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financial+Chapter 7

financial+Chapter 7 - Chapter 7 Some Examples of Account...

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Chapter 7 - Some Examples of Account Analysis Learning Objectives: After studying Chapter 7 you should Know how to calculate a missing amount in the accounts receivable equation. Know how to calculate a missing amount in inventory equation. Know how to calculate a missing amount in the prepaid expenses equation. Know how to calculate a missing amount in the accounts payable equation. Understand the relationship between inventory and accounts payable and be able to calculate a missing amount in one account using information from the other account. Know how to calculate a missing amount in both notes payable and interest payable equations. Know how to calculate a missing amount in the other payables. Understand the concept of unearned revenue and how balances in this account impact accounts receivable and revenue. Recall that Balance Sheet accounts carry over from one period to the next. An ending balance for one period in a Balance Sheet account becomes the beginning balance for the next period. (Remember that this is true for Balance Sheet accounts, but is not true for Income Statement accounts. It is also not true of entries on the Statement of Cash Flows.) However, we can often use the information given to analyze the account and obtain more information about the transactions during the period. Accounts Receivable: Assume you know that beginning accounts receivable was $24,000 and ending accounts receivable was $30,000. Given this information, you know that the balance at the beginning of the period was $24,000 and there were transactions during the period that made the account go up as well as transactions that made it go down, and the ending balance was $30,000. Assume you are also given that sales on account during the period were $90,000. You know that these sales would have made the account go up. If you were trying to answer the question, “How much cash was collected?” you could set up the following equation: $24,000 + $90,000 - X = $30,000 Then, just solving for X shows that cash collected must have been $84,000. Intuitively, you can see that this is correct because it is solving for the amount by which accounts receivable was reduced during the period, and cash collected on account reduces the accounts receivable account. This way of analyzing this type of problem will give you the correct answer whether or not all sales of the company were made on account. Because we are adding in all sales (which could have included some sales which were paid immediately in cash), we will get all the cash collected. We have to use the accounts receivable beginning and ending balances because the change in this account is a necessary part of the computation. Alternatively, if we had been given the amount of cash collected, then we could have determined the total revenues by solving for the amount that had increased the accounts receivable.
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