CHAPTER 1
Accounting in Action
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Brief
Exercises
Questions
1. Explain what accounting is.
1, 2
2. Identify the users and explain
the uses of accounting.
3, 4, 5
3. Demonstrate an understanding
of why ethics is a fundamental
business concept.
6
4. Explain the meaning of
generally accepted accounting
principles and the cost
principle.
7
5. Explain the meaning of the
going concern, monetary unit,
and economic entity
assumptions.
8, 9, 10, 11
6. State and utilize the basic
accounting equation and
explain the meaning of assets,
liabilities, and owner’s equity.
1
Problems
Set B
Problems
Set A
Exercises
1
1
1, 2
2,3
2,3
2
1, 2, 7
2, 3
2, 3
12, 13, 14,
15
3, 4, 5
3, 4, 7, 8, 9
4, 7
4, 7
7. Calculate the effect of business
transactions on the basic
accounting equation.
16, 17, 18
6, 7, 8
5, 6, 10
4, 5, 6, 8, 9, 10
4, 5, 6, 8, 9, 10
8. Understand what the four
financial statements are and
how they are prepared.
19, 20, 21,
22, 23
9, 10, 11, 12
7, 8, 9, 10,
11, 12, 13,
14, 15, 16
5, 6, 7, 8, 9,
10, 11
5, 6, 7, 8, 9,
10, 11
1-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Identify users and uses of financial statements.
Simple
10-15
2A
Discuss accounting assumptions and GAAP related to
value.
Simple
10-15
3A
Identify assumption or principle violated.
Simple
15-20
4A
Analyse transactions and calculate net income.
Simple
35-45
5A
Analyse transactions and prepare financial statements.
Simple
40-50
6A
Analyse transactions and prepare balance sheet.
Moderate
40-50
7A
Use financial statement relationships to determine missing
amounts.
Moderate
25-35
8A
Prepare financial statements.
Moderate
45-55
9A
Determine financial statement amounts, prepare a
statement of owner’s equity, and comment.
Moderate
45-55
10A
Analyse transactions and prepare balance sheet.
Moderate
35-45
11A
Prepare income statement and statement of owner’s
equity.
Simple
35-45
1B
Identify users and uses of financial statements.
Simple
10-15
2B
Discuss accounting assumptions and GAAP related to
value.
Simple
10-15
3B
Identify assumption or principle violated.
Simple
15-20
4B
Analyse transactions and calculate net income.
Simple
35-45
5B
Analyse transactions and prepare financial statements.
Simple
40-50
6B
Analyse transactions and prepare income statement and
balance sheet.
Moderate
40-50
7B
Use financial statement relationships to determine missing
amounts.
Moderate
25-35
8B
Prepare financial statements.
Moderate
45-55
9B
Determine financial statement amounts, prepare a
statement of owner’s equity, and comment.
Moderate
45-55
10B
Analyse transactions and prepare balance sheet.
Moderate
35-45
11B
Prepare income statement and statement of owner’s
equity.
Simple
35-45
1-2
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective
Knowledge
1. Explain what accounting is.
2. Identify the users and
explain the uses of
accounting.
BE1-1
Comprehension
Q1-1
Q1-2
Q1-3
Q1-4
Q1-5
Application
Analysis
Synthesis
Evaluation
P1-1A
P1-1B
Q1-6
3. Demonstrate an
understanding of why
ethics is a fundamental
business concept.
4. Explain the meaning of
generally accepted
accounting principles and
the cost principle.
E1-1
E1-2
Q1-7
P1-3A
P1-3B
P1-2A
P1-2B
P1-3A
P1-3B
P1-2A
P1-2B
5. Explain the meaning of the
going concern, monetary
unit, and economic entity
assumptions.
Q1-9
E1-7
Q1-8
Q1-10
E1-1
E1-2
Q1-11
BE1-2
6. State and utilize the basic
accounting equation and
explain the meaning of
assets, liabilities, and
owner’s equity.
Q1-12
Q1-14
E1-7
Q1-13
Q1-15
BE1-3
BE1-4
BE1-5
E1-3
E1-4
E1-8
E1-9
P1-4A
P1-7A
P1-4B
P1-7B
Q1-16
Q1-17
P1-9A
P1-10A
P1-5B
P1-6B
P1-8B
P1-9B
P1-10B
Q1-18
E1-7
P1-4A
P1-5A
P1-6A
P1-4B
E1-16
P1-8A
P1-9A
P1-10A
P1-11A
P1-5B
P1-6B
P1-8B
P1-9B
P1-10B
P1-11B
E1-13
E1-15
P1-5A
P1-6A
P1-7A
P1-7B
7. Calculate the effect of
business transactions on
the basic accounting
equation.
8. Understand what the four
financial statements are
and how they are
prepared.
E1-7
Q1-20
Q1-23
BE1-10
Broadening Your Perspective
BYP1-3
BYP1-1
BE1-6
BE1-7
BE1-8
E1-5
E1-10
P1-8A
Q1-19
Q1-21
Q1-22
BE1-9
BE1-11
BE1-12
E1-8
E1-9
E1-10
E1-11
E1-12
E1-14
BYP1-4
1-4
BYP1-2
BYP1-5
BYP1-6
ANSWERS TO QUESTIONS
1.
Yes. Accounting is the financial information system that provides
relevant financial information to every person who owns and uses
economic resources or otherwise engages in economic activity.
2.
Accounting is the process of identifying, recording, and
communicating the economic events of an organization to interested
users of the information. The first step of the accounting process is to
identify events that are (a) considered evidence of economic activity
and (b) relevant to a particular business enterprise. Once identified and
measured, the events are recorded to provide a permanent history of
the financial activities of the organization. Recording consists of
keeping a chronological diary of these measured events in an orderly
and systematic manner. The information is communicated through the
preparation and distribution of accounting reports, the most common
of which are called financial statements. A vital element in the
communication process is the accountant's ability and responsibility to
analyse and interpret the reported information.
3.
(a) Internal users are those who manage the business, and therefore
are officers and other decision makers.
(b) To assist management, accounting provides internal reports.
Examples include financial comparisons of operating alternatives,
projections of income from new sales campaigns, and forecasts of
cash needs for the next year.
4.
(a) Investors use the financial accounting information to evaluate a
company’s performance. They would look for answers to questions
such as “Is the company earning satisfactory income?”
(b) Creditors use financial accounting information to evaluate a
company’s credit risk. They look for answers to question like “Can
the company pay its debts as they come due?”
5.
Bookkeeping usually involves only the recording of economic events,
and is just one part of the entire accounting process. Accounting, on
the other hand, involves the entire accounting process, including
identification, measurement, recording, communication, and analysis.
1-5
Questions Chapter 1 (Continued)
6. Ethics is a fundamental business concept. If accountants do not have a
high ethical standard the information they produce will not have any
credibility.
7. Ouellette Travel Agency should report the land at $75,000 on its
December 31, 2002 balance sheet. An important concept that
accountants follow is the cost principle, which states that assets
should be recorded at their cost. Cost has important advantages over
other valuations: it is reliable, objective and verifiable. The answer
would not change if the value of the land declined to $65,000. In
addition, the market value of the land is not relevant when a company
is a going concern. The going concern assumption assumes the
company will continue in business indefinitely using the land, not
selling the land.
8. The monetary unit assumption requires that only transaction data
capable of being expressed in terms of money be included in the
accounting records of the economic entity. An important corollary to
the monetary unit assumption is the added assumption that the unit of
measure remains sufficiently constant over time. The assumption of a
stable monetary unit has been seriously challenged during periods of
high inflation (rising prices). In such cases, dollars of different
purchasing power are added together without any adjustment for the
effect of inflation.
9. The economic entity assumption states that economic events can be
identified with a particular unit of accountability. This assumption
requires that the activities of the entity be kept separate and distinct
from (1) the activities of its owners and (2) all other economic entities.
10. The three basic forms of business organizations are (1) proprietorship,
(2) partnership, and (3) corporation.
1-6
Questions Chapter 1 (Continued)
11. In a proprietorship, the business is owned by one person and the
equity is termed “owner’s equity.” Owner’s equity is increased by an
owner’s investments and the revenues generated by the business.
Owner’s equity is decreased by an owner’s drawings and the expenses
incurred by the business.
In the corporate form of business organization, the owners are the
shareholders and the equity is termed “shareholders’ equity.”
Shareholders’ equity is separated into two components: share capital
and retained earnings. The investments by the shareholders (owners)
are called share capital. Retained earnings represent the accumulated
earnings of the company that have not been distributed to
shareholders. Withdrawals by the shareholders decrease retained
earnings and are called “dividends.”
