Complete A 4-Part Assessment That Requires Categorization

Complete A 4 Part Assessment That Requires You To Categorize Balance S

Complete a 4-part assessment that requires you to categorize balance sheet accounts, prepare a balance sheet, prepare an income statement, and analyze items in a financial statement. Because the balance sheet reflects all journal entries affecting the business since inception, knowledge of the placement of each account is essential to preparing a financial statement. Likewise, preparation of the balance sheet, or statement of financial position, is an essential skill and requires the accountant to take information from the accounting system and summarize it in a single location. GAAP requires organizations to prepare both an income statement and a balance sheet. Before the balance sheet can be prepared, the organization's net income must be determined. Finally, balance sheets do not always balance once they are prepared, and income statements may contain incorrect data, necessitating analysis and correction by the accountant.

Paper For Above instruction

Introduction

Financial statements are vital tools for internal management and external stakeholders to assess an organization’s financial health and operational performance. The process of preparing accurate and compliant financial reports necessitates a clear understanding of accounting principles, classification of accounts, and analytical skills to identify discrepancies. This paper encompasses a comprehensive 4-part assessment: categorizing balance sheet accounts, preparing a balance sheet, preparing an income statement, and analyzing financial statement items for accuracy and completeness.

Part 1: Categorizing Balance Sheet Accounts

The initial step involves correctly classifying various accounts into their respective categories based on their nature and function within the accounting cycle. Permanent accounts, also known as real accounts, typically include assets, liabilities, and equity accounts, reflecting the ongoing financial position of the business. Temporary accounts, or nominal accounts, consist of revenues and expenses, which are closed at the end of the fiscal period to determine net income or loss.

Assets such as accounts payable, equipment, prepaid rent, inventory, land, cash, goodwill, patent, and security deposits are classified as permanent accounts. Conversely, accounts like salaries payable, income tax payable, allowance for uncollectibles, and accrued expenses fall under current liabilities. Equity accounts include common stock, retained earnings, preferred stock, and long-term bonds payable are also categorized as permanent. The classification is crucial for accurate financial reporting and reflects the organization's financial position at any given point.

Part 2: Balance Sheet Preparation

The second phase involves compiling account data to produce a balance sheet, which summarizes an organization’s financial position at a specific point in time. Using the provided account balances for Blaze Industries, the balance sheet is structured into sections: assets, liabilities, and shareholders’ equity.

Assets:

- Current assets include cash ($3,050), accounts receivable ($400), supplies ($80), prepaid insurance ($830), and advances from customers ($460).

- Non-current assets consist of equipment ($217,200), less accumulated depreciation ($29,100), land, goodwill, patent, and security deposits.

Liabilities:

- Current liabilities include wages payable ($880), interest payable ($3,600), and income tax payable (not provided but can be deduced).

- Long-term liabilities comprise long-term bonds payable ($150,000).

Equity:

- Equity accounts include common stock ($10,000), retained earnings ($27,520), and possibly preferred stock if applicable.

The proper balance sheet format involves listing assets on the left or top section, liabilities followed by shareholders’ equity, ensuring total assets equal total liabilities and equity, aligning with the accounting equation.

Balance Sheet for Blaze Industries (2011):

Assets

• Current Assets:
  • Cash: $3,050
  • Accounts receivable: $400
  • Supplies: $80
  • Prepaid insurance: $830
  • Advances from customers: $460
• Total current assets: $4,820
• Property, Plant, and Equipment (PP&E):
  • Equipment: $217,200
  • Less: Accumulated depreciation: ($29,100)
  • Net equipment: $188,100
• Land, Goodwill, Patent, Security deposits are added to non-current assets separately.

Liabilities

• Current Liabilities:
  • Salaries payable: $880
  • Interest payable: $3,600
  • Income tax payable: [Calculate based on net income]
• Long-term liabilities:
  • Long-term bonds payable: $150,000

Shareholders’ Equity

• Common stock: $10,000
• Retained earnings: $27,520