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Financial Accounting 4th Canadian Edition Solution Manual

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    Chapter 1 Business Decisions and Financial Accounting ANSWERS TO QUESTIONS 1. Accounting is a system of analyzing, recording, and summarizing the results of a business’s activities and then reporting them to decision makers . 2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy to establish. Another advantage is that income from a sole proprietorship is taxed only once in the hands of the individual proprietor (income from a corporation is taxed in the corporation and then again in the hands of the individual proprietor). A disadvantage of operating as a sole proprietorship, rather than a corporation, is that the individual proprietor can be held responsible for the debts of the business. 3. Financial accounting focuses on preparing and using the financial statements that are made available to owners and external users such as customers, creditors, and potential investors who are interested in reading them. Managerial accounting focuses on other accounting reports that are not released to the general public, but instead are prepared and used by employees, supervisors, and managers who run the company. 4 . Financial reports are used by both internal and external groups and individuals. The internal groups are comprised of the various managers of the business. The external groups include investors, creditors, governmental agencies, other interested parties, and the public at large. 5 . The business itself, not the individual shareholders who own the business, is viewed as owning the assets and owing the liabilities on its balance sheet. A business’s balance sheet includes the assets, liabilities, and shareholders’ equity of only that business and not the personal assets, liabilities, and equity of the shareholders . The financial statements of a company show the results of the business activities of only that company. 6 . (a) Operating – These activities are directly related to earning profits. They include buying supplies, making products , serving customers, cleaning the premises , advertising, renting a building, repairing equipment , and obtaining insurance coverage. (b) Investing – These activities involve buying and selling produ ctive resources with long lives ( such as buildings, land, equipment, and tools ), purchasing investments , and lending to others . (c) Financing – Any borrowing from banks, repaying bank loans, receiving contributions from shareholders , or paying dividends to shareholders ar e considered financing activities.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 2 7 . The heading of each of the four primary financial statements should include the following: (a) Name of the business (b) Name of the statement (c) Date of the statement, or the period of time 8 . (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and shareholders’ equity) of a business at a point in time. (b) The purpose of the income statement is to present information about the revenues, expenses, and net income of a business for a specified period of time. (c) The statement of retained earnings reports the way that net income and the distribution of dividends affected the financial position of the company during the period. (d) The purpose of the statement of cash flows is to summarize how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time. 9 . The income statement, statement of retained earnings, and statement of cash flows would be dated “For the Year Ended December 31, 20 1 4 ,” because they report the inflows and outflows of resources during a period of time. In contrast, the balance sheet would be dated “At Dec ember 31, 20 1 4 , ” because it represents the assets, liabilities and shareholders’ equity at a specific date. 10 . Net income is the excess of total revenues over total expenses. A net loss occurs if total expenses exceed total revenues. 1 1 . The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders’ Equity. Assets are the economic resources controlled by the company. Liabilities are amounts owed by the business. Shareholders’ equity is the owners’ claims to the business. It includes amounts contributed to the business (by investors through purchasing the company’s s hares ) and the amounts earned and accumulated through profitable business operations. 1 2 . The equation for the income statement is Revenues – Expenses = Net Income. R evenues are increases in a company’s resources, arising primarily from its operating activities. Expenses are decreases in a company’s resources, arising primarily from its operating activities. Net I ncome is equal to revenues minus expenses. (If expenses are greater than revenues, the company has a Net Loss.) 1 3 . The equation for the statement of retained earnings is: Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings. It begins with beginning - of - the - year retained earnings which is the prior year’s ending retained earnings reported on the prior year’s balance sheet. The current year's net income reported on the income statement is added and the current year's dividends are subtracted from this amount. The ending retained earnings amount is reported on the end - of - year balance sheet.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 3 1 4 . The equation for the statement of cash flows is: Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities = Change in cash for the period. Change in cash for the period + B eginning cash balance = E nding cash balance. The net cash flows for the period represent the increase or decrease in cash that occurred during the period. Cash flows from operating activities are cash flows directly related to earning income (normal business activity). Cash flows from investing activities include cash flows that are related to the acquisition or sale of the company’s long - term assets. Cash flows from financing activities are directly related to the financing of the company. 1 5 . Currently, the Chartered Professional Accountants of Canada (CPA) is given the primary responsibility for setting the detailed rules that become Generally A ccepted A ccounting P rinciples (GAAP) in Canada . ( Internationally, the International Accounting Standards Board (IASB) has the responsibility for setting accounting rules known as International Financial Reporting Standards (IFRS). ) 1 6 . The main goal of accounting rules is to ensure that companies produce useful financial information for present and potential investors, lenders, and other creditors in making decisions in their capacity as capital providers. Financial information must show relevance and faithful representation, as well as be comparable, verifiable, timely, and understandable. 1 7 . An ethical dilemma is a situation where following one moral principle would result in violating another . Three steps that should be considered when evaluating ethical dilemmas are: (a) Identify who will benefit from the situation (often, the manager or employee) and how others will be harmed (other employees, the company’s reputation, owners, creditors, and the public in general). (b) Identify the alternative courses of action. (c) Choose the alternative that is the most ethical – that which you would be proud to have reported in the news media. Often, there is no one right answer and hard choices will need to be made. F ollowing strong ethical practices is a key part of ensuring good financial reporting by businesses of all sizes.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 4 1 8 . Accounting frauds and cases involving academic dishonesty are similar in many respects. Both involve deceiving others in an attempt to influence their actions or decisions, often resulting in temporary personal gain for the deceiver. For example, when an accounting fraud is committed, financial statement users may be misled into making decisions they wouldn’t have made had the fraud not occurred (e.g., creditors might loan money to the company, investors might invest in the company, or shareholders might reward top managers with big bonuses). When academic dishonesty is committed, instructors might assign a higher grade than is warranted by the student’s individual contribution. A nother similarity is that, a s a consequence of the dece pt ion , innocent bystanders may be adversely affected by fraud and academic dishonesty. F raud may require the company to charge higher prices to customers to cover costs incurred as a result of the fraud. Academic dishonesty may lead to stricter grading standards, with significant deductions taken for inadequate documentation of sources referenced. A final similarity is that if fraud and academic dishonesty are ultimately uncovered, both are likely to lead to adverse long - term consequences for the perpetrator. Fraudsters may be fined, imprisoned, and encounter an abrupt end to their careers. Students who cheat may be penalized through lower course grades or expulsion, and might find it impossible to obtain academic references for employment applications.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 5 Authors' Recommended Solution Time (Time in minutes) Mini - exercises Exercises Problems Skills Development Cases* Continuing Case No. Time No. Time No. Time No. Time No. Time 1 3 1 10 CP1 - 1 45 1 20 1 45 2 11 2 10 CP1 - 2 10 2 20 3 12 3 15 CP1 - 3 60 3 30 4 6 4 25 PA1 - 1 45 4 30 5 6 5 25 PA1 - 2 10 5 20 6 6 6 10 PA1 - 3 50 6 30 7 6 7 15 PB1 - 4 45 7 45 8 4 8 10 PA1 - 5 50 9 4 9 20 PB1 - 1 45 10 3 10 10 PB1 - 2 10 11 3 11 3 PB1 - 3 45 12 6 12 3 PB1 - 4 10 13 6 PB1 - 5 50 14 6 15 6 16 12 * Due to the nature of cases, it is very difficult to estimate the amount of time students will need to complete them. As with any open - ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear, and by offering suggestions (about how to research topics or what companies to select). The skills developed by these cases are indicated below. Case Financial Analysis Research Ethical Reasoning Critical Thinking Technology Writing Teamwork 1 x 2 x 3 x x x x x 4 x x x 5 x x x 6 x x x 7 x x

