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ch01answers - CHAPTER 1 Accounting in Action ASSIGNMENT...

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Unformatted text preview: CHAPTER 1 Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Brief Exercises A Problems B Problems Study Objectives 1. Explain what accounting is. Identify the users and uses of accounting. Understand why ethics is a fundamental business concept. Explain the meaning of generally accepted accounting principles and the cost principle. Explain the meaning of the monetary unit assumption and the economic entity assumption. State the basic accounting equation, and explain the meaning of assets, liabilities, and owner's equity. Analyze the effects of business transactions on the basic accounting equation. Understand what the four financial statements are and how they are prepared. Questions 1, 2, 5 Exercises 2. 3, 4 3. 4. 6 5. 7, 8, 9, 10 6. 11, 12, 13 1, 2, 3, 9 1, 2, 3, 7 1A, 2A 1B, 2B 7. 14, 15, 16, 18 4, 5, 6, 7 2, 3, 4, 6, 7 1A, 2A, 4A, 5A 1B, 2B, 4B, 5B 8. 17, 19, 20, 21 8, 10 5, 8, 9, 10, 11, 12 2A, 3A, 4A, 5A 2B, 3B, 4B, 5B 1-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A Difficulty Level Moderate Moderate Time Allotted (min.) 40-50 50-60 Description Analyze transactions and compute net income. Analyze transactions and prepare an income statement, owner's equity statement, and balance sheet. Prepare an income statement, owner's equity statement, and balance sheet. Analyze transactions and prepare financial statements. Determine financial statement amounts and prepare owner's equity statement. Analyze transactions and compute net income. Analyze transactions and prepare an income statement, owner's equity statement, and balance sheet. Prepare an income statement, owner's equity statement, and balance sheet. Analyze transactions and prepare financial statements. Determine financial statement amounts and prepare owner's equity statement. 3A Moderate 50-60 4A 5A Moderate Moderate 40-50 40-50 1B 2B Moderate Moderate 40-50 50-60 3B Moderate 50-60 4B 5B Moderate Moderate 40-50 40-50 1-2 Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems Knowledge Q1-1 Q1-2 Q1-3 Q1-4 Q1-5 Comprehension Application Analysis Synthesis Evaluation Study Objective 1. Explain what accounting is. 2. Identify the users and uses of accounting. 3. Q1-6 Understand why ethics is a fundamental business concept. 4. Explain the meaning of generally accepted accounting principles and the cost principle. Q1-8 Q1-9 Q1-11 Q1-12 Q1-13 BE1-9 E1-1 E1-2 Q1-14 Q1-15 Q1-16 Q1-18 BE1-4 BE1-5 Q1-17 Q1-19 BE1-10 Q1-20 Q1-21 BE1-8 E1-5 E1-8 E1-10 E1-11 E1-12 Exploring the Web BE1-6 BE1-7 E1-2 E1-3 E1-4 E1-6 E1-7 P1-1A P1-2A P1-4A P1-5A P1-1B P1-2B P1-4B P1-5B P1-2A E1-9 P1-3A P1-4A P1-5A P1-2B P1-3B P1-4B P1-5B E1-3 BE1-1 BE1-2 BE1-3 E1-7 P1-1A P1-2A P1-1B P1-2B Q1-7 Q1-10 BLOOM'S TAXONOMY TABLE 5. Explain the meaning of the monetary unit assumption and the economic entity assumption. 6. State the basic accounting equation, and explain the meaning of assets, liabilities, and owner's equity. 7. 1-3 Analyze the effects of business transactions on the basic accounting equation. 8. Understand what the four financial statements are and how they are prepared. Broadening Your Perspective Interpreting Comparative Financial Reporting Analysis Comparative Analysis Financial Statements Group Decision Exploring the Web Communication Activity Ethics Case ANSWERS TO QUESTIONS 1. Yes, this is correc t . Virt ually ev ery organiz ation and person in our soc iet y us es ac counting information. Bus inesses , inv es t ors , credit ors , government agenc ies , and not -f or-prof it organiz at ions must us e ac c ount ing inf ormat ion to operat e ef f ec t iv ely . Ac count ing is the proc es s of ident ify ing, rec ording, and communic at ing the ec onomic ev ent s of an organiz at ion to int eres ted us ers of the inf ormation. The firs t st ep of the ac c ount ing proc ess is therefore to identify event s that are: (a) cons idered ev idenc e of ec onomic ac tivit y and (b) relev ant to a part icular bus ines s enterprise. Once ident if ied and meas ured, the ev ents are recorded t o prov ide a permanent his tory of the financ ial activ it ies of the organiz ation. Rec ording cons is t s of keeping a chronologic al diary of these measured ev ent s in an orderly and sy st emat ic manner. The inf ormat ion is communic at ed through the preparation and dis t ribut ion of acc ounting report s , t he most common of whic h are called financial st at ements. A vital element in the communic ation proc es s is the ac c ount ant's abilit y and respons ibilit y to analy z e and interpret the report ed inf orma ti o n . (a) I nternal us ers are thos e who manage the bus ines s and theref ore are off ic ers and ot her decis ion mak ers. (b) To as s is t management , ac c ount ing prov ides internal reports . Ex amples inc lude financ ial c omparis ons of operating alt ernativ es , project ions of income from new sales campaigns , and forec ast s of cas h needs for the nex t year. (a) Investors (owners) use accounting information to make decisions to buy, hold, or sell stock. (b) Creditors use accounting information to evaluate the risks of granting credit or lending money. Book k eeping us ually inv olv es only the rec ording of ec onomic ev ent s and theref ore is just one part of the entire acc ount ing proc es s . Ac c ount ing, on the ot her hand, inv olv es the ent ire ac c ount ing proc es s, inc luding ident if ic at ion, meas urement , rec ording, and communic ation. J ack ie Remmers Trav el Agency should report the land at $85, 000 on it s Dec ember 31, 2005 balance sheet . An import ant conc ept that ac c ount ants follow is the cos t principle. The cos t princ iple st at es that as set s should be rec orded at their cos t. Cos t has an import ant adv antage over ot her valuat ions : it is reliable. Cos t can be object iv ely meas ured and can be verif ied. The monetary unit as sumpt ion requires that only trans ac t ion data capable of being ex press ed in terms of money be inc luded in the acc ount ing records . An import ant part of the monetary unit as sumpt ion is the added as sumpt ion that the unit of meas ure remains suf f ic ient ly cons t ant ov er t ime. The as s umpt ion of a st able monet ary unit has been challenged bec aus e of the signif icant decline in the purc has ing power of the dollar. The prof ess ion has recognized this problem and encourages companies to disc los e the eff ec t s of changing pric es. The ec onomic ent it y as s umption requires that the act iv it ies of the ent it y be kept separat e and dist inc t from the ac tiv it ies of it s owners and all ot her ec onomic entit ies . The three basic forms of bus iness organizations are: (1) proprietorship, (2) part nership, and (3) corporation. 2. 3. 4. 5. 6. 7. 8. 9. 