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Solution Manual for Financial Managerial Accounting, 4th edition

  • Accounting
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    Chapter 0 1 – Introducing Accounting in Business 1 - 1 Chapter 1 Introducing A ccounting 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 their interests in 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 Computer, Ford Motor Co., Philip Morris, Coca - Cola, Best Buy, and Circuit City. 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.

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    Chapter 0 1 – Introducing Accounting in Business 1 - 2 8. Marketing managers are likely interested in information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions. 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. This concept increases the reliability and verifiability of financial statement information. 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 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 in one of three basic forms: sole proprietorship, partnership, or corporation. These forms have implications for legal liability, taxation, continuity, number of owners, and legal status as follows: Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no* no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes * Proprietorships and partnerships that are set up as LLCs provide limited liability . 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.

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    Chapter 0 1 – Introducing Accounting in Business 1 - 3 18. Equity is increased by investments from the owner and by net income (which is the excess of revenues over expenses) . It is decreased by dividends to the owner and by a net loss (which is the excess of expenses over revenues). 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 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.

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    Chapter 0 1 – Introducing Accounting in Business 1 - 4 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.) 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 Research In Motion’s financial statements are rounded to the nearest thousand ($1,000). Research In Motion’s consolidated statement of earnings (or income statement) covers the fiscal year (consisting of 52 weeks) ended February 27, 2010. Research In Motion also reports comparative income statements for the previous two years (consisting of 52 weeks). 33 . At September 26, 2009, Apple had ($ in millions) assets of $47,501, liabilities of $15,861, and equity of $31,640. 34. Confirmation of Nokia’s accounting equation follows (numbers in EUR millions): Assets = Liabilities + Equity 35,738 = 20,989 + 14,749 35. The independent auditor for Palm, Inc., is Deloitte and Touché LLP. The auditor expressly states that “our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.” The auditor also states that “these consolidated financial statements and financial statement schedule are the responsibility of the Company’s management.”

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    Chapter 0 1 – Introducing Accounting in Business 1 - 5 QUICK STUDIES Quick Study 1 - 1 (a) and (b) GAAP: Generally Accepted Accounting Principles Importance: GAAP are the rules that specify acceptable accounting practices. SEC: Securities and Exchange Commission Importance: The SEC is charged by Congress to set reporting rules for organizations that sell ownership shares to the public. The SEC delegates part of this responsibility to the FASB. FASB: Financial Accounting Standards Board Importance: FASB is an independent group of full - time members who are responsible for setting accounting rules. IASB: International Accounting Standards Board. Importance: Its purpose is to issue standards that identify preferred practices in the desire of harmonizing accounting practices across different countries. The vast majority of countries and financial exchanges support its activities and objectives. IFRS: International Financial Reporting Standards. Importance: A global set of accounting standards issued by the IASB. Many countries require or permit companies to comply with IFRS in preparing their financial statements. The FASB is undergoing a process with the IASB to converge GAAP and IFRS and to create a single set of accounting standards for global use. Quick Study 1 - 2 Internal controls serve several purposes: • They involve monitoring an organization’s activities to promote efficiency and to prevent wrongful use of its resources. • They help ensure the validity and credibility of accounting reports. • They are often crucial to effective operations and reliable reporting. More generally, the absence of internal controls can adversely affect the effectiveness of domestic and global financial markets. Examples of internal controls include cash registers with internal tapes or drives, scanners at doorways to identify tagged products, overhead video cameras, security guards, and many others.

