Practical Experience Welcome to the Fundamental Accounting Concepts Practical Experience. The exercises in this practical experience will challenge you to use the concepts that you learned in the Fundamental Accounting Concepts course. Accounting is an exact science, and therefore, you must plan on how to approach a task and follow the plan. Be sure to read each task thoroughly and carefully record the required detail. After completing the practical experience, you can check your answers in the solutions section located in the back of this manual. Part 1 Assigning Accounts The table below contains typical general ledger account names and your task is to assign each name into their appropriate broad class category, e.g. 1000 Current Assets; 1600 Fixed Assets and so on, as shown on the Chart of Accounts worksheet on the following page. Hint: Write the broad class category number in the page margin along side of each general ledger account name in this table and when satisfied that you have them correctly, assign the account name to a numbered account in the worksheet. Accounts to be assigned Bank & Interest Charges Cost of Sales Automobile Expenses Office Supplies Accumulated Depreciation -Automobile Equipment Accounting Fees Pension Expense Current Earnings Accumulated Depreciation - Equipment Accounts Payable Employment Insurance Payable Furniture & Fixtures Fixed Assets - Cost Advertising Total Accumulated Depreciation Bank Account Automobile Employment Insurance Expense Retained Earnings Pension Payable Inventory Wages & Bonuses Sales Income Depreciation Expense Income Tax Payable Telephone Expense Accumulated Depreciation - Furniture & Fixtures Sales Tax Payable Accounts Receivable Bank Loan Payable Travel Expense FAC2EPE/0906 Page 1
Chart of Accounts Worksheet Insert Accounts into the appropriate category. ASSETS 1000 CURRENT ASSETS 1100 1200 1300 1500 TOTAL CURRENT ASSETS 1600 FIXED ASSETS 1620 1640 1660 1700 1720 1740 1760 1780 LIABILITIES 2000 CURRENT LIABILITIES 2100 2200 2310 2320 2350 2400 2700 TOTAL CURRENT LIABILITIES EQUITY 3000 EARNINGS 3550 3600 3700 TOTAL EARNINGS 1800 TOTAL FIXED ASSETS Page 2 FAC2EPE/0906
Practical Experience REVENUE 4000 REVENUE 4100 4400 TOTAL REVENUE EXPENSE 5000 ADMINISTRATION 5020 5040 5060 5080 5100 5120 5140 5160 5180 5200 5220 5240 5400 TOTAL ADMINISTRATION FAC2EPE/0906 Page 3
Part 2 Analyzing and Posting Transactions to the General Journal In this exercise you will analyze a series of source document transactions and enter them into the general journal blank pages provided, using the Chart of Accounts, provided for you on pages 6 and 7, to assign the appropriate general ledger account numbers. Scenario: The company name is; Bathtubs Galore Inc., This company only has one product line being bathtubs. The following transactions are in chronological order and the general journal entry starting number is J77. (Hint: write the journal number along the left side of the transaction. Use the right margin to perform the T account analyasis.) Note: not all of the general ledger accounts in the chart of accounts will be put to use. In addition, for simplicity, sales taxes have been omitted from transactions. Source document transactions: Purchase : Various office supplies from Wards Stationery Inc. Date: January 01, 2004 Cost: $ 212.40 Type of purchase: On account Source document: Invoice # 2232 Loan: Loan to the business by principal of Bathtubs Galore Date: January 01, 2004 Amount: $ 10,000.00 Type of loan: 5 year monthly installments Source document: Loan contract #10102 Purchase : 24 bathtubs from Krane Corp of America Date: January 02, 2004 Cost: $ 4,800.00 Type of purchase: Credit Source document: Invoice # 334575 Sale : 3 bathtubs, $ 310.00 each to The Plumbing Works COGS: $ 600.00 Date: January 03, 2004 Payment method: On account Source document: Invoice # SB 7112 Hint: COGS Cost of Goods Sold Purchase : Used deliver van from Auto Auctions Inc. Date: January 11, 2004 Cost: $22,000.00 Type of purchase: Credit Source document: Invoice F22798 Page 4 FAC2EPE/0906
