Financial Accounting 4th Canadian Edition Solution Manual
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Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business’s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
easy to establish. Another advantage is that income from a sole proprietorship is taxed
only once in the hands of the individual proprietor (income from a corporation is taxed in
the corporation and then again in the hands of the individual proprietor). A disadvantage
of operating as a sole proprietorship, rather than a corporation, is that the individual
proprietor can be held responsible for the debts of the business.
3. Financial accounting focuses on preparing and using the financial statements that are
made available to owners and external users such as customers, creditors, and potential
investors who are interested in reading them. Managerial accounting focuses on other
accounting reports that are not released to the general public, but instead are prepared
and used by employees, supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the business. The external
groups include investors, creditors, governmental agencies, other interested parties, and
the public at large.
5. The business itself, not the individual shareholders who own the business, is viewed as
owning the assets and owing the liabilities on its balance sheet. A business’s balance
sheet includes the assets, liabilities, and shareholders’ equity of only that business and
not the personal assets, liabilities, and equity of the shareholders. The financial
statements of a company show the results of the business activities of only that company.
6. (a) Operating – These activities are directly related to earning profits. They include buying
supplies, making products, serving customers, cleaning the premises, advertising, renting
a building, repairing equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive resources with long
lives (such as buildings, land, equipment, and tools), purchasing investments, and lending
to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving
contributions from shareholders, or paying dividends to shareholders are considered
financing activities.
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business’s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
easy to establish. Another advantage is that income from a sole proprietorship is taxed
only once in the hands of the individual proprietor (income from a corporation is taxed in
the corporation and then again in the hands of the individual proprietor). A disadvantage
of operating as a sole proprietorship, rather than a corporation, is that the individual
proprietor can be held responsible for the debts of the business.
3. Financial accounting focuses on preparing and using the financial statements that are
made available to owners and external users such as customers, creditors, and potential
investors who are interested in reading them. Managerial accounting focuses on other
accounting reports that are not released to the general public, but instead are prepared
and used by employees, supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the business. The external
groups include investors, creditors, governmental agencies, other interested parties, and
the public at large.
5. The business itself, not the individual shareholders who own the business, is viewed as
owning the assets and owing the liabilities on its balance sheet. A business’s balance
sheet includes the assets, liabilities, and shareholders’ equity of only that business and
not the personal assets, liabilities, and equity of the shareholders. The financial
statements of a company show the results of the business activities of only that company.
6. (a) Operating – These activities are directly related to earning profits. They include buying
supplies, making products, serving customers, cleaning the premises, advertising, renting
a building, repairing equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive resources with long
lives (such as buildings, land, equipment, and tools), purchasing investments, and lending
to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving
contributions from shareholders, or paying dividends to shareholders are considered
financing activities.
Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business’s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
easy to establish. Another advantage is that income from a sole proprietorship is taxed
only once in the hands of the individual proprietor (income from a corporation is taxed in
the corporation and then again in the hands of the individual proprietor). A disadvantage
of operating as a sole proprietorship, rather than a corporation, is that the individual
proprietor can be held responsible for the debts of the business.
3. Financial accounting focuses on preparing and using the financial statements that are
made available to owners and external users such as customers, creditors, and potential
investors who are interested in reading them. Managerial accounting focuses on other
accounting reports that are not released to the general public, but instead are prepared
and used by employees, supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the business. The external
groups include investors, creditors, governmental agencies, other interested parties, and
the public at large.
5. The business itself, not the individual shareholders who own the business, is viewed as
owning the assets and owing the liabilities on its balance sheet. A business’s balance
sheet includes the assets, liabilities, and shareholders’ equity of only that business and
not the personal assets, liabilities, and equity of the shareholders. The financial
statements of a company show the results of the business activities of only that company.
6. (a) Operating – These activities are directly related to earning profits. They include buying
supplies, making products, serving customers, cleaning the premises, advertising, renting
a building, repairing equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive resources with long
lives (such as buildings, land, equipment, and tools), purchasing investments, and lending
to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving
contributions from shareholders, or paying dividends to shareholders are considered
financing activities.