12. The basic accounting equation is Assets = Liabilities + Owner's Equity.
13. (a)
Assets are economic resources owned by a business. Liabilities
are creditors' claims against the assets. Put more simply,
liabilities are existing debts and obligations. Owner's equity is the
ownership claim on the assets.
(b) The items affecting owner's equity are invested capital, drawings,
revenues, and expenses.
14. The liabilities are (b) Accounts payable and (g) Salaries payable.
15. Yes, a business can enter into a transaction in which only the left side
of the accounting equation is affected. An example would be a
transaction where an increase in one asset is offset by a decrease in
another asset, such as when equipment is purchased for cash
(resulting in an increase in the equipment account which is offset by a
decrease in the cash account).
1-7
Questions Chapter 1 (Continued)
16. Business transactions are the economic events of the enterprise
recorded by accountants because they affect the basic 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 purchased on account is a business transaction,
because it affects the basic equation (+A; +L).
(c) A terminated employee is not a business transaction, as it does
not affect the basic equation.
(d) A withdrawal of cash from the business is a business transaction,
because it affects the basic equation (-A; -OE).
17. (a)
Decrease assets (cash) and decrease owner's equity (due to the
expense incurred).
(b) Increase assets (equipment) and decrease assets (cash).
(c) Increase assets (cash) and increase owner's equity (due to the
capital invested).
(d) Decrease assets (cash) and decrease liabilities (accounts payable).
18. No, this treatment is not proper. While the transaction does involve a
receipt of cash, it does not represent revenues. Revenues are the
gross increase in owner's equity resulting from business activities
entered into for the purpose of earning income. This transaction is
simply an additional investment of capital in the business, made by the
owner.
19. Yes. Net income does appear on the income statement—it is the result
of subtracting expenses from revenues. In addition, net income
appears in the statement of owner's equity—it is shown as an addition
to the beginning-of-period capital. Indirectly, the net income of a
company is also included in the balance sheet, as it is included in the
capital account which appears in the owner's equity section of the
balance sheet.
20. (a) Income statement.
(b) Balance sheet.
(c) Income statement.
(d) Balance sheet.
(e) Balance sheet and
statement of owner's equity.
(f) Balance sheet.
1-8
Questions Chapter 1 (Continued)
21. (a)
Ending capital balance.......................................................
Beginning capital balance .................................................
Net income ..........................................................................
$198,000
168,000
$ 30,000
(b) Ending capital balance.......................................................
Beginning capital balance .................................................
Increase in capital ..............................................................
Deduct: Portion of increase arising from investment.....
Net income ..........................................................................
$198,000
0168,000
30,000
18,000
$ 12,000
22. (a) Total revenues ($35,000 + $70,000) ...................................
$105,000
(b) Total expenses ($26,000 + $40,000) ..................................
$66,000
(c) Total revenues ....................................................................
Total expenses....................................................................
Net income ..........................................................................
$105,000
66,000
$ 39,000
23. The notes to the financial statements present explanatory information
such as a description of the accounting policies used and additional
detail on the information in the financial statements. The annual report
includes information on financial and non-financial information, such
as management discussion of the company’s plans.
1-9
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 1-1
5
3
2
4
1
(a) Owner
(b) Marketing managers
(c) Creditors
(d) Chief Financial Officer
(e) Canada Customs and Revenue Agency
BRIEF EXERCISE 1-2
P (a) Simple to set up, founder retains control.
PP (b) Shared control, increased skills and resources
C (c) Easier to transfer ownership and raise funds, no personal liability.
BRIEF EXERCISE 1-3
(a) $80,000 – $50,000 = $30,000 (Owner's Equity).
(b) $45,000 + $70,000 = $115,000 (Assets).
(c) $94,000 – $62,000 = $32,000 (Liabilities).
BRIEF EXERCISE 1-4
(a) $90,000 + $240,000 = $330,000 (Total assets).
(b) $170,000 – $80,000 = $90,000 (Total liabilities).
(c) $600,000 – (2/3 x $600,000) = $200,000 (Owner's equity).
1-10
BRIEF EXERCISE 1-5
(a) ($700,000 + $150,000) – ($500,000 – $80,000) = $430,000
equity).
(Owner's
(b) ($500,000 + $100,000) + ($200,000 – $70,000) = $730,000 (Assets).
(c) ($700,000 – $90,000) – ($200,000 + $120,000) = $290,000 (Liabilities).
BRIEF EXERCISE 1-6
Assets
(a)
(b)
(c)
(d)
(e)
(f)
Liabilities
Owner's Equity
+
NE
NE
NE
NE
NE
NE
+ (Revenue earned)
– (Expenses incurred)
+ (Capital)
– (Drawings)
NE
+
+
–
+
–
NE
(both + and – )
BRIEF EXERCISE 1-7
R
NA
E
(a) Received cash for services performed
(b) Paid cash to purchase equipment
(c) Paid employee salaries
BRIEF EXERCISE 1-8
E
R
E
E
R
R
E
D
(a) Cost incurred for advertising
(b) Commission earnings
(c) Insurance paid
(d) Amounts paid to employees
(e) Services performed
(f) Rent received
(g) Utilities incurred
(h) Cash distributed to owner
1-11
BRIEF EXERCISE 1-9
YUNG COMPANY
Balance Sheet
December 31, 2002
Assets
Cash ...................................................................................................
Accounts receivable..........................................................................
Total assets................................................................................
$040,500
0071,000
$111,500
Liabilities and Owner's Equity
Liabilities
Accounts payable ......................................................................
Owner's Equity
Kim Yung, Capital ......................................................................
Total liabilities and owner's equity ...................................
$080,000
0031,500
$111,500
BRIEF EXERCISE 1-10
A
L
A
A
(a) Accounts receivable
(b) Salaries payable
(c) Equipment
(d) Office supplies
OE
L
OE
(e) Capital invested
(f) Notes payable
(g) Drawings
IS
BS
IS
OE
Fees earned
Interest receivable
Service revenue
Harrison, Drawings
BRIEF EXERCISE 1-11
BS
IS
OE, BS
BS
Notes payable
Advertising expense
Harrison, Capital
Cash
1-12
BRIEF EXERCISE 1-12
BS
BS
IS
BS
BS
IS
IS
BS
BS
IS
(a) Accounts receivable
(b) Inventories
(c) Food services expense
(d) Share capital
(e) Building
(f) Stampede revenue
(g) Horse racing revenue
(h) Accounts payable and accrued liabilities
(i) Cash and short-term deposits
(j) Administration, marketing and park services expenses
1-13
SOLUTIONS TO EXERCISES
EXERCISE 1-1
3
4
2
1
(a)
Is the rationale for why capital assets are not reported at
liquidation value. [Note: Do not use the cost principle.]
(b) Indicates that personal and business record-keeping
should be separately maintained.
(c) Assumes that the dollar is the “measuring stick” used to
report on financial performance.
(d) Indicates that the market value changes after purchase
are not recorded in the accounts.
EXERCISE 1-2
(a) This is a violation of the cost principle. Land was reported at its
market value, when it should have been recorded and reported at cost.
(b) This is a violation of the economic entity assumption. An owner’s
personal transactions should be kept separate from those of the
business.
(c) This is a violation of the monetary unit assumption. An important part
of the monetary unit assumption is the stability of the monetary unit
(the dollar) over time. Inflation is considered a non-issue for
accounting purposes in Canada and is ignored.
1-14
EXERCISE 1-3
(a)
A
A
OE
L
A
L
A
L
A
OE
L
(b)
Cash
Accounts receivable
Share capital
Notes payable
Other assets
Other liabilities
Inventories
Income taxes payable
Property, plant and equipment
Retained earnings
Accounts payable
$ 108.6
1,674.4
265.4
480.2
1,064.7
1,042.1
1,396.6
28.9
1,153.1
2,996.2
584.6
Assets = Liabilities + Shareholders’ Equity
$108.6 + $1,674.4 + $1,064.7 + $1,396.6 + $1,153.1 = ($480.2 + $1,042.1
+ $28.9 + $584.6) + ($265.4 + $2,996.2)
$5,397.4 = $2,135.8 + $3,261.6
EXERCISE 1-4
Assets
(b) Cash
(c) Cleaning equipment
(d) Cleaning supplies
(e) Accounts receivable
Liabilities
(a) Accounts payable
(f) Notes payable
(g) Salaries payable
1-15
Owner's Equity
(h) Ace, Capital
EXERCISE 1-5
1.
2.
3.
4.
5.
6.
7.
8.
9.
Increase in assets (cash) and increase in owner's equity (capital).
Decrease in assets (cash) and decrease in owner's equity (rent
expense).
Increase in assets (equipment) and increase in liabilities (accounts
payable).
