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3. Importance of Accounting 3 C1 For example, the sale by Apple of an iPhone. Keep a chronological log of transactions. Prepare reports such as financial statements.

4. Users of Financial Information 4 C2 Accounting is called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. Accounting serves many users who can be divided into two groups: external users and internal users.

5. Opportunities in Accounting 5 Accounting information is in all aspects of our lives. When we earn money, pay taxes, invest savings, budget earnings, and plan for the future, we use accounting. C2

6. 6 Fraud Triangle C3 Three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization. Envision a way to commit fraud with a low perceived risk of getting caught Fails to see the criminal nature of the fraud or justifies the action Must have some pressure to commit fraud, like unpaid bills

7. Generally Accepted Accounting Principles (GAAP) 7 C4 Financial accounting is governed by concepts and rules known as generally accepted accounting principles (GAAP). GAAP aims to make information relevant, reliable, and comparable. Relevant information affects decisions of users. Reliable information is trusted by users. Comparable information is helpful in contrasting organizations.

8. Accounting Principles 8 C4 Measurement Principle (or Cost Principle) Actual Accounting information is based on actual cost.; Actual cost is considered objective. Expense Recognition Principle (or Matching Principle) A company must record its expenses incurred to generate the revenue reported. Full Disclosure Principle A company is required to report the details behind financial statements that would impact users’ decisions. Revenue Recognition Principle earned 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received.

9. Accounting Assumptions 9 Monetary Unit Monetary Unit Assumption Express transactions and events in monetary, or money, units. Business Entity Business Entity Assumption A business is accounted for separately from other business entities, including its owner. Time Period Time Period Assumption Presumes that the life of a company can be divided into time periods, such as months and years. Going-Concern Going-Concern Assumption Reflects assumption that the business will continue operating instead of being closed or sold. C4

10. Transaction Analysis and the Accounting Equation 10 The Accounting Equation Expanded Accounting Equation: A1 Net Income Liabilities Equity Assets =+ Equity Assets = Liabilities + Contributed Capital + Retained Earnings = Liabilities + Common Stock - Dividends + Revenues - Expenses

11. NEED-TO-KNOW (1-3) Use the accounting equation to compute the missing financial statement amounts. AssetsLiabilitiesEquity Bose$150$30$120 Vogue$400$100$300 = + Use the expanded accounting equation to compute the missing financial statement amounts. AssetsLiabilitiesEquity Common Stock DividendsRevenuesExpenses Nikon$200$80$120$100$0$60($40) YouTube$400$160$240$220($10)$120($90) = + + - 11

12. NEED-TO-KNOW (1-4) Jan. 1Jamsetji invested $4,000 cash in the Tata Company in exchange of common stock. Jan. 5The company purchased $2,000 of equipment on credit. Jan. 14The company provided $540 of services for a client on credit. Jan. 21The company paid $250 cash for an employee’s salary Assume Tata began operations on January 1 and completed the following transactions during its first month of operations. Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Equipment; Accounts Payable; Common Stock; Dividends; Revenues; and Expenses. Liabilities CashAccounts Receivable EquipmentAccounts Payable + Common Stock - Dividends+ Revenues- Expenses Jan. 1$4,000 Jan. 5$2,000 Jan. 14$540 Jan. 21($250) $3,750$540$2,000 $4,000$0$540($250) + EquityAssets = Total Assets$6,290 Total Liabilities2,000 Total Equity$4,290 12

13. Financial Statements 13 The four financial statements and their purposes are: Income statement 1. Income statement — describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Statement of retained earnings 2. Statement of retained earnings— explains changes in equity from net income (or loss) and from any dividends over a period of time. Balance sheet 3. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. Statement of cash flows 4. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time. The four financial statements and their purposes are: Income statement 1. Income statement — describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Statement of retained earnings 2. Statement of retained earnings— explains changes in equity from net income (or loss) and from any dividends over a period of time. Balance sheet 3. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. Statement of cash flows 4. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time. P2

