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Solution Manual for Financial and Managerial Accounting, 8th Edition

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 1 Chapter 1 Accounting in Business QUESTIONS 1. The purpose of accounting is to provide decision makers with relevant and reliable information to help them make better decisions. Examples include information for people making investments, loans, and business plans. 2. Technology reduces the time, effort, and cost of recordkeeping. There is still a demand for people who can design accounting systems, supervise their operation, analyze complex transactions, and interpret reports. Demand also exists for people who can effectively use computers to prepare and analyze accounting reports. Technology will never substitute for qualified people with abilities to prepare, use, analyze, and interpret accounting information. 3. External users and their uses of accounting information include: (a) lenders, to measure the risk and return of loans; (b) shareholders, to assess whether to buy, sell, or hold their shares; (c) directors, to oversee the organization; (d) employees and labor unions, to judge the fairness of wages and assess future employment opportunities; and (e) regulators, to determine whether the organization is complying with regulations. Other users are voters, legislators, government officials, contributors to nonprofits, suppliers , and customers. 4. Business owners and managers use accounting information to help answer questions such as: What resources does an organization own? What debts are owed? How much income is earned? Are expenses reasonable for the level of sales? Are customers’ accounts being promptly collected? 5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch, Southwest Airlines, CitiCorp, Humana, Charles Schwab, and Prudential. Businesses offering products include Nike, Reebok, Gap, Apple, Ford Motor Co., Philip Morris, Coca - Cola, Best Buy, and WalMart . 6. The internal role of accounting is to serve the organization’s internal operating functions. It does this by providing useful information for internal users in completing their tasks more effectively and efficiently. By providing this information, accounting helps the organization reach its overall goals. 7. Accounting professionals offer many services including auditing, management advice, tax planning, business valuation, and money management. 8. Marketing managers are likely interested in information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions.

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 2 9. Accounting is described as a service activity because it serves decision makers by providing information to help them make better business decisions. 10. Some accounting - related professions include consultant, financial analyst, underwriter, financial planner, appraiser, FBI investigator, market researcher, and system designer. 11. Ethics rules require that auditors avoid auditing clients in which they have a direct investment, or if the auditor’s fee is dependent on the figures in the client’s reports. This will help prevent others from doubting the quality of the auditor’s report. 12. In addition to preparing tax returns, tax accountants help companies and individuals plan future transactions to minimize the amount of tax to be paid. They are also actively involved in estate planning and in helping set up organizations. Some tax accountants work for regulatory agencies such as the IRS or the various state departments of revenue. These tax accountants help to enforce tax laws. 13. The objectivity concept means that financial statement information is supported by independent, unbiased evidence other than someone’s opinion or imagination. 14. This treatment is justified by both the cost principle and the going - concern assumption. 15. The revenue recognition principle provides guidance for managers and auditors so they know when to recognize revenue. If revenue is recognized too early, the business looks more profitable than it is. On the other hand, if revenue is recognized too late the business looks less profitable than it is. This principle demands that revenue be recognized when it is both earned (when service or product is provided) and can be measured reliably. The amount of revenue should equal the value of the assets received or expected to be received from the business’s operating activities covering a specific time period. 16. Business organizations can be organized as a sole proprietorship, partnership, corporation , or LLC . These forms have implications for legal entity and liability , business life , taxation, and number of owners as follows . Proprietorship Partnership Corporation LLC Business entity yes yes yes yes Legal entity no no yes yes L imited liability no no yes yes Unlimited life no no yes yes Business Taxed no no yes no One owner allowed yes no yes yes 17. (a) Assets are resources owned or controlled by a company that are expected to yield future benefits. (b) Liabilities are creditors’ claims on assets that reflect obligations to provide assets, products , or services to others. (c) Equity is the owner’s claim on assets and is equal to assets minus liabilities. (d) Net assets refer to equity. 18. Equity is increased by investments (stock issuances) from the owner and by net income (which is the excess of revenues over expenses). It is decreased by dividends and by a net loss (which is the excess of expenses over revenues).

