2.10: Analyzing and using the financial results— Horizontal and vertical analyses

Company, the amount of inventory increased by USD 836 million from 1999 October 31, to 2000 October 31. This amount represented a 17 per cent increase. To find the amount of the increase or decrease, subtract the 1999 amount from the 2000 amount. To find the percentage change, divide the increase or decrease by the 1999 amount.

Knowing the dollar amount and percentage of change in an amount is much more meaningful than merely knowing the amount at one point in time. By analyzing the data, we can see that cash and cash equivalents declined in 2000. Their decline at least partially explains the increases in some of the other current assets. We can also see that the company invested in property, plant and equipment. Any terms in Hewlett-Packard's list of assets that you do not understand are explained in later chapters. At this point, all we want you to understand is the nature of horizontal and vertical analyses.

Vertical analysis shows the percentage that each item in a financial statement is of some significant total such as total assets or sales. For instance, in the Hewlett-Packard data we can see that cash and cash equivalents were 15.3 per cent of total assets as of 1999 October 31, and had declined to 10.0 per cent of total assets by 2000 October 31. Total current assets (cash plus other amounts that will become cash or be used up within one year) increased from 61.3 per cent of total assets to 68.3 per cent during 2000. Long-term investments and other non-current assets accounted for 18.4 per cent of total assets as of 2000 October 31.

Management performs horizontal and vertical analyses along with other forms of analysis to help evaluate the wisdom of its past decisions and to plan for the future. Other data would have to be examined before decisions could be made regarding the assets shown. For instance, if you discovered the liabilities that would have to be paid within a short time by Hewlett-Packard were more than USD 30 billion, you might conclude that the company is short of cash even though current assets increased substantially during 2000. We illustrate horizontal and vertical analyses to a much greater extent later in the text.

What you have learned in this chapter is basic to your study of accounting. The entire process of accounting is based on the double-entry concept. Chapter 3 explains that adjustments bring the accounts to their proper balances before accurate financial statements are prepared.

Understanding the learning objectives

•         An account is a storage unit used to classify and summarize money measurements of business activities of a similar nature.

• A firm sets up an account whenever it needs to provide useful information about a particular business item to some party having a valid interest in the business.

• A T-account resembles the letter T.

• Debits are entries on the left side of a T-account.

Credits are entries on the right side of a T-account

• Debits increase asset, expense, and Dividends accounts.

• Credits increase liability, stockholders' equity, and revenue accounts.

• Analyze transactions by examining source documents.

• Journalize transactions in the journal.

• Post journal entries to the accounts in the ledger.

• Prepare a trial balance of the accounts and complete the work sheet.

• Prepare financial statements.

• Journalize and post adjusting entries.

• Journalize and post closing entries. Prepare a post-closing trial balance.

• A journal contains a chronological record of the transactions of a business. An example of a general journal is shown in Exhibit 11. Journalizing is the process of entering a transaction in a journal.

• Posting is the process of transferring information recorded in the journal to the proper places in the ledger.

•         Cross-indexing is the placing of (1) the account number of the ledger account in the general journal and (2) the general journal page number in the ledger account.

•         An example of cross-indexing appears in Exhibit 10.

•         A trial balance is a listing of the ledger accounts and their debit or credit balances.

•         If the trial balance does not balance, an accountant works backward to discover the error.

•         A trial balance is shown in Exhibit 13.

•         Horizontal analysis involves calculating the dollar and/or percentage changes in an item from one year to the next.

• Vertical analysis shows the percentage that each item in a financial statement is of some significant total.

Demonstration problem

Green Hills Riding Stable, Incorporated, had the following balance sheet on 2010 June 30:

a. Prepare the journal entries to record the transactions for July 2010.

b. Post the journal entries to the ledger accounts after entering the beginning balances in those accounts. Insert cross-indexing references in the journal and ledger. Use the following chart of accounts:

c. Prepare a trial balance.

Solution to demonstration problem

Key terms

Account A part of the accounting system used to classify and summarize the increases, decreases, and balances of each asset, liability, stockholders' equity item, dividend, revenue, and expense. The three-column account is normally used. It contains columns for debit, credit, and balance.

Accounting cycle A series of steps performed during the accounting period (some throughout the period and some at the end) to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements.