14. NEED-TO-KNOW (1-5) Income StatementStatement of Retained EarningsBalance Sheet AssetsDetail of Assets LiabilitiesDetail of Liabilities Equity: + Common stock Beginning Retained Earnings - Dividends + Ending Retained Earnings + RevenuesDetail of Revenues ± Net income (loss) - Expenses Detail of ExpensesEnding Retained Earnings Net income (loss) Prepare the (a) income statement, (b) statement of retained earnings, and (c) balance sheet, for Apple using the following condensed data from its fiscal year ended September 28, 20X3. 14 Accounts payable$22,367Investments and other assets$163,042 Other liabilities61,084Land and equipment16,597 Cost of sales (expense)119,724Selling and other expense14,149 Cash14,259Accounts receivable13,102 Retained Earnings, Sept. 29, 20X2101,289Net income37,037 Dividends in fiscal year 20X334,070Retained Earnings, Sept. 28, 20X3104,256 Revenues170,910 Common stock 19,293 Common stock

15. NEED-TO-KNOW Retained Earnings, Sept. 28, 20X3$104,256 Total liabilities83,451 Common Stock 19,293 Total assets $207,000 Total liabilities and equity $207,000 APPLE Income Statement For Fiscal Year Ended September 28, 20X3 APPLE Statement of Retained Earnings For Fiscal Year Ended September 28, 20X3 Equity APPLE Balance Sheet September 28, 20X3 $22,367 Revenues$170,910Retained Earnings, Sept. 29, 20X2$101,289 Less: Dividends(34,070) Assets Expenses Cost of sales (expense)$119,724 Cash$14,259Accounts payable Other liabilities61,084 Liabilities Plus: Net income37,037 Total expenses133,873 Selling and other expense14,149 Net income$37,037 Accounts receivable13,102 Land and equipment16,597 Investments and other assets163,042 15 Accounts payable$22,367Investments and other assets$163,042 Other liabilities61,084Land and equipment16,597 Cost of sales (expense)119,724Selling and other expense14,149 Cash14,259Accounts receivable13,102 Retained Earnings, Sept. 29, 20X2101,289Net income37,037 Dividends in fiscal year 20X334,070Retained Earnings, Sept. 28, 20X3104,256 Revenues170,910 Common stock 19,293 Retained earnings 104,256 Total equity 123,549

16. 1) Return on Assets 16 A2 Return on assets (ROA) is stated in ratio form as net income divided by the average of total assets invested. Net income Average total assets Return on assets =

17. C 1 Analyzing and Posting Process 17 The accounting process identifies business transactions and events, analyzes and records their effects, and summarizes and presents information in reports and financial statements. These reports and statements are used for making investing, lending, and other business decisions.

18. Sales Tickets Bank Statements Purchase Orders Checks Source Documents 18 Bills from Suppliers Employee Earnings Records C 1

19. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The Account and Its Analysis 19 The general ledger is a record containing all accounts used by the company. C 2

20. The Account and Its Analysis 20 C 2 Common Stock Dividends

21. Land Equipment Buildings Cash Notes Receivable Supplies Prepaid Accounts Accounts Receivable Asset Accounts 21 C 2

22. Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts 22 C 2

23. Equity Accounts Revenues Common Stock Dividends Expenses Equity Accounts 23 C 2

24. The Account and Its Analysis 24 C 2 Revenues and owner’s contributions increase equity. Expenses and owner’s withdrawals decrease equity.

25. Debits and Credits 25 A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. C 4

26. Liabilities Equity Assets =+ Double-Entry Accounting 26 C 4

27. Double-Entry Accounting 27 C 4 Here is the expanded accounting equation showing the equity section.

28. Journalizing and Posting Transactions 28 P 1

29. c.Dollar amount of debits and credits Journalizing Transactions 29 a.Transaction Date d.Transaction explanation b.Titles of Affected Accounts P 1 Common stock

30. Searching for and Correcting Errors 30 If the trial balance does not balance, the error(s) must be found and corrected. columns  Make sure the trial balance columns are correctly added. from the ledger  Make sure account balances are correctly entered from the ledger. mistakenly placed  See if debit or credit accounts are mistakenly placed on the trial balance. balance in the ledger  Re-compute each account balance in the ledger. posted correctly  Verify that each journal entry is posted correctly. equal  Verify that each original journal entry has equal debits and credits. P 2

