Solution Manual For Financial Accounting,
8th Canadian Edition by Libby, Hodge,
Kanaan, Sterling Chapters 1 - 13, Complete
1-1
TABLE OF CONTENTS
CHAPTER ONE
Financial Statements and Business Decisions
CHAPTER TWO
Investing and Financing Decisions and the Accounting System
CHAPTER THREE
Operating Decisions and the Accounting System
CHAPTER FOUR
Adjustments, Financial Statements, and the Closing Process
CHAPTER FIVE
Reporting and Interpreting Sales Revenue, Receivables, and Cash
CHAPTER SIX
Reporting and Interpreting Cost of Sales and Inventory
CHAPTER SEVEN
Reporting and Interpreting Long-Lived Assets
CHAPTER EIGHT
Reporting and Interpreting Current Liabilities
CHAPTER NINE
Reporting and Interpreting Non-current Liabilities
CHAPTER TEN
Reporting and Interpreting Shareholders' Equity
CHAPTER ELEVEN
Statement of Cash Flows
CHAPTER TWELVE
Communicating Accounting Information and Analyzing Financial Statements
CHAPTER THIRTEEN
Reporting and Interpreting Investments in Other Corporations
1-2
CHAPTER ONE
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and
records) financial information about an organization and reports that information to
decision makers.
2. Financial accounting involves preparation of the four basic financial statements and
related disclosures for external decision makers. Managerial accounting involves
the preparation of detailed plans, budgets, forecasts, and performance reports for
internal decision makers.
3. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the entity. The external
groups include the owners, investors, creditors, governmental agencies, other
interested parties, and the public at large.
4. Investors purchase all or part of a business and hope to gain by receiving part of
what the company earns and/or selling the company in the future at a higher price
than they paid. Creditors lend money to a company for a specific length of time and
hope to gain by charging interest on the loan.
5. In a society each organization can be defined as a separate accounting entity. An
accounting entity is the organization for which financial data are to be collected.
Typical accounting entities are a business, a church, a governmental unit, a
university and other nonprofit organizations such as a hospital and a welfare
organization. A business typically is defined and treated as a separate entity
because the owners, creditors, investors, and other interested parties need to
evaluate its performance and its potential separately from other entities and from its
owners.
1-3
6.
Name of Statement
(a) Income Statement
(b) Balance Sheet
(c) Audit Report
Alternative Title
(a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) Statement of Financial Position
(c) Report of Independent Accountants
1-4
7. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
8. (a)
(b)
(c)
(d)
The purpose of the income statement is to present information about the
revenues, expenses, and the net income of the entity for a specified period of
time.
The purpose of the balance sheet is to report the financial position of an entity
at a given date, that is, to report information about the assets, obligations and
stockholders’ equity of the entity as of a specific date.
The purpose of the statement of cash flows is to present information about
the flow of cash into the entity (sources), the flow of cash out of the entity
(uses), and the net increase or decrease in cash during the period.
The statement of retained earnings reports the way that net income and
distribution of dividends affected the retained earnings of the company during
the accounting period.
9. The income statement and the statement of cash flows are dated “For the Year
Ended December 31, 2010,” because they report the inflows and outflows of
resources during a period of time. In contrast, the balance sheet is dated “At
December 31, 2010,” because it represents the resources, obligations and
stockholders’ equity at a specific date.
10. Assets are important to creditors and investors because assets provide a basis for
judging whether sufficient resources are available to operate the company. Assets
are also important because they could be sold for cash in the event the company
goes out of business. Liabilities are important to creditors and investors because
the company must be able to generate sufficient cash from operations or further
borrowing to meet the payments required by debt agreements. If a business does
not pay its creditors, the law may give the creditors the right to force the sale of
assets sufficient to meet their claims.
11. Net income is the excess of total revenues over total expenses. Net loss is the
excess of total expenses over total revenues.
12. The equation for the income statement is Revenues - Expenses = Net Income (or
Net Loss if the amount is negative). Thus, the three major items reported on the
income statement are (1) revenues, (2) expenses, and (3) net income.
1-5
13. The equation for the balance sheet (also known as the basic accounting equation)
is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
future economic benefits owned by the entity as a result of past transactions. They
are the resources owned by the business at a given point in time such as cash,
receivables, inventory, machinery, buildings, land, and patents. Liabilities are
probable (expected) debts or obligations of the entity as a result of past transactions
which will be paid with assets or services in the future. They are the
obligations of the entity such as accounts payable, notes payable, and bonds
payable. Stockholders’ equity is financing provided by owners of the business and
operations. It is the claim of the owners to the assets of the business after the
creditor claims have been satisfied. It may be thought of as the residual interest
because it represents assets minus liabilities.
14. The equation for the statement of cash flows is: Cash flows from operating activities
+ Cash flows from investing activities + Cash flows from financing activities =
Change in cash for the period. The net cash flows for the period represent the
increase or decrease in cash that occurred during the period. Cash flows from
operating activities are cash flows directly related to earning income (normal
business activity including interest paid and income taxes paid). Cash flows from
investing activities include cash flows that are related to the acquisition or sale of
productive assets used by the company. Cash flows from financing activities are
directly related to the financing of the enterprise itself.
15. The equation for the statement of retained earnings is: Beginning Retained
Earnings + Net Income - Dividends = Ending Retained Earnings. It begins with
beginning-of-the-year Retained Earnings which is the prior year’s ending retained
earnings reported on the balance sheet. The current year's Net Income reported on
the income statement is added and the current year's Dividends are subtracted from
this amount. The ending Retained Earnings amount is reported on the end-ofperiod balance sheet.
16. Marketing managers and credit managers use customers' financial statements to
decide whether to extend them credit for their purchases. Purchasing managers
use potential suppliers' financial statements to judge whether the suppliers have the
resources necessary to meet current and future demand. Human resource
managers use financial statements as a basis for contract negotiations, to
determine what pay rates the company can afford. The net income figure even
serves as a basis to pay bonuses not only to management, but to other employees
through profit sharing plans.
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
which determines the financial statements that public companies must provide to
stockholders and the measurement rules used in producing those statements. The
Financial Accounting Standards Board (FASB) is the private sector body given the
primary responsibility to work out the detailed rules which become generally
accepted accounting principles.
1-6
18. Management is responsible for preparing the financial statements and other
information contained in the annual report and for the maintenance of a system of
internal accounting policies, procedures and controls. These measures are
intended to provide reasonable assurance, at appropriate cost, that transactions are
processed in accordance with company authorization as well as properly recorded
and reported in the financial statements, and that assets are adequately
safeguarded. Independent auditors examine the financial reports (prepared by
management) and the underlying records to assure that the reports represent what
they claim and conform with generally accepted accounting principles (GAAP).
