# Computing the Total Assets, Liabilities, and Owner s Equity

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1 21-1 Assets are the total of your cash, the items that you have purchased, and any money that your customers owe you. Liabilities are the total amount of money that you owe to creditors. Owner s equity, net worth, or capital is the total value of assets that you own minus your total liabilities. To put it another way, owner s equity plus liabilities equal assets. Accounts representing these three items will make up your company s financial statements. Assets Liabilities Owner s Equity Owner s Equity Assets Liabilities Liabilities Assets Owner s Equity Computing the Total Assets, Liabilities, and Owner s Equity Find the assets, liabilities, and owner s equity. Kevin Crawford and Crystal Alesio started Customized Websites, a Web design firm. They each contributed \$10,000 of their own money and borrowed \$50,000 from the bank to pay for computers and the necessary peripherals. Computers cost them \$5,000, while printers, scanners, and software cost them \$27,500. Office furniture cost them an additional \$7,500, which they have not yet paid. What are their assets, liabilities, and owner s equity? Find the assets. Cash (2 \$10,000) Bank Loan (\$50,000 \$5,000 \$27,500) Computers (\$5,000) Computer Peripherals (\$27,500) Office Furniture (\$7,500) \$77,500 assets Find the liabilities. Bank Loan (\$50,000) Unpaid Office Furniture (\$7,500) \$57,500 liabilities Find the Owner s Equity. \$77,500 \$57,500 \$20,000 owner s equity Find the liabilities, assets, or owner s equity in the table below. Liabilities Assets Owner s Equity \$ 45,000 \$25,000 \$100,000 24,750 57,827 75, ,327 4, Standardized Test Dr. Doug Moore and Dr. Kim Peters started Valley Dental. They each contributed \$7,500 of their own money and borrowed \$100,000 for equipment and supplies. Dental equipment cost them \$81,000 and supplies amounted to \$3,467, which they have not yet paid. What are their liabilities? A. \$118,467 B. \$103,467 C. \$100,000 D. \$15,000 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Section 21-1 Study Guide 149

2 21-2 Calculating a Balance Sheet A balance sheet shows the financial position of your company on a certain date. You may prepare your balance sheet monthly, quarterly, or annually. The balance sheet shows your total assets, total liabilities, and owner s equity. The balance sheet is designed so that the assets appear on the left, while the liabilities and owner s equity appear on the right. As you ll recall from the previous section, the sum of the assets must equal the sum of the liabilities and owner s equity. Prepare a balance sheet. To start Customized Websites, Kevin Crawford and Crystal Alesio each contributed \$10,000 of their own money and borrowed \$50,000 from the bank to pay for computers and the necessary peripherals. Computers cost them \$5,000, while printers, scanners, and software cost them \$27,500. Office furniture cost them an additional \$7,500, which they have not yet paid. They are left with \$37,500 in cash. Prepare a balance sheet for Customized Websites. Customized Websites Balance Sheet Jan 31, 20 Assets Liabilities Cash \$ 37,500 Bank Loan \$50,000 Computers 5,000 Furniture Payable 7,500 Comp. Peripherals 27,500 Total Liabilities \$57,500 Office Furniture 7,500 Owner s Equity Capital 20,000 Total Assets \$77,500 Total Liabilities and Owner s Equity \$77,500 Find the total assets, total liabilities, and owner s equity. Total Bank Wages Total Owner s Cash Inventory Supplies Assets Loan Owed Liabilities Equity \$25,000 \$ 17,500 \$2,150 a. \$ 7,500 \$15,500 b. c. 50, ,000 5,936 a. 100,000 42,385 b. c. 62,375 38, a ,247 b. c. 35, ,585 9,462 a. 150, b. c. 5. Standardized Test To start Valley Dental, Dr. Moore and Dr. Peters each contributed \$7,500 of their own money and borrowed \$100,000 for equipment and supplies. Dental equipment cost them \$81,000 and supplies amounted to \$3,467. They also have unpaid taxes of \$5,500. What is the total amount of their assets on their balance sheet? A. \$120,500 B. \$115,000 C. \$105,500 D. \$113, Section 21-2 Study Guide Copyright by The McGraw-Hill Companies, Inc. All rights reserved.

5 21-5 Analyzing Balance Sheets and Income Statements Your business might analyze its income statement by finding what percentage any given item is of the net sales. Your business might also analyze its balance sheet by finding certain defined ratios. The current ratio is the ratio of total assets to total liabilities. The quick ratio, sometimes called the acid-test ratio, is the ratio of total assets minus inventory to total liabilities. Percentage of Net Sales Amount for Item Net Sales Current Ratio Total Assets Total Liabilities Quick Ratio (Total Assets Inventory) Total Liabilities Find the percentage of net sales. Customized Computers net sales for January amounted to \$74,76 According to its income statement, its cost of goods sold amounted to \$42,585. What is the cost of goods sold as a percentage of net sales, rounded to the nearest hundredth percent? Find the percentage of net sales. Percentage of Net Sales Amount for Item Net Sales \$42,585 \$74, % of net sales Find the percentage of net sales, rounded to the nearest hundredth percent. Amount for Item Net Sales % of Net Sales Gross profit \$55,000 \$250,000 Operating expenses 18,750 55,000 Find the current ratio and the quick ratio, rounded to the nearest tenth. Total Assets Inventory Liabilities Current Ratio Quick Ratio \$125,000 \$ 32,000 \$ 50,000 a. b. 287, , ,233 a. b. 5. Standardized Test Summer Sensation s sales for the third quarter totaled \$192,428, of which \$2,327 was returned. Its cost of goods sold totaled \$41,20 What is its cost of goods sold as a percentage of its net sales? A. 24% B. 7:1 C. 27% D. 6:1 Copyright by The McGraw-Hill Companies, Inc. All rights reserved. Section 21-5 Study Guide 153

6 21-6 Comparing Income Statements Using Horizontal Analysis When you perform a horizontal analysis, you compare two or more of your income statements for different periods. This is done by computing percentage changes from one income statement to another. When computing percentage change, the dollar amount on the earlier statement is the base figure. The amount of change is the difference between the base figure and the corresponding figure on the current statement. If an amount decreased from one income statement to the next, the change will be expressed as a negative number. Find the percentage change. Customized Computers net sales for January were \$74,762 and its cost of goods sold amounted to \$42,585. It net sales for February are \$81,334 and its cost of goods sold came to \$40,97 To the nearest hundredth percent, what is the percent change for net sales and cost of goods sold? Find the percentage change. Percentage Change Amount of Change Base Figure (\$81,344 \$74,762) \$74, % change in net sales (\$40,972 \$42,585) \$42,585 79% change in cost of goods sold Find the percentage change, rounded the nearest hundredth percent. Last Year (Base) This Year % Change \$650,000 \$700,000 59,000 52, , ,357 Income statements for O Reilly Associates showed these figures for July and August. Find the amount of change and the percentage change July August Amount of Change % Change Net sales \$205,255 \$200,398 a. b. Cost of goods sold 138, ,792 a. b. Gross profit on sales 66,898 57,606 a. b. Operating expenses 36,326 41,285 a. b. Net income 30,572 16,321 a. b. 9. Standardized Test Summer Sensation s sales for the third quarter totaled \$192,428, of which \$2,327 was returned. Its net sales for the fourth quarter totaled \$191,397. What is the percent change of net sales? A. 0.54% B. 0.68% C. 0.54% D. 0.68% 154 Section 21-6 Study Guide Copyright by The McGraw-Hill Companies, Inc. All rights reserved.

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