Accounting 101 Help

[jimbo]

Larry started a business a year ago when the she put in $50,000 of her own money. Shortly after that, the business borrowed $10,000 on a longterm bank loan. By the end of the year, the balance sheet included the following:
                                                          $
Noncurrent assets (net of depreciation)    53 000
Inventories                             2 500
Trade payables                                  2 700
Cash at bank                                  5 100
Trade receivables                             700
Noncurrent liabilities (longterm loan)               10 000

During the year Larry drew out $15,000 for her own spending.p

a)   How much profit (or loss) did Larry business make during its first year?

b)   Which principle did you follow in deriving Larry’s profit?

c)   What is the point of preparing an income statement if the profit figure can be found in the way that you have just done?

d)       “Inflation is not really a problem in accounting. In the income statement and balance sheet all items are affected by inflation in the same way, so we are always comparing like with like. In any case with inflation running at about 2% a year, the effect is negligible.”

Hi Pecan et al is me again...any help is appreciated on any of them?  Thanks

[pecan]

1st: I is a engineer, not an accountant

2nd:  All the "Larry's" I know are "he's", not "she's" so I think that this example is flawed

3rd: I'll give it a shot anyway and the real accountants can tell me if i wrong


Here is the balance sheet at the of the period

Assets: $60,000

Liabilities: $10,000

Owner Equity: $50,000

i.e.  Assets = Liabilities + Owner Equity


So let's examine the balance sheet at the end of the period with the following assumption

- assume no change in owner equity
- the $15,000 that Larry withdrew was paid as a wage


Assets: $61,300   (this is the sum of these items: 53000+2500+5100+700)

Liabilities: 12,700 (this is the sum of these items: 2700+10,000)

Owner Equity: ??  (the owner equity will increase if the company makes a profit or will decrease if the company loses money)

Now we know that Assets (A) = Liabilities (L) + Owner Equity (OE)

Solving for Owner Equity:

OE = A-Liability = $48,600 at the end of the year compared to $50,000 at the beginning of the year

The difference in OE from the beginning of the year to the end of the year represents the profit or loss.

So the company lost money to the tune of $1,400.

a)   How much profit (or loss) did Larry business make during its first year?  $1,400 loss

b)   Which principle did you follow in deriving Larry’s profit? I looked at the change in owner equity position between the start and end of the accounting period.

c)   What is the point of preparing an income statement if the profit figure can be found in the way that you have just done?  The balance sheet shows the financial position of the company at a specific date.  It is a snap shot.  The income statement however, shows the revenues and expenses over a date range. The difference between these two immediately shows profit or loss.  You cannot tell profit or loss from a single balance sheet (as in this example.  we only knew the company made a loss by comparing two balance sheets).

d)     I am assuming part d was asking to comment on the effect of inflation.  Inflation is an example of a "price-level change".  Basic accounting principles do not take this into account.  Inflation could cause identical assets purchased at different time to have different values on the balance sheet. To account for this, accountants use to use a concept of general price-level adjusted accounting.  This is beyond my knowledge but I think an example could be the use of a "price-index" to re-state dollar amounts to comparable amounts.


Well I hope this is right and if not, I apologize in advance.

[rotatopoti3]

Whey sah...I wish I could be posting questions like that and getting eloquent answers like that too...

Like iz really Friday....If allyuh helpin den do this one for me too nah

A company had the following balance sheet at the beginning of 2006:

Assets                                   Liabilities and Equity   
Bank                         30 000        Accounts payable           25 000
Accounts receivable  20 000      Loans                           95 000
Inventory                 90 000       Paid in capital                   50 000
Equipment                  70 000       Retained earnings           40 000
Total assets    2 100 000       Total Liabilities & Equity    2 100 000


Condensed transactions during 2006:

Accounts receivable settled    170 000
Credit sales          190 000
Equipment purchase, cash      20 000
Credit purchase, inventory    100 000
Salaries paid, cash         50 000
Rent paid, cash               30 000
Cash sales                  60 000
Office expenses paid, cash    15 000
Accounts payable settled      95 000
Dividends paid to shareholders 10 000
Depreciation               15 000
Loan repayments               12 000
Interest expense                5 000
Ending inventory is valued at      70 000

a)   Construct budgeted cash flow for the year ending 31st December 2006.
b)   Construct income statement for the year ending 31st December 2006.
c)   Construct a balance sheet for the year ending 31st December 2006.
d)   How would these budgets be affected if salaries paid included advances of 10 000?

[jimbo]

Hi Pecan thanks so much for your explanations...I am going to follow this with a fine teeth comb...

[pecan]

Whey sah...I wish I could be posting questions like that and getting eloquent answers like that too...

