Applied Accounting Post Test - Free Essay Example

1. If a business calculated the balance in the Accounts Payable T-account that should always have a credit balance but instead had a debit balance, what would this indicate?

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A debit balance in the Accounts Payable T-account indicates that the company recorded more transactions that increase its gross value than those that reduce its value. The occurrence of these types of transactions causes a reduction in the liabilities of the business. Occasionally, a business might make an advance payment for materials that a supplier is yet to deliver. When the business pays its vendors, it reduces the normal credit balance in the Accounts Payable. The debit balance implies that the business has paid suppliers in advance for the goods not delivered (Franklin & Cooper, 2018). Also, if a company procures and pays for goods, and the latter returns the goods to the supplier due to some reason like substandard, the vendor is supposed to repay the company for the goods returned. If a company compiles its Accounts Payable T-account before the vendor repays for the goods, the account will indicate a debit balance. Franklin and Cooper (2018) also highlighted the effect of allowances on the Accounts payable T-account, noting that discounts that a company had not initially factored in its accounts debited the account. Another cause of debit balance would be errors in recording the double entries. These mistakes can result from the misjudgment of the accountant. The regular erroneous entry of credit transactions on the debit side will lead to the account indicating a debit balance (Franklin & Cooper, 2018).

2. During the financial planning process, if a business learns from its balance sheets that its liabilities and equity are substantially greater than its assets, what choices does the business have to deal with the difference keeping in mind assets should be in balance with liabilities and equity?

The effective operation of a business requires a stable accounting equation that balances the assets to the sum of liabilities and equity (Bigio & Weill, 2016). The excess of the liabilities and equity side over the assets calls for interventions that help to reduce the liabilities of the business. The best approach for regaining a balance in the accounting equation is reducing the business debt-to-capital ratio. This ratio indicates a company's overall financial soundness, ensuring the ratio remains as low as possible servers as an indication of a stable business. The three common approaches to reducing the ratio include increasing the business profitability, effective management of inventory, and restructuring the debt (Bigio & Weill, 2016). Through an increase in sales revenue, the company is likely to raise its profits. The business can achieve profits by increasing the prices and sales of its products and reducing operational costs. Through effective management of its inventory, the company will regulate its working capital by maintaining only the level that just satisfies the needs of its customers. The company can also achieve a realistic inventory level by examining daily sales ratio and cash conversion cycle and maintaining them to the levels that guarantee profits (Bigio & Weill, 2016). These approaches generate extra funds that can offset the existing debt.

3. What is the “economic entity assumption” in managerial accounting?

“Economic entity assumption” is an accounting principle that requires businesses to separate their transactions from those of the business owner (Zhao, 2020). Mostly, business owners have personal, commercial dealings that are likely to confuse business accountant. Their proceeds are not supposed to mix with the proceeds of the company. The premise of the “Economic entity assumption” is the appreciation of the need to separate an entity's activities from the activities of the business shareholder (Zhao, 2020). The assumption also narrows down to the operations of different divisions or departments within a company, requiring distinction of the financial and management operations of the different sections of the company. The entity assumption is also applicable to businesses that engage in different types of activities.

A practical example will be if a company X has two different business departments, with one division running a hotel and the other in an auto dealership. The principle guides the company to have two separate accounting records. Separation of the operations and records of the different but connected entities help evaluate the progress of any particular section. Such records are also useful when the company intends to seek support from external agencies who wish to offer financial support to a specific section. For instance, if an investor wanted to support the company X's automobiles sector, he or she may only want to review the department's financial state and not the hospitality sector.

4. Cash budgets are prepared for a month. In addition to monthly cash budgets, where else should business managers look to ensure cash is available for paying bills as they come due throughout the month?