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 3 19. Accounting principles consist of (a) general and (b) specific principles. General principles are the basic assumptions, concepts, and guidelines for preparing financial statements. They stem from long - used accounting practices. Specific principles are detailed rules used in reporting on business transactions and events. They usually arise from the rulings of authoritative and regulatory groups such as the Financial Accounting Standards Board or the Securities and Exchange Commission. 20. Revenue (or sales) is the amount received from selling products and services. 21. Net income (also called income, profit , or earnings) equals revenues minus expenses (if revenues exceed expenses). Net income increases equity. If expenses exceed revenues, the company has a net loss. Net loss decreases equity. 22. The four basic financial statements are: income statement, statement of retained earnings , balance sheet, and statement of cash flows. 23. An income statement reports a company’s revenues and expenses along with the resulting net income or loss over a period of time. 24. Rent expense, utilities expense, administrative expenses, advertising and promotion expenses, maintenance expense, and salaries and wages expenses are some examples of business expenses. 25. The statement of retained earnings explains the changes in retained earnings from net income or loss, and from any owner contributions (stock issuances) and dividends over a period of time. 26. The balance sheet describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 27. The statement of cash flows reports on the cash inflows and outflows from a company’s operating, investing, and financing activities. 28. Return on assets, also called return on investment, is a profitability measure that is useful in evaluating management, analyzing and forecasting profits, and planning activities. It is computed as net income divided by the average total assets. For example, if we have an average annual balance of $100 in a bank account and it earns interest of $5 for the year, then our return on assets is $5 / $100 or 5%. The return on assets is a popular measure for analysis because it allows us to compare companies of different sizes and in different industries. 29 A . Return refers to income, and risk is the uncertainty about the return we expect to make. The lower the risk of an investment, the lower the expected return. For example, savings accounts pay a low return because of the low risk of a bank not returning the principal with interest. Higher risk implies higher, but riskier, expected returns. 30 B . Organizations carry out three major activities: financing, investing, and operating. Financing provides the means used to pay for resources. Investing refers to the acquisition and disposing of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. (Planning is the glue that connects these activities, including the organization’s ideas, goals , and strategies.)

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 4 31 B . An organization’s financing activities (liabilities and equity) pay for investing activities (assets). An organization cannot have more or less assets than its liabilities and equity combined and, similarly, it cannot have more or less liabilities and equity than its total assets. This means: assets = liabilities + equity. This relation is called the accounting equation (also called the balance sheet equation ), and it applies to organizations at all times. 32. The dollar amounts in Goog le’s financial statements are rounded to the nearest million ($1,000,000). Googl e’s consolidated statement of income (or income statement) covers the calendar - year ended December 31 , 201 7 . Google also reports comparative income statements for the previous two years. 33. The independent auditor for Apple is Ernst & Young, LLP . The auditor expressly states that “our responsibility is to express an opinion on these financial statements based on our audits.” The auditor also states that “these financial statements are the responsibility of the Company’s management.”

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 5 QUICK STUDIES Quick Study 1 - 1 (10 minutes) 1. f Technology 2. c Recording 3. h Recordkeeping (bookkeeping) Quick Study 1 - 2 (10 minutes) a. E External user g. E External user b. E External user h. E External user c. E External user i. I Internal user d. E External user j. E External user e. I Internal user k. E External user f. E External user l. E External user Quick Study 1 - 3 ( 10 minutes) 1. A . O pportunity 2. B . P ressure 3. C . R ationalization 4. A . O pportunity 5. B . P ressure 6. C . R ationalization Quick Study 1 - 4 ( 5 minutes) 1. a . principle 2. b. assumption 3. b . assumption 4. a. principle

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 6 Quick Study 1 - 5 (10 minutes) Attribute Present Proprietorship Partnership Corporation LLC 1. Business taxed no no yes no 2. Limited liability no no yes yes 3. Legal entity no no yes yes Quick Study 1 - 6 (10 minutes) 1. D . Revenue recognition principle 2. B . Measurement (c ost ) principle 3. C . Business entity assumption Quick Study 1 - 7 ( 5 minutes) Assets = Liabilities + Equity $700,000 (a) $280,000 $420,000 $500,000 (b) $250,000 (b) $250,000 Quick Study 1 - 8 (10 minutes) 1. Assets = Liabilities + Equity $75,000 (a) $35,000 $40,000 (b) $95,000 $25,000 $70,000 $85,000 $20,000 (c) $65,000 2 . Assets = Liabilities + Common Stock - Dividend s + Revenues - Expenses $4 0 ,000 $16,000 $20,000 $ 0 (a) $12,000 $ 8,000 $8 0 ,000 $32,000 $44,000 (b) $2,000 $24,000 $18,000