19. A sole proprietorship is an unincorporated business owned by one individual. A
partnership is an unincorporated association of two or more individuals to carry on a
business. A corporation is a business that is organized under the laws of a
particular state whereby a charter is granted and the entity is authorized to issue
shares of stock as evidence of ownership by the owners (i.e., stockholders).
20. A CPA firm normally renders three services: auditing, management advisory
services, and tax services. Auditing involves examination of the records and
financial reports to determine whether they “fairly present” the financial position and
results of operations of the entity. Management advisory services involve
management advice to the individual business enterprises and other entities. It is
like a consulting firm. Tax services involve providing tax planning advice to clients
(both individuals and businesses) and preparation of their tax returns.
1-7
ANSWERS TO MULTIPLE CHOICE
1. b)
6. d)
2. d)
7. a)
3. d)
8. a)
1-8
4. c)
9. c)
5. a)
10. b)
Authors' Recommended Solution
Time
Mini-exercises
No.
Time
1
5
2
5
3
5
Exercises
No.
Time
1
12
2
12
3
12
4
20
5
25
6
20
7
15
8
25
9
25
10
25
11
30
12
15
13
12
14
30
(Time in minutes)
Problems
No.
Time
1
45
2
45
3
45
4
45
Alternate
Problems
No.
Time
1
45
2
45
3
45
Cases and
Projects
No.
Time
1
20
2
30
3
30
4
60
5
30
6
20
7
*
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open-ended project,
it is possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time discussing research strategies. When we want the students
to focus on a real accounting issue, we offer suggestions about possible companies or
industries.
1-9
MINI-EXERCISES
M1–1.
Element
B (1) Expenses
D (2) Cash flow from investing activities
A (3) Assets
C* (4) Dividends
B (5) Revenues
D (6) Cash flow from operating activities
A (7) Liabilities
D (8) Cash flow from financing activities
Financial Statement
A. Balance sheet
B. Income statement
C. Statement of retained earnings
D. Statement of cash flows
*Dividends paid in cash are also subtracted in the Financing section of the Statement of
Cash Flows
M1–2.
SE
A
R
A
E
A
E
L
A
(1) Retained earnings
(2) Accounts receivable
(3) Sales revenue
(4) Property, plant, and equipment
(5) Cost of goods sold expense
(6) Inventories
(7) Interest expense
(8) Accounts payable
(9) Land
M1–3.
(1)
(2)
(3)
(4)
(5)
Abbreviation
CPA
GAAP
AICPA
SEC
FASB
Full Designation
Certified Public Accountant
Generally Accepted Accounting Principles
American Institute of Certified Public Accountants
Securities and Exchange Commission
Financial Accounting Standards Board
1-
EXERCISES
E1–1.
K
G
I
E
A
D
J
F
C
L
H
B
N
M
Term or Abbreviation
(1) SEC
(2) Audit
(3) Sole proprietorship
(4) Corporation
(5) Accounting
(6) Accounting entity
(7) Audit report
(8) Cost principle
(9) Partnership
(10) FASB
(11) CPA
(12) Unit of measure
(13) GAAP
(14) Publicly traded
Definition
A. A system that collects and processes financial
information about an organization and reports that
information to decision makers.
B. Measurement of information about an entity in the
monetary unit–dollars or other national currency.
C. An unincorporated business owned by two or more
persons.
D. The organization for which financial data are to be
collected (separate and distinct from its owners).
E. An incorporated entity that issues shares of stock as
evidence of ownership.
F. Initial recording of financial statement elements at
acquisition cost.
G. An examination of the financial reports to ensure that
they represent what they claim and conform with
generally accepted accounting principles.
H. Certified Public Accountant.
I. An unincorporated business owned by one person.
J. A report that describes the auditor’s opinion of the
fairness of the financial statement presentations and
the evidence gathered to support that opinion.
K. Securities and Exchange Commission.
L. Financial Accounting Standards Board.
M. A company with stock that can be bought and sold by
investors on established stock exchanges.
N. Generally accepted accounting principles.
1-
Chapter 01 - Financial Statements and Business Decisions
E1–2.
A
(1)
A
(2)
R
(3)
L
(4)
L
(5)
SE (6)
E
(7)
E
(8)
E
(9)
L (10)
A (11)
A (12)
L (13)
A (14)
E (15)
Accounts receivable
Cash and cash equivalents
Net sales
Notes payable
Taxes payable
Retained earnings
Cost of products sold
Marketing, administrative, and other operating expenses
Income taxes
Accounts payable
Land
Property, plant, and equipment
Long-term debt
Inventories
Interest expense
E1–3.
L
E
L
L
SE
A
A
E
E
(1) Notes payable to banks
(2) General and administrative
(3) Accounts payable
(4) Dividends payable
(5) Retained earnings
(6) Cash and cash equivalents
(7) Accounts receivable
(8) Provision for income taxes*
(9) Cost of goods sold
A
R
A
E
A
A
L
E
A
(10) Machinery and equipment
(11) Net sales
(12) Inventories
(13) Marketing, selling, and advertising
(14) Buildings
(15) Land
(16) Income taxes payable
(17) Distribution and warehousing costs
(18) Investments (in other companies)
*Note that “Provision for income taxes” is a common synonym for “Income tax expense.”
1-
Chapter 01 - Financial Statements and Business Decisions
E1–13.
Honda Motor Corporation
Balance Sheet
as of March 31, 2009
(in billions of Yen)
Assets
Cash and cash equivalents
Trade accounts, notes, and other receivables
Inventories
Investments
Net property, plant and equipment
Other assets
Total assets
Liabilities
Accounts payable and other current liabilities
Long-term debt
Other liabilities
Total liabilities
Stockholders’ Equity
Contributed capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
1-13
¥
690
854
1,244
639
2,148
6,244
¥11,819
¥ 4,237
1,933
1,519
7,689
259
3,871
4,130
¥11,819
Chapter 01 - Financial Statements and Business Decisions
E1–14.
Req. 1
NEW WORLD BOOK STORE
Balance Sheet
At December 31, 2011
ASSETS
Cash
Accounts receivable
Store and office equipment
LIABILITIES
$68,350 Accounts payable
39,000 Note payable
72,000 Interest payable
Total liabilities
$12,000
3,000
120
15,120
STOCKHOLDERS’ EQUITY
Total assets
$179,350
Contributed capital
Retained earnings
Total stockholders’ equity
Total liabilities and
stockholders' equity
140,000
24,230
164,230
$179,350
Req. 2
Net income for the year was $24,230. This is the first year of operations and no
dividends were declared or paid to stockholders; therefore, the ending retained earnings
of $24,230 represents income for one year.
