Professional Documents
Culture Documents
Trimester 1
2012/2013
INTRODUCTION
Nicol David spent time learn the art of cookie-making from her grandmother
and involved in the squash games during her childhood. She mastered every type of
cookie imaginable and created new recipes with her grandmother. Now, she is at her
second year in the University and she is investigating the possibilities of opening her
own business as a part of the entrepreneurship program in which she is enrolled.
Nicol decided to open a cookie-making school after discuss with her family
and friends. To begin, she will start on a part-time basis and provide her services in
peoples homes. Nicol will concentrate on making holiday cookies during her long
semester break. She will offer group sessions and individual lessons of making
cookies. She decided to include the children in her target market. Nicol has decided to
opearate her business as a Corporation Cookie Creation Inc.
Nicol is introduced to Mr.Bean, the operation manager of London Biscuits
at a trade show. Nicol is asked to become the major supplier of oatmeal chocolate chip
cookies. Mr Bean expects Nicol will supply approximately 1500 dozen cookies a
week to London Biscuits Ayer Keroh warehouse. Nicol will be paid after 30 days
from the invoice date after Nicol sent the invoive to London Biscuit KL office every
month.
Nicol is excited with the offer. Unfortunately, she has recently found that the
consumer demand for the London Biscuit companys product has decreased because
of selling cookies and donuts with high amounts of sugar and fats.
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
revenues.
Retained earning statement reports the changes in retained earning for
a specific period of time. The retained earnings statement uses the
information in income statement and provides the information in
balance sheet. The retained earnings will record in the balance sheet
Conclusion, the four financial statements are connected with each other
because the net income or net loss in the income statement is used to add or subtract
from the beginning retained earnings in the Statement of Retained Earnings. Then, the
retained earnings of the end period in retained earnings statement are reported into the
balance sheet. The amount of cash present in the balance sheet is reported in the cash
flows statement.
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
Operating activities
This tells us how much cash the company generated from its core business, as
opposed to the peripheral activities such as investing and borrowing. The
indirect method adjusts the net income figure to remove non-cash revenues
and expenses. It also removes items like gains and losses that are not
attributable to the operating activities of the business.
Investing activities
This report the aggregate change in a companys cash position resulting from
any gains (or losses) from investment in the financial markets and operating
subsidies and changes resulting from amount spent on investments in capital
assets such as plant and equipment.
Financing activities
This tells us activities that involve the companys owners or creditors. This
section is relates to long-term liabilities and shareholders equity.
(II) Whether London Biscuits will be able to survive over a long period of time?
Nicol can refer to balance sheet of the London Biscuits to determine whether
they can survive over a long period of time. Balance sheet reports the assets,
3
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
(c) Where can Nicol find out whether London Biscuits has outstanding debt? How
can Nicol determine whether London Biscuits would be able to meet its interest
and debt payments on any debt it has?
Outstanding debt is an unsettled portion of a debt that may include interest
accrued on the balance. In a simple word, outstanding debt stand for unpaid debt.
Nicole may find out the London Biscuit outstanding debt by referring to its Balance
Sheet. Balance sheet is a financial statement that summarizes a company's assets,
liabilities and shareholders' equity in a specific point of time. These three balance
sheet segments give investors an idea as to what the company owns and owes, as well
as the amount invested by the shareholders. Liabilities can be split into two categories
which are current liabilities and long-term liability. Current liabilities are debts
payable within one year, while long-term liabilities are debts payable over a longer
period. To find outstanding debt, Nicol should look for the total amount of liabilities
for the current amount in the Balance Sheet.
Besides, Nicol may use Interest Coverage Ratio to determine whether London
Biscuits would be able to meet its interest. Interest Coverage Ratio is used to verify
how simply a company can pay its interest on outstanding debt. Interest coverage ratio
is calculated by dividing a company's earnings before interest and taxes (EBIT) by the
company's interest expenses.
Formula :
interest coverage ratio=
EBIT
interest expenses
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
Formula:
debt ratio=
total debt
total assets
When the debt ratio is high, it means that London Biscuit has more debt relative to its
assets. This will result a burden in the sense that the interest payment might take a
very large amount of the companys cash flow or courses a rise in the interest rate.