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 6 ANSWERS TO MINI - EXERCISES M1 - 1 Abbreviation Full Designation 1. CPA Chartered Professional Accountant 2. GAAP Generally Accepted Accounting Principles 3. IASB International Accounting Standards Board 4. CSA Canadian Securities Administrators 5. IFRS International Financial Reporting Standards 6. ASPE Accounting Standards for Private Enterprises M1 - 2 Term or Abbreviation Definition F D E A C I G B K J H (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Investing activities Private company Corporation Accounting Partnership AcSB Financing activities Unit of measure GAAP Public company Operating activities A. A system that collects and processes financial information about an organization and reports that information to decision makers. B. Measurement of information about a business in the monetary unit (dollars or other national currency). C. An unincorporated business owned by two or more persons. D. A company that sells shares privately and is not required to release its financial statements to the public. E. An incorporated business that issues shares as evidence of ownership. F. Buying and selling productive resources with long lives. G. Transactions with lenders (borrowing and repaying cash) and shareholders (selling company s hares and paying dividends). H. Activities directly related to running the business to earn profit. I. Accounting Standards Board. J. A company that has its s hares bought and sold by investors on established stock exchanges. K. Generally accepted accounting principles.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 7 M1 - 3 Term Definition F I C A B H D G E J (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Relevance Faithful Representation Comparability Separate Entity Assets Liabilities Shareholders’ Equity Revenues Expenses Unit of Measure A. The financial reports of a business are assumed to include the results of only that business’s activities. B. The resources owned by a business. C. Financial information that can be compared across businesses because similar accounting methods have been applied. D. The total amounts invested and reinvested in the business by its owners. E. The costs of business necessary to earn revenues. F. A feature of financial information that allows it to influence a decision. G. Earned by selling goods or services to customers. H. The amounts owed by the business. I. Financial information that depicts the economic substance of business activities. J. The assumption that states that results of business activities should be reported in an appropriate monetary unit. M1 - 4 L (B/S) (1) Accounts Payable A (B/S) (2) Accounts Receivable A (B/S) (3) Cash E (I/S) (4) Income Tax Expense E (I/S) (5) Selling and Administrative Expenses R (I/S) (6) Sales Revenue L (B/S) (7) Notes Payable SE (B/S) (8) Retained Earnings M1 - 5 A (B/S) (1) Accounts Receivable R (I/S) (2) Sales Revenue A (B/S) (3) Equipment E (I/S) (4) Supplies Expense A (B/S) (5) Cash E (I/S) (6) Advertising Expense L (B/S) (7) Accounts Payable SE (B/S) (8) Retained Earnings

