SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 4 EXERCISE 4-1A a. Hopkins CPAs Income Statement For the Year Ended December 31, Year 1 Revenue Service Revenue $50,000 Expenses Salaries Expense (32,000) Net Income $18,000 Hopkins CPAs Balance Sheet As of December 31, Year 1 Assets Cash* Total Assets $108,000 $108,000 Liabilities Notes Payable Total Liabilities $90,000 Stockholders’ Equity Retained Earnings Total Stockholders’ Equity $18,000 $90,000 18,000 Total Liab. and Stockholders’ Equity $108,000 *$90,000 + $50,000 $32,000 = $108,000 4-7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-1A (cont.) a. Hopkins CPAs Statement of Cash Flows For Year Ended December 31, Year 1 Cash Flows From Operating Activities: Cash Inflow from Clients Cash Outflow for Salaries Net Cash Flow from Operating Activities $50,000 (32,000) $18,000 Cash Flows From Investing Activities Cash Flows From Financing Activities: Cash Inflow from Loan Net Cash Flow from Financing Activities Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance -0$90,000 90,000 108,000 -0$108,000 4-8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-1A (cont.) a. Sports Clothing Income Statement For the Year Ended December 31, Year 1 Net Sales Revenue $50,000 Cost of Goods Sold (26,000) Gross Margin 24,000 Expenses Operating Expenses (8,000) Net Income $16,000 Sports Clothing Balance Sheet As of December 31, Year 1 Assets Cash* Merchandise Inventory** Total Assets $82,000 24,000 Liabilities Notes Payable Total Liabilities $90,000 Stockholders’ Equity Retained Earnings Total Stockholders’ Equity $16,000 $106,000 $ 90,000 16,000 Total Liab. and Stockholders’ Equity $106,000 *$90,000 $50,000 + $50,000 $8,000 = $82,000 **$50,000 – $26,000 = $24,000 4-9 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-1A (cont.) a. Sports Clothing Statement of Cash Flows For the Year Ended December 31, Year 1 Cash Flows From Operating Activities: Cash Inflow from Customers Cash Outflow for Inventory Cash Outflow for Expenses Net Cash Flow from Operating Activities 50,000 (50,000) (8,000) ($8,000) Cash Flows From Investing Activities Cash Flows From Financing Activities: Cash Inflow from Loan Net Cash Flow from Financing Activities Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance -0$90,000 90,000 82,000 -0$82,000 b. Sports Clothing is a merchandising business and has inventory and cost of goods sold -- product costs. Hopkins is a service business and does not have product costs. c. Hopkins is a service business and sells a service not a product. Consequently, it does not have cost of goods sold or gross margin. It only has selling and administrative expense (period expense). d. The asset in common is cash. The only asset that Hopkins has is cash. Sports Clothing has cash but also has inventory. Hopkins does not sell a product and does not have any inventory. Sports Clothing sells products and must carry inventory available for sale to customers. 4-10 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-2A a. Dan Watson Merchandising Effect of Events on Financial Statements No. 1. Assets = Equity Cash + Inv. = C. Stock + Ret. Earn. 30,000 NA 30,000 NA 2. (18,000) 3a. 32,000 3b. NA Tot. 44,000 + 18,000 NA (15,000) 3,000 = NA NA NA 32,000 NA (15,000) 30,000 + 17,000 Rev. Exp. = Net. Inc. NA NA NA NA NA NA NA 32,000 32,000 NA 32,000 15,000 15,000 = (15,000) 17,000 4-11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Cash Flow 30,000 FA (18,000) OA 32,000 OA NA 44,000 NC EXERCISE 4-2A (cont.) b. Dan Watson Merchandising Income Statement For the Year Ended December 31, Year 1 c. Net Sales $32,000 Cost of Goods Sold (15,000) Gross Margin $17,000 Total assets: $47,000 (Cash $44,000 + Inventory $3,000). 