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business’s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
easy to establish. Another advantage is that income from a sole proprietorship is taxed
only once in the hands of the individual proprietor (income from a corporation is taxed in
the corporation and then again in the hands of the individual proprietor). A disadvantage
of operating as a sole proprietorship, rather than a corporation, is that the individual
proprietor can be held responsible for the debts of the business.
3. Financial accounting focuses on preparing and using the financial statements that are
made available to owners and external users such as customers, creditors, and potential
investors who are interested in reading them. Managerial accounting focuses on other
accounting reports that are not released to the general public, but instead are prepared
and used by employees, supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the business. The external
groups include investors, creditors, governmental agencies, other interested parties, and
the public at large.
5. The business itself, not the individual shareholders who own the business, is viewed as
owning the assets and owing the liabilities on its balance sheet. A business’s balance
sheet includes the assets, liabilities, and shareholders’ equity of only that business and
not the personal assets, liabilities, and equity of the shareholders. The financial
statements of a company show the results of the business activities of only that company.
6. (a) Operating – These activities are directly related to earning profits. They include buying
supplies, making products, serving customers, cleaning the premises, advertising, renting
a building, repairing equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive resources with long
lives (such as buildings, land, equipment, and tools), purchasing investments, and lending
to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving
contributions from shareholders, or paying dividends to shareholders are considered
financing activities.
Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-2
7. The heading of each of the four primary financial statements should include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
and shareholders’ equity) of a business at a point in time.
(b) The purpose of the income statement is to present information about the revenues,
expenses, and net income of a business for a specified period of time.
(c) The statement of retained earnings reports the way that net income and the
distribution of dividends affected the financial position of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a business’s
operating, investing, and financing activities caused its cash balance to change over a
particular period of time.
9. The income statement, statement of retained earnings, and statement of cash flows would
be dated “For the Year Ended December 31, 2014,” because they report the inflows and
outflows of resources during a period of time. In contrast, the balance sheet would be
dated “At December 31, 2014,” because it represents the assets, liabilities and
shareholders’ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
expenses exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders’
Equity. Assets are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders’ equity is the owners’ claims to the
business. It includes amounts contributed to the business (by investors through
purchasing the company’s shares) and the amounts earned and accumulated through
profitable business operations.
12. The equation for the income statement is Revenues – Expenses = Net Income.
Revenues are increases in a company’s resources, arising primarily from its operating
activities. Expenses are decreases in a company’s resources, arising primarily from its
operating activities. Net Income is equal to revenues minus expenses. (If expenses are
greater than revenues, the company has a Net Loss.)
13. 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 prior
year’s 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-of-year balance sheet.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-2
7. The heading of each of the four primary financial statements should include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
and shareholders’ equity) of a business at a point in time.
(b) The purpose of the income statement is to present information about the revenues,
expenses, and net income of a business for a specified period of time.
(c) The statement of retained earnings reports the way that net income and the
distribution of dividends affected the financial position of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a business’s
operating, investing, and financing activities caused its cash balance to change over a
particular period of time.
9. The income statement, statement of retained earnings, and statement of cash flows would
be dated “For the Year Ended December 31, 2014,” because they report the inflows and
outflows of resources during a period of time. In contrast, the balance sheet would be
dated “At December 31, 2014,” because it represents the assets, liabilities and
shareholders’ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
expenses exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders’
Equity. Assets are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders’ equity is the owners’ claims to the
business. It includes amounts contributed to the business (by investors through
purchasing the company’s shares) and the amounts earned and accumulated through
profitable business operations.
12. The equation for the income statement is Revenues – Expenses = Net Income.
Revenues are increases in a company’s resources, arising primarily from its operating
activities. Expenses are decreases in a company’s resources, arising primarily from its
operating activities. Net Income is equal to revenues minus expenses. (If expenses are
greater than revenues, the company has a Net Loss.)
13. 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 prior
year’s 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-of-year balance sheet.
Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-3
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. Change in cash for the period + Beginning cash balance = Ending
cash balance. 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). Cash flows from investing
activities include cash flows that are related to the acquisition or sale of the company’s
long-term assets. Cash flows from financing activities are directly related to the financing
of the company.
