brainsmile

I'm trying to learn financial accounting and I'm not sure how to answer these questions

Run the simulation, then answer the following discussion questions:

a. Many of the transactions in the simulation affect more than one financial statement. Identify five transactions in the simulation and specify the different information that is conveyed to the manager in each of the financial statements.

I just don't understand the question. What does it mean to affect more than one financial statement? Where's legendkiller?


b. Suppose Aunt Connie is getting ready to visit her banker seeking a loan to expand her business. She wants to demonstrate the strength of her business on her income statement. If she has firm orders for $100,000 worth of cookies for delivery in the next six months, can she show this as revenue on her income statement? Why or why not?

I think this one is that she can't because income statements show past strength and current orders, though firm can be cancelled. This cannot be shown as revenue since the order has not been completed and on the balance sheet shown as an increase in accounts receivable. Doesn't it matter more about past history more than future orders?

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"Nobody beats Vitus Gerulaitis 18 times in a row." - Vitus Gerulaitis on beating Jimmy Connors after 17 failed attempts.

Merlin

a) Many things will affect more than one financial statement. Any non cash charge (depreciation, amortization & depletion) will appear on both the income statement and the cash flow statement. Also the sale of assets and purchase of capital equipment will impact both the Balance Sheet and Cash Flow Statement. Same with long-term debt. Those same two statements will also be affected by changes in paid in capital - that is the issuance or retirement of stock.

b) No she may not show this as revenue as it would violate the matching principle - income can only be recognized when earned. If the orders had a been paid for in advance then it would be a balance sheet item - pre-paid orders, not on the income statement. For the loan she can show the bank her order book. There are no financial entries for firm orders unless cash has changed hands.

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brainsmile

Yeah that's what I thought for part b. Thanks for the answer to a. I used changes in in revenue and expenditures which change income statements and balance sheets.

dbax791

I agree with Merlin except for the last statement. There is a financial entry once the goods have shipped and the customer has been invoiced. At that point the revenue can be recognized, because it has been earned.

Then there is a separate transaction later when the cash is received to debit cash and credit accounts receivable.

Edit: Whoops - yes you can make an entry for prepaid orders, but revenue can't be recognized. Sorry merlin. I left my clarification up in case it helps out bs.