4-7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-3A a. NC = Net Change in Cash Hardy Merchandising Company Effect of Events on the Financial Statements Assets Events Beg. Bal. 1. Pur. Inv. 2a. Sold Inv. 2b. Inv. Cost 3. Pd. AP Cash 20,000 NA NA NA (22,000) + A. Rec. + NA + NA + 38,000 + NA + NA + + + + + + Balance Sheet = Liab. + Stkholders’ Equity Inv. = A. Pay. + C. Stk. + Ret. Ear. NA = NA + 20,000 + NA 40,000 = 40,000 + NA + NA NA = NA + NA + 38,000 (24,500) = NA + NA + (24,500) NA = (22,000) + NA + NA Income Statement Rev. Exp. = Net Inc. NA NA = NA NA = 38,000 NA = NA 24,500 = NA NA = 4. Coll. AR 26,000 + (26,000) + NA = NA + NA + NA NA NA = 5. Pd. Exp. (5,100) + NA + NA = NA + NA + (5,100) NA 5,100 = End. Bal. 18,900 + 12,000 + 15,500 = 18,000 + 20,000 + 8,400 b. $12,000 c. $18,000 d. Sales Cost of Goods Sold Gross Margin Operating Exp. Net Income 38,000 29,600 = $38,000 (24,500) 13,500 (5,100) $ 8,400 4-8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Statement of Cash Flows NA NA NA NA 38,000 NA (24,500) NA NA (22,000) OA NA 26,000 OA (5,100) (5,100) OA 8,400 (1,100) NC e. Cash Flows From Operating Activities: Cash Inflow from Customers Cash Outflow for Inventory Cash Outflow for Expenses Net Cash Flow from Operating Activities $26,000 (22,000) (5,100) $ (1,100) 4-9 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-3A (cont.) f. Ending retained earnings and net income are the same in this problem because this is the first year of operations and no dividends were paid. Ending Retained Earnings is calculated as follows: Beginning Retained Earnings + Net Income Dividends = Ending Retained Earnings. 4-10 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-4A Milo Clothing Effect of Events on the Financial Statements No. 1. Assets = Equity Cash + Inv. = C. Stock + Ret. Earn. 30,000 + NA = 30,000 + NA Rev. Exp. = Net. Inc. NA NA = NA NA NA = NA NA = 20,000 2. (15,000) + 15,000 = NA + NA 3a. 20,000 + NA = NA + 20,000 20,000 3b. 4. NA + (1,500) + (9,000) = NA = NA + NA + (9,000) (1,500) NA NA 9,000 = 1,500 = (9,000) (1,500) Tot. 33,500 + 6,000 = 30,000 + 9,500 20,000 10,500 = 9,500 Cash Flow 4-11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 30,000 FA (15,000) OA 20,000 OA NA (1,500) OA 33,500 NC EXERCISE 4-5A a. Purchase Less: return Gross due (subject to discount) Discount percentage Amount of discount Gross amount due Less: discount Net amount due $ $25,200 (2,400) 22,800 x 2% 456 $22,800 (456) $22,344 b. Home Furnishings Effect of Events on the Financial Statements Events Stkholders’ Equity + Mdse. Inv. = A. Pay. + C. Stk. + Ret. Ear. Assets Cash 1. Pur. Inv. 2. Ret. Inv. 3. Disc. 4. Pd. AP Balance Sheet = Liab. + NA + NA + NA + (22,344) + 25,200 = (2,400) = (456) = NA = 25,200 + (2,400) + (456) + (22,344) + NA NA NA NA + + + + NA NA NA NA Income Statement Rev. Exp. = Net Inc. NA NA NA NA – NA NA NA NA = = = = NA NA NA NA 4-12 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Cash Flows NA NA NA (22,344) OA EXERCISE 4-5A (cont.) c. $22,800; Home Furnishings would not be eligible for the discount. d. Home Furnishings Effect of Events on the Financial Statements Events Stkholders’ Equity + Mdse. Inv. = A. Pay. + C. Stk. + Ret. Ear. Assets Cash 3. Pd. AP Balance Sheet = Liab. + (22,800) + NA = (22,800) + NA + NA Income Statement Rev. Exp. = Net Inc. NA NA = NA Cash Flows (22,800) OA e. Home Furnishings would be willing to pay within the discount period in order to take advantage of the discount. Taking the discount will reduce the cost of the merchandise by $456. While this does not seem like a large savings, if the rate is annualized the savings is considerable. A 2% discount for paying within 10 days, or 35 days before the total amount would be due, amounts to a savings of $13.03 per day ($456 35 days). Even if Home Furnishings borrowed the $22,344 at an 8% interest rate, the cost of borrowing would only be $171.41 ($22,344 x 8% x 35/365) or $4.90 per day. Home Furnishings would still save $8.13 per day, even if the company had to borrow the funds to pay early. 