15. Currently, the Chartered Professional Accountants of Canada (CPA) is given the primary
responsibility for setting the detailed rules that become Generally Accepted Accounting
Principles (GAAP) in Canada. (Internationally, the International Accounting Standards
Board (IASB) has the responsibility for setting accounting rules known as International
Financial Reporting Standards (IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial
information for present and potential investors, lenders, and other creditors in making
decisions in their capacity as capital providers. Financial information must show
relevance and faithful representation, as well as be comparable, verifiable, timely, and
understandable.
17. An ethical dilemma is a situation where following one moral principle would result in
violating another. Three steps that should be considered when evaluating ethical
dilemmas are:
(a) Identify who will benefit from the situation (often, the manager or employee) and how
others will be harmed (other employees, the company’s reputation, owners, creditors, and
the public in general).
(b) Identify the alternative courses of action.
(c) Choose the alternative that is the most ethical – that which you would be proud to
have reported in the news media. Often, there is no one right answer and hard choices
will need to be made. Following strong ethical practices is a key part of ensuring good
financial reporting by businesses of all sizes.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-3
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. Change in cash for the period + Beginning cash balance = Ending
cash balance. 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). Cash flows from investing
activities include cash flows that are related to the acquisition or sale of the company’s
long-term assets. Cash flows from financing activities are directly related to the financing
of the company.
15. Currently, the Chartered Professional Accountants of Canada (CPA) is given the primary
responsibility for setting the detailed rules that become Generally Accepted Accounting
Principles (GAAP) in Canada. (Internationally, the International Accounting Standards
Board (IASB) has the responsibility for setting accounting rules known as International
Financial Reporting Standards (IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial
information for present and potential investors, lenders, and other creditors in making
decisions in their capacity as capital providers. Financial information must show
relevance and faithful representation, as well as be comparable, verifiable, timely, and
understandable.
17. An ethical dilemma is a situation where following one moral principle would result in
violating another. Three steps that should be considered when evaluating ethical
dilemmas are:
(a) Identify who will benefit from the situation (often, the manager or employee) and how
others will be harmed (other employees, the company’s reputation, owners, creditors, and
the public in general).
(b) Identify the alternative courses of action.
(c) Choose the alternative that is the most ethical – that which you would be proud to
have reported in the news media. Often, there is no one right answer and hard choices
will need to be made. Following strong ethical practices is a key part of ensuring good
financial reporting by businesses of all sizes.
Loading page 4...
Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-4
18. Accounting frauds and cases involving academic dishonesty are similar in many respects.
Both involve deceiving others in an attempt to influence their actions or decisions, often
resulting in temporary personal gain for the deceiver. For example, when an accounting
fraud is committed, financial statement users may be misled into making decisions they
wouldn’t have made had the fraud not occurred (e.g., creditors might loan money to the
company, investors might invest in the company, or shareholders might reward top
managers with big bonuses). When academic dishonesty is committed, instructors might
assign a higher grade than is warranted by the student’s individual contribution. Another
similarity is that, as a consequence of the deception, innocent bystanders may be
adversely affected by fraud and academic dishonesty. Fraud may require the company to
charge higher prices to customers to cover costs incurred as a result of the fraud.
Academic dishonesty may lead to stricter grading standards, with significant deductions
taken for inadequate documentation of sources referenced. A final similarity is that if fraud
and academic dishonesty are ultimately uncovered, both are likely to lead to adverse long-
term consequences for the perpetrator. Fraudsters may be fined, imprisoned, and
encounter an abrupt end to their careers. Students who cheat may be penalized through
lower course grades or expulsion, and might find it impossible to obtain academic
references for employment applications.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-4
18. Accounting frauds and cases involving academic dishonesty are similar in many respects.
Both involve deceiving others in an attempt to influence their actions or decisions, often
resulting in temporary personal gain for the deceiver. For example, when an accounting
fraud is committed, financial statement users may be misled into making decisions they
wouldn’t have made had the fraud not occurred (e.g., creditors might loan money to the
company, investors might invest in the company, or shareholders might reward top
managers with big bonuses). When academic dishonesty is committed, instructors might
assign a higher grade than is warranted by the student’s individual contribution. Another
similarity is that, as a consequence of the deception, innocent bystanders may be
adversely affected by fraud and academic dishonesty. Fraud may require the company to
charge higher prices to customers to cover costs incurred as a result of the fraud.
