Warren SMChap01 - 1 CHAPTER 1 INTRODUCTION TO ACCOUNTING...

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Unformatted text preview: 1 CHAPTER 1 INTRODUCTION TO ACCOUNTING AND BUSINESS EYE OPENERS 1. The objective of most businesses is to earn a profit. Profit is the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide those goods or services. 2. A manufacturing business changes basic inputs into products that are then sold to customers. A service business provides services rather than products to customers. A restaurant such as Applebee’s has char- acteristics of both a manufacturing and a service business in that Applebee’s takes raw inputs such as cheese, fish, and beef and processes them into products for con- sumption by its customers. At the same time, Applebee’s provides services of wait- ing on its customers as they dine. 3. Some users of accounting information in- clude owners, managers, employees, cus- tomers, creditors, and the government. 4. Simply put, the role of accounting is to pro- vide information for managers to use in op- erating the business. In addition, accounting provides information to others to use in as- sessing the economic performance and condition of the business. 5. The corporate form allows the company to obtain large amounts of resources by issu- ing stock. For this reason, most companies that require large investments in property, plant, and equipment are organized as cor- porations. 6. No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the busi- ness. The payment of the interest of $3,000 is a personal transaction of Barry Bergan and should not be recorded by Elephant Delivery Service. 7. The land should be recorded at its cost of $115,000 to Gremlin Repair Service. This is consistent with the cost concept. 8. a. No. The offer of $900,000 and the increase in the assessed value should not be recognized in the accounting re- cords. b. Cash would increase by $900,000, land would decrease by $475,000, and owner’s (stockholders’) equity would in- crease by $425,000. 9. An account receivable is a claim against a customer for goods or services sold. An account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the re- cords of the seller is an account payable in the records of the purchaser. 10. (a); the business incurred a net loss of $115,000 ($715,000 – $600,000). 11. (b); the business realized net income of $195,100 ($687,500 – $492,400). 12. Net income or net loss Retained earnings at the end of the period Cash at the end of the period 2 PRACTICE EXERCISES PE 1–1A $81,000. Under the cost concept, the land should be recorded at the cost to Snap Repair Service....
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Warren SMChap01 - 1 CHAPTER 1 INTRODUCTION TO ACCOUNTING...

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