Question 1: Define the three components of the Accounting Equation.
Question 2: If a business owns a piece of real estate worth $250,000, and they owe $180,000 on a loan for that real estate, what is owners’ equity in the property?
Answer to Question 1:
Answer to Question 2: $70,000
Question 1: Categorize the following accounts as to whether they’re Asset, Liability, of Owners’ Equity accounts.
Question 2: For each of the following assets or liabilities, state whether it is current or non-current:
Answer to Question 1:
Answer to Question 2:
Question 1: Given the following information, calculate ABC Corp’s Net Income:
Question 2: Using the above information, calculate ABC Corp’s Operating Income.
Question 3:Using the above information, calculate ABC Corp’s Gross Profit.
Answer to Question 1: $40,000 (Sales of $260,000 minus $220,000 of total expenses.)
Answer to Question 2: $90,000 (Operating Income is intended to represent income from typical business operations. As a result, expenses resulting from a fire would certainly not be included when calculating Operating Income.)
Answer to Question 3: $160,000 (Sales minus Cost of Goods Sold)
Question 1: Using the following information, calculate the ending balance in Retained Earnings:
Question 2: Calculate Net Income given the following information:
Question 3: Using the following information, calculate how much was paid out in dividends during the year:
Answer to Question 1: $11,000
Answer to Question 2: $22,000 (Remember, dividends are not an expense! They are a distribution of net income rather than a reduction of net income.)
Answer to Question 3: $25,000
Question 1: Calculate cash flow from operating activities using the following information:
Question 2: Categorize the following cash flows as to whether they are operating, investing, or financing activities:
Answer to Question 1: Net cash inflow of $4,000. (Remember not to include the $15,000 of credit sales when calculating cash flow.)
Answer to Question 2:
Questions 1-3: Use the following income statement and balance sheet to answer the following questions.
| Income Statement | ||
| Sales | 130,000 | |
| Cost of Goods Sold | 26,000 | |
| Profit Margin | 104,000 | |
| Salaries and Wages | 15,000 | |
| Rent Expense | 5,000 | |
| Licensing Expenses | 20,000 | |
| Advertising Expense | 4,000 | |
| Total Expenses | 44,000 | |
| Net Income | 60,000 | |
| Balance Sheet | ||
| Assets | ||
| Cash | 10,000 | |
| Inventory | 15,000 | |
| Property, Plant, and Equipment | 250,000 | |
| Accounts Receivable | 5,000 | |
| Total Assets | 280,000 | |
| Liabilities | ||
| Accounts Payable | 20,000 | |
| Notes Payable | 40,000 | |
| Total Liabilities | 60,000 | |
| Owners’ Equity | ||
| Common Stock | 120,000 | |
| Retained Earnings | 100,000 | |
| Total Owners’ Equity | 220,000 | |
Question 1: Calculate the company’s current ratio and quick ratio.
Question 2: Calculate the company’s return on assets and return on equity.
Question 3: Calculate the company’s debt ratio and debt to equity ratio.
Answer to Question 1: Current ratio = 1.5 (30,000 current assets ÷ 20,000 current liabilities). Quick ratio = 0.75 (15,000 non-inventory current assets ÷ 20,000 current liabilities).
Answer to Question 2: Return on assets = 21.4% (60,000 net income ÷ 280,000 total assets). Return on equity = 27.3% (60,000 net income ÷ 220,000 shareholders’ equity)
Answer to Question 3: Debt ratio = 21.4% (60,000 liabilities ÷ 280,000 assets). Debt to equity ratio = 27.3% (60,000 liabilities ÷ 220,000 shareholders’ equity).
Question 1: Who is required to follow GAAP?
Question 2: Who creates the rules for GAAP?
Question 3: What is the purpose of Generally Accepted Accounting Principles (GAAP)?
Answer to Question 1: Publicly-traded companies. (Governmental entities are required to follow GAAP as well, but the rules that make up GAAP for governmental entities are significantly different from the rules for publicly-traded companies.)
Answer to Question 2: The Financial Accounting Standards Board (FASB)
Answer to Question 3: To purpose of GAAP is to ensure that companies’ financial statements are prepared using a similar set of rules and assumptions. This helps to enable meaningful comparisons between the financial statements of multiple companies.
Questions 1-3: Show how the following transactions would affect the Accounting Equation
Question 1: James purchases a $5,000 piece of equipment.
Question 2: James writes his monthly check for rent: $3,000.
Question 3: James takes out a $25,000 loan with his bank.
Questions 4-6: Create journal entries to record the following transactions
Question 4: James purchases a $5,000 piece of equipment.
Question 5: James writes his monthly check for rent: $3,000.
Question 6: James takes out a $25,000 loan with his bank.
