CH01 INTRODUCTION TO ACCOUNTING.pdf

8/10/2019 CH01 INTRODUCTION TO ACCOUNTING.pdf

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CHAPTER 1INTRODUCTION TO ACCOUNTING

AND BUSINESS

CLASS DISCUSSION QUESTIONS

1. The objective of most businesses is to max-imize profits. Profit is the difference betweenthe amounts received from customers forgoods or services provided and the amountspaid for the inputs used to provide thosegoods or services.

2. A manufacturing business changes basicinputs into products that are then sold tocustomers. A service business provides ser-

vices rather than products to customers. Arestaurant such as Applebees has charac-teristics of both a manufacturing and a ser-vice business in that Applebees takes rawinputs such as cheese, fish, and beef andprocesses them into products for consump-tion by their customers. At the same time,

Applebees provides services of waiting ontheir customers as they dine.

3. The corporate form allows the company toobtain large amounts of resources by is-suing stock. For this reason, most compa-nies that require large investments in prop-erty, plant, and equipment are organized as

corporations.4. The business strategy of KIA is a low-cost

strategy. In contrast, the business strategyof Porche is a differentiation strategy. Thedifference in strategies is directly reflected inthe prices of the autos. For example, youcan purchase a KIA for under $10,000 whilethe entry level Porche begins at over$40,000.

5. Super Wal-Mart will compete for customersusing a low-cost strategy. The size and buy-ing power of Wal-Mart Corporation providesWal-Mart a competitive advantage over yourfriend in the ability to offer low prices. Thus,your friend should attempt to compete usinga differentiation strategy. For example, yourfriend could offer personalized service tocustomers such as knowing customersnames, friendly atmosphere, home deliveryof medicines, help in filing insurance forms,24-hour call service, etc.

6. eBay offers value to its customers by devel-oping a Web-based community in which

buyers and sellers are brought together inan efficient format to browse, buy, and sellitems such as collectibles, automobiles,high-end or premium art items, jewelry, con-sumer electronics, and a host of practicaland miscellaneous items.

7. The stakeholders of a business normallyinclude owners, managers, employees, cus-tomers, creditors, and the government.

8. Simply put, the role of accounting is to pro-vide information for managers to use in op-erating the business. In addition, accountingprovides information to other stakeholders touse in assessing the economic performanceand condition of the business.

9. No. The business entity concept limits therecording of economic data to transactionsdirectly affecting the activities of the busi-ness. The payment of the interest of $3,600is a personal transaction of Deana Moranand should not be recorded by First DeliveryService.

10. The land should be recorded at its cost of$112,000 to Elrod Repair Service. This isconsistent with the cost concept.

11. a. No. The offer of $600,000 and the in-crease in the assessed value should notbe recognized in the accountingrecords.

b. Cash would increase by $600,000, landwould decrease by $500,000, and own-ers equity would increase by $100,000.

12. An account receivable is a claim against acustomer for goods or services sold. An ac-count payable is an amount owed to a credi-tor for goods or services purchased. There-fore, an account receivable in the records ofthe seller is an account payable in therecords of the purchaser.

13. The business incurred a net loss of $35,000.

14. The business realized net income of$80,000.

15. Net income or net loss

Owners equity at the end of the periodCash at the end of the period


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EXERCISES

Ex. 11

1. manufacturing

2. service

3. merchandise

4. service

5. service

6. manufacturing

7. service

8. manufacturing

9. merchandise

10. manufacturing

11. service

12. manufacturing

13. merchandise

14. service

15. manufacturing

Ex. 12

1. alow cost

2. alow cost3. bdifferentiation

4. bdifferentiation

5. ccombination

6. bdifferentiation

7. bdifferentiation8. ccombination

9. alow cost

10. bdifferentiation

11. alow cost

12. bdifferentiation13. alow cost

14. alow cost

15. ccombination

Ex. 13

As in many ethics issues, there is no one right answer. The local newspaper re-ported on this issue in these terms: "The company covered up the first report,

and the local newspaper uncovered the company's secret. The company wasforced to not locate here (Collier County). It became patently clear that doing theleast that is legally allowed is not enough."

Ex. 14

1. B

2. B

3. E

4. F

5. B

6. F

7. X

8. E

9. X

10. B

Ex. 15

Coca-Cola owners equity: $24,501$12,701 = $11,800PepsiCo owners equity:$23,474$14,183 = $9,291


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Ex. 16

Toys R Us $9,397$5,367 = $4,030Este Lauder $3,417$1,955 = $1,462

Ex. 17

a. $96,500 ($25,000 + $71,500)

b. $67,750 ($82,750$15,000)

c. $19,500 ($37,000$17,500)

Ex. 18

a. $275,000 ($475,000$200,000)b. $310,000 ($275,000 + $75,000$40,000)

c. $233,000 ($275,000$15,000$27,000)

d. $465,000 ($275,000 + $125,000 + $65,000)

e. Net income: $45,000 ($425,000$105,000$275,000)

Ex. 19

a. owner's equity

b. liability

c. asset

d. asset

e. owner's equity

f. asset

Ex. 110

a. Increases assets and increases owners equity.b. Increases assets and increases owners equity.

c. Decreases assets and decreases owners equity.

d. Increases assets and increases liabilities.

e. Increases assets and decreases assets.