Increase in assets (accounts receivable) and increase in owner's equity
(service revenue).
Decrease in assets (cash) and decrease in owner's equity (drawings).
Increase in assets (cash) and decrease in assets (accounts receivable).
Increase in liabilities (accounts payable) and decrease in owner's
equity (advertising expense).
Increase in assets (equipment) and decrease in assets (cash).
Increase in assets (cash) and increase in owner's equity (service
revenue).
EXERCISE 1-6
1.
2.
3.
4.
(c)
(d)
(a)
(b)
5.
6.
7.
8.
(d)
(b)
(e)
(f)
EXERCISE 1-7
8
5
6
1
7
2
3
4
(a) An examination of financial statements to determine
whether they are presented in accordance with generally
accepted accounting principles
(b) A business enterprise that raises money by issuing shares
(c) The portion of owner’s equity that results from receiving
investments from the owner
(d) Obligations to suppliers of goods
(e) Amounts due from customers
(f) A party to whom a business owes money
(g) A financial statement that reports assets, liabilities, and
owner’s equity at a specific date
(h) A business that is owned by one individual
1-16
EXERCISE 1-8
(a) Total assets (beginning of year) .............................................
Total liabilities (beginning of year).........................................
Total owner's equity (beginning of year) ...............................
$95,000
0 80,000
$15,000
(b) Total owner's equity (end of year) ..........................................
Total owner's equity (beginning of year) ...............................
Increase in owner's equity ......................................................
$40,000
15,000
$25,000
Total revenues .........................................................................
Total expenses.........................................................................
Net income ...............................................................................
$215,000
175,000
$ 40,000
Increase in owner's equity ...................................
Less: Net income ................................................. $(40,000)
Add: Drawings .................................................... 0 24,000
Investments...........................................................
$025,000
(16,000)
$ 9,000
(c) Total assets (beginning of year) .............................................
Total owner's equity (beginning of year) ...............................
Total liabilities (beginning of year).........................................
$125,000
95,000
$ 30,000
(d) Total owner's equity (end of year) ..........................................
Total owner's equity (beginning of year) ...............................
Increase in owner's equity ......................................................
$130,000
95,000
$ 35,000
Total revenues .........................................................................
Total expenses.........................................................................
Net income ...............................................................................
$100,000
85,000
$ 15,000
Increase in owner's equity ...................................
Less: Net income ................................................. $(15,000)
Investments................................................ (25,000)
Drawings ...............................................................
$035,000
1-17
(40,000)
$ 5,000
EXERCISE 1-9
(a) Owner's equity—12/31/01 ($400,000 – $250,000)..................... $150,000
Owner's equity—1/1/01.............................................................. 0
0
Increase in owner's equity ........................................................
150,000
Less: Owner’s investment .......................................................
100,000
50,000
Add: Drawings ........................................................................ 0
15,000
Net income for 2001................................................................... $ 65,000
(b) Owner's equity—12/31/02 ($460,000 – $320,000)..................... $140,000
Owner's equity—12/31/01—see (a) .........................................
150,000
Increase (decrease) in owner's equity ...................................
(10,000)
Less: Investment .................................................................... 0 50,000
Net loss for 2002 ......................................................................
$ 60,000
(c) Owner's equity—12/31/03 ($590,000 – $400,000)...................
Owner's equity—12/31/02—see (b).........................................
Increase in owner's equity ......................................................
Less: Investment ....................................................................
Add: Drawings .......................................................................
Net income for 2003.................................................................
1-18
$190,000
0 140,000
50,000
0 10,000
40,000
20,000
$ 60,000
EXERCISE 1-10
(a) 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Owner invested $12,000 cash in the business.
Purchased office equipment for $5,000, paying $2,000 in cash with
the balance of $3,000 on account.
Paid $750 cash for supplies.
Earned $6,000 in fees, receiving $2,600 cash with the remaining
$3,400 on account.
Paid $1,500 cash on accounts payable.
Owner withdrew $2,000 cash for personal use.
Paid $650 cash for rent.
Collected $450 cash from customers on account.
Paid salaries of $2,900.
Incurred $500 of utilities expense on account.
(b) Investment..................................................................................
Fees earned................................................................................
Drawings ....................................................................................
Rent expense .............................................................................
Salaries expense........................................................................
Utilities expense ........................................................................
Increase in capital......................................................................
$12,000
6,000
(2,000)
(650)
(2,900)
(500)
$11,950
(c) Fees earned................................................................................
Rent expense .............................................................................
Salaries expense........................................................................
Utilities expense ........................................................................
Net income .................................................................................
$06,000
(650)
(2,900)
(500)
$ 1,950
1-19
EXERCISE 1-11
BOURQUE & CO.
Income Statement
For the Month Ended August 31, 2003
Revenues
Fees earned................................................................
Expenses
Salaries expense........................................................
Rent expense .............................................................
Utilities expense ........................................................
Total expenses ...................................................
Net income.........................................................................
$6,000
$2,900
650
500
4,050
$1,950
BOURQUE & CO.
Statement of Owner's Equity
For the Month Ended August 31, 2003
Bourque, Capital, August 1............................................
Add: Investments .........................................................
Net income ...........................................................
Less: Drawings..............................................................
Bourque, Capital, August 31..........................................
1-20
$00,000
$12,000
1,950
13,950
13,950
2,000
$11,950
EXERCISE 1-11 (Continued)
BOURQUE & CO.
Balance Sheet
August 31, 2003
Assets
Cash ...................................................................................................
Accounts receivable..........................................................................
Supplies .............................................................................................
Office equipment ...............................................................................
Total assets................................................................................
$ 5,250
2,950
750
5,000
$13,950
Liabilities and Owner's Equity
Liabilities
Accounts payable ......................................................................
Owner's equity
Bourque, Capital ........................................................................
Total liabilities and owner's equity ...................................
1-21
$02,000
11,950
$13,950
EXERCISE 1-12
SERG CO.
Income Statement
For the Year Ended December 31, 2002
Revenues
Service revenue ......................................................
Expenses
Salaries expense.....................................................
Rent expense ..........................................................
Utilities expense .....................................................
Advertising expense...............................................
Interest expense .....................................................
Total expenses ................................................
Net income......................................................................
$55,000
$28,000
10,400
3,100
1,800
0 1,700
45,000
$10,000
SERG CO.
Statement of Owner's Equity
For the Year Ended December 31, 2002
Serg, Capital, January 1....................................................................
Add: Net income ..............................................................................
Less: Drawings.................................................................................
Serg, Capital, December 31 ..............................................................
1-22
$48,000
10,000
58,000
5,000
$53,000
EXERCISE 1-13
OTAGO COMPANY
Balance Sheet
December 31, 2002
Assets
Cash ...................................................................................................
Accounts receivable..........................................................................
Supplies .............................................................................................
Equipment..........................................................................................
Total assets................................................................................
$20,500
10,000
8,000
46,000
$84,500
Liabilities and Owner's Equity
Liabilities
Accounts payable ......................................................................
Owner's equity
Otago, Capital ($67,500 – $3,000) .............................................
Total liabilities and owner's equity ...................................
1-23
$20,000
64,500
$84,500
EXERCISE 1-14
(a) Camping fee revenue.................................................................
General store revenue ...............................................................
Total revenue......................................................................
Expenses....................................................................................
Net income .................................................................................
$160,000
40,000
200,000
150,000
$ 50,000
(b)
DEER PARK
Balance Sheet
December 31, 2002
Assets
Cash............................................................................................
Supplies......................................................................................
Equipment ..................................................................................
Total assets ........................................................................
$020,000
2,500
115,500
$138,000
Liabilities and Owner's Equity
Liabilities
Notes payable.....................................................................
Accounts payable...............................................................
Total liabilities ............................................................
Owner's equity
Judy Cumby, Capital ($17,000 + $50,000) ........................
Total liabilities and owner's equity............................
1-24
$060,000
11,000
71,000
67,000
$138,000
EXERCISE 1-15
ATLANTIC CRUISE COMPANY
Income Statement
For the Month Ended October 31, 2003
Revenues
Ticket revenue.........................................................
Expenses
Salaries expense.....................................................
Maintenance expense.............................................
Food, fuel and other operating expenses .............
Property tax expense..............................................
Advertising expense...............................................
Total expenses ................................................
Net income......................................................................
1-25
$325,000
$142,000
80,000
20,500
10,000
3,500
256,000
$ 69,000
EXERCISE 1-16
LORRAINE RING, LAWYER
Statement of Owner's Equity
For the Year Ended January 31, 2003
Lorraine Ring, Capital, February 1 ...........................................
Add: Net income ......................................................................
Less: Drawings.........................................................................
Lorraine Ring, Capital, January 31...........................................
