01 Chapter - Introducing Accounting in Business
Chapter 1
Introducing 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 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 Poors, 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 organizations 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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Chapter 01 - Introducing Accounting in Business
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 auditors fee is dependent on the figures in the clients reports.
This will prevent others from doubting the quality of the auditors 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 someones 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 and can be measured
reliably. The amount of revenue should equal the value of the assets received or
expected to be received from the businesss 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
Business entity
Legal entity
Limited liability
Unlimited life
Business taxed
One owner allowed
Partnership
yes
no
no*
no
no
yes
yes
no
no*
no
no
no
Corporation
yes
yes
yes
yes
yes
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
owners claim on assets and is equal to assets minus liabilities. (d) Net assets refer
to equity.
18. Equity is increased by contributions from the owners and by net income. It is
decreased by dividends to the owners and by a net loss (which is the excess of
expenses over revenues).
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Chapter 01 - Introducing Accounting in Business
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. A 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 companys 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 companys 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
companys 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.
29A. 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.
30B. 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 organizations
plans. Operating activities are the actual carrying out of these plans. (Planning is the
glue that connects these activities, including the organizations ideas, goals and
strategies.)
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Chapter 01 - Introducing Accounting in Business
31B. An organizations 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 Best Buys financial statements are rounded to the nearest
million ($1,000,000). Best Buys consolidated statement of earnings (or income
statement) covers the fiscal year (consisting of 52 weeks) ended February 28, 2009.
Best Buy also reports comparative income statements for the previous two years.
33. At December 31, 2008, RadioShack had (in millions) assets of $2,283.5, liabilities of
$1,466.2, and equity of $817.3.
34. In thousands, GOMEs accounting equation is (numbers in RMB 000s):
Assets
=
Liabilities
+
Equity
27,495,104
=
18,795,069
+
8,700,035
35. The independent auditor for Apple, Inc., is KPMG LLP. The auditor expressly states
that our responsibility is to express an opinion on these consolidated financial
statements based on our audits. The auditor also states that these consolidated
financial statements are the responsibility of the Companys management.
QUICK STUDIES
Quick Study 1-1 (10 minutes)
a.
b.
c.
d.
e.
f.
E
E
I
E
E
I
g.
h.
i.
j.
k.
l.
E
E
E
E
I
E
Quick Study 1-2 (10 minutes)
(a) and (b)
GAAP:
Generally Accepted Accounting Principles
Importance: GAAP are the rules that specify acceptable accounting
practices.
SEC:
Securities and Exchange Commission
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Chapter 01 - Introducing Accounting in Business
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.
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Chapter 01 - Introducing Accounting in Business
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.
Quick Study 1-3 (10 minutes)
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 01 - Introducing Accounting in Business
Quick Study 1-4 (10 minutes)
Internal controls serve several purposes:
They involve monitoring an organizations 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.
Quick Study 1-5 (5 minutes)
a.
b.
c.
Revenue recognition principle
Cost principle (also called historical cost)
Business entity assumption
Quick Study 1-6 (10 minutes)
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
divisions income, its computation has direct financial implications for
these individuals.
Quick Study 1-7 (5 minutes)
Assets
=
Liabilities
+
Equity
$375,000
(a) $125,000
$250,000
(b) $250,000
$ 90,000
$160,000
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Chapter 01 - Introducing Accounting in Business
$185,000
$ 60,000
1-8
(c) $125,000
Chapter 01 - Introducing Accounting in Business
Quick Study 1-8 (5 minutes)
Assets
=
Liabilities
+
Equity
$500,000
(a) $180,000
$320,000
$900,000
(b) $450,000
(b) $450,000
Quick Study 1-9 (5 minutes)
a.
For September 27, 2008, the accounts and their dollar amounts (in
millions) for Apple are:
(1)
Assets
=
$39,572
(2)
Liabilities
=
$18,542
(3)
Equity
=
$21,030
Quick Study 1-9continued
b. Using Apples amounts from (a) we verify that (in millions):
Assets
=
Liabilities
+
Equity
$39,572
=
$18,542
+
$21,030
Quick Study 1-10 (10 minutes)
(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.
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Chapter 01 - Introducing Accounting in Business
Quick Study 1-11 (10 minutes)
[Code:
a.
b.
c.
Income statement (I), Balance sheet (B), Statement of retained earnings (RE), or
Statement of cash flows (CF).]
B
I
B
d.
e.
f.
CF
I
B
g.
h.
i.
B
CF
RE (and CF*)
*The more advanced student might know that this item would also appear in CF.
Quick Study 1-12 (10 minutes)
Return on assets =
Net income
Average total assets =
$2,260
$42,744
= 5.3%
Interpretation: Its return of 5.3% is slightly above the 5% of its competitors.
Home Depots performance can be rated as about average in light of the
recessionary period.
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.
EXERCISES
Exercise 1-1 (20 minutes)
External users and some questions they seek to answer with accounting
information include:
1. Shareholders (investors), who seek answers to questions such as:
a. Are resources owned by a business adequate to carry out plans?
b. Are the debts owed excessive in amount?
c. What is the current level of income (and its components)?
2. Creditors, who seek answers for questions such as:
a. Does the business have the ability to repay its debts?
b. Can the business take on additional debt?
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Chapter 01 - Introducing Accounting in Business
c. Are resources sufficient to cover current amounts owed?
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Chapter 01 - Introducing Accounting in Business
3. Employees, who seek answers to questions such as:
a. Is the business financially stable?
b. Can the business afford to pay higher salaries?
c. What are growth prospects for the organization?
Internal users and some ways they use accounting information on their
jobs include:
1. Research and development managers, who need info on projected costs
and revenues of any proposed changes in products or services.
2. Purchasing managers, who need to know what, when, and how much to
purchase.
3. Human resource managers, who need information about employees
payroll, benefits, performance, and compensation.
4. Production managers, who depend on information to monitor costs and
ensure quality.
5. Distribution managers, who need reports for timely, accurate, and
efficient delivery of products and services.
Exercise 1-2 (10 minutes)
1.
C
5.
B
2.
C
6.
A
3.
A
7.
B
4.
A
8.
B
Exercise 1-3 (20 minutes)
a.
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.
b.
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
1-12
Chapter 01 - Introducing Accounting in Business
questionable under the law. Issues of confidentiality also arise when
these professionals have access to clients personal records.
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Chapter 01 - Introducing Accounting in Business
c.
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.
d.
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.
Exercise 1-4 (10 minutes)
Code
Principle or Assumption
Description
E
1. Usually created by a pronouncement from an
authoritative body.
Specific accounting
principle
G
2. Financial statements reflect the assumption that
the business continues operating.
Going concern
assumption
A
3. Derived from long-used and generally accepted
accounting practices.
General accounting
principle
C
4. Every business is accounted for separately from
its owner or owners.
Business entity
assumption
D
5. Revenue is recorded only when the earnings
process is complete.
Revenue recognition
principle
B
6. Information is based on actual costs incurred in
transactions.
Cost principle
F
7. A company reports details behind financial
Full disclosure
statements that would influence users' decisions. principle
H
8. A company records the expenses incurred to
generate the revenue reported.
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Matching principle
Chapter 01 - Introducing Accounting in Business
Exercise 1-5 (10 minutes)
a.
b.
c.
d.
Sole proprietorship
Corporation
Sole proprietorship
Corporation
e.
f.
g.
Corporation
Partnership
Sole proprietorship
Exercise 1-6 (10 minutes)
Assets
(a) $180,000
$ 90,000
$201,000
=
=
=
=
Liabilities
$164,000
$ 39,000
(c) $139,000
+
+
+
+
Equity
$16,000
(b) $51,000
$62,000
Exercise 1-7 (10 minutes)
1.
