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Horngren's Accounting, 12th Edition Solution Manual

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    Horngren’s Accounting 12 th Edition Tracie Miller - Nobles Brenda Mattison Ella - Mae Matsumura Instructor’s Solutions Manual With Questions Tracie Miller - Nobles Austin Community College Brenda Mattison Tri - County Technical College

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    1-1 Chapter 1 Accounting and the Business Environment Review Questions 1. What is accounting? Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. Accounting is the language of business. 2. Briefly describe the two major fields of accounting. Financial accounting provides information for external decision makers, such as outside investors, lenders, customers, and the federal government. Managerial accounting focuses on information for internal decision makers, such as the company’s managers and employees. 3. Describe the various types of individuals who use accounting information and how they use that information to make important decisions. Individuals use accounting information to help them manage their money, evaluate a new job, and better decide whether they can afford to make a new purchase. Business owners use accounting information to set goals, measure progress toward those goals, and make adjustments when needed. Investors use accounting information to help them decide whether or not a company is a good investment and once they have invested, they use a company’s financial statements to analyze how their investment is performing. Creditors use accounting information to decide whether to lend money to a business and to evaluate a company’s ability to make the loan payments. Taxing authorities use accounting information to calculate the amount of income tax that a company has to pay. 4. What are two certifications available for accountants? Briefly explain each certification. Certified Public Accountants (CPAs) are licensed professional accountants who serve the general public. They work for public accounting firms, businesses, government, or educational institutions. To be certified they must meet educational and/or experience requirements and pass an exam. Certified Management Accountants (CMAs) specialize in accounting and financial management knowledge. They work for a single company. 5. What is the role of the Financial Accounting Standards Board (FASB)? The FASB oversees the creation and governance of accounting standards. They work with governmental regulatory agencies, congressionally created groups, and private groups.

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    1-2 6. Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the organization currently responsible for the creation and governance of these standards. The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule book and is currently created and governed by the FASB. Investors and lenders must have information that is relevant and has faithful representation in order to make decisions and GAAP provides the framework for this financial reporting. 7. Describe the similarities and differences among the four different types of business entities discussed in the chapter. A sole proprietorship has a single owner, terminates upon the owner’s death or choice, the owner has personal liability for the business’s debts, and it is not a separate tax entity. A partnership has two or more owners, terminates at partner’s choice or death, the partners have personal liability, and it is not a separate tax entity. A corporation is a separate legal entity, has one or more owners, has indefinite life, the stockholders are not personally liable for the business’s debts, and it is a separate tax entity. A limited - liability company has one or more members and each is only liable for his or her own actions, has an indefinite life, and is not a separate tax entity. 8. A business purchases an acre of land for $5,000. The current market value is $5,550, and the land was assessed for property tax purposes at $5,250. What value should the land be recorded at, and which accounting principle supports your answer? The land should be recorded at $5,000. The cost principle states that assets should be recorded at their historical cost. 9. What does the going concern assumption mean for a business? The going concern assumption assumes that the entity will remain in business for the foreseeable future and long enough to use existing resources for their intended purpose. 10. Which concept states that accounting information should be complete, neutral, and free from material error? The faithful representation concept states that accounting information should be complete, neutral, and free from material error. 11. Financial statements in the United States are reported in U.S. dollars. What assumption supports this statement? T he monetary unit assumption states that items on the financial statements should be measured in terms of a monetary unit.

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    1-3 12. Explain the role of the International Accounting Standards Board (IASB) in relation to International Financial Reporting Standards (IFRS). The IASB is the organization that develops and creates IFRS which are a set of global accounting standards that would be used around the world. 13. What is the accounting equation? Briefly explain each of the three parts. Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the business in the future. They are things of value that a business owns or has control of. Liabilities are debts that are owed to creditors. They are one source of claims against assets. Equity is the other source of claims against assets. Equity is the owner’s claims against assets and is the amount of assets that is left over after the company has paid its liabilities. It represents the net worth of the business . 14. What are two ways that equity increases? What are the two ways that equity decreases? Equity increases with owner contributions and revenues. Equity decreases with expenses and owners withdrawals . 15. How is net income calculated? Define revenues and expenses . Revenues – Expenses = Net Income. Revenues are earnings resulting from delivering goods or services to customers. Expenses are the cost of selling goods or service. 16. What are the steps used when analyzing a business transaction? Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases or decreases. Step 3: Determine if the accounting equation is in balance. 17. List the four financial statements. Briefly describe each statement. Income Statement – Shows the difference between an entity’s revenues and expenses and reports the net income or net loss for a specific period. Statement of Owner’s Equity – Shows the changes in owner’s capital for a specific period including owner contributions, net income (loss) and owner withdrawals . Balance Sheet – Shows the assets, liabilities, and owner’s equity of the business as of a specific date. Statement of Cash Flows – Shows a business’s cash receipts and cash payments for a specific period. 18. What is the calculation for ROA? Explain what ROA measures. Return on Assets = Net income / Average total assets. ROA measures how profitably a company uses its assets.