Academic dishonesty may lead to stricter grading standards, with significant deductions
taken for inadequate documentation of sources referenced. A final similarity is that if fraud
and academic dishonesty are ultimately uncovered, both are likely to lead to adverse long-
term consequences for the perpetrator. Fraudsters may be fined, imprisoned, and
encounter an abrupt end to their careers. Students who cheat may be penalized through
lower course grades or expulsion, and might find it impossible to obtain academic
references for employment applications.
Loading page 5...
Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-5
Authors' Recommended Solution Time
(Time in minutes)
Mini-exercises Exercises Problems
Skills
Development
Cases*
Continuing Case
No. Time No. Time No. Time No. Time No. Time
1 3 1 10 CP1-1 45 1 20 1 45
2 11 2 10 CP1-2 10 2 20
3 12 3 15 CP1-3 60 3 30
4 6 4 25 PA1-1 45 4 30
5 6 5 25 PA1-2 10 5 20
6 6 6 10 PA1-3 50 6 30
7 6 7 15 PB1-4 45 7 45
8 4 8 10 PA1-5 50
9 4 9 20 PB1-1 45
10 3 10 10 PB1-2 10
11 3 11 3 PB1-3 45
12 6 12 3 PB1-4 10
13 6 PB1-5 50
14 6
15 6
16 12
* Due to the nature of cases, it is very difficult to estimate the amount of time students will
need to complete them. 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, and by offering suggestions
(about how to research topics or what companies to select). The skills developed by these
cases are indicated below.
Case Financial
Analysis Research Ethical
Reasoning
Critical
Thinking Technology Writing Teamwork
1 x
2 x
3 x x x x x
4 x x x
5 x x x
6 x x x
7 x x
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-5
Authors' Recommended Solution Time
(Time in minutes)
Mini-exercises Exercises Problems
Skills
Development
Cases*
Continuing Case
No. Time No. Time No. Time No. Time No. Time
1 3 1 10 CP1-1 45 1 20 1 45
2 11 2 10 CP1-2 10 2 20
3 12 3 15 CP1-3 60 3 30
4 6 4 25 PA1-1 45 4 30
5 6 5 25 PA1-2 10 5 20
6 6 6 10 PA1-3 50 6 30
7 6 7 15 PB1-4 45 7 45
8 4 8 10 PA1-5 50
9 4 9 20 PB1-1 45
10 3 10 10 PB1-2 10
11 3 11 3 PB1-3 45
12 6 12 3 PB1-4 10
13 6 PB1-5 50
14 6
15 6
16 12
* Due to the nature of cases, it is very difficult to estimate the amount of time students will
need to complete them. 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, and by offering suggestions
(about how to research topics or what companies to select). The skills developed by these
cases are indicated below.
Case Financial
Analysis Research Ethical
Reasoning
Critical
Thinking Technology Writing Teamwork
1 x
2 x
3 x x x x x
4 x x x
5 x x x
6 x x x
7 x x
Loading page 6...
Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-6
ANSWERS TO MINI-EXERCISES
M1-1
Abbreviation Full Designation
1. CPA Chartered Professional Accountant
2. GAAP Generally Accepted Accounting Principles
3. IASB International Accounting Standards Board
4. CSA Canadian Securities Administrators
5. IFRS International Financial Reporting Standards
6. ASPE Accounting Standards for Private Enterprises
M1-2
Term or Abbreviation Definition
F
D
E
A
C
I
G
B
K
J
H
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Investing activities
Private company
Corporation
Accounting
Partnership
AcSB
Financing activities
Unit of measure
GAAP
Public company
Operating activities
A. A system that collects and processes financial
information about an organization and reports that
information to decision makers.
B. Measurement of information about a business in the
monetary unit (dollars or other national currency).
C. An unincorporated business owned by two or more
persons.