E1–6.
COLLEGE CONNECTION
Income Statement
For the Month of January 2011
Revenues:
Sales: Cash
On credit
Total sales revenue
Expenses:
Cost of goods sold
Salaries, rent, supplies, and other
expenses (paid in cash)
Utilities
Total expenses
Net Income
$110,000
3,000
$113,000
50,000
37,000
900
87,900
$25,100
1-14
Chapter 01 - Financial Statements and Business Decisions
E1–7.
WALGREEN CO.
Income Statement
For the Quarter ended May 31, 2009
(in millions)
Revenues:
Net sales
Total revenues
Expenses:
Cost of sales
Selling, occupancy and
administration expense
Interest Expense
Total expenses
Pretax income
Income tax expense
Net earnings
$16,210
$16,210
11,751
3,613
25
$
15,389
821
299
522
*Note that “Provision for income taxes” is a common synonym for “Income tax
expense.”
E1–8.
NEIGHBORHOOD REALTY, INCORPORATED
Income Statement
For the Year Ended December 31, 2012
Revenues:
Commissions earned ($150,900+$16,800)
Rental service fees
Total revenues
Expenses:
Salaries expense
Commission expense
Payroll tax expense
Rent expense ($2,475+$225)*
Utilities expense
Promotion and advertising expense
Miscellaneous expenses
Total expenses (excluding income taxes)
Pretax income
Income tax expense
Net Income
$167,700
20,000
$187,700
62,740
35,330
2,500
2,700
1,600
7,750
500
113,120
74,580
24,400
$50,180
*$2,475 has been paid for 11 months ($225 per month) plus $225 owed for December.
1-15
Chapter 01 - Financial Statements and Business Decisions
E1–9.
Net Income (or Loss) = Revenues - Expenses
Assets = Liabilities + Stockholders’ Equity
A
Net Income = $91,700 - $76,940 = $14,760;
Stockholders’ Equity = $140,200 - $69,000 = $71,200.
B
Total Revenues = $74,240 + $14,740 = $88,980;
Total Liabilities = $107,880 - $79,010 = $28,870.
C
Net Loss = $69,260 - $76,430 = ($7,170);
Stockholders’ Equity = $97,850 - $69,850 = $28,000.
D
Total Expenses = $58,680 - $21,770 = $36,910;
Total Assets = $17,890 + $78,680 = $96,570.
E
Net Income = $84,840 - $78,720 = $6,120;
Total Assets = $25,520 + $79,580 = $105,100.
E1–10.
Net Income (or Loss) = Revenues - Expenses
Assets = Liabilities + Stockholders’ Equity
A
Net Income = $231,820 - $196,700 = $35,120;
Stockholders’ Equity = $294,300 - $75,000 = $219,300.
B
Total Revenues = $175,780 + $29,920 = $205,700;
Total Liabilities = $590,000 - $348,400 = $241,600.
C
Net Loss = $72,990 - $91,890 = ($18,900);
Stockholders’ Equity = $258,200 - $190,760 = $67,440.
D
Total Expenses = $36,590 - $9,840 = $26,750;
Total Assets = $189,675 + $97,525 = $287,200.
E
Net Income = $224,130 - $210,630= $13,500;
Total Assets = $173,850 + $361,240 = $535,090.
1-16
Chapter 01 - Financial Statements and Business Decisions
E1–17.
PAINTER CORPORATION
Income Statement
For the Month of January 2011
Total revenues
Less: Total expenses (excluding income tax)
Pretax income
Less: Income tax expense
Net income
$299,000
189,000
110,000
34,500
$ 75,500
PAINTER CORPORATION
Balance Sheet
At January 31, 2011
Assets
Cash
Receivables from customers
Merchandise inventory
Total assets
$ 65,150
34,500
96,600
$196,250
Liabilities
Payables to suppliers
Income taxes payable
Total liabilities
Stockholders' Equity
Contributed capital (2,600 shares)
Retained earnings (from income statement above)
Total stockholders’ equity
Total liabilities and stockholders' equity
1-17
$26,450
34,500
60,950
59,800
75,500
135,300
$196,250
Chapter 01 - Financial Statements and Business Decisions
E1–18.
CLINT’S STONEWORK CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2012
Beginning retained earnings*
Net income
Dividends
Ending retained earnings
$16,800
42,000
18,700
$40,100
* Beginning retained earnings + Net income – Dividends = Ending retained earnings
For 2011: $0 + 31,000 – 14,200 = $16,800;
Ending retained earnings for 2011 becomes beginning retained earnings for 2012
E1–13.
(I)
(1)
O
(2)
(F)
(3)
(O)
(4)
(O)
(5)
(O)
(6)
I (7)
(F)
(8)
Purchases of property, plant, and equipment
Cash received from customers
Cash paid for dividends to stockholders
Cash paid to suppliers
Income taxes paid
Cash paid to employees
Cash proceeds received from sale of investment in another company
Repayment of borrowings
1-18
Chapter 01 - Financial Statements and Business Decisions
E1–14.
LAH MANUFACTURING CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flow from operating activities
Cash collections from sales
$270,000
Cash paid for operating expenses
(175,000)
Net cash flow from operating activities
$95,000
Cash flow from investing activities
25,000
Sale of land
Purchase of new machines
(48,000)
Net cash flow from investing activities
(23,000)
Cash flow from financing activities
Sale of capital stock
30,000
Payment on long-term notes
(80,000)
Payment of cash dividends
(18,000)
Net cash flow from financing activities
(68,000)
Net increase in cash
4,000
Cash at beginning of year
63,000
Cash at end of year
$ 67,000
1-19
Chapter 01 - Financial Statements and Business Decisions
PROBLEMS
(Note to the instructor: Most students find the Problems in this chapter to be quite
challenging.)
P1–1.
Req. 1
GASLIGHT COMPANY
Income Statement
For the Year Ended December 31, 2011
Total sales revenue (given)
Total expenses (given)
Pretax income
Income tax expense ($45,800 x 30%)
Net income
$126,000
80,200
45,800
13,740
$ 32,060
Req. 2
GASLIGHT COMPANY
Statement of Retained Earnings
For the Year Ended December 31, 2011
Beginning retained earnings
+Net income (from req. 1)
–Dividends (given)
Ending retained earnings
$
0
32,060
10,000
$ 22,060
Req. 3
GASLIGHT COMPANY
Balance Sheet
At December 31, 2011
Assets
Cash (given)
Receivables from customers (given)
Inventory of merchandise (given)
Equipment (given)
Total assets
Liabilities
Accounts payable (given)
Salary payable (given)
Total liabilities
Stockholders' Equity
Contributed capital (given)
Retained earnings (from req. 2)
Total stockholders' equity
Total liabilities and stockholders' equity
$24,500
10,800
81,000
40,700
$157,000
$46,140
1,800
$ 47,940
$87,000
22,060
109,060
$157,000
1-20
Chapter 01 - Financial Statements and Business Decisions
P1–21.