4-13 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-6A a. FOB shipping point b. FOB destination c. FOB destination d. FOB shipping point 4-14 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-7A a. & b. Computation of Ending Inventory Jill’s Dress Shop Ken’s Bait Shop Beginning balance in inventory Plus: Purchases Less: Purchase Returns and Allow. Less: Purchases Discounts Plus: Transportation-In Costs Cost of Goods Available for Sale $40,000 75,000 (5,000) (750) 1,000 110,250 Less: Cost of Goods Sold Ending Inventory (82,300) $27,950 $ 8,000 36,900 (1,200) (360) 900 44,240 (33,900) $10,340 4-15 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-8A Transaction Added to Inventory a. Transportation-out b. Purchase discount c. Transportation-in d. Purchase computer e. Purchase of inventory f. Allowance for damaged inventory No No Yes No Yes No 4-16 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-9A Event Event No. Type 1. 2. 3. 4a. 4b. 5. 6a. 6b. 7. 8. 9. 10. AE AS AU AS AU AU AS AU AU AE AE AU Assets = Liab. + + + + + + NA + NA NA NA NA NA NA NA NA + S. Equity NA NA NA + NA + NA NA Rev. Exp. = Net Inc. NA NA NA + NA NA + NA NA NA NA NA NA NA NA NA + NA NA + + NA NA + NA NA NA + NA + NA NA Cash Flows + + 4-17 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. OA NA NA OA NA OA NA NA OA OA OA OA EXERCISE 4-10A a. Transaction Period Costs Product Costs 1. 2. 3. 4. 5. Not Applicable 6. 7. 8. 9. 10. 4-18 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-10A (cont.) b. NC = Net Change in Cash The Pet Store Horizontal Statements Model for Year 1 Cash Assets + A. Rec. + 1. Stock 60,000 + 2. Pur Inv. 3. Freight 4a. Sold Inv. 4b. Cost 5. Pd. Frt. 6a. Ret. Sale 6b. Ret. Inv. 7. Coll. AR NA + NA + 65,000 (900) + NA + 900 = NA + 71,000 + NA = NA + NA + (38,000) = (620) + NA + NA = NA + (4,200) + NA = + + NA NA 2,150 = 58,300 + (58,300) + NA = 8. Pd. AP NA + Balance Sheet = Liab. + Stkholders’ Equity Inv. = A. Pay. + C. Stk. + Ret. Ear. NA = NA + 60,000 + 65,000 + NA + NA + NA + NA + NA + NA + NA + NA NA NA NA NA NA NA NA + + + + + + + + NA NA NA 71,000 (38,000) (620) (4,200) 2,150 NA Income Statement Rev. Exp. = Net Inc. NA NA NA 71,000 NA NA (4,200) NA NA NA = NA NA = NA NA = NA NA = 71,000 38,000 = (38,000) 620 = (620) NA = (4,200) (2,150) = 2,150 NA = NA NA NA = NA (2,600) NA 2,600 = (2,600) NA + (3,100) NA 3,100 = (3,100) 5,800 + 60,000 + 24,630 66,800 42,170 = 24,630 (59,200) + NA + NA = (59,200) + NA + 9. Pd. Exp. (2,600) + NA + NA = NA + NA + 10. Pd. Exp. (3,100) + NA + NA = NA + End. Bal. 51,880 + 8,500 + 30,050 = NA 4-19 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Statement of Cash Flows 60,000 FA NA (900) OA NA NA (620) OA NA NA 58,300 OA (59,200) OA (2,600) OA (3,100) OA 51,880 NC EXERCISE 4-11A a. The Merchandise Inventory account is analyzed as follows: Mdse. Inventory 2. Purcashed Inventory 3. Inventory Sold Book Balance 4. Less:Actual Count Difference in book and actual inventory $41,000 (37,500) 3,500 (3,200) $ 300 b. Lost, stolen, or damaged inventory may not have been accounted for. When management discovers differences in the book balance of the inventory and the physical count of the inventory, adjusting entries are made to the books to reduce the inventory account to its actual balance. For control purposes, it is important for management to know the amount of lost or damaged inventory. 