Solution Manual For Survey of Accounting, 9th Edition

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1CHAPTER 1THE ROLE OF ACCOUNTING IN BUSINESSCLASS DISCUSSION QUESTIONS1.The objective of most businesses is tomaximize profits. Profit is the differencebetweentheamountsreceivedfromcustomers for goods or services provid-ed and the amounts paid for the inputsused to provide those goods or services.2.Amanufacturingbusinesschangesbasic inputs into products that are soldto customers. In contrast, a merchandis-ing business purchases products in a formthat can be sold to customers without anyadditional changes. Examples of manu-facturing businesses include Alcoa, Boe-ing,Caterpillar,andDowChemical.ExamplesofmerchandisingbusinessesincludeBestBuy,Macy’s,Target,andWalmart.3.Amanufacturingbusinesschangesbasic inputs into products that are soldto customers. A service business pro-vides services rather than products tocustomers.Arestaurant,suchasMcDonald’s, has characteristics of botha manufacturing and a service businessinthatMcDonald’stakesrawinputs,such as cheese, fish, and beef, and pro-cesses them into products for consump-tion by its customers. At the same time,McDonald’s provides services of waitingon its customers.4.The corporate form allows the companyto obtain large amounts of resources byissuing stock. In addition, in a corpora-tion, the stockholders’ liability to credi-tors for the debts of the company is lim-ited to their investment in the corpora-tion.Forthesereasons,mostlargecompaniesthatrequirelargeinvest-ments in property, plant, and equipmentare organized as corporations.5.The business emphasis of KIA is a low-cost emphasis. In contrast, the businessemphasis of BMW is a premium-priceemphasis. The difference in emphasesis directly reflected in the prices of theautos. For example, a new KIA starts forjustover$15,000,butanewBMWstarts for just over $30,000.6.Super Walmart will compete for customers usinga low-cost strategy. The size and buying powerof Walmart Inc. provides Walmart a competitiveadvantage over your friend in the ability to offerlow prices. Thus, your friend should attempt tocompete using a premium-price emphasis. Forexample,yourfriendcouldofferpersonalizedservice to customers such as knowing custom-ers’ names and providing a friendly atmosphere,home delivery of medicines, help in filing insur-ance forms, and 24-hour call service.7.eBay services its customers by maintaining aWeb-basedcommunityinwhichbuyersandsellers are brought together in an efficient formatto browse, buy, and sell items such as collecti-bles,automobiles,high-endorpremiumartpieces,jewelry,consumerelectronics,andahost of practical and miscellaneous items.8.No. The stakeholders within a group do not al-ways share the same interests. For example,bankers are primarily concerned about the abilityof the business to repay its debt, including inter-est.Incontrast,stockholdersaremorecon-cerned about the long-term profitability of thebusiness, the business’s ability to pay dividends,and the future appreciation of their stock.9.Examples of financing activities for SouthwestAirlines could include issuing stock, borrowingfrom banks, and paying dividends. Examples ofinvesting activities could include purchasing newaircraft,acquiringnewterminalfacilities,andupgrading its computerized reservation systems.Examples of operating activities could includetransporting passengers and freight.10.The role of accounting is to provide informationfor managers to use in operating the business.In addition, accounting provides information tootherstakeholderstouseinassessingtheeconomicperformanceandconditionofthebusiness.11.The income statement presents a summary ofthe revenues and expenses of a business for aspecific period of time. The statement of stock-holders’ equity indicates the changes in retainedearnings that have occurred over a specific periodof time. The balance sheet presents a listing of theassets, liabilities, and stockholders’ equity of a

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2business as of a specific date. The state-ment of cash flows presents a summaryof the cash receipts and cash paymentsof a business entity for a specific period oftime.12.Netlossof$(1,636)million($72,618million – $74,254 million).13.Net income or net loss will appear onthe income statement and the statementofstockholders’equity.TheRetainedEarnings and Common Stock balancesat the end of the period will appear onthestatementofstockholders’equityand the balance sheet. Finally, the Cashbalance at the end of the period will ap-pear on the balance sheet and the statement ofcash flows.14.No. The business entity concept limits the re-cording of economic data to transactions directlyaffecting the activities of the business. The pay-mentoftheinterestof$6,000isapersonaltransaction of Billy Jessop and should not berecorded by Valley Delivery Service.15.Thelandshouldberecordedatitscostof$110,000 to Wok Repair Service. This is con-sistent with the cost concept.16.No. The offer of $975,000 and the increase in theassessedvalueshouldnotberecognizedinthe accounting records. This is consistent withthe cost concept.