D. A company that sells shares privately and is not
required to release its financial statements to the
public.
E. An incorporated business that issues shares as
evidence of ownership.
F. Buying and selling productive resources with long lives.
G. Transactions with lenders (borrowing and repaying
cash) and shareholders (selling company shares and
paying dividends).
H. Activities directly related to running the business to
earn profit.
I. Accounting Standards Board.
J. A company that has its shares bought and sold by
investors on established stock exchanges.
K. Generally accepted accounting principles.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-6
ANSWERS TO MINI-EXERCISES
M1-1
Abbreviation Full Designation
1. CPA Chartered Professional Accountant
2. GAAP Generally Accepted Accounting Principles
3. IASB International Accounting Standards Board
4. CSA Canadian Securities Administrators
5. IFRS International Financial Reporting Standards
6. ASPE Accounting Standards for Private Enterprises
M1-2
Term or Abbreviation Definition
F
D
E
A
C
I
G
B
K
J
H
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Investing activities
Private company
Corporation
Accounting
Partnership
AcSB
Financing activities
Unit of measure
GAAP
Public company
Operating activities
A. A system that collects and processes financial
information about an organization and reports that
information to decision makers.
B. Measurement of information about a business in the
monetary unit (dollars or other national currency).
C. An unincorporated business owned by two or more
persons.
D. A company that sells shares privately and is not
required to release its financial statements to the
public.
E. An incorporated business that issues shares as
evidence of ownership.
F. Buying and selling productive resources with long lives.
G. Transactions with lenders (borrowing and repaying
cash) and shareholders (selling company shares and
paying dividends).
H. Activities directly related to running the business to
earn profit.
I. Accounting Standards Board.
J. A company that has its shares bought and sold by
investors on established stock exchanges.
K. Generally accepted accounting principles.
Loading page 7...
Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-7
M1-3
Term Definition
F
I
C
A
B
H
D
G
E
J
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Relevance
Faithful Representation
Comparability
Separate Entity
Assets
Liabilities
Shareholders’ Equity
Revenues
Expenses
Unit of Measure
A. The financial reports of a business are assumed to
include the results of only that business’s activities.
B. The resources owned by a business.
C. Financial information that can be compared across
businesses because similar accounting methods have
been applied.
D. The total amounts invested and reinvested in the
business by its owners.
E. The costs of business necessary to earn revenues.
F. A feature of financial information that allows it to
influence a decision.
G. Earned by selling goods or services to customers.
H. The amounts owed by the business.
I. Financial information that depicts the economic
substance of business activities.
J. The assumption that states that results of business
activities should be reported in an appropriate monetary
unit.
M1-4
L (B/S) (1) Accounts Payable
A (B/S) (2) Accounts Receivable
A (B/S) (3) Cash
E (I/S) (4) Income Tax Expense
E (I/S) (5) Selling and Administrative Expenses
R (I/S) (6) Sales Revenue
L (B/S) (7) Notes Payable
SE(B/S) (8) Retained Earnings
M1-5
A (B/S) (1) Accounts Receivable
R (I/S) (2) Sales Revenue
A (B/S) (3) Equipment
E (I/S) (4) Supplies Expense
A (B/S) (5) Cash
E (I/S) (6) Advertising Expense
L (B/S) (7) Accounts Payable
SE(B/S) (8) Retained Earnings
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-7
M1-3
Term Definition
F
I
C
A
B
H
D
G
E
J
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Relevance
Faithful Representation
Comparability
Separate Entity
Assets
Liabilities
Shareholders’ Equity
Revenues
Expenses
Unit of Measure
A. The financial reports of a business are assumed to
include the results of only that business’s activities.
B. The resources owned by a business.
C. Financial information that can be compared across
businesses because similar accounting methods have
been applied.
D. The total amounts invested and reinvested in the
business by its owners.
E. The costs of business necessary to earn revenues.
F. A feature of financial information that allows it to
influence a decision.
G. Earned by selling goods or services to customers.
H. The amounts owed by the business.
I. Financial information that depicts the economic
substance of business activities.
J. The assumption that states that results of business
activities should be reported in an appropriate monetary
unit.
