debit to AccountsPayable. The Office Equipment account has a debit balance of $26,663 on the trial balance. Answer eachof the following questions and compute the dollar amount of any misstatement.a. Is the debit column total of the trial balance overstated, understated, or correctly stated?b. Is the credit column total of the trial balance overstated, understated, or correctly stated?c. Is the Office Equipment account balance overstated, understated, or correctly stated in the trialbalance?d. Is the Accounts Payable account balance overstated, understated, or correctly stated in the trialbalance?e. If the debit column total of the trial balance is $236,250 before correcting the error, what is the totalof the credit column before correction?a. Calculate the debt ratio and the return on assets using the year-end information for each of the fol-lowing six separate companies ($ thousands).Interpreting the debt ratioand return on assetsA2CaseCompany 3Company 5Company 6Company 1Company 4Company 2b.c.d.e.f.$Assets90,500 $64,00032,500147,00092,000104,500LiabilitiesAverage AssetsNet Income20,000100,000 $12,000 $3,80040,00047,00066050,00026,50021,000200,00056,0007,50040,00031,00012,00070,00051,500Of the six companies, which business relies most heavily on creditor financing?Of the six companies, which business relies most heavily on equity financing?Which two companies indicate the greatest risk?Which two companies earn the highest return on assets?Which one company would investors likely prefer based on the riskreturn relation?wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 79 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions79Available with McGraw-Hills Homework ManagerLancet Engineering completed the following transactions in the month of June.a. Jenna Lancet, the owner, invested $195,000 cash, office equipment with a value of $8,200, and$80,000 of drafting equipment to launch the company.b. The company purchased land worth $52,000 for an office by paying $8,900 cash and signing a longterm note payable for $43,100.c. The company purchased a portable building with $55,000 cash and moved it onto the land acquiredin b.d. The company paid $2,300 cash for the premium on an 18-month insurance policy.e. The company completed and delivered a set of plans for a client and collected $6,600 cash.f. The company purchased $24,000 of additional drafting equipment by paying $9,600 cash and signinga long-term note payable for $14,400.g. The company completed $14,500 of engineering services for a client. This amount is to be receivedin 30 days.h. The company purchased $1,100 of additional office equipment on credit.i. The company completed engineering services for $23,000 on credit.j. The company received a bill for rent of equipment that was used on a recently completed job. The$1,410 rent cost must be paid within 30 days.k. The company collected $8,000 cash in partial payment from the client described in transaction g.l. The company paid $2,500 cash for wages to a drafting assistant.m. The company paid $1,100 cash to settle the account payable created in transaction h.n. The company paid $970 cash for minor maintenance of its drafting equipment.o. J. Lancet withdrew $10,450 cash from the company for personal use.p. The company paid $2,000 cash for wages to a drafting assistant.q. The company paid $2,400 cash for advertisements in the local newspaper during June.PROBLEM SET AProblem 2-1APreparing and postingjournal entries; preparing atrial balanceC4 C5 A1 P1 P2Required1. Prepare general journal entries to record these transactions (use the account titles listed inpart 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balance col-umn format): Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment(163); Drafting Equipment (164); Building (170); Land (172); Accounts Payable (201); Notes Payable(250); J. Lancet, Capital (301); J. Lancet, Withdrawals (302); Engineering Fees Earned (402); WagesExpense (601); Equipment Rental Expense (602); Advertising Expense (603); and Repairs Expense(604). Post the journal entries from part 1 to the accounts and enter the balance after each posting.3. Prepare a trial balance as of the end of June.Denzel Brooks opens a Web consulting business called Venture Consultants and completes the following transactions in March.March 1 Brooks invested $180,000 cash along with $30,000 of office equipment in the company.2 The company prepaid $8,000 cash for six months rent for an office. (Hint: Debit PrepaidRent for $8,000.)3 The company made credit purchases of office equipment for $3,300 and office supplies for$1,400. Payment is due within 