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 8 M1 - 6 A (B/S) (1) Accounts Receivable E (I/S) (2) Selling and Administrative Expenses A (B/S) (3) Cash A (B/S) (4) E quipment E (I/S) (5) Advertising Expenses R (I/S) (6) Sales Revenue L (B/S) (7) Notes Payable SE (B/S) (8) Retained Earnings L (B/S) (9) Accounts Payable M1 - 7 L (B/S) (1) Accounts Payable SE (B/S) (2) Contributed Capital A (B/S) (3) Equipment A (B/S) (4) Accounts Receivable L (B/S) (5) Notes Payable A (B/S) (6) Cash SE (B/S) (7) Retained Earnings E (I/S) (8) Selling and Administrative Expenses R (I/S) (9) Sales Revenue A (B/S) (10) Supplies M1 - 8 SRE* (1) Dividends B/S (2) Total Shareholders’ Equity I/S (3) Sales Revenue B/S (4) Total Assets SCF (5) Cash Flows from Operating Activities B/S (6) Total Liabilities I/S, SRE (7) Net Income SCF (8) Cash Flows from Financing Activities * An argument could be made for also including SCF as a plausible answer because the SCF reports “Dividends paid in cash.” The answer SCF has been excluded here because (technically) the caption would have to read “Dividends paid in cash” if it were to be reported on the SCF.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 9 M1 - 9 Element Financial Statement D (1) Cash Flows from Financing Activities A. Balance Sheet B (2) Expenses B. Income Statement D (3) Cash Flows from Investing Activities C. Statement of Retained Earnings A (4) Assets D. Statement of Cash Flows C (5) Dividends B (6) Revenues D (7) Cash Flows from Operating Activities A (8) Liabilities M1 - 10 (F ) (1) Cash paid for dividends O (2) Cash collected from customers F (3) Cash received when signing a note (O ) (4) Cash paid to employees (I ) (5) Cash paid to purchase equipment F (6) Cash received from issuing shares M1 - 11 (I) (1) Cash paid to purchase equipment O (2) Cash collected from c lients I (3) Cash received from selling equipment (F) (4) Cash paid for dividends (O) (5) Cash paid to suppliers F (6) Cash received from issuing s hares M1 - 12 STONE CULTURE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 201 3 Retained Earnings, January 1, 201 3 $ 0 Add: Net Income 36,000 Subtract: Dividends (15,000) Retained Earnings, December 31, 201 3 $ 21,000