Accrual basis of accounting Recognizes revenues when sales are made or services are performed, regardless of when cash is received. Recognizes expenses as incurred, whether or not cash has been paid out.

Business transactions Measurable events that affect the financial condition of a business.

Chart of accounts The complete listing of the account titles and account numbers of all of the accounts in the ledger; somewhat comparable to a table of contents.

Compound journal entry A journal entry with more than one debit and/or credit.

Credit The right side of any account; when used as a verb, to enter a dollar amount on the right side of an account; credits increase liability, stockholders' equity, and revenue accounts and decrease asset, expense, and Dividends accounts.

Credit balance The balance in an account when the sum of the credits to the account exceeds the sum of the debits to that account.

Cross-indexing The placing of (1) the account number of the ledger account in the general journal and (2) the general journal page number in the ledger account.

Debit The left side of any account; when used as a verb, to enter a dollar amount on the left side of an account; debits increase asset, expense, and Dividends accounts and decrease liability, stockholders' equity, and revenue accounts.

Debit balance The balance in an account when the sum of the debits to the account exceeds the sum of the credits to that account.

Double-entry procedure The accounting requirement that each transaction must be recorded by an entry that has equal debits and credits.

Horizontal analysis The calculation of dollar and/or percentage changes in an item on the financial statements from one year to the next.

Journal A chronological (arranged in order of time) record of business transactions; the simplest form of journal is the two-column general journal.

Journal entry Shows all of the effects of a business transaction as expressed in debit(s) and credit(s) and may include an explanation of the transaction.

Journalizing A step in the accounting recording process that consists of entering the effects of a transaction in a journal.

Ledger The complete collection of all of the accounts of a company; often referred to as the general ledger.

Nominal accounts See temporary accounts.

Note An unconditional written promise to pay to another party the amount owed either when demanded or at a certain specified date.

Permanent accounts (real accounts) Balance sheet accounts; their balances are not transferred (or closed) to any other account at the end of the accounting period.

Posting Recording in the ledger accounts the information contained in the journal.

Real accounts See permanent accounts.

Simple journal entry An entry with one debit and one credit.

T-account An account resembling the letter T, which is used for illustrative purposes only. Debits are entered on the left side of the account, and credits are entered on the right side of the account.

Temporary accounts (nominal accounts) They temporarily contain the revenue, expense, and dividend information that is transferred (or closed) to a stockholders' equity account (Retained Earnings) at the end of the accounting period.

Trial balance A listing of the ledger accounts and their debit or credit balances to determine that debits equal credits in the recording process.

Vertical analysis Shows the percentage that each item in a financial statement is of some significant total such as total assets or sales.

Self-test

True-false

Indicate whether each of the following statements is true or false.

All of the steps in the accounting cycle are performed only at the end of the accounting period.

A transaction must be journalized in the journal before it can be posted to the ledger accounts.

The left side of any account is the credit side.

Revenues, liabilities, and capital stock accounts are increased by debits.

The dividends account is increased by debits.

If the trial balance has equal debit and credit totals, it cannot contain any errors.

Multiple-choice

Select the best answer for each of the following questions.

When the stockholders invest cash in the business:

a. Capital Stock is debited and Cash is credited.

b. Cash is debited and Dividends is credited.

c. Cash is debited and Capital Stock is credited.

d. None of the above.

Assume that cash is paid for insurance to cover a three-year period. The recommended debit and credit are:

a. Debit Insurance Expense, credit Cash.

b. Debit Prepaid Insurance, credit Cash.

c. Debit Cash, credit Insurance Expense.

d. Debit Cash, credit Prepaid Insurance.

A company received cash from a customer in payment for future delivery services. The correct debit and credit are:

a. Debit Cash, credit Unearned Delivery Fees.

b. Debit Cash, credit Delivery Fee Revenue.

c. Debit Accounts Receivable, credit Delivery Fee Revenue.

d. None of the above.

A company performed delivery services for a customer for cash. The correct debit and credit are:

a. Debit Cash, credit Unearned Delivery Fees.

b. Debit Cash, credit Delivery Fee Revenue.

c. Debit Accounts Receivable, credit Delivery Fee Revenue.

d. None of the above.

A cash dividend of USD 500 was declared and paid to stockholders. The correct journal entry is:

Now turn to “Answers to self-test” at the end of the chapter to check your answers.

