Chapter 3: Quick Study

QS 2-1: Identifying Source Documents Items likely to serve as source documents: • • • • Sales receipt Invoice from supplier Bank statement Telephone bill Non-source documents: • • • • • Trial balance Balance sheet Prepaid insurance account Company revenue account Income statement QS 2-2: Identifying Financial Statement Accounts Classifications: • • • • • • • • • Cash: Asset Prepaid Rent: Asset Office Supplies: Asset Prepaid Insurance: Asset Office Equipment: Asset Notes Payable: Liability Accounts Payable: Liability Unearned Rent Revenue: Liability Notes Receivable: Asset QS 2-3: Reading a Chart of Accounts Classify the following accounts: • • • • • • • • • Advertising Expense: Expense Rent Revenue: Revenue Rent Receivable: Asset Machinery: Asset Accounts Payable: Liability Furniture: Asset Notes Payable: Liability Prepaid Insurance: Asset Utilities Expense: Expense QS 2-4: Identifying Normal Balance Normal balances (debit or credit): • • • • • • • • • Rideshare Revenue: Credit Office Supplies: Debit Cash: Debit Wages Expense: Debit Accounts Receivable: Debit Prepaid Rent: Debit Wages Payable: Credit Building: Debit Unearned Revenue: Credit QS 2-5: Linking Debit or Credit with Normal Balance Indicate if a debit or credit decreases the normal balance: • • • • • • Interest Payable: Debit Accounts Receivable: Credit Prepaid Insurance: Credit Buildings: Credit Accounts Payable: Debit Land: Credit QS 2-6: Analyzing Debit or Credit by Account Identify whether a debit or credit results in the indicated change: • • • • • • • • • • To increase Land: Debit To decrease Cash: Credit To increase Consulting Revenue: Credit To increase Salaries Expense: Debit To decrease Unearned Revenue: Debit To decrease Prepaid Rent: Credit To increase Notes Payable: Credit To decrease Accounts Receivable: Credit To increase Accounts Payable: Credit To increase Store Equipment: Debit QS 2-7: Computing T-Account Balance To compute T-account balances, total debits and credits for each account, then subtract credits from debits to find the ending balance. QS 2-8: Analyzing Transactions and Preparing Journal Entries Transactions for Elegant Lawns: 1. May 15: Invest $7,000 cash and $3,000 equipment: o Debit: Cash $7,000 o Debit: Equipment $3,000 o Credit: Common Stock $10,000 2. May 21: Purchase office supplies on credit: o Debit: Office Supplies $500 o Credit: Accounts Payable $500 3. May 25: Receive $4,000 cash for services: o Debit: Cash $4,000 o Credit: Landscaping Revenue $4,000 4. May 30: Receive $1,000 in advance for future services: o Debit: Cash $1,000 o Credit: Unearned Landscaping Revenue $1,000 QS 2-9: Preparing Journal Entries for Green Energy Company Transactions for Green Energy: 1. Provided consulting services on credit: o Debit: Accounts Receivable $2,000 o Credit: Consulting Revenue $2,000 2. Purchased energy-efficient supplies on credit: o Debit: Supplies $300 o Credit: Accounts Payable $300 3. Collected $500 partial payment: o Debit: Cash $500 o Credit: Accounts Receivable $500 4. Paid $300 toward supplies payable: o Debit: Accounts Payable $300 o Credit: Cash $300 5. Paid $100 for utilities: o Debit: Utilities Expense $100 o Credit: Cash $100 QS 2-10: Analyzing Transactions Using the Accounting Equation Each transaction from QS 2-9 affects the accounting equation (Assets = Liabilities + Equity). For example: • • Transaction 1: Increase in Accounts Receivable (+$2,000), increase in Equity through Revenue (+$2,000). Transaction 2: Increase in Supplies (+$300), increase in Accounts Payable (+$300). QS 2-11: Preparing Compound Journal Entries 1. Owner investment: o Debit: Cash $6,500 o Debit: Equipment $3,500 o Credit: Common Stock $10,000 2. Supplies purchase: o Debit: Supplies $2,000 o Credit: Cash $500 o Credit: Accounts Payable $1,500 QS 2-12: Identifying a Posting Error Error creating imbalance: • Incorrectly posting a debit to Utilities Expense as a credit would result in an imbalance. QS 2-13: Classifying Accounts in Financial Statements Classifications: • • • • • • • • • • • • Services Revenue: Income statement Interest Payable: Balance sheet Accounts Receivable: Balance sheet Salaries Expense: Income statement Equipment: Balance sheet Prepaid Insurance: Balance sheet Buildings: Balance sheet Rental Revenue: Income statement Unearned Revenue: Balance sheet Office Supplies: Balance sheet Interest Expense: Income statement Insurance Expense: Income statement QS 2-14 to QS 2-17: Preparing Financial Statements Use the given data from QS 2-14 to prepare a trial balance, income statement, statement of retained earnings, and balance sheet for Lawson Consulting. The Retained Earnings at December 31 is $2,500. QS 2-18 & QS 2-19: Interpreting and Computing Debt Ratio • Debt ratio measures the proportion of a company’s assets financed by liabilities. If Deutsche Auto’s debt ratio increased over three years, its financial risk from leverage increased. For Home Demo, compute debt ratio using: Debt Ratio=Total LiabilitiesTotal Assets=38,63342,966≈90% With a debt ratio of 90%, Home Demo has a higher financial risk compared to Lows Hardware’s 60%.