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Ex. 111

a. (1) Total assets increased $80,000.

(2) No change in liabilities.

(3) Owners equity increased $80,000.

b. (1) Total assets decreased $30,000.

(2) Total liabilities decreased $30,000.

(3) No change in owners equity.

Ex. 112

1. increase

2. decrease

3. increase

4. decrease

Ex. 113

1. c

2. c

3. d

4. c5. e

6. a

7. e

8. a

9. e

10. e


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Ex. 114

a. (1) Sale of catering services for cash, $25,000.

(2) Purchase of land for cash, $10,000.

(3) Payment of expenses, $16,000.

(4) Purchase of supplies on account, $800.

(5) Withdrawal of cash by owner, $2,000.

(6) Payment of cash to creditors, $10,600.

(7) Recognition of cost of supplies used, $1,400.

b. $13,600 ($18,000$4,400)

c. $5,600 ($64,100$58,500)

d. $7,600 ($25,000$16,000$1,400)

e. $5,600 ($7,600$2,000)

Ex. 115

It would be incorrect to say that the business had incurred a net loss of $21,750. Theexcess of the withdrawals over the net income for the period is a decrease in theamount of owners equity in the business.


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Ex. 119

MADRAS COMPANYStatement of Owners Equity

For the Month Ended April 30, 2006

Leo Perkins, capital, April 1, 2006 ............................. $297,200Net income for the month ........................................... $73,000Less withdrawals ........................................................ 12,000Increase in owners equity......................................... 61,000Leo Perkins, capital, April 30, 2006 ........................... $358,200

Ex. 120

HERCULES SERVICESIncome Statement

For the Month Ended November 30, 2006

Fees earned ................................................................. $232,120Operating expenses:

Wages expense ........................................................ $100,100Rent expense ........................................................... 35,000Supplies expense .................................................... 4,550Miscellaneous expense ........................................... 3,150

Total operating expenses ................................... 142,800Net income ................................................................... $ 89,320


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Ex. 121

In each case, solve for a single unknown, using the following equation:Owners equity (beginning) + Investments Withdrawals + Revenues

Expenses = Owners equity (ending)

A. Owner's equity at end of year ($894,000$390,000) ............. $504,000Owner's equity at beginning of year ($720,000$432,000) .. 288,000Increase in owner's equity ....................................................... $216,000Deduct increase due to net income ($237,300$129,600) ... 107,700

$108,300Add withdrawals ....................................................................... 48,000

Additional investment in the business ............................... (a) $156,300

B. Owner's equity at end of year ($175,000$55,000) ............... $120,000Owner's equity at beginning of year ($125,000$65,000) .... 60,000

Increase in owner's equity ....................................................... $ 60,000Add withdrawals ....................................................................... 8,000

$ 68,000Deduct additional investment .................................................. 25,000Increase due to net income ..................................................... $ 43,000Add expenses ........................................................................... 32,000

Revenue ................................................................................ (b) $ 75,000

C. Owner's equity at end of year ($144,000$128,000) ............. $ 16,000Owner's equity at beginning of year ($160,000$121,600) .. 38,400Decrease in owner's equity ..................................................... $ (22,400)

Deduct decrease due to net loss ($184,000$196,000) ....... (12,000)$ (10,400)

Deduct additional investment .................................................. 16,000Withdrawals from the business .......................................... (c) $ (26,400)

D. Owner's equity at end of year ($310,000$170,000) ............. $140,000Add decrease due to net loss ($140,000$160,000) ............. 20,000

$160,000Add withdrawals ....................................................................... 75,000

$235,000Deduct additional investment .................................................. 50,000

$185,000Add liabilities at beginning of year ......................................... 150,000

Assets at beginning of year ................................................. (d) $335,000


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Ex. 122

a.DERBY INTERIORS

Balance Sheet

October 31, 2006Assets Liabilities

Cash ................................. $48,000 Accounts payable .......... $12,320Accounts receivable ....... 27,200Supplies ........................... 2,400 Owners Equity

Mary Lou Reily, capital .. 65,280Total liabilities and

Total assets ..................... $77,600 owners equity............ $77,600

DERBY INTERIORSBalance Sheet

November 30, 2006

Assets Liabilities

Cash ................................. $ 81,600 Accounts payable .......... $ 13,280Accounts receivable ....... 31,300Supplies ........................... 2,000 Owners Equity

