Solved Which of the following financial statements

Tyler_Foster April 29, 2022 0 Comments

which of the following financial statements illustrates the accounting equation?

Bankrupt, its assets are sold and these funds are used to settle its debts first. Only after debts are settled are shareholders entitled to any of the company’s assets to attempt to recover their investment. Decrease on the debit side, increase on the credit side and are liabilities.

The main limitation of the accounting equation is that it doesn’t provide an analysis of how well the business is operating. Changes in the accounting equation get recorded through double-entry bookkeeping. To understand the accounting equation better, let’s take a few practical transactions and analyze their effect. Creating the balance sheet statement is one of the last steps in the accounting cycle, and it is done after double-entry bookkeeping. Creditors include people or entities the business owes money to, such as employees, government agencies, banks, and more.

The Basic Accounting Equation

In our examples below, we show how a given transaction affects the accounting equation. We also show how the same transaction affects specific accounts by providing the journal entry that is used to record the transaction in the company’s general ledger. The balance sheet then displays the ending balance in each major account from period to period. Net income from the income statement flows into the balance sheet as a change inretained earnings.

  • The interest payable would be routed through the P&L account, where it is recorded as an expense.
  • Does the stockholders’ equity total mean the business is worth $720,000?
  • On the liabilities and equity side of the equation, there is also an increase of $20,000, keeping the equation balanced.
  • Journal entries often use the language of debits and credits .
  • All transactions are recorded by the accounting system and used to produce an income statement, balance sheet and cash flow statement.
  • The owner’s equity is the value of assets that belong to the owner.
  • They are developed through recording the transactions in the accounting journal and the general ledger.

Then cash inflows and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash. Often, the first place an investor or analyst will look is the income statement. Theincome statementshows the performance of the business throughout each period, displayingsales revenueat the very top. The statement then deducts the cost of goods sold to findgross profit. They are probable future sacrifices of economic benefits that arise as the result of past transactions or events. Common examples of liabilities are notes payable , accounts payable , and taxes payable.

Producing the Financial Statements

Because you make purchases with debt or capital, both sides of the equation must equal. A company has $4,500 in net sales, $3,200 in gross profit, $1,300 in ending inventory, and $1,800 in beginning inventory. 21) Corporation’s outstanding stock is 75 shares of $60-par, 8% non-cumulative preferred stock and 2,000 shares of $10-par common stock. 11) GAAP is the acronym for generally accepted ________ principles. 11) Which of the following is a disadvantage of the corporate form of business? A) Ease of raising capital B) Double taxation C) …

The underlying rationale behind the fundamental accounting equation is that of equilibrium. This means that every plus should have a corresponding minus, and every debit should have a corresponding credit. Assets entail probable future economic benefits to the owner. Let’s summarize the transactions and make sure the accounting equation has remained balanced. D. The owner of the company believes the most valuable asset for his company is the employees. Without the employees, the company would not be so successful.

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A. Debbie did not yet receive the shelving—it has only been ordered. As of now there is no new asset owned by the company. Since the shelving has not yet been delivered, Debbie does not owe any money to the other company.

Assets include cash and cash equivalentsor liquid assets, which may include Treasury bills and certificates of deposit. The company purchases land by paying half in cash and signing a note payable for the other half. The company’s liability account Accounts Payable increases. Harold Averkamp has worked as a university accounting instructor, what is the accounting equation accountant, and consultant for more than 25 years. He is the sole author of all the materials on E) Net income during 2020, assuming that as of December 31, 2020, assets were $960,000, liabilities were $156,000, and there were no additional investments or withdrawals. Business owners love Patriot’s accounting software.

Description of the auditors responsibilities for the audit of the financial statements

1.2 Questions 1) Amounts owed to the business’ owners as a result of an initial investment are called liabilities. 31) The ________ keeps a running balance of an individual account. A) general journal B) balance sheet C) general ledger D) posting referenc… 2.3 Questions 1) The general journal was developed to organize transactions by account. The auditor may be required to address other legal and regulatory requirements relating to other auditor’s responsibilities in the auditor’s report. Let us now discuss some sample transactions forming a part of the day-to-day business activities.

which of the following financial statements illustrates the accounting equation?

Utility payments are generated from bills for services that were used and paid for within the accounting period, thus recognized as an expense. The decrease to assets, specifically cash, affects the balance sheet and statement of cash flows. The decrease to equity as a result of the expense affects three statements. The income statement would see a change to expenses, changing net income . Net income is computed into retained earnings on the statement of retained earnings. This change to retained earnings is shown on the balance sheet under stockholder’s equity. Now, we can consider some of the transactions a business may encounter.

Example 1:

The business is organized as a sole proprietorship. Sole proprietorships are businesses owned and operated by one individual. Keep in mind that we are concerned about the records of Harry’s business; we are not interested in Harry’s personal affairs. The entity assumption indicates that accounting records are kept for business units distinct from their owners.

which of the following financial statements illustrates the accounting equation?

This allows its users to easily budget for their needs from one month to another. It also enables management to know the performance …

They are developed through recording the transactions in the accounting journal and the general ledger. The financial statements come together from those records and paint a picture of the financial health of a small business. The balance sheet is a financial statement which represents the accounting equation in a more detailed and expanded manner.

Equity typically refers to shareholders’ equity, which represents the residual value to shareholders after debts and liabilities have been settled. The global adherence to the double-entry accounting system makes the account keeping and tallying processes more standardized and more fool-proof. Debt is a liability, whether it is a long-term loan or a bill that is due to be paid. The major and often largest value asset of most companies be that company’s machinery, buildings, and property. These are fixed assets that are usually held for many years. Financing through debt shows as a liability, while financing through issuing equity shares appears in shareholders’ equity. Every transaction will affect two or more accounts.

The balancing entry is a reduction in the equity of the shareholders. It is, in fact, an expense and all expenses reduce retained earnings which is part of the shareholder’s equity. If a business buys raw materials and pays in cash, it will result in an increase in the company’s inventory while reducing cash capital . Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.

If your income equals or exceeds $75,000.00 you must complete the LONG FORM financial statement, unless otherwise ordered by the Court. The fundamental accounting equation involves playing around with the balance sheet.

The business’s balance sheet is at the end of the section. Uses the accounting equation to show the relationship between assets, liabilities, and equity. When you use the accounting equation, you can see if you use business funds for your assets or finance them through debt. The accounting equation is also called the balance sheet equation. The group auditor is responsible for the direction, supervision and performance of the group audit. The group auditor remains solely responsible for the audit opinion. As we previously mentioned, the accounting equation is the same for all businesses.

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