Financial Accounting
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Chapter 1: What is Accounting
Exercises: Chapter 1
SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS
Questions:
➢ Accounting has often been called the language of business. In what respects would you agree with this description? How
might you argue that this description is deficient?
➢ Define asset, liability, and stockholders’ equity.
➢ How do liabilities and stockholders’ equity differ? How are they similar?
➢ How do accounts payable and notes payable differ? How are they similar?
➢ Define revenues. How are revenues measured?
➢ Define expenses. How are expenses measured?
➢ What is a balance sheet? On what aspect of a business does the balance sheet provide information?
➢ What is an income statement? On what aspect of a business does this statement provide information?
➢ What information does the statement of retained earnings provide?
➢ Identify the three types of activities shown in a statement of cash flows.
➢ What is a transaction? What use does the accountant make of transactions? Why?
➢ What is the accounting equation? Why must it always balance?
➢ Give an example from your personal life that illustrates your use of accounting information in reaching a decision.
➢ You have been elected to the governing board of your church. At the first meeting you attend, mention is made of building a
new church. What accounting information would the board need in deciding whether or not to go ahead?
➢ A company purchased equipment for $ 2,000 cash. The vendor stated that the equipment was worth $ 2,400. At what
amount should the equipment be recorded?
➢ What is meant by money measurement?
➢ Of what significance is the exchange-price (or cost) concept? How is the cost to acquire an asset determined?
➢ What effect does the going-concern (continuity) concept have on the amounts at which long-term assets are carried on the
balance sheet?
➢ Of what importance is the periodicity (time periods) concept to the preparation of financial statements?
➢ Describe a transaction that would:
Increase both an asset and capital stock.
Increase both an asset and a liability.
Increase one asset and decrease another asset.
Decrease both a liability and an asset.
Increase both an asset and retained earnings.
Decrease both an asset and retained earnings.
Increase a liability and decrease retained earnings.
Decrease both an asset and retained earnings.
Identify the causes of increases and decreases in stockholders’ equity
B) Accounting Exercises:
Exercise 1. Applying Basic Accounting Equation
Royals Palm, Inc. reports the following assets and liabilities. Compute the totals that would appear in the corporation’s basic
accounting equation (Assets = Liabilities + Stockholders’ Equity (Capital Stock)).
Cash………………………….$55,000
Accounts Payable……………25,000
Office Supplies………………. 1, 500
Loan Payable…………………..7,000
Accounts Receivable………….10,000
Answer:
Assets
= Liabilities
+ Stockholders’ Equity
Exercise 2. Applying Basic Accounting Equation
Dan and Den, Inc. reports the following assets and liabilities. Compute the totals that would appear in the corporation’s basic
accounting equation (Assets = Liabilities + Stockholders’ Equity (Capital Stock)).
Cash………………………….$37,000
Accounts Payable……………15,000
Supplies……………………….1, 800
Loan Payable…………………..9,000
Inventory……………………….12,000
Answer:
Assets
= Liabilities
+ Stockholders’ Equity
Exercise 3. Complete missing amounts in fundamental accounting equation for several businesses:
Assets
= Liabilities
+ Stockholders’ Equity
578,000
152,000
25,000
127,000
17,000
269,000
45,000
180,500
850,000
675,000
250,000
657,450
Exercise 4. Perez Company had the following transactions during January:
1. Jan 1 Issued $100,000 in stock to owners in exchange for cash to start the business.
2. Jan 5 Borrowed $50,000 from the bank by signing a notes payable.
3. Jan 10 Purchase equipment by paying cash for $25,000.
3. Jan 15 Paid January rent of $2,400 for the office space (hint: since this is for January, record as rent expense)
4. Jan 18 Performed services for customers and received cash immediately for $8,000.
5. Jan 20 Purchased $2,000 in supplies on account.
Prepare a transaction analysis for the January transactions. Remember to prove the accounting equation at the end.
Assets =
Transaction
Cash
Supplies
Liability
Accounts
Payable
Equipment
+ Equity
Notes
Payable
+ Revenue
Common
Stock
– Expense
Service
Revenue
Rent
Expense
Jan 1 Issued stock to owners
Jan 5 Borrowed money from bank
Jan 10 Purchased equipment with
cash
Jan 15 Paid January rent
Jan 18 Performed services
Jan 20 Purchased supplies on
account
Balance:
Exercise 5. On December 31, Bryniuk’s Company, the accounting records showed the following information:
Cash
49,500
Accounts Receivable
125,000
Supplies
1,500
Prepaid Insurance
12,000
Equipment
70,000
Building
420,000
Land
111,500
Accounts Payable
80,000
Notes Payable
170,000
Common Stock
410,000
Retained Earnings
65,000
Dividends
20,000
Service Revenue
174,000
Interest Revenue
1,000
Salaries Expense
52,000
Advertising Expense
17,000
Insurance Expense
5,000
Utilities Expense
13,750
Interest Expense
2,750
Prepare the Income Statement for year ended December 31.
Bryniuk’s Company
Income Statement
For Year Ended December 31
Revenues:
.
Total Revenues
Expenses:
Total Expenses
Net Income
Exercise 6. Using the information from Exercise 5, prepare the Statement of Retained Earnings for December 31.
Bryniuk’s Company
Statement of Retained Earnings
For Year Ended December 31
Beginning Retained Earnings
$65,000
Add: Net Income
Subtract: Dividends
Ending Retained Earnings
Exercise 7. Using the information from Exercises 5 and 6, prepare the Balance Sheet for December 31.