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    Chapter 0 1 – Introducing Accounting in Business 1 - 6 Quick Study 1 - 3 a. E g. E b. I h. E c. E i. E d. I j. I e. E k. E f. E l. E Quick Study 1 - 4 Accounting professionals practice in at least four main areas. These four areas, along with a listing of some work opportunities in each, are: 1. Financial accounting • Preparation • Analysis • Auditing (external) • Consulting • Investigation 2. Managerial accounting • Cost accounting • Budgeting • Auditing (internal) • Consulting 3. Tax accounting • Preparation • Planning • Regulatory • Consulting • Investigation 4. Accounting - related • Lending • Consulting • Analyst • Investigator • Appraiser

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    Chapter 0 1 – Introducing Accounting in Business 1 - 7 Quick Study 1 - 5 The choice of an accounting method when more than one alternative method is acceptable often has ethical implications. This is because accounting information can have major impacts on individuals’ (and firms’) well - being. To illustrate, many companies base compensation of managers on the amount of reported income. When the choice of an accounting method affects the amount of reported income, the amount of compensation is also affected. Similarly, if workers in a division receive bonuses based on the division’s income, its computation has direct financial implications for these individuals. Quick Study 1 - 6 a. Cost principle (also called historical cost) b. Business entity assumption c. Revenue recognition principle Quick Study 1 - 7 Assets = Liabilities + Equity $40,000 (a) $30,000 $10,000 $55,000 (b) $27,500 (b) $27,500 Quick Study 1 - 8 Assets = Liabilities + Equity $30,000 (a) $10,000 $20,000 (b) $80,000 $ 50,000 $30,000 $90,000 $ 10,000 (c) $80,000

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    Chapter 0 1 – Introducing Accounting in Business 1 - 8 Quick Study 1 - 9 (a) Examples of business transactions that are measurable include: • Selling products and services. • Collecting funds from dues, taxes, contributions, or investments. • Borrowing money. • Purchasing products and services. (b) Examples of business events that are measurable include: • Decreases in the value of securities (assets). • Bankruptcy of a customer owing money. • Technological advances rendering patents (or other assets) worthless. • An “act of God” (casualty) that destroys assets. Quick Study 1 - 10 a. For September 26, 2009, the account and its dollar amount (in millions) for Apple are: (1) Assets = $47,501 (2) Liabilities = $ 15,861 (3) Equity = $ 31,640 b. Using Apple’s amounts from (a) we verify that (in millions): Assets = Liabilities + Equity $47,501 = $ 15,861 + $ 31,640 Quick Study 1 - 11 Return on assets = = = 5.3% Interpretation: Its return of 5.3% is slightly above the 5% of its competitors. Home Depot’s performance can be rated as above average. $2,260 $42,744 Net income Average total assets

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    Chapter 0 1 – Introducing Accounting in Business 1 - 9 Quick Study 1 - 12 [Code: Income statement (I), Balance sheet (B), Statement of retained earnings ( R E), or Statement of cash flows (CF).] a. B d. B g. B b. I e. RE (and CF*) h. CF c. B f. I i. CF *The more advanced student might know that this item would also appear in CF. Quick Study 1 - 13 (10 minutes) a. International Financial Reporting Standards (IFRS) b. Convergence desires to achieve a single set of accounting standards for global use. c. The SEC roadmap proposes that large U.S. companies adopt IFRS by 2014.

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    Chapter 0 1 – Introducing Accounting in Business 1 - 10 EXERCISES Exercise 1 - 1 (10 minutes) I 1. Determining employee tasks behind a service I 2. Establishing revenues generated from a product R 3. Maintaining a log of service costs R 4. Measuring the costs of a product C 5. Preparing financial statements C 6. Analyzing and interpreting reports C 7. Presenting financial information Exercise 1 - 2 (20 minutes) Part A. 1. E 5. I 2. E 6. I 3. E 7. I 4. I 8. I Part B. 1. I 5. I 2. E 6. E 3. I 7. I 4. E Exercise 1 - 3 (10 minutes) 1. B 5. A 2. C 6. A 3. C 7. B 4. B 8. A

