Chapter 1: Quick Study

Quick Study Solutions QS 1-1 Understanding Accounting 1. Recording requires that we input, measure, and log transactions and events. 2. Recordkeeping (bookkeeping) is the recording of transactions and events, either manually or electronically. 3. Artificial helps accountants by performing repetitive tasks such as entering invoice data. QS 1-2 Identifying Accounting Users • • • • • • • • • • • • Customers: External user Suppliers: External user External auditors: External user Business press: External user Managers: Internal user District attorney: External user Shareholders: External user Lenders: External user Controllers: Internal user FBI and IRS: External user Consumer group: External user Voters: External user QS 1-3 Applying the Fraud Triangle 1. Opportunity: The business has no cameras or security devices at its warehouse. 2. Pressure: Managers are expected to grow the business or be fired. 3. Rationalization: A worker sees other employees regularly take inventory for personal use. QS 1-4 Identifying Principles, Assumptions, and Constraints 1. 2. 3. 4. Full disclosure: Principle Time period: Assumption Going-concern: Assumption Revenue recognition: Principle QS 1-5 Identifying Attributes of Businesses Sole Proprietorship Partnership Corporation LLC No Yes Yes Separate legal entity No No No Yes Yes Limited liability Sole Proprietorship Partnership Corporation LLC No No Yes No Business taxed Yes Yes No Yes Owners taxed No No Yes Yes Unlimited life Yes No Yes Owner involvement Yes QS 1-6 Identifying Accounting Principles and Assumptions 1. Revenue recognition principle: Chavez should record the revenue from the customer order in March of next year, not December of this year. 2. Measurement (cost) principle: If $51,000 cash is paid to buy land, it is recorded at $51,000. 3. Business entity assumption: Mike Derr keeps transactions for Dockside Digs separate from those of Sailing Passions. QS 1-7 Applying the Accounting Equation 1. Liabilities = Assets - Equity 700,000−420,000=280,000700,000 - 420,000 = 280,000700,000−420,000=280,000 Liabilities: $280,000 2. Liabilities = Equity 500,000÷2=250,000500,000 \div 2 = 250,000500,000÷2=250,000 Liabilities: $250,000 Equity: $250,000 QS 1-8 Applying the Accounting Equation • Assets = Liabilities + Equity 1. (a) Assets = $50,000, Liabilities = $30,000, Equity = ? Equity=50,000−30,000=20,000Equity = 50,000 - 30,000 = 20,000Equity=50,000−30,000=20,000 2. (b) Assets = $75,000, Liabilities = ?, Equity = $55,000 Liabilities=75,000−55,000=20,000Liabilities = 75,000 - 55,000 = 20,000Liabilities=75,000−55,000=20,000 3. (c) Assets = ?, Liabilities = $40,000, Equity = $60,000 Assets=40,000+60,000=100,000Assets = 40,000 + 60,000 = 100,000Assets=40,000+60,000=100,000 QS 1-9 Determining Effects of Transactions on Equity 1. 2. 3. 4. Owner invested cash: Increases equity Incurred maintenance expenses: Decreases equity Performed services for a client: Increases equity Incurred employee wage expenses: Decreases equity QS 1-10 Identifying Effects of Transactions Using the Accounting Equation (Revenues and Expenses) Transaction Assets Liabilities Equity (Revenues/Expenses) a. Completed consulting work for $5,500 +5,500 +5,500 (Revenue) b. Billed client for $4,000 (on credit) +4,000 +4,000 (Revenue) c. Paid assistant $1,400 in wages -1,400 -1,400 (Expense) d. Collected $1,000 for services billed +1,000 e. Paid $700 for cleaning services -700 -700 (Expense) QS 1-11 Identifying Effects of Transactions Using the Accounting Equation (Assets and Liabilities) Transaction Assets Liabilities Equity a. Owner invested $15,000 cash +15,000 +15,000 b. Purchased $500 of supplies for cash -500 c. Owner invested $10,000 of equipment +10,000 +10,000 d. Purchased $200 of supplies on credit +200 +200 e. Purchased land for $9,000 cash -9,000 QS 1-12 Identifying Items with Financial Statements • • • • • • • • Assets: Balance sheet Cash from operating activities: Statement of cash flows Equipment: Balance sheet Expenses: Income statement Liabilities: Balance sheet Net decrease/increase in cash: Statement of cash flows Revenues: Income statement Total liabilities and equity: Balance sheet QS 1-13 Identifying Income and Equity Accounts • • • Utilities expense: Expense Service revenue: Revenue Wages expense: Expense • • • • • Cash dividends: Dividends Rent expense: Expense Rental revenue: Revenue Insurance expense: Expense Consulting revenue: Revenue QS 1-14 Identifying Assets, Liabilities, and Equity • • • • • • Land: Asset Wages payable: Liability Equipment: Asset Accounts payable: Liability Accounts receivable: Asset Supplies: Asset QS 1-15 Preparing an Income Statement Use the provided information to prepare the income statement for Hawkin.