4-20 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-12A a. Terry’s Auto Shop Effect of Events on the Financial Statements Assets Events Beg. Bal. 1. Pur. Inv. 2. Freight 3. Ret. Inv. 4. Allow. 5a. Sales 5b. Cost 6. Tran. 7. Paid AP End Bal. Cash + 16,000 NA (800) NA NA 31,000 NA (500) (8,000) 37,700 + Inv. Balance Sheet = Liab. + Stkholders’ Equity = A. Pay. + C. Stk. + Ret. Ear. 8,000 15,000 800 (2,600) (1,100) NA (15,000) NA NA 5,100 = NA 15,000 NA (2,600) (1,100) NA NA NA (8,000) 3,300 + 20,000 NA NA NA NA NA NA NA NA 20,000 + 4,000 NA NA NA NA 31,000 (15,000) (500) NA 19,500 Acct. Title for RE Sales Cost of Sales Trans. Out Exp. 4-21 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-12A (cont.) b. Terry’s Auto Shop Financial Statements Income Statement For the Year Ended December 31, Year 2 Net Sales $31,000 Cost of Goods Sold (15,000) Gross Margin 16,000 Operating Expenses Transportation-out (500) Net Income $15,500 Statement of Cash Flows For the Year Ended December 31, Year 2 Cash Flows From Operating Activities: Cash inflow from Customers Cash Outflow for Inventory Cash Outflow for Expenses Net Cash Flow from Operating Activities $31,000 (8,800) (500) $21,700 Cash Flows From Investing Activities -0- Cash Flows From Financing Activities -0- Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance 21,700 16,000 $37,700 4-22 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-12A (cont.) c. The difference between net income of $15,500 and cash flow from operating activities of $21,700 is because not all of the inventory that has been sold was paid for. The amount of inventory that was sold is $15,000, but the amount of accounts payable paid for inventory was only $8,800. This accounts for the $6,200 difference. 4-23 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-13A a. Kim Company Income Statement For the year ended December 31, Year 1 Sales Revenue $198,000 Cost of Goods Sold (110,000) Gross Margin 88,000 Expenses Operating Expenses (36,000) Operating Income 52,000 Non-Operating Items Gain on the Sale of Land 20,000 Net Income $72,000 b. Kim Company Income Statement For the year ended December 31, Year 2 Sales Revenue ADD 10% Cost of Goods Sold ADD 10% Gross Margin $217,800 (121,000) 96,800 Expenses Operating Expenses ADD 10% (39,600) Operating Income 57,200 Non-Operating Items -0- Net Income $57,200 4-24 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4-25 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-13A (cont.) c. Net income decreased by 21%. d. If the shareholders look at operating income, they will find that operating income increased by 10% and this is expected because all recurring line items increased by 10%. However, net income decreased by 21% because of the sale of land at a gain in Year 1. Shareholders must be careful when only looking at the net income amount. 4-26 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-14A Single-Step Income Statement: Green Market Income Statement For the Year Ended December 31, Year 2 Net Sales Revenue $5,600 Expenses Cost of Goods Sold Advertising Expense Interest Expense Salaries Expense Rent Expense Total Cost and Expenses Gain on Sale of Land $2,950 600 120 960 510 (5,140) 200 Net Income $ 660 Multistep Income Statement: Green Market Income Statement For the Year Ended December 31, Year 2 Net Sales $5,600 Cost of Goods Sold (2,950) Gross Margin 2,650 Operating Expenses Advertising Expense Salaries