Like iz really Friday....If allyuh helpin den do this one for me too nah

A company had the following balance sheet at the beginning of 2006:

Assets                                   Liabilities and Equity   
Bank                         30 000        Accounts payable           25 000
Accounts receivable  20 000      Loans                           95 000
Inventory                 90 000       Paid in capital                   50 000
Equipment                  70 000       Retained earnings           40 000
Total assets    2 100 000       Total Liabilities & Equity    2 100 000


Condensed transactions during 2006:

Accounts receivable settled    170 000
Credit sales          190 000
Equipment purchase, cash      20 000
Credit purchase, inventory    100 000
Salaries paid, cash         50 000
Rent paid, cash               30 000
Cash sales                  60 000
Office expenses paid, cash    15 000
Accounts payable settled      95 000
Dividends paid to shareholders 10 000
Depreciation               15 000
Loan repayments               12 000
Interest expense                5 000
Ending inventory is valued at      70 000

a)   Construct budgeted cash flow for the year ending 31st December 2006.
b)   Construct income statement for the year ending 31st December 2006.
c)   Construct a balance sheet for the year ending 31st December 2006.
d)   How would these budgets be affected if salaries paid included advances of 10 000?

yours more complicated 

[rotatopoti3]

How so? 

a      
Cash Flow for year ending 31st Dec 2006      
Inflow      
Credit Sales   190,000   
Total   190,000   
Outflow      
Credit Purchase, Inventory   100,000   
Salaries Paid,cash   50,000   
Rent paid,cash   30,000   
Loan Repayments   12,000   
Total   192,000   
Ending Cash   2,000   


b      
Income Statement for year ending 31st Dec 2006      
Credit Sales   190,000   
Cash Sales   60,000   
Total   250,000   
Expenses      
Office Expenses paid,cash   15,000   
Depeciation   15,000   
Interest Expense   5,000   
Ending inventory   70,000   
Total   105,000   
Profit   145,000   


C      
Balance Sheet for year ending 31st Dec 2006      
Assets         Liabilities and Owners Equity   
Cash   2,000      Accounts Payable    95,000
Equipment purchase, cash   20,000         
Inventory   90,000      Profit   145,000

[pecan]

How so? 

a      
Cash Flow for year ending 31st Dec 2006      
Inflow      
Credit Sales   190,000   should this be in here?  It is not a cash sale
Total   190,000   
Outflow      
Credit Purchase, Inventory   100,000    this is a credit purchase - no cash flow here?
Salaries Paid,cash   50,000   
Rent paid,cash   30,000   
Loan Repayments   12,000   
Total   192,000   
Ending Cash   2,000   


Here is what I see as cash transactions


Opening Cash   30000
- Equipment   -20000
+ Accounts Receivable settled:   170000  (I am assuming that this was a cash inflow)
- Salaries   -50000
- Rent   -30000
+ Cash Sales   60000
- Office Exp   -15000
- A/P settled   -95000
- Dividends   -10000
- Loan repayment   -12000
- Int exp   -5000
Closing Balance:   23000


b      
Income Statement for year ending 31st Dec 2006      
Credit Sales   190,000   
Cash Sales   60,000   
Total   250,000   
Expenses      
Office Expenses paid,cash   15,000   
Depeciation   15,000   
Interest Expense   5,000   
Ending inventory   70,000   
Total   105,000   
Profit   145,000   


C      
Balance Sheet for year ending 31st Dec 2006      
Assets         Liabilities and Owners Equity   
Cash   2,000      Accounts Payable    95,000
Equipment purchase, cash   20,000         
Inventory   90,000      Profit   145,000


Here is what I got

            Assets                                             Liabilities              Owner Equity      
               Cash    A/R    Inventory    Equipment      A/P           Loans   R/E      Paid in Capital   
1-Jan-06     30000   20000   90000   70000           25000   95000   40000   50000
31-Dec-06   23000   40000   70000   75000           30000   83000   45000   50000

[rotatopoti3]

Pecan...Rotato is in awe ....  rather speechless...I guess you have your private practice as well.... if not     You are amazing...thank u...


Im trying to follow the end of year 10000 advances...how did u calculate that? Can you shed some light there...at your convenience

           Assets                                             Liabilities              Owner Equity     
                      Cash    A/R    Inventory    Equipment      A/P     Loans   R/E      Paid in Capital   
1-Jan-06         30000   20000   90000      70000           25000   95000   40000   50000
31-Dec-06   23000   40000   70000      75000           30000   83000   45000   50000

[pecan]

Pecan...Rotato is in awe ....  rather speechless...I guess you have your private practice as well.... if not     You are amazing...thank u...


Im trying to follow the end of year 10000 advances...how did u calculate that? Can you shed some light there...at your convenience

           Assets                                             Liabilities              Owner Equity     
                      Cash    A/R    Inventory    Equipment      A/P     Loans   R/E      Paid in Capital   
1-Jan-06         30000   20000   90000      70000           25000   95000   40000   50000
31-Dec-06   23000   40000   70000      75000           30000   83000   45000   50000

I can email you an excel file with a list of all the transactions and entries to both side of the balance sheet.

pm me a email address

dont ask why I created an excel file ... i have issues

[weary1969]

Yrs ago might have been able 2 help.