1-4 Questions Chapter 1 (Continued) 10. One of the adv ant ages Teresa Alv arez would enjoy is that owners hip of a corporat ion is repres ent ed by transf erable shares of st ock . This would allow Teres a to rais e money eas ily by selling a part of her owners hip in the company. Anot her advant age is that becaus e holders of the shares (s toc k holders ) enjoy limit ed liabilit y , they are not personally liable for the debt s of the corporat e entit y. Also, bec aus e owners hip can be trans ferred wit hout dis solving the corporation, the corporat ion enjoy s an unlimit ed lif e. The basic accounting equation is Assets = Liabilities + Owner's Equity. (a) As set s are res ourc es owned by a bus iness . Liabilit ies are claims agains t as s ets . Put more s imply , liabilit ies are ex is t ing debt s and obligat ions . Owner's equity is the owners hip claim on tot al as s et s. (b) Owner's equity is affect ed by owner's inv es tment s, drawings, revenues, and expens es . The liabilities are: (b) Accounts payable and (g) Salaries payable. Yes, a bus ines s can enter int o a transact ion in whic h only the lef t side of the acc ounting equation is af f ec ted. An ex ample would be a trans act ion where an inc rease in one asset is of fs et by a dec reas e in anot her as set . An inc reas e in the Equipment ac count whic h is of fset by a dec reas e in t he Cas h ac c ount is a specif ic ex ample. Busines s trans ac t ions are the ec onomic ev ent s of the ent erpris e rec orded by ac c ount ant s bec aus e they af f ec t the bas ic equation. (a) The death of the owner of the company is not a business transaction as it does not affect the basic equation. (b) Supplies purchas ed on account is a bus ines s transact ion as it af fects the basic equation. (c) An employee being fired is not a business transaction as it does not affect the basic equation. (d ) A wit h draw al of ca s h from the bus i nes s is a bu s ine s s trans ac t i on as it af f ec t s the bas ic eq uat i on. (a) Decrease assets and decrease owner's equity. (b) Increase assets and decrease assets. (c) Increase assets and increase owner's equity. (d) Decrease assets and decrease liabilities. (a) Income statement. (b) Balance sheet. (c) Income statement. (d) (e) (f) Balance sheet. Balance sheet and owner's equity statement. Balance sheet. 11. 12. 13. 14. 15. 16. 17. 18. No, this treatment is not proper. While the trans ac t ion does involve a rec eipt of cash, it does not repres ent rev enues . Rev enues are the gros s inc reas e in owner's equit y res ult ing from bus ines s ac tiv it ies ent ered int o for the purpos e of earning income. This transac t ion is simply an addit ional inv est ment made by the owner in the busines s . Yes. Net inc ome does appear on the inc ome st atement--it is the res ult of subt ract ing expens es f rom rev enues . In addit ion, net inc ome appears in the st at ement of owner's equit y--it is shown as an addition to the beginning-of -period capital. Indirec t ly , the net inc ome of a company is als o included in the balanc e sheet . It is inc luded in the capit al ac count which appears in the owner's equity sec tion of the balanc e sheet. 1-5 19. Questions Chapter 1 (Continued) 20. (a) Ending capital balance...................................................................................... Beginning capital balance ................................................................................. Net income ....................................................................................................... (b) Ending capital balance...................................................................................... Beginning capital balance ................................................................................. Deduct: Investment.......................................................................................... Net income ....................................................................................................... $198,000 158,000 $ 40,000 $198,000 158,000 40,000 13,000 $ 27,000 $100,000 $66,000 $100,000 66,000 $ 34,000 21. (a) Total revenues ($30,000 + $70,000) ................................................................. (b) (c) Total expenses ($26,000 + $40,000)................................................................. Total revenues.................................................................................................. Total expenses ................................................................................................. Net income ....................................................................................................... 1-6 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1 (a) $90,000 $50,000 = $40,000 (Owner's Equity). (b) $45,000 + $70,000 = $115,000 (Assets). (c) $94,000 $65,000 = $29,000 (Liabilities). BRIEF EXERCISE 1-2 (a) $100,000 + $232,000 = $332,000 (Total assets). (b) $190,000 $80,000 = $110,000 (Total liabilities). (c) $600,000 0.5($600,000) = $300,000 (Owner's equity). BRIEF EXERCISE 1-3 (a) ($870,000 + $150,000) ($500,000 $80,000) = $600,000 (Owner's equity). (b) ($500,000 + $100,000) + ($870,000 $500,000 $70,000) = $900,000 (Assets). (c) ($870,000 $80,000) ($870,000 $500,000 + $120,000) = $300,000 (Liabilities). BRIEF EXERCISE 1-4 Assets + + Liabilities + NE NE Owner's Equity NE + (a) (b) (c) BRIEF EXERCISE 1-5 Assets + NE Liabilities NE NE NE 1-7 (a) (b) (c) Owner's Equity + NE BRIEF EXERCISE 1-6 E R E E (a) (b) (c) (d) Advertising expense Commission revenue Insurance expense Salaries expense D R E (e) Carland, Drawing (f) Rent revenue (g) Utilities expense BRIEF EXERCISE 1-7 R NOE E (a) Received cash for services performed (b) Paid cash to purchase equipment (c) Paid employee salaries BRIEF EXERCISE 1-8 GOMEZ COMPANY Balance Sheet December 31, 2005 Assets Cash .................................................................................................. Accounts receivable........................................................................ Total assets .............................................................................. Liabilities and Owner's Equity Liabilities Accounts payable .................................................................... Owner's equity Kim Gomez, Capital ................................................................. Total liabilities and owner's equity ................................ $ 85,000 31,500 $116,500 $ 44,000 72,500 $116,500 BRIEF EXERCISE 1-9 A L A (a) Accounts receivable (b) Salaries payable (c) Equipment A OE L (d) Office supplies (e) Owner's investment (f) Notes payable 1-8 BRIEF EXERCISE 1-10 BS IS OE, BS BS IS (a) (b) (c) (d) (e) Notes payable Advertising expense Morgan M. Sondgeroth, Capital Cash Service revenue 1-9 SOLUTIONS TO EXERCISES EXERCISE 1-1 Asset Cash Cleaning equipment Cleaning supplies Accounts receivable EXERCISE 1-2 1. 2. 3. 4. 5. 6. 7. 8. 9. Increase in assets and increase in owner's equity. Decrease in assets and decrease in owner's equity. Increase in assets and increase in liabilities. Increase in assets and increase in owner's equity. Decrease in assets and decrease in owner's equity. Increase in assets and decrease in assets. Increase in liabilities and decrease in owner's equity. Increase in assets and decrease in assets. Increase in assets and increase in owner's equity. Liability Accounts payable Notes payable Salaries payable Owner's Equity Karin Robinson, Capital EXERCISE 1-3 1. 2. 3. 4. (c) (d) (a) (b) 5. 6. 7. 8. (d) (b) (e) (f) EXERCISE 1-4 (a) 1. 2. 3. 4. 5. Owner invested $15,000 cash in the business. Purchased office equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account. Paid $750 cash for supplies. Earned $6,300 in revenue, receiving $2,600 cash and $3,700 on account. Paid $1,500 cash on accounts payable. 1-10 EXERCISE 1-4 (Continued) 6. 7. 8. 9. 10. Owner withdrew $2,000 cash for personal use. Paid $650 cash for rent. Collected $450 cash from customers on account. Paid salaries of $3,900. Incurred $500 of utilities expense on account. $15,000 6,300 (2,000) (650) (3,900) (500) $14,250 $6,300 (650) (3,900) (500) $1,250 (b) Investment ................................................................................. Service revenue ........................................................................ Drawings .................................................................................... Rent expense............................................................................. Salaries expense....................................................................... Utilities expense........................................................................ Increase in capital..................................................................... (c) Service revenue ........................................................................ Rent expense............................................................................. Salaries expense....................................................................... Utilities expense........................................................................ Net income................................................................................. EXERCISE 1-5 J. L. KANG & CO. Income Statement For the Month Ended August 31, 2005 Revenues Service revenue .......................................................... Expenses Salaries expense......................................................... Rent expense............................................................... Utilities expense.......................................................... Total expenses .................................................... Net income........................................................................... $6,300 $3,900 650 500 5,050 $1,250 1-11 EXERCISE 1-5 (Continued) J. L. KANG & CO. Owner's Equity Statement For the Month Ended August 31, 2005 J. L. Kang, Capital, August 1 ......................................... Add: Investments ......................................................... Net income........................................................... Less: Drawings .............................................................. J. L Kang, Capital, August 31........................................ 0 $15,000 1,250 16,250 16,250 2,000 $14,250 J. L. KANG & CO. Balance Sheet August 31, 2005 Assets Cash .................................................................................................. Accounts receivable........................................................................ Supplies............................................................................................ Office equipment ............................................................................. Total assets .............................................................................. Liabilities and Owner's Equity Liabilities Accounts payable .................................................................... Owner's equity J. L. Kang, Capital.................................................................... Total liabilities and owner's equity ................................ $ 2,000 14,250 $16,250 $ 7,250 3,250 750 5,000 $16,250 EXERCISE 1-6 (a) Owner's equity--12/31/05 ($380,000 $250,000).................. Owner's equity--1/1/05 ........................................................... Increase in owner's equity...................................................... Add: Drawings ....................................................................... Net income for 2005................................................................. $130,000 100,000 30,000 15,000 $ 45,000 1-12 EXERCISE 1-6 (Continued) (b) Owner's equity--12/31/06 ($460,000 $310,000)................ Owner's equity--1/1/06--see (a) .......................................... Increase in owner's equity .................................................... Less: Additional investment ................................................ Net loss for 2006 .................................................................... (c) Owner's equity--12/31/07 ($590,000 $400,000)................ Owner's equity--1/1/07--see (b) .......................................... Increase in owner's equity .................................................... Less: Additional investment ................................................ Add: Drawings ..................................................................... Net income for 2007............................................................... $150,000 130,000 20,000 50,000 $ 30,000 $190,000 150,000 40,000 15,000 25,000 30,000 $ 55,000 EXERCISE 1-7 (a) Total assets (beginning of year)........................................... Total liabilities (beginning of year) ...................................... Total owner's equity (beginning of year)............................. (b) Total owner's equity (end of year) ....................................... Total owner's equity (beginning of year)............................. Increase in owner's equity .................................................... Total revenues........................................................................ Total expenses ....................................................................... Net income.............................................................................. Increase in owner's equity .............................. Less: Net income ............................................ Add: Drawings ............................................... Additional investment ..................................... $97,000 85,000 $12,000 $40,000 12,000 $28,000 $215,000 175,000 $ 40,000 $28,000 $(40,000) 24,000) (16,000) $12,000 $129,000 75,000 $ 54,000 (c) Total assets (beginning of year)........................................... Total owner's equity (beginning of year)............................. Total liabilities (beginning of year) ...................................... 1-13 EXERCISE 1-7 (Continued) (d) Total owner's equity (end of year) ....................................... Total owner's equity (beginning of year) ............................ Increase in owner's equity.................................................... Total revenues ....................................................................... Total expenses....................................................................... Net income ............................................................................. Increase in owner's equity............................... Less: Net income ............................................. Additional investment........................... Drawings............................................................ $130,000 75,000 $ 55,000 $100,000 55,000 $ 45,000 $55,000 $(45,000) (25,000) (70,000) $15,000 EXERCISE 1-8 KARIN WEIGEL CO. Income Statement For the Year Ended December 31, 2005 Revenues Service revenue ...................................................... Expenses Salaries expense..................................................... Rent expense .......................................................... Utilities expense ..................................................... Advertising expense............................................... Total expenses ................................................ Net income ...................................................................... $62,500 $28,000 10,400 3,100 1,800 43,300 $19,200 KARIN WEIGEL CO. Owner's Equity Statement For the Year Ended December 31, 2005 Karin Weigel, Capital, January 1...................................................... Add: Net income.............................................................................. Less: Drawings ................................................................................. Karin Weigel, Capital, December 31 ................................................ 1-14 $48,000 19,200 67,200 5,000 $62,200 EXERCISE 1-9 SANCULI COMPANY Balance Sheet December 31, 2005 Assets Cash .................................................................................................. Accounts receivable........................................................................ Supplies ............................................................................................ Equipment ........................................................................................ Total assets .............................................................................. Liabilities and Owner's Equity Liabilities Accounts payable .................................................................... Owner's equity Sanculi, Capital ($67,500 $8,500)......................................... Total liabilities and owner's equity ................................ $20,000 59,000 $79,000 $16,500 8,500 8,000 46,000 $79,000 EXERCISE 1-10 (a) Camping fee revenues............................................................. General store revenues ........................................................... Total revenue .................................................................... Expenses .................................................................................. Net income................................................................................ (b) BEAR PARK Balance Sheet December 31, 2005 Assets Cash .......................................................................................... Supplies .................................................................................... Equipment................................................................................. Total assets....................................................................... $ 20,000 2,500 105,500 $128,000 $140,000 47,000 187,000 150,000 $ 37,000 1-15 EXERCISE 1-10 (Continued) BEAR PARK Balance Sheet (Continued) December 31, 2005 Liabilities and Owner's Equity Liabilities Notes payable................................................................... Accounts payable ............................................................ Total liabilities .......................................................... Owner's equity Jan Way, Capital ($128,000 $71,000)........................... Total liabilities and owner's equity ........................ EXERCISE 1-11 DEBRA-JOAN CRUISE COMPANY Income Statement For the Year Ended December 31, 2005 Revenues Ticket revenue.................................................... Expenses Salaries expense................................................ Maintenance expense........................................ Property tax expense ........................................ Advertising expense.......................................... Total expenses ........................................... Net income ................................................................. EXERCISE 1-12 DOUGLAS WILLIAM, ATTORNEY Owner's Equity Statement For the Year Ended December 31, 2005 Douglas William, Capital, January 1........................................ Add: Net income...................................................................... Less: Drawings ......................................................................... Douglas William, Capital, December 31 .................................. 1-16 $ 60,000 11,000 71,000 57,000 $128,000 $335,000 $142,000 97,000 10,000 3,500 252,500 $ 82,500 $ 23,000 (a) 129,000 (b) 152,000 64,000 $ 88,000 (c) EXERCISE 1-12 (Continued) Supporting Computations (a) Assets, January 1, 2005 .......................................................... Liabilities, January 1, 2005...................................................... Capital, January 1, 2005 .......................................................... (b) Legal fees earned..................................................................... Total expenses ......................................................................... Net income................................................................................ (c) Assets, December 31, 2005..................................................... Liabilities, December 31, 2005 ................................................ Capital, December 31, 2005..................................................... $85,000 62,000 $23,000 $340,000 211,000 $129,000 $168,000 80,000 $ 88,000 1-17 (a) MATRIX TRAVEL AGENCY Cash +$10,000 = + = +$2,500 + = +$300 = +0000 = +0000 = = = = +00,000 + +$2,500 = +0000 +$ 0 + + 300 +0000 + 300 +300 + 0 +0000 + + + 300 + + 300 + + + + +00,000 + +$600 + + +00,000 + +00,000 + +00,000 + + + 2,500 +00,000 + 2,500 + 2,500 + 2,500 +$6,500 + 6,500 + 0,000 + 6,500 + 0,000 + 6,500 + 0,000 + 6,500 +5,000 +$1,500 + +$600 +0000 + + 600 +0000 + + 600 +0000 + + 600 +0000 + + 600 +0000 + 600 + 2,500 +00,000 + 2,500 + 2,500 + 9,600 300 9,300 +000,000 9,300 +7,500 + 16,800 + 200 + 16,600 +000,000 + 16,600 + 2,200 + 14,400 +000,000 +$14,400 Salaries Exp. Drawings +000,000 + 9,600 400 + 10,000 Investment + Accounts Receivable + Supplies + Office + Equipment = Accounts Payable Holly Palmer, Capital 1. +$10,000 + 10,000 2. + 400 Rent Expense + 9,600 3. + 2,500 + 7,100 4. +000,000 Adv. Expense + 7,100 PROBLEM 1-1A SOLUTIONS TO PROBLEMS 1-18 5. + 600 + 6,500 6. +1,000 Serv. Revenue + 7,500 + 7. + 200 + 7,300 + 8. + 300 + 7,000 + 9. + 2,200 + 4,800 + 10. +5,000 +$ 9,800 + PROBLEM 1-1A (Continued) (b) Ending capital ........................................................................... Add: Drawings......................................................................... Deduct: Investments............................................................... Net income................................................................................. OR Service revenue ....................................................... Expenses Salaries.............................................................. Rent ................................................................... Advertising........................................................ Net income ................................................ $7,500 $2,200 400 300 $14,400 200 14,600 10,000 $ 4,600 2,900 $4,600 1-19 (a) MANDY ARNOLD, ATTORNEY AT LAW Cash $1,500 1,400 100 + 0000 + 0000 + 0000 + 500 + = 6,000 2,100 + +1,000 +600 500 + = + 5,000 1,500 00,000 00,000 +7,500 14,300 000,000 14,300 3,000 900 00,000 4,600 + 0000 + 0000 + 0000 + $500 + $6,000 00,000 500 + 6,000 00,000 500 + = +$2,000 = + 2,000 + +00,000 = +$2,000 + 6,000 00,000 + = 00,000 4,600 00,000 4,600 00,000 $4,600 500 6,000 0000 00,000 00,000 2,100 00,000 2,100 00,000 2,100 +250 $2,350 + + + + 350 10,050 550 9,500 000,000 9,500 250 $ 9,250 Utilities Expense Drawings Salaries Expense Rent Expense 500 + = + 5,000 1,500 6,800 Service Revenue 00,000 2,700 000,000 + = + 00,000 100 +4,500 4,600 00,000 4,600 500 5,000 4,200 6,800 0000 00,000 00,000 000,000 + $500 $5,000 $4,200 $ 6,800 + = + Accounts Office Notes Accounts + Receivable + Supplies + Equipment = Payable + Payable + Mandy Arnold, Capital Bal. $4,000 + 1. +1,400 5,400 + 2. 2,700 2,700 + 3. +3,000 5,700 + PROBLEM 1-2A 1-20 4. 400 5,300 + 5. 4,250 Advertising Expense 1,050 + 6. 550 500 + 7. +2,000 2,500 + 8. 00,000 $2,500 + PROBLEM 1-2A (Continued) (b) MANDY ARNOLD, ATTORNEY AT LAW Income Statement For the Month Ended August 31, 2005 Revenues Service revenue............................................... Expenses Salaries expense ............................................. Rent expense ................................................... Advertising expense ....................................... Utilities expense.............................................. Total expenses ........................................ Net income............................................................... $7,500 $3,000 900 350 250 4,500 $3,000 MANDY ARNOLD, ATTORNEY AT LAW Owner's Equity Statement For the Month Ended August 31, 2005 Mandy Arnold, Capital, August 1 ............................................ Add: Net income ..................................................................... Less: Drawings ........................................................................ Mandy Arnold, Capital, August 31 .......................................... $6,800 3,000 9,800 550 $9,250 1-21 PROBLEM 1-2A (Continued) MANDY ARNOLD, ATTORNEY AT LAW Balance Sheet August 31, 2005 Assets Cash ............................................................................................ Accounts receivable.................................................................. Supplies ...................................................................................... Office equipment ....................................................................... Total assets ........................................................................ Liabilities and Owner's Equity Liabilities Notes payable..................................................................... Accounts payable .............................................................. Total liabilities ............................................................ Owner's equity Mandy Arnold, Capital ....................................................... Total liabilities and owner's equity .......................... $ 2,000 2,350 4,350 9,250 $13,600 $ 2,500 4,600 500 6,000 $13,600 1-22 PROBLEM 1-3A (a) DIVINE COSMETICS CO. Income Statement For the Month Ended June 30, 2005 Revenues Service revenue............................................. Expenses Supplies expense.......................................... Gas and oil expense ..................................... Advertising expense ..................................... Utilities expense............................................ Total expenses ...................................... Net income............................................................. $5,500 $1,600 800 500 300 3,200 $2,300 DIVINE COSMETICS CO. Owner's Equity Statement For the Month Ended June 30, 2005 Jennifer Garner, Capital, June 1.......................... Add: Investments................................................ Net income ................................................. Less: Drawings .................................................... Jennifer Garner, Capital, June 30........................ $ $26,200 2,300 0 28,500 28,500 1,700 $26,800 DIVINE COSMETICS CO. Balance Sheet June 30, 2005 Assets Cash ........................................................................................... Accounts receivable ................................................................. Cosmetic supplies .................................................................... Equipment.................................................................................. Total assets........................................................................ $10,000 4,000 2,000 25,000 $41,000 1-23 PROBLEM 1-3A (Continued) DIVINE COSMETICS CO. Balance Sheet (Continued) June 30, 2005 Liabilities and Owner's Equity Liabilities Notes payable..................................................................... Accounts payable .............................................................. Total liabilities ............................................................ Owner's equity Jennifer Garner, Capital .................................................... Total liabilities and owner's equity .......................... $13,000 1,200 14,200 26,800 $41,000 (b) DIVINE COSMETICS CO. Income Statement For the Month Ended June 30, 2005 Revenues Service revenue ($5,500 + $800).................. Expenses Supplies expense.......................................... Gas and oil expense ($800 + $100) ............. Advertising expense..................................... Utilities expense............................................ Total expenses ...................................... Net income ............................................................ $6,300 $1,600 900 500 300 3,300 $3,000 DIVINE COSMETICS CO. Owner's Equity Statement For the Month Ended June 30, 2005 Jennifer Garner, Capital, June 1 ......................... Add: Investments ............................................... Net income ................................................. Less: Drawings .................................................... Jennifer Garner, Capital, June 30 ....................... $ $26,200 3,000 0 29,200 29,200 1,700 $27,500 1-24 (a) STINER CONSULTING Assets Liabilities Owner's Equity Date Cash Accounts Office Notes Accounts L. Stiner, + Receivable + Supplies + Equipment = Payable + Payable + Capital ($8,000) (800) $500 ($ 500) Investment Rent Expense ($ 8,000) (800) PROBLEM 1-4A 1-25 ($3,300) (2,000) $5,000 (00,000) ($1,300) + 0000 $500 + $2,400 00,000 $2,400 (50) (3,000) (700) (50) (3,000) (700) (3,300) (3,000) (500) May 1 2 3 5 9 12 15 17 20 23 26 29 30 (3,000) (500) (2,000) (5,000) Advertising Expense Service Revenue Drawings Service Revenue Salaries Expense 000(150) ($12,800) + (2,400) 00,000 (00,000) = $5,000 + ($2,400) + ( (150) ($9,600) Utilities Expense PROBLEM 1-4A (Continued) (b) STINER CONSULTING Income Statement For the Month Ended May 31, 2005 Revenues Service revenue ($3,000 + $3,300)................. Expenses Salaries expense............................................. Rent expense................................................... Utilities expense.............................................. Advertising expense....................................... Total expenses ........................................ Net income .............................................................. $6,300 $3,000 800 150 50 4,000 $2,300 (c) STINER CONSULTING Balance Sheet May 31, 2005 Assets Cash ............................................................................................ Accounts receivable.................................................................. Supplies ...................................................................................... Office equipment ....................................................................... Total assets ........................................................................ Liabilities and Owner's Equity Liabilities Notes payable..................................................................... Accounts payable .............................................................. Total liabilities ............................................................ Owner's equity L. Stiner, Capital................................................................. Total liabilities and owner's equity .......................... $ 5,000 2,400 7,400 9,600 $17,000 $12,800 1,300 500 2,400 $17,000 1-26 PROBLEM 1-5A (a) Winger Company (a) $25,000 (b) 95,000 (c) 10,000 Selara Company (d) $40,000 (e) 55,000 (f) 18,000 Delta Company (g) $129,000 (h) 80,000 (i) 408,000 Hindi Company (j) $ 50,000 (k) 220,000 (l) 465,000 (b) WINGER COMPANY Owner's Equity Statement For the Year Ended December 31, 2005 Capital, January 1 ................................................. Add: Investment.................................................. Net income ................................................. Less: Drawings .................................................... Capital, December 31............................................ $25,000 $10,000 15,000 25,000 50,000 10,000 $40,000 (c) The se quence of pr epar ing fi nanc ial statements is income statement, ow ner' s equity statement, and balance sheet. The inter relationship of the owner' s equity statement to the other financia l statem ents results fr om the fact that net income from the income statement is reported in the owner's equity statement and ending capital reported in the owner's equity statement is the am ount reported for owner' s equity on the ba lanc e sheet. 1-27 (a) MCINNES REPAIR SHOP Cash +$10,000 = +$5,000 + = + 400 9,600 9,600 250 9,350 Service Revenue + 12,450 1,000 + + +0000 = = = +0250 +0000 +0250 +0000 +$5,000 + +$250 + + + + 11,450 + 1,000 + 10,450 + 140 + 10,310 +850 + 11,160 +000,000 +$11,160 Service Revenue Utilities Expense Salaries Expense Drawings Adv. Expense = +000,000 = +$250 = +0000 = +0000 = +0000 = + 250 + 250 + 250 + + 250 + + + + + + + Rent Expense +00,000 + +$500 + + +00,000 + +00,000 + +00,000 + +00,000 + +00,000 + +00,000 + + 5,000 +00,000 + 5,000 + 5,000 + 5,000 + 5,000 + 5,000 +0000 + +0000 + +0000 + +0000 + +0000 + +$850 + + +0000 + +$500 +120 + +$730 + 850 + 500 +0000 + 500 + 500 + 500 + 500 + 500 + 500 + 5,000 +00,000 + 5,000 + 5,000 + + 10,000 +000,000 + 10,000 Investment + Accounts Receivable + Supplies + Equipment = + Accounts Payable J. McInnes, Capital 1. +$10,000 + 10,000 2. + 5,000 + 5,000 3. + 400 + 4,600 4. + 500 + 4,100 5. +000,000 + 4,100 PROBLEM 1-1B 1-28 6. +3,100 +3,100 + 7,200 7. 