Financial Analysis Problem Tim Johnson runs a local photography studio, Action Images, Inc. Action Images is organized as a corporation. Tim's primary sources of revenue are from the events he is contracted to photograph, mostly sporting events, and from photography lessons given at a local community college. Most of Tim's photographic event customers pay him soon after they receive an invoice from Tim, approximately one week after the event, although in some cases Tim receives payment on the day of the event. The community college pays Tim at the end of each month that he teaches a class. Tim maintains the following accounts to account for these revenue transactions: Cash, Accounts Receivable, Photographic Revenue, Teaching Revenue.

Tim leases the studio where he does most of his work. He owns all his equipment, which consists of cameras, lenses, lighting, a computer, printer, furniture, and miscellaneous office equipment. These assets are accounted for in the following accounts: Photographic Equipment, Office Equipment, and Furniture.

Tim does most of the work himself, but he does employ part-time help on days of his photo events, and he also employs a part-time bookkeeper. Most months Tim has expenses for the studio rent, utilities, advertising, supplies, and insurance. The following accounts are used to account for these expenses: Rent Expense, Utilities Expense, Salaries Expense, Advertising Expense, Supplies Expense, and Insurance Expense.

Tim pays himself a monthly salary. In addition, if his business does well, he will receive a dividend from Action Images. The following stockholders' equity accounts are maintained by Tim: Common Stock and Retained Earnings.

During the month of November, Tim hired a new bookkeeper while his regular bookkeeper was away on vacation. The new bookkeeper was inexperienced, and Tim is concerned that things may not have been recorded correctly. He has asked you to review the following transactions. For each transaction, Tim provides you with the account, the amount either debited or credited, and an explanation for the transaction. In each case, the explanation is correct.

Required

a. For each entry, state if it is correct. If the entry is in error, make the necessary correction.

b. Will any of the errors cause the trial balance to be out of balance?

c. What effect did the errors have on Tim's net income for November?

Transcribed Image Text:

Account Debit Credit Cash 5,000 Photographic revenue 5,000 Issued common stock in exchange for cash. 2 Cash 2,000 Teaching revenue 2,000 Received $2,000 from the community college for course taught. 3 Cash 4,500 Accounts receivable 5,400 Received $4,500 from customers for work done last month. 4 Supplies expense 1,600 Cash 1,600 Purchase of a new camera for $1,600. 5 Rent expense 3,000 Cash 3,000 To pay the month's rent on the studio. 6 Supplies expense 150 Accounts receivable 150 Purchased printing supplies on account. 7 Salaries expense 3,000 Cash 3,000 Paid the salaries for the month.