Mary Lou Reily, capital .. 101,620Total liabilities and


b. Owner's equity, November 30 ...................................... $101,620Owner's equity, October 31 .......................................... 65,280

Net income .............................................................. $ 36,340

c. Owner's equity, November 30 ...................................... $101,620Owner's equity, October 31 .......................................... 65,280

Increase in owner's equity ..................................... $ 36,340Add withdrawal.............................................................. 10,000

Net income .............................................................. $ 46,340


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Ex. 123

Balance sheet: b, c, e, f, h, i, j, l, m, n, o

Income statement: a, d, g, k

Ex. 124

1. binvesting activity

2. aoperating activity

3. cfinancing activity

4. aoperating activity

Ex. 125

1. All financial statements should contain the name of the business in their head-ing. The statement of owners equity is incorrectly headed as Jerry Maris ra-ther than Caddis Realty. The heading of the balance sheet needs the name of thebusiness.

2. The income statement and statement of owners equity cover a period of timeand should be labeled For the Month Ended July 31, 2006.

3. The year in the heading for the statement of owners equity should be 2006 ra-ther than 2005.

4. The balance sheet should be labeled as of July 31, 2006, rather than For theMonth Ended July 31, 2006.

5. In the income statement, the miscellaneous expense amount should be listed asthe last operating expense.

6. In the income statement, the total operating expenses are incorrectly subtractedfrom the sales commissions, resulting in an incorrect net income amount. Thecorrect net income should be $4,900. This also affects the statement of ownersequity and the amount of Jerry Maris, capital, that appears on the balance sheet.

7. In the statement of owners equity, the additional investment should be addedfirst to Jerry Maris, capital, as of July 1, 2006. The net income should be pre-sented next, followed by the amount of withdrawals, which is subtracted fromthe net income to yield a net increase in owners equity.

8. Accounts payable should be listed as a liability on the balance sheet.

9. Accounts receivable and supplies should be listed as assets on the balancesheet.

10. The balance sheet assets should equal the sum of the liabilities and owners eq-uity.


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Ex. 126

a. 2003: $10,209 ($30,011$19,802)

2002: $8,312 ($26,394$18,082)

b. 2003: 0.52 ($10,209 $19,802)2002: 0.46 ($8,312 $18,082)

c. The ratio of liabilities to stockholders equity increased from 2002 to 2003, in-dicating an increase in risk for creditors. However, the assets of The HomeDepot are more than sufficient to satisfy creditor claims.

Ex. 127

a. 2003: $7,807 ($16,109$8,302

2002: $6,674 ($13,736$7,062)

b. 2003: 1.06 ($8,302 $7,807)

2002: 1.06 ($7,062 $6,674)

c. The margin of safety for creditors has remained approximately the same from2002 to 2003. In both years, creditors have more at stake in Lowes than dostockholders, since the ratio exceeds one.

d. Lowes ratio of liabilities to stockholders equity (1.06) is much higher thanthat of The Home Depot (0.52 and 0.46), indicating that creditors of Lowes are

more at risk than creditors of The Home Depot.


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PROBLEMS

Prob. 11A

1.

OwnersAssets = Liabilities + Equity

Accounts Accounts Duane Mays,Cash + Receivable + Supplies = Payable + Capital

a. + 18,000 + 18,000 Investmentb. + 950 + 950Bal. 18,000 950 950 18,000c. 575 575Bal. 17,425 950 375 18,000d. + 4,250 + 4,250 Fees earned

Bal. 21,675 950 375 22,250e. 1,200 1,200 Rent expenseBal. 20,475 950 375 21,050f. 975 600 Auto expense

375 Misc. expenseBal. 19,500 950 375 20,075g. 1,500 1,500 Salaries exp.Bal. 18,000 950 375 18,575h. 725 725 Supplies exp.Bal. 18,000 225 375 17,850i. + 6,350 + 6,350 Fees earnedBal. 18,000 6,350 225 375 24,200

j. 2,000 2,000 WithdrawalBal. 16,000 6,350 225 375 22,200

2. Owner's equity is the right of owners to the assets of the business. These rightsare increased by owners investments and revenues and decreased by owner'swithdrawals and expenses.


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Prob. 13A

1.

LINCHPIN COMPUTER SERVICESIncome Statement

For the Month Ended August 31, 2006

Fees earned ........................................................................ $16,500Operating expenses:

Salaries expense ......................................................... $4,000Rent expense ............................................................... 3,600Auto expense ............................................................... 1,550Supplies expense ........................................................ 650Miscellaneous expense .............................................. 750

Total operating expenses ....................................... 10,550Net income .......................................................................... $ 5,950

2.