Purchase : Various office supplies from Wards Stationery Inc. Date: January 14, 2004 Cost: $ 33.00 Type of purchase: Cash Source document: Check # 4001 Purchase : Welding equipment from Solder Plus Inc. Date: January 15, 2004 Cost: $ 3,250.00 Type of purchase: Cash Source document: Check # 4002 Purchase : Auto repairs from Southbend Motors Date: January 22, 2004 Cost: $ 427.60 Type of purchase: Cash Source document: Check # 4003 Sale : 1 standard bathtub, $ 310.00 to Mr. Stork COGS: $ 200.00 Date: January 23, 2004 Payment method: Cash Source document: Deposit slip Payment : You receive a check from The Plumbing Works paying their Jan 02/04 purchase in full Date: January 31, 2004 Payment method: Check Source document: Invoice # 7112 and deposit slip Payment: First monthly installment on loan Date: January 31, 2004 Amount: $ 189.37 principal and interest Interest: $22.71 Source document: Ck. 4004 Hint: apply the difference as principal to Loan Payable account Practical Experience FAC2EPE/0906 Page 5
Bathtubs Galore Inc. Chart of Accounts ASSETS 1000 CURRENT ASSETS 1100 Accounts Receivable 1200 Bank Account 1300 Inventory 1500 TOTAL CURRENT ASSETS 1600 FIXED ASSETS 1620 Automobile 1640 Equipment 1700 Furniture and Fixtures 1740 Fixed Assets Cost 1800 TOTAL FIXED ASSETS LIABILITIES 2000 CURRENT LIABILITIES 2100 Accounts Payable 2200 Loan Payable to Principal 2300 Sales Tax Payable 2700 TOTAL CURRENT LIABILITIES EQUITY 3000 EARNINGS 3500 Current Year Earnings 3600 Prior Years Retained Earnings 3700 TOTAL EARNINGS Page 6 FAC2EPE/0906
Practical Experience REVENUE 4000 REVENUE 4100 Income on Product Sales 4400 TOTAL REVENUE EXPENSE 5000 OPERATIONS 5020 Advertising 5040 Automobile expense 5060 Accounting Fees 5080 Loan Interest Charges 5140 Cost of Goods Sold 5160 Travel Expense 5180 Office Supplies 5220 Telephone expense 5240 Wages and Bonuses 5400 TOTAL OPERATIONS FAC2EPE/0906 Page 7
Date Journal Number Account Number Journal Description Page 8 FAC2PE/0806
Practical Experience Date Journal Number Account Number Journal Description FAC2EPE/0906 Page 9
Part 3 Posting from the General Journal to the A completed set of general journal transactions follows. In this exercise you are required to post these transactions to the blank general ledger account pages provided immediately following these transactions. In addition, Once the postings are complete, each account must be totaled and a final balance of all accounts must be done and proven to be in balance. (Hint: Check off each amount as you post it to the general ledger to avoid missing or duplicating an entry.) Journal Date Journal Account Description Number Number 01/01/03 J1 Bank Deposit 1100 Bank Account 100,000.00 3201 Partner A Investment Capital 50,000.00 3202 Partner B Investment Capital 50,000.00 Owner Investment in Company 01/03/03 J2 22545, Office Home Place Inc. 1650 Furniture & Fixtures 2,500.00 2300 Sales Tax 1 175.00 2100 Accounts Payable 2,675.00 Purchase of Office Furniture and Equipment 01/11/03 J3 23994, Office Home Place Inc. 1700 Equipment 6,500.00 2300 Sales Tax 1 455.00 2100 Accounts Payable 6,955.00 Purchase of Computer and Server 01/12/03 J4 Ch#001, Office Mart 5240 Office Supplies 420.00 2300 Sales Tax 1 29.40 1100 Bank Account 449.40 Purchase of Office Supplies 01/15/03 J5 F2270, Furniture Palace 1650 Furniture & Fixtures 5,700.00 2300 Sales Tax 1 399.00 2100 Accounts Payable 6,099.00 Purchase of Furniture & Fixtures on Account 01/15/03 J6 Ch#002, Computer How-To 5340 Subscriptions 34.50 2300 Sales Tax 1 2.12 1100 Bank Account 36.62 Magazine Subscription 01/15/03 J7 Ch#003, Satellite Plus 5250 Computer Expense 60.00 2300 Sales Tax 1 4.20 1100 Bank Account 64.20 Service Repair Page 10 FAC2PE/0806