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    Chapter 0 1 – Introducing Accounting in Business 1 - 11 Exercise 1 - 4 (20 minutes) a. Situations involving ethical decision making in coursework include performing independent work on examinations and individually completing assignments/projects. It can also extend to promptly returning reference materials so others can enjoy them, and to properly preparing for class to efficiently use the time and question period to not detract from others’ instructional benefits. b. Auditing professionals with competing audit clients are likely to learn valuable information about each client that the other clients would benefit from knowing. In this situation the auditor must take care to maintain the confidential nature of information about each client. c. Accounting professionals who prepare tax returns can face situations where clients wish to claim deductions they cannot substantiate. Also, clients sometimes exert pressure to use methods not allowed or questionable under the law. Issues of confidentiality also arise when these professionals have access to clients’ personal records. d. Managers face several situations demanding ethical decision making in their dealings with employees. Examples include fairness in performance evaluations, salary adjustments, and promotion recommendations. They can also include avoiding any perceived or real harassment of employees by the manager or any other employees. It can also include issues of confidentiality regarding personal information known to managers. Exercise 1 - 5 (10 minutes) 1. G 4. F 2. A 5. D 3. C

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    Chapter 0 1 – Introducing Accounting in Business 1 - 12 Exercise 1 - 6 (10 minutes) Code Description Principle or Assumption G 1. Revenue is recorded only when the earnings process is complete. Revenue recognition principle A 2. Information is based on actual costs incurred in transactions. Cost principle C 3. Usually created by a pronouncement from an authoritative body. Specific accounting principle H 4. Financial statements reflect the assumption that the business continues operating. Going - concern assumption D 5. A company reports details behind financial statements that would i mpact users' decisions. Full disclosure principle B 6. A company records the expenses incurred to generate the revenue s reported. Matching (expense recognition) principle E 7. Derived from long - used and generally accepted accounting practices. General accounting principle F 8. Every business is accounted for separately from its owner or owners. Business entity assumption ` Exercise 1 - 7 (10 minutes) a. Corporation e. Partnership b. Corporation f. Sole proprietorship c. Sole proprietorship g. Sole proprietorship d. Corporation

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    Chapter 0 1 – Introducing Accounting in Business 1 - 13 Exercise 1 - 8 (20 minutes) a. Using the accounting equation: Assets = Liabilities + Equity $123,000 = $53,000 + ? Thus, equity = $70,000 b. Using the accounting equation at the beginning of the year: Assets = Liabilities + Equity $200,000 = ? + $150,000 Thus, beginning liabilities = $50,000 Using the accounting equation at the end of the year: Assets = Liabilities + Equity $200,000 + $70,000 = $50,000 + $30,000 + ? $270,000 = $80,000 + ? Thus, ending equity = $190,000 Alternative approach to solving part (b):  Assets($70,000) =  Liabilities($30,000) +  Equity(?) where “  ” refers to “change in.” Thus: Ending Equity = $150,000 + $40,000 = $190,000 c. Using the accounting equation at the end of the year: Assets = Liabilities + Equity $180,000 = $60,000 - $10,000 + ? $180,000 = $50,000 + $130,000 Using the accounting equation at the beginning of the year: Assets = Liabilities + Equity $180,000 - $80,000 = $60,000 + ? $100,000 = $60,000 + ? Thus : Beginning Equity = $40,000

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    Chapter 0 1 – Introducing Accounting in Business 1 - 14 Exercise 1 - 9 (10 minutes) Assets = Liabilities + Equity (a) $95,000 = $30,000 + $65,000 $89,000 = $22,000 + (b) 67,000 $132,000 = (c) $112,000 + $20,000 Exercise 1 - 10 (15 minutes) Examples of transactions that fit each case include: a. Business acquires office supplies (or some other asset) for cash (or some other asset). Another example is collection of cash from a receivable. b. Business pays an account payable (or some other liability) with cash (or some other asset). c. Business signs a note payable to extend the due date on an account payable ; OR, a business substitutes one note with better terms for another note with poorer terms . d. Business purchases equipment (or some other asset) on credit ; OR, a business takes out a cash loan . e. Cash dividends (or some other asset) paid to the owner(s) of the business; OR, the business incurs an expense paid in cash. f. Business incurs an expense that is not yet paid (for example, when employees earn wages that are not yet paid). g. Owner(s) invest cash (or some other asset) in the business; OR, the business earns revenue and accepts cash (or another asset).

