Kim is an accountant for Jacqueline Daniels Kitchenry (JDK), a company owned by a celebrity chef. JDK has two main components: a service business, which provides high-end catering in the Manhattan area, and a merchandising business that sells cookware and cooking supplies nationwide. In her role, Kim must prepare separate statements for these two components of JDK. Kim is currently teaching Edward, her intern, about the company's accounts and how they are handled. Edward tells her that he is familiar with what a balance sheet is and how it's prepared, so she asks him a few questions to gauge his level of knowledge.

1. Why is a balance sheet important?

2. What information is provided on a balance sheet?

3. What steps are involved in preparing a balance sheet?

4. How is a balance sheet for a merchandising business different from one for a service business?

Analyze

Analyze the impact of different transactions on a balance sheet.

1. JDK purchases two new delivery trucks for its service business, each at a cost of $25,000. The company puts down $30,000 on the trucks and finances the remainder of the amount. a. How will this purchase affect the company's assets?

b. How will this purchase affect the company's liabilities and equity?

2. JDK's merchandising business purchases $200,000 worth of inventory over the course of the quarter. At the end of the quarter, it has sold $175,000 of it at a cost of $280,000. a. How will this transaction affect the company's assets?

b. How will this transaction affect the company's liabilities and equity?

3. Consider the purchase of the delivery trucks and the unsold inventory described previously. a. If JDK's merchandising business had purchased these trucks instead of the service business, how would this purchase have been reflected on the business's balance sheet?

b. If JDK's service business had purchased and sold this inventory instead of the merchandising business, how would this transaction have been reflected on the business's balance sheet?

Synthesize

Prepare a balance sheet given a business scenario for both a merchandising and a service business.

Now, Kim and Edward are getting ready to prepare the balance sheet for JDK for the third quarter of the year. Because this business has two components, there will be two balance sheets. They start with the adjusted trial balances and the statements of owner's equity for the business's merchandising and service components.