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Chapter 1: Business, Accounting, and You
Discussion Questions: Key Points
1. The economic events that affect a business are communicated through the accounting
function. Language helps us to make sense of the world around us. If we don’t know the
language, we will be limited in our ability to operate effectively in the business
environment.
2. Valid arguments can be made on both sides of this question. Without technical knowledge
an accountant will not be able to provide much value. Without ethics, however, an
accountant can be dangerous. Accounting exists because of a need for an objective account
of the economic events that affect an entity.
3. Financial statements seek to provide information about the events that have already
occurred. For example, the cost principle is used to carry assets on the books. It is up to the
user to make projections as to how past transactions are likely to affect future events.
4. Reasons why—reliability, objectivity. Disadvantages—relevance, decision-usefulness.
5. Financial statement uses discussed in the text: allow investors and creditors to make
investment decisions, enable suppliers and customers to determine the financial condition of
a business, and report to regulatory agencies.
6. It is a separate legal entity from its owners. Factors—liability of owners for business
activities, taxation, distribution of income.
7. A = L + SE. Assets—things of value a company has. Liabilities—amount a business owes to
third parties. Stockholder’s equity—the amount of assets that is owned by the stockholders.
8. The transactions would have the following effects:
a. A+, SE+
b. A+, L+
c. A+, SE+
d. A+, A9. Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash
Flows. The financial statements articulate (join together). The income statement needs to be
prepared in order to produce the net income amount that is reported on the statement of
retained earnings. The ending balance in retained earnings is needed in order to prepare the
balance sheet. The ending balance in cash on the balance sheet and other information is
needed for the statement of cash flows.
10. The financial statements are
a. Balance sheet
b. Statement of retained earnings
c. Statement of cash flows
d. Income statement
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Short Exercises
(5-10 min.) S 1-1
1.
d
2.
a
3.
c
4.
b
(5-10 min.) S 1-2
Answer: d.
Cost Principle
(10-15 min.) S 1-3
1.
e
2.
f
3.
d
4.
g
5.
b
6.
c
7.
a
(5-10 min.) S 1-4
a. $82,000 ($106,000 − $24,000)
b. $91,000 ($63,000 + $28,000)
c. $49,000 ($94,000 − $45,000)
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(5-10 min.) S 1-5
Assets
=
Liabilities
+
Stockholder’s Equity
Cash + Equipment
=
Accounts Notes
payable + payable
+
Stockholder’s
equity
$13,000 + $35,000
=
$9,000 + $5,000
+
$34,000
Based on the accounting equation, Beach has $34,000 of equity in the business. Assets of $48,000
($13,000 + $35,000) − Liabilities of $14,000 ($9,000 + $5,000) = Stockholder’s equity of $34,000.
(5-10 min.) S 1-6
Assets
=
Cash + Supplies
=
$36,000 + $1,500
=
Liabilities
$9,500
+
Stockholders’ Equity
+
Stockholders’ equity
+
$28,000
Based on the accounting equation, Boehms has $9,500 of liabilities. Assets of $37,500 ($36,000 +
$1,500) − Stockholders’ equity of $28,000 = Liabilities of $,500
(5-10 min.) S 1-7
Investment
Borrowing
Bal.
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+ $15,000
+ 18,000
$33,000
=
=
=
=
Notes Payable
+
+ $18,000
$18,000
+
+
Common Stock
+ $15,000
______
$15,000
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(5-10 min.) S 1-8
Assets
Cash
+
=
Accounts
receivable
Liabilities
Accounts
payable
Stockholders’ Equity
+
Common
stock
+
Retained Earnings
Service
revenue
–
Salary
-
Dividends
expense
a.
+$62,000
b.
-$33,000
+ 62,000
+ $33,000
(5-10 min.) S 1-9
1. e
2. a
3. c
4. a
5. e
6. e
7. a
8. e
9. d
10. b
11. a
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(5-10 min.) S 1-10
1.
BS
2.
BS
3.
IS
4.
IS
5.
BS, RE
6.
BS
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(5-10 min.) S 1-11
1.
d
2.
e
3.
b
4.
a
5.
c
(5-10 min.) S 1-12
1. Increased total assets (Cash)
2. No effect on total assets. The increase in Land offset the decrease in Cash.
3. Decreased total assets (Cash)
4. Increased total assets (Machinery and equipment)
5. Increased total assets (Accounts receivable)
6. Decreased total assets (Cash)
7. No effect on total assets. The increase in Cash offset the decrease in Accounts receivable.
8. No effect on total assets. The increase in Cash offset the decrease in Land.
9. Increased total assets (cash)
(5-10 min.) S 1-13
1.
True
2.
False ( Increase Supplies; decrease Cash)
3.
True
4.
True
5.
True
6.
False (Decrease Cash; decrease Accounts payable)
7.
True
8.
True
False (Decrease Cash; increase Expense/decrease Stockholders’ equity)
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(5-10 min.) S 1-14
Req. 1
1.
f. Sold stock to start the business.
2.
e. Paid cash to purchase equipment.
3.
g. Purchased equipment with a bank loan.
4.
a. Earned revenue for services provided, but customer will pay later.
5.
d. Paid cash for expenses incurred to operate the business.
6.
c. Received cash for revenue earned by providing services.
7.
b. Customers paid cash for services completed earlier in the month.