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    1-4 Short Exercises S1 - 1 Identifying users of accounting information Learning Objective 1 For each user of accounting information, identify if the user would use financial accounting or managerial accounting. a. investor e. controller b. banker f. stockholder c. IRS g. human resources director d. manager of the business h. creditor SOLUTION a . FA e. MA b. FA f. FA c. FA g. MA d. MA h. FA S1 - 2 Determining organizations that govern accounting Learning Objective 2 Suppose you are starting a business, Wholly Shirts, to imprint logos on T - shirts. In organizing the business and setting up its accounting records, you take your information to a CPA to prepare financial statements for the bank. Name the organization that governs the majority of the guidelines that the CPA will use to prepare financial statements for Wholly Shirts. What are those guidelines called? SOLUTION The Financial Accounting Standards Board governs the majority of guidelines, called Generally Accepted Accounting Principles (GAAP), that the CPA will use to prepare financial statements for Wholly Shirts. S1 - 3 Identifying types of business organizations Learning Objective 2 Chloe Michaels plans on opening Chloe Michaels Floral Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and wants owners of the business to not be held personally liable for the business’s debts. Additionally, Chloe wants the business to be a separate taxable entity. Which type of business organization will meet Chloe’s needs best?

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    1-5 SOLUTION Chloe’s needs will best be met by organizing a corporation since a corporation has an unlimited life and is a separate tax entity. In addition, the owners (stockholders) have limited liability. Chloe could also consider a limited liability company (LLC) as an option. A LLC meets two of the three criteria. It has an unlimited life and limited liability for the owner. However, a LLC is not a separate tax entity. S1 - 4 Identifying types of business organizations Learning Objective 2 You would like to start a cellular telephone equipment service business. You are considering organizing the business as a sole proprietorship. Identify the advantages and disadvantages of owning a sole proprietorship. SOLUTION Advantages: 1. Easy to organize. 2. Unification of ownership and management. 3. Less government regulation. 4. Owner has more control over business. Disadvantages: 1. The owner pays taxes on the entity’s earnings since it is not a separate tax entity. 2. No continuous life or transferability of ownership. 3. Unlimited liability of owner for business’s debts . S1 - 5 Applying accounting assumptions and principles Learning Objective 2 Michael McNamee is the proprietor of a property management company, Apartment Exchange, near the campus of Pensacola State College. The business has cash of $8,000 and furniture that cost $9,000 and has a market value of $13,000. The business debts include accounts payable of $6,000. Michael’s personal home is valued at $400,000, and his personal bank account has a balance of $1,200. Consider the accounting principles and assumptions discussed in the chapter, and identify the principle or assumption that best matches the situation: a. Michael’s personal assets are not recorded on the Apartment Exchange’s balance sheet. b. The Apartment Exchange records furniture at its cost of $9,000, not its market value of $13,000. c. The Apartment Exchange reports its financial statements in U.S. dollars. d. Michael expects the Apartment Exchange to remain in operation for the foreseeable future. SOLUTION a . The economic entity assumption b. The cost principle. c. The monetary unit assumption . d . The going concern assumption .

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    1-6 S1 - 6 Using the accounting equation Learning Objective 3 Thompson Handyman Services has total assets for the year of $18,400 and total liabilities of $9,050. Requirements 1. Use the accounting equation to solve for equity. 2. If next year assets increased by $4,300 and equity decreased by $3,850, what would be the amount of total liabilities for Thompson Handyman Services? SOLUTION Req uirement 1 Thompson Handyman Services has equity of $ 9,350 . Assets = Liabilities + Equity $ 18,400 = $ 9,050 + ? $ 1 8 ,400 = $ 9,050 + $ 9,350 Requirement 2 Thompson Handyman Services has liabilities of $ 17,200 . Assets = Liabilities + Equity $ 18,400 + $ 4,300 = ? + $ 9,350 – $ 3,850 $ 22 , 700 = $ 17,200 + $ 5 , 500 S1 - 7 Using the accounting equation Learning Objective 3 Roland’s Overhead Doors reports the following financial information: Assets $ 45,800 Liabilities 17,220 Roland, Capital 27,460 Roland, Withdrawals 6,500 Revenues 8,850 Expenses ? Requirements 1. Use the accounting equation to solve for the missing information. 2. Did Roland’s Overhead Doors report net income or net loss?