Questions

➢     Describe the steps in recording and posting the effects of a business transaction.

➢     Give some examples of source documents.

➢     Define an account. What are the two basic forms (styles) of accounts illustrated in the chapter?

➢     What is meant by the term double-entry procedure, or duality?

➢     Describe how you would determine the balance of a T-account.

➢     Define debit and credit. Name the types of accounts that are:

➢     Increased by a debit.

➢     Decreased by a debit.

➢     Increased by a credit.

➢     Decreased by a credit.

➢     Do you think this system makes sense? Can you conceive of other possible methods for recording changes in accounts?

➢     Which of the steps in the accounting cycle are performed throughout the accounting period?

➢     Which of the steps in the accounting cycle are performed only at the end of the accounting period?

➢     Why are expense and revenue accounts used when all revenues and expenses could be shown directly in the Retained Earnings account?

➢     What is the purpose of the Dividends account and how is it increased?

➢     Are the following possibilities conceivable in an entry involving only one debit and one credit? Why?

➢     Increase a liability and increase an expense.

➢     Increase an asset and decrease a liability.

➢     Increase a revenue and decrease an expense.

➢     Decrease an asset and increase another asset.

➢     Decrease an asset and increase a liability.

➢     Decrease a revenue and decrease an asset.

➢     Decrease a liability and increase a revenue.

➢     Describe the nature and purposes of the general journal. What does journalizing mean? Give an example of a compound entry in the general journal.

➢     Describe a ledger and a chart of accounts. How do these two compare with a book and its table of contents?

➢     Describe the act of posting. What difficulties could arise if no cross-indexing existed between the general journal and the ledger accounts?

➢     Which of the following cash payments would involve the immediate recording of an expense? Why?

➢     Paid vendors for office supplies previously purchased on account.

➢     Paid an automobile dealer for a new company auto.

➢     Paid the current month's rent.

➢     Paid salaries for the last half of the current month.

➢     What types of accounts appear in the unadjusted trial balance? What are the purposes of this trial balance?

➢     You have found that the total of the Debits column of the trial balance of Burns Company is USD 200,000, while the total of the Credits column is USD 180,000. What are some possible causes of this difference? If the difference between the columns is divisible by 9, what types of errors are possible?

➢     Store equipment was purchased for USD 2,000. Instead of debiting the Store Equipment account, the debit was made to Delivery Equipment. Of what help will the trial balance be in locating this error? Why?

➢     A student remembered that the side toward the window in the classroom was the debit side of an account. The student took an examination in a room where the windows were on the other side of the room and became confused and consistently reversed debits and credits. Would the student's trial balance have equal debit and credit totals? If there were no existing balances in any of the accounts to begin with, would the error prevent the student from preparing correct financial statements? Why?

Exercises

Exercise A A diagram of the various types of accounts follows. Show where pluses (+) or minuses (-) should be inserted to indicate the effect debits and credits have on each account.

Exercise B Prepare the journal entry required for each of the following transactions:

a. Cash was received for services performed for customers, USD 1,200.

b. Services were performed for customers on account, USD 4,200.

Exercise C Prepare the journal entry required for each of the following transactions:

a. Capital stock was issued for USD 100,000.

b. Purchased machinery for cash, USD 30,000.

Exercise D Prepare the journal entry required for each of the following transactions:

a. Capital stock was issued for USD 200,000 cash.

b. A USD 30,000 loan was arranged with a bank. The bank increased the company's checking account by USD 30,000 after management of the company signed a written promise to return the USD 30,000 in 30 days.

c. Cash was received for services performed for customers, USD 700.

d. Services were performed for customers on account, USD 1,200.

Exercise E For each of the following unrelated transactions, give the journal entry to record the transaction. Then show how the journal entry would be posted to T-accounts. You need not include explanations or account numbers.

a. Capital stock was issued for USD 100,000 cash.

b. Salaries for a period were paid to employees, USD 24,000.

c. Services were performed for customers on account, USD 40,000.

Exercise F Explain each of the sets of debits and credits in these accounts for Tuxedos, Inc., a company that rents wedding clothing and accessories. There are 10 transactions to be explained. Each set is designated by the small letters to the left of the amount. For example, the first transaction is the issuance of capital stock for cash and is denoted by the letter (a).