Req. 2
Revenues (transactions “4” and “6”)…………………
$2,950
Less: Expenses (transaction “5”)………………..……
1,350
Net income………………………………………..….
$1,600
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Exercises
(10-15 min.) E 1-15A
Appleway, Corp.
1st Choice, Inc.
Hamilton, Inc.
$ 48,700 + $13,400 = $62,100
$ 82,000 - $27,000 = $55,000
$127,300 - $88,500 = $38,800
(10-15 min.) E 1-16A
Req. 1
Beginning…..
Ending………
Total
Assets
$91,000
$145,000
−
Total
Stockholders’
Equity
=
Total
Liabilities
−
−
$7,000
$73,000
=
=
$84,000
$72,000
=
$ 12,000
Decrease during the year
Req. 2
Possible reasons for the decrease in Liabilities may include:
•
Payments were made on account
•
Payments were made on a note payable
(10-15 min.) E 1-17A
Req. 1
Beginning…..
Ending………
Increase during the year
Total
Assets
$37,000
$82,000
−
Total
Liabilities
=
Total
Stockholders’ Equity
−
−
$16,000
$28,000
=
=
$21,000
$54,000
=
$33,000
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Req. 2
Possible reasons for the increase in Stockholders’ equity may include:
•
Sold stock
•
Earned net income
(15-20 min.) E 1-18A
Aug. 31, 2014
Sept. 30, 2014
Total assets
$135,000
$190,000
-
Total liabilities
$(81,000)
$(145,000)
=
Stockholders’ equity
$54,000
$45,000
-
Common stock
(25,000)
(25,000)
=
Retained earnings
$29,000
$20,000
Assumption A:
No dividends were paid
$20,000 ending balance
$20,000
$(9,000)
Assumption B:
$29,000 Beg bal + Net income - dividends
$29,000 + Net income - 0
Net loss
$14,000 of dividends were paid
$20,000 ending balance
$20,000
$5,000
Assumption C:
=
=
=
=
=
=
$29,000 Beg bal + Net income - dividends
$29,000 + Net income – $14,000
Net income
$6,000 of dividends were paid
$20,000 ending balance
$20,000
$(3,000)
=
=
=
$29,000 Beg bal + Net income - dividends
$29,000 + Net income - $6,000
Net loss
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(15-20 min.) E 1-19A
Assets
=
Cash
+
+
Stockholders’ Equity
+
Accounts
payable
Land
Common
stock
+
Retained Earnings
Service
revenue
August
2
+ 90,000
6
- 53,000
+ 90,000
+ 1,200
15
No entry
17
+ 9,400
19
- 2,400
22
+ 150
30
-800
$43,350
Rent
– expense
+530,000
11
Bal.
Medical
supplies
Liabilities
+ 1,200
+ 9,400
+ 2,400
- 150
-800
+
$1,050
+
$53,000
=
$400
+
$90,000
+
$9,400
–
$2,400
(10-15 min.) E 1-20A
Req. 1
The business is a corporation, as shown by the fact that it has a common stock account.
Req. 2
Happy Tots Gym, Inc.
Balance Sheet
March 31, 2014
ASSETS
Cash
Accounts receivable
Supplies
Office equipment
$ 24,000
12,500
300
9,400
Total assets
$46,200
LIABILITIES
Accounts payable
$3,300
Note payable
20,000
Total liabilities
23,300
STOCKHOLDERS’ EQUITY
Common stock
4,000
Retained earnings
18,900
Total Stockholders’ equity
22,900
Total liabilities and
stockholders’ equity
$46,200
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Req. 3
The balance sheet reports the financial position of a company at a given point in time and that
Assets = Liabilities + Stockholders’ Equity.
(15-20 min.) E 1-21A
Req. 1
Account
Office furniture
Utilities expense
Accounts payable
Notes payable
Service revenue
Accounts receivable
Supplies expense
Type of Account
Asset
Expense
Liability
Liability
Revenue
Asset
Expense
Account
Rent expense
Cash
Office supplies
Salaries expense
Salaries payable
Property tax expense
Equipment
Type of Account
Expense
Asset
Asset
Expense
Liability
Expense
Asset
Req. 2
Cole Consulting, Inc.
Income Statement
For the Year Ended December 31, 2014
Service Revenue
Expenses
Salaries expense
Rent expense
Utilities expense
Supplies expense
Property tax expense
Total expenses
Net income
$116,600
$36,700
28,000
6,300
2,700
1,600
75,300
$ 41,300
Results of operations for 2014: Net income of $41,300
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(15-20 min.) E 1-21A Cont.
Req 3
Cole Consulting, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained earnings, Jan. 1, 2014
Add: Net income
Subtotal
Less: Dividends
Retained earnings, Dec. 31, 2014
$0
41,300
41,300
32,000
$9,300
The dividends for the year were $32,000. ($0 + $41,300 - $9,300)
(15-20 min.) E 1-22A
Req 1
Earth, Inc.