31. Presentation Issues 31 1.Dollar signs are not used in journals and ledgers. 2.Dollar signs appear in financial statements and other reports such as trial balances. The usual practice is to put dollar signs beside only the first and last numbers in a column. 3.When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. 4.Commas are always used in financial statements. 5.Companies commonly round amounts in reports to the nearest dollar, or even to a higher level. 1.Dollar signs are not used in journals and ledgers. 2.Dollar signs appear in financial statements and other reports such as trial balances. The usual practice is to put dollar signs beside only the first and last numbers in a column. 3.When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. 4.Commas are always used in financial statements. 5.Companies commonly round amounts in reports to the nearest dollar, or even to a higher level. P 3

32. 2) Debt Ratio 32 Evaluates the level of debt risk. not A higher ratio indicates that there is a greater probability that a company will not be able to pay its debt in the future. A 2 Total Liabilities Total Assets Debt Ratio =

33. Accrual Basis versus Cash Basis 33 Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses are recorded when cash is paid. C 1

34. Cash Basis Revenues are recognized when cash is received and expenses are recorded when cash is paid. Accrual Basis versus Cash Basis 34 Non-GAAPNon-GAAP C 1 Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred.

35. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$5,000 Step 2: Determine what the current account balance should equal.$1,000 Unadj.5,000 Adjustment4,000 Adj.1,000 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Insurance expense4,000 Prepaid Insurance4,000 Prepaid Insurance 1) Prepaid Insurance. The Prepaid Insurance account has a $5,000 debit balance to start the year. A review of insurance policies and payments shows that $1,000 of unexpired insurance remains at year- end. Prepaid Insurance General Journal P 1 35 Income Statement Revenue Debit Expense Balance Sheet Credit Asset Liability

36. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$12,000 Step 2: Determine what the current account balance should equal.$9,000 Oct. 112,000 Adjustment3,000 Dec. 319,000 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Rent Expense3,000 Prepaid Rent3,000 Prepaid Rent General Journal Prepaid Rent 2) Prepaid Rent. On October 1 of the current year, the company prepaid $12,000 for one year of rent for facilities being occupied from that day forward. The company debited Prepaid Rent and credited Cash for $12,000. December 31 year-end statements must be prepared. P 1 36 Income Statement Revenue Debit Expense Balance Sheet Credit Asset Liability

37. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$3,000 Step 2: Determine what the current account balance should equal.$500 Unadj.3,000 Adjustment2,500 Dec. 31500 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Supplies Expense2,500 Supplies2,500 Supplies 3) Supplies. The Supplies account has a $1,000 debit balance to start the year. Supplies of $2,000 were purchased during the current year and debited to the Supplies account. A December 31 physical count shows $500 of supplies remaining. Supplies General Journal P 1 37 Income Statement Revenue Debit Expense Balance Sheet Credit Asset Liability

38. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$0 Step 2: Determine what the current account balance should equal.$3,000 Unadj.0 Adjustment3,000 Dec. 313,000 ($38,000 - $8,000) 10 years Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Depreciation Expense3,000 Accumulated Depreciation3,000 Accumulated Depreciation General Journal Accumulated Depreciation 4) Accumulated Depreciation. The company has only one fixed asset (equipment) that it purchased at the start of this year. That asset had cost $38,000, had an estimated life of 10 years, and is expected to be valued at $8,000 at the end of the 10-year life. P 1 38 Income Statement Revenue Debit Expense Balance Sheet Credit Contra-Asset Liability

39. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$24,000 Step 2: Determine what the current account balance should equal.$16,000 Sept. 124,000 Adjustment8,000 Dec. 3116,000 (8 mos. @ $2,000) Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Unearned Rent Revenue8,000 Rent Revenue8,000 General Journal Unearned Rent Revenue 5) Unearned Rent Revenue.The company collected $24,000 rent in advance on September 1, debiting Cash and crediting Unearned Rent Revenue. The tenant was paying 12 months rent in advance and occupancy began September 1. Unearned Rent Revenue Income Statement Revenue Expense Balance Sheet Asset Liability Debit Credit P 1 39

40. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$600 Step 2: Determine what the current account balance should equal.$400 Nov. 1600 Adjustment200 Dec. 31400 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Unearned Services Revenue200 Services Revenue200 Unearned Services Revenue 6) Unearned Services Revenue.The company charges $100 per month to spray a house for insects. A customer paid $600 on November 1 in advance for six treatments, which was recorded with a debit to Cash and a credit to Unearned Services Revenue. At year-end, the company has applied two treatments for the customer. Unearned Services Revenue General Journal Income Statement Revenue Expense Balance Sheet Asset Liability Debit Credit P 1 40

41. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$0 Step 2: Determine what the current account balance should equal.$5,000 Unadj.0 Adjustment5,000 Dec. 315,000 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Salaries Expense5,000 Salaries Payable5,000 Salaries Payable 7) Salaries Payable.At year-end, salaries expense of $5,000 has been incurred by the company, but is not yet paid to employees. Salaries Payable General Journal Income Statement Revenue Expense Balance Sheet Asset Liability Credit Debit P 1 41

42. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$0 Step 2: Determine what the current account balance should equal.$1,000 Unadj.0 Adjustment1,000 Dec. 311,000 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Interest Expense1,000 Interest Payable1,000 Interest Payable 8) Interest Payable.At its December 31 year-end, the company holds a mortgage payable that has incurred $1,000 in annual interest that is neither recorded nor paid. The company intends to pay the interest on January 3 of the next year. Interest Payable General Journal Income Statement Revenue Expense Balance Sheet Asset Liability Credit Debit P 1 42

43. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$0 Step 2: Determine what the current account balance should equal.$1,000 Unadj.0 Adjustment1,000 Dec. 311,000 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Accounts Receivable1,000 Services Revenue1,000 Accounts Receivable General Journal Accounts Receivable 9) Accounts Receivable.At year-end, the company has completed services of $1,000 for a client, but the client has not yet been billed for those services. Income Statement Revenue Expense Balance Sheet Asset Liability Debit Credit P 1 43

44. NEED-TO-KNOW Step 1: Determine what the current account balance equals.$0 Step 2: Determine what the current account balance should equal.$500 Unadj.0 Adjustment500 Dec. 31500 Step 3: Record an adjusting entry to get from step 1 to step 2. DateDebitCredit Dec. 31Interest Receivable500 Interest Revenue500 Interest Receivable 10) Interest Receivable.At year-end, the company has earned, but not yet recorded, $500 of interest earned from its investments in government bonds. Interest Receivable General Journal Income Statement Revenue Expense Balance Sheet Asset Liability Debit Credit P 1 44

45. Preparing Financial Statements from an Adjusted Trial Balance 45 P3 Step 1— Prepare income statement using revenue and expense accounts from trial balance. Step 2—Prepare statement of retained earnings using retained earnings and dividends from trial balance; and pull net income from step 1. Step 3—Prepare balance sheet using asset and liability account from trial balance; and pull updated retained earnings balance from step 2. Step 4—Prepare statement of cash flows from changes in cash flows for the period (illustrated later in the book).

46. NEED-TO-KNOW Use the following adjusted trial balance of Magic Company to prepare its (1) income statement, (2) statement of Retained earnings, and (3) balance sheet (unclassified), for the year ended, or date of, December 31, 2015. The Retained Earnings account balance is $45,000 at December 31, 2014. P3 46 DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000

47. DebitCredit Fees earned$79,000 Expenses Salaries expense$56,000 Office supplies expense8,000 64,000 Net income$15,000 For Year Ended December 31, 2015 Magic Company Income Statement P 3 47 The Income Statement DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000

48. DebitCredit Fees earned$79,000 Retained Earnings, Dec. 31 2014$45,000 Expenses Plus: Net income15,000 Salaries expense$56,000 Less: Dividends(20,000) Office supplies expense8,000 Retained Earnings, Dec. 31 2015$40,000 64,000 Net income$15,000 For Year Ended December 31, 2015 Magic Company Income Statement Statement of Retained Earnings P 3 48 The Statement of Retained Earnings DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000