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    1-7 SOLUTION Requirement 1 ASSETS = LIABILITIES + EQUITY + Roland, Capital – Roland, Withdrawals + Revenues – Expenses $ 45,800 $ 45,800 = = $ 17,220 $1 7,220 + + $ 27,460 $ 27,460 – – $ 6 ,500 $ 6 ,500 + + $ 8,850 $ 8,850 – – ? $ 1,230 Requirement 2 Roland’s Overhead Doors reported net income of $ 7, 620 . Net Income = Revenues ($ 8,850 ) – Expenses ($ 1,230 ) S1 - 8 Identifying accounts Learning Objective 3 Consider the following accounts: a. Accounts Payable b. Cash c. Owner, Capital d. Accounts Receivable e. Rent Expense f. Service Revenue g. Office Supplies h. Owner, Withdrawals i. Land j. Salaries Expense Identify each account as Asset, Liability, or Equity. SOLUTION a. L f. E b. A g. A c. E h. E d. A i. A e. E j. E

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    1-8 S1 - 9 Using the accounting equation to analyze transactions Learning Objective 4 Tiny Town Kennel earns service revenue by caring for the pets of customers. Tiny Town Kennel is organized as a sole proprietorship and owned by Earle Martin. During the past month, Tiny Town Kennel has the following transactions: a. Received $520 cash for service revenue earned. b. Paid $325 cash for salaries expense. c. Martin contributed $1,000 to the business in exchange for capital. d. Earned $640 for service revenue, but the customer has not paid Tiny Town Kennel yet. e. Received utility bill of $85, which will be paid next month. f. Martin withdrew $100 cash. Indicate the effects of the business transactions on the accounting equation for Tiny Town Kennel. Transaction (a) is answered as a guide. a. Increase asset (Cash); Increase equity (Service Revenue) SOLUTION a. Increase asset (Cash); Increase equity (Service Revenue) b. Decrease asset (Cash); Decrease equity (Salaries Expense) c. Increase asset (Cash); Increase Equity ( Martin, Capital ) d. Increase asset (Accounts Receivable); Increase equity (Service Revenue) e. Increase liability (Accounts Payable); Decrease equity (Utility Expense) f. Decrease asset (Cash); Decrease equity ( Martin, Withdrawals ) S1 - 10 Using the accounting equation to analyze transactions Learning Objective 4 Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is organized as a sole proprietorship and owned by Elaine Gibson. During the past month, Elaine’s Inflatables had the following transactions: a. Gibson contributed $10,000 to the business in exchange for capital. b. Purchased equipment for $5,000 on account. c. Paid $400 for office supplies. d. Earned and received $2,500 cash for service revenue. e. Paid $400 for wages to employees. f. Gibson withdrew $1,000 cash. g. Earned $1,000 for services provided. Customer has not yet paid. h. Paid $1,000 for rent. i. Received a bill for $250 for the monthly utilities. The bill has not yet been paid.

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    1-9 Indicate the effects of the business transactions on the accounting equation for Elaine’s Inflatables. Transaction (a) is answered as a guide. a. Increase asset (Cash); Increase equity (Gibson, Capital) SOLUTION a. Increase asset (Cash); Increase equity ( Gibson, Capital ) b. Increase asset (Equipment); Increase liability (Accounts Payable ) c. Increase asset (Office Supplies); Decrease asset (Cash) d. Increase asset (Cash); Increase equity (Service Revenue) e. Decrease asset (Cash); Decrease equity (Wages Expense) f. Decrease asset (Cash); Decrease equity ( Gibson, Withdrawals ) g. Increase asset (Accounts Receivable); Increase equity (Service Revenue) h. Decrease asset (Cash); Decrease equity (Rent Expense) i. Increase liability (Accounts Payable); Decrease equity (Utilities Expense) S1 - 11 Identifying accounts on the financial statements Learning Objective 5 Consider the following accounts: a. Accounts Payable b. Cash c. Owner, Capital d. Accounts Receivable e. Rent Expense f. Service Revenue g. Office Supplies h. Owner, Withdrawals i. Land j. Salaries Expense Identify the financial statement (or statements) that each account would appear on. Use I for Income Statement, OE for Statement of Owner’s Equity, B for Balance Sheet, and C for Statement of Cash Flows. SOLUTION a. B f. I b. B , C g. B c. OE, B h. OE d. B i. B e. I j. I