Req. 1
BRIDGET'S LAWN SERVICE
Income Statement
For the Three Months Ended August 31, 2011
Revenues
Lawn service–cash
–credit
Total revenues
Expenses
Gas, oil, and lubrication ($940+$180)
Pickup repairs
Repair of mowers
Miscellaneous supplies used
Helpers (wages)
Payroll taxes
Preparation of payroll tax forms
Insurance
Telephone
Interest expense on note paid
Equipment use cost (depreciation)
Total expenses
Net income
$12,300
700
$13,000
1,120
250
110
80
5,400
190
25
125
110
65
600
8,075
$ 4,925
Req. 2
Because the above report reflects only revenues, expenses, and net income, it is
reasonable to suppose that Bridget would need the following:
(1)
(2)
(3)
A balance sheet–that is, a statement that reports for the business, at the end of
August 2011, each asset (name and amount, such as Cash, $XX), each liability
(such as Wages Payable, $XX), and stockholders’ equity.
A statement of retained earnings that shows how income and dividends (if any)
affect retained earnings on the balance sheet.
A statement of cash flows–that is, a statement of the inflows and outflows of cash
during the period in three categories: operating, investing, and financing.
1-21
Chapter 01 - Financial Statements and Business Decisions
P1–22.
Transaction
(a)
Req. 1
Income
+$66,000
Req. 2–Explanation
Cash
+$55,000
(b)
–0–
+45,000
Cash borrowed is not income.
(c)
–0–
–9,500
Purchase of the truck does not represent
an expense until it is used (it is an asset);
cash outflow was $9,500.
(d)
–21,000
–10,500
All of the wages incurred reduce income,
$21,000; cash paid during the quarter was,
$21,000 x 1/2 = $10,500. The $10,500
owed will be paid on the next payroll date.
(e)
–2,900
–3,800
Not all of the supplies were used; expense is
the amount used, $3,800 – 900 = $2,900.
Cash paid during the quarter was $3,800.
(f)
–39,000
–32,500
All expenses incurred reduce income; cash
expended was, $39,000 – 6,500 = $32,500.
All services performed increase income;
cash received during the period was,
$66,000 – 11,000 = $55,000.
Based only
on the above:
Income (loss) $3,100
Cash inflow
(outflow)
$ 43,700
1-22
Chapter 01 - Financial Statements and Business Decisions
P1–4.
Req. 1
The personal residences of the organizers are not resources of the business entity.
Therefore, they should be excluded.
Req. 2
It is not indicated whether the $57,000 listed for service trucks and equipment is their
cost when acquired or the current market value on December 31, 2011.
Req. 3
The list of company resources (i.e., assets) suggests the following areas of concern:
Company resources:
(1)
Cash, inventories, and bills due from customers (i.e., accounts receivable)–
these items tend to fluctuate; they may be significantly more or less at date of
the loan and during the term of the loan.
(2)
Service trucks and equipment–as noted above, it is not indicated whether the
$57,000 is cost when acquired or current market value on December 31, 2011.
(3)
Personal residences–as noted above, these items are not resources of the
business entity and should be excluded.
Company obligations:
(4)
Unpaid wages of $19,000, which are now due, pose a serious problem because
only $12,000 cash currently is available.
(5)
Unpaid taxes and accounts payable to suppliers–it is not clear when these
payments of $8,000 and $10,000, respectively, are due (cash needed to pay
them is a problem).
(6)
The $45,000 owed on the service trucks probably is long term; however, shortterm installments may be required–these details are very important to the bank.
(7)
Loan from organizer–the expected payment date and interest rate are important
issues for which details are not provided. This is a major cash demand.
In general, the bank should request more details about the specific resources and
debts. The personal residences are not a part of the resources of the business entity.
The bank should request that the owners provide audited information about the entity's
assets and debts.
1-23
Chapter 01 - Financial Statements and Business Decisions
P1–4. (continued)
Req. 4
The amount of stockholders’ equity (i.e., assets minus liabilities) for Northwest
Company, assuming the amounts provided by the owners are acceptable, would be:
Assets ($311,000–$190,000)
Liabilities
Stockholders’ equity
$121,000
92,000
$29,000
1-24
Chapter 01 - Financial Statements and Business Decisions
ALTERNATE PROBLEMS
AP1–1.
Req. 1
INFLUENCE CORPORATION
Income Statement
For the Year Ended June 30, 2011
Total sales revenue (given)
Total expenses (given)
Pretax income
Income tax expense ($31,500 x 30%)
Net income
$100,000
68,500
31,500
9,450
$22,050
Req. 2
INFLUENCE CORPORATION
Statement of Retained Earnings
For the Year Ended June 30, 2011
Beginning retained earnings
+Net income (from req. 1)
–Dividends (given)
Ending retained earnings
$
0
22,050
0
$ 22,050
Req. 3
INFLUENCE CORPORATION
Balance Sheet
At June 30, 2011
Assets
Cash (given)
Receivables from customers (given)
Inventory of merchandise (given)
Equipment (given)
Total assets
Liabilities
Accounts payable (given)
Salary payable (given)
Total liabilities
Stockholders' Equity
Contributed capital (given)
Retained earnings (from req. 2)
Total stockholders' equity
Total liabilities and stockholders' equity
$13,150
10,900
27,000
66,000
$117,050
$31,500
1,500
$ 33,000
$62,000
22,050
84,050
$117,050
1-25
Chapter 01 - Financial Statements and Business Decisions
AP1–2.
Req. 1
LIST ELECTRIC REPAIR COMPANY, INC.
Income Statement
For the Three Months Ended December 31, 2011
Revenues:
Electric repair services–cash
–credit
Total revenues
Expenses:
Electrician's assistant (wages)
Payroll taxes
Supplies used on jobs
Oil, gas, and maintenance on truck
Insurance
Rent ($500+$250)
Utilities and telephone
Miscellaneous expenses
Depreciation of truck and tools (use)
Total expenses
Pretax Income
Income taxes
Net Income
$32,000
3,500
$35,500
7,500
175
9,500
1,200
700
750
825
600
1,200
22,450
13,050
3,930
$ 9,120
Req. 2
Because the above report reflects only revenues, expenses, and net income, it is
reasonable to suppose that Sam would have need for the following:
(1)
(2)
(3)
A statement that reports for the business, at the end of 2011, each asset (name
and amount such as Cash, $XX), and each liability (such as Income taxes
payable, $XX), and stockholders' equity; that is, a balance sheet.