Beginning:
Assets
−
Liabilities
=
Stockholders’ Equity
$ 55,000
45,000
$ 10,000
Req 2
Ending:
Assets
−
Liabilities
=
Stockholders’ Equity
$ 114,000
25,000
$ 89,000
Req 3
Ending Stockholders’ equity
Beginning Stockholders’ equity
Change in Stockholders’ equity
Sale of stock
Change in retained earnings
Dividends
Net income
=
=
+
=
$89,000
(10,000)
79,000
16,000
63,000
50,000
$113,000
Note: The change in Retained earnings equals Net income minus Dividends. So, Dividends are
added back to the change in Retained earnings to arrive at Net income.
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(10-15 min.) E 1-23B
Corner Grocery Corp.
Sampson Hardware, Inc.
Perfect Cleaners, Inc.
$45,000 + $27,900 = $72,900
$104,000 - $44,000 = $60,000
$108,800 - $92,600 = $16,200
(10-15 min.) E 1-24B
Req. 1
Beginning…..
Ending………
Total
Assets
Total
− Stockholders’ Equity =
Total
Liabilities
$84,000
$153,000
−
−
=
=
$28,000
$62,000
=
$ 34,000
$56,000
$91,000
Increase during the year
Req. 2
Possible reasons for the increase in Liabilities may include:
•
Made purchases on account
•
Borrowed money on a note payable
(10-15 min.) E 1-25B
Req. 1
Beginning…..
Ending………
Total
Assets
−
Total
Liabilities
=
Total
Stockholders’ Equity
$50,000
$57,000
−
−
$40,000
$8,000
=
=
$10,000
$49,000
=
$ 39,000
Increase during the year
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(10-15 min.) E 1-25B (cont)
Req. 2
Possible reasons for the increase in Stockholders’ equity may include:
•
Sold stock
•
Earned net income
(15-20 min.) E 1-26B
Oct. 31, 2014
Nov. 30, 2014
Total assets
$127,000
$165,000
-
Total liabilities
$(92,000)
$(119,000)
=
Stockholders’ equity
$35,000
$46,000
-
Common stock
(15,000)
(15,000)
=
Retained earnings
$20,000
$31,000
Assumption A:
No dividends were paid.
$31,000 ending balance
$31,000
$11,000
Assumption B:
=
=
$20,000 Beg bal + Net income - Dividends
$20,000 + Net income - 0
Net income
$7,000 of dividends were paid.
$31,000 ending balance
$31,000
$18,000
Assumption C:
=
=
=
=
$20,000 Beg bal + Net income - Dividends
$20,000 + Net income – $7,000
Net income
$15,000 of dividends were paid.
$31,000 ending balance
$31,000
$26,000
=
=
=
$20,000 Beg bal + Net income - Dividends
$20,000 + Net income - $15,000
Net income
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(15-20 min.) E 1-27B
Assets
=
Cash
+
Medical
supplies
+
Liabilities
Accounts
payable
Land
Stockholders’ Equity
+
Common
stock
+
Retained Earnings
Service
revenue
March
2
+ 45,000
6
- 20,000
Rent
expense
+ 45,000
+ 20,000
11
15
–
+ 1,000
+ 1,000
No entry required
17
+ 11,000
19
- 1,700
22
+ 350
30
-700
Bal.
+ 11,000
+ 1,700
- 350
- 700
$33,950
+
$650
+
$20,000
=
$300
+
$45,000
+
$11,000
–
$1,700
(10-15 min.) E 1-28B
Req. 1
The business is a corporation, as shown by the fact that it has a common stock account.
Req. 2
Julie’s Coffee Shop, Inc.
Balance Sheet
October 31, 2014
ASSETS
LIABILITIES
Cash
Accounts receivable
Supplies
Office equipment
$ 19,000
1,400
750
14,200
Total assets
$35,350
Accounts payable
$800
Note payable
4,000
Total liabilities
4,800
STOCKHOLDERS’ EQUITY
Common stock
18,000
Retained earnings
12,550
Total Stockholders’ equity
30,550
Total liabilities and
stockholders’ equity
$35,350
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Req. 3
The balance sheet reports the financial position of a company at a given point in time and that
Assets = Liabilities + Stockholders’ Equity.
(15-20 min.) E 1-29B
Req. 1
Account
Office furniture
Utilities expense
Accounts payable
Notes payable
Service revenue
Accounts receivable
Supplies expense
Type of Account
Asset
Expense
Liability
Liability
Revenue
Asset
Expense
Account
Rent expense
Cash
Office supplies
Salaries expense
Salaries payable
Property tax expense
Equipment
Type of Account
Expense
Asset
Asset
Expense
Liability
Expense
Asset
Req. 2
Alden Consulting, Inc.
Income Statement
For the Year Ended December 31, 2014
Service Revenue
Expenses
Salaries expense
Rent expense
Utilities expense
Supplies expense
Property tax expense
Total expenses
Net income
$161,000
$43,000
18,000
12,600
3,400
2,400
79,400
$ 81,600
Results of operations for 2014: Net income of $81,600.
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(15-20 min.) E 1-29B Cont.
Req 3
Alden Consulting, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained earnings, Jan. 1, 2014
Add: Net income
Subtotal
Less: Dividends
Retained earnings, Dec. 31, 2014
$0
81,600
81,600
60,000
$21,600
The dividends for the year were $60,000 ($0 + $81,600 - $21,600).
(15-20 min.) E 1-30B
Req 1
Hastings, Inc.