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 10 M1 - 12 (continued) STONE CULTURE CORPORTATION Statement of Retained Earnings For the Year Ended December 31, 201 4 Retained Earnings, January 1, 201 4 $ 21,000 Add: Net Income 45,000 Subtract: Dividends (20,000) Retained Earnings, December 31, 201 4 $ 46,000 M1 - 13 Apple, Inc. Google, Inc. Intel Corp. Contributed Capital $11 $18 $17 Dividends 0 0 4 Net Income (a) 14 (d) 9 (g) 11 Retained Earnings, Beginning of Year 23 20 26 Retained Earnings, End of Year (b) 37 (e) 29 (h) 33 Total Assets (c) 75 (f) 59 (i) 63 Total Expenses 51 20 33 Total Liabilities 27 12 13 Total Revenues 65 29 44 Net income = Revenues – Expenses Retained Earnings, End of Year = Retained Earnings Beginning of Year + Net Income – Dividends Total Assets = Total Liabilities and Shareholders’ Equity M1 - 14 Amazin’ Corp. Best Tech, Inc. Colossal Corp. Contributed Capital $5 $15 $100 Dividends 10 5 50 Net Income (a) 25 (d) 20 (g) 100 Retained Earnings, Beginning of Year 30 0 200 Retained Earnings, End of Year (b) 45 (e) 15 (h) 250 Total Assets (c) 80 (f) 60 (i) 700 Total Expenses 75 30 200 Total Liabilities 30 30 350 Total Revenues 100 50 300

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 11 M1 - 1 4 (continued) Net income = Revenues – Expenses Retained Earnings, End of Year = Retained Earnings Beginning of Year + Net Income – Dividends Total Assets = Total Liabilities and Shareholders’ Equity M1 - 15 (a) (300) (b) 70 (c) 3,900. Electronic Arts was not profitable because its expenses ($3,900) were greater than its revenues ($3,600), resulting in the net loss of $300 reported on the income statement. The above amounts are determined using the various relationships that exist in the financial statements. Because this exercise excludes two pieces of information from both the income statement and statement of retained earnings, students must first work backwards from the balance sheet to the statement of retained earnings to the income statement. Although not required, the following statements show the given and missing information. The ?s in the balance sheet are determined from A = L + SE. Electronic Arts, Inc. Income Statement For the Year Ended xxxx Revenues $3,600 Expenses (c) Net Income (Loss) (a) Electronic Arts, Inc. Statement of Retained Earnings For the Year Ended xxxx RE, beginning $370 Net income (loss) (a) Dividends (0) RE, ending (b) Electronic Arts, Inc. Balance Sheet At xxxx Total Assets $4,900 Liabilities and Shareholders’ Equity Total Liabilities $2,400 Shareholders’ Equity Contributed capital $2,430 Retained earnings (b) Total SE ? Total Liabilities & SE ?

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 12 M1 - 1 6 Req. 1 WESTJET AIRLINES, LTD . Income Statement For the Year Ended December 31, 201 4 (Amounts in millions) Revenues Ticket Revenues $ 9,861 Other Revenue 336 Total Revenue 10,197 Expenses Salaries Expense 3,213 Aircraft Fuel Expense 2,536 Other Operating Expenses 2,145 Repairs and Maintenance Expense 616 Landing Fees Expense 560 Interest Expense 69 Income Tax Expense 413 Total Expenses 9,552 Net Income $ 645 Req. 2 WESTJET AIRLINES, LTD . Statement of Retained Earnings For the Year Ended December 31, 201 4 (Amounts in millions) Retained Earnings, January 1, 201 4 $ 4,157 Add: Net Income 645 Subtract: Dividends (14) Retained Earnings, December 31, 201 4 $ 4,788

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 13 M1 - 1 6 (continued) Req. 3 WESTJET AIRLINES, LTD . Balance Sheet At December 31, 201 4 (Amounts in millions) Assets Cash $ 2,213 Accounts Receivable 845 Supplies 259 Property and Equipment 10,874 Other Assets 2,581 Total Assets $ 16,772 Liabilities Accounts Payable $ 1,731 Notes Payable 4,993 Other Liabilities 3,107 Total Liabilities 9,831 Shareholders’ Equity Contributed Capital 2,153 Retained Earnings 4,788 Total Shareholders’ Equity 6,941 Total Liabilities and Shareholders’ Equity $ 16,772 Req. 4 Westjet Airlines financed its assets primarily with liabilities ($9,831) as opposed to shareholders’ equity ($6,941).