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    Chapter 0 1 – Introducing Accounting in Business 1 - 15 Exercise 1 - 11 (30 minutes) Cash + Accounts Receivable + Equip - ment = Accounts Payable + Common Stock – Dividends + Revenues – Expenses a. +$50,000 + $10,000 = + $60,000 b. – 1,600 ______ ______ – $1,600 Bal. 48,400 + + 10,000 = + 60,000 – 1,600 c. _______ + 12,000 +$12,000 ______ _____ Bal. 48,400 + + 22,000 = 12,000 + 60,000 – 1,600 d. + 2,000 ______ _______ ______ + $2,000 _____ Bal. 50,400 + + 22,000 = 12,000 + 60,000 + 2,000 – 1,600 e. _______ + $7,000 ______ _______ ______ + 7,000 _____ Bal. 50,400 + 7,000 + 22,000 = 12,000 + 60,000 + 9,000 – 1,600 f. – 8,000 ______ + 8,000 _______ ______ _____ _____ Bal. 42,400 + 7,000 + 30,000 = 12,000 + 60,000 + 9,000 – 1,600 g. – 2,400 ______ ______ _______ ______ _____ – 2,400 Bal. 40,000 + 7,000 + 30,000 = 12,000 + 60,000 + 9,000 – 4,000 h. + 5,000 - 5,000 ______ _______ ______ _____ _____ Bal. 45,000 + 2,000 + 30,000 = 12,000 + 60,000 + 9,000 – 4,000 i. – 12,000 ______ ______ – 12,000 ______ _____ _____ Bal. 33,000 + 2,000 + 30,000 = 0 + 60,000 + 9,000 – 4,000 j. – 500 ______ ______ _______ ______ – $500 _____ _____ Bal. $32,500 + $2,000 + $30,000 = $ 0 + $60,000 – $500 + $9,000 – $4,000 Exercise 1 - 12 (20 minutes) a. Started the business with the owner investing $20,000 cash in exchange for common stock . b. Purchased office supplies for $1,500 by paying $1,000 cash and putting the remaining $500 balance on credit. c. Purchased office furniture by paying $8,000 cash. d. Billed a customer $3,000 for services earned. e. Provided services for $500 cash.

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    Chapter 0 1 – Introducing Accounting in Business 1 - 16 Exercise 1 - 13 (15 minutes) a. Purchased land for $2,000 cash. b. Purchased $500 of office supplies on credit. c. Billed a client $950 for services provided. d. Paid the $500 account payable created by the credit purchase of office supplies in transaction b . e. Collected $950 cash for the billing in transaction c . Exercise 1 - 14 (15 minutes) REAL SOLUTIONS Income Statement For Month Ended October 31 Revenues: Consulting fees earned .................... $15,000 Expenses: Salaries expense .............................. $6,000 Rent expense ................................ .... 2,550 Miscellaneous expenses ................. 6 8 0 Telephone expense .......................... 6 6 0 Total expenses ................................ . 9,890 Net income ................................ .................. $ 5,110 Exercise 1 - 15 (15 minutes) REAL SOLUTIONS Statement of Retained Earnings For Month Ended October 31 Retained earnings , Oct. 1 ................................ $ 0 Add: Net income (from Exercise 1 - 14) ............. 5,110 5 ,110 Less: Cash dividends ................................ ...... 3,360 Retained earnings , Oct. 31 .............................. $ 1 ,7 5 0