Beginning:
Assets
−
Liabilities
=
Stockholders’ Equity
$ 83,000
36,000
$ 47,000
Req 2
Ending:
Assets
−
Liabilities
=
Stockholders’ Equity
$ 162,000
31,000
$ 131,000
Req 3
=
=
+
=
Ending Stockholders’ equity
Beginning Stockholders’ equity
Change in Stockholders’ equity
Sale of stock
Change in retained earnings
Dividends
Net income
$131,000
47,000
84,000
20,000
64,000
71,000
$135,000
Note: The change in Retained earnings equals Net income minus Dividends. So, Dividends are
added back to the change in Retained earnings to arrive at Net income.
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Problems
(20-25 min.) P 1-31A
Req. 1
Assets
Cash
+
Accounts
receivable
+
=
Supplies
+
Office
furniture
Liabilities
Stockholders’ Equity
+
Accounts
payable
Common
stock
+
April
3
*
5
+ 50,000
Bal.
$50,000
7
-600
Bal.
$49,400
+
$0
+
$0
$49,400
*
14
**
$49,400
-1,300
Bal.
$48,100
30
-2,000
Bal.
$46,100
–
Dividends
$0
=
$0
+
$50,000
+
$0
–
$0
–
$0
+
$0
+
$600
+
$0
=
$0
+
$50,000
+
$0
–
$0
–
$0
+
$0
+
$600
+
$50,000
+
$0
–
$0
–
$0
$0
–
$0
–
$0
+
$4,300
+4,300
=
$4,300
+5,400
27
Rent
expense
+ 600
20
Bal.
–
+
+4,300
10
Service
revenue
+ 50,000
9
Bal.
Retained Earnings
+
$5,400
+5,400
+
$600
+
$4,300
=
$4,300
+
$50,000
+
$5,400
–
+1,300
+
$5,400
+
$600
+
$4,300
=
$4,300
+
$50,000
+
$5,400
–
+2,000
+
$5,400
+
$600
+
$4,300
=
$4,300
+
$50,000
+
$5,400
–
* Represents a personal, not a business transaction
** Not a transaction as there was no financial impact
18
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$1,300
–
$2,000
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Req. 2
a.
Total assets
=
$56,400 ($46,100 + $5,400+ $600 + $4,300)
b.
Total liabilities
=
$4,300
c.
Total stockholder’s equity
=
$52,100 ($50,000 + $5,400 - $1,300 - $2,000)
d.
Net income for April
=
$4,100 ($5,400 − $1,300)
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(25-30 min.) P 1-32A
Req. 1
Assets
Cash
Nov.
Beg.
bal.
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
20
+
Accounts
receivable
+
=
Supplies
+
Liabilities
Accounts
payable
Equipment
Common
stock
Retained Earnings
Service
revenue
–
Salaries
expense
–
Dividends
+
$6,300
–
$1,770
–
$0
+
+
$6,300
–
$1,770
–
$0
+
$41,640
+
–
$1,770
–
$0
$0
+
$41,640
+
$6,300
+ 4,000
$10,300
–
$1,770
–
$0
+
$41,640
+
$10,300
–
$1,770
–
$0
=
$0
+ 500
$500
+
$41,640
+
–
$1,770
–
$0
$26,000
=
$500
+
+
–
$1,770
–
$0
+
$26,000
=
$500
+
$41,640
+ 8,000
$49,640
$10,300
+ 3,500
$13,800
+
$13,800
–
–
$0
+
$26,000
=
$500
+
$49,640
+
$13,800
–
–
$0
+
$500
- 180
$320
$1,770
+ 2,300
$4,070
+
$26,000
=
$500
+
$49,640
+
$13,800
–
$4,070
–
+
$320
+
$26,000
=
$500
+
$49,640
+
$13,800
–
$4,070
–
$0
+700
$700
+
$3,210
+
$0
+
$26,000
=
$4,700
+
+
$3,210
+
$0
+
$26,000
=
+
$3,210
+
$0
+
$26,000
=
$4,700
-4,700
$0
+
$3,210
- 1,100
$2,110
+
$0
+
$26,000
=
+
+
$26,000
=
$22,060
+
+
+
$26,000
$22,060
+8,000
$30,060
- 2,300
$27,760
+180
$27,940
-700
$27,240
+
$2,110
+ 3,500
$5,610
$0
+ 500
$500
+
$500
+
+
$5,610
+
$500
+
$5,610
+
+
$5,610
+
$5,610
Solutions Manual
+
$21,640
+ 20,000
$41,640
$1,660
+ 20,000
$21,660
-4,700
$16,960
+ 4,000
$20,960
+ 1,100
$22,060
+
Stockholders’ Equity
+
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(25-30 min.) P 1-32A (cont.)
Req. 2
Interiors by Dennise Inc.
Income Statement
Month Ended November 30, 2014
Revenues
Service revenue
Expenses
Salaries expense
Net income
$13,800
4,070
$9,730
Req. 3
Interiors by Dennise, Inc.
Statement of Retained Earnings
Month Ended November 30, 2014
Retained earnings, November 1, 2014
Add: Net income
Subtotal
Less: Dividends
Retained earnings, November 30, 2014
$0
9,730
9,730
700
$9,030
Req.4
Interiors by Dennise, Inc.