Meanwhile, when the debt ratio is low, the interest payments do not control a large
portion of the company's cash flows. Therefore, debt ratio can quantifies how
leveraged a company is.
There is also another solvency ratio that measures the portion of the assets of a
business which are financed through debt. This debt-to-assets ratio or simply debt
ratio is the ratio of total liability of the company over its total assets. The total
liabilities include both the current liabilities and non-current liabilities.
Formula:
debt ratio=
total liabilities
totalassets
The range of the ratio is from 0.00 to 1.00. When the debt ratio is lower, it is more
complimentary. Meanwhile, a higher value indicates that higher portion London
Biscuit assets are claimed by it creditors which leads a higher risk in operation. If the
debt ratio is 0.5, it means that half of the company's assets are financed through debts.
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
(d)In deciding whether to go ahead with this opportunity, are there other areas of
concern that Nicol should be aware of?
Others than concerning about the London Biscuit Companys financial status,
Nicol should also concern about the image and the reputation of the company. It is
because that the image and the reputation are very important for a company to do
their business. If the reputation of the company is good, then there are more
consumers choose to purchase the goods of the company, the company will
increases their sales of the product and generate a higher profit. But if the reputation
of company is not good as like the London Biscuit Company, the sales of the
product will decreases because the consumers have changes their decision and
choose another products rather than buying the product of London Biscuit. So, the
company will has a low profit and it may cause the losses if it keeps unchanged for
a long time. As a conclusion, companys image and reputation are also important for
the business. Although the financial statement shows the company is generating the
profit, but if suddenly the reputation of company drop, it may influence the sales of
company and at last it may causes the loss of the company.
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
ACCOUNT TITLE
DEBIT
($)
500
2011
Nov 8
Cash
Common Stock
Nov 11
Supplies
Cash
95
Baking Supplies
Cash
125
Baking Equipment
Common Stock
300
Cash
Note Payable
2000
Baking Equipment
Cash
900
Cash
Unearned Revenue
60
Cash
Service Revenue
100
Website
Note Payable
600
Prepaid Insurance
Cash
1200
Account Receivable
Service Revenue
300
50
Nov 14
Nov 15
Nov 16
Nov 17
Nov 25
Nov 29
Nov 30
Nov 30
Nov 30
Nov 30
CREDIT
($)
500
95
125
300
2000
900
60
100
600
1200
300
50
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
10
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FUNDAMENTALS OF FINANCIAL ACCOUNTING
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2012/2013
GENERAL LEDGER
Cash
DATE
Nov 8
11
14
16
17
25
29
30
ACCOUNT TITLE
Common stock
Supplies
Baking Supplies
Note Payable
Baking Equipment
Unearned Revenue
Service Revenue
Prepaid Insurance
DEBIT($)
500
CREDIT($)
95
125
2000
900
60
100
1200
BALANCE($)
500
405
280
2280
1380
1440