LINCHPIN COMPUTER SERVICESStatement of Owners Equity


Jeanine Sykes, capital, August 1, 2006 ............................ $ 0Investment on August 1, 2006 ........................................... $10,000Net income for August ....................................................... 5,950

$15,950Less withdrawals ............................................................... 2,000

Increase in owners equity................................................ 13,950Jeanine Sykes, capital, August 31, 2006 .......................... $13,950

3.

LINCHPIN COMPUTER SERVICESBalance Sheet

August 31, 2006

Assets Liabilities

Cash ................................. $ 6,600 Accounts payable .......... $ 940Accounts receivable ....... 7,500

Supplies ........................... 790 Owners EquityJeanine Sykes, capital ... 13,950Total liabilities and



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Prob. 14A

1. OwnersAssets = Liabilities + Equity

Accounts Shad Menard,

Cash + Supplies = Payable + Capital

a. + 15,000 + 15,000 Investmentb. 2,400 2,400 Rent expenseBal. 12,600 12,600c. 1,130 750 Auto expense

380 Misc. expenseBal. 11,470 11,470d. + 950 + 950Bal. 11,470 950 950 11,470e. + 17,350 + 17,350 Sales commissions

Bal. 28,820 950 950 28,820f. 580 580Bal. 28,240 950 370 28,820g. 3,600 3,600 Salaries expenseBal. 24,640 950 370 25,220h. 1,500 1,500 WithdrawalBal. 23,140 950 370 23,720i. 675 675 Supplies expenseBal. 23,140 275 370 23,045

2.

CENTILLION REALTYIncome Statement


Sales commissions ............................................................ $17,350Operating expenses:

Office salaries expense .............................................. $3,600Rent expense ............................................................... 2,400Automobile expense ................................................... 750Supplies expense ........................................................ 675

Miscellaneous expense .............................................. 380Total operating expenses ....................................... 7,805

Net income .......................................................................... $ 9,545


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Prob. 14A Concluded

CENTILLION REALTYStatement of Owners Equity


Shad Menard, capital, August 1, 2006 .............................. $ 0Investment on August 1, 2006 ........................................... $15,000Net income for August ....................................................... 9,545

$24,545Less withdrawals ............................................................... 1,500Increase in owners equity................................................ 23,045Shad Menard, capital, August 31, 2006 ............................ $23,045

CENTILLION REALTYBalance Sheet

August 31, 2006

Assets Liabilities

Cash ................................. $23,140 Accounts payable .......... $ 370Supplies ........................... 275

Owners Equity

Shad Menard, capital ..... 23,045Total liabilities and



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Prob. 15A

1.

Assets = Liabilities + Owner's Equity

Accounts AccountsCash + Receivable + Supplies + Land = Payable + Vince Fry, Capital

8,600 + 9,500 + 1,875 + 15,000 = 4,100 + Vince Fry, Capital

34,975 = 4,100 + Vince Fry, Capital

30,875 = Vince Fry, Capital


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Prob. 15A Concluded

3. a.

EUREKA DRY CLEANERSIncome Statement

For the Month Ended June 30, 2006

Dry cleaning sales .............................................................. $25,750Operating expenses:

Dry cleaning expense ................................................. $7,400Rent expense ............................................................... 4,000Wages expense ........................................................... 2,800Supplies expense ........................................................ 1,775Truck expense ............................................................. 825Utilities expense .......................................................... 710Miscellaneous expense .............................................. 390

Total operating expenses ....................................... 17,900Net income .......................................................................... $ 7,850

b.

EUREKA DRY CLEANERSStatement of Owners Equity


Vince Fry, capital, June 1, 2006 ........................................ $30,875Net income for June ........................................................... $7,850Less withdrawals ............................................................... 3,500

Increase in owners equity................................................ 4,350Vince Fry, capital, June 30, 2006....................................... $35,225

c.

EUREKA DRY CLEANERSBalance SheetJune 30, 2006

Assets Liabilities

Cash ................................. $19,745 Accounts payable .......... $10,320Accounts receivable ....... 9,200

Supplies ........................... 1,600 Owners EquityLand .................................. 15,000 Vince Fry, capital ........... 35,225Total liabilities and



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Prob. 16A

a. Wages expense, $4,300 ($9,560$1,920$1,600$1,080$660)

b. Net income, $9,240 ($18,800$9,560)

c. Terry Garcia, capital, June 1, 2006, $0

d. Investment on June 1, 2006, $36,000

e. Net income for June, $9,240

f. $45,240 ($36,000 + $9,240)

g. Withdrawals, $4,800

h. Increase in owners equity, $40,440 ($45,240 $4,800)

i. Terry Garcia, capital, June 30, 2006, $40,440

j. Land, $28,800 ($41,400$11,800$800)

k. Total assets, $41,400

l. Terry Garcia, capital, $40,440m. Total liabilities and owners equity, $41,400 ($960 + $40,440)

n. Cash received from customers, $18,800 ($9,400 + $9,400)

o. Net cash flow from operating activities, $9,400 ($11,800$31,200 + $28,800)

p. Net cash flow from financing activities, $31,200 ($36,000$4,800)

q. Net cash flow and June 30, 2006 cash balance, $11,800


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Prob. 11B

1.