Exercise G Assume the ledger accounts given in the previous problem are those of Tuxedos, Inc., as they appear at 2010 December 31. Prepare the trial balance as of that date.

Exercise H Prepare journal entries to record each of the following transactions for Sanchez Company. Use the letter of the transaction in place of the date. Include an explanation for each entry.

a. Capital stock was issued for cash, USD 300,000.

b. Purchased trucks by signing a note bearing no interest, USD 210,000.

c. Earned service revenue on account, USD 4,800.

d. Collected the account receivable resulting from transaction (c), USD 4,800.

e. Paid the note payable for the trucks purchased, USD 210,000.

f. Paid utilities for the month in the amount of USD 1,800.

g. Paid salaries for the month in the amount of USD 7,500.

h. Incurred supplies expenses on account in the amount of USD 1,920.

i. Purchased another truck for cash, USD 48,000.

j. Performed delivery services on account, USD 24,000.

Exercise I Using the data in the previous problem, post the entries to T-accounts. Write the letter of the transaction in the account before the dollar amount. Determine a balance for each account.

Exercise J Using your answer for the previous exercise, prepare a trial balance. Assume the date of the trial balance is 2010 March 31.

Exercise K John Adams owns and manages a bowling center called Strike Lanes. He also maintains his own accounting records and was about to prepare financial statements for the year 2010. When he prepared the trial balance from the ledger accounts, the total of the debits column was USD 435,000, and the total of the credits column was USD 425,000. What are the possible reasons why the totals of the debits and credits are out of balance? How would you normally proceed to find an error if the two trial balance columns do not agree?

Exercise L Refer to the Consolidated Balance Sheets of The Limited in the Annual Report Appendix located in the back of this text. Perform both horizontal and vertical analysis on each of The Limited's asset accounts, treating total assets as a significant total for vertical analysis. comment on the results.

Note: While you can certainly do this exercise with a calculator, computer spreadsheets such as Excel are ideal for this type of analysis.

Problems

Problem A The transactions of Lightning Package Delivery Company for March 2010 follow:

Mar. 1 The company was organized and issued capital stock for USD 300,000 cash.

2 Paid USD 6,000 as the rent for March on a completely furnished building.

5 Paid cash for delivery trucks, USD 180,000.

6 Paid USD 4,000 as the rent for March on two forklift trucks.

9 Paid USD 2,200 for supplies received and used in March.

12 Performed delivery services for customers who promised to pay USD 27,000 at a later date.

20 Collected cash of USD 4,500 from customers on account (see March 12 entry).

21 Received a bill for USD 1,200 for advertising in the local newspaper in March.

27 Paid cash for gas and oil consumed in March, USD 450.

31 Paid USD 2,400 salaries to employees for March.

31 Received an order for services at USD 12,000. The services will be performed in April.

31 Paid cash dividend, USD 1,000.

Prepare the journal entries required to record these transactions in the general journal of the company.

Problem B Economy Laundry Company had the following transactions in August 2010:

Aug. 1 Issued capital stock for cash, USD 150,000.

3 Borrowed USD 40,000 from the bank on a note.

4 Purchased cleaning equipment for USD 25,000 cash.

6 Performed services for customers who promised to pay later, USD 16,000.

7 Paid this month's rent on a building, USD 2,800.

10 Collections were made for the services performed on August 6, USD 3,200.

14 Supplies were purchased on account for use this month, USD 3,000.

17 A bill for USD 400 was received for utilities for this month.

25 Laundry services were performed for customers who paid immediately, USD 22,000.

31 Paid employee salaries, USD 6,000.

31 Paid cash dividend, USD 2,000.

a. Prepare journal entries for these transactions.

b. Post the journal entries to T-accounts. Enter the account number in the Posting Reference column of the journal as you post each amount. Use the following account numbers:

c. Prepare a trial balance as of 2010 August 31.

Problem C Clean-Sweep Janitorial, Inc., a company providing janitorial services, was organized 2010 July 1. The following account numbers and titles constitute the chart of accounts for the company:

July 1 The company issued USD 600,000 of capital stock for cash.

5 Office space was rented for July, and USD 5,000 was paid for the rental.

8 Desks and chairs were purchased for the office on account, USD 28,800.

10 Equipment was purchased for USD 50,000; a note was given, to be paid in 30 days.

15 Purchased trucks for USD 150,000, paying USD 120,000 cash and giving a 60-day note to the dealer for USD 30,000.

July 18 Paid for supplies received and already used, USD 2,880.