2.
3.
D
G
C
4.
5.
F
A
Exercise 1-8 (20 minutes)
a. Using the accounting equation:
Assets
=
Liabilities
$137,000
=
$110,000
Thus, equity = $27,000
+
+
Equity
?
b. Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
$259,000
=
?
+
$194,250
Thus, beginning liabilities = $64,750
Using the accounting equation at the end of the year:
Assets
=
Liabilities
+
Equity
$259,000 + $80,000 =
$64,750 + $52,643
+
?
$339,000
=
$117,393
+
?
Thus, ending equity = $221,607
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Chapter 01 - Introducing Accounting in Business
Alternative approach to solving part (b):
Assets($80,000) = Liabilities($52,643) + Equity(?)
where refers to change in.
Thus: Ending Equity = $194,250 + $27,357 = $221,607
c. Using the accounting equation at the end of the year:
Assets
=
Liabilities
+
Equity
$190,000
=
$57,000 - $16,000
+
?
$190,000
=
$41,000
+
$149,000
Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
$190,000 - $60,000 =
$57,000
+
?
$130,000
=
$57,000
+
?
Thus: Beginning Equity
= $73,000
Exercise 1-9 (15 minutes)
Examples of transactions that fit each case include:
a. Business purchases equipment (or some other asset) on credit.
b. Business signs a note payable to extend the due date on an account
payable.
c. Business pays an account payable (or some other liability) with cash
(or some other asset).
d. Business purchases office supplies (or some other asset) for cash (or
some other asset).
e. Business incurs an expense that is not yet paid (for example, when
employees earn wages that are not yet paid).
f.
Owner(s) invest cash (or some other asset) in the business; OR, the
business earns revenue and accepts cash (or another asset).
g. Cash dividends (or some other asset) paid to the owner(s) of the
business; OR, the business incurs an expense paid in cash.
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Chapter 01 - Introducing Accounting in Business
Exercise 1-10 (20 minutes)
a. Started the business with the owner investing $20,000 cash in the
company in exchange for stock.
b. Purchased office supplies for $3,000 by paying $2,000 cash and putting
the remaining $1,000 balance on credit.
c. Purchased office furniture by paying $8,000 cash.
d. Billed a customer $6,000 for services earned.
e.
Provided services for $1,000 cash.
Exercise 1-11 (15 minutes)
a. Purchased land for $4,000 cash.
b. Purchased $1,000 of office supplies on credit.
c. Billed a client $1,900 for services provided.
d. Paid the $1,000 account payable created by the credit purchase of
office supplies in transaction b.
e.
Collected $1,900 cash for the billing in transaction c.
Exercise 1-12 (30 minutes)
Accounts
Cash
+ Receivable +
a. +$70,000
b.
Bal.
c.
Bal.
71,000 +
5,000
66,000 +
+
25,000
+
45,000 =
______
+
$9,500
9,500 +
______ +
9,500 +
45,000 =
______
45,000 =
5,000
50,000 =
Common
Stock
Dividends
+ Revenues Expenses
+ $90,000
______
20,000 =
+
71,000 +
Bal.
f.
+
3,000
_______ +
Accounts
Payable
______
68,000 +
Bal.
e.
2,000
_______
d. +
=
+ $20,000 =
68,000 +
Bal.
Equipment
+
+$25,000
25,000 +
_______
25,000 +
_______
25,000 +
_______
25,000 +
1-17
$2,000
90,000
______
2,000
_____
90,000
______
+
90,000
+
3,000
2,000
______
+
9,500
_____
90,000
+
12,500
2,000
_____
_____
12,500
2,000
______
90,000
+
$3,000
2,000
_____
Chapter 01 - Introducing Accounting in Business
g.
Bal.
Bal.
Bal.
6,500
69,000 +
25,000
Bal.
j.
______
62,500 +
h. +
i.
3,500
9,500 +
6,500
______
3,000 +
1,500
50,000 =
3,000 +
______
$42,500 +
_______
50,000 =
______
44,000 +
______
______
25,000 +
_______
25,000 +
25,000
50,000 =
______
0+
_______
$3,000 + $50,000 = $
______
_____
______
90,000
+
______
90,000
______
0 + $90,000
+
$1,500
REAL ANSWERS
Income Statement
For Month Ended October 31
$14,000
$5,600
2,520
760
580
9,460
$ 4,540
Exercise 1-14 (15 minutes)
REAL ANSWERS
Statement of Retained Earnings
For Month Ended October 31
Retained earnings, October 1.........................
Add: Net income (from Exercise 1-13).............
Less: Dividends...............................................
Retained earnings, October 31.......................
1-18
5,500
_____
12,500
5,500
_____
12,500
5,500
______
_____
$1,500 + $12,500 $5,500
Exercise 1-13 (15 minutes)
Revenues
Consulting fees earned.....................
Expenses
Salaries expense................................
Rent expense.....................................
Telephone expense............................
Miscellaneous expenses...................
Total expenses...................................
Net income.................................................
12,500
_____
+
3,500
_____
90,000
$
0
4,540
4,540
2,000
$ 2,540
Chapter 01 - Introducing Accounting in Business
Exercise 1-15 (15 minutes)
Assets
Cash..............................
Accounts receivable....
Office supplies.............
Office equipment..........
Land..............................
REAL ANSWERS
Balance Sheet
October 31
Liabilities
$ 11,500
Accounts payable................. $ 25,037
12,000
24,437
Equity
18,000
Common stock...................... 84,360
46,000
Retained earnings*...............
2,540
Total equity........................... 86,900
$111,937
Total liabilities and equity.... $111,937
_
Total assets..................
* For the computation of this amount see Exercise 1-14.
Exercise 1-16 (15 minutes)
REAL ANSWERS
Statement of Cash Flows
For Month Ended October 31
Cash flows from operating activities
Cash received from customers1..........................................
Cash paid to employees2.....................................................
Cash paid for rent................................................................
Cash paid for telephone expenses.....................................
Cash paid for miscellaneous expenses..............................
Net cash used by operating activities................................
$ 2,000
(5,000)
(2,520)
(760)
(580)
( 6,860)
Cash flows from investing activities
Purchase of office equipment.............................................
Net cash used by investing activities...............................
(18,000)
(18,000)
Cash flows from financing activities
Investments by stockholders..............................................
Dividends to stockholders..................................................
Net cash provided by financing activities..........................
38,360
(2,000)
36,360
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Chapter 01 - Introducing Accounting in Business
Net increase in cash............................................................
Cash balance, October 1.....................................................
Cash balance, October 31...................................................
1
$14,000 Consulting Fees Earned - $12,000 Accounts Receivable
2
$11,500
0
$11,500
$5,600 Salaries Expense - $600 still owed = $5,000 paid to employees.
Exercise 1-17 (10 minutes)
O 1. Cash paid for rent
O
5. Cash paid for advertising
O 2. Cash paid on an account payable
O
6. Cash paid for wages
F 3. Cash received from stock issued
F
7. Cash paid for dividends
O 4. Cash received from clients
I
8. Cash purchase of equipment
Exercise 1-18 (10 minutes)
Return on assets
=
Net income / Average total assets
=
$36,000 / [($135,000 + $185,000)/2]
=
22.5%
Interpretation: Iowa Groups return on assets of 22.5% is markedly above
the 10% return of its competitors. Accordingly, its performance is
assessed as superior to its competitors.
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Chapter 01 - Introducing Accounting in Business
Exercise 1-19B (10 minutes)
a.
Investing
b.
Operating
c.
Financing
d.
Financing*
e.
Investing
* Would also be listed as investing if resources contributed by owner were in the
form of nonfinancial resources.