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 7 Quick Study 1 - 9 (10 minutes) a. T he account s and their dollar amount s (in $ millions) for Google are: (1) Assets = $ 197,295 (2) Liabilities = $ 44,793 (3) Equity = $ 152,502 b. Using Google’s amounts from (a) we verify that (in $ millions): Assets = Liabilities + Equity 197,295 = 44,793 + 152,502 Quick Study 1 - 10 (1 5 minutes) Assets = Liabilities + Equity Cash + Accounts Recble. = Accounts Payable + Common Stock - Dividends + Revenues - Expenses (a) $5,500 = $5,500 Consulting (b) + $4,000 = + 4,000 Commission Bal. 5,500 + 4,000 = + 9,500 (c) - 1,400 = - $ 1,400 Wages Bal. 4,100 + 4,000 = + 9,500 - 1,400 (d) + 1 ,000 + - 1 ,000 = - Bal. 5 ,100 + 3 ,000 = + 9,500 - 1,400 (e) - 700 + = - 700 C leaning Bal. $ 4 , 4 00 + $ 3 ,000 = + $ 9,500 - $ 2,100

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 8 Quick Study 1 - 11 (1 5 minutes) Assets = Liabilities + Equity Cash + Supplies + Equip. + Land = Accts. Pay. + Common Stock - Divi - dends + Rev. - Exp. (a) $15,000 = $15,000 (b) - 500 + $500 = Bal. 14,500 + 500 = + 15,000 (c) + $10,000 = 10,000 Bal. 14,500 + 500 + 10,000 = + 2 5,000 (d) + 200 = +$200 Bal. 14,500 + 700 + 10,000 = 200 + 2 5,000 (e) - 9,000 + $ 9,000 = Bal. $ 5,500 + $ 700 + $ 10,000 + $ 9,000 = $ 200 + $ 2 5,000 Quick Study 1 - 1 2 (10 minutes) [ Code: Income statement (I), Balance sheet (B), or Statement of cash flows (CF). ] a . B Balance sheet e . B Balance sheet b . CF Statement of cash flows f . CF Statement of cash flows c . B Balance sheet g . I Income statement d . I Income statement h . B Balance sheet

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 9 Quick Study 1 - 13 ( 5 minutes) 1. EX expenses 4 . D dividends 7. EX expenses 2. R revenues 5 . EX expenses 8. R revenues 3. EX expenses 6 . R revenues Quick Study 1 - 14 ( 5 minutes) 1. A assets 3 . A assets 5. A assets 2. EQ equity 4 . L liabilities 6. A assets Quick Study 1 - 1 5 (15 minutes) HAWKIN Income Statement For Month Ended December 31 Revenues Services revenue ................................ $ 16 , 0 00 Expenses Wages expense ................................ ... $8 ,000 Rent expense ................................ ....... 1 ,5 0 0 Utilities expense ................................ .. 700 Total expenses ................................ .... 1 0 , 20 0 Net income ................................ .................. $ 5 , 80 0 Quick Study 1 - 1 6 (10 minutes) Return on assets = = = 1 9 . 0 % Interpretation: Its return of 1 9 . 0% exceeds the 11 % of its competitors. Home Depot’s performance can be judged as above average. $8 billion $42 billion Net income Average total assets

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 10 Quick Study 1 - 1 7 (10 minutes) a. T he account s and their dollar amount s (in KRW millions) for Samsung are: (1) Assets = 301,752,090 (2) Liabilities = 87,260,662 (3) Equity = 214,491,428 b. Using Samsung’s amounts from (a) we verify (in KRW millions): Assets = Liabilities + Equity 301,752,090 = 87,260,662 + 214,491,428

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 11 EXERCISES Exercise 1 - 1 (10 minutes) C Communicating 1. Analyzing and interpreting reports . C Communicating 2. Presenting financial information . R Recording 3. Keep ing a log of service costs . R Recording 4. Measuring the costs of a product . C Communicating 5. Preparing financial statements . I Identifying 6 . Acquiring knowledge of revenue transactions . I Identifying 7 . Observing transactions and events. R Recording 8 . Registering cash sales of products sold . Exercise 1 - 2 (20 minutes) Part A . 1. I Internal user 5. I Internal user 2. E External user 6. E External user 3. I Internal user 7. I Internal user 4. E External user Part B . 1. I Internal user 5. I Internal user 2. I Internal user 6. E External user 3. E External user 7. I Internal user 4. E External user 8. I Internal user Exercise 1 - 3 (10 minutes) 1. B Managerial accounting 5. C Tax accounting 2. A Financial accounting 6. C Tax accounting 3. B Managerial accounting 7. A Financial accounting 4. B Managerial accounting 8. A Financial accounting