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    1-10 Use the following information to answer Short Exercises S1 - 12 through S1 - 14. Centerpiece Arrangements has just completed operations for the year ended December 31, 2018. This is the third year of operations for the company. The following data have been assembled for the business: Insurance Expense $ 4,500 Salaries Expense $ 46,000 Service Revenue 70,000 Accounts Payable 17,600 Utilities Expense 1,400 Office Supplies 1,700 Rent Expense 16,000 Right, Withdrawals 4,800 Right, Capital, Jan. 1, 2018 9,000 Accounts Receivable 8,000 Cash 7,200 Equipment 12,100 Owner contribution 5,100 S1 - 12 Preparing the income statement Learning Objective 5 Prepare the income statement of Centerpiece Arrangements for the year ended December 31, 2018. SOLUTION CENTERPIECE ARRANGEMENTS Income Statement Year Ended December 31, 2018 Revenue: Service Revenue $ 70 ,000 Expenses: Salaries Expense $ 46 ,000 Rent Expense 16 ,000 Insurance Expense 4,5 00 Utilities Expense 1,4 00 Total Expenses 67,9 00 Net Income $ 2 ,10 0

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    1-11 S1 - 13 Preparing the statement of owner’s equity Learning Objective 5 Prepare the statement of owner’s equity of Centerpiece Arrangements for the year ended December 31, 2018. SOLUTION CENTERPIECE ARRANGEMENTS Statement of Owner’s Equity Year Ended December 31, 2018 Right, Capital , January 1, 2018 $ 9 , 000 Owner contribution 5,100 Net income for the year 2,100 16 , 200 Owner withdrawal ( 4, 800 ) Right, Capital , December 31, 2018 $ 11 , 400 S1 - 14 Preparing the balance sheet Learning Objective 5 Prepare the balance sheet of Centerpiece Arrangements as of December 31, 2018. SOLUTION CENTERPIECE ARRANGEMENTS Balance Sheet December 31, 2018 Assets Liabilities Cash $ 7,200 Accounts Payable $ 17,600 Accounts Receivable 8,000 Office Supplies 1,700 Owner’s Equity Equipment 12,100 Right, Capital 11 , 400 Total Assets $ 29,000 Total Liabilities and Owner’s Equity $ 29,000

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    1-12 S1 - 15 Preparing the statement of cash flows Learning Objective 5 Polk Street Homes had the following cash transactions for the month ended July 31, 2018. Cash receipts: Collections from customers $ 25,000 Owner contribution 13,000 Cash payments: Rent 500 Utilities 2,000 Salaries 1,500 Purchase of equipment 25,000 Owner withdrawal 4,000 Cash balance, July 1, 2018 14,000 Cash balance, July 31, 2018 19,000 Prepare the statement of cash flows for Polk Street Homes for the month ended July 31, 2018. SOLUTION POLK STREET HOMES Statement of Cash Flows Month Ended July 31, 2018 Cash flows from operating activities: Receipts: Collections from customers $ 25 ,000 Payments: To employees $ (1, 500 ) To suppliers ( 2 , 5 00 ) ( 4 , 000 ) Net cash provided by operating activities 21,0 00 Cash flows from investing activities: Purchase of equipment ( 25 ,000) Net cash used by investing activities ( 25 ,000) Cash flows from financing activities: Owner contribution 13 ,000 Owner withdrawal ( 4 , 000 ) Net cash provided by financing activities 9 , 000 Net increase in cash 5 ,000 Cash balance, July 1, 2018 14 ,000 Cash balance, July 31, 2018 $ 19 ,000

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    1-13 S1 - 16 Calculating ROA Learning Objective 6 Matured Water Services had net income for the month of October of $50,880. Assets as of the beginning and end of the month totaled $362,000, and $486,000, respectively. Calculate Matured Water Services’ ROA for the month of October. SOLUTION Return on assets = Net income / Average total assets = $ 50,880 / (($ 362 ,000 + $ 486 ,000) / 2) = $ 50,880 / $ 424 ,000 = 12 %

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    1-14 Exercises E1 - 17 Identifying users of accounting information Learning Objective 1 For each of the users of accounting information, identify whether the user is an external decision maker (E) or an internal decision maker (I): a. customer b. company manager c. Internal Revenue Service d. lender e. investor f. controller g. cost accountant h. SEC SOLUTION a. E e. E b. I f. I c. E g. I d. E h. E E1 - 18 Using accounting vocabulary Learning Objective 2 Consider the following accounting terms and definitions, and match each term to the definition: SOLUTION 1. d 6. f 2. e 7. b 3. g 8. c 4. a 9. j 5. i 10. h E1 - 19 Using accounting vocabulary Learning Objectives 3, 5 Consider the following accounting terms and definitions, and match each term to the definition: 1. Accounting equation a. An economic resource that is expected to be of benefit in the future