Accounts Accounts Pamela Larsen,Cash + Receivable + Supplies = Payable + Capital

a. + 15,000 + 15,000 Investmentb. + 1,350 + 1,350Bal. 15,000 1,350 1,350 15,000c. + 6,500 + 6,500 Fees earnedBal. 21,500 1,350 1,350 21,500d. 2,500 2,500 Rent expenseBal. 19,000 1,350 1,350 19,000e. 700 700

Bal. 18,300 1,350 650 19,000f. + 1,250 + 1,250 Fees earnedBal. 18,300 1,250 1,350 650 20,250g. 1,225 550 Auto expense

675 Misc. expenseBal. 17,075 1,250 1,350 650 19,025h. 1,800 1,800 Salaries exp.Bal. 15,275 1,250 1,350 650 17,225i. 970 970 Supplies exp.Bal. 15,275 1,250 380 650 16,255

j. 1,500 1,500 Withdrawal

Bal. 13,775 1,250 380 650 14,755

2. Owner's equity is the right of owners to the assets of the business. Theserights are increased by owners investments and revenues and decreased byowner's withdrawals and expenses.


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Prob. 13B

1.

JACK-IN-THE-PULPIT FINANCIAL SERVICESIncome Statement

For the Month Ended January 31, 2006


Rent expense ............................................................... $6,000Salaries expense ......................................................... 5,000Auto expense ............................................................... 3,000Supplies expense ........................................................ 2,520Miscellaneous expense .............................................. 800

Total operating expenses ....................................... 17,320Net income .......................................................................... $14,080

2.

JACK-IN-THE-PULPIT FINANCIAL SERVICESStatement of Owners Equity

For the Month Ended January 31, 2006

Lynn Rosberg, capital, January 1, 2006 ........................... $ 0Investment on January 1, 2006 ......................................... $30,000Net income for January ..................................................... 14,080

$44,080Less withdrawals ............................................................... 7,000

Increase in owners equity................................................ 37,080Lynn Rosberg, capital, January 31, 2006 ......................... $37,080

3.

JACK-IN-THE-PULPIT FINANCIAL SERVICESBalance Sheet

January 31, 2006

Assets Liabilities

Cash ................................. $27,200 Accounts payable .......... $ 1,180Accounts receivable ....... 10,400

Supplies ........................... 660 Owners EquityLynn Rosberg, capital ... 37,080Total liabilities and



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Prob. 14B

1.


Accounts Beth Nesbit,Cash + Supplies = Payable + Capital

a. + 18,000 + 18,000 Investmentb. + 1,650 + 1,650Bal. 18,000 1,650 1,650 18,000c. 1,100 1,100Bal. 16,900 1,650 550 18,000d. + 25,200 + 25,200 Sales commissionsBal. 42,100 1,650 550 43,200e. 7,200 7,200 Rent expense

Bal. 34,900 1,650 550 36,000f. 10,000 10,000 WithdrawalBal. 24,900 1,650 550 26,000g. 2,250 1,500 Auto expense

750 Misc. expenseBal. 22,650 1,650 550 23,750h. 8,000 8,000 Salaries expenseBal. 14,650 1,650 550 15,750i. 1,050 1,050 Supplies expenseBal. 14,650 600 550 14,700

2.PATRIOTIC REALTYIncome Statement

For the Month Ended July 31, 2006

Sales commissions ............................................................ $25,200Operating expenses:

Office salaries expense .............................................. $8,000Rent expense ............................................................... 7,200Automobile expense ................................................... 1,500Supplies expense ........................................................ 1,050

Miscellaneous expense .............................................. 750Total operating expenses ....................................... 18,500

Net income .......................................................................... $ 6,700


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Prob. 14B Concluded

PATRIOTIC REALTYStatement of Owners Equity

For the Month Ended July 31, 2006

Beth Nesbit, capital, July 1, 2006 ...................................... $ 0Investment on July 1, 2006 ................................................ $18,000Net income for July ............................................................ 6,700

$24,700Less withdrawals ............................................................... 10,000Increase in owners equity................................................ 14,700Beth Nesbit, capital, July 31, 2006 .................................... $14,700

PATRIOTIC REALTYBalance SheetJuly 31, 2006

Assets Liabilities


Owners Equity

Beth Nesbit, capital ........ 14,700Total liabilities and



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Prob. 15B Continued

2.