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 14 ANSWERS TO EXERCISES E1 - 1 a) Assets = Liabilities + Shareholders’ Equity = $13,750 + $4,450 = $18,200 = Assets reported on the balance sheet b) Net Income = Revenue – Expenses = $10,500 - $9,200 = $1,300 = Net income reported on the income statement c) Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E $3,500 + $1,300 - $500 = $4,300 d) Beginning Cash + Cash Flows from Operating Activities + Cash Flows from Investing Activities + Cash Flows from Financing Activities = Ending Cash $1,000 + $1,600 + ($1,000) + ($900) = $700 E1 - 2 a) Assets = Liabilities + Shareholders’ Equity = $18,500 + $61,000 = $79,500 = Assets reported on the balance sheet b) Net Income = Revenue – Expenses = $32,100 – $18,950 = $13,150 = Net income reported on the income statement c) Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E $20,500 + $13,150 – $4,900 = $28,750 d) Beginning Cash + Cash Flows from Operating Activities + Cash Flows from Investing Activities + Cash Flows from Financing Activities = Ending Cash $3,200 + $15,700 + ($7,200) + ($5,300) = $6,400

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 15 E1 - 3 Req. 1 Designer Footwear Inc. Balance Sheet At November 1, 201 4 (in thousands) Assets Cash $ 45,570 Accounts Receivable 11,888 Property, Plant, and Equipment 233,631 Other Assets 494,294 Total Assets $785,383 Liabilities Accounts Payable $136,405 Notes Payable 99,044 Other Liabilities 79,148 Total Liabilities 314,597 Shareholders’ Equity Contributed Capital 291,248 Retained Earnings 179,538 Total Shareholders’ Equity 470,786 Total Liabilities and Shareholders’ Equity $785,383 Req. 2 Most of the financing as of November 1 came from shareholders . The shareholders have financed $470,786 of the total assets and creditors have financed only $314,597 of the total assets of the company.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 16 E1 - 4 Req. 1 READER DIRECT Balance Sheet At December 31, 201 4 Assets Liabilities Cash $ 47,500 Accounts Payable $ 8,000 Accounts Receivable 26,900 Note Payable 2,850 Property and Equipment 48,000 Total Liabilities 10,850 Shareholders’ Equity Contributed Capital 98,000 Retained Earnings 13,550 Total Shareholders’ Equity 111,550 Total Assets $122,400 Total Liabilities and Shareholders’ Equity $122,400 Req. 2 Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E, so Net Income= Ending R/E + Dividends - Beginning R/E = $13,550 + 0 – 0 = $13,550 Net income for the year was $13,550. This is the first year of operations and no dividends were declared or paid to shareholders ; therefore, retained earnings is $13,550 (which represents income for one year). Req. 3 Most of the financing as of December 31, 201 4 came from shareholders . The shareholders have financed $111,550 of the total assets and creditors have financed only $10,850 of the total assets of the company. Req.4 Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E, so Ending R/E = $13,550 + 3,000 – 2,000 = $14,550 Retained Earnings at December 31, 201 5 would be $14,550.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 17 E1 - 5 Req. 1 Label Req. 2 Type a. Coins , bullion, and currency Inventory A b. Amounts Collectibles Canada owes to suppliers of coins, bullion and currency Accounts Payable L c. Amounts Collectibles Canada can collect from customers Accounts Receivable A d. Amounts owed to bank for loan to buy building Notes Payable L e. Property on which buildings will be built Land A f. Amounts distributed from profits to shareholders Dividends SE g. Earned by Collectibles Canada by selling coin collecting supplies Revenue R h. Unused paper in Collectibles Canada head office Supplies A i. Cost of paper used up during month Supplies Expense E j. Amounts contributed to Collectibles Canada by shareholders Contributed Capital SE E1 - 6 Req. 1 CINEPLEX ENTERTAINMENT Income Statement For the Quarter Ended June 26, 201 4 (in thousands) Revenues Admissions Revenues $455,700 Concessions Revenues 188,900 Other Revenues 31,200 Total Revenues 675,800 Expenses Film Rental Expenses 247,000 Rent Expense 90,000 General , Selling and Administrative Expenses 65,700 Concessions Expenses 25,500 Other Expenses 233,800 Total Expenses 662,000 Net Income $ 13,800