10 days.6 The company completed services for a client and immediately received $6,000 cash.9 The company completed a $9,200 project for a client, who must pay within 30 days.12 The company paid $4,700 cash to settle the account payable created on March 3.19 The company paid $7,500 cash for the premium on a 12-month insurance policy.22 The company received $4,300 cash as partial payment for the work completed on March 9.25 The company completed work for another client for $3,590 on credit.29 Brooks withdrew $4,900 cash from the company for personal use.30 The company purchased $1,700 of additional office supplies on credit.31 The company paid $500 cash for this months utility bill.Check (2) Ending balances: Cash,$114,380; Accounts Receivable,$29,500; Accounts Payable, $1,410(3) Trial balance totals,$386,210Problem 2-2APreparing and posting journalentries; preparing a trial balanceC4 C5 A1 P1 P2xe celmhhe.com/wildFAP19ewiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 80 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions80RequiredCheck (2) Ending balances: Cash,$164,700; Accounts Receivable, $8,490;Accounts Payable, $1,700(3) Total debits, $230,490Problem 2-3APreparing and posting journalentries; preparing a trial balanceC4 C5 A1 P1 P21. Prepare general journal entries to record these transactions (use the account titles listed in part 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balance col-umn format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance (128);Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); D. Brooks, Capital (301);D. Brooks, Withdrawals (302); Services Revenue (403); and Utilities Expense (690). Post the journal entries from part 1 to the ledger accounts and enter the balance after each posting.3. Prepare a trial balance as of the end of March.Jayden Lanelle opens a computer consulting business called Viva Consultants and completes the followingtransactions in its first month of operations.April 1 Lanelle invests $95,000 cash along with office equipment valued at $22,800 in the company.2 The company prepaid $7,200 cash for twelve months rent for office space. (Hint: Debit PrepaidRent for $7,200.)3 The company made credit purchases for $11,400 in office equipment and $2,280 in office supplies. Payment is due within 10 days.6 The company completed services for a client and immediately received $2,000 cash.9 The company completed a $7,600 project for a client, who must pay within 30 days.13 The company paid $13,680 cash to settle the account payable created on April 3.19 The company paid $6,000 cash for the premium on a 12-month insurance policy. (Hint: DebitPrepaid Insurance for $6,000.)22 The company received $6,080 cash as partial payment for the work completed on April 9.25 The company completed work for another client for $2,640 on credit.28 Lanelle withdrew $6,200 cash from the company for personal use.29 The company purchased $760 of additional office supplies on credit.30 The company paid $700 cash for this months utility bill.RequiredCheck (2) Ending balances: Cash,$69,300; Accounts Receivable, $4,160;Accounts Payable, $760(3) Total debits, $130,800Problem 2-4AComputing net income fromequity analysis, preparing abalance sheet, and computing thedebt ratioC3 A1 A2 P3xe celmhhe.com/wildFAP19e1. Prepare general journal entries to record these transactions (use account titles listed in part 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balance col-umn format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance (128);Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); J. Lanelle, Capital (301);J. Lanelle, Withdrawals (302); Services Revenue (403); and Utilities Expense (690). Post journalentries from part 1 to the ledger accounts and enter the balance after each posting.3. Prepare a trial balance as of April 30.The accounting records of Faviana Shipping show the following assets and liabilities as of December 31,2008 and 2009.December 31Cash . . . . . . . . . .Accounts receivableOffice supplies . . .Office equipment .Trucks . . . . . . . . .Building . . . . . . . .Land . . . . . . . . . . .Accounts payable .Note payable . . . .2008.......................................................................2009$ 47,86725,9834,098125,81649,2360068,3100$ 8,15420,3703,002134,01858,236164,12440,95633,87985,080wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 81 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions81Late in December 2009, the business purchased a small office building and land for $205,080. It paid$120,000 cash toward the purchase and an $85,080 note payable was signed for