$023,000 (a)
155,000 (b)
178,000
80,000*
$ 98,000 (c)
Supporting Calculations
(a) Assets, February 1, 2002 ...........................................................
Liabilities, February 1, 2002 ......................................................
Capital, February 1, 2002...........................................................
$085,000
62,000
$ 23,000
(b) Legal fees earned ......................................................................
Total expenses...........................................................................
Net income .................................................................................
$360,000
205,000
$155,000
(c) Assets, January 31, 2003...........................................................
Liabilities, January 31, 2003......................................................
Capital, January 31, 2003 ..........................................................
$168,000
70,000
$ 98,000
*
This is simply the amount required to account for the difference
between $178,000 and $98,000.
1-26
SOLUTIONS TO PROBLEMS
PROBLEM 1-1A
(a)
In deciding to extend credit to a new customer, North Face would
focus its attention on the balance sheet. The terms of credit they are
extending require repayment in a short period of time. Funds to repay
the credit would come from cash on hand. The balance sheet will
show if the company has enough cash to meet its obligations.
(b)
An investor purchasing common shares of WestJet Airlines that they
intend to hold for a long period of time, 5 years, should focus on the
company’s income statement. The income statement reports the
company’s past performance in terms of revenues, expenses and net
income. This is generally regarded as a good indicator of the
company’s future performance.
(c)
In deciding whether to extend a loan, the Caisse D’I
Iconomie Base
Montréal is interested in two things—the ability of the company to
make interest payments on an annual basis for the next five years and
the ability to repay the principal amount at the end of five years. In
order to evaluate both of these factors the focus should be on the
cash flow statement. This statement provides information on the cash
the company generates from its operations on an ongoing basis. This
will be the most important factor in determining if the company will
survive and be able to repay the loan.
1-27
PROBLEM 1-2A
MEMO
Date:
To:
From:
Re:
President, Richelieu Motors
Controller
Change in Value of Company vs. Reported Income
The change in the value of the company includes items that are recognized
by the basic accounting model and items that are not.
This is primarily due to the cost principle. For accounting purposes, assets
are recorded at the cost at the time of purchase. There is no recognition of
the increase in their value. The market value of the company is not
considered relevant, if the company intends to operate as a going concern.
Additionally, the monetary unit assumption only records transactions that
are quantifiable in the accounting records.
Net income is not always indicative of what a company is worth. For
example, the cost of long-lived assets is amortized and allocated as an
expense on the income statement, reducing net income. This occurs even
while assets (e.g., building) may be appreciating in value. Other items that
may contribute to increased earnings potential are not recorded in the
accounting process. These include “intellectual property” and “knowledge
assets” of the people who work for the company. Many high-tech
companies report losses, but are worth much more to potential investors
than is indicated by their financial performance. Worth is a very subjective
concept, reflecting future expectations and other qualitative factors that
are not reported in the financial statements.
1-28
PROBLEM 1-3A
1. The cost principle has been violated. Dot.com did not purchase the
employees. It cannot use an estimated value to record them on the
balance sheet. Also, by recording the value of its people, Dot.com
Company is violating the monetary unit assumption.
They are
estimating and recording the value of the “knowledge assets” but at
this present time, there is no method to measure this value in
monetary terms.
2. Barton violated the cost principle, which states that assets are
recorded at the amount that was paid to acquire them. It does not
permit writing them up in value.
3. Wolfson violated the economic entity assumption. Assets for her
personal use should be kept separate from the company.
1-29
PROBLEM 1-4A
(a)
PEPER TRAVEL AGENCY
Cash
Apr. 1
Accounts
Office
Accounts
Merle Peper,
+ Receivable + Supplies + Equipment = Payable +
Capital
+$15,000
+$15,000
15,000
2
2
–400
–400
–2,500
000000
+
–600
+$600
11,500
11
+1,000
+
+$8,000
12,500 +
15
–200
8,000 +
0000 00
12,300 +
25
–300
8,000 +
0000 00
12,000 +
30
–2,200
8,000 +
0000 00
9,800 +
30
+8,000
$17,800 +
2,500 =
00
12,100
8
000000
+$2,500
+
8,000 +
–8,000
$
0 +
0
2,500 =
00
0
600 +
2,500 =
00 0
00
600 +
2,500 =
00 0
00
600 +
2,500 =
00 0
00
600 +
2,500 =
00 0
00
600 +
2,500 =
00 0
00
$600 +
$2,500 =
0
0
0
0
0
14,600
+$300
300 +
00 0
300 +
00 0
300 +
00 0
300 +
–300
0 +
00 0
0 +
–300
000000
14,300
+9,000
Service Revenue
23,300
–200
Drawings
23,100
000000
23,100
–2,200
20,900
000000
$
$20,900
0 +
Adv. Expense
14,300
00 0
$20,900 = $20,900
1-30
Rent Expense
14,600
=
12,100
7
15,000
=
14,600
Investment
Salaries Expense
PROBLEM 1-4A (Continued)
(b) Ending capital ............................................................................
Add: Drawings ..........................................................................
Deduct: Investments.................................................................
Net income .................................................................................
$20,900
200
21,100
15,000
$ 6,100
OR
PEPER TRAVEL AGENCY
Income Statement
For the Month Ended April 30
Service revenue .......................................................
Expenses
Salaries .............................................................
Rent ...................................................................
Advertising .......................................................
Net income..............................................................
1-31
$9,000
$2,200
400
300
2,900
$6,100
PROBLEM 1-5A
(a)
JULIE SZO, BARRISTER & SOLICITOR
Cash
Bal
Aug. 4
Accounts
Office
Notes
Accounts
+ Receivable + Supplies + Equipment = Payable + Payable +
$4,000 +
$1,500 +
$500 +
$5,000 =
$4,200 +
$ 6,800
+1,400
–1,400
0000
00000
00000
000000
5,000 =
4,200 +
5,400 +
7
–2,700
2,700 +
8
12
15
+3,000
100 +
00000
100 +
+3,400
5,700 +
3,500 +
–400
00000
5,300 +
3,500 +
500 +
0000
500 +
0000
500 +
0000
500 +
00000
–2,700
26
00000
00000
+6,400 Fees Earned
5,000 =
1,500 +
13,200
+600
000000
2,100 +
13,200
+1,000
6,000 =
29
6,800
–2,500 Salaries Expense
–900 Rent Expense
00000
1,550 +
3,500 +
–550
00000
1,000 +
3,500 +
+2,000
000000
1,500 +
–2,500
-350
6,800
5,000 =
-900
20
Julie Szo,
Capital
00000
3,000 +
3,500 +
00000
00000
$3,000 +
$3,500 +
0000
500 +
0000
500 +
0000
500 +
00000
00000
–350 Advertising Exp.
6,000 =
2,100 +
9,450
00000
00000
–550 Drawings
6,000 =
2,100 +
8,900
00000
+$2,000
00000
000000
6,000 =
2,000 +
2,100 +
8,900
0000
00000
00000
+250
–250 Utilities Expense
$500 +
$6,000 =
$2,000 +
$13,000 = $13,000
1-33
$2,350 +
$ 8,650
PROBLEM 1-5A (Continued)
(b)
JULIE SZO, BARRISTER & SOLICITOR
Income Statement
For the Month Ended August 31, 2003
Revenues
Fees earned ...........................................................
Expenses
Salaries expense ...................................................
Rent expense.........................................................
Advertising expense .............................................
Utilities expense....................................................
Total expenses...............................................
$6,400
$2,500
900
350
250
Net income ....................................................................
4,000
$2,400
JULIE SZO, BARRISTER & SOLICITOR
Statement of Owner's Equity
For the Month Ended August 31, 2003
Julie Szo, Capital, August 1 .........................................................
Add: Net income .........................................................................
Less: Drawings ............................................................................
Julie Szo, Capital, August 31 .......................................................
1-34
$6,800
2,400
9,200
550
$8,650
PROBLEM 1-5A (Continued)
JULIE SZO, BARRISTER & SOLICITOR
Balance Sheet
August 31, 2003
Assets
Cash............................................................................................
Accounts receivable ..................................................................
Supplies on hand.......................................................................
Office equipment .......................................................................
$03,000
3,500
500
6,000
Total assets ........................................................................
$13,000
Liabilities and Owner's Equity
Liabilities
Notes payable.....................................................................
Accounts payable...............................................................
Total liabilities ............................................................
$02,000
2,350
4,350
Owner's Equity
Julie Szo, Capital................................................................
8,650
Total liabilities and owner's equity............................