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    Chapter 0 1 – Introducing Accounting in Business 1 - 17 Exercise 1 - 16 (15 minutes) REAL SOLUTIONS Balance Sheet October 31 Assets Liabilities Cash ............................... $ 2,000 Accounts payable ................. $ 7,500 Accounts receivable .... 13,000 Equity Office supplies .............. 4,250 Common stock ...................... 74,000 Office equipment .......... 28,000 Retained earnings* ............... 1,750 Land ............................... 36,000 Total equity ............................ 75 ,7 5 0 Total assets ................... $83,250 Total liabilities and equity .... $83,250 * Computation of amount from Exercise 1 - 15. Exercise 1 - 17 (15 minutes) REAL SOLUTIONS Statement of Cash Flows For Month Ended October 31 Cash flows from operating activities Cash received from customers ................................ ............ $ 2,000 Cash paid to employees ................................ ....................... (2,750) Cash paid for rent ................................ ................................ .. (2,550) Cash paid for telephone expenses ................................ ...... (660) Cash paid for miscellaneous expenses .............................. (680 ) Net cash used by operating activities ................................ . ( 4,640) Cash flows from investing activities Purchase of office equipment ................................ .............. (28,000 ) Net cash used by investing activities ................................ . (28,000) Cash flows from financing activities I nvestments by stockholders for stock ............................... 38,000 Dividends to stockholders ................................ ................... (3,360 ) Net cash provided by financing activities .......................... 34,640 Net increase in cash ................................ .............................. $ 2,000 Cash balance, October 1 ................................ ...................... 0 Cash balance, October 31 ................................ .................... $ 2,000

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    Chapter 0 1 – Introducing Accounting in Business 1 - 18 Exercise 1 - 18 (10 minutes) Return on assets = Net income / Average total assets = $20,000 / [($100,000 + $150,000)/2] = 16% Interpretation: Geneva Group’s return on assets of 16% is markedly above the 10% return of its competitors. Accordingly, its performance is assessed as superior to its competitors. Exercise 1 - 19 (10 minutes) A 1. Cash paid for wages A 5. C ash paid on an account payable C 2. Cash paid for dividends C 6. Cash received from stock issued B 3. Cash purchase of equipment A 7. Cash received from clients A 4. Cash paid for advertising A 8. Cash paid for rent Exercise 1 - 20 B (10 minutes) 1. F Financing* 2. I Investing 3. O Operating 4. F Financing 5. I Investing * Would also be listed as “investing” if resources contributed by owner were in the form of non - financial resources (assets other than cash) .

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    Chapter 0 1 – Introducing Accounting in Business 1 - 19 Exercise 1 - 21 (20 minutes) NINTENDO Income Statement For Year Ended March 31, 2009 Net sales ................................ ................................ ...... ¥ 1,838,622 Expenses Cost of sales ................................ ............................ ¥1,044,981 Selling, general and administrative expenses ...... 238,378 Other expenses ................................ ........................ 276,174 Total expenses ................................ ......................... 1,559,533 Net income ................................ ................................ .... ¥ 279,089

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    Chapter 0 1 – Introducing Accounting in Business 1 - 20 PROBLEM SET A Problem 1 - 1A (25 minutes) Balance Sheet Income Statement Statement of Cash Flows Transaction Total Assets Total Liab. Total Equity Net Income Operating Activities Financing Activities Investing Activities 1 Owner invests cash for stock + + + 2 Incurs legal costs on credit + – – 3 Pays cash for employee wages – – – – 4 Borrows cash by signing L - T note payable + + + 5 Receives cash for services provided + + + + 6 Buys land by signing note payable + + 7 Buys office equipment for cash +/ – – 8 Provides ser - vices on credit + + + 9 Collects cash on receivable from (8) +/ – + 10 Pays cash dividend – – –

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    Chapter 0 1 – Introducing Accounting in Business 1 - 21 Problem 1 - 2A (40 minutes) Part 1 Company A: (a) Equity on December 31, 2010: Assets ................................ .......................... $45,000 Liabilities ................................ ..................... (23,500 ) Equity ................................ .......................... $21,500 (b) Equity on December 31, 2011: Equity, December 31, 2010 ........................ $21,500 Plus s tock issuances ................................ . 5,000 Plus net income ................................ .......... 7,500 Less cash dividends ................................ .. (2,500 ) Equity, December 31, 2011 ........................ $31,500 (c) Amount of liabilities on December 31, 2011: Assets ................................ .......................... $48,000 Equity ................................ .......................... (31,500 ) Liabilities ................................ ..................... $16,500 Part 2 Company B: (a) and (b) Equity: 12/31/2010 12/31/2011 Assets ................................ ... $35,000 $41,000 Liabilities .............................. (22,500 ) (27,500 ) Equity ................................ ... $12,500 $13,500 (c) Net income for 2011: Equity, December 31, 2010 ..................... $12,500 Plus stock issuances .............................. 1,500 Plus net income ................................ ....... ? Less cash dividends ............................... (3,000 ) Equity, December 31, 2011 ..................... $13,500 Therefore, net income must have been $ 2,500.