Accounts Accounts Gloria Carson,Cash + Receivable + Supplies + Land = Payable + Capital

Bal. 7,150 12,880 3,400 20,000 6,360 37,070

a. + 22,000 + 22,000 Dry cleaning salesBal. 29,150 12,880 3,400 20,000 6,360 59,070b. 3,500 3,500 Rent expenseBal. 25,650 12,880 3,400 20,000 6,360 55,570c. + 2,100 + 2,100Bal. 25,650 12,880 5,500 20,000 8,460 55,570d. 4,800 4,800Bal. 20,850 12,880 5,500 20,000 3,660 55,570e. + 11,700 + 11,700 Dry cleaning salesBal. 20,850 24,580 5,500 20,000 3,660 67,270f. + 8,400 8,400 Dry cleaning expenseBal. 20,850 24,580 5,500 20,000 12,060 58,870g. 6,570 3,400 Wages expense

1,580 Truck expense

960 Utilities expense 630 Miscellaneous expense

Bal. 14,280 24,580 5,500 20,000 12,060 52,300h. + 10,100 10,100Bal. 24,380 14,480 5,500 20,000 12,060 52,300i. 2,900 2,900 Supplies expenseBal. 24,380 14,480 2,600 20,000 12,060 49,400j. 6,000 6,000 WithdrawalsBal. 18,380 14,480 2,600 20,000 12,060 43,400


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Prob. 16B

a. Fees earned, $30,000 ($12,400 + $17,600)

b. Supplies expense, $3,000 ($17,600$8,500$3,200$1,800$1,100)

c. Craig Haas, capital, November 1, 2006, $0

d. Net income for November, $12,400

e. $52,400 ($40,000 + $12,400)

f. Increase in owners equity, $46,400 ($52,400 $6,000)

g. Craig Haas, capital, November 30, 2006, $46,400

h. Total assets, $48,000 ($5,800 + $2,200 + $40,000)

i. Craig Haas, capital, $46,400 ($48,000$1,600)

j. Total liabilities and owners equity, $48,000

k. Cash received from customers, $30,000 ($18,200 + $11,800)

l. Net cash flow from operating activities, $11,800 ($5,800$34,000 + $40,000)m. Cash payments for acquisition of land, $(40,000)

n. Cash received as owners investment, $40,000

o. Cash withdrawal by owner, $(6,000)

p. Net cash flow from financing activities, $34,000 ($40,000$6,000)

q. Net cash flow and November 30, 2006 cash balance, $5,800


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CONTINUING PROBLEM

1. OwnersAssets = Liabilities + Equity

Shannon

Accounts Accounts Burns,Cash + Receivable + Supplies = Payable + Capital

Apr. 1 + 7,000 + 7,000 Investment2 + 2,000 + 2,000 Fees earned

Bal. 9,000 9,000Apr. 2 1,000 1,000 Office rent exp.Bal. 8,000 8,000Apr. 4 + 350 + 350Bal. 8,000 350 350 8,000Apr. 6 600 600 Advertising exp.

Bal. 7,400 350 350 7,400Apr. 8 650 650 Equip. rent exp.Bal. 6,750 350 350 6,750Apr. 12 200 200 Music expenseBal. 6,550 350 350 6,550Apr. 13 100 100Bal. 6,450 350 250 6,550Apr. 16 + 150 + 150 Fees earnedBal. 6,600 350 250 6,700Apr. 22 + 1,200 + 1,200 Fees earnedBal. 6,600 1,200 350 250 7,900

Apr. 25 + 500 + 500 Fees earnedBal. 7,100 1,200 350 250 8,400Apr. 29 240 240 Music expenseBal. 6,860 1,200 350 250 8,160Apr. 30 + 900 + 900 Fees earnedBal. 7,760 1,200 350 250 9,060Apr. 30 400 400 Wages expenseBal. 7,360 1,200 350 250 8,660Apr. 30 300 300 Utilities exp.Bal. 7,060 1,200 350 250 8,360Apr. 30 180 180 Supplies exp.

Bal. 7,060 1,200 170 250 8,180Apr. 30 150 150 Misc. expenseBal. 6,910 1,200 170 250 8,030Apr. 30 500 500 Music expenseBal. 6,410 1,200 170 250 7,530Apr. 30 250 250 WithdrawalBal. 6,160 1,200 170 250 7,280


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Continuing Problem Concluded

2.

DANCIN MUSICIncome Statement



Office rent expense ..................................................... $ 1,000Music expense ............................................................. 940Equipment rent expense ............................................. 650Advertising expense ................................................... 600Wages expense ........................................................... 400Utilities expense .......................................................... 300Supplies expense ........................................................ 180

Miscellaneous expense .............................................. 150Total operating expenses ....................................... 4,220Net income .......................................................................... $ 530

3.

