Recording transactions

1
Recording transactions

• Cash assets are reduced by 100, and wage expense
  of 100 is reflected in the income statement,
  which reduces income and retained earnings by
  that amount.
• All transactions incurred by the company during
  the accounting period are recorded similarly.

2
Adjusting Accounts
3
Accrual of Wages
4
Exercise The Ice Cream Store, Inc.

• The Ice Cream Store, Inc. incurred the following
  start-up costs
• The Ice Cream Store, Inc. was formed on October
  1, 20XX, with the investment of 90,000 in cash
  by the owners.
• Obtained a bank loan and received the proceeds of
  35,000 on October 2. The cash will be used for
  operations.
• Purchased equipment for 25,000 cash on October
  2.
• Acquired a building at a cost of 80,000. It was
  financed by making a 20,000 down-payment and
  obtaining a mortgage for the balance. The
  transaction occurred on October 2.
• On October 2, the President of the United States
  publicly declared that she will eat (and plug)
  our ice cream while entertaining guests in the
  White House.
• Prepare a transaction analysis of 1. 5. using
  the financial statement effects template

5
Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Income Statement Income Statement
Transaction Cash Asset Noncash Assets Liabi-lities Contrib. capital Retained Earnings Revenues Expenses
1. The Ice Cream Store, Inc. was formed on October 1, 20XX, with the investment of 90,000 by the owners. 90 90
2. Obtained a bank loan and received the proceeds of 35,000 on October 2. The cash will be used for operations. 35 35 N/P
3. Purchased equipment for 25,000 cash on October 2. -25 25 Equip
4. Acquired a building at a cost of 80,000. It was financed by making a 20,000 down-payment and obtaining a mortgage for the balance. The transaction occurred on October 2. -20 80 Bldg. 60 M/P
5. The President of the United States agreed to eat (and plug) our ice cream while entertaining guests in the White House on Oct. 2.
6
ASSETS  
Cash  80,000
Equipment  25,000
Building  80,000
   
Total Assets  185,000
   
LIABILITY AND STOCKHOLDERS' EQUITY   LIABILITY AND STOCKHOLDERS' EQUITY  
Liabilities  
Note Payable  35,000
Mortgage Payable  60,000
Total Liabilities  95,000
   
Stockholders Equity  
Capital Stock  90,000
Total Liabilities and  
Stockholders Equity  185,000
Ice Cream Shop Balance Sheet
7
Ice Cream Shop additional transactions

• On October 4, purchased merchandise inventory
  (i.e., ice cream) at a cost of 15,000 by paying
  5,000 cash and receiving short-term credit for
  the remainder from the supplier.
• Immediately returned some of the ice cream
  because some of the flavors delivered were not
  ordered. The cost of the inventory returned was
  3,000.
• Sales of ice cream for the month of October,
  20XX, totaled 8,000. All sales were for cash.
  The ice cream cost 3,500.
• For all of October, total employee wages and
  salaries earned/paid were 3,000.
• As of the end of October, one month's
  depreciation on the equipment and building was
  recognized -- 383 for the building and 167 for
  the equipment.
• 450 interest expense on the note and mortgage
  was due and paid on October 31. Assume that the
  principal amounts (35,000 60,000) of the note
  and mortgage remain unchanged.
• Prepare a transaction analysis of 6. -11. using
  the balance sheet/income statement template
  presented above

8
Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Income Statement Income Statement
Transaction Cash Asset Noncash Assets Liabi-lities Contrib. capital Retained Earnings Revenues Expenses
6. -5 15 Inv. 10 A/P
7. -3 Inv. -3 A/P
8. 8 -3.5 Inv. 4.5 8 Sales -3.5 COGS
9. -3 . -3 -3 Wage exp.
10. - .383 Bldg., net -.167 Equip., net -.550 -.550 Dep. exp.
11. -.450 -.450 -.450 Int. Exp.

Prepare the following financial statements
(ignore income taxes) (i) an updated Balance
Sheet as of October 31, 20XX and (ii) an Income
Statement for the month of October 20XX.
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Cash (80,000 -5,000 8,000 -3,000 -450)  79,550
Merchandise Inventory (0 15,000 -3,000 -3,500)  8,500
Equipment (25,000 )  25,000
Less Accumulated Depreciation  (383)
Building (80,000)  80,000
Less Accumulated Depreciation (167)
Total Assets  192,500

Accounts Payable (0 10,000 3,000)  7,000
Note Payable (35,000 principal is unchanged)  35,000
Mortgage Payable (60,000 principal is unchanged)  60,000
   102,000
Stockholders' Equity  
Capital Stock  90,000
Retained Earnings  500
   90,500
Total Liabilities and Stockholders' Equity  192,500
10
   
REVENUES
Sales of Ice Cream  8,000
Cost of Sales  3,500
GROSS PROFIT 4,500
Payroll Expense  3,000
Depreciation Expense 550
INCOME FROM OPERATIONS 950
Interest Expense 450
NET INCOME 500
   
Note Assume no income taxes.  
11
Preparing the Financial Statements
12
Balance Sheet and Income Statement
13
Statement of Stockholders Equity
14
Additional Sources of Information

• Form 10-K
• Item 1, Business Item 1A. Risk Factors
• Item 2, Properties
• Item 3, Legal Proceedings
• Item 4, Submission of Matters to a Vote of
  Security Holders
• Item 5, Market for Registrants Common Equity and
  Related Stockholder Matters
• Item 6, Selected Financial Data
• Item 7, Managements Discussion and Analysis of
  Financial Condition and Results of Operations
• Item 7A, Quantitative and Qualitative Disclosures
  About Market Risk
• Item 8, Financial Statements and Supplementary
  Data
• Item 9, Changes in and Disagreements With
  Accountants on Accounting and Financial
  Disclosure
• Item 9A, Controls and Procedures.

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Additional Sources of Information

• Form 8-K
• Entry into or termination of a material
  definitive agreement (including petition for
  bankruptcy)
• Exit from a line of business or impairment of
  assets
• Change in the companys certified public
  accounting firm
• Change in control of the company
• Departure of the companys executive officers
• Changes in the companys articles of
  incorporation or bylaws

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Credit and Data Services

• Credit Analysis
• Standard Poors (StandardAndPoors.com)
• Moodys Investors Service (Moodys.com)
• Fitch Ratings (FitchRatings.com)
• Data Services
• Thomson Corporation (Thomson.com)
• First Call - summary of analysts earnings
  forecasts
• Compustat database - individual data items for
  all publicly traded companies or for any
  specified subset of companies.