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 18 E1 - 6 (continued) The question marks in the exercise correspond to Total Expenses of $662,000 and Net Income of $13,800, as determined above. Req. 2 Cineplex’s main source of revenue is admissions and its biggest expense is its film rental expense and other expenses . E1 - 7 HOME REALTY, INCORPORATED Income Statement For the Year Ended December 31, 201 4 Revenue: Sales Revenue $166,000 Expenses: Selling Expenses 97,000 Promotion and Advertising Expenses 9,025 Interest Expense 6,300 Income Tax Expense 18,500 Total Expenses 130,825 Net Income $ 35,175 Note that dividends declared are not an expense. As a distribution of the company’s prior profits, they will be deducted from Retained Earnings. E1 - 8 A Net Income = $100,000 - $82,000 = $18,000 Shareholders’ Equity = $150,000 - $70,000 = $80,000 B Total Revenues = $80,000 + $12,000 = $92,000 Total Liabilities = $112,000 - $60,000 = $52,000 C Net Income (Loss) = $80,000 - $86,000 = $(6,000) Shareholders’ Equity = $104,000 - $26,000 = $78,000 D Total Expenses = $50,000 - $13,000 = $37,000 Total Assets = $22,000 + $77,000 = $99,000 E Total Revenues = $81,000 - $6,000 = $75,000 Total Assets = $73,000 + $28,000 = $101,000

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 19 E1 - 9 Req. 1 MONCTON CLAY CORPORATION Income Statement For the Month Ended January 31, 201 4 Total Revenues $131,000 Operating Expenses 90,500 Net Income $ 40,500 MONCTON CLAY CORPORATION Balance Sheet At January 31, 201 4 Assets: Cash $30,800 Accounts Receivable 25,300 Supplies 40,700 Total Assets $96,800 Liabilities: Accounts Payable $ 25,700 Total Liabilities 25,700 Shareholders’ Equity: Contributed Capital (2,600 shares) 30,600 Retained Earnings (from the income statement above) 40,500 Total Shareholders’ Equity 71,100 Total Liabilities and Shareholders’ Equity $96,800 Req. 2 Moncton Clay Corporation should have no problem paying its liabilities since it has more total assets than total liabilities. In fact, it has over three times as many total assets as liabilities ($96,800/$25,700 = 3.77 times). This means that Moncton Clay Corporation could pay its liabilities more than three times over if all assets on hand at January 31, 201 4 , were converted to cash. Of course, not all assets will be converted into cash right away. Even so, looking only at the amount of cash at the end of January, we see that Moncton Clay has enough cash to cover all its liabilities. This is a very strong financial position.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 20 E1 - 10 Req. 1 Average monthly revenue, $216,000  12 = $18,000 Req. 2 Average monthly salaries and wages expense, $33,000  12 = $2,750 Req. 3 Advertising is an expense because it represents the cost of ads that were run during the period to generate revenue. Req. 4 The dividends are not reported as an expense because they represent a distribution of prior profits to shareholders . Consequently, they appear only on the statement of retained earnings, not the income statement. Req. 5 Standing alone, the income statement does not report, or make it possible to determine, the ending cash balance. Some revenues might not have been collected, and some expenses might not have been paid by the end of the year. The amount of cash on December 31, 201 4 , would be reported on the balance sheet under assets and on the cash flow statement as the final amount shown. E1 - 11 (O) 1 . Cash paid to suppliers and employees O 2 . Cash received from customers F 3 . Cash received from borrowing long - term debt F 4 . Cash received from issuing s hares (I) 5 . Cash paid to purchase equipment

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 21 E1 - 12 (I) 1 . Purchases of equipment O 2 . Cash received from customers F 3 . Cash received from issuing s hares (O) 4 . Cash paid to suppliers and employees (F) 5 . Cash paid on notes payable I 6 . Cash received from selling equipment

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 22 ANSWERS TO COACHED PROBLEMS CP1 - 1 Req. 1 NUCLEAR COMPANY Income Statement For the Year Ended December 31, 201 4 Sales Revenue $ 88,000 Expenses Operating Expenses 57,200 Other Expenses 8,850 Total Expenses 66,050 Net Income $ 21,950 Req.2 NUCLEAR COMPANY Statement of Retained Earnings For the Year Ended December 31, 201 4 Retained Earnings, January 1, 201 4 $ 0 Add: Net Income 21,950 Subtract: Dividends (200) Retained Earnings, December 31, 201 4 $ 21,750 Req. 3 NUCLEAR COMPANY Balance Sheet At December 31, 201 4 Assets Cash $ 12,000 Accounts Receivable 59,500 Supplies 8,000 Equipment 36,000 Total Assets $115,500 Liabilities Accounts Payable $ 30,297 Notes Payable 1,470 Total Liabilities 31,767 Shareholders’ Equity Contributed Capital 61,983 Retained Earnings 21,750 Total Shareholders’ Equity 83,733 Total Liabilities and Shareholders’ Equity $115,500