DANCIN MUSICStatement of Owners Equity


Shannon Burns, capital, April 1, 2006 .............................. $ 0Investment on April 1, 2006 ............................................... $7,000

Net income for April ........................................................... 530$7,530Less withdrawals ............................................................... 250Increase in owners equity................................................ 7,280Shannon Burns, capital, April 30, 2006 ............................ $7,280

4.

DANCIN MUSICBalance SheetApril 30, 2006

Assets LiabilitiesCash ................................. $6,160 Accounts payable .......... $ 250Accounts receivable ....... 1,200Supplies ........................... 170 Owners Equity

Shannon Burns, capital . 7,280Total liabilities and



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SPECIAL ACTIVITIES

Activity 11

1. Acceptable professional conduct requires that Sue Alejandro supply First Na-

tional Bank with all the relevant financial statements necessary for the bankto make an informed decision. Therefore, Sue should provide the completeset of financial statements. These can be supplemented with a discussion ofthe net loss in the past year or other data explaining why granting the loan isa good investment by the bank.

2. a. Owners are generally willing to provide bankers with information about theoperating and financial condition of the business, such as the following:

Operating Information:

description of business operations

results of past operations

preliminary results of current operations

plans for future operations

Financial Condition:

list of assets and liabilities (balance sheet)

estimated current values of assets

owners personal investment in the business

owners commitment to invest additional funds in the business

Owners are normally reluctant to provide the following types of informa-tion to bankers:

Propr ietary Operat ing Inform at ion. Such information, which might hurtthe business if it becomes known by competitors, might include specialprocesses used by the business or future plans to expand operationsinto areas that are not currently served by a competitor.

Person al Financial Informat ion. Owners may have little choice here be-cause banks often require owners of small businesses to pledge theirpersonal assets as security for a business loan. Personal financial in-formation requested by bankers often includes the owner's net worth,salary, and other income. In addition, bankers usually request informa-tion about factors that might affect the personal financial condition ofthe owner. For example, a pending divorce by the owner might signifi-cantly affect the owner's personal wealth.


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Activity 11 Concluded

b. Bankers typically want as much information as possible about the abilityof the business and the owner to repay the loan with interest. Examples ofsuch information are described above.

c. Both bankers and business owners share the common interest of thebusiness doing well and being successful. If the business is successful,the bankers will receive their loan payments on time with interest, and theowners will increase their personal wealth.

Activity 12

1. In a commodity business like poultry production, the dominant businessstrategy is a low-cost strategy. This is because customers cannot differen-tiate between chickens produced by different companies. The implication of alow-cost strategy is that you would put most of your emphasis on designingand running efficient operations. In addition, you would spend significantamounts of monies in research and development activities trying to discoverand develop new ways to breed and raise bigger chickens with less feed.

2. A major business risk includes the selling of contaminated chickens and thepossibility that competitors will develop lower-cost methods of breeding andraising chickens. Also, a major cost of raising chickens is the cost of feed.Thus, fluctuations in feed costs such as corn can dramatically influence the

profitability of chicken production. To manage feed cost risk, chicken pro-ducers like Gold Kist enter into hedging transactions for feed that involvecommodity futures and options. Finally, another major risk is that consumertastes may change with the result that the demand for chicken products maydecrease significantly.

3. Gold Kist could try to differentiate its products by emphasizing that it raisesits chickens with only natural feeds without the use of artificial ingredientssuch as steroids, etc. Gold Kist could then sell its products as the healthychoice products.


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Activity 13

The difference in the two bank balances, $180,000 ($240,000 $60,000), may notbe pure profit from an accounting perspective. To determine the accounting profitfor the seven-month period, the revenues for the period would need to be

matched with the related expenses. The revenues minus the expenses would in-dicate whether the business generated net income (profit) or a net loss for the pe-riod. Using only the difference between the two bank account balances ignoressuch factors as amounts due from customers (receivables), liabilities (accountspayable) that need to be paid for wages or other operating expenses, additionalinvestments that Dr. Smith may have made in the business during the period, orwithdrawals during the period that Dr. Smith might have taken for personal rea-sons unrelated to the business.

Some businesses that have few, if any, receivables or payables may use a cashbasis of accounting. The cash basis of accounting ignores receivables andpayables because they are assumed to be insignificant in amount. However, evenwith the cash basis of accounting, additional investments during the period andany withdrawals during the period have to be considered in determining the netincome (profit) or net loss for the period.


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Activity 14

1.