A statement of the sources and uses of cash during the period; that is, a
statement of cash flows.
A statement of retained earnings that shows how net income and dividends affect
retained earnings on the balance sheet.
1-26
Chapter 01 - Financial Statements and Business Decisions
AP1–3.
Req. 1
Transaction
Income
Cash
(a)
+$85,000
+$70,000
Req. 2–Explanation
All services performed increase income;
cash received during the period was,
$85,000 – 15,000 = $70,000.
(b)
–0–
+25,000
Cash borrowed is not income.
(c)
–0–
–8,000
Purchase of the truck does not represent
an expense until it is used (it is an asset);
cash outflow was $8,000.
(d)
–36,000
–30,000
All of the wages incurred reduce income,
$36,000; cash paid during the quarter was,
$36,000 x 5/6 = $30,000. The $6,000
owed will be paid on the next payroll date.
(e)
–3,000
–4,000
Not all of the supplies were used; expense is
the amount used, $4,000 – 1,000 = $3,000.
Cash paid during the quarter was $4,000.
(f)
–31,000
–15,500
All expenses incurred reduce income; cash
expended was, $31,000 – 15,500 = $15,500.
Based only
on the above:
Income (loss) $15,000
Cash inflow
(outflow)
$ 37,500
1-27
Chapter 01 - Financial Statements and Business Decisions
CASES AND PROJECTS
ANNUAL REPORT CASES
CP1–1.
1. It sells its own brand of high quality, on-trend clothing, accessories, and personal
care products targeting 15 to 25 year-old customers.
2. The company’s most recent fiscal year ended on January 31, 2009.
3. a. Balance Sheets–2 years
b. Income Statements–3 years
c. Cash Flow Statements–3 years
4. Yes, it is audited by independent CPAs, as indicated by the ”Report of Independent
Registered Public Accounting Firm” on page 68 of the annual report.
5. Its total assets increased from $1,867,680,000 to $1,963,676,000. The instructor
should note that the reported numbers are in thousands.
6. As of January 31, 2009, the company had $294,928,000 in inventory.
7. Assets
= Liabilities*
$1,963,676,000 = $554,645,000
+ Stockholders’ Equity
+ $1,409,031,000
*Liabilities are determined by either adding current ($401,763,000) and long term
liabilities ($152,882,000) or by solving the accounting equation: Assets
($1,963,676,000) = Liabilities + Stockholders’ Equity ($1,409,031,000)
1-28
Chapter 01 - Financial Statements and Business Decisions
CP1–2.
1. Net income was $199,364 thousand or $199,364,000 for the year ended January 31,
2009. This is disclosed on the income statement. The instructor should note that the
reported numbers are in thousands. Some students will erroneously report
income as $199,364. Students should also be warned that different companies
often use different terminology—some companies may use the term “net earnings”
to describe net income.
2. Net sales were $1,834,618,000. This is also disclosed on the income statement.
3. Inventory is $169,698,000. This is disclosed on the balance sheet.
4. Cash and cash equivalents increased by $210,764,000 during the year. This amount
can be computed from the balance sheet or it can be found on the statement of cash
flows.
5. The auditor is Deloitte & Touche LLP. This is found on the auditor’s report (in this
case, called the “report of independent registered public accounting firm”).
CP1–3.
1. American Eagle Outfitters had total assets of $1,963,676,000 at the end of the most
recent year, whereas Urban Outfitters had total assets of $1,329,009,000. Clearly
American Eagle Outfitters is the larger of the two companies in terms of total assets at
the end of the most recent year.
2. Urban Outfitters had net sales of $1,834,618,000 in the most recent year, while
American Eagle Outfitters had greater net sales in the amount of $2,988,866,000.
Again, American Eagle Outfitters is the larger of the two companies in terms of net
sales.
3. In the most recent year, Urban Outfitters had growth in total assets of
($1,329,009,000 - $1,142,791,000)/($1,142,791,000) = 16.3%, while American Eagle
Outfitters had lower growth in total assets of ($1,963,676,000 $1,867,680,000)/($1,867,680,000) = 5.1%.
Similarly, Urban Outfitters had growth in net sales of ($1,834,618,000 $1,507,724,000)/($1,507,724,000) = 21.7%, while American Eagle Outfitters had
negative growth in net sales of ($2,988,866,000 - $3,055,419,000)/($3,055,419,000) =
-2.2%.
By both measures, Urban Outfitters is growing faster.
1-29
Chapter 01 - Financial Statements and Business Decisions
FINANCIAL REPORTING AND ANALYSIS CASES
CP1–4.
Req. 1–Deficiencies:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Heading: titles of the reports are missing and dates are not in proper form.
Income statement should show revenues and expenses separately.
“Profit earned in 2009” should be “Net income.”
Balance sheet should separately report assets, liabilities, and stockholders'
equity.
Retained earnings, $30,000, should be reported under stockholders' equity.
Due from customers, $13,000, should be reported under assets.
Supplies on hand, $15,000, should be reported under assets.
Accumulated depreciation, $10,000, should be subtracted from service vehicles.
1-30
Chapter 01 - Financial Statements and Business Decisions
CP1–4. (continued)
Req. 2–Financial Statements:
PERFORMANCE CORPORATION
Income Statement
For the Year Ended December 31, 2009
Revenues:
Sales
Services
Total revenues
Expenses:
Cost of goods sold
Selling expenses
Depreciation expense
Salaries and wages
Total expenses (excluding income tax)
Pretax income
Income tax expense (25% x $40,000)
Net income
$175,000
52,000
$227,000
$ 90,000
25,000
10,000
62,000
187,000
40,000
10,000
$30,000
PERFORMANCE CORPORATION
Balance Sheet
At December 31, 2009
Assets
Cash
Accounts receivable (from customers)
Merchandise inventory (for resale)
Supplies inventory (for use in rendering services)
Service vehicles
$50,000
Less accumulated depreciation
(10,000)
Total assets
Liabilities
Accounts payable (to suppliers)
Note payable (to bank)
Total liabilities
Stockholders' equity
Contributed capital, 6,500 shares
$65,000
Retained earnings
30,000
Total stockholders' equity
Total liabilities and stockholders' equity
1-31
$ 32,000
13,000
42,000
15,000
40,000
$142,000
$22,000
25,000
47,000
95,000
$142,000
Chapter 01 - Financial Statements and Business Decisions
CRITICAL THINKING CASES
CP1–5.
Req. 1 You should forcefully assert the need for an independent audit of the financial
statements each year because this is the best way to assure credibility–
conformance with GAAP, completeness and absence of bias.