Balance Sheet
November 30, 2014
ASSETS
Cash
Accounts receivable
Supplies
Equipment
Total assets
LIABILITIES
$ 27,240 Accounts payable
$ 500
5,610
320
STOCKHOLDERS’ EQUITY
26,000 Common stock
49,640
Retained earnings
9,030
Total Stockholders’ equity
58,670
$59,170
Total liabilities and
stockholder’s equity
$59,170
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(20-25 min.) P 1-33A
a.
The Classy Chassis, Inc.
Income Statement
Year Ended December 31, 2014
Service revenue
Expenses
Salaries expense
Insurance expense
Advertising expense
Total expenses
Net Income
$106,000
$38,000
4,600
3,500
46,100
$59,900
b.
The Classy Chassis, Inc.
Statement of Retained Earnings
Year Ended December 31, 2014
Retained earnings, December 31, 2013
Add: Net income
Subtotal
Less: Dividends
Retained earnings, December 31, 2014
$32,400
59,900
92,300
25,000
$67,300
c.
The Classy Chassis, Inc.
Balance Sheet
December 31, 2014
ASSETS
Cash
Accounts receivable
Equipment
Total assets
$14,800
12,500
82,400
LIABILITIES
Accounts payable
Notes payable
Total liabilities
$109,700
STOCKHOLDERS’ EQUITY
Common stock
30,000
Retained earnings
67,300
Total stockholders’ equity
97,300
Total liabilities and
stockholders’ equity
$109,700
$ 2,400
10,000
12,400
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(25-30 min.) P 1-34A
Req. 1
Account
Accounts payable
Accounts receivable
Advertising expense
Building
Cash
Common stock
Dividends
Equipment
Insurance expense
Type of Account
Liability
Asset
Stockholders’ equity
Asset
Asset
Stockholders’ equity
Stockholders’ equity
Asset
Stockholders’ equity
Account
Interest expense
Land
Note payable
Property tax expense
Rent expense
Salaries expense
Salaries payable
Service revenue
Supplies
Type of Account
Stockholders’ equity
Asset
Liability
Stockholders’ equity
Stockholders’ equity
Stockholders’ equity
Liability
Stockholders’ equity
Asset
Req. 2
Fast and Fit, Inc.
Income Statement
Year Ended March 31, 2014
Service revenue
Expenses
Salaries expense
Rent expense
Advertising expense
Interest expense
Property tax expense
Insurance expense
Total expenses
Net Income
$166,000
$92,000
23,000
15,000
6,000
3,500
2,300
141,800
$ 24,200
Fast and Fit, Inc.
Statement of Retained Earnings
Year Ended March 31, 2014
Retained earnings, March 31, 2013
Add: Net income
Subtotal
Less: Dividends
Retained earnings, March 31, 2014
$132,700
24,200
156,900
28,000
$128,900
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(continued) P 1-34A
Req. 3
Fast and Fit, Inc.
Balance Sheet
March 31, 2014
ASSETS
Cash
Accounts receivable
Supplies
Land
Equipment
Building
Total assets
$16,000
22,000
1,900
35,000
45,000
125,000
$244,900
LIABILITIES
Accounts payable
Salaries payable
Notes payable
Total liabilities
STOCKHOLDERS’ EQUITY
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and
stockholders’ equity
$ 16,000
3,000
62,000
81,000
35,000
128,900
163,900
$244,900
Req. 4
a.
$24,200 (Net profit = net income).
b. Decrease of $3,800 ($24,200 Net income minus $28,000 Dividends).
c. $244,900 (Total economic resources = total assets).
d. $ 81,000 (Total owed = total liabilities).
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(20-25 min.) P 1-35A
Baldwin Realty, Inc.
Balance Sheet
April 30, 2014
ASSETS
Cash
Accounts receivable
Supplies
Equipment
Total assets
$9,100
2,300
700
21,000
LIABILITIES
Accounts payable
Salaries payable
Notes payable
Total liabilities
$33,100
STOCKHOLDERS’ EQUITY
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and
stockholders’ equity
$ 650
1,800
6,000
8,450
15,000
9,650
24,650
$33,100
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(20-25 min.) P 1-36B
Req. 1
Assets
Cash
+
Accounts
receivable
+
=
Supplies
+
Office
furniture
Liabilities
Stockholders’ Equity
+
Accounts
payable
Common
stock
+
June
3
*
5
+ 70,000
Bal.
$70,000
7
-1,300
Bal.
$68,700
+
$0
+
$0
+
$0
=
10
*
14
**
+
+
20
$68,700
27
-2,400
Bal.
$66,300
30
-700
Bal.
$65,600
Rent
expense
–
Dividends
$0
=
$0
+
$70,000
+
$0
–
$0
–
$0
$0
+
$1,300
+
$0
+
$70,000
+
$0
–
$0
–
$0
$0
+
$1,300
+
$3,500
+
$70,000
+
$0
–
$0
–
$0
–
$0
–
$0
–
$0
+3,500
=
$3,500
+3,800
Bal.
–
+ 1,300
+3,500
$68,700
Service
revenue
+ 70,000
9
Bal.
Retained Earnings
+
$3,800
+3,800
+
$1,300
+
$3,500
=
$3,500
+
$70,000
+
$3,800
+2,400
+
$3,800
+
$1,300
+
$3,500
=
$3,500
+
$70,000
+
$3,800
–
+ 700
+
$3,800
+
$1,300
+
$3,500
=
$3,500
+
$70,000
+
$3,800
–
* Represents a personal, not a business transaction
** Not a transaction as there was no financial impact
26
$2,400
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$2,400
–
$700
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Req. 2
a.