Bryniuk’s Company
Balance Sheet
December 31
Assets
Liabilities and Equity
Total Liabilities
Total Equity
Total Assets
Total Liabilities and Equity
Problem 1: Prepare the financial statements of RodCast Company using the following information:
Accounts Payable
43,100.00
Accounts Receivable
85,000.00
Cash
55,320.00
Common Stock
125,000.00
Dividends
28,000.00
Machinery
70,000.00
Rent Expense
24,000.00
Retained Earnings
70,000.00
Salaries Expense
65,000.00
Service Revenue
165,320.00
Supplies
2,350.00
Trucks
60,000.00
Utilities Expense
13,750.00
1. Classify each account by Account Type (Asset, Liability, Equity, Revenue or Expense) and which financial statement (income
statement, statement of retained earnings, or balance sheet) it appears on.
Account
Account Type
Financial Statement
2. Prepare the Income Statement, Statement of Retained Earnings and Balance Sheet for the month ended October 31.
Comprehensive Problems Example:
Larson’s Accounting Company has the following account balances: Cash, $5,000; Accounts Receivable, $2,000; Prepaid Rent $1,500; Supplies,
$850; Equipment, $6,000; Trucks, $15,000; Accounts Payable, $2,500; Common Stock, $20,000; Retained Earnings $7,850. Business
transactions during December are presented as follows:
1. Company received cash from clients for services, $4,500
2. Larson paid to creditors $500,
3. Paid office rent for the month of December, $750,
4. Company billed client for accounting services on account, $5,200
5. Supplies were purchased on account, $650,
6. Company received cash from clients billed previously, $6,000
7. Larson received an invoice for office equipment repair services from Office Extra for December (the invoice will be paid
next month), $850,
8. Larson paid monthly salaries, $2,700,
9. Utilities expense were paid, $280,
10. Miscellaneous expense were paid, $350,
11. Dividends were paid, $550.
Assets
Cash
Previous
Balances
$5,000
1
4,500
2
-500
=
Liabilities
Accounts
Receivable
Prepaid
Rent
Supplies
Equipment
$2,000
$1,500
$850
$6,000
Trucks
$15,000
+ Stockholders’ Equity
Accounts
Payable
Common
Stock
+
Retained
Earnings
$2,500
$20,000
$7,850
+ Net Income
–
Dividends
Revenue
5,200
Rent
expense
850
Repair
expense
5,200
5
650
6,000
750
-500
-750
6
Expense
Type
4,500
3
4
–
Expenses
650
-6,000
7
850
8
-2,700
2,700
Salary
expense
9
-280
280
Utilities
expense
10
-350
350
Misc.
expense
11
-550
Ending
Balance:
$11,120
550
$1,200
$750
$1,500
$6,000
$15,000
$3,500
$20,000
$7,850
$550
$9,700
Larson Company
Income Statement
Month Ended December 31, 2014
Fees earned
$9,700
Expenses:
Rent Expense
$750
Repair Expense
850
Wages Expense
2700
Utilities Expense
280
Miscellaneous expense
350
Total Expenses
$4,930
Net Income ($9,700 – $4,930)=
$4,770
Larson Company
Statement of Retained Earnings
Month Ended December 31
Larson Inc., Retained Earnings, December 31
$ 7,850
Net income for the month
$4,770
Less Dividends
– 550
Increase in Stockholders’ Equity
+ 4,220
Larson Inc., Retained Earnings, December 31
$12,070
Larson Company
Balance Sheet
Month Ended December 31
Assets
Cash
Accounts Receivable
Liabilities
$11,120
$3,500
1,200
Prepaid Rent
750
Supplies
1,500
Equipment
6,000
Trucks
15,000
Total Assets
Accounts Payable
$35,570
Stockholders’ Equity
Common Stock
20,000
Retained Earnings
12,070
Total Liabilities and Stockholders’ Equity
$35,570
Comprehensive Problem 1.
Cast 77 Service Company has the following account balances: Cash, $6,000; Accounts Receivable, $7,000; Prepaid Rent, 1,900; Prepaid
Insurance, $1,200 Supplies, $950; Equipment, $7,000; Trucks, $10,000; Accounts Payable, $2,700; Common Stock $25,000; Retained Earnings
$6,350. Business transactions during December are presented as follows:
1. Company received cash from clients for services, $7,500
2. Cast 77 paid to creditors $600,
3. Paid office rent for the month of December, $950,
4. Company billed client for accounting services on account, $8,200
5. Supplies were purchased on account, $450,
6. Company received cash from clients billed previously, $4,200
7. Cast 77 received an invoice for services from Copy Plus for December (the invoice will be paid next month), $550,
8. Cast 77 paid monthly salaries, $4,700,
9. Utilities expense were paid, $380,
10. Miscellaneous expense were paid, $250,
11. Paid for monthly insurance, $200
12. Dividends were paid, $750.
Required:
Apply the basic accounting equation (create a spreadsheet, please see comprehensive example) to complete a
transaction analysis for each transaction (hint: enter the balances provided first).
Prepare income statement at the end of December 31.
Prepare statement of retained earnings equity at the end of December 31.
Prepare balance sheet at the end of December 31.
LICENSES AND ATTRIBUTIONS
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$4,930