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3EXERCISESE1–11.service2.merchandising3.manufacturing4.manufacturing5.service6.merchandising7.manufacturing8.manufacturing9.service10.manufacturing11.manufacturing12.service13.service14.service15.merchandisingE1–21.a—low-cost2.a—low-cost3.b—premium-price4.a—low-cost5.a—low-cost6.b—premium-price7.a—low-cost8.b—premium-price9.b—premium-price10.a—low-cost11.b—premium-price12.b—premium-priceE1–3Best Buy stockholders’ equity (in millions): $13,856 – $9,147 = $4,709Gamestop stockholders’ equity (in millions): $4,976 – $2,722 = $2,254E1–4(in millions)Apple:$375,319 – $241,272 = $134,047Microsoft: $258,848 – $176,130 = $82,718E1–5a.$262,500 + $450,000 = $712,500b.$1,320,000 – $787,500 = $532,500c.$3,150,000 – $900,000 = $2,250,000

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4E1–6a.$36,347 – $25,268 = $11,079b.$38,999 – $11,709 = $27,290c.$123,700 + $80,822 = $204,522E1–7It would be incorrect to say the business had incurred a net loss of $10,000. Theexcess of the dividends over the net income for the period is a decrease in theamount of retained earnings in the business.E1–8Company ChangStockholders’ equity at end of year ($900,000 – $300,000) ....................$600,000Deduct stockholders’ equity at beginning of year($775,000 – $400,000) ...........................................................................375,000Net income (increase in stockholders’ equity) ..................................$225,000Company HenryIncrease in stockholders’ equity (as determined for Chang).................$225,000Add dividends............................................................................................90,000Net income............................................................................................$315,000Company NagelIncrease in stockholders’ equity (as determined for Chang).................$225,000Deduct additional issuance of capital stock ...........................................125,000Net income............................................................................................$100,000Company WilcoxIncrease in stockholders’ equity (as determined for Chang).................$225,000Deduct additional issuance of capital stock ...........................................125,000$100,000Add dividends............................................................................................90,000Net income............................................................................................$190,000

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5E1–9a.(1)$8,271 – $3,696 = $4,575(2)$10,172 – $4,788 = $5,384b.$18,247 – $13,489 – $4,967 – $143 – $107 = $(459), net lossE1–10Balance sheet items: 1, 2, 3, 7, 8E1–11Income statement items: 4, 5, 6, 9, 10E1–121.a—asset2.b—liability3.a—asset4.e—dividend5.c—revenue6.a—asset7.b—liability8.d—expense9.d—expense10.d—expense

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6E1–13ALL SEASONS COMPANYStatement of Stockholders’ EquityFor the Month Ended June 30, 20Y7Common StockRetained EarningsTotalBalances, June 1, 20Y7 ..................$30,000$145,000$175,000Issuance of common stock............20,00020,000Net income ......................................87,50087,500Dividends ........................................(15,000)(15,000)Balances, June 30, 20Y7 ................$50,000$217,500$267,500E1–14JLM SERVICESIncome StatementFor the Month Ended August 31, 20Y5Fees earned...........................................................................$2,550,000Operating expenses:Wages expense ...............................................................$1,612,500Rent expense...................................................................240,000Supplies expense ............................................................22,500Miscellaneous expense ..................................................41,250Total operating expenses..........................................(1,916,250)Net income ............................................................................$633,750

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7E1–15In each case, solve for a single unknown, using the following equation:Stockholders’ Equity (beginning) + Additional Issue of Capital Stock – Dividends+ Revenue – Expenses = Stockholders’ Equity (ending)ALStockholders’ equity at end of year ($800,000 – $450,000).........$350,000Deduct stockholders’ equity at beginning of year($400,000 – $200,000). ....................................................................200,000Increase in stockholders’ equity...................................................$150,000Deduct increase due to net income ($175,000 – $65,000)...........110,000$40,000Add dividends ................................................................................50,000Additional issue of capital stock .............................................(a) $90,000COStockholders’ equity at end of year ($460,000 – $110,000).........$350,000Deduct stockholders’ equity at beginning of year($300,000 – $130,000)..................................................................170,000Increase in stockholders’ equity...................................................$180,000Add dividends ................................................................................20,000$200,000Deduct additional issue of capital stock ......................................50,000Increase due to net income ...........................................................$150,000Add expenses.................................................................................70,000Revenue..................................................................................... (b) $220,000KSStockholders’ equity at end of year ($660,000 – $360,000).........$300,000Deduct stockholders’ equity at beginning of year($550,000 – $325,000)..................................................................225,000Increase in stockholders’ equity...................................................$75,000Add decrease due to net loss ($115,000 – $130,000) ..................15,000$90,000Deduct additional issue of capital stock ......................................100,000Dividends...................................................................................(c) $ (10,000)MTStockholders’ equity at end of year ($1,200,000 – $700,000)......$500,000Add decrease due to net loss ($420,000 – $480,000) ..................60,000$560,000Add dividends ................................................................................90,000$650,000Deduct additional issue of capital stock ......................................100,000Stockholders’ equity at beginning of year ...................................$550,000Add liabilities at beginning of year ...............................................350,000Assets at beginning of year ..................................................... (d) $900,000