the balance. Ms. Favianahad to invest $34,000 cash in the business to enable it to pay the $120,000 cash. The owner withdraws$2,400 cash per month for personal use.Required1. Prepare balance sheets for the business as of December 31, 2008 and 2009. (Hint: Report only totalequity on the balance sheet and remember that total equity equals the difference between assets andliabilities.)2. By comparing equity amounts from the balance sheets and using the additional information presentedin this problem, prepare a calculation to show how much net income was earned by the business during 2009.3. Compute the 2009 year-end debt ratio for the business.Yi Min started an engineering firm called Min Engineering. He began operations and completed seventransactions in May, which included his initial investment of $18,000 cash. After those seven transactions,the ledger included the following accounts with normal balances.Cash . . . . . . . . . . . . .Office supplies . . . . . .Prepaid insurance . . . .Office equipment . . . .Accounts payable . . . .Y. Min, Capital . . . . . .Y. Min, Withdrawals . . .Engineering fees earnedRent expense . . . . . . ........................................................................$44,1321,0904,70011,20011,20018,0004,32844,0007,750Check (2) Net income, $120,011(3) Debt ratio, 27.7%Problem 2-5AAnalyzing account balancesand reconstructingtransactionsC1 C4 A1 P2Required1. Prepare a trial balance for this business as of the end of May.Check (1) Trial balance totals,$73,200Analysis Components2. Analyze the accounts and their balances and prepare a list that describes each of the seven most likelytransactions and their amounts.3. Prepare a report of cash received and cash paid showing how the seven transactions in part 2 yieldthe $44,132 ending Cash balance.Business transactions completed by Alanna Emitt during the month of September are as follows.a. Emitt invested $82,000 cash along with office equipment valued at $22,000 in a new company namedAE Consulting.b. The company purchased land valued at $40,000 and a building valued at $165,000. The purchase ispaid with $25,000 cash and a long-term note payable for $180,000.c. The company purchased $1,700 of office supplies on credit.d. Emitt invested her personal automobile in the company. The automobile has a value of $16,800 andis to be used exclusively in the business.e. The company purchased $5,900 of additional office equipment on credit.f. The company paid $1,500 cash salary to an assistant.g. The company provided services to a client and collected $7,600 cash.h. The company paid $630 cash for this months utilities.i. The company paid $1,700 cash to settle the account payable created in transaction c.(3) Cash paid, $17,868Problem 2-6ARecording transactions;posting to ledger; preparing atrial balanceC4 A1 P1 P2wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 82 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions82j.k.l.m.n.The company purchased $20,200 of new office equipment by paying $20,200 cash.The company completed $6,750 of services for a client, who must pay within 30 days.The company paid $2,000 cash salary to an assistant.The company received $4,000 cash in partial payment on the receivable created in transaction k.Emitt withdrew $2,900 cash from the company for personal use.RequiredCheck (2) Ending balances: Cash,$39,670; Office Equipment, $48,100(3) Trial balance totals,$321,050PROBLEM SET BProblem 2-1BPreparing and posting journalentries; preparing a trial balanceC4 C5 A1 P1 P21. Prepare general journal entries to record these transactions (use account titles listed in part 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balance col-umn format): Cash (101); Accounts Receivable (106); Office Supplies (108); Office Equipment (163);Automobiles (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250);A. Emitt, Capital (301); A. Emitt, Withdrawals (302); Fees Earned (402); Salaries Expense (601);and Utilities Expense (602). Post the journal entries from part 1 to the ledger accounts and enter thebalance after each posting.3. Prepare a trial balance as of the end of September.At the beginning of April, Vanessa Wende launched a custom computer solutions company calledSoftworks. The company had the following transactions during April.a. Vanessa Wende invested $155,000 cash, office equipment with a value of $5,100, and $78,000 ofcomputer equipment in the company.b. The company purchased land worth $55,000 for an office by paying $8,700 cash and signing a longterm note payable for $46,300.c. The company purchased a portable building with $59,000 cash and moved it onto the