Solution Manual For Survey of Accounting, 6th Edition

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1-64SOLUTIONS TO ANALYZE, THINK, COMMUNICATE–CHAPTER 1ATC 1–1(All dollar amounts are in millions.)a.$2,937b.Net income increased by $23STOCKHOLDERS’c.ASSETS=LIABILITIES+EQUITY$41,290=$29,993*+$11,297* Liabilities must be computed by subtracting equity from assets.d.Sales increased by3.7% from2017to2018.($74,443$71,786)$71,786 = 3.7%Cost of sales increased by 4.3% from2017to2018.($53,299$51,125)$51,125 =4.3%Selling, general and administrative expensesincreasedby3.9% from2017to2018.($15,723$ 15,140)$ 15,140 = 3.9%The largest percentage increase wasfor cost ofsalesexpenses.

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1-65ATC 1-2a.IncomeStatements (amounts given are in millions)Year 6Year 5Year 4Year 3Revenue$ 860$1,520(a)$2,720$1,200Cost and Expenses(a)(840)(a)(1,070)(2,400)(860)Income from Cont. Op.(b)20450320(a)340Unusual Items-0-175(b)(145)(b)( 40)Net Income$20(b)$625$175$300Balance SheetsCash and Marketable Sec.$350$1,720(c)$750$940Other Assets1,900(c)1,1802,500(c)2,560Total Assets$2,250$2,900(d)$3,250$3,500Liabilities(c)$ 730(d)$1,555$1,001(d)$1,300Stockholders’ EquityCommon Stock$880$720(e)$1,449$800Retained Earnings(d)640(e)625800(e)1,400TotalStockholders’ Equity1,5201,345(f)2,2492,200Total Liab. and Stk. Equity$2,250(f)$2,900$3,250$3,500

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1-66ATC 1-3This solution is based on McDonald’s 2017 financial report.a.McDonald’s net income for 2017, 2016,and 2015 were as follows:2017:$5,192.3 million2016:4,686.52015:4,529.3b.The company had $33,803.7 million of assets at the end of 2017.c.The company had $48,325.8 million of retained earnings at the end of2017.d.For 2017, the company’s:net cash flow fromoperatingactivities were $5,551.2 millionnet cash flow frominvestingactivities were $562.0 million.net cash flow fromfinancingactivities were ($5,310.8) million.

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1-67ATC 1-4This problem is designed to testwritten communication skills. The memoshould describe the balance sheet and the income statement. It shouldexplain that the balance sheet is a statement of assets, liabilities, andstockholders’ equity at the date of the financial statement. The incomestatement gives the amount of revenues and expenses for the designatedperiod. The memo should also define each of the following terms:AssetsLiabilitiesStockholders’ EquityRevenueExpenseNet Income

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1-1ANSWERS TO QUESTIONS-CHAPTER 11.Stakeholdersare the parties that use accounting information.Stakeholders with adirect interestinclude owners, managers,creditors, suppliers, and employees. These individuals are directlyaffected by what happens to the business.Stakeholders with anindirect interestinclude financial analysts,brokers, attorneys, government regulators, and news reporters.These individuals use information in the financial reports to adviseand influence their clients.Students may give many different answers under the abovecategories depending on their level of experience in business.All students are direct users of accounting information related totuition and fees, financial aid, and account balances.2.Accounting provides information that is useful in making decisionsby all participants in the market for resource goods and services,both profit-oriented and nonprofit oriented. Because accounting’srole is so important, it is often called the language of business.3.The primary mechanism used to allocate resources in the U.S. iscompetition for resources in the open market.4.A market is a group of people or organizations that come togetherfor the purpose of exchanging items of value.5.The market for business resources involves three distinctparticipants: consumers, conversion agents, and resource owners.See Exhibit 1-1 that illustrateshow market trilogy is involved inresource allocation.

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1-26.Financial Resource: moneyPhysical Resource: natural resources (i.e. land, forests, mine ore,petroleum, etc.), buildings, machinery and equipment, furniture andfixturesLabor Resource: includes both intellectual and physical labor; i.e.employees7.Investors expect adistributionof the business’sprofitsas a returnon their financial investment (capital allocation).Creditors lend financial resources to businesses and receiveinterestas a return or profit on the loan.8.Financial accountingprovides information that is useful to externalresource providers.Managerial accountingprovides information that is useful tomanagers in operating an organization (i.e., internal users).9.Not-for-profit or nonprofit entities provide goods or services toconsumers forhumanitarian or special reasonsrather than to earn aprofit for owners. For example, certain not-for-profit entitiesallocate resources to provide for research of diseases orsocial/environmental welfare; others allocate resources to promotethe arts and provide education.10.The U.S. rules of accounting information measurement are calledgenerally accepted accounting principles (GAAP).11.Careers in public accounting consist of providing services to thegeneral public from a public accounting firm. These services includeauditing, tax,and consulting services. Careers in private accountingusually consist of working for a specific company (which would be aclient of the public accounting firm) providing a wide variety ofservices to the company including recording transactions, preparingfinancial statements, internal auditing,and others.