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    Chapter 0 1 – Introducing Accounting in Business 1 - 22 Problem 1 - 2A ( continued ) Part 3 Company C: First, calculate the beginning balance of equity: Dec. 31, 2010 Assets ................................ .......................... $29,000 Liabilities ................................ ..................... (14,000 ) Equity ................................ .......................... $15,000 Next, find the ending balance of equity by completing this table: Equity, December 31, 2010 ........................ $15,000 Plus s tock issuances ................................ . 7,750 Plus net income ................................ .......... 9,000 Less cash dividends ................................ .. (3,875 ) Equity, December 31, 2011 ........................ $27,875 Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of liabilities: Dec. 31, 2011 Liabilities ................................ ..................... $19,000 Equity ................................ .......................... 27,875 Assets ................................ .......................... $46,875 Part 4 Company D: First, calculate the beginning and ending equity balances: 12/31/2010 12/31/2011 Assets ................................ ...... $80,000 $ 125,000 Liabilities ................................ . (38,000 ) (64,000 ) Equity ................................ ...... $42,000 $ 61,000 Then, find the amount of s tock issuances during 2011: Equity, December 31, 2010 .......................... $42,000 Plus s tock issuances ................................ ... ? Plus net income ................................ ............ 12,000 Less cash dividends ................................ .... 0 Equity, December 31, 2011 .......................... $61,000 Thus, s tock issuances must have been: $ 7,000

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    Chapter 0 1 – Introducing Accounting in Business 1 - 23 Problem 1 - 2A ( Concluded ) Part 5 Company E: First, compute the balance of equity as of December 31, 2011: Assets ................................ .......................... $112,500 Liabilities ................................ ..................... (75,000 ) Equity ................................ .......................... $ 37,500 Next, find the beginning balance of equity as follows: Equity, December 31, 2010 ........................ $ ? Plus s tock issuances ................................ . 4,500 Plus net income ................................ .......... 18,000 Less cash dividends ................................ .. (9,000 ) Equity, December 31, 2011 ........................ $37,500 Thus, the beginning balance of equity was $24,000 . Finally, find the beginning amount of liabilities by subtracting the beginning balance of equity from the beginning balance of assets: Dec. 31, 2010 Assets ................................ .......................... $123,000 Equity ................................ .......................... (24,000 ) Liabilities ................................ ..................... $ 99,000 Problem 1 - 3A (15 minutes) Affiliated Company Balance Sheet December 31, 2011 Assets .............................. $ 90,000 Liabilities ................................ .. $ 34,000 Equity ................................ ........ 56,000 Total assets ..................... $ 90,000 Total liabilities and equity ....... $ 90,000

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    Chapter 0 1 – Introducing Accounting in Business 1 - 24 Problem 1 - 4A (15 minutes) Sun Energy Company Income Statement For Year Ended December 31, 2011 Revenues ................................ ................. $65,000 Expenses ................................ .................. 50,000 Net income ................................ ................ $15,000 Problem 1 - 5A (15 minutes) Boardwalk Statement of Retained Earnings For Year Ended December 31, 2011 Retained earnings , Dec. 31, 2010 .................... $ 8,000 Add: Net income ................................ ................ 9,000 17,000 Less: Cash dividends ................................ ....... (2,000 ) Retained earnings , Dec. 31, 2011 ..................... $15,000 Problem 1 - 6A (15 minutes) Trimark Statement of Cash Flows For Year Ended December 31, 2011 Cash from operating activities ........................ $ 7,000 Cash used by investing activities .................... (3,000) Cash used by financing activities .................... (3,800 ) Net increase in cash ................................ .......... 200 Cash, December 31, 2010 ................................ . 3,300 Cash, December 31, 2011 ................................ . $ 3,500