1540
340
Common Stock
DATE
Nov 8
15
ACCOUNT TITLE
DEBIT($)
CREDIT($)
500
300
BALANCE($)
500
800
DEBIT($)
95
CREDIT($)
BALANCE($)
95
CREDIT($)
BALANCE($)
125
CREDIT($)
2000
BALANC ($)
2000
Cash
Baking Equipment
Supplies
DATE
Nov 11
ACCOUNT TITLE
Cash
Baking Supplies
DATE
Nov 14
ACCOUNT TITLE
DEBIT($)
125
Cash
Note Payable
DATE
Nov 16
ACCOUNT TITLE
Website
DEBIT($)
Baking Equipment
11
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FUNDAMENTALS OF FINANCIAL ACCOUNTING
DATE
Nov 15
17
Trimester 1
2012/2013
ACCOUNT TITLE
Common Stock
Cash
DEBIT($)
300
900
CREDIT($)
BALANCE($)
300
1200
CREDIT($)
60
BALANCE($)
60
DEBIT($)
CREDIT($)
100
300
BALANCE($)
100
400
DEBIT($)
600
CREDIT($)
BALANCE($)
600
CREDIT($)
BALANCE($)
1200
CREDIT($)
BALANCE($)
CREDIT($)
100
300
BALANCE($)
100
400
CREDIT($)
BALANCE($)
300
Unearned Revenue
DATE
Nov 25
ACCOUNT TITLE
DEBIT($)
Cash
Service Revenue
DATE
Nov 29
30
ACCOUNT TITLE
Cash
Account Receivable
Website
DATE
Nov 30
ACCOUNT TITLE
Account Payable
Prepaid Insurance
DATE
Nov 30
ACCOUNT TITLE
DEBIT($)
1200
Cash
Account Receivable
DATE
Nov 30
ACCOUNT TITLE
Service Revenue
DEBIT($)
300
Account Payable
DATE
Nov 29
30
ACCOUNT TITLE
Website
Cell Phone Bill Expenses
DEBIT($)
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
ACCOUNT TITLE
Cash
Common Stock
Supplies
Baking Equipment
Baking Supplies
Note Payable
Unearned Revenue
Service Revenue
Website
Prepaid Insurance
Account Receivable
Account Payable
Cell Phone Bill Expenses
TOTAL
CREDIT
($)
800
95
1200
125
2000
60
400
600
1200
300
650
50
3910
13
3910
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FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
Dec 8
Dec 9
Dec 15
Dec 16
Dec 19
Dec 23
Dec 23
Dec 23
Dec 28
ACCOUNT TITLE
Unearned Revenue
Cash
Service Revenue
DEBIT
($)
60
90
CREDIT
($)
150
Cash in Bank
Account Receivable
300
Cash
Unearned Revenue
750
50
Account Payable
Cash in Bank
600
Cash
Unearned Revenue
60
Cash
Account Receivable
Service Revenue
3000
1000
Baking Supplies
Cash
1250
Salaries Expense
Cash in Bank
800
Dividend
Cash
500
300
750
50
600
60
4000
1250
800
500
14
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
i) Post the December transactions. (Use the General ledger accounts that was
prepared earlier in (f) above)
GENERAL LEDGER
Cash
DATE
Dec 1
5
9
15
19
23
23
28
ACCOUNT TITLE
Balance b/d from November
Service Revenue
Unearned Revenue
Cell Phone Bill Payable
Unearned Revenue
Service Revenue
Supplies
Dividend
DEBIT($)
340
90
750
CREDIT($)
50
60
3000
1250
500
BALANCE($)
340
430
1180
1130
1190
4190
2940
2440
Cash In Bank
DATE
Dec 8
16
23
ACCOUNT TITLE
Service Revenue
Account Payable
Salaries Expense
DABIT($)
300
CREDIT($)
600
800
BALANCE($)
300
(300)
(1100)
CREDIT($)
400
90
60
3000
1000
BALANCE($)
400
490
550
3550
4550
CREDIT($)
BALANCE ($)
300
0
1000
Service Revenue
DATE
Dec 1
5
23
ACCOUNT TITLE
Balance b/d from November
Cash
Unearned Revenue
Cash
Account Receivable
DABIT($)
Account Receivable
DATE
Dec 1
8
23
ACCOUNT TITLE
Balance b/d from November
Cash in Bank
Service Revenue
DABIT($)
300
300
1000
15
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FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
Unearned Revenue
DATE
Dec 1
5
9
19