M1-4
L (B/S) (1) Accounts Payable
A (B/S) (2) Accounts Receivable
A (B/S) (3) Cash
E (I/S) (4) Income Tax Expense
E (I/S) (5) Selling and Administrative Expenses
R (I/S) (6) Sales Revenue
L (B/S) (7) Notes Payable
SE(B/S) (8) Retained Earnings
M1-5
A (B/S) (1) Accounts Receivable
R (I/S) (2) Sales Revenue
A (B/S) (3) Equipment
E (I/S) (4) Supplies Expense
A (B/S) (5) Cash
E (I/S) (6) Advertising Expense
L (B/S) (7) Accounts Payable
SE(B/S) (8) Retained Earnings
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-8
M1-6
A (B/S) (1) Accounts Receivable
E (I/S) (2) Selling and Administrative Expenses
A (B/S) (3) Cash
A (B/S) (4) Equipment
E (I/S) (5) Advertising Expenses
R (I/S) (6) Sales Revenue
L (B/S) (7) Notes Payable
SE(B/S) (8) Retained Earnings
L (B/S) (9) Accounts Payable
M1-7
L (B/S) (1) Accounts Payable
SE(B/S) (2) Contributed Capital
A (B/S) (3) Equipment
A (B/S) (4) Accounts Receivable
L (B/S) (5) Notes Payable
A (B/S) (6) Cash
SE(B/S) (7) Retained Earnings
E (I/S) (8) Selling and Administrative Expenses
R (I/S) (9) Sales Revenue
A (B/S) (10) Supplies
M1-8
SRE* (1) Dividends
B/S (2) Total Shareholders’ Equity
I/S (3) Sales Revenue
B/S (4) Total Assets
SCF (5) Cash Flows from Operating Activities
B/S (6) Total Liabilities
I/S, SRE (7) Net Income
SCF (8) Cash Flows from Financing Activities
* An argument could be made for also including SCF as a plausible answer because the SCF
reports “Dividends paid in cash.” The answer SCF has been excluded here because
(technically) the caption would have to read “Dividends paid in cash” if it were to be reported
on the SCF.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-8
M1-6
A (B/S) (1) Accounts Receivable
E (I/S) (2) Selling and Administrative Expenses
A (B/S) (3) Cash
A (B/S) (4) Equipment
E (I/S) (5) Advertising Expenses
R (I/S) (6) Sales Revenue
L (B/S) (7) Notes Payable
SE(B/S) (8) Retained Earnings
L (B/S) (9) Accounts Payable
M1-7
L (B/S) (1) Accounts Payable
SE(B/S) (2) Contributed Capital
A (B/S) (3) Equipment
A (B/S) (4) Accounts Receivable
L (B/S) (5) Notes Payable
A (B/S) (6) Cash
SE(B/S) (7) Retained Earnings
E (I/S) (8) Selling and Administrative Expenses
R (I/S) (9) Sales Revenue
A (B/S) (10) Supplies
M1-8
SRE* (1) Dividends
B/S (2) Total Shareholders’ Equity
I/S (3) Sales Revenue
B/S (4) Total Assets
SCF (5) Cash Flows from Operating Activities
B/S (6) Total Liabilities
I/S, SRE (7) Net Income
SCF (8) Cash Flows from Financing Activities
* An argument could be made for also including SCF as a plausible answer because the SCF
reports “Dividends paid in cash.” The answer SCF has been excluded here because
(technically) the caption would have to read “Dividends paid in cash” if it were to be reported
on the SCF.