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8E1–16a.MONTANA INTERIORSBalance SheetOctober 31, 20Y8AssetsCash .................................................................................$110,000Accounts receivable .......................................................75,000Supplies ...........................................................................15,000Total assets .....................................................................$200,000LiabilitiesAccounts payable............................................................$ 40,000Stockholders’ EquityCapital stock ....................................................................$ 60,000Retained earnings ...........................................................100,000*160,000Total liabilities and stockholders’ equity ......................$200,000*$100,000 = $110,000 + $75,000 + $15,000 – $40,000 – $60,000MONTANA INTERIORSBalance SheetNovember 30, 20Y8AssetsCash .................................................................................$140,000Accounts receivable .......................................................118,000Supplies ...........................................................................20,000Total assets .....................................................................$278,000LiabilitiesAccounts payable............................................................$65,000Stockholders’ EquityCapital stock ....................................................................$ 60,000Retained earnings ...........................................................153,000**213,000Total liabilities and stockholders’ equity ......................$278,000**$153,000 = $140,000 + $118,000 + $20,000 – $65,000 – $60,000

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9E1–16, Concludedb.Retained earnings, November 30 ........................................................$153,000Deduct retained earnings, October 31................................................100,000Net income ............................................................................................$53,000c.Retained earnings, November 30 ........................................................$153,000Deduct retained earnings, October 31................................................100,000Increase in retained earnings ..............................................................$53,000Add dividends.......................................................................................20,000Net income ............................................................................................$73,000E1–17Balance sheet: a, b, c, d, f, g, h, i, j, l, mIncome statement: e, k, n, oE1–181.c—financing activity2.a—operating activity3.b—investing activity4.a—operating activity5.c—financing activity6.b—investing activity7.a—operating activity8.a—operating activity9.a—operating activity10.c—financing activityE1–191.c—financing activity2.a—operating activity3.a—operating activity4.b—investing activity

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10E1–20LOONEY INC.Statement of Cash FlowsFor the Month Ended July 31, Year 1Cash flows from (used for) operating activities:Cash received from customers ...................................$ 600,000Cash paid for expenses ...............................................(380,000)Net cash flows from operating activities....................$220,000Cash flows from (used for) investing activities:Cash paid for purchase of equipment ........................(95,000)Cash flows from (used for) financing activities:Cash received from issuance of common stock .......$200,000Cash received from note payable ...............................75,000Cash paid as dividends ...............................................(25,000)Net cash flows from financing activities ....................250,000Net increase in cash ..........................................................$375,000Cash as of July 1 ...............................................................0Cash as of July 31 .............................................................$375,000E1–21Situation 1:The income statement of Dell would provide the most useful informationon whether the company’s business emphasis is working and, thus, whether thecompany will be around to provide warranty and other support services for yourpersonal computer.Situation 2:The statement of cash flows would be a primary focus to determinewhether LinkedIn is generating positive cash flows from operations. BecauseLinkedIn is a relatively new company using an innovative business emphasis, ithas generated losses on its income statement. Thus, the income statement doesnot provide as much useful information as the statement of cash flows. In thelong run, LinkedIn must generate positive cash flows from its operations to sur-vive and succeed.Situation 3:A current balance sheet would be a primary focus to determinewhether the grocery store chain has sufficient cash or other assets such as re-ceivables that will enable the chain to repay the credit within 60 days. The bal-ance sheet would also report any other liabilities of the chain.