You should firmly reject “Uncle Ray” as the auditor because there is no
evidence about his competence as an accountant or auditor. Also, he is related
to the partner who prepares the financial statements; there is a conflict of
interest.
Req. 2 You should strongly recommend the selection of an independent CPA in public
practice because the financial statements should be audited by a competent and
independent professional who must follow prescribed accounting and auditing
standards on a strictly independent basis. An audit by “Uncle Ray” would not
meet any of these requisites, particularly the important one in this case–
independence (and absence of bias).
1-32
Chapter 01 - Financial Statements and Business Decisions
CP1–6.
The textbook does not explicitly cover the elements of independence. The case is
designed to permit the students to develop their own values. We have found that it is
useful to emphasize the difference between independence in fact and in appearance
during these discussions.
1.
Most students feel that there is no problem with independence if the stock held is
immaterial in amount. When asked about a possible headline that might read
“Auditor who was shareholder is accused of fraud,” most students see a problem
with the appearance. In fact, the AICPA does not apply a materiality threshold
where there is a direct financial interest. Any holding of stock is a problem.
2.
This is an example of an indirect holding of stock. A materiality threshold is
applied in these situations. There could be a question of independence if the
auditor held a material interest in the mutual fund (relative to her net worth) and
the mutual fund held a material interest in the company that she audited.
3.
The AICPA Code of Professional Conduct applies only to audit professionals who
are members (though most state laws incorporate similar rules). Bob's employers
may want to assign him to a different company but there is no conflict with the
Code.
4.
Clearly there is an ethics violation in this case because she would audit
statements that covered a period of time where she was responsible for the
accounting operations of the company. This is a problem both in appearance and
in fact.
5.
The original Code indicated that a loan from a bank that was made under normal
lending procedures, terms, and requirements was not an impairment of
independence. This issue is currently under a review that will probably result in a
modification of the rule. It is an excellent example of how ethics rules can change
over time. The savings and loan debacle with the resulting lawsuits has caused
the profession to reconsider the appearance of loans to auditors.
FINANCIAL REPORTING AND ANALYSIS PROJECTS
CP1–7.
The solutions to this case will depend on the company and/or accounting period
selected for analysis.
1-33
Chapter 02 - Investing and Financing Decisions and the
Balance Sheet
Chapter 02
Investing and Financing Decisions and
the Balance Sheet
ANSWERS TO QUESTIONS
1.
The primary objective of financial reporting for external users is to provide useful
economic information about a business to help external parties, primarily
investors and creditors, make sound financial decisions. These users are
expected to have a reasonable understanding of accounting concepts and
procedures. Usually, they are interested in information to assist them in
projecting future cash inflows and outflows of a business.
2.
(a)
An asset is a probable future economic benefit owned by the entity as a
result of past transactions.
(b)
A current asset is an asset that will be used or turned into cash within one
year; inventory is always considered a current asset regardless of how
long it takes to produce and sell the inventory.
(c)
A liability is a probable debt or obligation of the entity as a result of a past
transaction, which will be paid with assets or services.
(d)
A current liability is a liability that will be paid in cash (or other current
assets) or satisfied by providing service within the coming year.
(e)
Contributed capital is the financing provided to the business by owners;
usually owners provide cash and sometimes other assets such as
equipment and buildings.
(f)
Retained earnings are the cumulative earnings of a company that are not
distributed to the owners and are reinvested in the business.
2-1
Chapter 02 Investing and Financing Decisions and the Balance Sheet
3.
(a) The separate-entity assumption requires that business transactions are
separate from the transactions of the owners. For example, the purchase
of a truck by the owner for personal use is not recorded as an asset of the
business.
(b)
The unit-of-measure assumption requires information to be reported in the
national monetary unit. That means that each business will account for
and report its financial results primarily in terms of the national monetary
unit, such as Yen in Japan and Australian dollars in Australia.
(c)
Under the continuity or going-concern assumption, businesses are
assumed to operate into the foreseeable future. That is, they are not
expected to liquidate.
(d)
The historical cost principle requires assets to be recorded at the cashequivalent cost on the date of the transaction. Cash-equivalent cost is the
cash paid plus the dollar value of all noncash considerations.
4.
Accounting assumptions are necessary because they reflect the scope of
accounting and the expectations that set certain limits on the way accounting
information is reported.
5.
An account is a standardized format used by organizations to accumulate the
dollar effects of transactions on each financial statement item. Accounts are
necessary to keep track of all increases and decreases in the fundamental
accounting model.
6.
The fundamental accounting model is provided by the equation:
Assets = Liabilities + Stockholders' Equity
7.
A business transaction is (a) an exchange of resources (assets) and obligations
(debts) between a business and one or more outside parties, and (b) certain
events that directly affect the entity such as the use over time of rent that was
paid prior to occupying space and the wearing out of equipment used to operate
the business. An example of the first situation is (a) the sale of goods or
services. An example of the second situation is (b) the use of insurance paid
prior to coverage.
8.
Debit is the left side of a T-account and credit is the right side of a T-account. A
debit is an increase in assets and a decrease in liabilities and stockholders'
equity. A credit is the opposite -- a decrease in assets and an increase in
liabilities and stockholders' equity.
2-2
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
9.
Transaction analysis is the process of studying a transaction to determine its
economic effect on the entity in terms of the accounting equation:
Assets = Liabilities + Stockholders' Equity
The two principles underlying the process are:
* every transaction affects at least two accounts.
* the accounting equation must remain in balance after each
transaction.
The two steps in transaction analysis are:
(1) identify and classify accounts and the direction and amount of the
effects.
(2) determine that the accounting equation (A = L + SE) remains in
balance.
10.
The equalities in accounting are:
(a) Assets = Liabilities + Stockholders' Equity
(b) Debits = Credits
11.
The journal entry is a method for expressing the effects of a transaction on
accounts in a debits-equal-credits format. The title of the account(s) to be
debited is (are) listed first and the title of the account(s) to be credited is (are)
listed underneath the debited accounts. The debited amounts are placed in a lefthand column and the credited amounts are placed in a right-hand column.
12.
The T-account is a tool for summarizing transaction effects for each account,
determining balances, and drawing inferences about a company's activities. It is
a simplified representation of a ledger account with a debit column on the left
and a credit column on the right.
13.
The current ratio is computed as current assets divided by current liabilities. It
measures the ability of the company to pay its short-term obligations with current
assets. A high ratio normally suggests good liquidity, but a ratio that is too high
may indicate inefficient use of resources. The rule of thumb was a ratio between
1.0 and 2.0 (twice as many current assets as current liabilities), but sophisticated
cash management systems allow many companies to minimize funds invested in
current assets and have a current ratio below 1.0.
14.