Accounts Dawn IvyCash + Supplies = Payable + Capital

a. + 1,000 + 1,000 Investmentb. 320 + 320Bal. 680 320 1,000c. 160 160 Rent expenseBal. 520 320 840d. 140 + 60 200 Rent expenseBal. 380 320 60 640e. + 1,600 + 1,600 Service revenue

Bal. 1,980 320 60 2,240f. + 300 + 300 Service revenueBal. 2,280 320 60 2,540g. 600 600 Salary expenseBal. 1,680 320 60 1,940h. 150 150 Misc. expenseBal. 1,530 320 60 1,790i. + 600 + 600 Service revenueBal. 2,130 320 60 2,390

j. 170 170 Supplies expenseBal. 2,130 150 60 2,220

k. 800 800 WithdrawalBal. 1,330 150 60 1,420

2.

DEUCEIncome Statement


Service revenue .................................................................. $2,500Operating expenses:

Salary expense ............................................................ $600

Rent expense ............................................................... 360Supplies expense ........................................................ 170Miscellaneous expense .............................................. 150

Total operating expenses ....................................... 1,280Net income .......................................................................... $1,220


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Activity 14 Continued

3.

DEUCEStatement of Owners Equity


Dawn Ivy, capital, June 1, 2005 ......................................... $ 0Investment on June 1, 2005 ............................................... $1,000Net income for June ........................................................... 1,220

$2,220Less withdrawals ............................................................... 800Increase in owners equity................................................ 1,420Dawn Ivy, capital, June 30, 2005 ....................................... $1,420

4.

DEUCEBalance SheetJune 30, 2005

Assets Liabilities


Owners Equity

Dawn Ivy, capital ............ 1,420Total liabilities and


5. a. Deuce would provide Dawn with $260 more income per month than work-ing as a waitress. This amount is computed as follows:

Net income of Deuce, per month ............................................. $1,220Earnings as waitress, per month:

30 hours per week $8 per hour 4 weeks ....................... 960Difference .................................................................................. $ 260


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Activity 14 Concluded

b. Other factors that Dawn should consider before discussing a long-term ar-rangement with the Racquet Club include the following:

Dawn should consider whether the results of operations for June are indica-tive of what to expect each month. For example, Dawn should considerwhether club members will continue to request lessons or use the ball ma-chine during the winter months when interest in tennis may slacken. Dawnshould evaluate whether the additional income of $260 per month from Deuceis worth the risk being taken and the effort being expended.

Dawn should also consider how much her investment in Deuce could haveearned if invested elsewhere. For example, if the initial investment of $1,000had been deposited in a money market or savings account at 3% interest, itwould have earned $2.50 interest in June, or $30 for the year.

Note to Instructo rs: Numerous other considerations could be mentioned bystudents, such as the ability of Dawn to withdraw cash from Deuce for per-sonal use. Unlike a money market account or savings account, some of herinvestment in Deuce will be in the form of supplies (tennis balls, etc.), whichmay not be readily convertible to cash. The objective of this case is not tomention all possible considerations, but rather to encourage students to be-gin thinking about the use of accounting information in making business de-cisions.

Activity 15Note to Instructo rs:The purpose of this activity is to familiarize students with thecertification requirements and their on-line availability.

Activity 16

1998 1997 1996Net cash flows from operating activities positive positive negativeNet cash flows from investing activities negative negative negativeNet cash flows from financing activities positive positive positive

Start-up companies normally experience negative cash flows from operating andinvesting activities. Also, start-up companies normally have positive cash flowsfrom financing activitiesactivities from raising capital.


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Activity 17

As can be seen from the balance sheet data in the case, Enron was financedlargely by debt as compared to equity. Specifically, Enrons stockholders equityrepresented only 17.5% ($11,470 divided by $65,503) of Enrons total assets. The

remainder of Enrons total assets, 82.5%, were financed by debt. When a compa-ny is financed largely by debt, it is said to be highly leveraged.

In late 2001 and early 2002, allegations arose as to possible misstatements ofEnrons financial statements. These allegations revolved around the use of spe-cial purpose entities (partnerships) and related party transactions. The use ofspecial purpose entities allowed Enron to hide a significant amount of additionaldebt off its balance sheet. The result was that Enrons total assets were evenmore financed by debt than the balance sheet indicated.

After the allegations of misstatements became public, Enrons stock rapidly de-

clined and the company filed for bankruptcy. Subsequently, numerous lawsuitswere filed against the company and its management. In addition, the Securitiesand Exchange Commission, the Justice Department, and Congress launched in-vestigations into Enron.

Note to Instructo rs:The role of the auditors and board of directors of Enron mightalso be discussed. However, these topics are not covered in Chapter 1 but arecovered in later chapters.


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CH01 INTRODUCTION TO ACCOUNTING.pdf

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Transcript of CH01 INTRODUCTION TO ACCOUNTING.pdf