Answer to Question 1:
| Assets | = | Liabilities | + | Owners’ Equity |
| -5,000 | no change | no change | ||
| +5,000 |
Answer to Question 2:
| Assets | = | Liabilities | + | Owners’ Equity |
| -3,000 | -3,000 |
Answer to Question 3:
| Assets | = | Liabilities | + | Owners’ Equity |
| +25,000 | +25,000 |
Answer to Question 4:
| Dr. Equipment | 5,000 |
| Cr. Cash | 5,000 |
Answer to Question 5:
| Dr. Rent Expense | 3,000 |
| Cr. Cash | 3,000 |
Answer to Question 6:
| Dr. Cash | 25,000 |
| Cr. Note Payable | 25,000 |
Questions 1-5: Prepare journal entries to record each of the following events.
Question 1: Tom’s Tax Prep’s monthly rent is $3,500. At the end of February, they had not yet received their monthly rent invoice.
Question 2: In early March, Tom’s Tax Prep receives and pays their rent bill for February.
Question 3: Marla, a marketing consultant, performs services for a client. The agree-upon price was $10,000, due 30 days from the date the services were completed.
Question 4: ABC Hardware makes a sale (on credit) for $2,500 worth of lumber. The lumber originally cost them $1,300.
Question 5: Julie takes out a $10,000 loan for her business. Repayment is due in one year along with $1,200 interest.
Answer to Question 1:
| Dr. Rent Expense | 3,500 |
| Cr. Rent Payable | 3,500 |
Answer to Question 2:
| Dr. Rent Payable | 3,500 |
| Cr. Cash | 3,500 |
Answer to Question 3:
| Accounts Receivable | 10,000 |
| Sales | 10,000 |
Answer to Question 4:
| Accounts Receivable | 2,500 |
| Sales | 2,500 |
| Cost of Goods Sold | 1,300 |
| Inventory | 1,300 |
Answer to Question 5:
When the loan is taken out:
| Cash | 10,000 |
| Note Payable | 10,000 |
At the end of each month during the year:
| Interest Expense | 100 |
| Interest Payable | 100 |
When the loan is repaid:
| Note Payable | 10,000 |
| Interest Payable | 1,200 |
| Cash | 11,200 |
Prepare closing journal entries for Mario’s Mobile Products, which has the following end-of-year trial balance:
| Cash | 40,000 |
| Accounts Receivable | 8,000 |
| Property, Plant, and Equipment | 150,000 |
| Inventory | 30,000 |
| Accounts Payable | 15,000 |
| Wages Payable | 22,000 |
| Common Stock | 50,000 |
| Retained Earnings | 60,000 |
| Sales | 380,000 |
| Cost of Goods Sold | 120,000 |
| Rent Expense | 60,000 |
| Wages and Salary Expense | 110,000 |
| Advertising Expense | 9,000 |
| Sales | 380,000 |
| Income Summary | 380,000 |
| Income Summary | 120,000 |
| Cost of Goods Sold | 120,000 |
| Income Summary | 60,000 |
| Rent Expense | 60,000 |
| Income Summary | 110,000 |
| Wages and Salary Expense | 110,000 |
| Income Summary | 9,000 |
| Advertising Expense | 9,000 |
Alternatively, the above can be combined into one journal entry:
| Sales | 380,000 |
| Cost of Goods Sold | 120,000 |
| Rent Expense | 60,000 |
| Wages and Salary Expense | 110,000 |
| Advertising Expense | 9,000 |
| Income Summary | 81,000 |
In either case, the following closing journal entry is also required in order to close out the Income Summary account and transfer the balance — representing the business’s net income for the period — into Retained Earnings:
| Income Summary | 81,000 |
| Retained Earnings | 81,000 |
Question 1: Andy runs a real estate development firm. Five years ago, he purchased a piece of land for $250,000. This year, an appraiser tells Andy that the land is worth $300,000. At what value should Andy report the land on his balance sheet? Why?
Question 2: Andy is the sole owner of his firm. In June, he moves $30,000 from his business checking account to his personal checking account. If Andy wants his financial records to be in accordance with GAAP, should he record the transaction or not? Why?
Answer to Question 1: Andy should report the land at its original cost: $250,000. Under GAAP’s “Historical Cost” assumption, assets are reported at their historical cost rather than at their current market value. This is done in order to remove subjective asset valuations from the reporting process.
Answer to Question 2: Yes, in order to be in compliance with GAAP, Andy must record the transaction. GAAP’s “Entity Assumption” considers businesses to be separate entities from their owners. As such, transactions between a business and its owners must be recorded as if they were between the business and an entirely separate party.
Questions 1-6: Prepare journal entries to record each of the following events:
Question 1: Liliana spends $20,000 (cash) on a piece of equipment for use in her restaurant. She plans to use the straight-line method to depreciate the equipment over 5 years. She expects it to have no value at the end of the 5 years.
Question 2: After 4 years, Liliana sells the equipment for $4,000.