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-9
M1-9
Element Financial Statement
D (1) Cash Flows from Financing Activities A. Balance Sheet
B (2) Expenses B. Income Statement
D (3) Cash Flows from Investing Activities C. Statement of Retained Earnings
A (4) Assets D. Statement of Cash Flows
C (5) Dividends
B (6) Revenues
D (7) Cash Flows from Operating Activities
A (8) Liabilities
M1-10
(F) (1) Cash paid for dividends
O (2) Cash collected from customers
F (3) Cash received when signing a note
(O) (4) Cash paid to employees
(I) (5) Cash paid to purchase equipment
F (6) Cash received from issuing shares
M1-11
(I) (1) Cash paid to purchase equipment
O (2) Cash collected from clients
I (3) Cash received from selling equipment
(F) (4) Cash paid for dividends
(O) (5) Cash paid to suppliers
F (6) Cash received from issuing shares
M1-12
STONE CULTURE CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2013
Retained Earnings, January 1, 2013 $ 0
Add: Net Income 36,000
Subtract: Dividends (15,000)
Retained Earnings, December 31, 2013 $ 21,000
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-9
M1-9
Element Financial Statement
D (1) Cash Flows from Financing Activities A. Balance Sheet
B (2) Expenses B. Income Statement
D (3) Cash Flows from Investing Activities C. Statement of Retained Earnings
A (4) Assets D. Statement of Cash Flows
C (5) Dividends
B (6) Revenues
D (7) Cash Flows from Operating Activities
A (8) Liabilities
M1-10
(F) (1) Cash paid for dividends
O (2) Cash collected from customers
F (3) Cash received when signing a note
(O) (4) Cash paid to employees
(I) (5) Cash paid to purchase equipment
F (6) Cash received from issuing shares
M1-11
(I) (1) Cash paid to purchase equipment
O (2) Cash collected from clients
I (3) Cash received from selling equipment
(F) (4) Cash paid for dividends
(O) (5) Cash paid to suppliers
F (6) Cash received from issuing shares
M1-12
STONE CULTURE CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2013
Retained Earnings, January 1, 2013 $ 0
Add: Net Income 36,000
Subtract: Dividends (15,000)
Retained Earnings, December 31, 2013 $ 21,000
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-10
M1-12 (continued)
STONE CULTURE CORPORTATION
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014 $ 21,000
Add: Net Income 45,000
Subtract: Dividends (20,000)
Retained Earnings, December 31, 2014 $ 46,000
M1-13
Apple, Inc. Google, Inc. Intel Corp.
Contributed Capital $11 $18 $17
Dividends 0 0 4
Net Income (a) 14 (d) 9 (g) 11
Retained Earnings, Beginning of Year 23 20 26
Retained Earnings, End of Year (b) 37 (e) 29 (h) 33
Total Assets (c) 75 (f) 59 (i) 63
Total Expenses 51 20 33
Total Liabilities 27 12 13
Total Revenues 65 29 44
Net income = Revenues – Expenses
Retained Earnings, End of Year = Retained Earnings Beginning of Year + Net Income –
Dividends
Total Assets = Total Liabilities and Shareholders’ Equity
M1-14
Amazin’
Corp.
Best Tech,
Inc.
Colossal
Corp.
Contributed Capital $5 $15 $100
Dividends 10 5 50
Net Income (a) 25 (d) 20 (g) 100
Retained Earnings, Beginning of Year 30 0 200
Retained Earnings, End of Year (b) 45 (e) 15 (h) 250
Total Assets (c) 80 (f) 60 (i) 700
Total Expenses 75 30 200
Total Liabilities 30 30 350
Total Revenues 100 50 300
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-10
M1-12 (continued)
STONE CULTURE CORPORTATION
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014 $ 21,000
Add: Net Income 45,000
Subtract: Dividends (20,000)
Retained Earnings, December 31, 2014 $ 46,000
M1-13
Apple, Inc. Google, Inc. Intel Corp.
Contributed Capital $11 $18 $17
Dividends 0 0 4
Net Income (a) 14 (d) 9 (g) 11
Retained Earnings, Beginning of Year 23 20 26
Retained Earnings, End of Year (b) 37 (e) 29 (h) 33
Total Assets (c) 75 (f) 59 (i) 63
Total Expenses 51 20 33
Total Liabilities 27 12 13
Total Revenues 65 29 44
Net income = Revenues – Expenses
Retained Earnings, End of Year = Retained Earnings Beginning of Year + Net Income –
Dividends
Total Assets = Total Liabilities and Shareholders’ Equity
M1-14
Amazin’
Corp.
Best Tech,
Inc.
Colossal
Corp.