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1-312.Items reported on the financial statements are organized intoclasses or categories called elements. The ten elements of financialstatements are:1.Assets2.Liabilities3.Equity (Stockholders’ Equity)4.Investments by Owners (Contributed Capital)5.Revenue6.Expenses7.Distributions (Dividends)8.Net Income9.Gains10.LossesAccounts are specific items or subclassifications of the elements.Examples of accountsinclude cash, land,and common stock.13.Assets, the economic resources of a business, are used to produceearnings.14.The assets of a business belong to that business entity and theremay be claims on the assets. Claims on the assets belong toresource providers.15.Creditors are individuals and/or institutions that have providedgoods or services to the business which are not yet paid for, orloaned money to the business. These parties have first claim to theassets of the business, and the owners have a residual interest in theassets.16.The term “liabilities” is used to describe creditors' claims on theassets of a business.

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1-417. The accounting equation is:ASSETS–LIABILITIES = STOCKHOLDERS’ EQUITYorASSETS = LIABILITIES + STOCKHOLDERS’ EQUITYAssetsare the economic resources used by a business for theproduction of revenue.Liabilitiesare obligations of a business torelinquish assets, provide services, or accept other obligations.Equity, also called “residual interest” or “net assets,” is the portionof the assets remaining after the creditors' claims have beensatisfied (i.e., Assets–Liabilities).18.Theownersultimately bear the risk and collect the rewardsassociated with operating a business.19.A double-entry bookkeeping system is one in which everytransaction affects at least two accounts. A transaction can affectboth assets and claims (liabilities and equity) or only assets or onlyclaims. In order to “balance” the accounting equation,everytransaction requires a “double entry.”20.Capital is acquired from owners by issuing stock to them. Whenstock is issued, the assets of the business increase and thestockholders’ equity increases.21.Assets that are acquired by issuing common stock are the result ofinvestments by owners. Assets that are acquired by using retainedearnings are assets the business acquires through its earningsactivities.22.Revenueincreases the asset side of the accounting equation andalso increases the retained earnings account in the stockholders’equity section of the equation.23.The three primary sources of assets are (1) investments by owners(issue of stock), (2) borrowing from creditors, and (3) earningsactivities.

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1-524.Retained earnings are a result of a business retaining its earnedassets, rather than distributing those earnings to its owners.25.Distributions to owners, called dividends, decrease the asset side ofthe accounting equation and also decrease the retained earningsaccount in the stockholders’ equity section of the equation.26.Dividends and expenses are similar in that they both decrease assetsand affect the accounting equation in the same way (i.e. reduction ofretained earnings). However, dividends differ from expensesbecause of the nature of the decline in assets. Expenses reduceassets as the result of a firm's efforts to earn revenue. Dividendsreduce assets because of a transfer of wealth to the owners.27.(1)Income Statement-measures the difference between the assetincreases and the asset decreases that were associated withoperating a business during a particular accounting period.(2)Statement of Changes in Stockholders’ Equity-explains theeffects of transactions on stockholders’ equity during theaccounting period.(3)Balance Sheet-lists the assets and the corresponding claimsagainst the entity as of a particular date.(4)Statement of Cash Flows-explains how a company obtainedand used cash during the accounting period.28.Thebalance sheetprovides information about the enterprise at aparticular point in time.29.A net loss occurs when expenses exceed revenues in a givenaccounting period.

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1-630.(1)Operating activities-explain the cash generated from revenueand the cash paid for expenses.(2)Investing activities-include cash received or spent by thebusiness on productive assets used in the business, andinvestments in debt or equity of other companies.(3)Financing activities-include cash inflows and outflows fromthe company's transactions with its owners and inflows andoutflows from its borrowing activities.31.Asset accounts are arranged on the balance sheet in accordancewith their level ofliquidity(those that can be most quickly convertedto cash are listed first).32.Articulation refers to the interrelationships among the variouselements of the financial statements.33.Temporary accounts are used to capture information for a singleaccounting period. The balances in temporary accounts aretransferred out of the accounts at the end of the accounting period.Temporary accounts have zero balances at the beginning of anaccounting period.Temporary accounts include revenue accounts,expense accounts and dividends.Permanent accounts carry overfrom one accounting period to the next. Retained Earnings is apermanent account.34.The historical cost concept requires that most assets be reported atthe amount paid for them regardless of their increase or decrease invalue. It is related to the qualitative characteristic of verifiability inthat information can be independentlyverified. The historical cost isverified, while a change in value is subjective.

