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.

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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

9

Accounting Cycle Steps Preparation Data Sheet

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

2

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.

2

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