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Mcgraw Hill Financial Accounting Chapter 3 Solutions

McGraw Hill Financial Accounting Chapter 3 Solutions is an invaluable resource for students and professionals alike. Providing comprehensive and detailed solutions to the questions posed in this chapter, it is a great way to ensure a full understanding of key concepts. It covers topics such as Assets and Liabilities, Accrual Accounting Concepts, Adjusting Entries and Closing Procedures. With step-by-step explanations, users can quickly get up to speed with financial accounting principles.

Solutions To McGraw Hill’s Financial Accounting Chapter 3

McGraw Hill’s Financial Accounting Chapter 3 Solutions contains answers to all of the questions presented in the text and follows the order of the chapters in the textbook. Answers and explanations are clear, concise, and detailed; highlighting relevant information as well as key terms to enhance understanding of accounting concepts.

Overview

In the third chapter of Mcgraw-Hill’s Financial Accounting, your professor will go over the basics of financial statements. You’ll learn about the income statement, balance sheet, and statement of cash flows. You’ll also take a look at accounting for partnerships and corporations. Your professor will finish up this chapter with a look at inventory accounting.

Mcgraw Hill Financial Accounting Chapter 3 Solutions

The Basic Accounting Equation

In this post, we will focus on the accounting equation and how it ties into the financial statement. The basic accounting equation is Assets = Liabilities + Shareholders’ Equity. What this means is that a company’s assets are equal to its liabilities plus its shareholders’ equity. It is important for a company to make sure that their assets are worth more than their liabilities and equity. If not, then they would be considered insolvent. In order to analyze the three financial statements (income statement, balance sheet, and cash flow), you need four pieces of information: net income, total liabilities, total shareholder’s equity, and retained earnings from the balance sheet. One way of analyzing these three statements is by using ratios.


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Transactions And Their Effects On The Accounting Equation

The first transaction for this chapter is Marian purchases equipment for $8,000. This transaction will be recorded on the balance sheet as an increase in assets and an expense. The next transaction is Marian pays $750 cash down payment and borrows the remaining amount of $7,250 from a local bank. This transaction will be recorded on the balance sheet as an increase in liabilities and an increase in shareholders’ equity. The third transaction is Marian collects $8,000 cash from Doug in exchange for transferring ownership of the equipment. This transaction will be recorded on the balance sheet as a decrease in assets and a decrease in liabilities.

Journalizing Transactions

A journal entry is used when a company buys something or sells something. When a company buys something, the debit account increases, and the credit account decreases. For example, if Company A purchases inventory worth $1000 from Company B on credit, Company A would make a journal entry as follows: 

Debit Inventory 1000 

Credit Accounts Payable 1000

Posting To Ledgers

The solutions for this chapter are as follows: 

  1. A $4,000 cash sale is recorded on the Cash account and on the Sales account. 
  2. A $1,000 cash purchase is recorded on the Cash account and on the Purchases account. 
  3. An accounts receivable of $3,000 is collected in full and so it is credited to Cash as well as to Accounts Receivable. 
  4. Accrued salaries expense of $2,000 is paid in cash and so it is debited to Cash as well as Accrued Salaries Expense.


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Mcgraw Hill Financial Accounting Chapter 3 Solutions

Unadjusted Trial Balance

The unadjusted trial balance is a list of all the assets, liabilities and stockholders’ equity accounts. Below are two unadjusted trial balances. The first is the historical cost accounting method which represents the historical value of an asset on the date that it was purchased and placed in service. The second is the current cost accounting method which represents an asset’s replacement cost at the time that it was acquired.

Financial Statements

The balance sheet, statement of cash flows and income statement are the three primary financial statements. The balance sheet is a snapshot of the company’s assets, liabilities and shareholders’ equity at a given point in time. The statement of cash flows summarizes the net result of transactions over a given period. The income statement shows revenues, expenses, gains and losses incurred during a certain time period. If an organization has positive net income then this means that revenue exceeds expenses.

Mcgraw Hill Financial Accounting Chapter 3 Solutions

Adjusting Entries

-Adjusting entries are used to record accounting changes that do not affect the financial statements. 

-The following five adjusting entries were recorded in August:

-Rental expense was reduced by $200 because the amount of rent owed from July had been paid in cash at the beginning of August. 

-The interest payable account was credited for $1000 because a loan was taken out for equipment for the company. 

-A new telephone system was purchased and put on credit, so an asset account called Telephone System was increased by $2000. 

-Goods on hand decreased by $100 when they were purchased from suppliers. 

-Supplier accounts payable decreased by $500 when the goods were purchased from suppliers.


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Adjusted Trial Balance

Once the trial balance is completed, it must be adjusted by removing the accounts that represent liabilities. To remove these accounts, we must first find and match them on the trial balance with their corresponding assets. The sum of all matching account pairs should always equal zero. Therefore, if a matching pair has a negative value on one side, there will be a corresponding positive value on the other side. Once these pairs are found and removed from the trial balance, any remaining entries should have zero balances and can be removed as well.

Closing Entries

Cash accounting records all transactions that involve the transfer of cash, while accrual accounting records transactions without regard to whether or not they involve a cash transfer. The time difference between these two types of accounting is important because it dictates what is recorded in the balance sheet and income statement. Cash accountings record all assets and liabilities, as well as any changes in equity (ownership). Accrual accountings only show assets, liabilities and equity changes that are related to earning revenue or incurring expenses. When looking at a company’s income statement for a given year under both methods, accrual accounting will produce different results than cash accounting because it accounts for revenue earned but not yet collected from customers, and revenue from past years that has been recognized this year.

Post-Closing Trial Balance

When we close the books, our accounting system will summarize the results of all transactions that occurred during the life of our business. To analyze these results and make projections for future periods, we must prepare a post-closing trial balance. This balance summarizes what is known about our assets, liabilities and owner’s equity as of a specific date. It is also used for financial statement purposes.

A post-closing trial balance includes four sections: assets, liabilities, owner’s equity, and income summary. The first three sections are typically found on the right side of an individual page while the income summary section is usually placed at the top or bottom of a page.

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FAQ

What are the key concepts in financial accounting?

The key concepts in financial accounting are the balance sheet and income statement. The balance sheet shows a company’s assets, liabilities and equity while the income statement displays the company’s revenues, expenses and net income.

How do you prepare financial statements?

The preparation of financial statements starts with the development of an income statement, which is then followed by a balance sheet and finally a statement of cash flows. The income statement represents the net profit or loss for a period of time, typically one year. There are two types of income statements: (1) the simple statement that includes only revenue and expenses, and (2) the complete statement that provides additional information such as depreciation expense and long-term debt.

What is the difference between cash and accrual accounting?

Cash accounting is when you account for transactions by the date they are received or paid. Accrual accounting is when you account for transactions by the date they were made. The difference between these two methods is that in cash accounting, revenue and expenses are not accounted for until the cash changes hands. In accrual accounting, revenues and expenses are accounted for at the time of sale or delivery respectively.