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1-735.Anasset sourcetransaction results in an increase in an assetaccount and an increase in one of the claims accounts; i.e.,investments by owners (equity), borrowing funds from creditors(liabilities), or earnings activities (revenue).Anasset usetransaction results in a decrease in an asset accountand a decrease in either liabilities or equity; i.e., the payment of aliability, the payment of an expense, or a dividend.Anasset exchangetransaction is a transaction in which one asset isexchanged for another; i.e., purchase of land with cash.Aclaims exchangetransaction will be covered in a later chapter.36.While the contents of annual reports vary from company tocompany, all annual reports contain:Management’s discussion and analysis (MD&A)Financial statementsNotes to the financial statementsAuditor’s report37.U.S. GAAP, generally accepted accounting principles in the UnitedStates, are the measurement rules established by the (FASB)Financial Accounting Standards Board. The FASB is a privatelyfunded organization with the primary authority for establishingaccounting standards in the United States. International FinancialReporting Standards (IFRS) are issued by the InternationalAccounting Standards Board and are an attempttoset a commonstandard to be used in different countries. IFRS is used by globalcompanies and there is a move underway to merge GAAP and IFRS.

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1-8SOLUTIONS TO EXERCISES-SERIES A-CHAPTER 1EXERCISE 1-1AThe three participants in the free business market are:1.Resource owners2.Conversion agents3.ConsumersNote to instructor:The memo should discuss the fact that the resource owners arethosewho own resources that are desired by others, either in the original formor in a converted form. The conversion agents are the parties that acquirethe resource and supply it to consumers either in the original form or in aconverted form with value added by the conversion. The consumers arethe ultimate users of the resources.It should also include a discussion of the public accountant and theallocation of resources. For example, public accountants audit the annualreports that businesses (conversion agents) use to communicateinformation to investors and creditors (financial resource providers).Based on their findings they may certify or deny that the reports fairlyrepresent thefinancial condition of the business. In other words, publicaccountants provide assurance that the information providedbythebusiness is trustworthy. Public accountants usually gain the professionaldesignation of Certified Public Accountant (CPA).

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1-9EXERCISE 1-2Aa.The most common designation held by a public accountant is theCPA license. CPA stands for certified public accountant. CPAs arelicensed by the state government (or other jurisdiction). Althoughthe requirements vary from state to state (jurisdiction),CPAcandidates normally must have a college degree, pass a demandingtechnical examination and obtain relevant work experience.b.Designations that private accountants may hold include the CMA,Certified Management Accountant, and the CIA, Certified InternalAuditor. Both require meetingeducational requirements, passing atechnical examination,and obtaining relevant work experience.These designations are not professional licenses and are notgovernment regulated.

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1-10EXERCISE 1-3AEntities mentioned:Effect on cash:Vicky HillRecovery FundIncrease for cash contributions, $21,000Decrease for payment of advertising, $1,000Decrease payment for hospital bills, $12,000Decrease for donation to National CyclistFund, $8,000Karen WhiteDecrease by contribution, $1,000WKUXIncrease for advertising revenue, $1,000PublicDecrease for contributions, $20,000Mercy HospitalIncrease for medical care, $12,000National Cyclist FundIncrease for donation, $8,000

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1-11EXERCISE 1-4Aa.TermDefinitiona.Assets7.Economic resources that will be used by abusiness to produce revenue.b.CommonStock3.Certificates that evidence ownership in acompany.c.Creditors6.Individuals or institutions that have loanedgoods or services to a business.d.Liability5.An obligation to pay cash in the future.e.RetainedEarnings4.Assets–Liabilities–Common Stock.f.Stockholders1.Individuals or institutions that havecontributed assets or services to a businessin exchange for an ownershipinterest in thebusiness.g.Stockholders’Equity2.Common Stock + Retained Earnings.b.Accounting EquationStockholders’ EquityCommonRetainedCompanyAssets=Liabilities+Stock+EarningsA123,000=25,000+48,000+50,000B40,000=3,000+7,000+30,000C75,000=15,000+18,000+42,000D125,000=45,000+60,000+20,000

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