Journal Practical Experience Date Journal Account Description Number Number 01/22/03 J8 1377, Auditorium Dividers Inc. 1400 Inventory 12,225.00 2300 Sales Tax 1 855.75 2100 Accounts Payable 13,080.75 Purchased inventory on account 01/22/03 J9 H4667, Andy s Hardware Supplies 1400 Inventory 488.00 2300 Sales Tax 1 34.16 2100 Accounts Payable 522.16 Purchased inventory on account 01/14/03 J10 Ch#004, Angela 5360 Wages 816.00 5140 EI Expense 28.56 5260 Pension Expense 14.28 1100 Bank Account 642.60 2440 Income Tax Payable 138.72 2460 EI Payable 48.96 2480 Pension Payable 28.56 Angela pay period ending 01/14/03 01/28/03 J11 Ch#007, Angela 5360 Wages 816.00 5140 EI Expense 28.56 5260 Pension Expense 14.28 1100 Bank Account 642.60 2440 Income Tax Payable 138.72 2460 EI Payable 48.96 2480 Pension Payable 28.56 Angela pay period ending 01/28/03 01/31/03 J12 Ch#008, Partner A 3201 Partner A Investment Capital 1,000.00 1100 Bank Account 1,000.00 Draw on Investment 01/31/03 J13 Ch#009, Partner B 3202 Partner B Investment Capital 1,000.00 1100 Bank Account 1,000.00 Draw on Investment 1/31/03 J14 Ch#010, Leasehold Management Inc. 5050 Rent Expense 1,200.00 1100 Bank Account 1,200.00 February rent 1/31/03 J15 Bank Statement 5070 Banking Charges 18.00 1100 Bank Account 18.00 January Bank Fees FAC2EPE/0906 Page 11
account pages Account Bank Account Account #1100 Account -Inventory Account # 1400 Account Furniture & Fixtures Account # 1650 Page 12 FAC2PE/0806
Practical Experience Account - Equipment Account # 1700 Account Accounts Payable Account # 2100 Account Sales Tax 1 Account # 2300 FAC2EPE/0906 Page 13
Account Income Tax Payable Account # 2440 Account Employment Insurance Payable Account # 2460 Account Pensions Payable Account # 2480 Account Partner A Investment Capital Account # 3201 Page 14 FAC2PE/0806
Practical Experience Account Partner B Investment Capital Account # 3202 Account - Rent Account # 5050 Account Bank Charges Account # 5070 Account Employment Insurance Expense Account # 5140 FAC2EPE/0906 Page 15
Account Office Supplies Account # 5240 Account Computer Expense Account # 5250 Account Pension Expense Account # 5260 Account - Subscriptions Account # 5340 Page 16 FAC2PE/0806
Practical Experience Account - Wages Account # 5360 Account - Account # FAC2EPE/0906 Page 17
Part 4 Creating a Trial Balance For this exercise we have provided a set of completed general ledger account pages. The balances shown have been carried forward from the year ending Dec. 31, 2003. Your task is to create a trial balance as of that date. A blank trial balance sheet has been provided for you immediately following these general ledger account pages. Account Bank Account 1 Account # 1101 Jan 04 01 Bal. Fwd. 12,537.40 Account Bank Account 2 Account # 1102 Jan 04 01 Bal. Fwd. 4,365.19 Account Accounts Receivable Account # 1200 Jan 04 01 Bal. Fwd. 19,210.34 Page 18 FAC2PE/0806
Practical Experience Account Widget Inventory Account # 1400 Jan 04 01 Bal. Fwd. 53,627.05 Account Equipment Account # 1620 Jan 04 01 Bal. Fwd. 44,322.50 Account Furniture & Fixtures Account # 1640 Jan 04 01 Bal. Fwd. 8,873.21 Account Total Accumulated Depreciation Account # 1660 Jan 04 01 Bal. Fwd. 18,445.00 FAC2EPE/0906 Page 19