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 23 CP1 - 2 Req. 1 Nuclear Company’s income statement reported net income of $21,950, suggesting that the company was profitable because revenues exceeded expenses. Req. 2 Nuclear Company’s statement of retained earnings reported a retained earnings balance of $21,750, after dividends of $200 had been subtracted. This suggests the company could have sustained additional dividends of $21,750, if sufficient cash were available to pay them. As it turns out, the company’s balance sheet reports cash of $12,000, suggesting that only $12,000 in additional dividends could be paid (without borrowing additional cash). Req. 3 Nuclear Company’s balance sheet reports total liabilities of $31,767 and shareholders’ equity of $83,733, indicating that the company is financed mainly by shareholders . Req. 4 Nuclear Company was founded at the beginning of the year, so it began with no cash. The balance sheet reports a cash balance of $12,000 at the end of the year. The reasons for this increase of $12,000 would be shown in the statement of cash flows. CP1 - 3 Req. 1 FITNESS AND FUN , INC. Income Statement For the Nine Months Ended September 30, 201 4 (in thousands) Gym Revenues $575,667 Expenses Gym Operating Expenses 350,835 General , Selling and Administrative Expense 83,207 Advertising and Marketing Expense 23,608 Interest and Other Expenses 20,316 Income Tax Expense 38,895 Total Expenses 516,861 Net Income $ 58,806

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 24 CP1 - 3 (continued) Req. 2 FITNESS AND FUN , INC. Statement of Retained Earnings For the Nine Months Ended September 30, 201 4 (in thousands) Retained Earnings, January 1, 201 4 $199,890 Add: Net Income 58,806 Subtract: Dividends 0 Retained Earnings, September 30, 201 4 $258,696 Req. 3 FITNESS AND FUN , INC. Balance Sheet At September 30, 201 4 (in thousands) Assets Cash $ 7,119 Accounts Receivable 5,318 Supplies 14,739 Property and Equipment 1,451,641 Other Assets 117,108 Total Assets $1,595,925 Liabilities Accounts Payable $ 102,665 Accrued Liabilities 119,482 Notes Payable 647,120 Other Liabilities 86,234 Total Liabilities 955,501 Shareholders’ Equity Contributed Capital 381,728 Retained Earnings 258,696 Total Shareholders’ Equity 640,424 Total Liabilities and Shareholders’ Equity $1,595,925

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 25 CP1 - 3 (continued) Req. 4 FITNESS AND FUN , INC. Statement of Cash Flows For the Nine Months Ended September 30, 201 4 (in thousands) Cash Flows from Operating Activities: Cash received from customers $574,824 Cash paid to suppliers and employees (472,265) Cash Provided by Operating Activities 102,559 Cash Flows from Investing Activities: Cash paid to purchase equipment (354,255) Cash received from sale of long - term assets 161,885 Cash Used in Investing Activities ( 192,370) Cash Flows from Financing Activities: Cash received from issuing common s hares 9,061 Repayments of borrowings (13,043) Cash received from borrowings 95,558 Cash Provided by Financing Activities 91,576 Change in Cash 1,765 Beginning Cash Balance, January 1, 201 4 5,354 Ending Cash Balance, September 30, 201 4 $ 7,119

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 26 ANSWERS TO GROUP A PROBLEMS PA1 - 1 Req. 1 HIGH POWER CORPORATION Income Statement For the Year Ended December 31, 201 4 Sales Revenue $91,000 Expenses Operating Expenses 58,700 Other Expenses 8,850 Total Expenses 67,550 Net Income $23,450 Req.2 HIGH POWER CORPORATION Statement of Retained Earnings For the Year Ended December 31, 201 4 Retained Earnings, January 1, 201 4 $ 0 Add: Net Income 23,450 Subtract: Dividends (1,950) Retained Earnings, December 31, 201 4 $ 21,500 Req. 3 HIGH POWER CORPORATION Balance Sheet At December 31, 201 4 Assets Cash $ 13,300 Accounts Receivable 9,550 Supplies 5,000 Equipment 86,000 Total Assets $113,850 Liabilities Accounts Payable $ 32,087 Notes Payable 1,160 Total Liabilities 33,247 Shareholders’ Equity Contributed Capital 59,103 Retained Earnings 21,500 Total Shareholders’ Equity 80,603 Total Liabilities and Shareholders’ Equity $113,850