$13,000
1-35
PROBLEM 1-6A
(a)
JEANNIE LETOURNEAU, LAWYER
Transaction
Cash
+ Damage + Office + Computer + Office = Notes + Accounts + LeTourneau,
Deposit
Supplies Equipment Furniture
Payable
Payable
Capital
Mar. 10 +$75,000
16
-2,000
25
-3,000
+$75,000
+$2,000
+$7,000
27
31
+1,500
+$1,500
-5,000
$65,000
Note:
+$4,000
+5,000
$2,000
$1,500
$7,000
$5,000 = $4,000
$80,500 = $80,500
$1,500
$75,000
Items 1 (March 4), 2 (March 7), and 4 (March 14) are not relevant to the business entity. They
are personal transactions.
Item 6 (March 20) is not recorded, because the transaction has not yet been completed. There
is no expense, nor liability, until he begins working.
1-36
PROBLEM 1-6A (Continued)
(b)
JEANNIE LETOURNEAU, LAWYER
Balance Sheet
March 31, 2003
Assets
Cash............................................................................................
Damage Deposit (Receivable)...................................................
Office Supplies ..........................................................................
Computer Equipment ................................................................
Office Furniture..........................................................................
$65,000
2,000
1,500
7,000
5,000
Total assets ........................................................................
$80,500
Liabilities and Owner's Equity
Note Payable ...............................................................................
Accounts Payable.......................................................................
Total Liabilities ...................................................................
$ 4,000
1,500
5,500
Owner’s Equity
Jeannie LeTourneau, Capital .............................................
75,000
Total liabilities and owner's equity .................................
$80,500
1-37
PROBLEM 1-7A
(a) Using the balance sheet equation:
Assets = Liabilities + Owner’s Equity
$1,235,000 = Liabilities + $250,000
Liabilities = $985,000
(b) Using the income statement equation:
Revenues – Expenses = Net Income
$749,000 – Expenses = $59,000
Expenses = $690,000
(c) Using the statement of owner's equity equation:
$250,000
+ 23,000
+ 59,000
- 64,000
$268,000
Beginning capital
Additional investments
Net income
Drawn by owner
Ending capital
OR using the balance sheet equation:
Assets = Liabilities + Owner’s Equity
$1,208,000 [from part (d)] = $940,000 + Owner's Equity
Owner's Equity = $268,000
(d) Using the balance sheet equation:
Assets = Liabilities + Owner’s Equity
Assets = $940,000 + ($250,000 + $23,000 – $64,000 + $59,000)
Assets = $1,208,000
1-38
PROBLEM 1-8A
(a)
NATURAL COSMETICS CO.
Income Statement
For the Month Ended June 30, 2003
Revenues
Service revenue..................................................
Expenses
Supplies expense...............................................
Gas and oil expense ..........................................
Advertising expense ..........................................
Utilities expense.................................................
Total expenses............................................
$6,500
$1,200
800
500
300
2,800
Net income .................................................................
$3,700
NATURAL COSMETICS CO.
Statement of Owner's Equity
For the Month Ended June 30, 2003
Ann Okah, Capital, June 1.........................................
Add: Investments .....................................................
Net income.......................................................
$00,000
$27,200
3,700
Less: Drawings..........................................................
30,900
30,900
1,700
Ann Okah, Capital, June 30.......................................
$29,200
1-39
PROBLEM 1-8A (Continued)
(a) (Continued)
NATURAL COSMETICS CO.
Balance Sheet
June 30, 2003
Assets
Cash............................................................................................
Accounts receivable ..................................................................
Supplies on hand.......................................................................
Equipment ..................................................................................
$12,000
4,000
2,400
25,000
Total assets ........................................................................
$43,400
Liabilities and Owner's Equity
Liabilities
Notes payable.....................................................................
Accounts payable...............................................................
Total liabilities ............................................................
$13,000
1,200
14,200
Owner's equity
Ann Okah, Capital ..............................................................
29,200
Total liabilities and owner's equity............................
$43,400
1-40
PROBLEM 1-8A (Continued)
(b) 1.
The addition of $800 fees would increase revenue (service
revenue) and net income $800 in the income statement. In the
balance sheet, assets (accounts receivable) and the owner’s
capital would also be increased by $800.
2.
An additional $100 of gas and oil expense would increase
expenses (gas and oil expense) and decrease net income $100 in
the income statement. In the balance sheet, liabilities (accounts
payable) would increase and owner’s capital would decrease by
$100.
The revised financial statements, incorporating these two changes,
follow:
NATURAL COSMETICS CO.
Income Statement
For the Month Ended June 30, 2003
Revenues
Service revenue ($6,500 + $800) .....................
Expenses
Supplies expense.............................................
Gas and oil expense ($800 + $100) .................
Advertising expense ........................................
Utilities expense...............................................
Total expenses..........................................
Net income ...............................................................
1-41
$7,300
$1,200
900
500
300
2,900
$4,400
PROBLEM 1-8A (Continued)
NATURAL COSMETICS CO.
Statement of Owner's Equity
For the Month Ended June 30, 2003
Ann Okah, Capital, June 1.......................................
Add: Investments...................................................
Net income ....................................................
$00,000
$27,200
4,400
Deduct: Drawings ..................................................
Ann Okah, Capital, June 30.....................................
31,600
31,600
1,700
$29,900
NATURAL COSMETICS CO.
Balance Sheet
June 30, 2003
Assets
Cash............................................................................................
Accounts receivable ($4,000 + $800)........................................
Supplies on hand.......................................................................
Equipment ..................................................................................
$12,000
4,800
2,400
25,000
Total assets ........................................................................
$44,200
Liabilities and Owner's Equity
Liabilities
Notes payable.....................................................................
Accounts payable ($1,200 + $100).....................................
Total liabilities ............................................................
Owner's equity
Ann Okah, Capital ..............................................................
Total liabilities and owner's equity ...................................
1-42
$13,000
1,300
14,300
29,900
$44,200
PROBLEM 1-9A
(a)
Baker Lake
Company
Come by
Chance
Company
Georgian Bay
Company
Edmonton
Company
(a) $75,000 $50,000 =
$25,000
(d) $90,000 $60,000 =
$30,000
(g) $75,000 +
$45,000 =
$120,000
(j) $150,000 $90,000 =
$60,000
(b) $55,000 +
$45,000
= $100,000
(e) $120,000 $62,000 =
$58,000
(h) $180,000 $110,000 =
$70,000
(k) $80,000 +
$140,000
= $220,000
(c) $25,000 + X
- $10,000 +
$350,000 $335,000 =
$45,000;
X = $15,000
(f) $60,000 +
$8,000 - X +
$400,000 $385,000 =
$58,000;
X = $25,000
(i) $45,000 +
$10,000 $12,000 + X $360,000 =
$110,000;
X = $427,000
(l) $90,000 +
$15,000 $10,000 +
$500,000 - X =
$140,000;
X = $455,000
(b)
BAKER LAKE COMPANY
Statement of Owner's Equity
For the Year Ended December 31, 2002
Capital, January 1 .................................................
Add: Investments.................................................
Net income ..................................................
Less: Drawings ....................................................
Capital, December 31 ...........................................
1-43
$25,000
$15,000
15,000
30,000
55,000
10,000
$45,000
PROBLEM 1-9A (Continued)
(c)
MEMO
Date:
To:
From:
Re:
Student
Preparation and Interrelationship of Financial Statements
The sequence of preparing financial statements is (1) income
statement, (2) statement of owner's equity, and (3) balance sheet. It
should be noted that the balance sheet is usually presented first, even
though it is prepared last.
The interrelationship of the statement of owner's equity to the other
financial statements results from the fact that net income from the
income statement is reported in the statement of owner's equity. The
ending capital calculated in the statement of owner's equity is the
amount reported for owner's equity on the balance sheet.
1-44
PROBLEM 1-10A
LOONIE BIN COIN SHOP
Balance Sheet
April 30, 2003
Assets
Cash........................................................................................ (a)
Accounts receivable ..................................................................
Office and store supplies ..........................................................
Land............................................................................................
Office equipment ...................................................................(b)
Store furnishings .......................................................................
Building ......................................................................................
$ 6,000
7,000
4,000
36,000
69,000
48,000
110,000
Total assets ........................................................................
$280,000
Liabilities and Owner's Equity
Liabilities
Notes payable ................................................................ (c)
Accounts payable ..........................................................(d)
Long-term debt payable ................................................ (e)
$ 36,000
007,000
100,000
Total liabilities ....................................................................
143,000
Owner's equity:
Capital .................................................................................
137,000
Total liabilities and owner's equity ...................................
$280,000
1-45
PROBLEM 1-10A (CONTINUED)
Supporting calculations:
(a) $12,000 – (1) $3,000 – (2) $1,000 + (4) $5,000 – (5) $7,000 = $6,000
(b) $59,000 + (2) $15,000 – (4) $5,000 = $69,000
(c) $22,000 + (2) $14,000 = $36,000
(d) $10,000 – (1) $3,000 = $7,000
(e) $107,000 – (5) $7,000 = $100,000
Note the following points:
•
Item 3 is not recorded, as there was no transaction.