23 Received USD 17,280 cash as service revenue.

27 Insurance expense for July was paid, USD 4,500.

30 Paid for gasoline and oil used by the truck in July, USD 576.

31 Billed customers for janitorial services rendered, USD 40,320.

31 Paid salaries for July, USD 51,840.

31 Paid utilities bills for July, USD 5,280.

31 Paid cash dividends, USD 9,600.

a. Prepare general ledger accounts for all of these accounts except Retained Earnings. The Retained Earnings account has a beginning balance of zero and maintains this balance throughout the period.

b. Journalize the transactions given for July 2010 in the general journal.

c. Post the journal entries to ledger accounts.

d. Prepare a trial balance as of 2010 July 31.

Problem D Trim Lawn, Inc., is a lawn care company. Thus, the company earns its revenue from sending its trucks to customers' residences and certain commercial establishments to care for lawns and shrubbery. Trim Lawn's trial balance at the end of the first 11 months of the year follows:

Dec. 2 Paid rent for December, USD 3,000.

5 Paid the accounts payable of USD 33,600.

8 Paid advertising for December, USD 1,500.

10 Purchased a new office desk on account, USD 1,050.

13 Purchased USD 240 of supplies on account for use in December.

15 Collected cash from customers on account, USD 75,000.

20 Paid for customer entertainment, USD 450.

24 Collected an additional USD 6,000 from customers on account.

26 Paid for gasoline used in the trucks in December, USD 270.

28 Billed customers for services rendered, USD 79,500.

30 Paid for more December supplies, USD 12,000.

31 Paid December salaries, USD 15,300.

31 Paid a USD 4,000 cash dividend. (The Dividends account is No. 320.)

a. Open three-column general ledger accounts for each of the accounts in the trial balance under the date of 2010 December 1. Place the word Balance in the explanation space of each account. Also open an account for Dividends, No. 320.

b. Prepare entries in the general journal for the preceding transactions for December 2010.

c. Post the journal entries to three-column general ledger accounts.

d. Prepare a trial balance as of 2010 December 31.

Problem E Marc Miller prepared the following trial balance from the ledger of the Quick-Fix TV Repair Company. The trial balance did not balance

The difference in totals in the trial balance caused Miller to carefully examine the company's accounting records. In searching back through the accounting records, Miller found that the following errors had been made:

• One entire entry that included a USD 10,000 debit to Cash and a USD 10,000 credit to Accounts Receivable was never posted.

• In computing the balance of the Accounts Payable account, a credit of USD 3,200 was omitted from the computation.

• In preparing the trial balance, the Retained Earnings account balance was shown as USD 80,000. The ledger account has the balance at its correct amount of USD 83,200.

• One debit of USD 2,400 to the Dividends account was posted as a credit to that account.

• Office equipment of USD 12,000 was debited to Office Furniture when purchased.

Prepare a corrected trial balance for the Quick-Fix TV Repair Company as of 2010 December 31. Also, write a description of the effect(s) of each error.

Alternate problems

Alternate problem A Speedy Laundry Company, Inc., entered into the following transactions in August 2010:

Aug. 1 Received cash for capital stock issued to owners, USD 400,000.

3 Paid rent for August on a building and laundry equipment rented, USD 3,000.

6 Performed laundry services for USD 2,000 cash.

8 Secured an order from a customer for laundry services of USD 7,000. The services are to be performed next month.

13 Performed laundry services for USD 6,300 on account for various customers.

15 Received and paid a bill for USD 430 for supplies used in operations.

23 Cash collected from customers on account, USD 2,600.

31 Paid USD 2,400 salaries to employees for August.

31 Received the electric and gas bill for August, USD 385, but did not pay it at this time.

31 Paid cash dividend, USD 1,000.

Prepare journal entries for these transactions in the general journal.

Alternate problem B The transactions listed below are those of Reliable Computer Repair, Inc., for April 2010:

Apr. 1 Cash of USD 500,000 was received for capital stock issued to the owners.

