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Financial Accounting

In: Business and Management

Submitted By berk
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1. Describe the differences between financial accounting and managerial accounting. Financial Accounting Provides information to people who are outside of the company, such as shareholders. Financial reporting must be prepared by law. Scope is the entire organization. Prepared by using for 6 months periods or fiscally historical data. Not confidential. Managerial Accounting Provides information to people who are inside of the company, such as top management.

No governmental regulations. Product or cost centric. Prepared by future looking forecasts.

Confidential.

Can be used to make decision on investing or Used for decision making process of not investing the company. managers. Financial Report Parts: 1) Letter by top Management, 2) Financial Statements (Balance Sheet, Income Statement, Statement of Retained Earnings, Statement of Cash Flows and Footnotes) signed by CFO and CIO, 3) Auditors Report (prepared by Dependent and Independent Auditors) 4) Additional Information (Such as Partner Profiles and Company Data Sheets) Reports may include: Sales Forecasting Reports, Budget Analysis, Feasibility Studies, Consolidation Reports.

2. Given below are the daily balances in the accounts of Travel Tips, Inc. Assuming only one transaction occurred each day, explain the nature of each transaction from June 1 to June 10.

June 1 June 2 June 3 June 4

Bought $700 of inventory on account. Received $600 payment from the customers. Paid $800 (and account payable decreased). Owners invested $1,100 (and capital increased).

June 5 June 6 June 7 June 8 June 9 June 10

Bought equipment with cost of $2,600 by paying $1,300 cash and $1,300 on credit. Inventory decreased, probably company returned inventory that costs $500 and supplier deducted company's account payable by $500. Sold equipment costs $1800 and received 500$ cash. Rest of the sale, 1300$, is on account. Owners withdraw $2,100 cash from the company. Bought $800 of inventory and paid $800. Owners invested $1700 of equipment to the company.

3. “The accrual basis of accounting provides a better measure of economic performance than the cash basis.” True or false? Explain your answer. Accrual basis of accounting measures the performance of the company by the activities that causes value and future value, or liability and future liability to the company. Every effort, economic event matches with revenue or liability (matching principle). In cash basis accounting, cash flows are not enough to measure company’s performance. For example, a company made a big amount of sale and created revenue to the company 2 months ago in 2012 November. Does that mean on 1 January 2013, just because of the company received the payment from that sale, the company’s 2013 sale performance is better? Ofcourse not. 4. Describe how the matching concept is necessary to produce an income statement. It does not matter if the customer has actually paid the cash or not, if sale is done it is a revenue and should be recorded. It does not matter if the salaries are paid in cash or not, if it workers worked for a period, even if the payment day is not today, it is a liability and should be recorded. Matching principle says that appropriate costs should be matched to the sales for the period represented in the income statement. So, income statement can show as the value of the business. 5. Why doesn’t the cash basis of accounting require adjusting accounts with accruals? In cash basis accounting, revenue is created when cash is received, and expense is created when money is expensed. In accrual basis accounting, revenue and costs are recognized in the same accounting period (according to matching principle), even if the cash flow will be done in other period. So for example even if the next pay date is on 5 of Jan 2013, we need to make adjustment on 31 of Dec 2012 for accrued part of the salaries (for 25 days).

6. Journalizing amounts for unearned revenue can cause ethical dilemmas for many accountants since estimates are often used when exact completion amounts are uncertain. Discuss potential problems that this may cause for financial statement users. How does the concept of conservatism affect an accountant's recognition of revenue of a particular project? How would underestimating revenue of a project affect net income?

By the matching principle any effort may cause a future advantage to the company should be recorded. Future advantage can not be determined unless the cash flow is done. So it should be an estimation. Managers can make a firm’s accounting conservative (overestimate expenses, underestimate revenues and net assets) or aggressive (underestimate expenses, overestimate revenues and net assets). For example, if an item in inventory has a cost of $20, but it can be replaced for $15, the conservatism principle directs the account to report the item in inventory at $15 and to immediately report the loss of $5. Reporting the lower asset amount on the balance sheet will cause the lower net income amount on the income statement. Since we know that increase in revenue causes increase in asset, underestimating a revenue will also cause lower net income on the income statement.