Total assets
=
$74,200 ($65,600+ $3,800 + $1,300 + $3,500)
b.
Total liabilities
=
$3,500
c.
Total stockholder’s equity
=
$70,700 ($70,000 + $3,800 - $2,400 - $700)
d.
Net income for June
=
$1,400 ($3,800 − $2,400)
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(25-30 min.) P 1-37B
Req. 1
Assets
Cash
June
Beg.
bal.
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
28
+
Accounts
receivable
+
=
Supplies
+
Liabilities
Accounts
payable
Equipment
Common
stock
Retained Earnings
Service
revenue
–
Salaries
expense
–
Dividends
+
$9,170
–
$4,460
–
$0
+
+
$9,170
–
$14,460
–
$0
+
$40,000
+
–
$4,460
–
$0
$0
+
$40,000
+
$9,170
+ 2,500
$11,670
–
$4,460
–
$0
+
$40,000
+
$11,670
–
$4,460
–
$0
=
$0
+ 850
$850
+
$40,000
+
–
$4,460
–
$0
$32,000
=
$850
+
+
–
$4,460
–
$0
+
$32,000
=
$850
+
$40,000
+7,000
$47,000
$11,670
+ 6,200
$17,870
+
$17,870
–
–
$0
+
$32,000
=
$850
+
$47,000
+
$17,870
–
–
$0
+
$850
- 250
$600
$4,460
+ 4,600
$9,060
+
$32,000
=
$850
+
$47,000
+
$17,870
–
$9,060
–
+
$600
+
$32,000
=
$850
+
$47,000
+
$17,870
–
$9,060
–
$0
+1,500
$1,500
+
$4,130
+
$0
+
$32,000
=
$3,100
+
+
$4,130
+
$0
+
$32,000
=
+
$4,130
+
$0
+
$32,000
=
$3,100
-3,100
$0
+
$4,130
- 2,130
$2,000
+
$0
+
$32,000
=
+
+
$32,000
=
$13,210
+
+
+
$32,000
$13,210
+7,000
$20,210
- 4,600
$15,610
+250
$15,860
-1,500
$14,360
+
$2,000
6,200
$8,200
$0
+ 850
$850
+
$850
+
+
$8,200
+
$850
+
$8,200
+
+
$8,200
+
$8,200
Solutions Manual
+
$30,000
+ 10,000
$40,000
$1,680
+10,000
$11,680
-3,100
$8,580
+ 2,500
$11,080
+2,130
$13,210
+
Stockholders’ Equity
+
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(25-30 min.) P 1-37B (cont.)
Req. 2
Interiors by Jill, Inc.
Income Statement
Month Ended June 30, 2014
Revenues
Service revenue
Expenses
Salaries expense
Net income
$17,870
9,060
$8,810
Req. 3
Interiors by Jill, Inc.
Statement of Retained Earnings
Month Ended June 30, 2014
Retained earnings, June 1, 2014
Add: Net income
Subtotal
Less: Dividends
Retained earnings, June 30, 2014
$0
8,810
8,810
1,500
$7,310
Req.4
Interiors by Jill, Inc.
Balance Sheet
June 30, 2014
ASSETS
Cash
Accounts receivable
Supplies
Equipment
Total assets
LIABILITIES
$ 14,360 Accounts payable
$ 850
8,200
600
STOCKHOLDERS’ EQUITY
32,000 Common stock
47,000
Retained earnings
7,310
Total Stockholders’ equity
54,310
$55,160
Total liabilities and
stockholder’s equity
$55,160
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(20-25 min.) P 1-38B
a.
McKnight, Inc.
Income Statement
Year Ended December 31, 2014
Service revenue
Expenses
Salaries expense
Insurance expense
Advertising expense
Total expenses
Net Income
$88,000
$13,000
8,000
5,500
26,500
$61,500
b.
McKnight, Inc.
Statement of Retained Earnings
Year Ended December 31, 2014
Retained earnings, December 31, 2013
Add: Net income
Subtotal
Less: Dividends
Retained earnings, December 31, 2014
$23,500
61,500
85,000
40,000
$45,000
c.
McKnight, Inc.
Balance Sheet
December 31, 2014
ASSETS
Cash
Accounts receivable
Equipment
Total assets
$17,000
8,000
65,000
LIABILITIES
Accounts payable
Note payable
Total liabilities
$90,000
STOCKHOLDERS’ EQUITY
Common stock
20,000
Retained earnings
45,000
Total stockholders’ equity
65,000
Total liabilities and
stockholders’ equity
$90,000
$ 9,000
16,000
25,000
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(25-30 min.) P 1-39B
Req. 1
Account
Accounts payable
Accounts receivable
Advertising expense
Building
Cash
Common stock
Dividends
Equipment
Insurance expense
Type of Account
Liability
Asset
Stockholders’ equity
Asset
Asset
Stockholders’ equity
Stockholders’ equity
Asset
Stockholders’ equity
Account
Interest expense
Land
Note payable
Property tax expense
Rent expense
Salaries expense
Salaries payable
Service revenue
Supplies
Type of Account
Stockholders’ equity
Asset
Liability
Stockholders’ equity
Stockholders’ equity
Stockholders’ equity
Liability
Stockholders’ equity
Asset
Req. 2
Alpha, Inc.
