Recording transactionsRecording 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.

Adjusting AccountsAdjusting Accounts

Accrual of WagesAccrual of Wages

Exercise: The Ice Cream Exercise: The Ice Cream Store, Inc.Store, Inc.

The Ice Cream Store, Inc. incurred the following start-up The Ice Cream Store, Inc. incurred the following start-up costs:costs:

1.1. The Ice Cream Store, Inc. was formed on October 1, 20XX, The Ice Cream Store, Inc. was formed on October 1, 20XX, with the investment of $90,000 in cash by the owners. with the investment of $90,000 in cash by the owners.

2.2. Obtained a bank loan and received the proceeds of Obtained a bank loan and received the proceeds of $35,000 on October 2. The cash will be used for $35,000 on October 2. The cash will be used for operations. operations.

3.3. Purchased equipment for $25,000 cash on October 2. Purchased equipment for $25,000 cash on October 2. 4.4. Acquired a building at a cost of $80,000. It was financed Acquired a building at a cost of $80,000. It was financed

by making a $20,000 down-payment and obtaining a by making a $20,000 down-payment and obtaining a mortgage for the balance. The transaction occurred on mortgage for the balance. The transaction occurred on October 2. October 2.

5.5. On October 2, the President of the United States publicly On October 2, the President of the United States publicly declared that she will eat (and plug) declared that she will eat (and plug) ourour ice cream while ice cream while entertaining guests in the White House. entertaining guests in the White House.

Prepare a transaction analysis of 1. – 5. using the financial Prepare a transaction analysis of 1. – 5. using the financial statement effects template: statement effects template:

Balance Sheet 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+35N/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+80Bldg.

+60M/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.

ASSETS  

Cash  $80,000

Equipment  25,000

Building  80,000

   

Total Assets  $185,000

   

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 Ice Cream ShopShop

Balance Balance Sheet:Sheet:

Ice Cream Shop – Ice Cream Shop – additional transactionsadditional transactions

6.6. On October 4, purchased merchandise inventory (i.e., ice On October 4, purchased merchandise inventory (i.e., ice cream) at a cost of $15,000 by paying $5,000 cash and cream) at a cost of $15,000 by paying $5,000 cash and receiving short-term credit for the remainder from the supplier. receiving short-term credit for the remainder from the supplier.

7.7. Immediately returned some of the ice cream because some of Immediately returned some of the ice cream because some of the flavors delivered were not ordered. The cost of the the flavors delivered were not ordered. The cost of the inventory returned was $3,000.inventory returned was $3,000.

8.8. Sales of ice cream for the month of October, 20XX, totaled Sales of ice cream for the month of October, 20XX, totaled $8,000. All sales were for cash. The ice cream cost $3,500. $8,000. All sales were for cash. The ice cream cost $3,500.

9.9. For all of October, total employee wages and salaries For all of October, total employee wages and salaries earned/paid were $3,000.earned/paid were $3,000.

10.10. As of the end of October, one month's depreciation on the As of the end of October, one month's depreciation on the equipment and building was recognized -- $383 for the building equipment and building was recognized -- $383 for the building and $167 for the equipment.and $167 for the equipment.

11.11. $450 interest expense on the note and mortgage was due and $450 interest expense on the note and mortgage was due and paid on October 31. Assume that the principal amounts paid on October 31. Assume that the principal amounts ($35,000 + $60,000) of the note and mortgage remain ($35,000 + $60,000) of the note and mortgage remain unchanged.unchanged.

Prepare a transaction analysis of 6. -11. using the balance Prepare a transaction analysis of 6. -11. using the balance sheet/income statement template presented above: sheet/income statement template presented above:

Balance Sheet Income Statement

TransactionCash Asset

+ Noncash Assets =Liabi-lities

+Contrib. capital

+Retained Earnings

Revenues – Expenses

6.-5

+15 Inv.

+10A/P

7. -3 Inv.

-3A/P

8.+8

-3.5 Inv.

+4.5+8

Sales-3.5

COGS

9.-3 . -3

-3Wage exp.

10. - .383 Bldg., net

-.167 Equip., net

-.550

-.550Dep. exp.

11.-.450 -.450

-.450Int. 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.

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

   

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.  

Preparing Preparing the the

Financial Financial StatemenStatemen

tsts

Balance Sheet and Income Balance Sheet and Income StatementStatement

Statement of Stockholders’ Statement of Stockholders’ EquityEquity

Additional Sources of Additional Sources of InformationInformation

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 Registrant’s Common Equity and

Related Stockholder Matters; Item 6, Selected Financial Data; Item 7, Management’s 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.

Additional Sources of Additional Sources of InformationInformation

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 company’s certified public accounting firm

Change in control of the company Departure of the company’s executive officers Changes in the company’s articles of

incorporation or bylaws

Credit and Data ServicesCredit and Data Services Credit Analysis

Standard & Poor’s (StandardAndPoors.com)

Moody’s 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.