Case 2 Assignment Overview Review: The Background Material ✓ Solved

Case 2 Assignment Overview Review the Background Material For

Review the background material for the second module before attempting the case below in order to answer a series of questions about the balance sheet for ABC Company shown below. Start with the accounting equation and pay attention to definitions of assets, liabilities, and equity.

Required: Answer the questions below and explain your answer with numbers, computations, or a sentence or two.

  1. Determine total assets and total liabilities for ABC Company.
  2. Complete the accounting equation below using numbers instead of words. Assets = Liabilities + Equity
  3. Are short-term payables or receivable larger? Explain the significance of the difference.
  4. Is the order in which assets and liabilities are listed on the balance sheet significant? Explain.
  5. Determine the total amount owed by ABC at the end of the year.
  6. Does the company have more assets or liabilities? What is the significance of determining the difference between net assets and net liabilities?
  7. If the company borrows an additional $10,000, which two balance sheet accounts will change? The new totals for total assets and total liabilities are …
  8. Explain retained earnings.
  9. What is the total wealth of the company according to the balance sheet?
  10. Assume that the company paid $10,000 of dividends to the owners. Which balance sheet account (item) would have been affected by the payment?

Respond to all questions showing your computations and/or using your own words. The objective for this assignment is to evaluate accounting concepts of balance sheet.

Paper For Above Instructions

The financial health of a company is often assessed through its balance sheet, which outlines the assets, liabilities, and equity of the business. In the case of ABC Company, we are tasked with analyzing this balance sheet by answering a series of questions designed to enhance our understanding of accounting principles.

1. Total Assets and Total Liabilities

To determine the total assets and total liabilities of ABC Company, we would typically refer to the balance sheet. Assuming the following hypothetical values:

  • Total Assets: $250,000
  • Total Liabilities: $150,000

Thus, total liabilities equal $150,000, and total assets equal $250,000.

2. Completing the Accounting Equation

The accounting equation states: Assets = Liabilities + Equity. By substituting the values from our previous answer, we find:

  • Assets = $250,000
  • Liabilities = $150,000
  • Equity = Assets - Liabilities = $250,000 - $150,000 = $100,000

Hence, the accounting equation is represented as:

250,000 = 150,000 + 100,000

3. Short-term Payables vs. Receivables

Short-term payables (liabilities that are to be paid within one year) vs. short-term receivables (assets that are expected to be received within one year), must be compared. For example, if short-term payables are $30,000 and receivables are $20,000, payables are larger.

The significance of this difference highlights the company’s obligations to pay off its debts within the short-term versus the amounts it expects to collect. A higher level of payables indicates a potential liquidity concern if they exceed receivables excessively.

4. Order of Listing on the Balance Sheet

Yes, the order in which assets and liabilities are listed on the balance sheet is significant. Assets are generally listed in order of liquidity, while liabilities are arranged according to when obligations are due. This order provides insight into the financial stability of a company and its capacity to meet its financial obligations as they arise.

5. Total Amount Owed by ABC

The total amount owed by ABC Company at the end of the year is represented by total liabilities, which in this case, is $150,000. This figure represents the obligations the company must fulfill to its creditors.

6. More Assets or Liabilities?

In this instance, ABC Company has more assets ($250,000) than liabilities ($150,000). The difference between net assets and net liabilities is significant as it indicates the company’s equity which denotes ownership and financial stability. A company with significant net assets is usually considered a stable enterprise.

7. Impact of Borrowing Additional Funds

If ABC Company borrows an additional $10,000, two balance sheet accounts that will change are:

  • Total Assets will increase by $10,000 (new total = $260,000)
  • Total Liabilities will increase by $10,000 (new total = $160,000)

This change demonstrates the company’s increased obligations but also additional resources to work with.

8. Explanation of Retained Earnings

Retained earnings refer to the portion of net income that is retained within the company rather than distributed as dividends. This account reflects the cumulative amount of profit that has been reinvested in the business, supporting growth and operations.

9. Total Wealth of the Company

The total wealth of ABC Company, according to the balance sheet, can primarily be defined as total equity, which is calculated by:

  • Total Wealth = Total Assets - Total Liabilities
  • Total Wealth = $250,000 - $150,000 = $100,000.

This reflects the value that shareholders would retain if the company were liquidated.

10. Payment of Dividends

When ABC Company pays $10,000 in dividends, the balance sheet account that would be affected is retained earnings. The payment will decrease the retained earnings by the amount distributed to shareholders, reflecting the reduction of the profit reinvested in the business.

Conclusion

This analysis of ABC Company's balance sheet reinforces the importance of key accounting concepts such as the accounting equation, asset-liability relationships, and equity assessments. Understanding these principles is crucial for making informed financial decisions and gauging the company’s financial health.

References

  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial Accounting. Wiley.
  • Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2013). Introduction to Financial Accounting. Pearson.
  • Weil, R. L., & Wong, J. (2020). Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.
  • Accounting Coach. (2021). What is a Balance Sheet? Retrieved from https://www.accountingcoach.com/balance-sheet/explanation
  • Investopedia. (2023). Balance Sheet. Retrieved from https://www.investopedia.com/terms/b/balancesheet.asp
  • Needles, B. E., & Powers, M. (2013). Principles of Accounting. Cengage Learning.
  • Recklies Studio. (2020). Accounting Equation - Meaning and Formula. Retrieved from https://www.recklies.com/en/accounting/accounting-equation
  • Fraser, L. M., & Ormiston, A. (2018). Understanding Financial Statements. Pearson.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis: Text and Cases. Wiley.

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