7. a. Prepare a general ledger using T­accounts. Enter the opening balances in the ledger accounts as of July 1. Provision should be made for the following additional accounts: Dividends, Dry Cleaning Revenue, Repair Expense, Salaries Expense, and Utilities Expense. b. Journalize the transactions. c. Post to ledger accounts. d. Prepare a trial balance on July 31, 2013.

July 8

Cash Accounts Receivable (Collected cash from the customer)

$4,936 $4,936 $2,100 $2,100 $4,925 $4,925 $10,750 $10,750 $554 $554 $5600 $5600

July 9

Salaries Expense Cash (Paid salaries in cash) Cash Dry Cleaning Revenue (Performed service for a client, and received cash)

July 11

July 14

Accounts Payable Cash (Paid to creditors) Supplies Accounts Payable (Bought supply on credit) Accounts Receivable Dry Cleaning Revenue (Billed customers for $5,600)

July 17

July 22

July 30

Salaries Expense $3,114 Utilities Expense $1,584 Repair Expense $492 Cash (Spent cash for salaries, utilities and repair expense) Dividend Cash (Paid dividend) $500

$5,190

July 31

$500

CASH Dr Cr

Beg. Bal. $12,532 2.100 (July 9) (July 8) 4.936 $10,750 (July 14) (July 11) 4,925 $5,190 (July 30) $500 (July 31) (End. Bal.) 22,393 ­18,540 = 3,853

ACCOUNTS RECEIVABLE Beg. Bal. $10,536 4.936 (July 8) (July 22) 5,600 (End. Bal.) 16,136 ­ 4,936 = 11,200 ACCOUNTS PAYABLE Dr Cr

(July 14) 10,750 $15,878 Beg. Bal. $554 (July 17) 16,432 ­ 10,750 = 5,682 (End. Bal.) SALARIES EXPENSE Dr (July 9) $2.100 (July 30) $3,114 (End. Bal.) $5,214 DRY CLEANING REVENUE Dr Cr $4,925 (July 11) $5,600 (July 22) $10,525 (End. Bal.) SUPPLIES Dr Beg. Bal $4,844 (July 17) $554 (End. Bal.) $5,398 Cr Cr

UTILITIES EXPENSE Dr (July 30) $1,584 (End. Bal.) $1,584 REPAIR EXPENSE Dr (July 30) $492 (End. Bal.) $492 DIVIDEND Dr (July 31) $500 (End. Bal.) $500 Cr Cr Cr

TRIAL BALANCE OF BELLINGHAM DRY CLEANERS as of July 31, 2013

Account Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Revenue Common Stock Dry Cleaning Revenue Salaries Expense Utilities Expense

Dr 3,853 11,200 5,398 25,950

Cr

5,682 1,730 36,254 10,525 5,214 1,584

Repair Expense Dividend

492 500 54,191 54,191

8. Ceyda Kahveci started her own business consulting firm, Astro Consulting, on May 1, 2013. a. Prepare the adjusting entries for the month of May. b. Post the adjusting entries to the ledger accounts. Enter the totals from the trial balance as beginning account balances. Use T accounts. c. Prepare an adjusted trial balance at May 31, 2013. d. Prepare the income statement and a retained earnings statement for May and a classified balance sheet at May 31.