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 12 Exercise 1 - 4 (10 minutes) 1. A Audit 2. G Net income 3. D FASB 4. F Public accountants 5. C Ethics Exercise 1 - 5 (20 minutes) 1 . G Dodd - Frank Act 2 . F Audit 3 . E Sarbanes - Oxley Act 4 . D Internal controls 5 . C Prevention 6 . B Fraud triangle 7 . A Ethics Exercise 1 - 6 (10 minutes) a . (C) Corporation e. (C) Corporation b . (P) Partnership f. (SP) Sole proprietorship c . (SP) Sole proprietorship g. (C) Corporation d . (SP) Sole proprietorship h. (LLC) Limited liability company

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 13 Exercise 1 - 7 (10 minutes) Code Description Principle/Assumption H 1 . A company reports details behind financial statements that would impact users' decisions. Full disclosure principle G 2. Financial statements reflect the assumption that the business continues operating. Going - concern assumption F 3 . A company records the expenses incurred to generate the revenues reported. E xpense recognition (matching ) principle A 4 . C oncepts, assumptions, and guidelines for preparing financial statements . General accounting principle C 5 . E ach business is accounted for separately from its owner or owners. Business entity assumption D 6 . Revenue is recorded when products and services are delivered . Revenue recognition principle E 7 . Detailed rules used in reporting events and transactions . Specific accounting principle B 8 . Information is based on actual costs incurred in transactions. Measurement (c ost ) principle Exercise 1 - 8 (10 minutes) Assets = Liabilities + Equity (a) $ 65,000 = $ 20,000 + $45,000 $100,000 = $ 34,000 + (b) $66,000 $154,000 = (c) $114,000 + $40,000

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 14 Exercise 1 - 9 (20 minutes) a . Using the accounting equation at the beginning of the year: Assets = Liabilities + Equity $300,000 = ? + $100,000 Thus, beginning liabilities = $200,000 Using the accounting equation at the end of the year: Assets = Liabilities + Equity $300,000 + $80,000 = $200,000+ $50,000 + ? $380,000 = $250,000 + ? Thus, ending equity = $130,000 Alternative approach to solving part (b):  Assets($80,000) =  Liabilities($50,000) +  Equity(?) where “  ” refers to “change in.” Thus: Ending Equity = $100,000 + $30,000 = $130,000 b . Using the accounting equation: Assets = Liabilities + Equity $123,000 = $47,000 + ? Thus, equity = $76,000 c. Using the accounting equation at the end of the year: Assets = Liabilities + Equity $190,000 = $70,000 - $5,000 + ? $190,000 = $65,000 + $125,000 Using the accounting equation at the beginning of the year: Assets = Liabilities + Equity $190,000 - $60,000 = $70,000 + ? $130,000 = $70,000 + ? Thus : Beginning Equity = $60,000

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    W ild, Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 1 15 Exercise 1 - 1 0 (20 minutes) 1. d The owner invested $40,000 cash in the business in exchange for its common stock . 2. e The company purchased office supplies for $3,000 by paying $2,000 cash and putting $1,000 on credit. 3. a The company purchased office furniture for $8,000 cash. 4. f The company billed a customer $6,000 for services provided. 5. h The company provided services for $1,000 cash . Exercise 1 - 11 (20 minutes) 1. f The company purchased land for $4,000 cash. 2. a The company purchased $1,000 of office supplies on credit. 3. g The company billed a client $1,900 for services provided. 4. h The company paid $1,000 cash toward an account payable . 5. b The company collected $1,900 cash from an account receivable. Exercise 1 - 1 2 (15 minutes) a. 3 Decreases an asset and decreases a liability. b. 2 Increases an asset and increases a liability. c. 5 Increases an asset and increases equity. d. 1 Decreases an asset and decreases equity. e. 4 Increases an asset and decreases an asset. f. 5 Increases an asset and increases equity.

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