land acquiredin b.d. The company paid $3,500 cash for the premium on a two-year insurance policy.e. The company provided services to a client and immediately collected $7,000 cash.f. The company purchased $26,000 of additional computer equipment by paying $11,800 cash andsigning a long-term note payable for $14,200.g. The company completed $16,500 of services for a client. This amount is to be received within 30 days.h. The company purchased $1,800 of additional office equipment on credit.i. The company completed client services for $28,000 on credit.j. The company received a bill for rent of a computer testing device that was used on a recently completed job. The $1,685 rent cost must be paid within 30 days.k. The company collected $10,000 cash in partial payment from the client described in transaction i.l. The company paid $1,300 cash for wages to an assistant.m. The company paid $1,800 cash to settle the payable created in transaction h.n. The company paid $985 cash for minor maintenance of the companys computer equipment.o. V. Wende withdrew $10,230 cash from the company for personal use.p. The company paid $1,300 cash for wages to an assistant.q. The company paid $4,300 cash for advertisements in the local newspaper during April.RequiredCheck (2) Ending balances: Cash,$69,085; Accounts Receivable, $34,500;Accounts Payable, $1,685(3) Trial balance totals,$351,7851. Prepare general journal entries to record these transactions (use account titles listed in part 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balance col-umn format): Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment(163); Computer Equipment (164); Building (170); Land (172); Accounts Payable (201); NotesPayable (250); V. Wende, Capital (301); V. Wende, Withdrawals (302); Fees Earned (402); WagesExpense (601); Computer Rental Expense (602); Advertising Expense (603); and Repairs Expense(604). Post the journal entries from part 1 to the accounts and enter the balance after each posting.3. Prepare a trial balance as of the end of April.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 83 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsKylan Management Services opens for business and completes these transactions in November.Nov. 1 Rollie Kylan, the owner, invested $190,000 cash along with $29,000 of office equipment inthe company.2 The company prepaid $10,000 cash for six months rent for an office. (Hint: Debit PrepaidRent for $10,000.)4 The company made credit purchases of office equipment for $4,300 and of office supplies for$2,100. Payment is due within 10 days.8 The company completed work for a client and immediately received $7,000 cash.12 The company completed a $9,200 project for a client, who must pay within 30 days.13 The company paid $6,400 cash to settle the payable created on November 4.19 The company paid $4,100 cash for the premium on a 24-month insurance policy.22 The company received $3,700 cash as partial payment for the work completed on November 12.24 The company completed work for another client for $4,010 on credit.28 R. Kylan withdrew $6,300 cash from the company for personal use.29 The company purchased $1,200 of additional office supplies on credit.30 The company paid $1,100 cash for this months utility bill.83Problem 2-2BPreparing and posting journalentries; preparing a trial balanceC4 C5 A1 P1 P2Required1. Prepare general journal entries to record these transactions (use account titles listed in part 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balance col-umn format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance (128);Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); R. Kylan, Capital (301);R. Kylan, Withdrawals (302); Services Revenue (403); and Utilities Expense (690). Post the journalentries from part 1 to the ledger accounts and enter the balance after each posting.3. Prepare a trial balance as of the end of November.Hassan Management Services opens for business and completes these transactions in September.Sept. 1 Jamal Hassan, the owner, invests $130,000 cash along with office equipment valued at $31,200in the company.2 The company prepaid $7,200 cash for 12 months rent for office space. (Hint: Debit PrepaidRent for $7,200.)4 The company made credit purchases for $15,600 in office equipment and $3,120 in office supplies. Payment is due within 10 days.8 The company completed work for a client and immediately received $2,000 cash.12 The company completed a $10,400 project for a client, who must pay within 30 days.13 The company paid $18,720 cash to settle the payable created on September 4.19 The company paid $6,000 