The MBA Math Monday series helps prospective MBA students to self assess their proficiency with the quantitative building blocks of the MBA first year curriculum.
The first MBA Math accounting exercise explained that balance sheets provide a snapshot of a firm’s financial condition at a moment in time, with “balance” referring to the equality between the left side’s assets and the right side’s combination of liabilities and equity. The second accounting exercise introduced transactions as the means by which the balance sheet changes over time. As long as the balance sheet equation (assets = liabilities + equity) is maintained for each transaction then the new balance sheet that results from a large sequence of transactions will remain in balance.
This exercise introduces journals and t-accounts as recording systems to handle the volume of transactions that companies generate. Modern accounting recording systems are automated, of course, but putting pencil to paper with journals and t-accounts helps beginning students to internalize the logic of accounting.
Spending time in the accounting trenches working with transactions is critical to developing an informed understanding of the financial statements that MBAs will analyze in their classes and careers.
Exercise:
| Ruston Company Balance Sheet As of January 4, 2009 (amounts in thousands) |
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| Cash | 9,300 | Accounts Payable | 2,500 |
| Accounts Receivable | 5,000 | Debt | 2,300 |
| Inventory | 5,500 | Other Liabilities | 6,500 |
| Property Plant & Equipment | 15,900 | Total Liabilities | 11,300 |
| Other Assets | 1,400 | Paid-In Capital | 5,700 |
| Retained Earnings | 20,100 | ||
| Total Equity | 25,800 | ||
| Total Assets | 37,100 | Total Liabilities & Equity | 37,100 |
Transfer the journal entries to T-accounts for the transactions below, compute closing amounts for the T-accounts, and construct a final balance sheet to answer the question.
Journal amounts in thousands
| Date | Account and Explanation | Debit | Credit |
| Jan 4 | Accounts Payable | 8 | |
| Cash | 8 | ||
| Paid money owed to supplier | |||
| Jan 5 | Property, Plant & Equipment | 49 | |
| Cash | 49 | ||
| Paid cash for machine | |||
| Jan 6 | Cash | 70 | |
| Paid-In Capital | 70 | ||
| Issued stock | |||
| Jan 7 | Cash | 20 | |
| Inventory | 16 | ||
| Retained Earnings | 4 | ||
| Sold and delivered product to customer | |||
| Jan 8 | Cash | 51 | |
| Debt | 51 | ||
| Borrowed money from bank | |||
| Jan 9 | Inventory | 14 | |
| Accounts Payable | 14 | ||
| Bought manufacturing supplies on credit | |||
| Jan 10 | Cash | 10 | |
| Accounts Receivable | 10 | ||
| Received customer payment |
What is the final amount in Total Assets?
Solution (with audio commentary): click here
Prof. Peter Regan created the self-paced, online MBA Math quantitative skills course and teaches live MBA courses at Dartmouth (Tuck), Duke (Fuqua), and Cornell (Johnson).