49. Fees earned$79,000 Retained Earnings, Dec. 31 2014$45,000 Expenses Plus: Net income15,000 Salaries expense$56,000 Less: Dividends(20,000) Office supplies expense8,000 Retained Earnings, Dec. 31 2015$40,000 64,000 Net income$15,000 Cash$13,000Accounts payable$12,000 Accounts receivable17,000Long-term notes payable33,000 Land85,000Total liabilities45,000 Common Stock30,000 Total assets $115,000Total liabilities and equity115,000 AssetsLiabilities Equity For Year Ended December 31, 2015 Magic Company Balance Sheet December 31, 2015 Magic Company Income Statement Statement of Owner’s Equity P 3 49 DebitCredit DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000 40,000Retained Earnings Total Equity70,000 Balance Sheet

50. Recording Closing Entries 50  Close Credit Balances in Revenue Accounts to Income Summary.  Close Debit Balances in Expense accounts to Income Summary.  Close Income Summary account to Retained Earnings.  Close Dividends to Retained Earnings. P 4

51. NEED-TO-KNOW DebitCredit Magic Company Trial Balance December 31, 20X2 Use the adjusted trial balance of Magic Company to prepare its closing entries. P 4 51 DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000

52. DateDebitCredit Dec. 31Fees earned79,000 Income summary79,000 Dec. 31Income summary64,000 Salaries expense56,000 Office supplies expense8,000 Dec. 31Income summary15,000 Retained earnings15,000 Dec. 31Retained earnings20,000 Dividends20,000 General Journal Expenses64,000Revenues79,000 Net income15,000 Closing15,000 0 12/31/201445,000 Dividends 20,000Net income15,000 12/31/201540,000 Income summary Retained earnings DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Retained earnings45,000 Dividends20,000 Fees earned79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 P 4 52 Common stock30,000

53. Cash$13,000Accounts payable$12,000 Accounts receivable17,000Long-term notes payable33,000 Land85,000Total liabilities45,000 Common stock30,000 Total assets$115,000Total liabilities and equity115,000 AssetsLiabilities Equity Magic Company Balance Sheet December 31, 2015 Expenses64,000Revenues79,000 Net income15,000 Closing15,000 0 12/31/201445,000 Dividends 20,000Net income15,000 12/31/201540,000 Income Summary Retained Earnings P 4 53 Retained earnings DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Totals$115,000 Retained earnings40,000 Total equity75,000

54. Accounting Cycle 54 C 2

55. NEED-TO-KNOW Magic Company Use the adjusted trial balance of Magic Company to prepare its classified balance sheet as of December 31, 2015. C 3 55 DebitCredit Adjusted Trial Balance December 31, 20X2 DebitCredit Trial Balance DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000

56. NEED-TO-KNOW Current assets Cash$13,000 Accounts receivable17,000 Total current assets30,000 Plant assets Land85,000 Total plant assets85,000 Total assets$115,000 Current liabilities Accounts payable$12,000 Total current liabilities12,000 Long-term notes payable 33,000 Total liabilities$45,000 Common Stock 30,000 Total liabilities and equity Magic Company Balance Sheet December 31, 2015 Use the adjusted trial balance of Magic Company to prepare its classified balance sheet as of December 31, 2015. Assets Liabilities Equity $115,000 Long-term liabilities DebitCredit Magic Company Adjusted Trial Balance December 31, 20X2 C 3 56 DebitCredit Adjusted Trial Balance December 31, 20X2 DebitCredit Trial Balance DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000 Retained Earnings40,000 Total equity70,000

57. 3) Profit Margin 57 The profit margin ratio measures the company’s net income to net sales. Profit Margin = A 1 Limited Brands, Inc. Net Income Net Sales

58. 4) Current Ratio 58 Helps assess the company’s ability to pay its debts in the near future Current ratio = Current assets Current liabilities Limited Brands, Inc. A 2

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