ACC1000 Chapter Notes - Chapter 2: Current Liability, Balance Sheet, Accounting Equation

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6 Jun 2018

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Chapter 2 The Accounting equation

[Assets]

A common list of assets for a trading business might include the following items:

• Bank – cash kept in the business’s bank account

• Debtors – the amount owned to the business by customers who were sold goods on credit

• Stock – goods purchased and held for resale to customers

• Fixtures and fittings – items used in the business premises, such as sheving or window coverings

• Vehicles – cars, trucks and vans used for business purposes

• Premises – the building(s) from which the business activity is conducted

[Liabilities]

A common list of liabilities might include:

• Bank overdraft – an amount owed to the bank when a business spends more than is currently in tis

bank account

• Creditors – the amount owed by the business for goods it has bought on credit

• Loan – an a mount that is borrowed from a bank or other financial institution and must be repaid at

some time in the future

• Mortgage – a specific type of loan that is secured against property

[Owner’s equity]

Owner’s equity is the residual interest in the assets of the entity after the deduction of its liabilities.

[The accounting equation]

Liabilities are what the business owes to external parties, while owner’s equity is what the business owes to

the owner(entity principle). Both types of claim must be funded from the business’s assets

Equities:

claims on the assets of the business, consisting of both liabilities and owner’s equity

Accounting equation:

the rule that states that assets must always equal liabilities plus owner’s equity (Total

assets must equal to total equities!!!)

[Balance Sheet]

*Because businesses engage in a number of transactions everyday, and every transactions changes the

balance sheet, the balance sheet is only accurate on the day it is prepared, thus, the title states “as at” a

particular date.

Any profit earned by the business would be also listed under the heading of “owner’s equity” as “net profit”

Balance Sheet:

an accounting report that details the business’s assets, liabilities and owner’s equity at a

particular point in time.

Classification:

grouping together items that have some common characteristic. (improve undstandability)

[Current versus non-current assets/liabilities]

Current Asset:

A resource controlled by the entity as a result of past events, from which a future economic

benefit is expected to flow to the entity within the next 12 months

Non-current asset:

A resource controlled by the entity as a result of past events, from which a future

economic benefits is expected to flow to the entity for more than the next 12 months

[Current versus non-current liabilities]

Current liability:

A present obligation of the entity arising from past events, the settlement of which is

expected to result in an outflow of resources embodying economic benefits in the next 12 months

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Document Summary

A common list of assets for a trading business might include the following items: Bank cash kept in the business"s bank account. Debtors the amount owned to the business by customers who were sold goods on credit. Stock goods purchased and held for resale to customers. Fixtures and fittings items used in the business premises, such as sheving or window coverings. Vehicles cars, trucks and vans used for business purposes. Premises the building(s) from which the business activity is conducted. Bank overdraft an amount owed to the bank when a business spends more than is currently in tis bank account. Creditors the amount owed by the business for goods it has bought on credit. Loan an a mount that is borrowed from a bank or other financial institution and must be repaid at some time in the future: mortgage a specific type of loan that is secured against property.

Related Questions

1. Creditors' claims on the assets of a company are called: (Points : 2)

2. The primary objective of financial accounting is: (Points : 2)

To serve the decision-making needs of internal users

To provide financial statements to help external users analyze and interpret an organization's activities

To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services

To know what, when and how muchto produce

3. Assets created by selling goods and services on credit are: (Points : 2)

4. The debt ratio is used: (Points : 2)

To measure the amount of equity relative to the expenses

To reflect the risk associated with a company's debts

Only by banks when a business applies for a loan

To determine how much debt a firm should pay off

5. Net Income: (Points : 2)

Decreases equity

Represents the amount of assets owners put into a business

Equals assets minus liabilities

Is the excess of revenues over expenses

Represents the owners' claims against assets

6. Internal users of accounting information include: (Points : 2)

Shareholders

Customers

Creditors

Government regulators

Line Supervisor

7. Risk is: (Points : 2)

Net income divided by average total assets

The reward for investment

The uncertainty about the expected return that will be earned from an investment

Unrelated to expected return

8. An example of an operating activity is: (Points : 2)

Paying wages

Purchasing office equipment

Borrowing money from a bank

Selling stock

Paying off a loan

9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)

Business entity assumption

Monetary unit assumption

Value assumption

Cost assumption

Time period assumption

10. Distributions of assets by a business to its stockholders are called: (Points : 2)

Financing Decisions

Acme Inc. is a wholesaler and distributor of electricalcomponents. The most recent draft financial statements of thebusiness revealed the following:

Income statement for the year (in millions)

Sales revenue 14.2

Opening inventories 3.2

Purchases 8.4

Goods Available for Sale 11.6

Closing inventories (3.8)

Cost of Goods Sold (7.8)

Gross profit 6.4

Administration expenses (3.0)

Distribution expenses (2.1)

Operating profit 1.3

Finance costs (0.8)