Exercise 1-20 (20 minutes)
a.
NINTENDO
Income Statement
For Year Ended March 31, 2008
Net sales ....................................................................
1,672,423
Expenses
Cost of sales........................................................... 972,362
Selling, general and administrative expenses...... 212,840
Other expenses......................................................
229,879
Total expenses.......................................................
1,415,081
Net income...................................................................
257,342
b.
NINTENDO
Statement of Retained Earnings
For Year Ended March 31, 2008
Retained earnings, March 31, 2007....................
Add: Net income (from part a).............................
Less: Dividends..................................................
Retained earnings, March 31, 2008....................
1-21
1,220,293
257,342
1,477,635
97,205
1,380,430
Chapter 01 - Introducing Accounting in Business
PROBLEM SET A
Problem 1-1A (40 minutes)
Part 1
Company A
(a)
Equity on December 31, 2010:
Assets........................................................ $33,000
Liabilities................................................... (27,060)
Equity......................................................... $ 5,940
(b)
Equity on December 31, 2011:
Equity, December 31, 2010....................... $ 5,940
Plus owner investments...........................
6,000
Plus net income.........................................
7,760
Less cash dividends................................. (3,500)
Equity, December 31, 2011...................... $16,200
(c)
Liabilities on December 31, 2011:
Assets........................................................ $36,000
Equity......................................................... (16,200)
Liabilities................................................... $19,800
Part 2
Company B
(a) and (b)
Equity:
12/31/2010 12/31/2011
Assets.................................. $25,740
$25,920
Liabilities............................. (18,018)
(17,625)
Equity.................................. $ 7,722
$ 8,295
(c)
Net income for 2011:
Equity, December 31, 2010.................... $ 7,722
Plus owner investments........................
1,400
Plus net income......................................
?
Less cash dividends.............................. (2,000)
1-22
Chapter 01 - Introducing Accounting in Business
Equity, December 31, 2011.................... $ 8,295
Therefore, net income must have been $ 1,173
1-23
Chapter 01 - Introducing Accounting in Business
Problem 1-1A (Continued)
Part 3
Company C
First, calculate the beginning balance of equity:
Dec. 31, 2010
Assets........................................................ $21,120
Liabilities................................................... (11,404)
Equity......................................................... $ 9,716
Next, find the ending balance of equity by completing this table:
Equity, December 31, 2010....................... $ 9,716
Plus owner investments...........................
9,750
Less net loss............................................. (1,289)
Less cash dividends................................. (5,875)
Equity, December 31, 2011....................... $12,302
Finally, find the ending amount of assets by adding the ending balance of
equity to the ending balance of liabilities:
Dec. 31, 2011
Liabilities................................................... $11,818
Equity......................................................... 12,302
Assets........................................................ $24,120
Part 4
Company D
First, calculate the beginning and ending equity balances:
12/31/2010 12/31/2011
Assets..................................... $58,740
$65,520
Liabilities................................ (40,530)
(31,449)
Equity..................................... $18,210
$34,071
Then, find the amount of owner investments during 2011:
Equity, December 31, 2010.......................... $18,210
Plus owner investments..............................
?
Plus net income...........................................
8,861
Less cash dividends....................................
0
Equity, December 31, 2011.......................... $34,071
1-24
Chapter 01 - Introducing Accounting in Business
Thus, owner investments must have been
1-25
$ 7,000
Chapter 01 - Introducing Accounting in Business
Problem 1-1A (Concluded)
Part 5
Company E
First, compute the balance of equity as of December 31, 2011:
Assets........................................................ $ 99,360
Liabilities.................................................. (78,494)
Equity......................................................... $ 20,866
Next, find the beginning balance of equity as follows:
Equity, December 31, 2010....................... $
?
Plus owner investments...........................
6,500
Plus net income.........................................
7,348
Less cash dividends................................. (11,000)
Equity, December 31, 2011...................... $20,866
Thus, the beginning balance of equity is: $18,018
Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of assets:
Dec. 31, 2010
Assets........................................................ $90,090
Equity......................................................... (18,018)
Liabilities.................................................. $72,072
Problem 1-2A (25 minutes)
Transaction
1 Owner invests
cash for stock
2 Receives cash
for services
provided
3 Pays cash for
employee wages
4 Incurs legal
costs on credit
Income
Statement of
Balance Sheet
Statement
Cash Flows
Total Total Total
Net
Operating Financing Investing
Assets Liab. Equity
Income
Activities Activities Activities
+
+
+
+
+
+
+
+
1-26
Chapter 01 - Introducing Accounting in Business
5 Borrows cash
by signing L-T
note payable
+
+
6 Buys land by
signing note
payable
+
+
7 Provides services on credit
+
8 Buys office
equipment
for cash
+
+
+/
9 Collects cash
on receivable
from (7)
+
+/
10 Pays cash
dividend
+
Problem 1-3A (15 minutes)
Elko Energy Company
Income Statement
For Year Ended December 31, 2010
Revenues ..................................................
Expenses.................................................
Net income...................................................
$66,000
51,348
$14,652
Problem 1-4A (15 minutes)
Amity Company
Balance Sheet
December 31, 2010
Assets
.........$142,000Liabilities
Equity
Total assets..................... $142,000
................................... $ 54,244
................................... 87,756
Total liabilities and equity......
$142,000
1-27
Chapter 01 - Introducing Accounting in Business
Problem 1-5A (15 minutes)
Fortune Company
Statement of Cash Flows
For Year Ended December 31, 2010
Cash from operating activities ....................... $ 8,050
Cash used by investing activities................... (3,250)
Cash used by financing activities................... (4,050)
Net increase in cash........................................ $ 750
Cash, December 31, 2009................................ 4,100
Cash, December 31, 2010................................ $ 4,850
Problem 1-6A (15 minutes)
Atlee Company
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, Dec. 31, 2009.................. $11,000
Add:
Net income............................................
7,750
18,750
Less: Dividends.............................................. (2,000)
Retained earnings, Dec. 31, 2010.................. $16,750
1-28
Chapter 01 - Introducing Accounting in Business
Problem 1-7A (60 minutes) Parts 1 and 2
Date
Cash
+
Assets
Accounts
Receivable
= Liabilities
+
Office
=
Equipment
May 1 +$43,000
1
-
=
+
-
$1,940
750 `
8+
+
Common
Stock
-
Equity
+ Reve
Dividends
$43,000
= + $1,940
=
5,800
12
+
+
=
2,200
3
5
Accounts
Payable
=
+
$5,8
=
$2,800
+
+
2,8
+
4,0
+
$12,6
15 -
850
20 +
2,800 -
2,800
=
+
4,000
=
-
4,000
=
22
25 +
4,000
26 -
=
1,940
==+
27
1,940
85
28 -
850
=
30 -
400
=
30 -
260
=
31 -
2,000
=
$46,350 +
$
0
+
$1,940
1-29
=
$
85
+
$43,000
$2,000
-
$2,000
Chapter 01 - Introducing Accounting in Business
Problem 1-7A (Continued)
Part 3
The Graham Company
Income Statement
For Month Ended May 31
Revenues
Consulting services revenue ...........
Expenses
Rent expense.....................................
Salaries expense................................
Advertising expense..........................
Cleaning expense..............................
Telephone expense............................
Utilities expense.................................
Total expenses...................................
Net income.................................................
$12,600
$2,200
1,700
85
750
400
260
5,395
$ 7,205
The Graham Company
Statement of Retained Earnings
For Month Ended May 31
Retained earnings, May 1........................................ $
0
Plus: Net income......................................................
7,205
7,205
Less: Dividends........................................................