Question 3: Same as question 2, except she sells the equipment for $6,000.
Question 4: Same as question 2, except she sells the equipment for $2,000.
Question 5: Oscar is a self-employed electrician. He purchases a piece of equipment for $30,000 cash. He plans to use it for 10 years, at which point he plans to sell it for approximately $4,000.He elects to use the straight-line method of depreciation.
Question 6: Sandra runs a business making embroidered linens for wedding receptions. She purchases a new piece of equipment for $15,000 in credit. She plans to use the units of production method of depreciation. The equipment is expected to produce approximately 5,000 linens, at which point it will be valueless. During the first year after buying the equipment, Sandra uses it to produce 1,500 linens.
Answer to Question 1:
To record the purchase:
| Equipment | 20,000 |
| Cash | 20,000 |
To record depreciation every year:
| Depreciation Expense | 4,000 |
| Accumulated Depreciation | 4,000 |
Answer to Question 2:
| Cash | 4,000 |
| Accumulated Depreciation | 16,000 |
| Equipment | 20,000 |
Answer to Question 3:
| Cash | 6,000 |
| Accumulated Depreciation | 16,000 |
| Gain on Sale of Equipment | 2,000 |
| Equipment | 20,000 |
Answer to Question 4:
| Cash | 2,000 |
| Accumulated Depreciation | 16,000 |
| Loss on Sale of Equipment | 2,000 |
| Equipment | 20,000 |
Answer to Question 5:
To record the purchase:
| Equipment | 30,000 |
| Cash | 30,000 |
To record depreciation every year:
| Depreciation Expense | 2,600 |
| Accumulated Depreciation | 2,600 |
(Depreciable value is $26,000. If depreciated over 10 years, that’s $2,600 depreciation per year.)
Answer to Question 6:
To record the purchase:
| Equipment | 15,000 |
| Accounts Payable | 15,000 |
When the purchase is eventually paid for:
| Accounts Payable | 15,000 |
| Cash | 15,000 |
To record depreciation for the first year:
| Depreciation Expense | 4,500 |
| Accumulated Depreciation | 4,500 |
($15,000 depreciable value ÷ 5,000 units = $3 of depreciation per unit. 1,500 units produce x $3 per unit = $4,500 depreciation expense.)
Questions 1-2: Prepare journal entries to record each of the following events.
Question 1: Trent runs a business as an engineering consultant. He invents a new system for preparing bridges to deal with extreme weather conditions. He spends $28,000 securing a 14-year patent for his invention. He expects the system to be used for the next few decades at least.
Question 2: Tina runs a business creating medical supplies for surgeries. Her team develops a new tool for assisting in heart surgery. She spends $42,000 on getting it patented. She receives a 14-year patent, but she only expects the technology to be used for about 7 years before a newer technology comes along to replace it.
Answer to Question 1:
To record receiving the patent:
| Patents | 28,000 |
| Cash | 28,000 |
To record amortization expense each year:
| Amortization Expense | 2,000 |
| Accumulated Amortization | 2,000 |
Answer to Question 2:
To record receiving the patent:
| Patents | 42,000 |
| Cash | 42,000 |
To record amortization expense each year:
| Amortization Expense | 6,000 |
| Accumulated Amortization | 6,000 |
Question 1: Using the following information, calculate Cost of Goods Sold:
Question 2-4: Use the following information to answer questions 2-4.
Question 2: Calculate Cost of Goods Sold using First-In-First-Out (FIFO)
Question 3: Calculate Cost of Goods Sold using Last-In-First-Out (LIFO)
Question 4: Calculate Cost of Goods Sold using the Average Cost Method
Answer to Question 1: CoGS = $4,500
Answer to Question 2: CoGS = $2,800
The first thing to calculate is how many units were sold. In this case, 700 units must have been sold. Now we just have to figure out the cost for each unit of sold inventory.
Using FIFO, we assume that the first units purchased were the first units sold. Therefore, all 700 sold units must have been from the older ($4 per unit) inventory. 700 units x $4 per unit = $2,800
Answer to Question 3: CoGS =$3,400
Again, we know that 700 units were sold. Under LIFO, we assume that the most recently purchased units are sold first. Therefore, all 600 of the $5 units must have been sold. The remaining 100 sold units must have been from the older ($4/unit) inventory.
(600 units x $5 per unit) + (100 units x $4 per unit) = $3,400
Answer to Question 4: CoGS =$3,062.50
Using the Average Cost Method, we have to calculate the average cost per unit of inventory. We know that there were a total of 1,600 units available for sale and that–in total–they cost $7,000. That gives us an average cost per unit of $4.38 (or $4.375 to be precise).
To calculate CoGS, we multiply this average cost per unit by the number of units sold. 700 units x $4.375 per unit = $3,062.50
Accounting Made Simple: Accounting Explained in 100 Pages or Less
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