ACCOUNT TITLE
Balance b/d from November
Service Revenue
Cash
Cash
DEBIT($)
CREDIT($)
60
60
750
60
BALANCE($)
60
0
750
810
Account Payable
DATE
Dec 1
15
16
ACCOUNT TITLE
Balance b/d from November
Cash
Cash in Bank
DEBIT($)
CREDIT($)
650
BALANCE($)
650
600
0
CREDIT($)
BALANCE($)
125
1375
DEBIT($)
800
CREDIT($)
BALANCE($)
800
DEBIT($)
500
CREDIT($)
BALANCE($)
500
CREDIT($)
BALANCE($)
1200
50
600
Baking Supplies
DATE
Dec 1
23
ACCOUNT TITLE
Balance b/d from November
Cash
DEBIT($)
125
1250
Salaries Expense
DATE
Dec 23
ACCOUNT TITLE
Cash in Bank
Dividend
DATE
Dec 28
ACCOUNT TITLE
Cash
Prepaid Insurance
DATE
Dec 1
ACCOUNT TITLE
Balance b/d from November
DEBIT($)
1200
Website
DATE
Dec 1
ACCOUNT TITLE
Balance b/d from November
16
DEBIT ($)
600
CREDIT ($)
BALANCE ($)
600
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
Note Payable
DATE
Dec 1
ACCOUNT TITLE
Balance b/d from November
DEBIT($)
CREDIT($)
2000
BALANCE($)
2000
CREDIT($)
BALANCE($)
1200
DEBIT$)
CREDIT($)
800
BALANCE($)
800
DEBIT($)
95
CREDIT($)
BALANCE($)
95
CREDIT($)
50
BALANCE($)
50
0
CREDIT($)
BALANCE($)
50
Baking Equipment
DATE
Dec 1
ACCOUNT TITLE
Balance b/d from November
DEBIT($)
1200
Common Stock
DATE
Dec 1
ACCOUNT TITLE
Balance b/d from November
Supplies
DATE
Dec 1
ACCOUNT TITLE
Balance b/d from November
ACCOUNT TITLE
Balance b/d from November
Cash
DEBIT($)
50
ACCOUNT TITLE
Balance b/d from November
DEBIT($)
50
17
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
DEBIT
($)
2440
Cash
Cash in Bank
Account Receivable
Note Payable
Service Revenue
Unearned Revenue
Supplies
Baking Supplies
Common Stock
Salaries Expense
Prepaid Insurance
Dividend
Baking Equipment
Website
Cell Phone Expenses
TOTAL
CREDIT
($)
1100
1000
2000
4550
810
95
1375
800
800
1200
500
1200
600
50
9260
18
9260
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
k) Prepare and post adjusting journal entries for the month of December.
ACCOUNT TITLE
DEBIT
($)
CREDIT
($)
Adjusting Entries
2011
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Supplies expense
Supplies
45
40
Amortization
Website
25
Interest expense
Interest payable
11
Insurance expense
Prepaid insurance
100
Account Receivable
Service revenue
450
1025
75
56
Prepaid revenue
Service revenue
450
45
40
25
11
100
450
1025
75
56
450
19
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
GENERAL LEDGER
Supplies Expense
DATE
Dec 31
ACCOUNT TITLE
Adjustment
DEBIT($)
45
CREDIT($)
BALANCE($)
45
DEBIT($)
CREDIT($)
BALANCE($)
95
50
Supplies
DATE
Dec 31
31
ACCOUNT TITLE
Balance (b/d)
Adjustment
45
ACCOUNT TITLE
Adjustment
DEBIT($)
40
CREDIT($)
BALANCE($)
40
ACCOUNT TITLE
Adjustment
DEBIT($)
CREDIT($)
40
BALANCE($)
40
DEBIT($)
25
CREDIT($)
BALANCE($)
25
DEBIT($)
CREDIT($)
BALANCE($)
600
575
Amortization
DATE
Dec 31
ACCOUNT TITLE
Adjustment
Website
DATE
Dec 31
31
ACCOUNT TITLE
Balance (b/d)
Adjustment
25
Interest Expense
DATE
Dec 31
ACCOUNT TITLE
Adjustment
DEBIT($)
11
20
CREDIT($)
BALANCE($)
11
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
Interest Payable
DATE
Dec 31
ACCOUNT TITLE
Adjustment
DEBIT($)
CREDIT($)
11
BALANCE($)
11
CREDIT($)
BALANCE($)
1200
1100
Prepaid Insurance
DATE
Dec 31
31
ACCOUNT TITLE
Balance (b/d)
Adjustment
DEBIT($)
100