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    1-15 2. Asset 3. Balance sheet 4. Expense 5. Income statement b. Debts that are owed to creditors c. Excess of total expenses over total revenues d. Excess of total revenues over total expenses e. The basic tool of accounting, stated as Assets Liabilities Equity = + 6. Liability 7. Net income 8. Net loss 9. Revenue 10. Statement of cash flows 11. Statement of owner’s equity f. Decreases in equity that occur in the course of selling goods or services g. Increases in equity that occur in the course of selling goods or services h. Reports on a business’s cash receipts and cash payments during a period i. Reports on an entity’s assets, liabilities, and owner’s equity as of a specific date j. Reports on an entity’s revenues, expenses, and net income or loss for the period k. Reports how the owner’s capital balance changed from the beginning to the end of the period SOLUTION 1. e 7. d 2. a 8. c 3. i 9. g 4. f 10. h 5. j 11. k 6. b E1 - 20 Using the accounting equation Learning Objective 3 Compute the missing amount in the accounting equation for each entity from the financial information presented: Assets Liabilities Equity Hair Styles $ ? $ 36,000 $ 36,000 Style Cuts 90,000 ? 48,000 Your Basket 101,000 68,000 ? SOLUTION Assets Liabilities Equity Hair Styles $ 72 ,000 $ 36 ,000 $ 36 ,000 Style Cuts 90 ,000 4 2 ,000 48 ,000 Your Basket 101 ,000 68 ,000 33 ,000

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    1-16 E1 - 21 Using the accounting equation Learning Objective 3 Wizco Advertising’s balance sheet data at May 31, 2018, and June 30, 2018, follow: May 31, 2018 June 30, 2018 Total Assets $ 122,000 $ 287,000 Total Liabilities 66,000 144,000 For each of the following situations that occurred in June, 2018 with regard to owner’s contributions and withdrawals, compute the amount of net income or net loss during June 2018. a. The owner contributed $10,000 to the business and made no withdrawals. b. The owner made no contributions. The owner withdrew cash of $3,000. c. The owner made contributions of $12,500 and withdrew cash of $30,000. SOLUTION a. b. c. Owner’s equity, May 31, 2018 ($ 122 ,000 – $ 66 ,000) $ 56 ,000 $ 56 ,000 $ 56 ,000 Owner contribution 10, 00 0 0 12 , 5 00 Net income for the month 77 , 000 90 ,000 104 , 5 00 143 ,000 146 ,000 173 ,000 Owner withdrawal 0 ( 3 ,000) ( 30 ,000) Owner’s equity, June 30, 2018 ($ 287 ,000 – $ 144 ,000) $ 143 ,000 $ 143 ,000 $ 143 ,000

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    1-17 E1 - 22 Using the accounting equation Learning Objective 3 Mountain Drycleaners started 2018 with total assets of $19,000 and total liabilities of $14,000. At the end of 2018, Mountain’s total assets stood at $12,000 and total liabilities were $9,000. Requirements 1. Did the owner’s equity of Mountain Drycleaners increase or decrease during 2018? By how much? 2. Identify the four possible reasons that owner’s equity can change. SOLUTION Requirement 1 Assets = Liabilities + Equity Beginning of 2018 $ 19 ,000 = $ 14 ,000 + ? $ 19 ,000 = $ 14 ,000 + $ 5 ,000 End of 2018 $ 12 ,000 = $ 9 ,000 + ? $ 12 ,000 = $ 9 ,000 + $ 3 ,000 Owner’s equity de creased in 2018 by $2 ,000 ($ 5 ,000 – $ 3 ,000). Requirement 2 a. Increase through owner’s contributions . b. Increase through net income. c. Decrease through owner’s withdrawals . d. Decrease through net loss.

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    1-18 E1 - 23 Using the accounting equation Learning Objective 3 During 2018, Flowing Rivers Spa reported revenue of $30,000. Total expenses for the year were $15,000. Flowing Rivers Spa ended the year with total assets of $43,000, and it owed debts totaling $14,000. At year - end 2017, the business reported total assets of $28,000 and total liabilities of $14,000. Requirements 1. Compute Flowing Rivers Spa’s net income for 2018. 2. Did Flowing Rivers Spa’s owner’s equity increase or decrease during 2018? By how much? SOLUTION Requirement 1 Revenues – Expenses = Net Income $ 30 ,000 – $ 15 ,000 = $ 1 5 ,000 Requirement 2 Flowing Rivers Spa’s equity increased by $ 1 5 ,000 ($ 29 ,000 - $ 14 ,000) or the amount of the net income. Assets = Liabilities + Equity Beginning of 2018 $ 28 ,000 = $ 14 ,000 + ? $ 28 ,000 = $ 14 ,000 + $ 14 ,000 Ending of 2018 $ 43 ,000 = $ 14 ,000 + ? $ 43 ,000 = $ 14 ,000 + $ 29 ,000 E1 - 24 Using the accounting equation Learning Objective 3 The records of Felix Company show the following at December 31, 2018: Assets & Liabilities: Equity: Beginning: Owner contribution $ 11,000 Assets $ 67,000 Owner withdrawal 8,000 Liabilities 11,000 Revenues 205,000 Ending: Expenses ? Assets $ 46,000 Liabilities 34,000

