Assessment 1: Accounting Conventions and Accounting Cycle

 

Complete a two-part assessment in which you will identify accounting conventions and complete five exercises that reflect the steps of a business accounting cycle.

Introduction

Note: An accounting cycle requires specific steps that need to be executed in a particular sequence. The assessments in this course are likewise sequenced, and should be completed in the order in which they are presented.

Demonstrating your understanding of the financial accounting theories behind various financial accounting practices helps you support your professional work and gain credibility.

Imagine you are the captain of a large sailing vessel, hundreds of miles away from land. You have no maps, charts, or navigation equipment to show you where you have been, where you are, or where you should be going. Further, you have no means of communicating with the outside world to let them know the results of your journey.

If this scenario is a bit daunting, picture a business organization with no means of measuring past, present, or future operating results and no language for communicating its position in an industry.

This scenario helps you understand why an accounting information system is important and known as the lifeblood of any business organization. This complex system collects and processes business information and communicates the results to interested parties. Much like navigation equipment on a ship, accounting information charts show where the business organization has been financially and put the organization on a course toward achieving its stated purpose or vision.

Preparation

The following resources are required to complete the assessment.

• Accounting Cycle Steps Preparation Data Sheet [DOC].
• Assessment 1 Template [DOC].

Overview

Note: An accounting cycle requires specific steps that need to be executed in sequence. The assessments in this course are presented in sequence and must be completed in the order presented.

There are two parts to this assessment.

Part 1: Accounting Conventions

Accounting conventions are common guidelines and practices—principles, assumptions, and constraints—followed by accounting professionals when recording business transactions. These accounting conventions are standards used by all business organizations, so it is important to understand what they are and how to apply them.

For Part 1 of the assessment, define each of the following accounting conventions and provide an example of how they are applied in the world of business, and in particular in accounting. Provide your answers in a 3-4-page Word document.

• Economic entity assumption.
• Going concern assumption.
• Periodicity assumption.
• Monetary unit assumption.
• Historical cost principle.
• Conservatism.
• Matching principle.
• Full-disclosure principle.
• Materiality.
• Revenue recognition.
• Cost effectiveness.

Additional Requirements

Part 1 of your assessment should meet the following requirements:

• Written communication: Written communication should be clear, well-organized, and support a central idea, with no technical writing errors, as expected of a business professional.
• References: References and citations should be formatted using current APA style and formatting guidelines.
• Length: 3-4 typed, double-spaced pages.
• Font and font size: Times New Roman, 12-point.

Part 2: The Accounting Cycle

Part 2 of this assessment walks you through the basic steps of the accounting cycle to produce financial statements for stakeholders. This assessment has five sections; each section of the assessment is a continuation of the previous part.

For this part of the assessment, complete the following:

• Read the scenario below.
• Read the Accounting Cycle Steps Preparation Data Sheet, linked in the Resources under the Required Resources heading. This document provides the basis for all five sections of this assessment.
• Save the Assessment 1 Template, linked in the Resources under the Required Resources heading.
• Use this template to record your responses to the five sections below and to submit your assessment.

Scenario

Imagine after working with an accounting firm for one year, you are striving for a promotion. To earn a promotion, you must seek recognition from managers within your firm, from colleagues, and from clients. You strategize ways to be a sound resource for financial answers within your firm and for your clients. Demonstrating your understanding of the financial accounting theories behind various financial accounting practices helps you support your professional work and gain credibility. Your boss just assigned you numerous accounts that have a wide range of accounting needs. These new accounts are the final test for the promotional track.

Your client Dorothy Young, the owner of a dress shop, has recently died. Her daughter, Tanya, is the executor of the estate but has never been involved in running the business. The beneficiaries want to sell the business and divide the proceeds. The business broker Tanya hired needs current financial statements to determine the value of the business and put it on the market. You must complete the accounting cycle for the business and produce the necessary financial statements for the beneficiaries and the business broker.

Instructions

Using the information in the Accounting Cycle Steps Preparation Data Sheet, complete the following five parts in the Assessment 1 Template. Each part builds on the previous part. Where appropriate, show the calculations leading to the final solution.

A: Adjusting Entries

Adjusting entries are necessary to prepare a company’s financial information according to the matching and revenue recognition principles. Certain account balances must be adjusted at the end of each accounting period for all revenue and expense accounts to be reported with the correct balances.

• Journalize the adjusting entries for Dorothy’s Young Fashions.

B: Adjusted Trial Balance Income

The adjusted trial balance is prepared to assure us that debits equal credits after the adjusting entries have been posted to the general ledger.

• Prepare an adjusted trial balance for Dorothy’s Young Fashions.

C: Multiple-Step Income Statement

The multiple-step income statement is used to disclose the operating and nonoperating activities of a company separately. This income statement format organizes the operating expenses and nonoperating expenses into separate areas of the income statement and matches costs and expenses with revenues for the period.

• Prepare a multiple-step income statement for Dorothy’s Young Fashions.

D: Closing Entries

The closing process takes the balance of temporary or nominal accounts to zero to prepare the accounts for a new accounting period. At each year end, the income statement accounts and withdrawal or dividend accounts must be closed so that the balances will reflect only activity for the current accounting period, similar to an individual’s paycheck information. At the end of each year, employers prepare a W-2 for each employee and close the payroll accounts for the year. Zero balances begin the next year.