Profit before taxation 0.5

Tax (0.2)

Profit for the period 0.3

Statement of financial position as at the end of theyear (in millions)

ASSETS

Non-current assets

Property, plant and equipment

Land and buildings 4.0

Equipment 1.1

Motor vehicles 4

5.5

Current assets

Inventories 3.8

Trade receivables 2.9

Cash at bank .2

6.9

Total assets 12.4

EQUITY AND LIABILITIES

Equity

Share capital 2.1

Retained earnings 1.6

3.7

Non-current liabilities

Loan notes (secured on property) 3.9

Current liabilities

Trade payables 2.2

Short-term borrowings 2.6

4.8

Total equity and liabilities 12.4

1. Land and buildings are shown at their current market value.Equipment and motor vehicles are shown at their carrying amount(that is, cost less accumulated depreciation).

2. No dividends have been paid to ordinary shareholders for thepast three years.

In recent months, suppliers (trade payables) have been pressingfor payment. The chief executive has therefore decided to reducetheir level to an average of 40 days outstanding. To achieve this,she has decided to approach the bank with a view to increasing theoverdraft (the short-term borrowings comprise only a bankoverdraft). The business is currently paying 10 per cent a yearinterest on the overdraft.

Required:

(i) Comment on the liquidity position of the business.

(Ii) Calculate the amount of finance required to reduce tradepayables, from the level shown on the statement of financialposition, to an average of 40 days outstanding.

(iii) State, with reasons, how you consider the bank would reactto the proposal to grant an additional overdraft facility.

(iv) Identify four sources of finance (internal or external, butexcluding a bank overdraft) that may be suitable to finance thereduction in trade payables, and state, with reasons, which ofthese you consider the most appropriate.

burgundyelk45

The realizationprinciple indicates that revenue usually should be recorded inthe accounting records:

Question 1 options:

A)	when cash is collected from customers

B)	when goods are sold or services are rendered to customers

C)	at the end of the accounting period

D)	only when the revenue can be matched by an equal dollar amountof expenses

E)	both (b) and (d) are correct

Which of the following account(s) would be part ofworking capital?

Question 2 options:

A)	accounts payable

land

supplies

D)	retained earnings

E)	cost of goods sold

F)	two of the above accounts are part of working capital

G)	three of the above accounts are part of working capital

H)	four of the above accounts are part of working capital

I)	all of the above accounts are part of working capital

On May 17, Buckeye Corporation performed $800 ofservices for ABC Company, a customer. ABC paid for one-half ofthe
bill on May 17 and agreed to pay the remainder within 30 days. OnJune 9, ABC paid the remaining amount owed. Which
of the following journal entries would ABC Company make onJune 9?

Question 3 options:

A)	debit accounts receivable $400 and credit cash $400

B)	debit cash $400 and credit service revenue $400

C)	debit accounts payable $400 and credit service revenue$400

D)	debit cash $400 and credit accounts payable $400

E)	debit cash $400 and credit accounts receivable $400

F)	debit accounts payable $400 and credit cash $400

The following information is available for XYZ Company: January 1, 2003 December 31, 2003Assets $500,000 $700,000Liabilities $300,000 $400,000 Equity $200,000 $300,000
XYZ Company reported a net income of $50,000 during 2003.
XYZ Company's return on equity (ROE) for 2003 was equal to:

Fletcher, Inc. reported an ending notes payablebalance of $57,000. An examination of the notes payablet-account
revealed debits of $25,000 and credits of $39,000 during the year.The beginning notes payable balance for Fletcher,
Inc. was equal to:

Question 5 options:

A)	$71,000 credit

B)	$71,000 debit

C)	$43,000 debit

D)	$43,000 credit

E)	none of the above are correct

Indicate the effect each of the following transactions has onthe accounting equation (i.e., assets, liabilities, and equity).Enter the number corresponding to your answer in the box provided.Answer choices may be used once, more than once, or not atall.

Question 6 options:

	ABC Company performed $2,000 of delivery servicesfor a customer who agreed to pay next month
	ABC Company paid $2,000 cash to the bank; $1,800of this amount was the repayment of a bank loan and the other $200paid was interest
	ABC Company made the adjusting entry to accrueincome taxes owed but not yet paid
	ABC Company purchased equipment for $3,000cash

1.	assets increase; liabilities increase; equitydecrease
2.	assets decrease; liabilities decrease; equity noeffect
3.	assets increase; liabilities no effect; equityincrease
4.	assets no effect; liabilities no effect; equity noeffect
5.	assets no effect; liabilities increase; equitydecrease
6.	assets increase; liabilities increase; equityincrease
7.	assets increase; liabilities increase; equity noeffect
8.	assets no effect; liabilities decrease; equityincrease
9.	assets decrease; liabilities no effect; equitydecrease
10.	assets decrease; liabilities decrease; equitydecrease

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ACC1000 Chapter Notes - Chapter 2: Current Liability, Balance Sheet, Accounting Equation

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