Chapter Analyzing and Summarizing Business Transactions of a Service Entity Exercises Exercise a Received cash from a credit customer b Owner invested cash into business Cash was received as a result of revenue being earned c Purchased supplies on credit d Owner withdrew cash from business Paid cash for expense incurred e Earned revenue, cash to be received, at a later time f Made payment on an account payable g Purchased land for cash Exercise a P200,000 b P260,000 Exercise b c d e f g NC, NC, NC +, +, NC NC, NC, NC –, NC, – +, NC, + –, NC, – Exercise a b c d e f BS OE IS IS BS BS g h i j k IS OE BS OE BS Chapter Exercise Cash b Accounts Receivable Office Equipmen t + P10,000 P10,000 Accounts Payable P10,000 + P20,000 P30,000 + P20,000 P20,000 P30,000 P20,000 – P 5,000 P15,000 + P 1,000 P16,000 Balance – P10,000 P40,000 Balance P40,000 Balance P 5,000 – P 2,000 P 3,000 Balance P40,000 + P 2,000 P42,000 – P 5,000 P37,000 P 3,000 P30,000 Balance P37,000 P 3,000 P30,000 c + P 5,000 P 5,000 d e Balance f g H Phan, Capital P50,000 + P 5,000 P55,000 P55,000 P55,000 P55,000 – P 1,000 P54,000 Exercise Cash Accounts Receivable b Balance c Balance d Balance e Balance f Balance g Balance P120,000 +P P120,000 P – P 7,000 P113,000 P – P 8,000 P105,000 P + P 2,000 – P P107,000 P – P 1,500 P105,500 P Supplies + P 7,000 P 7,000 4,000 4,000 P 7,000 4,000 P 7,000 4,000 2,000 2,000 P 7,000 2,000 P 7,000 P 7,000 Accounts Payable + P 7,000 P 7,000 H Lee, Capital P120,000 + P 4,000 P 7,000 P124,000 – P 7,000 P124,000 – P 8,000 P116,000 P116,000 – P 1,500 P114,500 Exercise January 10 No recording need be made No business transaction yet February 15 Event should be recorded Transaction has take place with the exchange of values Analyzing and Summarizing Business Transactions of a Service Entity March Even should be recorded exchange of values Exercise Transaction has take place with the a b c d e f g h i j k l Liability Asset Asset Asset Liability Asset g h i j k l Credit Debit Debit Debit Credit Debit Liability Asset Expenses Revenue Expense Asset Exercise a b c d e f Credit Debit Debit Credit Debit Debit Exercise 10 September Accounts receivable Service revenue 19,000 19,000 September 16 Cash 9,000 Accounts receivable Exercise 11 a b c d e f g h (+) (+) (0) (–) (0) (–) (0) (+) 9,000 Chapter Exercise 12 e b d c a Exercise 13 a P432,000: Assets P1,116,000  liabilities P684,000 = owners’ equity P432,000 b P1,875,000: Liabilities P1,125,000 + owners’ equity P750,000 = assets P937,500 c P330,000: Assets P615,000  owners’ equity P285,000 = liabilities P330,000 Exercise 14 Transaction Assets a b c d e f g h i I NE* D D I I I NE* NE* *Could be I/D offsetting = Liabilities I NE D D NE I NE NE NE + Owners’ Equity NE NE NE NE I NE I NE NE Analyzing and Summarizing Business Transactions of a Service Entity Exercise 15 JANNY COMPANY Statement of Cash Flows For the Month Ended January 31, 2007 Cash flows from operating activities: Cash received from revenues P100,000 Cash paid for expenses (62,000) Net cash provided by operating activities P38,000 Cash flows from investing activities: Cash paid for equipment (25,000) Cash flows from financing activities: Cash received from sale of share capital P50,000 Cash used to repay bank loans (20,000) Net cash provided by financing activities 30,000 Increase in cash P43,000 Cash balance, January 1, 2007 56,000 Cash balance, January 31, 2007 P99,000 Exercise 16 BEIGE, INC Income Statement For the Month Ended March 31, 2007 Revenues