1,000 + 6,200 8. + 1,000 + 5,200 9. + 140 + 5,060 10. +000,000 + 5,060 11. +120 +$ 5,180 PROBLEM 1-1B (Continued) (b) Ending capital ........................................................................... Add: Drawings......................................................................... Deduct: Investments............................................................... Net income................................................................................. OR Service revenue ....................................................... Expenses Salaries.............................................................. Rent ................................................................... Advertising........................................................ Utilities .............................................................. Net income ................................................ $3,950 $1,000 400 250 140 $11,160 1,000 12,160 10,000 $ 2,160 1,790 $2,160 1-29 (a) PATRICIA PEREZ, VETERINARIAN Cash $1,700 00,000 1,700 + 0000 + 0000 + 0000 + 0000 + 600 + = 8,100 2,000 000,000 00,000 + 600 + = 8,100 2,000 + 000,000 00,000 600 + = + 8,100 2,000 +2,100 +1,300 000,000 13,700 +6,300 20,000 600 19,400 1,700 900 00,000 4,200 + 0000 + 0000 + $600 + $ 8,100 000,000 600 + 8,100 = +$10,000 = +$10,000 + 000,000 + = 00,000 4,200 00,000 $4,200 600 8,100 0000 000,000 00,000 2,000 +170 2,170 00,000 $2,170 + + + 300 16,500 170 16,330 000,000 $16,330 Utilities Exp. Salaries Exp. Rent Expense Adv. Expense Drawings Serv. Revenue 600 + = + 6,000 700 13,700 000,000 00,000 000,000 + = + 1,300 400 00,000 400 +3,800 4,200 00,000 4,200 600 6,000 700 13,700 0000 000,000 2,900 000,000 + $600 $ 6,000 $3,600 $13,700 + = + Accounts Office + Receivable + Supplies + Equipment = Notes Accounts Payable + Payable + P. Perez, Capital Bal. $ 9,000 + 1. 2,900 6,100 + 2. +1,300 7,400 + 3. 800 6,600 + 4. +2,500 PROBLEM 1-2B 1-30 9,100 + 5. 600 8,500 + 6. 2,900 5,600 + 7. 000,000 5,600 + 8. +10,000 $15,600 + PROBLEM 1-2B (Continued) (b) PATRICIA PEREZ, VETERINARIAN Income Statement For the Month Ended September 30, 2005 Revenues Service revenue................................................... Expenses Salaries expense ................................................. Rent expense ....................................................... Advertising expense ........................................... Utilities expense.................................................. Total expenses ............................................ Net income................................................................... $6,300 $1,700 900 300 170 3,070 $3,230 PATRICIA PEREZ, VETERINARIAN Owner's Equity Statement For the Month Ended September 30, 2005 P. Perez, Capital, September 1 ................................................ Add: Net income ..................................................................... Less: Drawings ........................................................................ P. Perez, Capital, September 30 .............................................. $13,700 3,230 16,930 600 $16,330 1-31 PROBLEM 1-2B (Continued) PATRICIA PEREZ, VETERINARIAN Balance Sheet September 30, 2005 Assets Cash ............................................................................................ Accounts receivable.................................................................. Supplies ...................................................................................... Office equipment ....................................................................... Total assets ........................................................................ Liabilities and Owner's Equity Liabilities Notes payable..................................................................... Accounts payable .............................................................. Total liabilities ............................................................ Owner's equity P. Perez, Capital ................................................................. Total liabilities and owner's equity .......................... $10,000 2,170 12,170 16,330 $28,500 $15,600 4,200 600 8,100 $28,500 1-32 PROBLEM 1-3B (a) SKYWARD FLYING SCHOOL Income Statement For the Month Ended May 31, 2005 Revenues Lesson revenue............................................. Expenses Fuel expense ................................................. Rent expense ................................................. Advertising expense ..................................... Insurance expense........................................ Repair expense.............................................. Total expenses ...................................... Net income............................................................. $6,600 $2,500 1,200 500 400 400 5,000 $1,600 SKYWARD FLYING SCHOOL Owner's Equity Statement For the Month Ended May 31, 2005 Jacob Bablad, Capital, May 1............................... Add: Investments................................................ Net income ................................................. Less: Drawings .................................................... Jacob Bablad, Capital, May 31 ............................ $ $45,000 1,600 0 46,600 46,600 1,700 $44,900 SKYWARD FLYING SCHOOL Balance Sheet May 31, 2005 Assets Cash ........................................................................................... Accounts receivable ................................................................. Equipment.................................................................................. Total assets........................................................................ $ 4,500 7,200 64,000 $75,700 1-33 PROBLEM 1-3B (Continued) SKYWARD FLYING SCHOOL Balance Sheet (Continued) May 31, 2005 Liabilities and Owner's Equity Liabilities Notes payable..................................................................... Accounts payable .............................................................. Total liabilities ............................................................ Owner's equity Jacob Bablad, Capital........................................................ Total liabilities and owner's equity .......................... (b) SKYWARD FLYING SCHOOL Income Statement For the Month Ended May 31, 2005 Revenues Lesson revenue ($6,600 + $900) .................. Expenses Fuel expense ($2,500 + $1,500) ................... Rent expense................................................. Advertising expense..................................... Insurance expense........................................ Repair expense ............................................. Total expenses ...................................... Net income ............................................................ $7,500 $4,000 1,200 500 400 400 6,500 $1,000 $30,000 800 30,800 44,900 $75,700 SKYWARD FLYING SCHOOL Owner's Equity Statement For the Month Ended May 31, 2005 Jacob Bablad, Capital, May 1 .............................. Add: Investments ............................................... Net income ................................................ Less: Drawings.................................................... Jacob Bablad, Capital, May 31............................ $ $45,000 1,000 0 46,000 46,000 1,700 $44,300 1-34 (a) DONAHUE DELIVERIES Assets Cash $10,000 ($2,400) (200) $150 ( 750) (750) ( 100) ( (500) ($150) ($8,000) ( Liabilities Owner's Equity Date Accounts Delivery Notes Accounts P. Donahue, + Receivable + Supplies + Van = Payable + Payable + Capital ($10,000) (500) 2,400) (200) Investment Rent Expense Service Revenue Drawings ($10,000) (2,000) (500) PROBLEM 1-4B 1-35 (00,000) ($1,650) + 0000 $150 (100) 1,500) (250) ) (100) (0000) ($150) (1,000) + ( $11,850) Gasoline Expense Service Revenue Utilities Expense Salaries Expense June 1 2 3 5 9 12 15 17 20 23 26 29 30 000,000 (00,000) + $10,000 = ($7,500) + (1,500) (500) (250) (100) 000(1,000) ($ 8,200) + PROBLEM 1-4B (Continued) (b) DONAHUE DELIVERIES Income Statement For the Month Ended June 30, 2005 Revenues Service revenue ($2,400 + $1,500).................... Expenses Salaries expense................................................ Rent expense...................................................... Utilities expense................................................. Gasoline expense .............................................. Total expenses ........................................... Net income ................................................................. $3,900 $1,000 500 250 100 1,850 $2,050 (c) DONAHUE DELIVERIES Balance Sheet June 30, 2005 Assets Cash ............................................................................................ Accounts receivable.................................................................. Supplies ...................................................................................... Delivery van................................................................................ Total assets ........................................................................ Liabilities and Owner's Equity Liabilities Notes payable..................................................................... Accounts payable .............................................................. Total liabilities ............................................................ Owner's equity P. Donahue, Capital ........................................................... Total liabilities and owner's equity .......................... $ 7,500 150 7,650 11,850 $19,500 $ 7,700 1,650 150 10,000 $19,500 1-36 PROBLEM 1-5B (a) Karma Company (a) $ 39,000 (b) 115,000 (c) 16,000 Molly Company (d) $50,000 (e) 72,000 (f) 38,000 McCain Company (g) $115,000 (h) 70,000 (i) 436,000 Bodie Company (j) $ 80,000 (k) 240,000 (l) 445,000 (b) MOLLY COMPANY Owner's Equity Statement For the Year Ended December 31, 2005 Capital, January 1................................................ Add: Investment................................................ Net income ............................................... Less: Drawings .................................................. Capital, December 31.......................................... $ 60,000 $15,000 35,000 50,000 110,000 38,000 $ 72,000 (c) The se quence of pr epar ing financia l statem ents is income statem ent, ow ner' s equity statement, and balance sheet. The inter relationship of the owner' s equity statement to the other financia l statem ents results fr om the fact that net income from the income statement is reported in the owner's equity statement and ending capital reported in the owner's equity statement is the am ount reported for owner' s equity on the ba lanc e sheet. 1-37 BYP 1-1 FINANCIAL REPORTING PROBLEM (a) PepsiC o's tota l as sets at December 28, 200 2 we re $23,4 74 milli on and at Dec embe r 29 , 20 01 were $21, 695 mill ion. (b) PepsiC o ha d $1,638 mil lion of cash and cash equiva lents at Dec embe r 28 , 20 02. (c) PepsiC o had ac counts payable (and othe r current li abil itie s) total ing $4 ,998 mil lion on Dece mber 28, 2002 and $4 ,461 mil lion on Dece mber 29 , 20 01. (d) PepsiC o reports net sa les for thre e consecutiv e ye ars as follows: 2000 2001 2002 $22,337 million $23,512 million $25,112 million (e) Fr om 2001 to 2002, PepsiCo's net incom e increased $651 mil lion from $2 ,662 mil lion to $3,3 13 milli on. 1-38 BYP 1-2 COMPARATIVE ANALYSIS PROBLEM (a) 1. 2. 3. 4. (in millions) Total assets Accounts receivable (net) Net sales Net income PepsiCo $23,474 $ 2,531 $25,112 $ 3,313 Coca-Cola $24,501 $ 2,097 $19,564 $ 3,050 (b) PepsiC o's tota l as sets were approxi mate ly equal to Coca-Col a's tota l as sets , and Pe psiC o's net sale s we re 28% greater than Coca-Col a's net sa les. In addi tion, Pe psiC o's accounts rec eivable were 20. 7% gr eate r than Coca-Cola 's and repre sent 10% of its net sale s. CocaCola's accounts re ceiv able amount to 10.7% of its net sale s. Both PepsiC o's and Coca-Col a's accounts rec eivable are at satisfactory le vels , being compar able to a 30 -day col lecti on period. PepsiCo's net income was 108.6% of Coca-Cola's. It appears that these tw o companies' ope rati ons are comparable in some ways, with Pe psi Co's ope rati ons slightly mor e pr ofitable . 1-39 BYP 1-3 INTERPRETING FINANCIAL STATEMENTS A Global Focus (a) Nestl follows the standards issued by the International Accounting Standards Committee. Tootsie Roll and Hershey Foods are U.S. companies and follow the standards issued by the Financial Accounting Standards Board. To the extent that these standards differ, then comparison may be difficult. (b) Nestl's financial reports are prepared under the historical cost convention. As noted in the chapter, the cost principle underlies U.S. accounting standards. Thus, this would assist comparison. (c) The pr i ma r y concer n he re re l ates to the monetary uni t assumption. I n the U. S., financial statements are pr epared in terms of U.S. dollar s. N es t l pr e pa r es its statements in te r ms of Sw i ss fr a nc s . Whi l e conv er s ion fr om fr a ncs to doll a rs is possible , it wi ll not ne ces sa ril y captur e the ful l econom i c situation. 1-40 BYP 1-4 EXPLORING THE WEB (a) The field is normally divided into three broad areas: auditing, financial/ tax, and management accounting. (b) The skills required in these areas: People skills, sales skills, communication skills, analytical skills, ability to synthesize, creative ability, initiative, computer skills. (c) The skills required in these areas differ as follows: Financial and Tax Medium Medium Medium Very High Low Medium Medium High Management Accounting Medium Low High High High Medium Medium Very High People skills Sales skills Communication skills Analytical skills Ability to synthesize Creative ability Initiative Computer skills Auditing Medium Medium Medium High Medium Low Medium High (d) Some key job functions in accounting: Auditing: Work in audit involves checking accounting ledgers and financial statements within corporations and government. This work is becoming increasingly computerized and can rely on sophisticated random sampling methods. Audit is the bread-and-butter work of accounting. This work can involve significant travel and allows you to really understand how money is being made in the company that you are analyzing. It's great background! Budget Analysis: Budget analysts are responsible for developing and managing an organization's financial plans. There are plentiful jobs in this area in government and private industry. Besides quantitative skills many budget analyst jobs require good people skills because of negotiations involved in the work. 1-41 BYP 1-4 (Continued) Fi nanc ial: Fi nanc ial accountants prepare financia l statem ents bas ed on general ledgers and par tici pate in important fi nanc ial decisions involving me rger s and acquisitions, benefits /ERI SA pl anni ng, and longte rm financia l pr ojections. This work can be vari ed over time. One da y you ma y be running spr eadsheets. The next day you may be visit ing a customer or supplier to set up a new account and discuss bus iness. This work requires a good unde rstanding of both ac counting and fina nc e . Ma nage ment Acc ounting: Manage ment accountants wor k in com pani es and parti cipate in de cisi ons about ca pita l budget ing and line of busine ss analy sis. Maj or funct ions inc lude cost analys is, anal ysis of ne w contra cts, and par tici pati on in efforts to control expense s effici ently. This work often invol ves the anal ysis of the structur e of organi zati ons. Is responsi bili ty to spend mone y in a company at the ri ght le vel of our organizat ion? Are goa ls and objective s to control costs