•
The capital balance is unchanged because
transactions affecting owner's equity on April 30.
1-46
there
were
no
PROBLEM 1-11A
(a)
MULTI-MEDIA CONSULTING CO.
Income Statement
For the Month Ended March 31, 2003
Revenues
Fees earned ...............................................
Expenses
Salaries expense ....................................... $1,900 (B)
Advertising expense ................................. 1,400 (C)
Rent expense.............................................
750
Utilities expense........................................
400 (D)
Property tax expense ................................
150
Repair expense..........................................
150 (E)
Total expenses...................................
Net income ........................................................
(A)
(B)
(C)
(D)
(E)
$9,650 (A)
4,750
$4,900
(6) $3,250 + (12) $2,100 + (20) $3,200 + (29) $1,100 = $9,650
(11) $1,000 + (32) $900 = $1,900
(8) $400 + (24) $1,000 = $1,400
(15) $250 + (36) $150 = $400
(22) $200 – $50 = $150
1-47
PROBLEM 1-11A (CONTINUED)
(b)
MULTI-MEDIA CONSULTING CO.
Statement of Owner's Equity
For the Month Ended March 31, 2003
M. Carrier, Capital, March 1 ..................................
Add: Investments..................................................
Net income ...................................................
Less: Drawings *...................................................
M. Carrier, Capital, March 31 ................................
* (18) $500 + (22) $50 + (27) $300 + (34) $50 = $900
1-48
$00,000
$15,000
4,900
19,900
19,900
900
$19,000
PROBLEM 1-1B
(a)
In making an investment, the Ontario investor is becoming a partial
owner of the company. In this case the investment will be held for
three years. The information that will be most relevant to him will
be on the income statement. The income statement reports the
past performance of the company in terms of its revenue,
expenses and net income. This is the best indicator of the
company’s future potential.
(b) In deciding to extend credit to a new customer Bombardier would
focus its attention on the balance sheet. The terms of credit they
are extending require repayment in a short period of time. Funds to
repay the credit would come from cash on hand. The balance sheet
will show if the company has enough cash to meet its obligations.
(c)
In deciding whether to extend a loan, the Laurentian Bank is
interested in two things, the ability of the company to make interest
payments on an annual basis for the next five years and the ability
to repay the principal amount at the end of five years. In order to
evaluate both of these factors the focus should be on the cash flow
statement. This statement provides information on the cash the
company generates from its operating activities on an ongoing
basis. This will be the most important factor in determining if the
company will survive and be able to repay the loan.
1-49
PROBLEM 1-2B
MEMO
Date:
To:
From:
Re:
President, Montiero Company
Controller
Change in Value of Company vs. Reported Income
The change in the value of the company includes items that are
recognized by the basic accounting model and items that are not. This
is primarily due to the cost principle. For accounting purposes, assets
are recorded at the cost at the time of purchase. There is no recognition
of the increase in their value. For example the company’s land and
buildings may be increasing in value, but this increase is not
recognized on the company’s books. In defence of the cost principle, it
creates information that is reliable and verifiable, thus increasing the
credibility of the financial statements. In addition, the market value of
the company is not relevant, if the company intends to operate as a
going concern.
1-50
PROBLEM 1-3B
1. Recording the impact of the President’s death violated the cost
principle and monetary unit assumption. Although the President
may be very important to the company, his appointment (and death)
did not trigger an accounting transaction. Disclosure of the
president’s death could be made in the company’s report but it
should not be recorded in the accounting records or on the
financial statements.
2. This violates the economic entity assumption. The portion of the
asset and expense relating to Paradis’s family should not be
recorded in the company’s records. It would be best to treat this as
a personal asset. When it is used for business purposes, the
Paradis family might consider renting to the company, rather than
having the company own it.
3. Recording the equipment at $300,000 violated the cost principle,
which states that assets are recorded at the amount that was paid
to acquire them. It does not permit writing them up in value.
1-51
PROBLEM 1-4B
(a)
KUMAR’S REPAIR SHOP
Cash
May 1
Accounts
Accounts
+ Receivable + Supplies + Equipment = Payable +
+$15,000
+$15,000
15,000
2
–5,000
–400
+
000000
+$500
9,600
9
+
+4,100
+
–500
+
–1,000
+
–140
000000
12,060 +
30
+120
$12,180 +
500 +
0000
12,060 +
28
500 +
0000
12,200 +
23
500 +
0000
13,200
15
500 +
0000
13,700
15
5,000 =
15,000
00000
9,600
7
000000
+$5,000
+
+
+$400
400 +
500 +
0000
500 +
-400
5,000 =
00000
5,000 =
00000
5,000 =
00000
5,000 =
00000
5,000 =
00000
5,000 =
00000
5,000 =
Rent Expense
14,600
+$500
500 +
0000
500 +
0000
500 +
0000
500 +
0000
500 +
0000
500 +
000000
14,600
+4,100
–500
Drawings
18,200
-1,000
Salaries Expense
17,200
–140
Utilities Expense
17,060
+400
17,460
0000
00000
0000
000000
$280 +
$500 +
$5,000 =
$500 +
$17,460
$17,960 = $17,960
Service Revenue
18,700
-120
1-52
Investment
15,000
=
10,000
5
U. Kumar,
Capital
Service Revenue
PROBLEM 1-4B (Continued)
(b) Ending capital ............................................................................
Add: Drawings .........................................................................
Deduct: Investments................................................................
Net income .................................................................................
$17,460
500
17,960
15,000
$ 2,960
OR
KUMAR’S REPAIR SHOP
Income Statement
For the Month Ended May 31
Service revenue .......................................................
Expenses
Salaries .............................................................
Rent ...................................................................
Utilities ..............................................................
Net income..............................................................
1-53
$4,500
$1,000
400
140
1,540
$2,960
PROBLEM 1-5B
(a)
SMITH VETERINARY CLINIC
Cash
Bal
Sept. 1
Accounts
Office
Notes
Accounts
+ Receivable + Supplies + Equipment = Payable + Payable +
$9,000 +
$1,700 +
$600 +
$6,000 =
$3,600 +
$13,700
-3,100
00000
0000
00000
-3,100
000000
5,900 +
4
+1,300
7,200 +
8
-800
6,400 +
17
19
30
-1,300
400 +
00000
400 +
3,400
8,900 +
3,800 +
-600
00000
3,800 +
+7,000
00000
15,300 +
3,800 +
600 +
0000
600 +
0000
600 +
0000
600 +
0000
600 +
0000
600 +
6,000 =
500 +
00000
00000
6,000 =
500 +
13,700
000000
13,700
2,100
1,300
000000
8,100 =
1,800 +
13,700
00000
00000
8,100 =
1,800 +
00000
00000
8,100 =
1,800 +
19,000
00000
000000
1,800 +
19,000
00000
8,100 =
+$7,000
7,000 +
5,900 Fees Earned
19,600
–600 Drawings
-700
-700 Salaries Expense
-900
-900 Rent Expense
-300
30
1,700 +
2,500
8,300 +
25
B. Smith,
Capital
00000
0000
00000
00000
00000
8,100 =
7,000 +
1,800 +
+170
13,400 +
3,800 +
000000
00000
0000
00000
00000
$13,400 +
$3,800 +
$600 +
$8,100 =
$7,000 +
600 +
$25,900 = $25,900
1-54
$1,970 +
–300 Advertising Exp
17,100
-170 Utilities Expense
$16,930
PROBLEM 1-5B (Continued)
(b)
SMITH VETERINARY CLINIC
Income Statement
For the Month Ended September 30, 2003
Revenues
Fees earned ........................................................................
$5,900
Expenses
Salaries expense ...............................................
$700
Rent expense.....................................................
900
Advertising expense .........................................
300
Utilities expense................................................
170
Total expenses............................................................
2,070
Net income .................................................................................
$3,830
SMITH VETERINARY CLINIC
Statement of Owner's Equity
For the Month Ended September 30, 2003
Bruce Smith, Capital, September 1 ..........................................
Add: Net income .......................................................................
Less: Drawings .........................................................................
Bruce Smith, Capital, September 30 ........................................
1-55
$13,700
3,830
17,530
600
$16,930
PROBLEM 1-5B (Continued)
(b) (Continued)
SMITH VETERINARY CLINIC
Balance Sheet
September 30, 2003
Assets
Cash............................................................................................
Accounts receivable ..................................................................
Supplies on hand.......................................................................
Office equipment .......................................................................