The success of any business depends on its ability to pay for both budgeted and unbudgeted bills. One of the measures of the effectiveness of the managers is their ability to facilitate the business in meeting the unbudgeted costs (Weygandt et al. 2019). One of the ways is working towards the reduction of avoidable business costs. By focusing on recurring quarterly or monthly expenses like utilities, managers can determine part of the expenses that the business can pay at a later date. For instance, managers should establish if the business has recurring expenditures like communication subscription for its employees and non-urgent fees like payment for insurance services, postpone their activation, and use the money to pay for emergency bills. Also, managers can generate quick cash by selling equipment the business stopped using, or inventory that has become obsolete. Weygandt et al. (2019) noted the need for accurate recording of any sale of the obsolete assets for accurate determination of the business equity at the end of the company’s operation. Another approach would be delaying the payment of vendors. Unless a vendor offers incentives like discounts for early payment, Weygandt et al. (2019) approve that managers can withhold the money for use on emergency bills and pay vendors the date that would not attract lateness fees or harm the company’s relationship with the vendor.

5. When a manager builds a “model” for business planning, what exactly is the manager doing?

Understanding the basic definition of a business model explains why a manager would build it. The model serves as a plan that managers can use to identify revenue sources, intended customer base, and the best products for their customers (Teece & Linden, 2017). Through the business model, the manager is forecasting the future operations of his or her business. Since business models have different aspects, each aspect equips managers with specific knowledge. A business model that includes contract research enables managers to know the approaches and measures they can use to clarifying the performance of planed business engagement (Teece & Linden, 2017). Also, the models have a marketing period that helps the managers familiarize their potential customers with the company's products. The market response provides marketing discipline with both challenges and opportunities and offers an entrepreneurial perspective to marketing elements like value propositions, capturing, and networks (Teece & Linden, 2017). The marketing period also stimulates the broadening of stakeholders since the different groups like the consumer and business markets to participate in the marketing process. Through the models, managers get to know the viable response to trade-offs between technology and marketing orientation and understand how the company would make money as it concerns the cost and earnings and what a company lives on (Teece & Linden, 2017). The model ensures the successful operation of a business.

6. Define “equity” as used in managerial accounting and explain how liabilities relate to equity.

Equity represents the shareholders' stake in the company, expounded as the amount of money that shareholders would get upon the liquidation of assets, and payment of the company’s debts (Ringe, 2016). The common phrase for the term is “shareholder equity," representing the book value of a company. The value is found on a company's balance sheet and serves vital data that analysts use to assess a company's financial state (Ringe, 2016). The relationship between equity is summarised with the accounting equation below.

Equity=Total Assets−Total Liabilities

Equity can also be described as the difference between the company’s assets and liabilities. Since assets are generally fixed, the value of equity generally depends on the value of a company's liabilities. An increase in liabilities will reduce a company's equity, while debt payment increases the value of equity. From the expression, it is evident that equity is a claim to the assets, just like liabilities. However, the claim of the former results from the investors; the latter is a claim of the creditors. Suppose the company's shareholders purpose of having a substantial equity measure at the end of its operations. In that case, it has to ensure that the managers effectively manage and pay the company’s debts since stakeholders only qualify for equity after clearing the business liabilities (Ringe, 2016).

7. What is an income statement, and what do income statements tell business managers?

Income Statement refers to a financial document that determines the profit or loss of the company over a specific time by coherently and logically summing up all the revenues and subtracting all expenses from the operating and non-operating activities of a company (Ioachim et al., 2017). The statement displays the company’s revenue, costs, selling and administrative expenses, taxes paid, and gross and net profit. The general function of Income Statement is to enhance managers' role in analyzing and making financial decisions for the good of the company, like forecasting the profitability and future growth of a company (Ioachim et al., 2017). Appropriate review of the company's performance using the quarterly, semi-annual or annual statements, managers can track the progress of the business and take the necessary remedies in case of possible losses. Unlike other financial statements that only show cash flow, a multi-step income statement informs managers about the four measures of profitability, including gross, operating, pre-tax, and after-tax profits. Appropriate use of profit and loss account enables the breaking down of revenue and expenses for easy interpretation. In contrast, simple and clear representation enables managers to establish the flow of money in their company and use the information to balance the financial movement of the business in subsequent financial periods (Ioachim et al., 2017).