cash for the premium on an 18-month insurance policy. (Hint: DebitPrepaid Insurance for $6,000.)22 The company received $8,320 cash as partial payment for the work completed on September 12.24 The company completed work for another client for $2,640 on credit.28 J. Hassan withdrew $6,200 cash from the company for personal use.29 The company purchased $1,040 of additional office supplies on credit.30 The company paid $700 cash for this months utility bill.Check (2) Ending balances: Cash,$172,800; Accounts Receivable, $9,510;Accounts Payable, $1,200(3) Total debits, $240,410Problem 2-3BPreparing and posting journalentries; preparing a trial balanceC4 C5 A1 P1 P2Required1. Prepare general journal entries to record these transactions (use account titles listed in part 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balancecolumn format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance(128); Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); J. Hassan, Capital(301); J. Hassan, Withdrawals (302); Service Fees Earned (401); and Utilities Expense (690). Postjournal entries from part 1 to the ledger accounts and enter the balance after each posting.3. Prepare a trial balance as of the end of September.Check (2) Ending balances: Cash,$101,500; Accounts Receivable, $4,720;Accounts Payable, $1,040(3) Total debits, $177,280wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 84 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:84Chapter 2 Analyzing and Recording TransactionsProblem 2-4BThe accounting records of Trinity Co. show the following assets and liabilities as of December 31, 2008and 2009.Computing net income fromequity analysis, preparing abalance sheet, and computing thedebt ratioDecember 31C3 A1 A2 P3Cash . . . . . . . . . .Accounts receivableOffice supplies . . .Office equipment .Machinery . . . . . . .Building . . . . . . . .Land . . . . . . . . . . .Accounts payable .Note payable . . . .2008..............................................................$ 54,77329,7314,689$143,96856,3390078,1650.........2009$ 10,62923,3093,435153,35365,339187,80246,86438,767114,666Late in December 2009, the business purchased a small office building and land for $234,666. It paid$120,000 cash toward the purchase and a $114,666 note payable was signed for the balance. Ms. Trinity,the owner, had to invest an additional $35,000 cash to enable it to pay the $120,000 cash toward thepurchase. The owner withdraws $4,000 cash per month for personal use.Required1. Prepare balance sheets for the business as of December 31, 2008 and 2009. (Hint: Report only totalCheck (2) Net income, $138,963(3) Debt ratio, 31.3%Problem 2-5BAnalyzing account balancesand reconstructingtransactionsequity on the balance sheet and remember that total equity equals the difference between assets andliabilities.)2. By comparing equity amounts from the balance sheets and using the additional information presentedin the problem, prepare a calculation to show how much net income was earned by the business during 2009.3. Calculate the December 31, 2009, debt ratio for the business.Roshaun Gould started a Web consulting firm called Gould Solutions. He began operations and completedseven transactions in April that resulted in the following accounts, which all have normal balances.Cash . . . . . . . . . . . . .Office supplies . . . . . .Prepaid rent . . . . . . .Office equipment . . . .Accounts payable . . . .R. Gould, Capital . . . .R. Gould, WithdrawalsConsulting fees earnedOperating expenses . .C1 C4 A1 P2........................................................................$46,5188504,70011,30011,30022,5004,17243,0009,260RequiredCheck (1) Trial balance total, $76,8001. Prepare a trial balance for this business as of the end of April.Analysis Component2. Analyze the accounts and their balances and prepare a list that describes each of the seven most likely(3) Cash paid, $18,982transactions and their amounts.3. Prepare a report of cash received and cash paid showing how the seven transactions in part 2 yieldthe $46,518 ending Cash balance.