Account Accounts Payable Account # 2100 Jan 04 01 Bal. Fwd. 7,321.21 Account Employment Insurance Payable Account # 2200 Jan 04 01 Bal. Fwd. 47.95 Account Income Tax Payable Account # 2220 Jan 04 01 Bal. Fwd. 175.50 Account Sales Tax Payable Account # 2300 Jan 04 01 Bal. Fwd. 1,372.55 Page 20 FAC2PE/0806
Practical Experience Account Preferred Shares Account # 3510 Jan 04 01 Bal. Fwd. 100.00 Account Common Shares Account # 3520 Jan 04 01 Bal. Fwd. 200.00 Account Retained Earnings Account # 3600 Jan 04 01 Bal. Fwd. 20,263.52 Account Widget Sales Account # 4200 Jan 04 01 Bal. Fwd. 225,470.12 FAC2EPE/0906 Page 21
Account Cost of Widget Sales Account # 5020 Jan 04 01 Bal. Fwd. 94,675.21 Account Salaries Account # 5220 Jan 04 01 Bal. Fwd. 21,113.62 Account Employment Insurance Expense Account # 5240 Jan 04 01 Bal. Fwd. 97.32 Account Office Expenses Account # 5250 Jan 04 01 Bal. Fwd. 1,222.60 Page 22 FAC2PE/0806
Practical Experience Account Gas and Hydro Account # 5260 Jan 04 01 Bal. Fwd. 3,925.70 Account Telephone Account # 5270 Jan 04 01 Bal. Fwd. 1,229.90 Account Legal and Audit Account # 5280 Jan 04 01 Bal. Fwd. 3,425.60 Account Depletion Expense Account # 5290 Jan 04 01 Bal. Fwd. 4,770.21 FAC2EPE/0906 Page 23
Trial Balance Account Descriptions Debit Amount Credit Amount Page 24 FAC2PE/0806
Practical Experience Part 5 Creating an Income Statement and a Balance Sheet We have provided a completed Trial Balance along with an Income Statement blank and a Balance Sheet blank and your task is to create those two financial statements from the figures in this trial balance. Note: (Drop the cents (units and tens) when creating the financial statements. Also write in the lines, on the financial statements where appropriate, immediately below the table grid line to make it obvious where your penciled line was inserted.) Student Name Company Trial Balance As of January 31, 2003 Account Descriptions Debit Amount Credit Amount Bank 27,500.00 Accounts Receivable 17,800.00 Inventory 100,600.00 Machinery and Equipment 126,600.00 Furniture and Fixtures 12,400.00 Computer Equipment 4,200.00 Accumulated Dep n.- Mach. & Equip. 46,600.00 Accumulated Dep n.- Furniture & Fix t. 6,200.00 Accounts Payable 10,500.00 Employment Insurance Payable 600.00 Pension Payable 800.00 Income Tax Payable 800.00 Sales Tax Payable 3,900.00 Common Stock 200.00 Retained Earnings 77,200.00 Sales 341,000.00 Cost of Sales 110,300.00 Wages 23,000.00 Employment Insurance Expense 1,900.00 Pension Expense 2,500.00 Office Supplies 8,600.00 Travel & Entertainment 12,000.00 Utilities 9,600.00 Telephone 1,500.00 Legal & Accounting 7,700.00 Depreciation & Depletion Expense 21,600.00 Totals 487,800.00 487,800.00 FAC2EPE/0906 Page 25
Income Statement Page 26 FAC2PE/0806
Practical Experience Hint: Combine Accumulated Depreciation accounts for the Fixed Assets category. Also combine the 4 payroll deduction payable amounts and name combined total Federal & Other taxes. Balance Sheet FAC2EPE/0906 Page 27
Part 6 Analyzing the Financial Statements After completing the Trial Balance and Income Statement, the final step is to compute the financial ratios listed below using the appropriate dollar amounts from your completed income statement and balance sheet. In your answer, include (a.) the formula for each ratio expressed in words, (b.) the numbers used from the financial statements and (c.) the calculated amount of each ratio. 1. Current Ratio a.) b.) c.) 2. Quick Ratio (also known as Acid Test Ratio) a.) b.) c.) 3. Fixed Asset Turnover Ratio a.) b.) c.) 4. Gross Profit Ratio a.) b.) c.) 5. Net Profit Ratio a.) b.) c.) 6. Return on Assets Ratio a.) b.) c.) Page 28 FAC2PE/0806
Practical Experience 7. Return on Equity Ratio a.) b.) c.) FAC2EPE/0906 Page 29