P85,000 Expenses  50,000 Net income P35,000 The cash received from bank loans is a positive cash flow—financing activity—in the statement of cash flows, but is not included in the income statement Similarly, dividends paid to stockholders are a negative cash flow—financing activity—in the statement of cash flows, but are not included in the income statement 6 Chapter Exercise 17 ANDALASA COMPANY Income Statement For the Month Ended August 31, 2007 Service revenues P100,000 Expenses   75,000 Net income P 25,000 The following four items represent cash flows, but are not revenues or expenses that should be included in the income statement:  Investment by stockholders  Loan from bank  Payments to long-term creditors  Purchase of land Exercise 18 a Pay a liability b Investment by owner Revenue transaction c Purchase of asset on account Borrow money d Purchase of asset for cash Sale of asst for cash Collection of account receivable e Withdrawal by owner Expense transaction Exercise 19 a b c d e f g h i j Increased assets (cash) No effect on total assets Increase in land offset the decrease in cash Increased assets (cash) Decreased assets (cash) Increased assets (machinery and equipment) Increased assets (accounts receivable) Decreased assets (cash) No effect on total assets Increase in cash offset the decrease in accounts receivable No effect (a personal transaction) No effect on total assets Increase in cash offset the decrease in land Analyzing and Summarizing Business Transactions of a Service Entity Exercise 20 a Increase in asset (Cash) Increase owner’s equity (Capital) b Increase asset (Office Supplies) Decrease asset (Cash) c Increase asset (Cash) Increase owner’s equity (Service Revenue) d Decrease in asset (Cash) Decrease in owner’s equity (Rent Expense) e Increase asset (Accounts Receivable) Increase owner’s equity (Service Revenue) f Increase asset (Office Furniture) Increase liability (Accounts Payable) g Increase asset (Cash) Decrease asset (Accounts Receivable) h Decrease asset (Cash) Decrease liability (Accounts Payable) i Increase asset (Cash) Decrease asset (Land) Exercise 21 Red Co White Co Blue Co Beginning: Assets P 500,000 Liabilities (200,000) P 900,000 (600,000) P1,100,000 (500,000) Owner’s Equity P 300,000 P 300,000 P 600,000 Ending: Assets P 700,000 Liabilities (350,000) P 150,0002 800,000 P1,600,000 700,000 Owner’s Equity P 350,000 P 700,000 P 900,000 Owner’s Equity: Investments by Owner P Withdrawals by Owner 400,000 P 100,000 700,000 P 200,000 1,000,000 Net increase (decrease) P (400,000) P (600,000) Income Statement: Revenues P2,100,000 Expenses 1,650,0001 Net income P 450,000 P4,000,000 3,000,000 P1,000,000 P4,300,000 3,200,000 P1,100,000 Chapter Statement of Owner’s Equity: Beginning owner’s equity P 300,000 + Investments by owner + Net income x1 – Withdrawals by owner (400,000) = Ending owner’s equity P 350,000 _ Net income (x) = P450,000 Revenues – expenses = net income P2,100,000 – expenses = P450,000 Expenses = P1,650,000 Assets – liabilities = OE Assets – P800,000 = P700,000 Assets = P150,000 P600,000 + Investments (y) + P1,100,000 – P1,000,000 = P900,000 Investments = P200,000 Exercise 22 Requirement (1) Classification of Events Feb 10 C A A A C Requirement (2) 11 12 18 25 28 C B A A A P 300,000 100,000 1,000,000 (700,000) P 700,000 P 600,000 y3 1,100,000 (1,000,000) P 900,000 Analyzing and Summarizing Business Transactions of a Service Entity ASSETS Date Feb 4* Accounts Receivable Cash Supplies Bal