2,000
Retained earnings, May 31...................................... $ 5,205
1-30
Chapter 01 - Introducing Accounting in Business
The Graham Company
Balance Sheet
May 31
Assets
Liabilities
Cash.............................. $46,350
Accounts payable....................... $
85
Office equipment.......... 1,940
Equity
Common stock............................ 43,000
Retained earnings.......................
5,205
Total equity................................. 48,205
Total assets.................. $48,290
Total liabilities and equity.......... $48,290
Problem 1-7A (Concluded)
Part 3continued
The Graham Company
Statement of Cash Flows
For Month Ended May 31
Cash flows from operating activities
Cash received from customers................................
Cash paid for rent.....................................................
Cash paid for cleaning.............................................
Cash paid for telephone...........................................
Cash paid for utilities...............................................
Cash paid to employees...........................................
Net cash provided by operating activities..............
$12,600
(2,200)
(750)
(400)
(260)
(1,700)
Cash flows from investing activities
Purchase of equipment............................................
Net cash used by investing activities......................
(1,940)
Cash flows from financing activities
Investments by stockholders...................................
Dividends to stockholders.......................................
Net cash provided by financing activities...............
43,000
(2,000)
1-31
$ 7,290
(1,940)
41,000
Chapter 01 - Introducing Accounting in Business
Net increase in cash.................................................
Cash balance, May 1.................................................
Cash May balance, 31...............................................
$46,350
0
$46,350
Problem 1-8A (60 minutes) Parts 1 and 2
Date
Cash
+
Dec. 1 +$68,800
2 - 1,800
Bal.
67,000
3 - 4,800
Bal.
Assets
=
Accounts + Office
+
Office
+ Electrical =
Receivable
Supplies
Equipment
Equipment
=
=
6
$13,000
13,000
=
8,200 +
$ 1,000
+
1,000
+
13,000
=
8,200
+
68,800
+
1,000
+
13,000
=
8,200 +
2,680
68,800
10,880 +
68,800
10,880 +
360
68,800
11,240 +
68,800
68,800
+
Bal.
62,800
15
62,800
62,800
-
+
6,000
1,000
+
2,680
+
13,000
=
+
+
1,000
360
+
2,680
+
13,000
=
+
6,000
+
1,360
+
+
2,680
+
13,000
=
+
+
6,000
1,000
+
1,360
+
2,680
+
13,000
=
2,680
8,560 +
60,120
6,000
+
+
1,360
+
2,680
+
13,000
=
8,560 +
68,800
-
7,000
6,000
66,120
Bal.
2,680
60,120
+
$6,000
18
Bal.
$2,680
+
+
Bal.
+
1,000
+
1,360
+
2,680
+
13,000
=
8,560 +
68,800
1,500
64,620
+
1,000
+
1,360
+
2,680
+
13,000
=
8,560 +
68,800
570
64,050
+
1,000
+
1,360
+
2,680
+
13,000
=
8,560 +
68,800
24
Bal.
28 +
Bal.
-
Bal.
30
-
Bal.
31
$
68,800
+
8
29
-
+ $8,200
1,000
61,200
+ 1,600
Bal.
20
Divide
68,800
+
-
-
$68,800
62,800
Bal.
Bal.
Common
Stock
+
62,200
5
Liabilities +
Accounts +
Payable
+
-
900
$63,150 +
$ 1,000
+
$1,360
+
$2,680
1-32
+
$13,000
=
$8,560
+
$68,800
Chapter 01 - Introducing Accounting in Business
Problem 1-8A (Continued)
Part 3
Anderson Electric
Income Statement
For Month Ended December 31
Revenues
Electrical fees earned......................
Expenses
Rent expense...................................
Salaries expense.............................
Utilities expense .............................
Total expenses................................
Net income.................................................
$8,600
$1,800
1,500
570
3,870
$4,730
Anderson Electric
Statement of Retained Earnings
For Month Ended December 31
Retained earnings, December 1...............
Plus: Net income.....................................
Less: Dividends.......................................
Retained earnings, December 31.............
Assets
Cash................................
Accounts receivable.......
Office supplies................
Office equipment............
Electrical equipment......
Total assets.....................
$
0
4,730
4,730
900
$ 3,830
Anderson Electric
Balance Sheet
December 31
Liabilities
$63,150
Accounts payable................... $ 8,560
1,000
1,360
Equity
2,680
Common stock........................ 68,800
13,000
Retained earnings................... 3,830
Total equity ............................. 72,630
$81,190
Total liabilities and equity...... $81,190
1-33
Chapter 01 - Introducing Accounting in Business
Problem 1-8A (Concluded)
Part 3continued
Anderson Electric
Statement of Cash Flows
For Month Ended December 31
Cash flows from operating activities
Cash received from customers1.................................
Cash paid for rent.......................................................
Cash paid for supplies...............................................
Cash paid for utilities.................................................
Cash paid to employees.............................................
Net cash provided by operating activities.................
$ 7,600
(1,800)
(1,000)
(570)
(1,500)
Cash flows from investing activities
Purchase of office equipment....................................
Purchase of electrical equipment..............................
Net cash used by investing activities........................
(2,680)
(4,800)
Cash flows from financing activities
Investments by stockholders.....................................
Dividends to stockholders.........................................
Net cash provided by financing activities.................
68,800
(900)
Net increase in cash...................................................
Cash balance, Dec. 1..................................................
Cash balance, Dec. 31................................................
1
$ 2,730
(7,480)
67,900
$63,150
0
$63,150
$1,600 + $6,000 = $7,600
Part 4
If the December 1 investment had been $49,000 cash instead of $68,800 and
the $19,800 difference was borrowed by the company from a bank, then:
(a) total beginning and ending equity would be $19,800 less,
(b) total liabilities would be $19,800 greater, and
(c) total assets would remain the same.
1-34
Chapter 01 - Introducing Accounting in Business
Problem 1-9A (60 minutes) Parts 1 and 2
Assets
=
Liabilities
+ Accounts +
Office
+
Office
+ Building = Accounts + Notes
Payable
Payable
Receivable
Supplies
Equipment
a. +$67,000
+
$11,000
Cash
b.
- 15,000
Bal.
52,000
+
11,000 +
c.
- 12,000
+
40,000
+
23,000 +
+ Common
Stock
+ $78,000
- Div
12,000
Bal.
+
+ $144,000
d.
$129,000
144,000 =
+
129,000 +
78,000
144,000 =
+
129,000 +
78,000
+
Bal.
e.
+
-
+
+
1,000
+
24,700 +
144,000 =
2,700 +
129,000 +
78,000
+
40,000
$1,000
1,700
+ $2,700
1,000
+
24,700 +
144,000 =
2,700 +
129,000 +
78,000
460
Bal.
39,540
f.
+
$2,400
Bal.
39,540 +
2,400
+
1,000
+
24,700 +
144,000 =
2,700 +
129,000 +
78,000
2,400
+
1,000
+
24,700 +
144,000 =
2,700 +
129,000 +
78,000
g. +
Bal.
h.
43,540 +
-
40,515 +
Bal.
-
j.
Bal.
2,400
-
600
1,800
1,000
+
24,700 +
144,000 =
2,700 +
129,000 +
78,000
-
+
1,000
+
24,700 +
144,000 =
2,700 +
129,000 +
78,000
-
129,000 +
78,000
-
$129,000 + $78,000
-
-
500
41,815 +
-
+
1,800
42,315 +
i. +
Bal.
-
3,025
Bal.
k.
