6. Scenario
Terry Maness publishes a travel magazine. In need of cash, the business asks Metro Bank for a
loan. The bank requires borrowers to submit financial statements. With little knowledge of
accounting, Terry Maness, the owner, does not know how to proceed.
Requirement
1. Explain how to prepare the balance sheet and income statement.
2. Which organization is the self – regulating body of accountants that defines pronouncements
that guide how the financial statements will be prepared?
3. Indicate why a lender would require this information.
4. What type of organization is Terry Maness?
Requirement 1
The balance sheet is prepared by summarizing the ______________________ of the entity at a
particular date.
c.
assets, liabilities, and owner’s equity
___________ is/are debts owed to creditors.
c.
Liabilities
______________ is/are the portion of the business assets owned outright by the owners.
d. Owner’s equity
The income statement is prepared by summarizing the ___________________________
h.
revenues and expenses
of a particular entity for a period such as a month or a year. Total ______________ equals net
income (or net loss).
j.
revenues minus total expenses
Requirement 2
The _________________________________ is the self – regulating body of accountants that
defines pronouncements that guide how the financial statements will be prepared.
c.Financial Accounting Standards Board
Requirement 3
Before lending money, the lender evaluates Maness’s ability to ______________________.
a. make the loan payments
Lenders will use the reported net income and other information in the financial statements to
_____________
a. calculate the loan payment
of the Maness travel magazine. Therefore, the bank requires the financial statements of Maness
travel magazine to _________________________.
c.Make a decision about lending the money to Maness.
Requirement 4
Terry Maness is organized as a ____________________.
c.sole proprietorship
7. Scenario
As the manager of an Aunty Pasta Restaurant, you must deal with a variety of business
transactions.
Requirement
Give an example of a transaction that has each of the following effects on the accounting
equation:
a. Increase one asset and decrease another asset.
b.Decrease an asset and decrease owner’s equity.
c.Decrease an asset and decrease liability.
d.Increase an asset and increase owner’s equity.
e. Increase an asset and increase a liability.
A. Increase one asset and decrease another asset. (Select three possible answers.)
______________________, ______________________, and ____________________
2. Collection of account receivable
7. Purchase of asset for cash
10. Sale of asset for cash
B. Decrease an asset and decrease owner’s equity. (Select two possible answers.)
______________________ and _____________________
3. Make a withdrawal
6. Pay an expense
C. Decrease an asset and decrease liability. (Select one possible answer.)
_________________________
5. Pay a liability
D. Increase an asset and increase owner’s equity. (Select two possible answers.)
_______________________ and _______________________
4. Owner investment
9. Revenue transaction
E. Increase an asset and increase a liability. (Select two possible answers.)
_____________________ and ________________________
1. Borrow money
8. Purchase of asset on account
8. Scenario
The analysis of the first eight transactions of Marlo Payroll Service follows. The owner made
only one investment to start the business and there were no owner withdrawals.
Cash
+ 22,000
1.
2.
3.
4.
5.
6.
7.
8.
Accounts
+ receivable
+Equipment
+ 2,200
+ 9,200
+ 210
– 430
– 7,400
+ 650
– 1,900
Accounts John Grant
payable +
Capital
+ 22,000
+ 2,200
+ 9,200
=
– 210
+ 430
– 7,400
+ 650
– 1,900
Requirement:
1. Describe each transaction.
2. If these transactions fully describe the operations of Marlo Payroll Service during the month,
what was the amount of net income or net loss?
Requirement 1
Select the appropriate description for each transaction. (1 – 8)
1.
cash purchase of equipment
Purchase equipment for $430 for cash.
2.
collected cash on account
Cash received from customer $210
3.
earned revenue and received cash
Cash Sales for $650
4.
5.
earned revenue on account
Sales on account for $2200
owner investment
Owner started business for $22000
6.
owner withdrawal
Owner withdrew cash from business for personal use.
7.
paid cash for expenses
Paid for rent expense for $1900
8.
paid on account
Paid cash for $7400 to supplier
9.
purchased equipment on account
Bought equipment on account for $9200
Requirement 2
Calculate the net income (or net loss).
(Use parentheses or a minus sign for net losses.)
Net income (loss) = $_950__________
9. Which sequence correctly summarizes the accounting process?
A.
Journalize transactions, post to the accounts, prepare a trial balance