Expense Rent Expense Total Operating Expenses Operating Income $600 960 510 (2,070) 580 Non-operating Items Interest Expense Gain on Sale of Land Net Income (120) 200 $ 660 4-27 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-15A a. Ozark Merchandisers Gross Sales Less: Sales Returns Less: Sales discounts Net Sales $39,900 (1,520) (768)* $37,612 *($39,900 $1,520) x .02 = $768 b. Ozark Merchandisers Income Statement For the Year Ended December 31, Year 1 Net Sales $37,612 Cost of Goods Sold* (20,280) Gross Margin 17,332 Operating Expenses Selling and administrative expenses (4,200) Operating Income 13,132 Nonoperating items Interest Expense Gain sale of land (360) 1,250 Net Income $14,022 *$21,200 – $920 return c. The interest expense would be reported in the operating activities section of the statement of cash flows when paid. d. The full sales price of the land, $9,250, would be shown as a cash inflow from investing activities on the statement of cash flows. 4-28 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-15A (cont.) e. A gain occurs from activities that are not part of the normal recurring operations of a business. Revenues are benefits that a business receives as a result of its normal operations. 4-29 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-16A a. Powell Company Effect of Events on the Financial Statements No. Bal. 1a. 1b. 2. 3a. 3b. 4. 5. Cash + Tot. 120,100 + 40,000 NA NA (900) NA NA NA 81,000 Assets A. Rec. + NA 99,500 NA NA (5,900) NA (3,000) (81,000) 9,600 + = Equity Inv. = C. Stock + Ret. Earn. 86,000 60,000 66,000 NA NA 99,500 (58,000) NA (58,000) NA NA (900) NA NA (5,900) 4,000 NA 4,000 NA NA (3,000) NA NA NA 32,000 = 60,000 + 101,700 Rev. Exp. = Net. Inc. NA 99,500 NA NA (5,900) NA (3,000) NA NA NA 58,000 900 NA (4,000) NA NA 90,600 54,900 = NA 99,500 (58,000) (900) (5,900) 4,000 (3,000) NA 35,700 4-30 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Cash Flow NA NA NA (900) OA NA NA NA 81,000 OA 80,100 NC EXERCISE 4-16A (cont.) b. Powell Company Financial Statements Income Statement For the Year Ended December 31, Year 3 Net Sales $90,600 Cost of Goods Sold (54,000) Gross Margin 36,600 Operating Expenses Transportation-out (900) Net Income $35,700 Balance Sheet As of December 31, Year 3 Assets Cash Accounts Receivable Merchandise Inventory Total Assets $120,100 9,600 32,000 $161,700 Liabilities $ Stockholders’ Equity Common Stock Retained Earnings* -0- $ 60,000 101,700 Total Stockholders’ Equity 161,700 Total Liabilities and Stockholders’ Equity $161,700 * Beg. RE. $66,000 + Net Income $35,700 = $101,700 4-31 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISE 4-16A b. (cont.) Powell Company Financial Statements For the Year Ended December 31, Year 3 Statement of Cash Flows Cash Flows From Operating Activities: Cash Inflow from Customers Cash Outflow for Expenses Net Cash Flow from Operating Activities $80,100 Cash Flows From Investing Activities -0- Cash Flows From Financing Activities -0- Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance c. $81,000 (900) 80,100 40,000 $120,100 Prentise may agree to keep the damaged goods for several reasons. First, Prentis already has the goods and, assuming the goods can be sold, will not have to wait for another shipment. Also, Prentise is getting the goods at a reduced price. Powell benefits because they do not have to pay for the shipping cost of the returned goods and any repair cost in order to sell them to another customer. This arrangement can benefit both buyer and seller. 4-32 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4-33 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
