Topic 1 Assignment template ACC 502 Week 1 Assignment Toys, In ✓ Solved

Toys, Inc began operations on December 31, 2019 with the following transactions: 1. Purchased equipment for $15,000. 2. Purchased inventory on account for $6,000. 3. Issued common stock for $20,000.

Toys, Inc's balance sheet including those transactions as of December 31, 2019, was as follows:

Toys, Inc. Balance Sheet As of December 31, 2019

  • Assets:

    • Cash: $5,000

    • Receivables: $0

    • Inventory: $6,000

    • Land: $0

    • Property, Plant, and Equipment: $15,000

    • Total Assets: $26,000

  • Liabilities and Equity:

    • Accounts Payable: $6,000

    • Note Payable: $0

    • Common Stock: $20,000

    • Retained Earnings: $0

    • Total Liabilities and Stockholders' Equity: $26,000

During January 2020, the company had the following transactions:

  1. Sold $2,000 of inventory to customers for $3,000 in cash.

  2. Purchased $2,500 of new inventory for cash.

  3. Sold $3,500 of inventory to customers on account for $5,500.

  4. Received $3,500 from customers as payments on their accounts.

  5. Borrowed $20,000 from the bank and issued stock for $5,000 to purchase land for $25,000 for a future warehouse.

  6. Paid employees $2,000 for payroll.

Required:

  1. Record the January 2020 transactions by adding and subtracting amounts in the rows of the following table in a way that the row totals represent the end of the month balances in the financial statements.

  2. Explain the main characteristics of the balance sheet and the income statement and the relationship between those two statements.

Paper For Above Instructions

The financial transactions of Toys, Inc. provide a vivid illustration of how a company manages its funds and resources from the inception of its operations. At the end of December 31, 2019, the company’s balance sheet accurately reflected its financial position with total assets and total liabilities and equity both totaling $26,000.

In January 2020, several vital transactions occurred, which require comprehensive recording in the financial statements to show accurate balances at the end of the month. The transactions involved sales of inventory, purchases, and payments, all of which need to be categorized under their respective accounts.

To begin recording January transactions, we first need to assess each transaction’s effect on the financial statements.

1. The first transaction in January involved selling $2,000 of inventory for $3,000 in cash. This transaction will increase cash and decrease inventory on the balance sheet accordingly. The income statement will reflect the revenue from this sale, thus resulting in a profit of $1,000 from this transaction.

2. The second transaction involves purchasing $2,500 worth of inventory for cash. Such a transaction decreases the cash account while augmenting inventory. There will be no immediate effect on the income statement from this transaction.

3. The third transaction reports the sale of $3,500 of inventory on account for $5,500. It will not only increase accounts receivable but also increase sales revenue on the income statement, yielding another profit margin on that sale.

4. In the fourth transaction, Toys, Inc. collected $3,500 from customers on account. This increases cash and reduces accounts receivable on the balance sheet. The income statement will remain unaffected by this transaction since it represents cash collection of prior sales.

5. The fifth transaction records borrowing $20,000 from the bank and issuing $5,000 worth of stock to obtain funds for purchasing land worth $25,000 for a future warehouse. This increases both the cash account and accounts payable (liabilities), reflecting the prepared future investments of the company while respecting its current debt obligations.

6. Lastly, the company paid $2,000 in employee payroll, which reduces cash—hitting the expenses account and reducing net income by that amount on the income statement.

Following these transactions, the totals in the accounting statements at the end of January will indicate a significant growth in cash if properly recorded. The cash position will change from $5,000 initially to $9,500 after these transactions. The accounts receivable will accurately reflect sales made on account.

It is essential to illustrate the balance sheet's characteristics in comparison to the income statement. A balance sheet portrays a snapshot of the organization’s financial position at a specific point in time. It summarizes all the assets, liabilities, and stockholders' equity—illustrating what the company owns versus what it owes. This dichotomy helps users ascertain the company's financial health and solvency. Moreover, the balance sheet acts as a reflection of the company’s resources and debts, ensuring that the accounting equation (Assets = Liabilities + Equity) holds true.

The income statement, conversely, spans a specific period, detailing revenues and expenses incurred. This statement offers insights into the company’s profitability and operational efficiency, culminating in the net income for the period. It stands clear of any considerations about cash flow as it reports all earned revenues and incurred expenses regardless of cash transactions. The income statement therefore reveals how well the company can generate profits from its operations over the reported period, providing a notable juxtaposition to the balance sheet which remains static.

The relationship between the two statements is particularly noteworthy. The net income from the income statement directly impacts the equity portion of the balance sheet—specifically through retained earnings. Each quarter’s or year’s end earnings will adjust the equity amount, reaffirming how active business operations influence the financial standing of the organization.

Conclusively, accurately recording financial transactions in accordance with recognized principles is critical for companies like Toys, Inc. It ensures that all accounting statements accurately reflect the company’s financial journey and sustainability within a competitive landscape.

References

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