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 85 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsWitter Consulting completed the following transactions during June.a. D. Witter, the owner, invested $82,000 cash along with office equipment valued at $23,000 in thenew company.b. The company purchased land valued at $50,000 and a building valued at $165,000. The purchase ispaid with $30,000 cash and a long-term note payable for $185,000.c. The company purchased $2,200 of office supplies on credit.d. D. Witter invested his personal automobile in the company. The automobile has a value of $16,800and is to be used exclusively in the business.e. The company purchased $5,100 of additional office equipment on credit.f. The company paid $1,500 cash salary to an assistant.g. The company provided services to a client and collected $8,000 cash.h. The company paid $630 cash for this months utilities.i. The company paid $2,200 cash to settle the payable created in transaction c.j. The company purchased $20,400 of new office equipment by paying $20,400 cash.k. The company completed $6,500 of services for a client, who must pay within 30 days.l. The company paid $2,000 cash salary to an assistant.m. The company received $4,000 cash in partial payment on the receivable created in transaction k.n. D. Witter withdrew $2,700 cash from the company for personal use.85Problem 2-6BRecording transactions; posting toledger; preparing a trial balanceC4 A1 P1 P2Required1. Prepare general journal entries to record these transactions (use account titles listed in part 2).2. Open the following ledger accountstheir account numbers are in parentheses (use the balance col-umn format): Cash (101); Accounts Receivable (106); Office Supplies (108); Office Equipment (163);Automobiles (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250);D. Witter, Capital (301); D. Witter, Withdrawals (302); Fees Earned (402); Salaries Expense (601);and Utilities Expense (602). Post the journal entries from part 1 to the ledger accounts and enter thebalance after each posting.3. Prepare a trial balance as of the end of June.(This serial problem started in Chapter 1 and continues through most of the chapters. If the Chapter 1segment was not completed, the problem can begin at this point. It is helpful, but not necessary, to usethe Working Papers that accompany this book.)SP 2 On October 1, 2009, Adriana Lopez launched a computer services company called SuccessSystems, which provides consulting services, computer system installations, and custom programdevelopment. Lopez adopts the calendar year for reporting purposes and expects to prepare the companys first set of financial statements on December 31, 2009. The companys initial chart of accountsfollows.AccountCash . . . . . . . . . . . .Accounts ReceivableComputer Supplies .Prepaid Insurance . .Prepaid Rent . . . . . .Office Equipment . . .Computer EquipmentAccounts Payable . . .No................................................................Account101106126128131163167201A. Lopez, Capital . . . . . . . . .A. Lopez, Withdrawals . . . . .Computer Services RevenueWages Expense . . . . . . . . .Advertising Expense . . . . . .Mileage Expense . . . . . . . . .Miscellaneous Expenses . . . .Repairs ExpenseComputerNo................................................................301302403623655676677684Check (2) Ending balances: Cash,$34,570; Office Equipment, $48,500(3) Trial balance totals,$326,400SERIAL PROBLEMSuccess SystemsA1 P1 P2wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 86 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording Transactions86Required1. Prepare journal entries to record each of the following transactions for Success Systems.Oct.123568101215172022283131Nov. 12581318222425283030Check (2) Cash, Nov. 30 bal., $48,052(3) Trial bal. totals, $108,659Lopez invested $55,000 cash, a $20,000 computer system, and $8,000 of office equipment inthe company.The company paid $3,300 cash for four months rent. (Hint: Debit Prepaid Rent for $3,300.)The company purchased $1,420 of computer supplies on credit from Harris Office Products.The company paid $2,220 cash for one years premium on a property and liability insurancepolicy. (Hint: Debit Prepaid Insurance for $2,220.)The company billed Easy Leasing $4,800 for services performed in installing a new Web server.The company paid $1,420 cash for the computer supplies purchased from Harris OfficeProducts on October 3.The company hired Lyn Addie as a part-time assistant for $125 per day, as needed.The company billed Easy Leasing another $1,400 for services performed.The company received $4,800 cash from Easy Leasing as partial payment on its account.The company paid $805 cash to repair computer equipment that was damaged when moving it.The company paid $1,940 cash for an advertisement in the local newspaper.The company received $1,400 cash from Easy Leasing on its account.The company billed IFM Company $5,208 for services performed.The company paid $875 cash for Lyn Addies wages for seven days work.A. Lopez withdrew $3,600 cash from the company for personal use.The company reimbursed Lopez in cash for business automobile mileage