Today I had a financial accounting midterm examination. It was made up of three questions, the bulk of which was a question that asked me to prepare a balance sheet, an income statement, and a statement of retained earnings given a list of accounts with balances on a given date (the year-end date). We were not told whether the accounts held credit or debit balances. We were not given the beginning-of-year balances for any account. We were not given any information other than the list of accounts.
I had never been presented with such a request in this way so I needed to pull a classic RJA move and learn how to do it on the exam. Read on for more.
So we were given a list like this:
| Account | Amount ($) |
|---|---|
| Cash | 35000 |
| Debit interest | 5000 |
| Sales | 693000 |
| Cost of Sales | 574000 |
| … | |
My first approach was one that was used in the textbook: pick from the list of items those that should go on the balance sheet, those that should go on the income statement, and those that go on the retained earnings report. If you’ve done accounting before, or even read what I wrote with some degree of care, you’ll notice what I eventually noticed: we’re simply given a list of accounts, not given a list of accounts, summary transactions, and amounts. So I switched from the approach of selecting what should go on which reports to deciding that everything should go on the balance sheet.
When it came to figuring out which accounts went where on the balance sheet many were obvious to me but a few left doubts. I set up a trial balance sheet with the remaining items off to the side. At this point I used a combination of “best guess” plus “how can I make this balance” to determine where accounts fit. In the end I felt pretty good having found a place for all accounts and balancing at somewhere in the area of $565 000.
But I was left scratching my head for the income statement. In questions that we had done we were always given information like “utility expense, $600″ or “sales revenue for the year was $48 300″. Initially it seemed to me that I wouldn’t know how much interest I paid, as an example, without being told. It was then when it occurred to me that the list of accounts included both permanent and temporary accounts!
Knowing that the temporary accounts were for the fiscal year I was now able to close them via the income statement, transferring the appropriate balances to this income summary to find my Net income for the year.
And with this I was one more account, the dividends account, away from completing the third statement: the statement of retained earnings. This was easily done and the question was complete.
The question ended up being more challenging than I expected, but I think the real challenge was that I had never encountered a question presented in this way before. Katelin was frustrated after the exam for the same reason, and I spoke to another classmate of mine who also had trouble with it. I doubt I did perfect but I am pleased with how I did none-the-less.
Next up: Human Resources Management, Thursday.