Problem 3-25: Comprehensive Cycle Problem Perpetual System A

Problem 3-25 Comprehensive cycle problem: Perpetual system at the beginn

Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). For each event, describe its impact on the company’s financial statements and record the transaction accordingly. Then, prepare the necessary financial statements: an income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows.

Paper For Above instruction

The problem presented involves analyzing several accounting events for Jeater Company during 2012, classifying each as asset source, asset use, asset exchange, or claims exchange, and subsequently recording these transactions within a statement model. This comprehensive exercise involves understanding the nature of each transaction, their impact on financial statements, and compiling accurate financial reports reflective of the company’s activities over the period.

Introduction

The analysis of transactions within an accounting period is fundamental to accurate financial reporting. For Jeater Company, the observed events during 2012 involve inventory management, sales, payments, returns, and freight costs—all of which influence the company's financial position and performance. Proper classification and recording of these transactions are critical for constructing credible financial statements in accordance with generally accepted accounting principles (GAAP).

Classification of Transactions

  1. Purchase of Inventory on Account: The purchase of inventory costing $2,200 on credit from Blue Company, with freight costs of $110 paid in cash, constitutes an asset source transaction. The inventory increases (asset increase), and accounts payable increases (liability increase). The freight cost adds to inventory value. The journal entry debits inventory and credits accounts payable and cash (for freight).
  2. Return of Damaged Inventory: Returning damaged inventory worth $200, with the freight company covering the return freight, represents an asset use transaction. The company reduces inventory and records a receivable/commitment for the freight expense paid by the freight company (or adjusts inventory value); cash decreases if directly paid, or records a receivable if billed later.
  3. Payment to Blue Company within Discount Period: Paying the account payable within the discount period (including the purchase discount) is an asset use transaction, decreasing cash and accounts payable, while reflecting the inventory purchase discount.
  4. Sale of Inventory: Selling inventory costing $3,000 for $5,500 on account is an asset exchange: inventory decreases, revenue increases, and net income is recognized. Accounts receivable increases, reflecting the claim from the customer.
  5. Return from Customer: Merchandise returned from a customer, originally costing $400 and sold for $710 cash, is an asset exchange—reducing accounts receivable and inventory. The merchandise's cost is reflected to determine gross profit on the sale.
  6. Delivery FOB Destination and Freight Costs: Paying $60 cash for freight costs on FOB destination delivery is an asset use, increasing freight expenses and cash, with no change to inventory or receivables at this point.
  7. Collection of Accounts Receivable: Collecting the receivable within the discount period is an asset exchange—cash increases, and accounts receivable decreases, with discounts leading to recognition of sales discounts if applicable.
  8. Inventory Count: The physical count of inventory indicates an ending inventory value of $7,970, representing an asset use—adjusting inventory to physical count, which affects the balance sheet and cost of goods sold calculation.

Transaction Recording in Statement Model

The statement model integrates these transactions into the accounting framework, typically involving the T-accounts or ledger entries for each activity. For example, the purchase increases inventory and accounts payable; payments reduce cash and accounts payable; sales increase accounts receivable and revenue; returns decrease inventory and receivables; freight costs are charged to either inventory or expenses; and the physical count adjusts the inventory asset to its actual value.

Financial Statements Preparation

Based on these transactions, the retained earnings, beginning balances, and net income are computed. The income statement summarizes revenues and expenses, leading to net income. The statement of changes in stockholders' equity starts with beginning retained earnings, adds net income, subtracts dividends if any, resulting in ending retained earnings. The balance sheet reflects the company's assets, liabilities, and stockholders’ equity at period end. The cash flow statement reports operating, investing, and financing activities, including cash flows from purchasing inventory, collecting receivables, paying payables, and freight costs.

Conclusion

This comprehensive analysis reinforces the importance of accurate classification and record-keeping in financial reporting. Correctly identifying transaction types ensures valid financial statements, which inform management decisions and demonstrate the company's fiscal health to investors and creditors. The detailed classification, recording, and statement preparation exemplify standard accounting practices essential for maintaining financial integrity.

References

  • Epstein, L., & Jermakowicz, E. (2010). Financial accounting: A comprehensive approach. McGraw-Hill Education.
  • FASB. (2020). Accounting Standards Codification (ASC). Financial Accounting Standards Board.
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  • AccountingTools. (2023). Understanding inventory transactions. Retrieved from https://www.accountingtools.com/
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