IES342 2/2005
Transaction Analysis and Preparation of Statements
Practice Problem Solution
(Horngren, Sundem, and Stratton (2002), Introduction to Management Accounting, Prentice Hall, ed 12)
16-A2 (pg 668)
1.
See the following page.
2.
NAGARAJAN COMPANY
Income Statement
For the Month Ended April 30, 20X1
Sales (revenue)
Deduct expenses:
Cost of goods sold
Wages, salaries and commissions
Rent, 2,000 + 9,000
Depreciation
Total expenses
Net income
$90,000
$37,000
40,000
11,000
1,000
89,000
$ 1,000
NAGARAJAN COMPANY
Balance Sheet
April 30, 20X1
Liabilities and
Stockholders' Equity
Assets
Cash
Accounts receivable
Merchandise
inventory 23,000
Prepaid rent 4,000
Equipment and
fixtures
35,000
Total assets
$ 20,000
50,000
$132,000
Liabilities:
Note payable
Accounts payable
Total liabilities
Stockholders' equity:
Paid-in capital
Retained income
Total stockholders' equity
Total equities
$ 24,000
7,000
$ 31,000
$100,000
1,000
101,000
$132,000
3.
Most businesses tend to have net losses during their infant months, so Nagarajan's ability to show
a net income for April is good. Indeed, the rate of return on beginning investment is $1,000 ÷ $100,000 =
1% per month, or 12% per year. Many points can be raised, including the problem of maintaining an
"optimum" cash balance so that creditors can be paid neither too quickly nor too slowly. See the next
solution also.
1
IES342 2/2005
NAGARAJAN COMPANY
Analysis of Transactions for April 20X1
(in thousands of dollars)
Description
1. Incorporation
2. Purchased
merchandise
Assets
=
Equities
MerPreEquipLiabilities
Stockholders' Equity
Accounts chandise paid
ment and = Note
Accounts Paid-in
Retained
Cash + Receivable +Inventory + Rent + Fixtures = Payable + Payable + Capital + Income
+100
=
-35
3. Purchased
merchandise
4a. Sales
b. Cost of inventory sold
5. Collections
6. Disbursements to
trade creditors
7. Purchased equipment
8. Prepaid rent
9. Rent expense
10. Wages, etc.
11. Depreciation
12. Rent expense
Balances, April 30, 20X1
+25
+15
+35
=
+25
=
-37
=
=
=
+65
-15
-18
+100
+25
+90(revenue)
-37(expense)
=
-12
-6
-9
-40
+36
+6
-1
-2
+20
+50
+23
+4
+35
________________________________________
132
-18
=
=
=
=
=
+24
=
=
- 2(expense)
+24
+7
+100
+1
__________________________
- 9(expense)
-40(expense)
- 1(expense)
132
2
IES342 2/2005
16-B1 Balance Sheet Equation (pg 669)
Computations are in millions of dollars.
A = 4,551.4 - (587.0 +2,114.3) = 1,850.1
B = 3,764.0 + 68.9 = 3,832.9
C = 2,114.3 – 68.9 – 0.0 = 2,045.4
D = 587.0 + 1,331.7 = 1,918.7
E = 2,832.8 + 1,918.7 + 2,045.4 = 6,796.9
16-B2 Analysis of Transactions, Preparation of Statements (pg 670)
2.
PACCAR
Statement of Earnings
For the Month Ended January 31
(in millions)
Sales
Deduct expenses:
Cost of goods sold
Selling and administrative expenses
Depreciation
Total expenses
Net earnings
$650
$400
190
20
610
$ 40
PACCAR
Balance Sheet
January 31
(in millions)
Liabilities and
Stockholders' Equity
Assets
Cash
Accounts receivable
Inventories
Prepaid expenses & other assets
Property, plant, and equipment
Total
$ 178
5,537
485
876
947
$8,023
Accounts payable
Other liabilities
Stockholders’ equity
$1,784
4,088
2,151
Total
$8,023
3
IES342 2/2005
PACCAR
Analysis of Transactions for January 2000
(in millions of dollars)
Assets
Transaction
Balances 1/1/00
=
Equities
Prepaid
Property, Exp. &
Liabilities
Stockholders' Equity
Accounts
Inven- Plant, &
Other =Accounts Other
Paid-in Capital &
Cash + Receivable + tories + Equip. + Assets = Payable + Liabilities Retained Earnings
+528
+5,337
+385
+ 967
+716 = +1,734
+4,088
+2,111
1a.
1b.
2.
3.
4.
+150
5.
6.
7.
8.
-450
-100
Balances, 1/31/00
+500
-400
+500
+300
-250
-300
+250
- 90
- 20
+178
+5,537
+485
+947
+876
________________________________________
+8,023
=
=
=
=
=
=
=
=
=
+650(increase revenue)
-400(increase expense)
+500
-450
-100(increase expense)
- 90(increase expense)
-20(increase
expense)
= +1,784
+4,088
+2,151
__________________________
+8,023
4
IES342 2/2005
16-34 Balance Sheet Effects (pg 675)
1.
The bank's assets (cash) and equities (deposits, a major liability) would each increase by
$1,000. Personal assets would change, but equities would not, assuming that the cash on hand
had already been recorded as, say, cash on hand (asset) and personal capital (equity). If the latter
recording had been made, the deposit would merely represent the transforming of one asset (cash
on hand) into another (cash in bank); no equities would be affected.
2.
The bank's total assets and equities would be unaffected. The only change would be in
the form of assets. Cash would decrease by $800,000, and notes receivable would increase by the
same amount.
3.
Personal cash (asset) would increase, and personal liabilities (note payable) would
increase.
5