4,000
600
+
1,000
+
$ 600
+
$1,000
+
24,700 +
500
144,000 =
2,200 +
$24,700 + $144,000 =
$2,200 +
1,800
$40,015 +
1-35
Chapter 01 - Introducing Accounting in Business
Problem 1-9A (Concluded)
Part 3
Wiz Consultings net income = $6,400 - $2,260 = $4,140
Problem 1-10A (20 minutes)
1. Return on assets equals net income divided by average total assets.
a. Coca-Cola return:
$5,080 / $29,695 = 0.171 or 17.1%.
b. PepsiCo return:
$5,642 / $30,829 = 0.183 or 18.3%.
2. Strictly on the amount of sales to consumers, Cokes sales of $24,088
are less than PepsiCos $35,187.
3. Success in returning net income from the average amount invested is
revealed by the return on assets. Part 1 showed that PepsiCos 18.3%
return is better than Coca-Colas 17.1% return.
4. Current performance figures suggest that PepsiCo yields a higher return
on assets than Coca-Cola. Based on this information alone, we would
be better advised to invest in PepsiCo than Coca-Cola.
Nevertheless, we would look for additional information in financial
statements and other sources for further guidance. For example, if
Coca-Cola could dispose of some assets without curtailing its sales
level, it would look more attractive. We would also look for consumer
trends, market expansion, competition, product development, and
promotion plans.
1-36
Chapter 01 - Introducing Accounting in Business
Problem 1-11A (15 minutes)
1.
Return on assets is net income divided by the average total assets
(average amount invested).
Notaros return: $64,000 / $250,000 = 0.256 or 25.6%.
2.
Return on assets seems satisfactory for the risk involved in the
manufacturing, marketing, and selling of cellular telephones.
Moreover, Notaros 25.6% return is more than twice as high as that of
its competitors 9.5% return.
3.
We know that revenues less expenses equal net income. Taking the
revenues and net income numbers for Notaro we obtain:
$468,000 - Expenses = $64,000 Expenses must equal $404,000.
4.
We know from the accounting equation that total financing (liabilities
plus equity) must equal the total for assets (investing). Since average
total assets are $250,000, we know the average total of liabilities plus
equity (financing) must equal $250,000.
Problem 1-12AA (20 minutes)
Case 1
Return:
Risk:
Expected return on your stock investment (both
dividends and stock price changes).
Depends on the current and future performance of
Yahoos stock price (and dividends).
Case 2
Return:
Risk:
Expected winnings from your bet.
Depends on the probability of your team covering
the spread.
Case 3
Return:
Risk:
5% interest or $100/year.
Very low; it is the risk of the financial institution not
paying interest and principal.
Case 4
Return:
Expected increase in career earnings and other
rewards from an accounting degree.
Depends on your ability to successfully learn and
apply accounting knowledge.
Risk:
1-37
Chapter 01 - Introducing Accounting in Business
Problem 1-13AB (15 minutes)
1.
I
5.
F
2.
O
6.
I
3.
O
7.
I
4.
O
8.
F
Problem 1-14AB (15 minutes)
An organization pursues three major business activities: financing,
investing, and operating.
(1)
Financing is the means used to pay for resources.
(2)
Investing refers to the buying and selling of resources (assets)
necessary to carry out the organizations plans.
(3)
Operating activities are the carrying out of an organizations plans.
If financial statements are to be informative about an organizations
activities, then they will need to report on these three major activities. Also
note that planning is the glue that links and coordinates these three major
activitiesit includes the ideas, goals, and strategies of an organization.
PROBLEM SET B
Problem 1-1B (40 minutes)
Part 1
Company V
(a) and (b)
Calculation of equity at
Assets.............................
Liabilities........................
Equity..............................
12/31/2010 12/31/2011
$36,000
$39,000
(29,520)
(21,450)
$ 6,480
$17,550
1-38
Chapter 01 - Introducing Accounting in Business
(c)
Calculation of income or loss for the year 2011:
Equity, December 31, 2010....................... $ 6,480
Plus owner investments...........................
6,000
Plus net income.........................................
?
Less cash dividends................................. (3,500)
Equity, December 31, 2011....................... $17,550
Therefore the income must be $8,570.
Part 2
Company W
(a)
Calculation of equity at December 31, 2010:
Assets........................................................ $28,080
Liabilities................................................... (19,656)
Equity......................................................... $ 8,424
(b)
Calculation of equity at December 31, 2011:
Equity, December 31, 2010....................... $ 8,424
Plus owner investments...........................
1,400
Plus net income.........................................
1,162
Less cash dividends................................. (2,000)
Equity, December 31, 2011....................... $ 8,986
(c)
Calculation of the amount of liabilities at December 31, 2011:
Assets........................................................ $28,080
Equity......................................................... (8,986)
Liabilities................................................... $19,094
Problem 1-1B (Continued)
Part 3
Company X
First, calculate the beginning and ending equity balances:
12/31/2010
12/31/2011
Assets.............................
$23,040
$26,130
Liabilities........................
(12,441)
(12,803)
Equity..............................
$10,599
$13,327
1-39
Chapter 01 - Introducing Accounting in Business
Then, find the amount of owner investments during 2011 as follows:
Equity, December 31, 2010...............................
Plus owner investments...................................
Less net loss.....................................................
Less cash dividends.......................................
Equity, December 31, 2011...............................
$10,599
?
(1,147)
(5,875)
$13,327
Thus, the owner investments must have been
$ 9,750
Part 4
Company Y
First, calculate the beginning balance of equity:
Dec. 31, 2010
Assets........................................................ $64,080
Liabilities................................................... 44,215
Equity......................................................... $19,865
Next, find the ending balance of equity as follows:
Equity, December 31, 2010....................... $19,865
Plus owner investments...........................
7,000
Plus net income......................................... 10,045
Less cash dividends.................................
0
Equity, December 31, 2011....................... $36,910
Finally, find the ending amount of assets by adding the ending balance of
equity to the ending balance of liabilities:
Dec. 31, 2011
Liabilities................................................... $34,070
Equity......................................................... 36,910
Assets........................................................ $70,980
1-40
Chapter 01 - Introducing Accounting in Business
Problem 1-1B (Concluded)
Part 5
Company Z
First, calculate the balance of equity as of December 31, 2011:
Assets........................................................ $107,640
Liabilities................................................... (85,035)
Equity......................................................... $ 22,605
Next, find the beginning balance of equity as follows:
Equity, December 31, 2010....................... $
?
Plus owner investments...........................
6,500
Plus net income.........................................
7,449
Less cash dividends............................... (11,000)
Equity, December 31, 2011....................... $ 22,605
Thus, the beginning balance of equity is $19,656.
Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of assets:
Dec. 31, 2010
Assets........................................................ $98,280
Equity.........................................................
(19,656)
Liabilities................................................... $78,624
1-41
Chapter 01 - Introducing Accounting in Business
Problem 1-2B (25 minutes)
Transaction
1 Owner invests
cash for stock
2 Buys building by
signing note
payable
Income
Statement of
Balance Sheet
Statement
Cash Flows
Total Total Total
Net
Operating Financing Investing
Assets Liab. Equity
Income
Activities Activities Activities
+
+
+
+
+
3 Pays cash for
salaries incurred
4 Provides services for cash
+
+
+
+
5 Pays cash for
rent incurred
6 Incurs utilities
costs on credit
7 Buys store equipment for cash
8 Provides services on credit
9 Collects cash on
receivable from (8)
10 Pays cash
dividend
+
+/
+
+
+
+/
+
Problem 1-3B (15 minutes)
Onshore Co.