3 Rent was paid for April, USD 3,500.

6 Trucks were purchased for USD 56,000 cash.

7 Office equipment was purchased on account from Wagner Company for USD 76,800.

14 Salaries for first two weeks were paid, USD 12,000.

15 USD 28,000 was received for services performed.

18 An invoice was received from Roger's Gas Station for USD 400 for gas and oil used during April.

23 A note was arranged with the bank for USD 80,000. The cash was received, and a note promising to return the USD 80,000 on 2010 May 30, was signed.

29 Purchased trucks for USD 73,600 by signing a note.

30 Salaries for the remainder of April were paid, USD 14,400.

a. Prepare journal entries for these transactions.

b. Post the journal entries to T-accounts. Enter the account number in the Posting Reference column of the journal as you post each amount. Use the following account numbers:

c. Prepare a trial balance as of 2010 April 30.

Alternate problem C Rapid Pick Up & Delivery, Inc., was organized 2010 January 1. Its chart of accounts is as follows:

Jan. 1 The company received USD 560,000 cash and USD 240,000 of office furniture in exchange for USD 800,000 of capital stock.

2 Paid garage rent for January, USD 6,000.

4 Purchased computers on account, USD 13,200.

6 Purchased delivery trucks for USD 280,000; payment was made by giving cash of USD 150,000 and a 30-day note for the remainder.

Jan 12 Purchased insurance for January on the delivery trucks. The cost of the policy, USD 800, was paid in cash.

15 Received and paid January utilities bills, USD 960.

15 Paid salaries for first half of January, USD 3,600.

17 Cash received for delivery services to date amounted to USD 1,800.

20 Received bill for gasoline purchased and used in January, USD 180.

23 Purchased delivery trucks for cash, USD 108,000.

25 Cash sales of delivery services were USD 2,880.

27 Purchased a copy machine on account, USD 3,600.

31 Paid salaries for last half of January, USD 4,800.

31 Sales of delivery services on account amounted to USD 11,400.

31 Paid for repairs to a delivery truck, USD 1,120.

a. Prepare general ledger accounts for all these accounts except Retained Earnings. The Retained Earnings account has a beginning balance of zero and maintains this balance throughout the period.

b. Journalize the transactions given for 2010 January in the general journal.

c. Post the journal entries to ledger accounts.

d. Prepare a trial balance as of 2010 January 31.

Alternate problem 4 The trial balance of California Tennis Center, Inc., at the end of the first 11 months of its fiscal year follows:

Dec. 1 Paid building rent for December, USD 4,000.

2 Paid vendors on account, USD 18,000.

5 Purchased land for cash, USD 10,000.

7 Sold memberships on account for December, USD 27,000.

10 Paid the note payable of USD 15,000, plus interest of USD 150.

13 Cash collections from customers on account, USD 36,000.

19 Received a bill for repairs, USD 225.

24 Paid the December utilities bill, USD 180.

28 Received a bill for December advertising, USD 1,650.

29 Paid the equipment repair bill received on the 19th, USD 225.

30 Gave tennis lessons for cash, USD 4,500.

30 Paid salaries, USD 6,000.

30 Sales of memberships on account since December 7, USD 18,000 (for the month of December).

30 Costs paid in entertaining customers in December, USD 350.

30 Paid dividends of USD 1,500. (The Dividends account is No. 320.)

a. Open three-column general ledger accounts for each of the accounts in the trial balance. Place the word Balance in the explanation space and enter the date 2010 December 1, on this same line. Also open an account for Dividends, No. 320.

b. Prepare entries in the general journal for the transactions during December 2010.

c. Post the journal entries to ledger accounts.

d. Prepare a trial balance as of 2010 December 31.

Alternate problem E Bill Baxter prepared a trial balance for Special Party Rentals, Inc., a company that rents tables, chairs, and other party supplies. The trial balance did not balance. The trial balance he prepared was as follows:

In trying to f ind out why the trial balance did not balance, Baxter discovered the following errors:

Equipment was understated (too low) by USD 12,000 because of an error in addition in determining the balance of that account in the ledger.

A credit of USD 4,800 to Accounts Receivable in the journal was not posted to the ledger account at all.

A debit of USD 16,000 for a semiannual dividend was posted as a credit to the Capital Stock account.

The balance of USD 12,000 in the Advertising Expense account was entered as USD 1,200 in the trial balance.

Miscellaneous Expense (Account No. 568), with a balance of USD 3,200, was omitted from the trial balance.

Prepare a corrected trial balance as of 2010 December 31. Also, write a description of the effect(s) of each error.