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    Chapter 0 1 – Introducing Accounting in Business 1 - 25 Problem 1 - 7A (60 minutes) Parts 1 and 2 Assets = Liabilities + Equity Cash + Accounts Receivable + Office Supplies + Office Equipment + Building = Accounts Payable + Notes Payable + Common Stock - Dividends + Reve - nues - Expen - ses a. +$60,000 + $30,000 + $90,000 b. - 50,000 + $300,000 + $250,000 Bal. 10,000 + 30,000 + 300,000 = + 250,000 + 90,000 c. - 6,000 + 6,000 Bal. 4,000 + 36,000 + 300,000 = + 250,000 + 90,000 d. + $4,000 + 1,000 + $5,000 Bal. 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 e. - 1,000 - $1,000 Bal. 3,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,000 f. + $4,000 + $4,000 Bal. 3,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 4,000 - 1,000 g. + 8,000 + 8,000 Bal. 11,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 12,000 - 1000 h. - 1,800 - $1,800 Bal. 9,200 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000 i. + 3,000 - 3,000 Bal. 12,200 + 1,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000 j. - 500 - 500 Bal. 11,700 + 1,000 + 4,000 + 37,000 + 300,000 = 4,500 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000 k. - 2,500 - 2,500 Bal. $9,200 + $1,000 + $4,000 + $37,000 + $300,000 = $4,500 + $250,000 + $90,000 - $1,800 + $12,000 - $3,500 Part 3 Right Consulting’s net income = $12,000 - $3,500 = $8,500

  27. Page 27
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    Chapter 0 1 – Introducing Accounting in Business 1 - 26 Problem 1 - 8A (60 minutes) Parts 1 and 2 Assets = Liabilities + Equity Date Cash + Accounts Receivable + Office Equipment = Accounts Payable + Common Stock – Dividends + Revenues – Expenses May 1 +$60,000 = + $60,000 1 - 3,200 = – $3,200 3 + $1,680 = + $1,680 5 - 800 = – 800 8 + 4,600 = + $4,600 12 + $3,000 = + 3,000 15 - 850 = – 850 20 + 3,000 – 3,000 = 22 + 2,800 = + 2,800 25 + 2,800 – 2,800 = 26 - 1,680 = – 1,680 27 = + 60 – 60 28 - 850 = – 850 30 - 200 = – 200 30 - 480 = – 480 31 - 1,200 = – $1,200 $61,140 + $ 0 + $1,680 = $ 60 + $60,000 – $1,200 + $10,400 – $6,440

  28. Page 28
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    Chapter 0 1 – Introducing Accounting in Business 1 - 27 Problem 1 - 8A (Continued) Part 3 THE SIMPSON CO. Income Statement For Month Ended May 31 Revenues: Consulting services revenue ............ $10,400 Expenses: Rent expense ................................ ....... $3,200 Salaries expense ................................ . 1,700 Advertising expense ........................... 60 Cleaning expense ............................... 800 Telephone expense ............................. 200 Utilities expense ................................ .. 480 Total expenses ................................ .... 6,440 Net income ................................ .................. $ 3,960 THE SIMPSON CO. Statement of Retained Earnings For Month Ended May 31 Retained earnings , May 1 ................................ .......... $ 0 Plus: Net income ................................ ....................... 3,960 3,960 Less: Cash dividends ................................ ................ 1,200 Retained earnings , May 31 ................................ ........ $ 2 ,760 THE SIMPSON CO. Balance Sheet May 31 Assets Liabilities Cash ............................... $61,140 Accounts payable ................ $ 60 Office equipment .......... 1,680 Equity Common stock .................... 60,000 Retained earnings ............... 2,760 Total equity .......................... 6 2,760 Total assets ................... $62,820 Total liabilities and equity .. $62,820