be ing comm unic ated effecti vely? Hi stor ical ly, many managem ent accountants have been de rided as "be an counters. " This menta lity has undergone major change as management accountants now often work si de by si de with mark eting and fi nanc e to dev elop new bus ines s. Ta x: Ta x ac countants pr epar e corpor ate and personal income tax statem ents and for mulate tax strategie s involv ing issues such as financia l choice , how to best tr eat a me rger or acquisit ion, deferra l of ta xes, when to expense ite ms and the like. Thi s work requi res a thorough under standing of economic s and the ta x code. Incr easi ngly , la rge corporat ions are looking for per sons with both an ac counting and a lega l ba ckground in tax. A person, for example, with a JD and a CP A would be espec iall y de sirable to many firm s. (e) Junior Staff Accountant $36-63,000 1-42 BYP 1-5 GROUP DECISION CASE (a) The es timate of the $4 ,900 los s wa s ba sed on the diffe renc e between the $2 0,00 0 invested in the dr iving range and the bank bal ance of $1 5,10 0 at Mar ch 31. This is not a val id basis for determi ning income be caus e it only shows the change in cash betwe en two points in tim e. (b) The balance sheet at March 31 is as follows: CHIP-SHOT DRIVING RANGE Balance Sheet March 31, 2005 Assets Cash ........................................................................................... Caddy shack .............................................................................. Equipment.................................................................................. Total assets........................................................................ Liabilities and Owner's Equity Liabilities Accounts payable ($150 + $100)...................................... Owner's equity Lucy and Nick Lars, Capital ............................................. Total liabilities and owner's equity.......................... $ 250 15,100 6,000 800 $21,900 21,650 $21,900 A s show n in the bal ance sheet, the ow n e r ' s ca p i t a l at Mar ch 31 is $ 2 1 , 6 5 0 . The es t i m a t e of $1 , 6 5 0 of ne t inco m e is the di ffer ence between the ini t i a l investm ent of $2 0 , 0 0 0 and $2 1 , 6 5 0 . Th i s wa s not a v a l i d bas i s for det er mi ni ng ne t income beca us e changes in ow ne r ' s equi ty between tw o poi nts in ti m e ma y ha v e been caused by fa ctor s unre lated to net incom e. For exam pl e, the re may be dr aw ings and/or addi ti o nal ca pi t a l investm ents by the ow n e r ( s ) . 1-43 BYP 1-5 (Continued) (c) Actual net income for March can be determined by adding owner's drawings to the change in owner's capital during the month as shown below: Owner's capital, March 31, per balance sheet........................ Owner's capital, March 1........................................................... Increase in owner's capital....................................................... Add: Drawings ......................................................................... Net income ................................................................................. $21,650 20,000 1,650 800 $ 2,450 Alternatively, net income can be found by determining the revenues earned [described in (d) below] and subtracting expenses. (d) Revenues earned can be determined by adding expenses incurred during the month to net income. March expenses were Rent, $1,000; Wages, $400; Advertising, $750; and Utilities, $100 for a total of $2,250. Revenues earned, therefore, were $4,700 ($2,250 + $2,450). Alternatively, since all revenues are received in cash, revenues earned can be computed from an analysis of the changes in cash as follows: Beginning cash balance.......................................... Less: Cash payments Caddy shack ........................................... Golf balls and clubs............................... Rent ......................................................... Advertising ............................................. Wages...................................................... Drawings ................................................. Cash balance before revenues............................... Cash balance, March 31 .......................................... Revenues earned ..................................................... $20,000 $6,000 800 1,000 600 400 800 9,600 10,400 15,100 $ 4,700 1-44 BYP 1-6 COMMUNICATION ACTIVITY To: From: Erin Danielle Student I have received the balance sheet of New York Company as of December 31, 2005. A number of items in this balance sheet are not properly reported. They are: 1. The balance sheet should be dated as of a specific date, not for a period of time. Therefore, it should be dated "December 31, 2005." Equipment should be shown as an asset and reported below Supplies on the balance sheet. Accounts receivable should be shown as an asset and reported between Cash and Supplies on the balance sheet. Accounts payable should be shown as a liability, not an asset. The note payable is also a liability and should be reported in the liability section. Liabilities and owner's equity should be shown on the balance sheet. Cole William, Capital and Cole William, Drawing are not liabilities. Cole William, Capital and Cole William, Drawing are part of owner's equity. The Drawing account is not reported on the balance sheet but is subtracted from Cole William, Capital to arrive at owner's equity at the end of the period. 2. 3. 4. 5. 6. 1-45 BYP 1-6 (Continued) A correct balance sheet is as follows: NEW YORK COMPANY Balance Sheet December 31, 2005 Assets Cash .................................................................................................... Accounts receivable.......................................................................... Supplies.............................................................................................. Equipment .......................................................................................... Liabilities and Owner's Equity Liabilities Notes payable ............................................................................ Accounts payable ...................................................................... Total liabilities .................................................................... Owner's equity Cole William, Capital ($23,000 $2,000).................................. Total liabilities and owner's equity .................................. $10,500 8,000 18,500 21,000 $39,500 $ 9,000 6,000 2,000 22,500 $39,500 1-46 BYP 1-7 ETHICS CASE (a) The students should identify all of the stakeholders in the case; that is, all the parties that are affected, either beneficially or negatively, by the action or decision described in the case. The list of stakeholders in this case are: Jeff Hunter, interviewee. Both Baltimore firms. Great Northern College. (b) The students should identify the ethical issues, dilemmas, or other considerations pertinent to the situation described in the case. In this case the ethical issues are: Is it proper that Jeff charged both firms for the total travel costs rather than split the actual amount of $282 between the two firms? Is collecting $564 as reimbursement for total costs of $282 ethical behavior? Did Jeff deceive both firms or neither firm? (c) Each student must answer the question for himself/herself. Would you want to start your first job having deceived your employer before your first day of work? Would you be embarrassed if either firm found out that you double-charged? Would your school be embarrassed if your act was uncovered? Would you be proud to tell your professor that you collected your expenses twice? 1-47 ...
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This note was uploaded on 04/18/2008 for the course ACT 230 taught by Professor Thompson during the Spring '08 term at N. Michigan.

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