Income Statement
Year Ended October 31, 2014
Service revenue
Expenses
Salaries expense
Rent expense
Advertising expense
Interest expense
Property tax expense
Insurance expense
Total expenses
Net Income
$210,000
$91,300
24,000
19,600
7,500
4,900
3,600
150,900
$ 59,100
Alpha, Inc.
Statement of Retained Earnings
Year Ended October 31, 2014
Retained earnings, October 31, 2013
Add: Net income
Subtotal
Less: Dividends
Retained earnings, October 31, 2014
$75,600
59,100
134,700
28,000
$106,700
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(continued) P 1-39B
Req. 3
Alpha, Inc.
Balance Sheet
October 31, 2014
ASSETS
Cash
Accounts receivable
Supplies
Land
Equipment
Building
Total assets
$24,800
15,100
2,250
40,000
51,000
142,000
$275,150
LIABILITIES
Accounts payable
Salaries payable
Note payable
Total liabilities
STOCKHOLDERS’ EQUITY
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and
stockholders’ equity
$ 13,700
4,750
75,000
93,450
75,000
106,700
181,700
$275,150
Req. 4
a. $59,100 (Net profit = net income).
b. Increase of $31,100 ($59,100 Net income minus $28,000 Dividends).
c. $275,150 (Total economic resources = total assets).
d. $ 93,450 (Total owed = total liabilities).
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(20-25 min.) P 1-40B
On Call Realty, Inc.
Balance Sheet
November 30, 2014
ASSETS
Cash
Accounts receivable
Supplies
Equipment
Total assets
$31,000
3,200
580
8,100
LIABILITIES
Accounts payable
Salaries payable
Notes payable
Total liabilities
$42,880
STOCKHOLDERS’ EQUITY
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and
stockholders’ equity
$ 2,500
1,100
7,000
10,600
10,000
22,280
32,280
$42,880
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Kemp Waybright Financial Accounting 3e 33
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Continuing Exercise
ASSETS
Accounts
+ receivable
Cash
4/1
4/3
4/5
4/6
4/8
4/17
4/30
Bal
=
+
Lawn
Supplies
+
LIABILITIES
Equipment
Accounts
payable
+1,600
+1,600
+
STOCKHOLDERS’ EQUITY
Common
stock
+2,000
+
Retained Earnings
Service
Fuel
revenue
– expense
+2,000
-90
+90
+225
-85
+850
+175
2,850
+225
+85
+850
-175
+ 50
+
85
+
1,600
=
1,600
+
2,000
+
1,075
-
90
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Continuing Problem
Req 1
Assets
Cash
= Liabilities
Accounts
+ receivable
+ Supplies
+ Equipment
+ Vehicles
Accounts
payable
+
+
Note
payable
Stockholders’ Equity
Common
stock
+
Retained Earnings
Service
revenue
se
5/1
5/3
+10,000
+35,000
-1,800
+600
+1,350
5/15
-625
5/16
+2,200
+625
Bal
+36,200
+4,500
-300
-2,200
5/31
5/31
+740
-2,500
43,325
Dividends
-10,000
+4,500
5/30
-
+45,000
+36,200
-300
-
+1,350
+10,000
5/27
expense
+600
5/18
5/21
–
Utilities
+1,800
5/7
5/12
Salaries
+740
+2,500
+ 2,300
+ 600
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+ 1,800
+ 36,200
= 1,040
+
36,200
+
45,000
+
5,850
Kemp Waybright Financial Accounting 3e
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-
625
-
740
-
2,500
35
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Req 2
Aqua Magic, Inc.
Income Statement
Month Ended May 31, 2014
Service revenue
Expenses:
Salaries expense
Utilities expense
Total expenses
Net Income
$5,850
$625
740
1,365
$4,485
Req 3
Aqua Magic, Inc.
Statement of Retained Earnings
For the Month Ended May 31, 2014
Retained Earnings, May 1, 2014
Add: Net Income for the Month
Subtotal
Less: Dividends
Retained Earnings, May 31, 2014
$0
4,485
4,485
2,500
$1,985
Req 4
Aqua Magic, Inc.
Balance Sheet
May 31, 2014
ASSETS
Cash
Accounts receivable
Supplies
Equipment
Vehicles
Total Assets
LIABILITIES
$43,325 Accounts payable
2,300 Note Payable
600
Total Liabilities
1,800
36,200
STOCKHOLDERS’ EQUITY
Common Stock
Retained Earnings
Total Stockholders’ Equity
$84,225
Total Liabilities and Stockholders’
Equity
$1,040
36,200
$37,240
$45,000
1,985
46,985
$84,225
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Req 5
It is unknown how much Greg was earning at his previous job and, after only one month of
operations, it is probably too early to tell. However, Aqua Magic, Inc. almost $4,500 of profit for
the month. So, it appears that Greg probably made a good decision.
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Continuing Financial Statement Analysis Problem
1. “Our mission is to make Target your preferred shopping destination in all channels by
delivering outstanding value, continuous innovation and exceptional guest experiences by
consistently fulfilling our Expect More. Pay Less.® brand promise.