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    1-19 Requirements 1. Compute the missing amount for Felix Company. You will need to work through owner’s equity. 2. Did Felix earn a net income or suffer a net loss for the year? Compute the amount. SOLUTION Requirement 1 Assets − Liabilities = E quity Beginning of 2018 $ 67 ,000 − $ 11 ,000 = $ 56 ,000 Ending of 2018 $ 46 ,000 − $ 34 ,000 = $ 12 ,000 Owner’s Equity : Capital , Jan. 1, 2018 $ 56 ,000 Plus: Owner contributions 11,000 Plus: Revenues 2 05 ,000 Less: Expenses ( 252,000 ) Less: Owner withdrawals ( 8 ,000) Capital , Dec. 31, 2018 $ 1 2 ,000 Requirement 2 Felix Company suffered (or reported) a net loss of ($ 47 ,000). Revenue − Expenses = Net Income (Loss) $ 205 ,000 − $ 252 ,000 = ($ 47 ,000) E1 - 25 Using the accounting equation to analyze transactions Learning Objective 4 As the manager of a Papa Sean’s restaurant, you must deal with a variety of business transactions. Give an example of a transaction that has each of the following effects on the accounting equation: a. Increase one asset and decrease another asset. b. Decrease an asset and decrease equity. c. Decrease an asset and decrease a liability. d. Increase an asset and increase equity. e. Increase an asset and increase a liability.

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    1-20 SOLUTION Student responses will vary. Examples include: a. Cash purchase of office supplies. b. C ash withdrawal by owner . c. Paid cash on a ccounts payable. d. Received cash for services provided . e. Borrowed cash from the bank. E1 - 26 Using the accounting equation to analyze business transactions Learning Objective 4 Indicate the effects of the following business transactions on the accounting equation of Vivian’s Online Video store. Transaction (a) is answered as a guide. a. Received cash of $10,000 from owner and gave capital. Answer: Increase asset (Cash); Increase equity (Vivian, Capital) b. Earned video rental revenue on account, $2,800. c. Purchased office furniture on account, $300. d. Received cash on account, $400. e. Paid cash on account, $100. f. Rented videos and received cash of $200. g. Paid monthly office rent of $1,000. h. Paid $100 cash to purchase office supplies. SOLUTION a. Increase asset (Cash); Increase equity ( Vivian, Capital ) b. Increase asset (Accounts Receivable); Increase equity (Rental Revenue) c. Increase asset (Office Furniture); Increase liability (Accounts Payable) d. Increase asset (Cash); Decrease asset (Accounts Receivable) e. Decrease asset (Cash); Decrease liability (Accounts Payable) f. Increase asset (Cash); Increase equity (Rental Revenue) g. Decrease asset (Cash); Decrease equity (Rent Expense) h. Decrease asset (Cash); Increase asset (Office Supplies).

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    1-21 E1 - 27 Using the accounting equation to analyze business transactions Learning Objective 4 Indicate the effects of the following business transactions on the accounting equation for Sam’s Snack Foods, a supplier of snack foods. Transaction (a) is answered as a guide. a. Sam’s Snack Foods received cash from owner and gave capital. Answer: Increase asset (Cash); Increase equity (Sam, Capital) b. Cash purchase of land for a building site. c. Paid cash on accounts payable. d. Purchased equipment; signed a note payable. e. Performed service for a customer on account. f. Employees worked for the week but will be paid next Tuesday. g. Received cash from a customer on accounts receivable. h. Borrowed money from the bank. i. Owner withdrew cash. j. Incurred utilities expense on account. SOLUTION a. Increase asset (Cash); Increase equity ( Sam, Capital ) b. Increase asset (Land); Decrease asset (Cash) c. Decrease asset (Cash); Decrease liability (Accounts Payable) d. Increase asset (Equipment); Increase liability (Notes Payable) e. Increase asset (Accounts Receivable); Increase equity (Service Revenue) f. Increase liability (Salaries Payable); Decrease equity (Salaries Expense) g. Increase asset (Cash); Decrease asset (Accounts Receivable) h. Increase asset (Cash); Increase liability (Notes Payable) i. Decrease asset (Cash); Decrease equity ( Sam, Withdrawals ) j. Increase liability (Accounts Payable); Decrease equity (Utility Expense)

