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Case Studies

Accounting Procedures

Critical Thinking

Case 3

James Patton starts a new business. Mr. Patton uses his personal car in the business with the expectation that later the business can buy the car. All expenses for operating the car, including license plates, gasoline, oil, tune-ups, and new tires, are paid for out of the business funds. Is this acceptable procedure?

The supervisor of cash management at Joe's Consulting Agency wants to see how much cash was received from cash sales and sales on account. Which of the following transactions would be included in determining this amt? How do you know your analysis is correct? Explain.

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No, this is not an acceptable accounting procedure. One of the basic account concepts-Business Entity-requires that personal and business expenses be kept separate. Only those car expenses directly connected with business activity should be paid for out of business funds.

Business Ethics

Is the action legal?

Does the action violate any laws?

Does the action violate company or professional standards?

Transactions

1. Received cash from sales.

2. Sold services on account to Johnson Company.

3. Paid cash for advertising

4. Paid cash to owner for personal use.

5. Received cash on account from Laundry Services.

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This is probably not satisfactory procedure. Few businesses need to have a balance sheet prepared as often as every day. Many businesses prepare a balance sheet once a month. Therefore, business owners and managers receive frequent and regular information that can be used to make business decisions.

Case 2

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The manager of Phillip's Dept. Store prepares a balance sheet at the end of each business day. Is this a satisfactory procedure?

Transactions 1, 2, and 5 would be included in determining how much cash was received from cash sales and sales on account. This can be verified by comparing the total of these three transactions with the balance in the cash account less the beginning balance of Cash.

Case 4

During the summer, Willard Kelly does odd jobs to earn money. Mr. Kelly keeps all his money in a single checking account. He writes checks to pay for personal items and for business expenses. These payments include personal clothing, school supplies, gasoline and his car, and recreation. Mr. Kelly uses his check stubs as his accounting records. Are Mr. Kelly's accounting procedures and records correct? Explain your answer.

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Neither Mr. Kelly's procecdures nor his records are corr

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