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11E1–21, ConcludedSituation 4:The income statements of Sears and JCPenney would provide themost useful information on which company’s business emphasis is working bestand, thus, generating profits.Situation 5:The statement of cash flows would be a primary focus to determinewhether the annual cash flows from operating activities is sufficient to pay theinterest on a continuing basis. Most large companies, like Target, will use creditlines to cover cash shortages throughout the year because of the seasonality ofthe retail industry.E1–221.BS2.BS3.BS, SCF4.IS5.IS6.IS7.BS8.SCF9.SCF10.IS11.IS12.IS13.BS14.IS15.SE, BS

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12E1–23AMAZON.COM, INC.Income StatementFor the Year Ended December 31(in millions)Revenues:Net sales ..........................................................................$177,866Other income ...................................................................548Total revenues............................................................$178,414Expenses:Cost of sales ....................................................................$111,934Operating expenses ........................................................61,826Interest expense ..............................................................848Income tax expense ........................................................769Other expense .................................................................4Total expenses ...........................................................(175,381)Net income ............................................................................$3,033E1–241.BS2.BS3.BS, SCF4.SCF5.SE, BS6.IS7.IS8.IS9.BS10.BS11.IS, SE12.SCF13.BS14.BS15.IS16.IS17.BS18.BS19.SE, BS20.IS

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13E1–251.All financial statements should contain the name of the business in theirheadings. The statement of stockholders’ equity is incorrectly headed as“Julie Baxter” rather than Outlaw Realty. The headings of the balance sheetand statement of cash flows need the name of the business.2.The income statement, retained earnings statement, and statement of cashflows cover a period of time and should be labeled “For the Month EndedAugust 31, 20Y7.”3.The year in the heading for the statement of stockholders’ equity should be20Y7 rather than Year 1.4.The balance sheet should be labeled “August 31, 20Y7,” rather than “For theMonth Ended August 31, 20Y7.”5.On the income statement, there is a mathematical error in the subtraction oftotal operating expenses from the sales commissions. The correct net incomeshould be $94,500. This also affects the retained earnings statement and theamount of retained earnings that appears on the balance sheet.6.On the statement of stockholders’ equity, the common stock issued duringthe month should be shown in the Common Stock column. The dividendsshould be subtracted rather than added to retained earnings. Beginning re-tained earnings should be zero. Ending amounts reported for common stock,retainedearnings,andtotalstockholders’equityshouldagreewiththeamounts reported on the balance sheet.7.Accounts payable should be listed as a liability on the balance sheet.8.Accounts receivable and prepaid expenses should be listed as assets on thebalance sheet.9.The balance sheet assets should equal the sum of the liabilities and stock-holders’ equity.10.The statement of cash flows omits the cash flows from investing activitiessection. This section should report cash flows used to purchase land of$60,000.11.The net increase in cash and the cash balance as of August 31, 20Y7, shouldbe the same as the ending cash reported on the balance sheet of $51,600.

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14E1–25, ContinuedCorrected financial statements appear as follows:OUTLAW REALTYIncome StatementFor the Month Ended August 31, 20Y7Sales commissions ..............................................................$408,400Operating expenses:Office salaries expense ..................................................$272,600Rent expense...................................................................31,200Automobile expense .......................................................7,900Miscellaneous expense ..................................................2,200Total operating expenses..........................................(313,900)Net income ............................................................................$ 94,500OUTLAW REALTYStatement of Stockholders’ EquityFor the Month Ended August 31, 20Y7Common StockRetained EarningsTotalBalances, August 1, 20Y7 ..............$0$0$0Issuance of common stock............100,000100,000Net income ......................................94,50094,500Dividends ........................................(12,000)(12,000)Balances, August 31, 20Y7 ............$100,000$82,500$182,500OUTLAW REALTYBalance SheetAugust 31, 20Y7AssetsCash.......................................................................................$51,600Accounts receivable.............................................................81,200Prepaid expenses .................................................................7,200Land .......................................................................................60,000Total assets...........................................................................$200,000LiabilitiesAccounts payable .................................................................$17,500Stockholders’ EquityCommon stock......................................................................$100,000Retained earnings ................................................................82,500182,500Total liabilities and stockholders’ equity............................$200,000

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15E1–25, ConcludedOUTLAW REALTYStatement of Cash FlowsFor the Month Ended August 31, 20Y7Cash flows from (used for) operating activities:Cash received from customers .........................................$327,200Cash paid for operating expenses ....................................(303,600)Net cash flows from operating activities ..........................$ 23,600Cash flows from (used for) investing activities:Cash paid for purchase of land .........................................(60,000)Cash flows from (used for) financing activities:Cash received from issuance of common stock .............$100,000Cash paid as dividends......................................................(12,000)Net cash flows from financing activities ..........................88,000Net increase in cash during month ........................................$ 51,600Cash as of August 1 ................................................................0Cash as of August 31 ..............................................................$ 51,600E1–261.G2.D3.M4.B5.O6.D7.C8.U9.O10.PE1–271.C2.C3.X4.C5.B6.C7.B8.M9.X10.M

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