Bal 597,000 10* 11* 12* 18 28 Bal Owner investment 3,000 600,000 70,000 70,000 70,000 70.000 600,000 40,000 597,000 (10,000) 587,000 (20,000) 567,000 Type of Owner’s Equity Transaction 600,000 3,000 3,000 Bal Accounts Payable Lorenzo Cabrera, Capital 600,000 600,000 (3,000) 597,000 25 OWNER’S EQUITY 600,000 Bal Bal Office Furniture LIABILITIES 40,000 40,000 3,000 70,000 70,000 40,000 3,000 70,000 70,000 40,000 3,000 70,000 70,000 640,000 (10,000) 630,000 (20,000) 610,000 Service revenue Rent expense Withdrawal * Not a transaction of the business Exercise 23 Requirement (1) Mitch Chua, Realtor Balance Sheet November 30, 2007 ASSETS LIABILITIES Cash Office supplies Franchise Furniture Land P 120,000 10,000 200,000 170,000 1,400,000 Total assets P1,900,000 Accounts payable P 60,000 Note payable 850,000 Total liabilities P 910,000 OWNER’S EQUITY Mitch Chua, capital 990,000 Total liabilities and owner’s equity P1,900,000 Requirement (2) Personal items not reported on the balance sheet of the business: c Personal residence (P1,700,000) and mortgage payable (P1,200,000) d Personal cash (P100,000) e Personal accounts payable (P18,000) Exercise 24 10 Chapter Requirement (1) Lua Lim, Realtor Balance Sheet March 31, 2007 ASSETS LIABILITIES Cash Office supplies Franchise Furniture Land P 90,000 10,000 150,000 120,000 700,000 Total assets P1,070,000 Accounts payable P 60,000 Note payable 330,000 Total liabilities P 390,000 OWNER’S EQUITY Mitch Chua, capital 680,000 Total liabilities and owner’s equity P1,070,000 Requirement (2) Personal items not reported on the balance sheet of the business: a Personal cash (P50,000) b Personal residence (P900,000) and mortgage payable (P650,000) f Personal account payable (P9,500) Exercise 25 + + =+ + + Cash Dec 31 Balance s P 95,000 (1) – 27,000 P 68,000 (2) + 40,000 P108,000 (3) – 32,000 P 76,000 (4) +100,000 P176,000 (5) –150,000 P 26,000 (6) +200,000 = Assets Accounts Office Receivabl Equipmen e Trucks t P 89,000 P580,000 P 89,000 + 40,000 P 49,000 P 49,000 Liabilities Account Notes s Payable Payable Owners’ Equity Share Capital P200,000 P 52,000 P550,000 P580,000 P 38,000 + 27,000 P 65,000 P200,000 P 52,000 P550,000 P580,000 P 65,000 P 65,000 52,000 32,000 20,000 P550,000 P580,000 P580,000 + 305,000 P 49,000 P885,000 P 65,000 P200,000 P – P200,000 P +100,000 P300,000 P +155,000 P455,000 P 20,000 P550,000 20,000 P550,000 +200,000 P 49,000 P 65,000 P550,000 Analyzing and Summarizing Business Transactions of a Service Entity Balance s P226,000 P 49,000 P885,000 P 65,000 P455,000 P 20,000 11 P750,000 Multiple Choice Questions a c a d b 10 d c b c d 11 12 13 14 15 b a c a c 16 17 18 19 20 d c b d d 21 22 23 24 25 c b c a d Test Material Test Material 7-1 Description of transactions: a Purchased equipment for cash at a cost of P3,200 b Received P900 cash from collection of accounts receivable c Purchased equipment at a cost of P13,500; paid P3,500 cash as down payment and incurred a liability (account payable) for the remaining P10,000 d Paid P14,500 of accounts payable e P15,000 cash was received from the sale of capital stock f Purchased equipment on account for P2,100 12 Chapter Analyzing and Summarizing Business Transactions of a Service Entity 13 Test Material 7-2 Assets + Cash + + Land P 950,000 = Building Dec 31 Balances P 370,000 P1,250,000 (1) + 250,000 Balances P 620,000 P 950,000 P1,250,000 (2) – 225,000 + 350,000 + 550,000 Balances P 395,000 P1,300,000 P1,800,000 (4) + 100,000 Balances P 495,000 (5) + 