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    1-22 E1 - 28 Using the accounting equation to analyze business transactions Learning Objective 4 The analysis of the first eight transactions of Advanced Accounting Service follows. Describe each transaction. SOLUTION Transaction Description s: 1. Cash contribution by owner 2. Earned revenue on account 3. Purchased equipment on account 4. Collected cash on account 5. Cash purchase of equipment 6. Paid cash on account 7. Earned revenue and received cash 8. Paid cash for salaries

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    1-23 E1 - 29 Using the accounting equation to analyze business transactions Learning Objective 4 Ashley Stamper opened a medical practice. During July, the first month of operation, the business, titled Ashley Stamper, MD, experienced the following events: Jul. 6 Stamper contributed $68,000 in the business by opening a bank account in the name of A. Stamper, MD. The business gave capital to Stamper. 9 Paid $56,000 cash for land. 12 Purchased medical supplies for $1,500 on account. 15 Officially opened for business. 20 Paid cash expenses: employees’ salaries, $1,300; office rent, $1,500; utilities, $100. 31 Earned service revenue for the month, $13,000, receiving cash. 31 Paid $1,050 on account. Analyze the effects of these events on the accounting equation of the medical practice of Ashley Stamper, MD, using the following format:

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    1-24 SOLUTION ASSETS = LIABILITIES + EQUITY Date Cash + Medical Supplies + Land = Accounts Payable + Stamper, Capital – Stamper, Withdrawals + Service Revenue – Salaries Expense – Rent Expense – Utilities Expense July 6 + 68 ,000 + 68 ,000 Bal. $ 68 ,000 = + $ 68 ,000 9 – 56 ,000 + 56 ,000 = Bal. $ 12 ,000 + $ 56 ,000 = + $ 68 ,000 12 + +1, 5 00 = +1, 5 00 Bal. $ 12 ,000 + $1, 5 00 + $ 56 ,000 = $1, 5 00 + $ 68 ,000 15 Bal. $ 12 ,000 + $1, 5 00 + $ 56 ,000 = $1, 5 00 + $ 68 ,000 20 – 2,90 0 = – 1, 3 00 – 1, 500 – 100 Bal. $ 9, 100 + $1, 5 00 + $ 56 ,000 = $1, 5 00 + $ 68 ,000 – $1, 3 00 – $ 1, 500 – $ 100 31 + 13 ,000 = + 13 ,000 Bal. $ 22 , 100 + $1, 5 00 + $ 56 ,000 = $1, 5 00 + $ 68 ,000 + $ 13 ,000 – $1, 3 00 – $ 1, 500 – $ 100 31 – 1,050 = – 1,050 Bal. $ 21 ,050 + $1, 5 00 + $ 56 ,000 = $ 450 + $ 68 ,000 + $ 13 ,000 – $1, 3 00 – $ 1, 500 – $ 100

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    1-25 E1 - 30 Preparing the financial statements Learning Objective 5 Estella Osage publishes an online travel magazine. In need of cash, the business applies for a loan with National Bank. The bank requires borrowers to submit financial statements. With little knowledge of accounting, Estella Osage, the owner, does not know how to proceed. Requirements 1 What are the four financial statements that the business will need to prepare? 2. Is there a specific order in which the financial statements must be prepared? 3. Explain how to prepare each statement. Use the following information to answer Exercises E1 - 31 through E1 - 33. The account balances of Wilson Towing Service at June 30, 2018, follow: Equipment $ 25,850 Service Revenue $ 15,000 Office Supplies 1,000 Accounts Receivable 9,000 Notes Payable 6,800 Accounts Payable 8,000 Rent Expense 900 Wilson, Capital, June 1, 2018 3,250 Cash 1,400 Salaries Expense 2,400 Wilson, Withdrawals 3,500 SOLUTION Requirement 1 a. Income s tatement b. Statement of owner’s equity c. Balance sheet d. Statement of cash flows Requirement 2 Yes, the financial statements should be prepared in the order listed above in Requirement 1 . Requirement 3 Income S tatement: a. The header includes the name of the business, the title of the statement, and the time period. An income statement always represents a period of time, for example, a month or a year. b. The revenue accounts are always listed first and then subtotaled if necessary. c. Each expense account is listed separately from largest to smallest and then subtotaled if necessary. d. Net income is calculated as total revenues minus total expenses.