$13,400
3,800
600
8,100
Total assets ........................................................................
$25,900
Liabilities and Owner's Equity
Liabilities
Notes payable.....................................................................
Accounts payable...............................................................
Total liabilities ............................................................
$07,000
1,970
8,970
Owner's Equity
Bruce Smith, Capital ........................................................ 0
16,930
Total liabilities and owner's equity............................
$25,900
1-56
PROBLEM 1-6B
(a)
BELL CONSULTING
Trans-
Cash
+
action
Accounts
+
Receivable
May 1 +$4,000
2
-800
3
5
-50
9 +1,000
12
-700
15
17 -2,500
20
-500
23 +2,000
26 +5,000
29 -2,400
30
-150
$4,900 +
Office
+
Supplies
Office
=
Equipment
Notes
+
Payable
Accounts
+
Payable
Bell,
Capital
+$4,000
-800
+$500
+$500
-50
+1,000
-700
+3,000
-2,500
+$3,000
-500
-2,000
+$5,000
+$2,400
-150
$1,000 +
$500 +
$2,400 =
$5,000 +
$8,800 = $8,800
1-57
$ 0 +
$3,800
PROBLEM 1-6B (Continued)
(b)
BELL CONSULTING
Income Statement
For the Month Ended May 31, 2003
Revenues
Fees earned ........................................................................
$4,000
Expenses
Salaries expense ...............................................
$ 2,500
Rent expense.....................................................
800
Advertising expense .........................................
50
Utilities expense................................................
150
Total expenses............................................................
3,500
Net income .................................................................................
$ 500
1-58
PROBLEM 1-6B (Continued)
(c)
BELL CONSULTING
Balance Sheet
May 31, 2003
Assets
Cash............................................................................................
Accounts receivable ..................................................................
Office supplies ...........................................................................
Office equipment .......................................................................
$4,900
1,000
500
2,400
Total assets ........................................................................
$8,800
Liabilities and Owner's Equity
Liabilities
Note payable .......................................................................
Owner’s equity
Jessica Bell, Capital ...........................................................
Total liabilities and owner's equity .................................
$5,000
3,800*
$8,800
*Capital = $4,000 investment – $700 withdrawal + $500 net income = $3,800
1-59
PROBLEM 1-7B
(a) Using the balance sheet equation:
Assets = Liabilities + Owner’s Equity
$1,265,000 = Liabilities + $245,000
Liabilities = $1,020,000
(b) Using the income statement equation:
Revenues – Expenses = Net Income
$687,000 – Expenses = $56,000
Expenses = $631,000
(c) Using the statement of owner's equity equation:
$245,000
+ 30,000
+ 56,000
- 74,000
$257,000
Beginning capital
Investments
Net income
Drawn by owner
Ending capital
OR using the balance sheet equation:
Assets = Liabilities + Owner’s Equity
$1,167,000 [from part (d)] = $910,000 + Owner's Equity
Owner's Equity = $257,000
(d) Using the balance sheet equation:
Assets = Liabilities + Owner’s Equity
Assets =$ 910,000 + $257,000
Assets = $1,167,000
1-60
PROBLEM 1-8B
(a)
SPECIALTY COSMETICS CO.
Income Statement
For the Month Ended September 30, 2003
Revenues
Service revenue..................................................
$5,900
Expenses
Supplies expense...............................................
Advertising expense ..........................................
Utilities expense.................................................
Total expenses............................................
$1,500
600
1,300
3,400
Net income .................................................................
$2,500
SPECIALTY COSMETICS CO.
Statement of Owner's Equity
For the Month Ended September 30, 2003
Emily Jackson, Capital, September 1.......................
Add:
Investments ....................................................
Net income .....................................................
$00,000
$20,000
2,500
22,500
22,500
Less: Drawings.........................................................
2,600
Emily Jackson, Capital, September 30.....................
$19,900
1-61
PROBLEM 1-8B (Continued)
(a) (Continued)
SPECIALTY COSMETICS CO.
Balance Sheet
September 30, 2003
Assets
Cash............................................................................................
Accounts receivable ..................................................................
Supplies on hand.......................................................................
Equipment ..................................................................................
$ 9,000
5,000
2,700
20,000
Total assets ........................................................................
$36,700
Liabilities and Owner's Equity
Liabilities
Notes payable.....................................................................
Accounts payable...............................................................
Total liabilities ............................................................
$15,000
1,800
16,800
Owner's equity
Emily Jackson, Capital ......................................................
19,900
Total liabilities and owner's equity............................
$36,700
1-62
PROBLEM 1-8B (Continued)
(b) 1.
2.
The addition of $900 fees would increase revenue (service
revenue) and net income $900 in the income statement. In the
balance sheet, assets (accounts receivable) and the owner’s
capital would also be increased by $900.
An additional $300 of gas and oil expense would increase
expenses (gas and oil expense) and decrease net income $300 in
the income statement. In the balance sheet, liabilities (accounts
payable) would increase and owner’s capital would decrease by
$300.
The revised financial statements, incorporating these two changes,
follow:
SPECIALTY COSMETICS CO.
Income Statement
For the Month Ended September 30, 2003
Revenues
Service revenue ($5,900 + $900) .......................
Expenses
Supplies expense...............................................
Advertising expense ..........................................
Gas and oil expense ..........................................
Utilities expense.................................................
Total expenses............................................
Net income .................................................................
1-63
$6,800
$1,500
600
300
1,300
3,700
$3,100
PROBLEM 1-8B (Continued)
(b) (Continued)
SPECIALTY COSMETICS CO.
Statement of Owner's Equity
For the Month Ended September 30, 2003
Emily Jackson, Capital, September 1.......................
Add: Investments ....................................................
Net income .....................................................
$00,000
$20,000
3,100
Less: Drawings.........................................................
Emily Jackson, Capital, September 30.....................
23,100
23,100
2,600
$20,500
SPECIALTY COSMETICS CO.
Balance Sheet
September 30, 2003
Assets
Cash............................................................................................
Accounts receivable ($5,000 + $900)........................................
Supplies on hand.......................................................................
Equipment ..................................................................................
Total assets ........................................................................
$ 9,000
5,900
2,700
20,000
$37,600
Liabilities and Owner's Equity
Liabilities
Notes payable.....................................................................
Accounts payable ($1,800 + $300).....................................
Total liabilities ............................................................
$15,000
2,100
17,100
Owner's equity
Emily Jackson, Capital ......................................................
Total liabilities and owner's equity............................
20,500
$37,600
1-64
PROBLEM 1-9B
(a)
Montreal
Company
Calgary
Company
Edmonton
Company
Vancouver
Company
(a) $80,000 $50,000 =
$30,000
(d) $110,000 $60,000 =
$50,000
(g) $75,000 +
$50,000 =
$125,000
(j) $170,000 $90,000 =
$80,000
(b) $55,000 +
$58,000
= $113,000
(e) $145,000 $65,000 =
$80,000
(h) $200,000 $130,000 =
$70,000
(k) $80,000 +
$180,000
= $260,000
(c) $30,000 + X
- $25,000 +
$350,000 $320,000 =
$58,000;
X = $23,000
(f) $60,000 +
$15,000 - X +
$420,000 $385,000 =
$80,000;
X = $30,000
(i) $50,000 +
$10,000 $14,000 + X $350,000 =
$130,000;
X = $434,000
(l) $90,000 +
$15,000 $20,000 +
$520,000 - X =
$180,000;
X = $425,000
(b)
CALGARY COMPANY
Statement of Owner's Equity
For the Year Ended December 31, 2002
Capital, January 1
Add: Investments
Net income
$60,000
$15,000
35,000
Less: Drawings
Capital, December 31
1-65
50,000
110,000
30,000
$80,000
PROBLEM 1-9B (Continued)
(c)
MEMO
Date:
To:
From:
Re:
Student
Preparation and Interrelationship of Financial Statements
The sequence of preparing financial statements is (1) income statement, (2)
statement of owner's equity, and (3) balance sheet. It should be noted that
the balance sheet is usually presented first, even though it is prepared last.
The interrelationship of the statement of owner's equity to the other
financial statements results from the fact that net income from the income
statement is reported in the statement of owner's equity. The ending
capital calculated in the statement of owner's equity is the amount reported
for owner's equity on the balance sheet.
1-66
PROBLEM 1-10B
FRANC D’OR COIN SHOP
Balance Sheet
June 30, 2003
Assets
Cash........................................................................................ (a)
Accounts receivable ..................................................................
Office and store supplies ..........................................................
Inventory.....................................................................................
Land............................................................................................
Office equipment ...................................................................(b)
Store equipment .................................................................... (c)
Building ......................................................................................