Words are just the beginning. Our mission and values work together to foster connections
and conversations both inside and outside our doors.
Found at Target.com, under: about Company-> Mission & Values
2. Target is an upscale discounter that provides high-quality, on-trend merchandise at
attractive prices in clean, spacious and guest-friendly stores. In addition, Target
operates an online business, Target.com.
Found at Target.com, under: about Company-> tab Investors -> Corporate Overview.
3. Target sells a wide assortment of general merchandise and a limited assortment of food.
Many of the products Target sells are from national brand merchandise or from their own,
exclusive brands.
Found at Target.com, throughout the website. Quote is from: about Company-> tab
Investors ->Annual Reports - >Annual Report 2010 Part I, Item I, Merchandise.
4. Target’s customers have:
•
Median age of 40
•
Median household income of approximately $64K
•
Approximately 43% have children at home
•
About 57% have completed college
Found at Target.com, under: about Company-> tab Investors ->Corporate Overview.
5. Answers will vary. Students will talk about what they like and dislike about Target.
The focus should be whether they are providing value to its stakeholders, including
customers, employees, suppliers, society, lenders, and especially owners. Students should
think about earning profits, but also acknowledge the importance of when the profits are
earned (time) and the risk associated with profits.
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Ethics in Action
Case #1
•
What Lisa proposed is not unethical as long as the assets contributed can legitimately be
used in the business and the stockholders’ equity accounts properly reflect the contribution.
The business entity principle recognizes the difference between the personal assets of the
owners and the assets owned by the business. When assets are contributed to the business by
the owners, proper accounting will reflect the transaction. Should a business need additional
assets, there is nothing wrong or improper for an owner to contribute additional assets that
can be used in the business.
•
What Mike proposed is unethical. His plan would provide information that would not be
reliable as the “sales” would be nothing more than disguised owner distributions. Inflating
the income statement by including fictitious sales is unethical, misleading and not allowable.
Mikeshould not provide false information that is unreliable.
There is nothing unethical about a business wanting to improve its Balance Sheet by
properly adding more business assets. It would be unacceptable, however, for a business to
temporarily add more assets just to improve the Balance Sheet in order to obtain a loan and
remove those assets once the loan is granted.
Case #2
•
The Balance Sheet should follow Generally Accepted Accounting Principles, and thus
the assets should be listed at the total cost of $2,100,000. This would also provide for
more reliable data as well.
•
Only one Balance Sheet can be provided, and it needs to comply with Generally
Accepted Accounting Principles. Adding supplemental footnote disclosures would be
acceptable; however, providing another Balance Sheet not following generally accepted
accounting principles would be misleading and confusing and therefore unacceptable.
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Financial Analysis
1.
No solution.
2.
The total assets were $1,458,842,000 as of December 31, 2012. This was an increase from
the $1,382,542,000 as of December 31, 2011.
3.
No solution.
5.
Total revenues in 2012 were $1,669,563,000. This is a decrease from the $1,693,985,000 in
2011 but an increase from the $1,483,524,000 in 2010.
Industry Analysis
Columbia Sportswear’s stockholders have a claim to approximately 80% ($1,166,167/$1,458,842)
of company assets compared to only approximately 71% ($816,922/$1,157,083) for Under
Armour’s Stockholders.
Small Business Analysis
The CPA tells you, “The income statement is not the only financial statement that will affect your
cash balance. The income statement only gives you the results of your operations. If all you did
during the year was to collect revenue and pay out expenses, then the net income would directly
correspond to the increase in your cash balance. But there are other aspects of BCS Consultants as
well. There’s the financing aspect, borrowing money and paying money back, as well as the
investment aspect, buying and disposing of fixed assets. These will also affect your cash balance.
In addition, the payment of dividends decreases the cash balance.
“You purchased a piece of equipment during the year for $12,000 and paid cash for it. That
decreased your cash by $12,000. You paid down your Note at the bank from $75,000 to $58,000
during the year. That used $17,000 in cash. And you paid yourself a dividend of $15,000. None of
these three items will appear on the income statement because they are not revenues or expenses,
but each of them affects cash.”
So here’s the recap of what happened to cash for the year:
Cash balance, Dec. 31, 2013
$38,000
Increase for net income 2014
36,000
Decrease for equipment purchased
(12,000)
Decrease for Note payment
(17,000)
Decrease for Dividends paid 2014
(15,000)
Cash Balance, Dec. 31, 2014
$30,000 - a decrease of $8,000
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Written Communication
In your e-mail back to this potential new client, you would want to list the four basic types of
business organizations available to most small businesses today. These were outlined in your
chapter, and they are sole proprietor, partnership, corporation and limited liability company. Of
course, you would want to elaborate on the tax advantages and disadvantages of each of these types
of organizations (that discussion is beyond the scope of our text) as well as talk briefly about the
legal aspects of each of them. But remember, we are not attorneys. Leave the high-level discussions
about legal liability to them.
However, because we are accountants, we can certainly tell this potential new client about the
benefits of having an accountant as part of the team of professionals that is necessary to help
achieve success in today’s business climate. Accountants “keep score”. They help ensure that the
business is running profitably. They help to determine what the true cost is for one unit of the
product that you are selling. They prepare financial statements for the stakeholders of the business.
They speak the language of business.
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