Always Balanced- The Accounting Equation
What are the two types of assets?
Is this the same as profits?
Answer: Cash and Non- Cash
Answer: No assets are not the same as profits
Where would you categorize expenses? (Balance Sheet, Statement of Equity, Income Statement or Statement of Cash Flows note: can be more than one but not always)
Income Statement (this is the only place you find revenues and expenses! Look at the example from the practice celebration pg 13 solutions, and look for yourself :))
Miranda's bookstore prepays the rent for their storefront. Using the FSET, place a "+" and "-" where appropriate to account for the transaction.
BONUS 100 points: can you explain why or why not you would account for an expense?
"-" under cash and "+" under non cash assets (prepaid rents)
you DO NOT account for an expense, because the rent has not been paid or "used". Once the rent is used, then you note an expense; right now, it is just money sitting in an account.
When calculating the retained earnings for the Unadjusted and Adjusted trial balances, what do you put in the retained earnings line?
Nothing, this is only calculated and noted after closing the books!
Do we account for gain contingencies?
Example: company anticipates will receive $200,000 in a law suit next month?
NO! Conservatism
(loss contingencies would be under liabilities AND it DOES go through the income statement and effect retained earnings)
What is the accounting equation?
Assets=Liabilities+ Equity
Which financial statement lists the type of cash flow (example operational vs investing)?
Statement of cash flow (this financial statement lists the types of cash flow, the net change in cash and the ending number of cash for a certain time frame)
Miranda's Bookstore purchases $8,000 worth of equip to fill the bookshop. Please account for that properly on the FSET.
Bonus question 100 point: what type of cash flow is this?
- 8000 cash
+ 8000 non-cash assets (inventory)
This is an example of investing cash flow
Where would you put the following transactions in the financial statements (what broad financial statements and what sub group)
Ex: Balance Sheet, accounts payable
1. Rent expense
2. Operating Cash Flow
3. Sales
1. Income Statement, expenses
2. Statement of Cash flow, cash
3. Income Statement, revenue
Calculate the net book value of the truck purchased in 2 years given the following (using the straight line method):
Original price 40,000, salvage value, $20,000, estimated useful life of 10 years
40000-20000/10= 2000
2000 (depreciation each year) X 2 = 4000
40000-4000= $36,000
furthermore, what is the equation for retained earnings?
Answer: Retained Earnings= net income- dividends
two truths and a lie:
The income statement includes:
-Wage Expense
-Cash
- Cost of goods sold
Truths: Wage expense, COGS
Lie: Cash (this is found on balance sheet and statement of cash flow only)
Miranda sells $150 worth of books, please account for this on the FSET
later that day, it is found that a delivery that had $1000 worth of books in it was left outside and they are all damaged and cannot be sold. The increase in inventory was already noted last month, please adjust this loss accordingly on the FSET
Part A:
+ 150 cash (operating)
- 150 non cash assets (inventory)
+ 150 revenue (sales)
+ 150 to net income
+150 to earned capital
Part B:
- 1000 from non cash assets (inventory)
+ 1000 expenses (loss expense)
- 1000 from net income
- 1000 from earned capital
(we can no longer sell these books, so we remove from inventory)
Calculate the accounts receivable for the following transactions to put on the balance sheet
1. Miranda's books sold 30,000 of books and bookmarks on credit to a cafe who is going to also sell books.
2. 15,000 was received from the cafe towards the credit in question #1
3. Miranda's books purchases a truck to help transport the books to the cafe for $40,000. Miranda gets a loan for the truck from the bank.
4. The cafe is a huge success and asks for $10,000 more supply and adds to the account.
total accounts receivable noted on balance sheet is 25,000
Bonus question to think about: would you note change on the income statement for 1-4 on the FSET? Which ones? Why?
Answer to bonus question: 1. yes note the sale, 2. no, exchange cash for non cash asset. 3. Yes, just under accounts payable (cash for liability) 4. Yes, note another sale
What is an example of an accrued expense?
a. prepaid rent
b. payment towards loan interest
c. wages from employees woorking that has not yet been paid
d. Paying multiple employees in the same month
Answer: C
An accrued expenses: "are costs a business incurs during a reporting period before it pays for them or receives an invoice "
What is an intangible asset, and what is goodwill?