• Prepare a closing entry statement for Dorothy’s Young Fashions.

E: Post-Closing Trial Balance

The post-closing trial balance is prepared to show us that debit account balances are equal to credit account balances after all of the closing entries have been posted to the general ledger. Once the post-closing trial balance has been prepared, verified, and balanced, we are ready to start recording transaction for the next year. This is the last step in the accounting cycle.

• Prepare a post-closing trial balance statement for Dorothy’s Young Fashions.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

• Competency 1: Define financial accounting conventions to support practice as a professional in the field.

  Define financial accounting conventions to support practice as a professional in the field.

• Competency 3: Evaluate economic resources of a business enterprise.

  Journalize the adjusting entries.
  Prepare an adjusted trial balance.
  Prepare a multiple-step income statement.
  Prepare closing entries and a post-closing trial balance.

• Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

  Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

Assessment 1

Part 1: Accounting Conventions

	Date		Account Title		Debit		Credit

Part 2: The Accounting Cycle

A. Adjusting Entries

		DOROTHY’S YOUNG FASHIONS
Adjusted Trial Balance
	July 31, 2018
Dr.	Cr.
Cash
	Accounts receivable
	Merchandise inventory
Store supplies
	Store equipment
Accumulated depr.—store   Equipment
	Delivery equipment
Accumulated depr.—delivery   Equipment
	Notes payable
	Accounts payable
	Common stock
	Retained earnings
Sales
Sales returns and allowances
	Cost of goods sold
Salaries expense
Advertising expense
Utilities expense
Repair expense
Delivery expense
Rent expense
Store supplies expense
Depreciation expense—store equipment
Depreciation expense—delivery equipment
Interest expense
	Interest payable
Totals

B. Adjusted Trial Balance Income

DOROTHY’S YOUNG FASHIONS

Cost of goods sold

Salaries expense

Rent expense

Utilities expense

Income Statement
	For the Year Ended July 31, 2018
Sales revenue
Sales
Less: Sales returns and allowances
Net sales
Gross profit
Operating expenses
Selling expenses
	Salaries expense
Advertising expense
	Rent expense
Delivery expense
	Utilities expense
Depr. exp.—store equipment
Depr. exp.—deliv. equipment
Stores supplies expense
Total selling expenses
Administrative expenses
Repair expense
Total admin. expenses
Total oper. expenses
Income from operations
Other expenses and losses
Interest expense
Net loss

C. Multiple-Step Income Statement

DOROTHY’S YOUNG FASHIONS

For the Year Ended July 31, 2018

Retained Earnings Statement
Retained earnings, August 1, 2017
Less: Net loss
Retained earnings, July 31, 2018
DOROTHY’S YOUNG FASHIONS Balance Sheet JULY 31, 2018
Assets
Current assets
	Cash
Accounts receivable
Merchandise inventory
Store supplies
Total current assets
Property, plant, and equipment
Store equipment
Accum. depr.—store equipment
Delivery equipment
Accum. depr.—delivery equipment
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable due next year
Accounts payable
Interest payable
Total current liabilities
Long-term liabilities
Notes payable
Total liabilities
Stockholders’ equity
Common stock
Retained earnings
Total liabilities and stockholders’ equity

D. Closing Entries

Date

Account Title

Debit

Credit

July 31, 2018

Cash

Accounts receivable

Merchandise inventory

Store equipment

Delivery equipment

Notes payable

Accounts payable

Interest payable

Common stock

Retained earnings

E. Post-Closing Trial Balance DOROTHY’S YOUNG FASHIONS
Post-Closing Trial Balance
Debit	Credit
Store supplies
Accumulated depreciation—store equipment
Accumulated depreciation—delivery Equipment

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Accounting Cycle Steps Preparation Data Sheet

The trial balance of Dorothy’s Young Fashions contained the following account balances on July 31,

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018, the end of the company’s fiscal year:

$538,285

Dorothy’s Young Fashions
Trial Balance
July 31, 2018
Debit	Credit
Cash	$14,685
Accounts Receivable	18,535
Merchandise Inventory	24,750
Store Supplies	3,025
Store Equipment	46,750
Accumulated Depreciation – Store Equipment	$9,900
Delivery Equipment	26,400
Accumulated Depreciation – Delivery Equipment	3,300
Notes Payable	28,050
Accounts Payable	26,675
Common Stock	49,500
Retained Earnings	4,400
Sales	416,460
Sales Returns and Allowances	2,310
Cost of Goods Sold	273,570
Salaries Expense	77,000
Advertising Expense	14,520
Utilities Expense	7,700
Repair Expense	6,655
Delivery Expense	9,185
Rent Expense	13,200
	$538,285

Adjusting Information

a) Stores Supplies on hand totaled $1,925.

b) Depreciation was $4,950 on the Store Equipment and $3,850 on the Delivery Equipment.

c) Interest of $6,050 is accrued on Notes Payable at July 31, 2018.

Additional Information

a) Salaries Expense is 70% selling expense and 30% administrative expense.

b) Rent Expense and Utilities Expense are allocated 80% to selling expenses and 20% to administrative expenses.

c) $16,500 of the Notes Payable will be due for payment during the next year.

d) Repair Expense is 100% administrative.

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