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.

Accounts AccountsJohn Grant

Cash +receivable+Equipment= payable+Capital

1.+ 22,000+ 22,000

2.+ 2,200+ 2,200

3.+ 9,200+ 9,200

4.+ 210 – 210

5.– 430 + 430

6. – 7,400– 7,400

7.+ 650+ 650

8. – 1,900– 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.

  1. collected cash on account

Cash received from customer $210

  1. earned revenue and received cash

Cash Sales for $650

  1. earned revenue on account

Sales on account for $2200

  1. owner investment

Owner started business for $22000

  1. owner withdrawal

Owner withdrew cash from business for personal use.

  1. paid cash for expenses

Paid for rent expense for $1900

  1. 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