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    1-26 Statement of Owner’s Equity : a. The header includes the name of the business, the title of the statement, and the time period. A statement of owner’s equity always represents a period of time, for example, a month or a year. b. The beginning capital is listed first and will always be the ending capital from the previous time period. c. The owner contributions and net income are added to the beginning capital . d. The owner withdrawals are subtracted from capital . If there had been a net loss, this would also be subtracted. Balance S heet: a. The header includes the name of the business and the title of the statement but the date is different. The balance sheet shows the date as a specific date and not a period of time. b. Each asset account is listed separately and then totaled. Cash is always listed first. c. Liabilities are listed separately and then totaled. Liabilities that are to be paid first are listed first. d. The owner’s equity section includes the ending capital from the statement of owner’s equity . e. The balance sheet must always balance: Assets = Liabilities + Equity. Statement of Cash Flows: a. The header includes the name of the business, the title of the statement, and the time period. A statement of cash flows always represents a period of time, for example, a month or a year. b. Each dollar amount is calculated by evaluating the cash column on the transaction detail. c. Operating activities involve cash receipts for services provided and cash payments for expenses paid. d. Investing activities include the purchase and sale of land and equipment for cash. e. Financing activities include cash from owner contributions and payment of cash for owner withdrawals . f. The ending cash balance must match the cash balance on the balance sheet.

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    1-27 E1 - 31 Preparing the income statement Learning Objective 5 Net Income $11,700 Requirements 1. Prepare the income statement for Wilson Towing Service for the month ending June 30, 2018. 2. What does the income statement report? SOLUTION Requirement 1 WILSON TOWING SERVICE Income Statement Month Ended June 30 , 2018 Revenue: Service Revenue $ 15 ,000 Expenses: Salar ies Expense $ 2,4 00 Rent Expense 900 Total Expenses 3 , 300 Net Income $ 11 , 700 Requirement 2 The income statement reports revenues and expenses for a period of time. E1 - 32 Preparing the statement of owner’s equity Learning Objective 5 Ending Capital $22,450 Requirements 1. Prepare the statement of owner’s equity for Wilson Towing Service for the month ending June 30, 2018. Assume Wilson contributed $11,000 during June. 2. What does the statement of owner’s equity report?

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    1-28 SOLUTION Requirement 1 WILSON TOWING SERVICE Statement of Owner’s Equity Month Ended June 30 , 2018 Wilson, Capital , June 1, 2018 $ 3 , 250 Owner contribution 11,000 Net i ncome for the month 11 , 700 25 , 950 Owner withdrawals ( 3,5 00 ) Wilson, Capital , June 30 , 2018 $ 22 , 450 Requirement 2 The statement of owner’s equity reports the changes in owner’s capital during a time period. E1 - 33 Preparing the balance sheet Learning Objective 5 Total Assets $37,250 Requirements 1. Prepare the balance sheet for Wilson Towing Service as of June 30, 2018. 2. What does the balance sheet report? Use the following information to answer Exercises E1 - 34 through E1 - 36. The assets, liabilities, and equities of Damon Design Studio have the following balances at December 31, 2018. The owner, Eric Damon, began the year with a $39,000 capital balance, contributed $13,000, and withdrew $57,000 during the year. Notes Payable $ 14,000 Office Furniture $ 48,400 Rent Expense 23,000 Utilities Expense 7,200 Cash 3,200 Accounts Payable 3,600 Office Supplies 5,100 Service Revenue 154,600 Salaries Expense 65,000 Accounts Receivable 9,300 Property Tax Expense 2,200 Miscellaneous Expense 3,800

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    1-29 SOLUTION Requirement 1 WILSON TOWING SERVICE Balance Sheet June 30 , 2018 Assets Liabilities Cash $ 1, 4 00 Accounts Payable $ 8 ,0 00 Accounts Receivable 9,0 00 Notes Payable 6, 8 00 Office Supplies 1, 000 Total Liabilities 14 , 8 00 Equipment 25,85 0 Owner’s Equity Wilson, Capital 22 , 450 Total A ssets $ 37,250 Total Liabilities a nd Owner’s Equity $ 37 , 250 Requirement 2 The balance sheet reports an entity’s assets, liabilities, and owner’s equity as of a specific date. E1 - 34 Preparing the income statement Learning Objective 5 Net Income $53,400 Prepare the income statement for Damon Design Studio for the year ending December 31, 2018. SOLUTION DAMON DESIGN STUDIO Income Statement Year Ended December 31 , 2018 Revenue: Service Revenue $ 154 , 600 Expenses: Salaries Expense $ 65 ,000 Rent Expense 2 3 ,000 Utilities Expense 7 , 200 Miscellaneous Expense 3 , 8 00 Property Tax Expense 2 , 2 00 Total Expenses 101 , 200 Net Income $ 53 , 400

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