allowance (Lopezlogged 1,000 miles at $0.32 per mile).The company received $4,633 cash from Liu Corporation for computer services performed.The company purchased computer supplies for $1,125 cash from Harris Office Products.The company billed Gomez Co. $5,668 for services performed.The company received notification from Alexs Engineering Co. that Success Systems bid of$3,950 for an upcoming project is accepted.The company received $2,208 cash from IFM Company as partial payment of the October 28 bill.The company donated $250 cash to the United Way in the companys name.The company completed work for Alexs Engineering Co. and sent it a bill for $3,950.The company sent another bill to IFM Company for the past-due amount of $3,000.The company reimbursed Lopez in cash for business automobile mileage (1,200 miles at $0.32per mile).The company paid $1,750 cash for Lyn Addies wages for 14 days work.A. Lopez withdrew $2,000 cash from the company for personal use.2. Open ledger accounts (in balance column format) and post the journal entries from part 1 to them.3. Prepare a trial balance as of the end of November.BEYOND THE NUMBERSREPORTING INACTIONA1 A2BTN 2-1 Refer to Best Buys financial statements in Appendix A for the following questions.Required1. What amount of total liabilities does it report for each of the fiscal years ended February 25, 2006,and March 3, 2007?2. What amount of total assets does it report for each of the fiscal years ended February 25, 2006, andMarch 3, 2007?3. Compute its debt ratio for each of the fiscal years ended February 25, 2006, and March 3, 2007.4. In which fiscal year did it employ more financial leverage (February 25, 2006, or March 3, 2007)?Explain.Fast Forward5. Access its financial statements (10-K report) for a fiscal year ending after March 3, 2007, fromits Website (BestBuy.com) or the SECs EDGAR database (www.SEC.gov). Recompute its debt ratiofor any subsequent years data and compare it with the February 25, 2006, debt ratio.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 87 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsBTN 2-2($ millions)Total liabilities . . . . . . . . .Total assets . . . . . . . . . . .1.2.3.4.COMPARATIVEANALYSISKey comparative figures for Best Buy, Circuit City, and RadioShack follow.Best BuyCircuit City87RadioShackCurrentYearPriorYearCurrentYearPriorYearCurrentYearPriorYear$ 7,36913,570$ 6,60711,864$2,2164,007$2,1144,069$1,4162,070A1 A2$1,6162,205What is the debt ratio for Best Buy in the current year and for the prior year?What is the debt ratio for Circuit City in the current year and for the prior year?What is the debt ratio for RadioShack in the current year and for the prior year?Which of the three companies has the highest degree of financial leverage? What does this imply?BTN 2-3 Review the Decision Ethics case from the first part of this chapter involving the cashier.The guidance answer suggests that you should not comply with the assistant managers request.ETHICSCHALLENGERequiredC1 C2Propose and evaluate two other courses of action you might consider, and explain why.BTN 2-4 Mora Stanley is an aspiring entrepreneur and your friend. She is having difficulty understanding the purposes of financial statements and how they fit together across time.COMMUNICATINGIN PRACTICERequiredC1 C3 A1 P3Write a one-page memorandum to Stanley explaining the purposes of the four financial statements andhow they are linked across time.BTN 2-5 Access EDGAR online (www.SEC.gov) and locate the 2006 year 10-K report ofAmazon.com (ticker AMZN) filed on February 16, 2007. Review its financial statements reported foryears ended 2006, 2005, and 2004 to answer the following questions.TAKING IT TOTHE NETA1Required1. What are the amounts of its net income or net loss reported for each of these three years?2. Do Amazons operations provide cash or use cash for each of these three years?3. If Amazon has a 2005 net income, how is it possible that its cash balance at December 31, 2005,shows a decrease relative to its balance at December 31, 2004?BTN 2-6 The expanded accounting equation consists of assets, liabilities, capital, withdrawals,revenues, and expenses. It can be used to reveal insights into changes in a companys financial position.TEAMWORK INACTIONRequiredC1 C3 C5 A11. Form learning teams of six (or more) members. Each team member must select one of the six com-ponents and each team must have at least one expert on each component: (a) assets, (b) liabilities,(c) capital, (d ) withdrawals, (e) revenues, and ( f ) expenses.