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 27 PA1 - 2 Req. 1 High Power Corporation’s income statement reported net income of $23,450, suggesting that the company was profitable because revenues exceeded expenses. Req. 2 High Power Corporation’s statement of retained earnings reported a retained earnings balance of $21,500, after dividends of $1,950 had been subtracted. This suggests the company could have sustained additional dividends of $21,500, if sufficient cash were available to pay them. As it turns out, the company’s balance sheet reports cash of $13,300, suggesting that only $13,300 in additional dividends could be paid (without borrowing additional cash). Req. 3 High Power Corporation’s balance sheet reports total liabilities of $33,247 and shareholders’ equity of $80,603, indicating that the company is financed mainly by shareholders . Req. 4 High Power Corporation was founded at the beginning of the year, so it began with no cash. The balance sheet reports a cash balance of $13,300 at the end of the year. The reasons for this increase of $13,300 would be shown in the statement of cash flows. PA1 - 3 Req. 1 COLLEGE PARK VETERINARY CLINIC Income Statement For the Year Ended June 30, 201 4 Sales Revenue $250,000 Expenses Operating Expenses 185,700 General , Selling and Administrative Expenses 53,400 Advertising and Marketing Expenses 27,800 Interest Expense 5,000 Total Expenses 271,900 Net Loss ( $21,900)

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 28 PA1 - 3 (continued) Req.2 COLLEGE PARK VETERINARY CLINIC Statement of Retained Earnings For the Year Ended June 30, 201 4 Retained Earnings, July 1, 201 3 $ 50,000 Add: Net Loss (21,900) Subtract: Dividends (27,500) Retained Earnings, June 30, 201 4 $ 600 Req. 3 COLLEGE PARK VETERINARY CLINIC Balance Sheet At June 30, 201 4 Assets Cash $ 5,000 Accounts Receivable 125,600 Supplies 25,000 Property and Equipment 242,500 Other Assets 13,500 Total Assets $411,600 Liabilities Accounts Payable $ 87,000 Notes Payable 150,000 Other Liabilities 37,000 Total Liabilities 274,000 Shareholders’ Equity Contributed Capital 137,000 Retained Earnings 600 Total Shareholders’ Equity 137,600 Total Liabilities and S hare holder’s Equity $411,600

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 29 PA1 - 4 Req. 1 College Park Veterinary Clinic’s income statement reported net loss of $21,900, suggesting that the company was not profitable because expenses exceeded revenues. Req. 2 College Park Veterinary Clinic’s statement of retained earnings reported a retained earnings balance of $600, after dividends of $27,500 had been subtracted. This suggests the company could have sustained additional dividends of $600, if sufficient cash were available to pay them. As it turns out, the company’s balance sheet reports cash of $ 5,000 , suggesting that additional dividends could be paid (without borrowing additional cash). Req. 3 College Park Veterinary Clinic’s balance sheet reports total liabilities of $274,000 and shareholders’ equity of $137,600, indicating that the company is financed mainly by debt/creditors. Req. 4 It is not possible to determine the amount of cash increase or decrease that would be shown in the statement of cash flows from the information presented. To determine this change, we would either require the opening cash balance at July 1, 201 4 , or would require the necessary information to calculate the cash from or cash used in the operating, investing and financing activities for the current year. None of this information is available in the information currently provided.

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    Chapter 0 1 - Business Decisions and Financial Accounting Phillips et al. Fundamentals of Financial Accounting , 4 Ce Solutions Manual Page 1 - 30 PA1 - 5 Req. 1 OSI RESTAURANT PARTNERS, INC. Income Statement For the Year Ended December 31, 201 4 (in millions) Revenues: Restaurant Sales Revenue $ 3,920 Other Revenues 21 Total Revenues 3,941 Expenses: Food and Supplies Expenses 1,415 Utilities and Other Expenses 1,104 Wages Expense 1,087 General, Selling and Administrative Expenses 235 Total Expenses 3,841 Net Income $ 100

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