Investing activities on the statement of cash flows include the buying and selling
of productive assets and investments. Financing activities include borrowing and
repaying debt, issuing and repurchasing stock, and paying dividends.
2-3
Chapter 02 Investing and Financing Decisions and the Balance Sheet
MULTIPLE CHOICE
1. b
2. d
3. b
4. a
5. d
6. c
7. d
8. d
9. b
10. a
2-4
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
Authors' Recommended Solution Time
(Time in minutes)
Mini-exercises
No.
Time
1
3
2
3
3
4
4
4
5
5
6
3
7
3
8
6
9
6
10
6
11
4
12
4
Exercises
No.
Time
1
8
2
15
3
8
4
10
5
10
6
10
7
10
8
15
9
20
10
20
11
15
12
20
13
20
14
20
15
20
16
15
17
10
18
10
19
15
20
10
Problems
No.
Time
1
20
2
25
3
40
4
15
5
40
6
20
Alternate
Problems
No.
Time
1
20
2
25
3
40
4
15
Cases and
Projects
No.
Time
1
15
2
15
3
15
4
20
5
15
6
20
7
30
8
20
9
*
* Due to the nature of these cases and projects, it is very difficult to estimate the
amount of time students will need to complete the assignment. As with any openended project, it is possible for students to devote a large amount of time to these
assignments. While students often benefit from the extra effort, we find that some
become frustrated by the perceived difficulty of the task. You can reduce student
frustration and anxiety by making your expectations clear. For example, when our goal
is to sharpen research skills, we devote class time discussing research strategies.
When we want the students to focus on a real accounting issue, we offer suggestions
about possible companies or industries.
2-5
Chapter 02 Investing and Financing Decisions and the Balance Sheet
MINI-EXERCISES
M2–1.
C
(1) Separate-entity assumption
H
(2) Historical cost principle
G
(3) Credits
A
(4) Assets
I
(5) Account
D
(1) Journal entry
C
(2) A = L + SE, and Debits = Credits
A
(3) Assets = Liabilities + Stockholders’ Equity
I
(4) Liabilities
B
(5) Income statement, balance sheet, statement of retained earnings, and
statement of cash flows
M2–2.
M2–3.
(1) Y
(2) N
(3) Y
(4) N
(5) Y
(6) N
2-6
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
M2–4.
CL
(1) Accounts Payable CA
(2) Accounts Receivable
NCA
(3) Buildings
CA
(4) Cash
SE
(5) Contributed Capital
NCA
(6) Land
CA
(7) Merchandise Inventory
CL
(8)
NCA
(9) Long-Term Investments
NCL
(10) Notes Payable (due in three years)
CA
(11) Notes Receivable (due in six months)
CA
(12) Prepaid Rent
SE
(13) Retained Earnings
CA
(14) Supplies
CL
(15) Utilities Payable
CL
(16) Wages Payable
Income Taxes Payable
M2–5.
Assets
=
a.
Cash
+20,000
b.
Cash
Notes
receivable
–7,000
+7,000
c.
Cash
+1,000
d.
Cash
Equipment
–
6,000
+15,000
e.
Cash
–2,000
Liabilities
+ Stockholders’ Equity
Notes payable +20,000
Notes payable
2-7
Contributed
capital
+1,000
Retained
earnings
–2,000
+9,000
Chapter 02 Investing and Financing Decisions and the Balance Sheet
M2–6.
Debit
Increases
Decreases
Decreases
Increase
Assets
Liabilities
Stockholders’ equity
Credit
Decreases
Increases
Increases M2–7.
Decrease
Assets
Debit
Credit
Liabilities
Credit
Debit
Stockholders’ equity
Credit
Debit
M2–8.
a.
Cash (+A) ............................................................................
Notes Payable (+L) ........................................................
20,000
b.
Notes Receivable (+A).........................................................
Cash ( A) .......................................................................
7,000
Cash (+A) ............................................................................
Contributed Capital (+SE) ..............................................
1,000
Equipment (+A) ...................................................................
Cash ( A) .......................................................................
Notes Payable (+L) ........................................................
15,000
Retained Earnings ( SE) .....................................................
Cash ( A) .......................................................................
2,000
c.
d.
e.
20,000
7,000
1,000
6,000
9,000
2,000
M2–9.
Cash
Beg.
800
(a) 20,000
(c)
1,000
6,800
7,000
6,000
2,000
Notes Receivable
(b)
(d)
(e)
Beg.
(b)
Equipment
900
7,000
Beg. 15,000
(d) 15,000
7,900
30,000
2-8
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
Notes Payable
2,700 Beg.
20,000 (a)
9,000 (d)
Contributed Capital
5,000 Beg.
1,000 (c)
31,700
6,000
Retained Earnings
9,000 Beg.
(e)
2,000
7,000
M2–10.
Pitt Inc.
Balance Sheet
At January 31, 2012
Assets
Current assets:
Cash
Notes receivable
Total current assets
$ 6,800
7,900
14,700
Equipment
30,000
Total Assets
$44,700
Liabilities
Current liabilities:
Notes payable
Total current liabilities
Stockholders’ Equity
Contributed capital
Retained earnings
Total stockholders’ equity
Total Liabilities &
Stockholders’ Equity
$ 31,700
31,700
6,000
7,000
13,000
$44,700
M2–11.
Current Ratio =
2007
2008
Current Assets
240,000
260,000
÷
÷
÷
Current Liabilities
160,000
220,000
=
=
1.50
1.18
This ratio indicates that Sal’s Pizza has sufficient current assets to settle current
liabilities, but that the ratio has also decreased between 2007 and 2008 by .32 (21%).
Sal’s Pizza’s ratio is higher than Papa John’s 2008 ratio (of .75), indicating that Sal’s
Pizza appears to have stronger liquidity than Papa John’s. However, given its size,
Papa John’s is likely to have a strong cash management system that can keep current
asset levels low.
2-9
Chapter 02 Investing and Financing Decisions and the Balance Sheet
M2–12.
(a) F
(b) I
(c) F
(d) I
(e) F
EXERCISES
2-10
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
E2–1.
E
(1) Transaction
F
(2) Continuity assumption
B
(3) Balance sheet
P
(4) Liabilities
K
(5) Assets = Liabilities + Stockholders’ Equity
M
(6) Note payable
S
(7) Conservatism
H
(8) Historical cost principle
I
(9) Account
Q
(10) Dual effects
O
(11) Retained earnings
A
(12) Current assets
C
(13) Separate-entity assumption
W
(14) Reliability
D
(15) Debits
J
(16) Accounts receivable
N
(17) Unit-of-measure assumption
U
(18) Materiality
T
(19) Relevance
R
(20) Stockholders’ Equity
2-11
Chapter 02 Investing and Financing Decisions and the Balance Sheet
E2–2.