$ 4,000
6,000
6,000
110,000
40,000
17,000
19,500
120,000
Total assets ........................................................................
$322,500
Liabilities and Owner's Equity
Liabilities
Notes payable ................................................................(d) $ 23,500
Accounts payable .......................................................... (e)
007,000
Long-term debt payable .................................................(f)
103,000
Total liabilities ............................................................
133,500
Owner's equity
Capital .................................................................................
189,000
Total liabilities and owner's equity............................
$322,500
1-67
PROBLEM 1-10B (Continued)
Supporting calculations:
(a) $13,000 – (1) $4000 – (2) $1,500 + (4) $4,500 – (5) $8,000 = $4,000
(b) $12,000 + (2) $5,000 = $17,000
(c)
$24,000 – (4) $4,500 = $19,500
(d) $20,000 + (2) $3,500 = $23,500
(e) $11,000 – (1) $4,000 = $7,000
(f)
$111,000 – (5) $8,000 = $103,000
Note the following points:
•
Item 3 is not recorded, as there was no transaction.
•
The capital balance is unchanged because
transactions affecting owner's equity on June 30.
1-68
there
were
no
PROBLEM 1-11B
(a)
NASH CONSULTING CO.
Income Statement
For the Month Ended January 31, 2003
Revenues
Fees earned ...............................................
Expenses
Salaries expense .......................................
Advertising expense .................................
Rent expense.............................................
Utilities expense........................................
Property tax expense ................................
Repair expense..........................................
Total expenses...................................
Net income ........................................................
(A)
(B)
(C)
(D)
(E)
$10,950 (A)
$1,700
1,550
800
480
150
250
(B)
(C)
(D)
(E)
4,930
$6,020
(6) $3,750 + (12) $2,300 + (20) $3,700 + (29) $1,200 = $10,950
(11) $1,200 + (32) $1,000 – (32) $500 = $1,700
(8) $450 + (24) $1,100 = $1,550
(15) $300 + (36) $180 = $480
$250 – (34) $100 = $150
1-69
PROBLEM 1-11B (Continued)
(b)
NASH CONSULTING CO.
Statement of Owner's Equity
For the Month Ended January 31, 2003
T. Nash, Capital, January 1 ...................................
Add: Investment...................................................
Net income ...................................................
$00,000
$12,000
6,020
Less: Drawings ....................................................
T. Nash, Capital, January 31 .................................
* (18) $600 + (27) $400 + (32) $500 + (34) $100 = $1,600
1-70
18,020
18,020
*1,600
$16,420
BYP 1-1 FINANCIAL REPORTING PROBLEM
(a)
The financial statements themselves take up three pages (14-16).
There are 15 notes to the financial statements, which occupy ten
pages (17-26).
(b) Ordinarily the fiscal year-end for the Second Cup is the last Saturday in
June. This is disclosed in Note 1 (page 18). In 1999 the fiscal year was
extended to Wednesday, June 30 in order to reflect the disposition of
the Company’s investment in Coffee People, Inc.
(c) The auditors are PricewaterhouseCoopers, Chartered Accountants.
(See page 13.)
(d) Total assets as at
June 24, 2000:
June 30, 1999:
$18,565,000
$49,584,000
(e) $11,067,000 (From a loss of $10,095,000 to net earnings of $972,000.)
(f)
June 24, 2000: $1,446,000
June 30, 1999: $ 822,000
(g) The percentage change in systemwide sales from 1996-2000 was a
negative 25.43%.
$159,198,000 – $213,488,000 = (25.43%)
$213,488,000
1-71
BYP 1-2 INTERPRETING FINANCIAL STATEMENTS
(a) For a software company such as Corel, the most important economic
resources are the knowledge, skills, and creativity of its people. These
human resources are not reflected in the balance sheet.
(b) The balance sheet reflects only the results of business transactions,
based upon the cost principle. It does not attempt to show what the
company's assets are currently worth.
In the case of a company which has just recently been formed, the
accounting (or book) values recorded on the balance sheet may be
approximately the same as the economic (or market) values. For
companies which have been in existence for some time, however,
there may be a great difference between the historical amounts
recorded in the accounting system and the current values of these
items, in economic terms.
(c) There are several reasons why Corel might prepare its financial
statements in US dollars. It might be done for regulatory reasons, in
order to be listed on American stock exchanges. It might also be done
because the company does a great deal of business in the US and
wants to be compared accurately with its American competitors.
Another possible reason is that Corel Corporation competes in over 70
countries worldwide, and the US dollar is a more recognized unit of
currency on a global basis.
1-72
BYP 1-3 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the
world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can
be found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].
1-73
BYP 1-4 COLLABORATIVE LEARNING ACTIVITY
(a) The estimate of the $2,450 loss was based on the difference between
the $10,000 initially invested by the owner and the remaining bank
balance of $7,550 at May 31.
This is not a valid basis for determining income, because it only
shows the change in cash between two points in time.
(b) The balance sheet at May 31 is as follows:
LONG-SHOT DRIVING RANGE
Balance Sheet
May 31, 2003
Assets
Cash............................................................................................
Caddy shack...............................................................................
Equipment ..................................................................................
Total assets ........................................................................
$07,550
4,000
1,800
$13,350
Liabilities and Owner's Equity
Liabilities
Accounts payable ($150 + $100) .......................................
Owner's equity
P. & P. Ross, Capital ($10,000 + $3,900 - $800)................
Total liabilities and owner's equity............................
$00,250
13,100
$13,350
As shown in the balance sheet, the owner's capital at May 31 is
$13,100 (the amount required to make Assets = Liabilities + Owner's
Equity). The estimate of $3,100 of net income is the difference between
the initial investment of $10,000 and $13,100.
This was not a valid basis for determining net income because
changes in owner's equity between two points in time may have been
caused by factors unrelated to net income. For example, there may be
drawings and/or additional capital investments by the owner.
1-74
BYP 1-4 (Continued)
(c) Actual net income for May can be determined by adding owner's
drawings to the change in owner's capital during the month, as shown
below:
Owner's capital, May 31, per balance sheet ............................
Owner's capital, May 1 ..............................................................
Increase in owner's capital .......................................................
Add: Drawings .........................................................................
Net income .................................................................................
$13,100
10,000
3,100
800
$ 3,900
(d) Fees earned can be determined by adding expenses incurred during
the month to net income. May expenses were Rent, $1,000; Wages,
$400; Advertising, $750; and Utilities, $100; for a total of $2,250.
Revenues earned, therefore, were $6,150 ($2,250 + $3,900).
Alternatively, since all fees are received in cash, fees earned can be
calculated 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 fees........................................
Actual cash balance, May 31...................................
Fees earned (cash receipts)....................................
1-75
$10,000
$4,000
1,800
1,000
600
400
800
8,600
1,400
7,550
$ 6,150
BYP 1-5 COMMUNICATION ACTIVITY
Date:
To:
From:
Subject:
Israel Unger
Student
Balance Sheet Correction
I have received the balance sheet of Mount Company as of December 31,
2002. 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. It should be stated "December 31, 2002."
2.
The bottom portion of the balance sheet should be headed "Liabilities
and Owner's Equity", with sub-headings for the Liabilities section and
the Owner's Equity section.
3.
Assets should be reordered, in order of liquidity. Equipment should be
reported below Supplies on the balance sheet. Accounts Receivable
should be shown as an asset and reported between Cash and
Supplies.
4.
Accounts Payable should be shown as a liability, not an asset. The
Note Payable should be reported in the liability section.
5.
Unger, Capital and Unger, Drawings are not liabilities. They are part of
owner's equity. The Drawings account is not reported on the balance
sheet but is subtracted from Unger, Capital to arrive at owner's equity
at the end of the period.
1-76
BYP 1-5 (Continued)
A correct balance sheet is as follows:
MOUNT COMPANY
Balance Sheet
December 31, 2002
Assets
Cash ...................................................................................................
Accounts receivable..........................................................................
Supplies .............................................................................................
Equipment..........................................................................................
Total assets .......................................................................
$09,000
3,000
2,000
21,500
$35,500
Liabilities and Owner's Equity
Liabilities
Note payable ..............................................................................
Accounts payable ......................................................................
Total liabilities ....................................................................
$10,500
6,000
16,500
Owner's equity
Unger, Capital ............................................................................
Total liabilities and owner's equity ...................................
19,000
$35,500
1-77
BYP 1-6 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 are:
Stephane Pelli
The two firms
University of New Brunswick
(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 Stephane charged both firms for the total travel
costs, rather than splitting the actual amount of $244 between the
two firms?
•
Is collecting $488 as reimbursement for total costs of $244 ethical
behaviour?
•
Did Stephane 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 instructor, or your
family, that you collected your expenses twice?
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