Intangible assets are things such as brand value, trademarks and customer lists
Goodwill is the difference between what is paid and the tangible assets (takes into account intangible assets)
Two truths and a lie:
The statement of equity includes:
- Dividends
-Retained Earnings
- Long Term and Other Payables
Truth: Dividends and Retained Earnings
Lie: Payables (these and all liabilities are found on the balance sheet)
Statement of Equity shows contributed capital and retained earnings (so includes dividends and retained earnings but also stocks, and contributed capital)
Miranda sells $20,000 worth of books to a school district on an account. The books were originally purchased by Miranda's bookstore for $6000. Please account for this in the FSET.
Later, the school district pays $10,000 towards the account with Miranda's Bookstore. Please account for this as well on the FSET
+20,000 Non cash assets (accounts receivable)
-6000 Non cash assets (inventory)
+20,000 revenue (sales)
+6000 expenses (COGS)
+ 14,000 net income
+ 14,000 earned capital
(this is because the inventory was used, and the sale was made, so both need to be noted for on the income statement)
Part B:
+ 10000 Cash (operating)
- 10000 non cash assets (accounts receivable)
(please note, Miranda's bookstore is still owed 10000 from the school, so eventually we will account for this again)
*DO NOT PUT THIS THROUGH THE IS TWICE!!!! only when the sale was made or when the assets is used.
What would you include as part of the Equity Section of the Balance Sheet out of the following transactions? Then add up the total equity.
1. Miranda's books contributes $50,000 of cash and $10,000 of equipment for the start of Miranda's books
2. Miranda's books takes out a credit to fund the addition of the building in the amount of $100,000
3. Miranda's books pays dividends in the amount of $500
4. The total sales of Miranda's books for the month was $50,000 and the total expenses for the month was $10,000
1. + 50000 (cash) and + 10000 (equipment) = +60,000 to contributed capital
2. No change to equity as this an accounts payable and would be under non cash assets and liabilities
3. Retained earnings would decrease by 500
4. Retained earning would increase by 50000 and decrease by 10000 with a net change from this transaction of +40000
total noted under equity on the balance sheet would be $99,500
Where do you account for unearned revenue?
Increasing cash and increasing liability
(only goes through income statement once revenue is earned)
DOUBLE JEOPARDY
Do either/any the Loss and Gains worksheet, Fabio's Bikes or Eric's Electronics worksheet and check your answers. Write out the ones you get wrong and an explanation of why.
If you did this, you win at life, collect your points!
(gold stars if you did this with a group and discussed!!)
Put the following items into the appropriate financial documents (Note, some maybe be categorized in more than one):
- Unearned Revenue
- Goodwill
- Retained Earnings
- Equipment
- Accounts Receivable
- Common Stock
- Operating Cash
Unearned Revenue- Balance Sheet
Goodwill- Balance Sheet
Retained Earnings- Balance Sheet, Statement of Equity
Equipment- Balance Sheet
Accounts Receivable- Balance Sheet
Common Stock- Balance Sheet, Statement of Equity
Operating Cash- Statement of Cash Flow
Account for the following on an FSET (might be helpful to have pen and paper handy)
We are looking at transactions in the month of August
1. Miranda hires 5 booksellers to start in September. They are going to be paid $16 per hour and work 20 hours a week each.
2. Miranda pays its current employees $5,000 in hourly wages
3. Miranda buys $8,000 worth of book sleeves and bookmarks from a company on credit. Miranda gives the company a $4,000 down payment.
1. NO ENTRY- nothing actually happened yet (no work was done in August, and no one was paid.
2.
- 5000 from cash (operating)
+ 5000 expense (wage expense)
- 5000 net income
- 5000 earned capital
3.
- 4000 cash (operating)
+ 8000 non cash assets (inventory)
+ 4000 liabilities (account payable)
(this does not go through the IS as the inventory is not sold yet!)
Which of the following are not listed in the post closing trial balances (because they are closed out and represented in retained earnings)
- Inventory
- Wage Expense
- Book sales
- Prepaid rent
- Impairment loss on inventory of books
- Accounts payable
- Contributed capital
(Inventory, Prepaid Rent, Accounts Payable and Contributed Capital are all still noted under assets, and liabilities where the expenses and sales are zeroed out and represented on the balance sheet and the statement of equity as "retained earnings"
What is the goal of financial accounting, how to does it differ from managerial accounting, and does financial accounting account for taxes?
Bonus 100 point question, is a 10-k quarterly or annualy?
Goal is to provide financial information about a company that is useful and current for potential investors and lenders.
Managerial accounting focuses on internal accounting (budgeting, etc.)
NO taxes are not included in financial accounting, there is a third type, tax accounting.
Bonus Question: a 10-K is an annual report