Income Statement
For Year Ended December 31, 2010
Revenues .................................................. $69,000
Expenses................................................. 53,682
Net income................................................... $15,318
1-42
Chapter 01 - Introducing Accounting in Business
Problem 1-4B (15 minutes)
NuTech Company
Balance Sheet
December 31, 2010
Assets
..... $121,000 Liabilities
Total assets.................. $121,000
................................ $ 46,222
Equity.................................... 74,778
Total liabilities and equity.... $121,000
Problem 1-5B (15 minutes)
HalfLife Company
Statement of Cash Flows
For Year Ended December 31, 2010
Cash from operating activities ...........................
Cash used by investing activities.......................
Cash used by financing activities.......................
Net increase in cash.............................................
Cash, December 31, 2009....................................
Cash, December 31, 2010....................................
$ 8,550
(3,750)
(4,550)
$ 250
3,700
$ 3,950
Problem 1-6B (15 minutes)
Act First
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, Dec. 31, 2009 ................ $ 5,500
Add: Net income................................................
7,000
12,500
Less: Dividends............................................
(2,000)
Retained earnings, Dec. 31, 2010................. $10,500
1-43
Chapter 01 - Introducing Accounting in Business
Problem 1-7B (60 minutes) Parts 1 and 2
Date
Cash
+
Assets
Accounts
Receivable
=
June 1 + $41,000
2-
Liabilities
Accounts
Payable
+ Equipment =
=
+
+
+
Common
Stock
-
Equity
Dividends + Reven
$41,000
=
2,200
4
+
$1,860
=
+
$1,860
6-
780
=
8+
5,700
=
+
$ 5,
=
+
2,
+
3,
+
$11,
14
+
$2,400
16 -
810
20 +
2,400 -
2,400
=
+
3,300
=
25 +
3,300 -
3,300
=
26 -
1,860
24
=
==+
27
1,860
80
28 -
810
=
29 -
1,600
=
30 -
250
=
30 -
300
=
$43,790 +
$
0
+
$1,860
1-44
=
-
$
80
+
$41,000
$1,600
-
$1,600
Chapter 01 - Introducing Accounting in Business
Problem 1-7B (Continued)
Part 3
Bentons Maintenance Co.
Income Statement
For Month Ended June 30
Revenues
Maintenance services revenue..........
Expenses
Rent expense.....................................
Salaries expense................................
Advertising expense..........................
Telephone expense............................
Utilities expense.................................
Total expenses...................................
Net income..............................................
$11,400
$2,200
1,620
860
250
300
5,230
$ 6,170
Bentons Maintenance Co.
Statement of Retained Earnings
For Month Ended June 30
Retained earnings, June 1..............................
Plus: Net income............................................
Less: Dividends..............................................
Retained earnings, June 30............................
$
0
6,170
6,170
1,600
$ 4,570
Bentons Maintenance Co.
Balance Sheet
June 30
Assets
Cash
Equipment....................
Total assets..................
$43,790
1,860
______
$45,650
Liabilities
Accounts payable................
Equity
Common stock....................
Retained earnings...............
Total equity..........................
Total liabilities and equity....
1-45
$
80
41,000
4,570
45,570
$45,650
Chapter 01 - Introducing Accounting in Business
Problem 1-7B (Concluded)
Part 3continued
Bentons Maintenance Co.
Statement of Cash Flows
For Month Ended June 30
Cash flows from operating activities
Cash received from customers1.................................
Cash paid for rent.......................................................
Cash paid for advertising...........................................
Cash paid for telephone.............................................
Cash paid for utilities.................................................
Cash paid to employees.............................................
Net cash provided by operating activities.................
$ 11,400
(2,200)
(780)
(250)
(300)
(1,620)
Cash flows from investing activities
Purchase of equipment..............................................
Net cash used by investing activities........................
(1,860)
Cash flows from financing activities
Investments by stockholders.....................................
Dividends to stockholders.........................................
Net cash provided by financing activities.................
41,000
(1,600)
Net increase in cash...................................................
Cash balance, June 1.................................................
Cash balance, June 30...............................................
1
$5,700 + $2,400 + $3,300 = $11,400
1-46
$
6,250
(1,860)
39,400
$ 43,790
0
$ 43,790
Chapter 01 - Introducing Accounting in Business
Problem 1-8B (60 minutes) Parts 1 and 2
Assets
Date
July
Cash
1
2
Bal.
3
Accounts + Office
Office
+
+ Excavating =
Receivable
Supplies
Equipment
Equipment
+ $68,600
1,300
67,300
-
Bal.
6
+
Accounts + Common
Payable
Stock
=
+
=
68,600
+
-
$14,600
+
6,400
60,900
8
Bal.
+ $8,200
14,600
=
8,200
+
68,600
900
60,000
+ 2,000
62,000
+
$ 900
+
900
+
14,600
=
8,200
+
68,600
+
900
+
14,600
=
+
68,600
+
900
+
+
$2,720
2,720
+
14,600
=
8,200
+ 2,720
10,920
+
68,600
10
Bal.
15
+
62,000 +
$ 4,300
4,300
+
900
+
2,720
+
14,600
=
10,920
+
68,600
62,000 +
4,300
+
+
350
1,250
+
2,720
+
14,600
=
+ 350
11,270
+
68,600
2,720
59,280 +
4,300
+
1,250
+
2,720
+
14,600
=
8,550
+
68,600
+
59,280 +
1,000
5,300
+
1,250
+
2,720
+
14,600
=
8,550
+
68,600
-
4,300
63,580 +
Bal.
1,000
+
1,250
+
2,720
+
14,600
=
8,550
+
68,600
1,900
61,680 +
1,000
+
1,250
+
2,720
+
14,600
=
8,550
+
68,600
590
61,090 +
1,000
+
1,250
+
2,720
+
14,600
=
8,550
+
68,600
17
Bal.
23
-
Bal.
25
Bal.
28
+
Bal.
30
-
Bal.
31
-
Bal.
31
-
$68,600
62,000
Bal.
Bal.
= Liabilities +
-
4,300
900
$60,190 +
- 2,720
$ 1,000
+
$1,250
+
1-47
$2,720
+
$14,600
=
$8,550
+
$68,600
-
Divi
Chapter 01 - Introducing Accounting in Business
Problem 1-8B (Continued)
Part 3
Truro Excavating Co.
Income Statement
For Month Ended July 31
Revenues
Excavating fees earned ............................
Expenses
Rent expense.............................................
Salaries expense.......................................
Utilities expense .......................................
Total expenses..........................................
Net income.........................................................
$7,300
$1,300
1,900
590
3,790
$3,510
Truro Excavating Co.
Statement of Retained Earnings
For Month Ended July 31
Retained earnings, July 1.........................
Plus: Net income.....................................
Less: Dividends.......................................
Retained earnings, July 31.......................
$
0
3,510
3,510
900
$ 2,610
Truro Excavating Co.
Balance Sheet
July 31
Assets
Liabilities
Cash
..........$ 60,190Accounts payable.................................... $ 8,550
Accounts receivable.........
1,000
Office supplies..................
1,250
Equity
Office equipment...............
2,720
Common stock................... 68,600
Excavating equipment...... 14,600
Retained earnings..............
2,610
Total equity......................... 71,210
Total assets....................... $ 79,760
Total liabilities & equity..... $ 79,760
1-48
Chapter 01 - Introducing Accounting in Business
Problem 1-8B (Concluded)
Part 3continued
Truro Excavating Co.
Statement of Cash Flows
For Month Ended July 31
Cash flows from operating activities
Cash received from customers1.................................
Cash paid for rent.......................................................
Cash paid for supplies...............................................
Cash paid for utilities.................................................
Cash paid to employees.............................................
Net cash provided by operating activities.................
$ 6,300
(1,300)
(900)
(590)
(1,900)
Cash flows from investing activities
Purchase of excavating equipment...........................
Purchase of office equipment....................................
Net cash used by investing activities........................