282,500 Balances P 212,500 P512,500 += P 800,000 P282,500 Owner’s Equity Share Capital P2,000,000 + 250,000 (3) Balances Office Equipment Liabilities + Notes Accounts Payable Payable + P512,500 P 800,000 P282,500 P2,250,000 P2,250,000 + 675,000 P512,500 P1,475,000 P282,500 + 85,000 + 100,000 + 85,000 P1,300,000 P1,800,000 P597,500 P1,575,000 P367,500 P2,250,000 P1,300,000 P1,800,000 P597,500 P1,575,000 P367,500 P2,250,000 –282,500 P1,300,000 P1,800,000 P597,500 P1,575,000 P 85,000 P2,250,000 14 Chapter Test Material 7-3 Requirement (1) Analysis of Transactions ASSETS Date Bal a) Bal b) Bal c) Bal d) Bal e) Bal f) Bal g) Bal h) Cash 12,500 200,000 212,500 7,000 219,500 (80,000) 139,500 139,500 10,000 149,500 10,000 159,500 159,500 (10,000) Accounts Receivable 15,000 LIABILITIES Land 120,000 Accounts Payable 80,000 15,000 120,000 80,000 15,000 120,000 80,000 (80,000) Supplies 15,000 15,000 (10,000) 5,000 5,000 24,000 29,000 Bal i) Bal j) 149,500 1,500 151,000 (18,000) 29,000 Balance 133,000 120,000 OWNER’S EQUITY Type of Katrina Owner’s Morales, Equity Capital Transaction 67,500 200,000 Owner investment 267,500 7,000 Service revenue 274,500 274,500 10,000 10,000 120,000 10,000 10,000 10,000 120,000 10,000 10,000 120,000 10,000 10,000 120,000 10,000 274,500 274,500 10,000 284,500 24,000 30,850 (9,000) (1,000) 298,500 Owner investment Service revenue Rent expense Advertising exp 120,000 10,000 29,000 10,000 (1,500) 8,500 120,000 10,000 298,500 (18,000) Owner withdrawal 29,000 8,500 120,000 10,000 280,500 Requirement (2) Morales Interiors Income Statement For the Month Ended September 30, 2007 Revenues: Service revenue (P7,000 + P24,000) Expenses: Rent expense Advertising expense Total expenses Net income Requirement (3) P31,000 P9,000 1,000 10,000 P21,000 Analyzing and Summarizing Business Transactions of a Service Entity 15 Morales Interiors Statement of Owner’s Equity For the Month Ended September 30, 2007 Katrina Morales, capital, August 31, 2007 Add: Investments by owner (P200,000 + P10,000) Net income for the month P 67,500 210,000 21,000 P298,500 18,000 P280,500 Less: Withdrawals by owner Katrina Morales, capital, September 30, 2007 Requirement (4) Morales Interiors Balance Sheet September 30, 2007 ASSETS Cash Accounts receivable Supplies Land Total assets LIABILITIES P 133,000 29,000 8,500 120,000 P290,500 Accounts payable OWNER’S EQUITY Katrina Morales, capital Total liabilities and owner’s equity P 10,000 280,500 P290,500 Requirements (5) and (6) Learning this material will help you manage a business by: Showing you how to account for the two sides of every transaction Showing you how to prepare the financial statements in order to measure how well the business performed (net income or net loss) and where it stands financially (assets, liabilities, and owner’s equity) Note: Students may answer in various other ways There is no single correct answer  ... Transactions of a Service Entity 15 Morales Interiors Statement of Owner’s Equity For the Month Ended September 30, 2 007 Katrina Morales, capital, August 31, 2 007 Add: Investments by owner (P200,000... Purchase of asset on account Borrow money d Purchase of asset for cash Sale of asst for cash Collection of account receivable e Withdrawal by owner Expense transaction Exercise 19 a b c d e f... P4,300,000 3,200,000 P1,100,000 Chapter Statement of Owner’s Equity: Beginning owner’s equity P 300,000 + Investments by owner + Net income x1 – Withdrawals by owner (400,000) = Ending