Beyond the numbers—Critical thinking

Business decision case A John Jacobs lost his job as a carpenter with a contractor when a recession hit the construction industry. Jacobs had been making USD 50,000 per year. He decided to form his own company, Jacobs Corporation, and do home repairs.

The following is a summary of the transactions of the business during the first three months of operations in 2010:

Jan. 15 Stockholders invested USD 40,000 in the business.

Feb. 25 Received payment of USD 4,400 for remodeling a basement into a recreation room. The homeowner purchased all of the building materials.

Mar. 5 Paid cash for an advertisement that appeared in the local newspaper, USD 150.

Apr. 10 Received USD 7,000 for converting a room over a garage into an office for a college professor. The professor purchased all of the materials for the job.

11 Paid gas and oil expenses for automobile, USD 900.

12 Miscellaneous business expenses were paid, USD 450.

15 Paid dividends of USD 2,000.

a. Prepare journal entries for these transactions.

b. Post the journal entries to T-accounts.

c. How profitable is this new venture? Should Jacobs stay in this business?

Annual report analysis B Refer to the Annual Report of The Limited, Inc. in the Annual Report Appendix. Perform horizontal and vertical analyses of the liabilities and stockholder's equity sections of the balance sheets for the two most recent years shown. Horizontal analysis involves showing the dollar amount and percentage increase or decrease of the latest year over the preceding year amounts. Vertical analysis involves showing the percentage of total liabilities and stockholder's equity that each account represents as of the balance sheet dates. Write comments on any important changes between the two years that are evidence of decisions made by management.

Annual report analysis C In The Home Depot's recent Annual Report, the following passages appear:

Write answers to the following questions:

a. Do you think The Home Depot management regards its employees more as expenses or assets? Explain.

b. What does The Home Depot regard as its most valuable asset? Explain your answer.

c. Is The Home Depot permitted to list its human resources as assets on its balance sheet? Why or why not?

d. Could its philosophy regarding its employees be the major factor in its outstanding financial performance? Explain.

Ethics case – Writing experience D Refer to "An ethical perspective: Financial deals, Inc.". Write out the answers to the following questions:

a. What motivated Larry to go along with unethical and illegal actions? Explain.

b. What are Larry's options now? List each possibility.

c. What would you do if you were Larry? Describe in detail.

d. What do you think the real Larry did? Describe in detail.

Group project E In teams of two or three students, interview in person or by speakerphone a new staff member who has worked for a CPA firm for only one or two years. Seek information on the advantages and disadvantages of working for a CPA firm. Also, inquire about the nature of the work and the training programs offered by the firm for new employees. As a team, write a memorandum to the instructor summarizing the results of the interview. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.

Group project F With one or two other students and using library resources, write a report on the life of Luca Pacioli, sometimes referred to as the father of accounting. Pacioli was a Franciscan monk who wrote a book on double-entry accounting in 1494. Be careful to cite sources and treat direct quotes properly. (If you do not know how to do this, ask your instructor.)

Using the Internet—A view of the real world

Visit the following website:

http://www.roberthalf.com

Click on Job Seekers. Read the information and write a memo to your instructor about your search and what you learned about certain jobs in accounting.

Visit the following website:

http://www.sec.gov

Investigate this site for anything of interest. Write a memo to your instructor about your search.

Answers to self-test

True-false

False. Only the last five steps are performed at the end of the period. The first three steps are performed throughout the accounting period.

True. The journal is the book of original entry. Any amounts appearing in a ledger account must have been posted from the journal.

False. The left side of any account is the debit side.

False. These accounts are all increased by credits.

True. Since dividends reduce stockholders' equity, the Dividends account is increased by debits.

False. An entire journal entry may not have been posted, or a debit or credit might have been posted to the wrong account.

Multiple-choice

c. An asset, Cash, is increased by a debit, and the Capital Stock account is increased by a credit.

b. Since the insurance covers more than the current accounting period, an asset is debited instead of an expense. The credit is to Cash.

a. The receipt of cash before services are performed creates a liability, Unearned Delivery Fees. To increase a liability, it is credited. Cash is debited to increase its balance.

b. Cash is increased by the debit, and Delivery Service Revenue is increased by the credit.

c. Dividends is increased by the debit, and Cash is decreased by the credit.