Question

Chapter 4 - Graded Discussion The Chapter 4 discussion is found in the "TIF" Take It Further section in the back of the chapter. Please see TIF 4-3, where it reads, "Your friend, Daniel Nat, recently began work as the lead accountant for the Asheville Company. Dan prepared the following balance sheet for December 31, 2018" Asheville Company Balance Sheet For the Year Ended December 31, 2018 Assets Land.............. Accounts payable Accounts receivable.. $100,000 10,000 12,500 10,000 115,000 $247,500 Cash... Common stock.... Total assets... Liabilities Equipment Retained earnings. Wages payable... Total liabilities ..... $125,000 120,000 2.500 $247.500 . ***** *** .. Explain the errors in the Asheville Company balance sheet and the correct presentation for the balance sheet. Incorporate into your discussion the accounting equation and further comment on why financial statements are important to any given end user. Finally, why is it important for you as business students, to understand the accounting cycle and the process that leads to the financial statement preparation?

Answer 1

1) Explanation of the errors in the given balance sheet:

A. Accounts payable of $ 10,000 is a current liability which comes under liabilities of the balance sheet.

B. Common stock of $ 115,000 is the equity of the business and comes in the liability side of the balance sheet. Because as per separate entity concept equity or owner's fund is the internal liability of the business.

C. Equipment of $ 125,000 is a non current asset of the business, so it will be posted in the assets side of the balance sheet.

2) Correct balance sheet is given under :

ASHEVILLE COMPANY
BALANCE SHEET
FOR THE YEAR ENDED 31ST DECEMBER 208
Assets
Land	$ 100,000
Equipment	$ 125,000
Accounts receivable	$ 12,500
Cash	$ 10,000
Total assets	$ 247,500
Liabilities
Accounts payable	$ 10,000
Wages payable	$ 2,500
Equity
Common stock	$ 115,000
Retained earnings	$ 120,000
Total liabilities and equity	$ 247,500

3) Here, accounting equation is

Total assets = Total liabilities + total equity

$ 247,500 = [ $ 10,000 + $ 2,500] + [ $ 115,000 + $ 120,000]

$ 247,500 = $ 12,500 + $ 235,000

$ 247,500 = $ 247,500 (proved)

4) Why financial statement are important to the given end users?

Financial statement shown the financial output of the company or business organizations. It depicts the profit or loss during the year, the financial status of the firm, composition of different assets in the hand of the organization, nature of the capital structure of the firm etc.

5) Importance of understanding accounting cycle and process of accounting :

Stages of accounting cycle are (1) Identification and measuring financial transactions and events (2) recording (3) classification (3) summarizing (4) analysing and interpretation and (6) communication of financial results.

Without understanding of the each and every steps of accounting cycle, students cannot understand the relationship between journal ,ledger ,trail balance and financial statements namely trading account ,profit and loss account and Balance sheet. What come first and what there after they can't understand such sequence at all.

Understanding of accounting cycle and process of accounting helps the students to do journal entries from given transactions, then post them into ledger in classification stage. Then from ledger they can get how to prepare trial balance and financial statements ( statement of profit & loss and balance sheet) to depicts the financial performance and status of the firm.