Insurance Expense
DATE
Dec 31
ACCOUNT TITLE
Adjustment
DEBIT($)
100
CREDIT($)
BALANCE($)
100
CREDIT($)
BALANCE($)
1000
1450
CREDIT($)
BALANCE($)
4550
5000
5450
Account Receivable
DATE
Dec 31
31
ACCOUNT TITLE
Balance (b/d)
Adjustment
DEBIT($)
450
Service Revenue
DATE
Dec 31
31
31
ACCOUNT TITLE
Balance (b/d)
Adjustment
Adjustment
DEBIT($)
450
450
ACCOUNT TITLE
Adjustment
DEBIT($)
1025
CREDIT($)
BALANCE($)
1025
CREDIT($)
BALANCE($)
1375
350
Baking Supplies
DATE
Dec 31
31
ACCOUNT TITLE
Balance (b/d)
Adjustment
DEBIT($)
1025
21
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
ACCOUNT TITLE
Balance (b/d)
Adjustment
DEBIT($)
CREDIT($)
BALANCE($)
50
75
CREDIT($)
75
BALANCE($)
75
CREDIT($)
BALANCE($)
800
856
CREDIT($)
BALANCE($)
2440
2384
75
Account Payable
DATE
Dec 31
ACCOUNT TITLE
Adjustment
DEBIT($)
ACCOUNT TITLE
Balance (b/d)
Cash
DEBIT($)
56
Cash
DATE
Dec 31
31
ACCOUNT TITLE
Balance ( b/d )
Salaries and wages expenses
DEBIT($)
56
ACCOUNT TITLE
Balance (b/d)
Adjustment
DEBIT($)
450
22
CREDIT($)
BALANCE($)
810
360
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
DEBIT
($)
2384
1100
5450
1450
360
75
350
50
856
500
800
2000
1200
1100
100
575
125
1025
45
40
40
25
11
11
9836
23
CREDIT
($)
9836
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
m) Prepare an income statement and a retained earnings statement for the 2 month
period ending December 31, 2011 and a classified balance sheet as of December
31,2011.
($)
5450
Expenses
Salaries Expenses
Cell Phone Bill Expense
Baking Supplies Expenses
Supplies Expense
Amortization
Interest Expense
Insurance Expense
Depreciation Baking Equipment
Net Income
856
125
1025
45
25
11
100
40
(2227)
3223
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
($)
Current asset
Cash
Account receivable
Prepaid insurance
Supplies
Baking supplies
($)
($)
2384
1450
1100
50
350
Non-current asset
Baking equipment
Less : accumulated equipment
website
5334
1200
(40)
Current Liability
Bank
Unearned revenue
Account payable
Interest payable
1160
575
1100
360
75
11
Non-current liability
Note payable
1735
7069
1546
2000
3546
Owners equity
Retained earnings
Common stock
2723
800
7069
25
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
ACCOUNT TITLE
DEBIT
($)
CREDIT
($)
Closing Entries
2011
Dec. 31
31
31
31
Service Revenue
Income Summary
(To close revenue account)
5450
Income Summary
Salaries Expenses
Cell Phone Bill Expenses
Baking Supplies Expense
Supplies Expense
Amortization
Interest Expense
Insurance Expense
Depreciation- Baking Equipment
(To close expense account)
2227
Income Summary
Retained Earning
(To close net income to retained earnings)
3223
Retained Earnings
Dividends
(To close dividends to capital)
500
26
5450
856
125
1025
45
25
11
100
40
3223
500
BAC 1614
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Trimester 1
2012/2013
COOKIE CREATIONS
Post-closing Trial Balance
December 31,2011
ACCOUNT TITLE
DEBIT
($)
2328
1145
1100
50
350
1200
Cash
Account Receivable
Prepaid Insurance
Supplies
Baking Supplies
Baking Equipment
Accumulated Equipment
Website
Bank
Unearned Revenue
Account Payable
Interest Payable
Note Payable
Retained Earning
Common Stock
CREDIT
($)
40
575
1100
360
75
11
2000
2723
800
Total
7109
27
7109