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    Chapter 0 1 – Introducing Accounting in Business 1 - 28 Problem 1 - 8A ( Concluded) Part 3 — continued THE SIMPSON CO. Statement of Cash Flows For Month Ended May 31 Cash flows from operating activities Cash received from customers ................................ $10,400 Cash paid for rent ................................ ...................... (3,200) Cash paid for cleaning ................................ .............. (800) Cash paid for telephone ................................ ............ (200) Cash paid for utilities ................................ ................ (480) Cash paid to employees ................................ ........... (1,700 ) Net cash provided by operating activities .............. $ 4,020 Cash flows from investing activities Purchase of equipment ................................ ............. (1,680 ) Net cash used by investing activities ...................... (1,680) Cash flows from financing activities Investments by stockholder ................................ ..... 60,000 Dividends to stockholder ................................ .......... (1,200 ) Net cash provided by financing activities ............... 58,800 Net increase in cash ................................ .................. $61,140 Cash balance, May 1 ................................ ................. 0 Cash balance, May 31 ................................ ............... $61,140

  30. Page 30
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    Chapter 0 1 – Introducing Accounting in Business 1 - 29 Problem 1 - 9A (60 minutes) Parts 1 and 2 Assets = Liabilities + Equity Date Cash + Accounts Receivable + Office Supplies + Office Equipment + Electrical Equipment = Accounts Payable + Common Stock - Dividends + Revenues - Expenses Dec. 1 +$56,000 = + $56,000 2 - 800 - $800 Bal. 55,200 = 56,000 - 800 3 - 3,200 + $14,000 + $10,800 Bal. 52,000 + 14,000 = 10,800 + 56,000 - 800 5 - 900 + $ 900 Bal. 51,100 + 900 + 14,000 = 10,800 + 56,000 - 800 6 + 1,000 + $1,000 Bal. 52,100 + 900 + 14,000 = 10,800 + 56,000 + 1,000 - 800 8 + $3,800 + 3,800 Bal. 52,100 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 1,000 - 800 15 + $4,000 + 4,000 Bal. 52,100 + 4,000 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 5,000 - 800 18 + 500 + 500 Bal. 52,100 + 4,000 + 1,400 + 3,800 + 14,000 = 15,100 + 56,000 + 5,000 - 800 20 - 3,800 - 3,800 Bal. 48,300 + 4,000 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,000 - 800 24 + 600 + 600 Bal. 48,300 + 4,600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 800 28 + 4,000 - 4,000 Bal. 52,300 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 800 29 - 1,200 - 1,200 Bal. 51,100 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,000 30 - 440 - 440 Bal. 50,660 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,440 31 - 700 - $700 Bal. $49,960 + $ 600 + $1,400 + $3,800 + $14,000 = $11,300 + $56,000 - $700 + $5,600 - $2,440

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    Chapter 0 1 – Introducing Accounting in Business 1 - 30 Problem 1 - 9A (Continued ) Part 3 HAMILTON ELECTRIC Income Statement For Month Ended December 31 Revenues: Electrical fees earned ...................... $5,600 Expenses: Rent expense ................................ .... $ 800 Salaries expense .............................. 1,200 Utilities expense .............................. 440 Total expenses ................................ . 2,440 Net income ................................ .................. $3,160 HAMILTON ELECTRIC Statement of Retained Earnings For Month Ended December 31 Retained earnings , December 1 ................ $ 0 Plus: Net income ................................ ....... 3,160 3 ,160 Less: Cash dividends ................................ 700 Retained earnings , December 31 .............. $ 2 ,460 HAMILTON ELECTRIC Balance Sheet December 31 Assets Liabilities Cash ................................ . $49,960 Accounts payable .................... $11,300 Accounts receivable ...... 600 Equity Office supplies ................ 1,400 Common stock ........................ 56,000 Office equipment ............ 3,800 Retained earnings ................... 2,460 Electrical equipment ...... 14,000 Total equity .............................. 58 ,460 Total assets ..................... $69,760 Total liabilities and equity ...... $69,760

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