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 88 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:88Chapter 2 Analyzing and Recording Transactions2. Form expert teams of individuals who selected the same component in part 1. Expert teamsare to draft a report that each expert will present to his or her learning team addressing thefollowing:a. Identify for its component the (i) increase and decrease side of the account and (ii) normal balance side of the account.b. Describe a transaction, with amounts, that increases its component.c. Using the transaction and amounts in (b), verify the equality of the accounting equation and thenexplain any effects on the income statement and statement of cash flows.d. Describe a transaction, with amounts, that decreases its component.e. Using the transaction and amounts in (d ), verify the equality of the accounting equation and thenexplain any effects on the income statement and statement of cash flows.3. Each expert should return to his/her learning team. In rotation, each member presents his/her expertteams report to the learning team. Team discussion is encouraged.ENTREPRENEURIALDECISIONA1 A2 P3BTN 2-7 Angel Fender is a young entrepreneur who operates Fender Music Services, offeringsinging lessons and instruction on musical instruments. Fender wishes to expand but needs a $30,000loan. The bank requests Fender to prepare a balance sheet and key financial ratios. Fender has not keptformal records but is able to provide the following accounts and their amounts as of December 31, 2009.Cash . . . . . . . . . .Prepaid Rent . . . .Accounts Payable .Annual net income................$ 3,6009,4002,20040,000Accounts Receivable . . .Store Supplies . . . . . . . .Unearned Lesson Fees . .$ 9,6006,60015,600Prepaid Insurance . . . . .Equipment . . . . . . . . . .Total Equity* . . . . . . . . .$ 1,50050,00062,900* The total equity amount reflects all owner investments, withdrawals, revenues, and expenses as of December 31, 2009.Required1. Prepare a balance sheet as of December 31, 2009, for Fender Music Services. (Report only the totalequity amount on the balance sheet.)2. Compute Fenders debt ratio and its return on assets (the latter ratio is defined in Chapter 1). Assumeaverage assets equal its ending balance.3. Do you believe the prospects of a $30,000 bank loan are good? Why or why not?A1 A2 P3BTN 2-8 Assume Sara Blakely of SPANX plans on expanding her business to accommodate moreproduct lines. She is considering financing her expansion in one of two ways: (1) contributing more ofher own funds to the business or (2) borrowing the funds from a bank.RequiredIdentify the issues that Blakely should consider when trying to decide on the method for financing herexpansion.HITTING THEROADC1BTN 2-9 Obtain a recent copy of the most prominent newspaper distributed in your area. Researchthe classified section and prepare a report answering the following questions (attach relevant classifiedclippings to your report). Alternatively, you may want to search the Web for the required information.One suitable Website is CareerOneStop (www.CareerOneStop.org). For documentation, you shouldprint copies of Websites accessed.1. Identify the number of listings for accounting positions and the various accounting job titles.2. Identify the number of listings for other job titles, with examples, that require or prefer accountingknowledge/experience but are not specifically accounting positions.3. Specify the salary range for the accounting and accounting-related positions if provided.4. Indicate the job that appeals to you, the reason for its appeal, and its requirements.wiL79549_ch02_0046-0089 07/25/2008 6:52 pm Page 89 pinnacle 201:MHBR055:mhwiL19:wiL19ch02:Chapter 2 Analyzing and Recording TransactionsBTN 2-10 DSG international plc (www.DSGiplc.com) competes with several companies, including Best Buy and RadioShack. Key financial ratios for the current fiscal year follow.Key FigureDSGBest Buy5.2%67.2%10.8%54.3%GLOBAL DECISIONA2RadioShackReturn on assets . . . . . . . .Debt ratio . . . . . . . . . . . .893.4%68.4%Required1. Which company is most profitable according to its return on assets?2. Which company is most risky according to the debt ratio?3. Which company deserves increased investment based on a joint analysis of return on assets and thedebt ratio? Explain.ANSWERS TO MULTIPLE CHOICE QUIZ1. b; debit Utility Expense for $700, and credit Cash for $700.2. a; debit Cash for $2,500, and credit Unearned Lawn Service Fees for$2,500.3. c; debit Cash for $250,000, debit Land for $500,000, and credit L. Shue,Capital for $750,000.4. d5. e; Debt ratio$400,000 $1,000,00040%...
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