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Aunt Connies Cookies

Essay by   •  December 18, 2010  •  1,149 Words (5 Pages)  •  1,285 Views

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"Financial statements are the product of the financial accounting process. They are the means of communicating economic information about the entity to individuals who want to make decisions and informed judgments about the entity" (Marshall, McManus, & Viele, 2003). Accurate financial statements are essential for informed decision making. The first step in ensuring accuracy of financial statements is the correct recording of business transactions. One incorrect entry can throw the statements off balance. This simulation discusses how to record business transactions and analyzes the effects of such transactions on the financial statements. Connie Rocha knew with good contacts in the local community that generating business for her cookie company would not be a problem.

The first transaction I will discuss is when Connie Rocha purchased an oven and other kitchen equipment to set up her business. She purchased new equipment for $20,000, which translates to an increase in property. Therefore, I increased Ð''Equipment' by $20,000. The firm paid $20,000 in cash for procuring this equipment. Therefore, I decreased Ð''Cash' by the same amount. This transaction conveys to the manager that it does not affect Connie's capital because the cash flow went down, but the equipment asset went up. The second transaction I will discuss is when Connie purchased office equipment to furnish her workplace after setting up the operational infrastructure. She bought the equipment for $15,000 on account from Trevor Depot; therefore, I increased Ð''Equipment' by $15,000 to account for the increase in property. To record the increase in dues, I increased Ð''Accounts Payable' by $15,000. This conveys to the manager that the firm now owes $15,000, while it owns equipment worth $35,000.

The third transaction I will discuss is when Connie Rocha's sister bought ingredients like flour, syrup, and sugar to execute a bulk order for cookies. She purchased these supplies by paying $15,000 in cash, which translates to an increase in property. I increased Ð''Supplies' to record this increase. The firm also paid $15,000 in cash for the supplies. Therefore, I decreased Ð''Cash' to record the reduction of the firm's property, Ð''Cash.' This conveys to the manager that the firm's cash balance now stands at $45,000. The fourth transaction I will discuss is when Connie issued a check for $3,000 towards setting a balance owed to Trevor Depot. Therefore, I recorded the decrease in Ð''Cash.' The payment also implies a decrease in the firm's dues. Therefore, I recorded the decrease in Ð''Accounts Payable.' This conveys to the manager that the firm's cash balance now stands at $42,000, while Accounts Payable stands at $12,000. The fifth transaction I will discuss is when Connie sold cookies worth $7,000 on credit to her club in the second week of December. Supplies costing $3,000 were used for the same. The firm's assets increased as it acquired a new asset through credit sales. Therefore, I increased Ð''Accounts Receivables' by $7,000. This conveys to the manager that the accounting equation is balanced by a corresponding increase in revenues. The total revenue of Aunt Connie's Cookies now stands at $28,000.

Connie Rocha is now 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. She has firm orders for $100,000 worth of cookies for delivery in the next six months and needs to know if she can show this as revenue on her income statement. I think she can put that on her income statement only if she chooses the accrual method of accounting. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them is actually received or paid (Marshall, McManus, & Viele, 2003). Connie would not have to wait until she sees the money to record this transaction. It is important to note that this is only possible for Connie with the accrual accounting method.

Aunt Connie's Cookies was asked by the owner of her office premised to pay rent in advance for the next two months. A check was issued for $6,000 for this purpose. Therefore, I increased the firm's property, Ð''Prepaid Rent,' by $6,000. To balance the accounting equation, I recorded the cash outflow by reducing



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