(6,400)
(2,720)
Cash flows from financing activities
Investments by stockholders.....................................
Dividends to stockholders.........................................
Net cash provided by financing activities.................
68,600
(900)
Net increase in cash...................................................
Cash balance, July 1...................................................
Cash balance, July 31.................................................
1
$ 1,610
(9,120)
67,700
$60,190
0
$60,190
$2,000 + $4,300 = $6,300
Part 4
If the $14,600 purchase on July 3 had been acquired through an additional
owner investment of cash, then:
(a)
total assets would be larger by $6,400,
(b)
total liabilities would be $8,200 smaller, and
(c)
total equity would be $14,600 larger.
1-49
Chapter 01 - Introducing Accounting in Business
Problem 1-9B (60 minutes) Parts 1 and 2
=
Assets
Cash
+ Accounts +
Receivable
a. + $70,000
b.
Office
Supplies
+
+
Office
+ Building
Equipment
= Accounts +
Payable
+
Notes +
Payable
$12,000
- 15,000
Bal.
Liabilities
Common
Stock
+
+
55,000
+
12,000 +
c.
- 11,000
+
44,000
+
23,000 +
126,000 +
82,000
=
126,000 +
82,000
$141,000
+
$126,000
11,000
Bal.
$82,000
141,000 =
-
d.
+
Bal.
e.
Bal.
Bal.
43,500 +
-
Bal.
82,000
600 +
24,300 +
141,000 =
1,900 +
126,000 +
82,000
2,400 +
600 +
24,300 +
141,000 =
1,900 +
126,000 +
82,000
2,400 +
600 +
24,300 +
141,000 =
1,900 +
126,000 +
82,000
-
1,750
-
2,400 +
600 +
24,300 +
141,000 =
1,900 +
126,000 +
82,000
-
600 +
24,300 +
141,000 =
1,900 +
126,000 +
82,000
-
1,750
650 +
-
700
45,225 +
-
$2,400
-
45,925 +
Bal.
Bal.
126,000 +
3,325
44,175 +
i. +
k.
1,900 +
4,000
47,500 +
Bal.
j.
141,000 =
+
+
h.
$1,900
500
f.
Bal.
+
24,300 +
43,500
g. +
1,300
600 +
44,000
-
$600 +
141,000
650 +
600 +
$650 +
$600 +
700
141,000 =
1,200 +
126,000 +
82,000
-
$24,300 + $141,000 =
$1,200 +
$126,000 +
$82,000
-
24,300 +
1,750
$43,475 +
1-50
Chapter 01 - Introducing Accounting in Business
Problem 1-9B (Concluded)
Part 3
Financial Managements net income = $6,400 - $2,250 = $4,150
Problem 1-10B (20 minutes)
1.
Return on assets equals net income divided by average total assets.
a.
AT&T return:
b. Verizon return:
$7,356/ $208,133
= 0.035 or 3.5%
$6,197/ $178,467
= 0.035 or 3.5%
2.
On strictly amount of sales to consumers, AT&Ts sales of $63,055 are
less than Verizons sales of $84,144.
3.
Success in returning net income from the amount invested is revealed
by the return on assets ratio. Part 1 showed that AT&T and Verizon
have an approximately equivalent 3.5% return on assets.
4.
Current performance figures suggest both are equally successful in
generating income based on assets. Based on this information alone, it
would be difficult to differentiate between the two companies.
Nevertheless, we would look for additional information in financial
statements and other sources for further guidance. For example, if
Verizon could reduce its expenses, or reduce its assets without
reducing income, it could potentially be a more appealing investment
given its greater market share. We would also look for consumer
trends, market expansion, competition, and product development and
promotion plans.
1-51
Chapter 01 - Introducing Accounting in Business
Problem 1-11B (15 minutes)
1.
Return on assets is net income divided by average total assets (the
average amount invested). For Carbondale Company this return is
computed as:
$62,500 / $243,000 = 0.257 or 25.7%.
2.
Return on assets seems more than satisfactory for the risk involved in
the manufacturing, marketing, and selling of ATV and snowmobile
equipment. Carbondale Companys 25.7% return is over 2 times
greater than the 10% return earned by its competitors.
3.
We know that revenues less expenses equal net income. Taking the
revenues and net income numbers for Carbondale Company we
obtain:
$473,000 - Expenses = $62,500 Expenses must equal $410,500.
4.
We know from the accounting equation that the total of liabilities plus
equity (financing) must equal the total for assets (investing). Since
average total assets are $243,000, we know the average total of
liabilities plus equity (financing) must equal $243,000.
Problem 1-12BA (20 minutes)
Case 1.
Return:
Risk:
Expected return on your stock investment (both
dividends and stock price changes).
Depends on the current and future performance of
Nikes stock price (and dividends).
Case 2.
Return:
Risk:
Expected winnings from your bet.
Depends on the probability of your horse finishing
the race in a position consistent with the odds
assigned the horse for the race.
Case 3.
Return:
Risk:
No return is generated.
Moderate risk. By hiding money at home a person
risks loss by theft or fire. Also such a strategy
might result in a loss of purchasing power in the
event of inflation.
Case 4.
Return:
Expected return on the bond is a function of the
interest rate paid on the bond.
1-52
Chapter 01 - Introducing Accounting in Business
Risk:
Very low because the full faith and credit of the U.S.
government back savings bonds.
1-53
Chapter 01 - Introducing Accounting in Business
Problem 1-13BB (15 minutes)
1.
O
5.
O
2.
F
6.
F
3.
O
7.
I
4.
O
8.
O
Problem 1-14BB (15 minutes)
I.
Financing Activities
A. Owner financinginvesting resources in the company
B. Nonowner (creditor) financingborrowing money from a bank
II.
Investing Activities
A. Buying resources (assets)
B. Selling resources (assets)
III.
Operating Activities
A. Use of assets to carry out plans
B. Management of internal functionsR&D, marketing, and so forth
[Note: Planning activities are the ideas, goals, and tactics for implementing
financing, investing, and operating activities.]
1-54
Chapter 01 - Introducing Accounting in Business
Serial Problem SP 1
Success Systems
Assets
Date
Oct.
Cash
+ Computer + Computer +
Office
Equipment
$20,000 +
Accounts
Receivable
System
+
55,000
+
1,420 +
20,000 +
+
1,420 +
20,000 +
6
+
Bal.
55,000
8
-
4,800
=
Accounts
Payable
53,580
$83,000
8,000 =
1,420 +
83,000
8,000 =
1,420 +
83,000
$1,420
+ $1,420
+
4,800
+
1,400
+
6,200
4,800 -
4,800
58,380 +
1,420
+
1,420 +
20,000 +
8,000 =
0
+
83,000
+
1,420 +
20,000 +
8,000 =
0+
83,000
1,400
+
1,420 +
20,000 +
8,000 =
0
+
83,000
1,400
+
1,420 +
20,000 +
8,000 =
0
+
83,000
55,635 +
1,400
+
1,420 +
20,000 +
8,000 =
0
+
83,000
1,400
-
1,400
57,035 +
0
+
1,420 +
20,000 +
8,000 =
0
+
83,000
+
5,208
57,035 +
5,208
+
1,420 +
20,000 +
8,000 =
0
+
83,000
5,208
+
1,420 +
20,000 +
8,000 =
0
+
83,000
12
Bal.
53,580
15
+
Bal.
17
-
Bal.
805
57,575 +
20
-
Bal.
22 +
Bal.
1,940
28
Bal.
31
-
Bal.
875
56,160 +
31
-
Divide
Stock
+
1,420
Bal.
+ Common -
$4,800
+
Liabilities +
$8,000
Supplies
1 +$55,000
3
Bal.
