SECTION D CHAPTER 9- ACCOUNTING

D. 1. all of the assets of a business are owned by one of the two groups: (1) the owner or owners of the business (owner’s equity); or (2) the individuals, or businesses, to whom the business owes money (liabilities) 2. Step 1: a three-line heading, centered at the top of the page, that identifies who, what, and when, where “who” refers to the name of the business, “what” identifies what type of financial statement it is, and “when” includes the date on which it was prepared

D. Step 2: assets are listed in order according to how easily they can be converted into cash, with the most liquid asset at the top Step 3: liabilities are listed in order by maturity date, which is the date by which they must be repaid to creditors, with the liability that has the earliest due date at the top

D. Step 4: the balance sheet equation, Assets – Liabilities = Owner’s Equity, is used to calculate the owner’s equity Step 5: use the information from steps 1 through 4 to create the balance sheet

D. 3. -Balance sheet: summarizes the information about assets, liabilities, and owner’s equity One day Snapshot that shows how a business is doing on a given day

D. 3. -Income statement: Summarizes information about revenues and expenses A period of time Shows how much money a business made or lost over a period of time (net income or net loss)

D. 3. -Statement of cash flow: Reports on the flow of cash into and out of the business A period of time Helps business operators estimate the amount of cash that will flow in and out during a given time period

D. 4. the balance sheet is considered to be a formal document because it is used for decision making and is shared with owners both inside and outside of the business. These conventions include never using abbreviations; never having corrections or changes appear on the final version; lining up figures and dollar signs, and underlining when totalling a column, and double underlining a final total

D. 5. By examining a business’s balance sheet, creditors can see how much of a claim other creditors have on the business and how solvent that business is at a particular point in time. This lets them know if they should lend money or extend credit to a business. The Canadian government is interested in the business’s ability to pay taxes. Potential investors are concerned about solvency so they will now lose their investment. A balance sheet lets the owners know exactly what their claim is on the assets as compared to the creditor’s claim. Examining several balance sheets over time will let the owners know how their financial position is changing

D. 6. Revenue is the money, or the promise of money, from the sales of goods or services 7. Expenses are expenditures that help a business generate revenue; they include things like salaries, advertising, maintenance, and utilities. If total revenue exceeds expenses, there is a profit, which is referred to as net income. If total expenses exceed total revenue, a net loss occurs

D. 8. step 1: a three-lining, centered at the top of the page, that identifies who, what, and when, where “who” identifies the name of the business, “what” identifies what type of financial statement it is, and “when” outlines a given time period, such as a week, a month, quarter, or year step 2: all sources of revenue should be listed

D. Step 3: there is no particular order for listing expenses, but larger ones tend to get listed first Step 4: use the information from step 2 and 3 and the equation for calculating profit (Total revenue – Total expenses) to calculate the net income or net loss

D. 9. According to the matching principle, accurate profit reporting can be done only if all the costs of doing business in a particular period are matched with the revenue generated during that period. If this principle is not followed, accounting figures could be distorted. Any accounting information that is not accurate will influence decisions that accountants and owners make

D. 10. The income statements for retail businesses are somewhat different because the cost of inventory needs to be taken into account. Also, the costs of goods and services used are treated differently, because this kind of business buys and sells finished products to consumers

D Revenue – Cost of Goods sold = Gross profit 2. Gross Profit – Expenses = Net Income 3. Beginning inventory + Inventory purchased – ending inventory = cost of goods sold -Gross profit: the money left over after deducting the cost of goods sold from the revenue, but before deducting the business expenses that helped generate the revenue

D. 11. Costs of goods sold: the cost of inventory that was sold to generate business revenue for a specific period of time. It is calculated by starting with the opening inventory figure (goods and services purchased in previous months but not yet used), adding the new purchases made during the period, and subtracting the inventory

D. 12. good inventory control saves the company and increases customer satisfaction. As inventory sells, businesses deduct it from the quantity they have on hand to provide accurate, up-to-date total

D. 13. An income statement has to be prepared before a balance sheet because the net profit or net income has to be calculated and then transferred to the balance sheet as part of the owner’s equity. After the financial statements are complete, the owner knows how much to claim as profit for the year. To help identify the owner’s account, the word “capital” becomes part of the account name

D. 14. Cash may move into a business through sales, interest received from investments, accounts receivable that will be collected, the sale of capital equipment, and new loans. Expenditures may include rent, payroll, accounts payable, interest payable, and insurance