1

Supplies Expense Supplies (Recognized use of $500 of supplies) Travel Expense Travel Payable (Recorded accrued but unpaid travel expense) Insurance Expense Prepaid Insurance (Recorded use of insurance expense for 1 month) Unearned Service Revenue Service Revenue (Delivered service that costs 2000)

500 500 200 200 150 150 2000 2000

2

3

4

5

Salaries Expense 600 Salaries Payable (Recorded accrued but unpaid salaries for 3 days x 2 workers x 100 TL per day) Depreciation Expense ­ Office Furniture Accumulated Depreciation ­ Office Furniture (Recorded depreciation expense for 1 month) Accounts Receivable Service Revenue (Recorded receivables for billed customers in May) 200

600

6

200 2000 2000

7

SUPPLIES EXPENSE Dr (1) 500 TL Adj. Bal. 500 SUPPLIES Dr Cr Cr

(Beg. Bal.) 1,500 500 TL (1) (Adj. Bal.) 1000

TRAVEL EXPENSE Dr (2) 200 TL (Adj. Bal.) 200 TRAVEL PAYABLE Dr Cr 200 TL (2) 200 (Adj. Bal.) INSURANCE EXPENSE Dr (3) 150 TL (Adj. Bal.) 150 PREPAID INSURANCE Dr Cr Cr Cr

(Beg. Bal.) 3600 150 TL (3) (Adj. Bal.) 3450

UNEARNED SERVICE REVENUE Dr Cr

(4) 2000 3000 TL (Beg. Bal.) 1000 (Adj. Bal.) SERVICE REVENUE Dr Cr 6000 TL (Beg. Bal.) 2000 TL (4) 2000 (7) 10000 (Adj. Bal.) SALARIES EXPENSE Dr (Beg. Bal.) 3000 TL (5) 600 (Adj. Bal.) 3600 SALARIES PAYABLE Dr Cr 600 TL (5) 600 (Adj. Bal.) DEPRECIATION EXPENSE Dr (6) 200 TL (Adj. Bal.) 200 Cr Cr

ACCUMULATED DEPRECIATION Dr Cr 200 TL (6) 200 (Adj. Bal.) ACCOUNTS RECEIVABLE Dr (Beg. Bal.) 4000 TL (7) 2000 (End. Bal.) 2000 ASTRO CONSULTING TRIAL BALANCE as of May 31, 2013
Account Dr Cr Dr (Adjusted) Cr (Adjusted)

Cr

Cash Accounts Receivable Prepaid Insurance Supplies Office Furniture Accounts Payable Unearned Service Revenue Common Stock Service Revenue Salaries Expense Rent Expense Supplies Expense Travel Expense Travel Payable

6500 4000 3600 1500 12000 3500 3000 19100 6000 3000 1000

6500 2000 3450 1000 12000 3500 1000 19100 10000 3600 1000 500 200 200

Insurance Expense Salaries Payable Depreciation Expense Accumulated Depreciation 31,600 31,600

150 600 200 200 30,600 34,600

30,600 and 34,600 are not equal. I could not find the mistake and make it equal, but I know that they should be equal.

ASTRO CONSULTING TRIAL BALANCE as of May 31, 2013 ASSETS Current Assets Cash Accounts Receivable Prepaid Insurance Supplies 6500 2000 3450 1000 12,950 Fixed Assets Office Furniture Accumulated Depreciation 12000 (200) 10,000 TOTAL ASSETS 22,950 TOTAL LIAB & O/E 24,400 Owners Equity Common Stock 19,100 LIABILITIES & OWNERS EQUITY Current Liabilities Accounts Payable Unearned Service Revenue Travel Payable Salaries Payable 3500 1000 200 600 5,300

22,950 and 24,400 are not equal. I could not find the mistake and make it equal, but I know that they should be equal.

ASTRO CONSULTING STATEMENT of INCOME for May 31, 2013

Revenues Service Revenue Total Revenues Expenses Salaries Expense Rent Expense Supplies Expense Travel Expense Insurance Expense Depreciation Expense Total Expenses EBIT Interest Expense EBT (Net Income) 3600 1000 500 200 150 200 5,650 4,350 (10,000 ­ 5,650 = 4,350 ) 0 4,350 10000 10000

ASTRO CONSULTING STATEMENT of RETAINED EARNINGS for May 31, 2013 Beginning Balance Net Income Dividend Ending Retained Earnings 0 4,350 TL 0 4,350 TL

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