Bal.
+
=
3,600
$52,560 +
$5208 +
$1,420 +
1-55
$20,000 +
$8,000 =
$
0
+
$3
$83,000 -
$3
Chapter 01 - Introducing Accounting in Business
Reporting in Action BTN 1-1
1.
An organizations total assets are equal to its total liabilities plus total
equity. Because Best Buys liabilities and equity total $15,826 (in
millions), this implies its amount of assets invested is the same $15,826
(in millions).
2.
Return on assets is net income divided by the average total assets
invested. For Best Buy this return is ($ millions):
$1,003 / [($12,758 + $15,826)/2] = 0.070 or 7.0%.
3.
We know that net income equals total revenues less total expenses. For
Best Buy, we are told net income is $1,003 and revenues are $45,015.
Thus, Best Buys total expenses are computed as: $45,015 - Expenses =
$1,003. Total expenses must equal $44,012 (in millions).
4.
Best Buys return on assets of 7.0% is good given the 2008-2009
recessionary period. Further, its return markedly exceeds its competitors
return on assets of approximately 3.7% for this period.
5.
Answer depends on the current annual report information obtained.
Comparative Analysis BTN 1-2
($ millions)
1. Total assets =
Liabilities + Equity
Best Buy
RadioShack
$15,826
$2,283.5
3. Revenues-Expenses
= Net income
$1,003
[($12,758 + $15,826)/2]
7.0%
$45,015-Expenses=$1,003
$192.4
[($1,989.6 + $2,283.5)/2]
9.0%
$4,224.5-Expenses=$192.4
Expenses = $44,012
2. Return on assets
Expenses = $4,032.1
4. Analysis of return on assets: Best Buys 7.0% return is good given the
moderate risk Best Buy confronts and the recessionary period for these
returns (and vis--vis the 3.7% return of its competitors). Moreover,
RadioShacks 9.0% return is even better.
1-56
Chapter 01 - Introducing Accounting in Business
5. Analysis conclusions: Best Buys return is acceptable (good when
compared to the industry norm); RadioShacks return is arguably very
good. Both companies expenses are a large percentage of their revenues.
1-57
Chapter 01 - Introducing Accounting in Business
Ethics Challenge BTN 1-3
1. There are several parties affected. They include the users of financial
statements such as shareholders, lenders, investors, analysts, suppliers,
directors, unions, regulators and others. They also include the accounting
firm, which can be sued if deemed a party to misleading statements.
2. A major factor in the value of an auditor's report is the auditor's
independence. If an auditor accepts a fee that increases when the clients
reported profit increases, the auditor is (or at least is perceived to be)
interested in higher profits for the client. This compromises the auditor's
independence.
3. Thorne should not accept this fee arrangement. To avoid compromising
the auditor's independence, Thorne should reject it. (Further, the AICPA
Code of Professional Conduct forbids auditors from accepting contingent
fees that depend on amounts reported in a client's financial statements.
This AICPA Code has been codified into law in most states and, therefore,
this action would also be an illegal act for a CPA.)
4. Ethical considerations guiding this decision include the potential harm to
affected parties by allowing such a fee arrangement to exist. The
unacceptable nature of such a fee arrangement guards the profession
against unethical actions that could undermine its real and perceived value
to society.
Communicating in Practice BTN 1-4
1. Deciding whether Facebook is a good loan risk can be difficult because the
planned expansion is risky if customer demand does not meet
expectations. As a loan officer in this situation you would want information
on the companys (1) projections of expected cash receipts and cash
payments (best provided on a monthly basis); (2) assessment of the
market, the companys plans, and a strategy to achieve success; (3) cash
contributions that Mark Zuckerberg will make to the business; and (4) a
listing of tangible assets (including their price and useful life) necessary to
carry out the companys plans.
2. How the company is organized is an important issue to a loan officer. If it
is a proprietorship (and not LLC), the personal assets of Mark Zuckerberg
are available to repay the loan. In this case, the loan officer will want
information about Marks financial status. If it is a corporation, the
amounts invested in the business by each shareholder are especially
important. The loan officer can also require owners or shareholders to
personally guarantee the loan for additional protection for the bank. Careful
execution of these
1-58
Chapter 01 - Introducing Accounting in Business
steps should minimize the banks risk of taking on a bad loan.
Taking It to the Net BTN 1-5
(in thousands)
2009
2008
2007
2006
2005
Revenues......
$28,539
$31,878
$31,573
$28,074
$24,524
Net income....
3,719
4,961
4,745
4,065
3,317
1.
Rocky Mountain Chocolate Factorys (RMCF) revenues grew
considerably from 2005 through 2007, but they flattened and even
declined in the recessionary period of 2008 and 2009. Each year saw
solid revenue growth prior to 2008. Management must work to recover
those lost revenues.
2.
Net income performance for RMCF was impressive over the time period
2005 through 2008. Its net income grew nearly 50%. However, 2009 net
income declines 25% from its 2008 level. Although 2008 and 2009 were
recessionary times, management must work to recover lost revenues
and reestablish profitability levels.
Teamwork in Action BTN 1-6
Suggestions for forming support/learning teams are in the Instructors
Resource Manual (IRM). The IRM provides the master of a Student Data
Form that can be duplicated and used to gather information as a basis for
forming these teams. The IRM also includes other administrative materials
helpful in creating an active learning environment for studying accounting.
[Note: Instructors often have students use the copy function in e-mail to keep
them advised of meeting times and other important team activities. This also
encourages students to use and explore additional features of e-mail. ]
1-59
Chapter 01 - Introducing Accounting in Business
Entrepreneurial Decision
BTN 1-7
1. (a) AccountBooks total amount of liabilities and equity consists of the
bank loan and the owner investments. Specifically:
Total assets
=
Bank Loan
+ Owner investment
$750,000
=
=
Liabilities
$500,000
+
+
Equity
$250,000
(b) AccountBooks total amount of assets equals its total amount of
liabilities plus equity, which is $750,000.
2. Return on assets = $80,000 / $750,000 = 0.107 = 10.7%
AccountBooks 10.7% return slightly exceeds its competitors average
return of 10%. Assuming AccountBook can continue to earn 10.7% or
more, Mark Zuckerberg should consider further investment in the new
company.
Hitting the Road BTN 1-8
Check each students report for the following content:
1. (a) Identification of the form of business organization for the business
interviewed.
(b) Identification of the main business activities for the business
interviewed.
2. Identification of the reasons why the owner(s) chose this particular
form of business organization.
3. Identification of advantages or disadvantages of the form of business
organization chosen.
[Note: Many instructors have students complete this assignment in teams.]
1-60
Chapter 01 - Introducing Accounting in Business
Global Decision
1.
BTN 1-9
GOMEs net income and revenues figures are computed using
Renminbi, which is the currency of China. In contrast, Best Buy and
RadioShack compute their financial figures in U.S. dollars. Accordingly,
one must convert these figures into comparable monetary units for
business decisions that depend on direct comparisons of these
numbers.
Moreover, GOMEs figures are computed according to International
Financial Reporting Standards (IFRS) following pronouncements of the
IASB, while Best Buy and RadioShack use U.S. GAAP per the FASB.
One should adjust these figures for any significant differences in
accounting measurements to yield an apples-to-apples comparison.
2.
GOMEs return on assets ratio eliminates differences in monetary units
(between renminbi and dollars). Consequently, we need not focus on
differences in renminbi and dollars for ratio comparisons provided we
are comfortable with measurement techniques underlying the financial
figures.
However, any comparisons using the return on assets ratio are still
impacted by potential differences in IFRS GAAP as applied by GOME
compared to U.S. GAAP applied by Best Buy and RadioShack.
1-61