Req. 1
Received
Given
(a)
Cash (A)
(b)
Equipment (A)
(c)
No exchange transaction
—
(d)
Equipment (A)
Note payable (L)
(e)
Building (A)
(f)
Intangibles (A)
[or Copyright]
Cash (A)
(g)
Retained earnings (SE) [Received a reduction
in the amount available for payment to
stockholders]
Cash (A)
(h)
Land (A)
Cash (A)
(i)
Intangibles (A)
(j)
No exchange transaction
—
(k)
Investments (A)
Cash (A)
(l)
Cash (A)
Short-term note payable (L)
(m)
Note payable (L)
promise to pay]
Contributed capital (SE)
Cash (A)
[or Delivery truck]
[or Computer equipment]
[or Construction in progress]
Cash (A)
Cash (A) and Note payable (L)
[or Patents]
[Received a reduction in its
Cash (A)
Req. 2
The truck in (b) would be recorded as an asset of $18,000. The land in (h) would be
recorded as an asset of $50,000. These are applications of the historical cost principle.
Req. 3
The agreement in (c) involves no exchange or receipt of cash, goods, or services and
thus is not a transaction. Since transaction (j) occurs between the owner and others,
there is no effect on the business because of the separate-entity assumption.
2-12
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
E2–3.
Balance Sheet
Categorization
Debit or Credit
Balance
(1) Accounts Receivable
CA
Debit
(2) Retained Earnings
SE
Credit
(3) Taxes Payable
CL
Credit
(4) Prepaid Expenses
CA
Debit
(5) Contributed Capital
SE
Credit
(6) Long-Term Investments
NCA
Debit
(7) Plant, Property, and Equipment
NCA
Debit
(8) Accounts Payable
CL
Credit
(9) Short-Term Investments
CA
Debit
(10) Long-Term Debt
NCL
Credit
Account
E2–4.
Event
a.
b.
Assets
Cash
+8,000
Cash
–
1,000
+9,000
+500
Cash
d.
Note
receivable
Liabilities
+ Stockholders’ Equity
+34,000
Equipment
c.
e.
=
Cash
–500
Land
+15,000
Cash
–4,000
Contributed
capital
Notes payable
+7,000
Notes payable
+9,000
Mortgage note
payable
+11,000
2-13
+34,000
Chapter 02 Investing and Financing Decisions and the Balance Sheet
E2–5.
Req. 1
Event
Assets
a.
Buildings
Equipment
Cash
b.
Cash
=
+212.0
+30.4
–
43.2
+186.6
c.
d.
Short-term
Investments
Cash
e.
No effects
f.
Cash
Short-term
Investments
Liabilities
+ Stockholders’ Equity
Notes payable
(long-term)
+199.2
Contributed
capital
Dividends
payable
+121.4
Retained
earnings
+186.6
–121.4
+2,908.7
– 2,908.7
+2,390.0
– 2,390.0
Req. 2
The separate-entity assumption states that transactions of the business are separate
from transactions of the owners. Since transaction (e) occurs between the owners and
others in the stock market, there is no effect on the business.
2-14
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
E2–6.
a.
b.
c.
d.
e.
Cash (+A) ............................................................................
Contributed capital (+SE) ...............................................
34,000
Equipment (+A) ...................................................................
Cash ( A) .......................................................................
Notes payable (+L) ........................................................
8,000
Cash (+A) ............................................................................
Notes payable (+L).........................................................
9,000
Notes receivable (+A) .........................................................
Cash ( A) ......................................................................
500
Land (+A).............................................................................
Cash ( A) .......................................................................
Mortgage notes payable (+L) ........................................
15,000
Buildings (+A) ......................................................................
Equipment (+A) ..................................................................
Cash ( A) .......................................................................
Note payable (+L) .........................................................
212.0
30.4
Cash (+A) ............................................................................
Contributed capital (+SE) ...............................................
186.6
Retained earnings ( SE) .....................................................
Dividends payable (+L) ..................................................
121.4
Short-term investments (+A)................................................
Cash ( A) .......................................................................
2,908.7
34,000
1,000
7,000
9,000
500
4,000
11,000
E2–7.
Req. 1
a.
b.
c.
d.
e.
No journal entry required.
f.
Cash (+A) ............................................................................
Short-term investments ( A) ..........................................
2-15
43.2
199.2
186.6
121.4
2,908.7
2,390.0
2,390.0
Chapter 02 Investing and Financing Decisions and the Balance Sheet
Req. 2
The separate-entity assumption states that transactions of the business are separate
from transactions of the owners. Since transaction (e) occurs between the owners and
others in the stock market, there is no effect on the business.
E2–8.
Req. 1
Cash
Beg.
0
(a) 63,000 5,000 (b)
4,000 2,500 (e)
(d)
59,500
Beg.
(e)
Note Receivable
0
2,500
2,500
Equipment
Beg.
0
(b) 20,000
20,000
Land
0
Beg.
(d) 13,000
Note Payable
0 Beg.
15,000 (b)
13,000
15,000
Contributed Capital
0 Beg.
63,000 (a)
17,000 (d)
80,000
Req. 2
Assets $
95,000
= Liabilities $ 15,000
+ Stockholders’ Equity $
80,000
Req. 3
The agreement in (c) involves no exchange or receipt of cash, goods, or services and
thus is not a transaction. Since transaction (f) occurs between the owner and others,
there is no effect on the business due to the separate-entity assumption.
2-16
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
E2–9.
Req. 1
Transaction
1
Brief Explanation
Issued capital stock to shareholders for $15,000 cash. (FastTrack
Sports Inc. is a corporation.)
2
Borrowed $75,000 cash and signed a short-term note for this amount.
3
Purchased land for $16,000; paid $5,000 cash and gave an $11,000
short-term note payable for the balance.
4
Loaned $4,000 cash; borrower signed a short-term note for this amount
(Note Receivable).
5
Purchased store fixtures for $9,500 cash.
6
Purchased land for $4,000, paid for by signing a short-term note.
Req. 2
FastTrack Sports Inc.
Balance Sheet
At January 7, 2011
Assets
Current Assets
Cash
Note receivable
Total Current Assets
Store fixtures
Land
$71,500
4,000
75,500
9,500
20,000
Total Assets
$105,000
Liabilities
Current Liabilities
Note payable
Total Current Liabilities
Stockholders’ Equity
Contributed capital
Total Stockholders’ Equity
Total Liabilities &
Stockholders’ Equity
IF YOU WANT THIS TEST BANK OR
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$90,000
90,000
15,000
15,000
$105,000
Chapter 02 - Investing and Financing Decisions and the Balance Sheet
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CHAPTERS IN PDF FORMAT
2-18