Contributed Capital $5 $15 $100
Dividends 10 5 50
Net Income (a) 25 (d) 20 (g) 100
Retained Earnings, Beginning of Year 30 0 200
Retained Earnings, End of Year (b) 45 (e) 15 (h) 250
Total Assets (c) 80 (f) 60 (i) 700
Total Expenses 75 30 200
Total Liabilities 30 30 350
Total Revenues 100 50 300
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-11
M1-14 (continued)
Net income = Revenues – Expenses
Retained Earnings, End of Year = Retained Earnings Beginning of Year + Net Income –
Dividends
Total Assets = Total Liabilities and Shareholders’ Equity
M1-15
(a) (300) (b) 70 (c) 3,900. Electronic Arts was not profitable because its expenses ($3,900)
were greater than its revenues ($3,600), resulting in the net loss of $300 reported on the
income statement.
The above amounts are determined using the various relationships that exist in the financial
statements. Because this exercise excludes two pieces of information from both the income
statement and statement of retained earnings, students must first work backwards from the
balance sheet to the statement of retained earnings to the income statement. Although not
required, the following statements show the given and missing information. The ?s in the
balance sheet are determined from A = L + SE.
Electronic Arts, Inc.
Income Statement
For the Year Ended xxxx
Revenues $3,600
Expenses (c)
Net Income (Loss) (a)
Electronic Arts, Inc.
Statement of Retained Earnings
For the Year Ended xxxx
RE, beginning $370
Net income (loss) (a)
Dividends (0)
RE, ending (b)
Electronic Arts, Inc.
Balance Sheet
At xxxx
Total Assets $4,900
Liabilities and Shareholders’ Equity
Total Liabilities $2,400
Shareholders’ Equity
Contributed capital $2,430
Retained earnings (b)
Total SE ?
Total Liabilities & SE ?
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-11
M1-14 (continued)
Net income = Revenues – Expenses
Retained Earnings, End of Year = Retained Earnings Beginning of Year + Net Income –
Dividends
Total Assets = Total Liabilities and Shareholders’ Equity
M1-15
(a) (300) (b) 70 (c) 3,900. Electronic Arts was not profitable because its expenses ($3,900)
were greater than its revenues ($3,600), resulting in the net loss of $300 reported on the
income statement.
The above amounts are determined using the various relationships that exist in the financial
statements. Because this exercise excludes two pieces of information from both the income
statement and statement of retained earnings, students must first work backwards from the
balance sheet to the statement of retained earnings to the income statement. Although not
required, the following statements show the given and missing information. The ?s in the
balance sheet are determined from A = L + SE.
Electronic Arts, Inc.
Income Statement
For the Year Ended xxxx
Revenues $3,600
Expenses (c)
Net Income (Loss) (a)
Electronic Arts, Inc.
Statement of Retained Earnings
For the Year Ended xxxx
RE, beginning $370
Net income (loss) (a)
Dividends (0)
RE, ending (b)
Electronic Arts, Inc.
Balance Sheet
At xxxx
Total Assets $4,900
Liabilities and Shareholders’ Equity
Total Liabilities $2,400
Shareholders’ Equity
Contributed capital $2,430
Retained earnings (b)
Total SE ?
Total Liabilities & SE ?
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-12
M1-16
Req. 1
WESTJET AIRLINES, LTD.
Income Statement
For the Year Ended December 31, 2014
(Amounts in millions)
Revenues
Ticket Revenues $ 9,861
Other Revenue 336
Total Revenue 10,197
Expenses
Salaries Expense 3,213
Aircraft Fuel Expense 2,536
Other Operating Expenses 2,145
Repairs and Maintenance Expense 616
Landing Fees Expense 560
Interest Expense 69
Income Tax Expense 413
Total Expenses 9,552
Net Income $ 645
Req. 2
WESTJET AIRLINES, LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2014
(Amounts in millions)
Retained Earnings, January 1, 2014 $ 4,157
Add: Net Income 645
Subtract: Dividends (14)
Retained Earnings, December 31, 2014 $ 4,788
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-12
M1-16
Req. 1
WESTJET AIRLINES, LTD.
Income Statement
For the Year Ended December 31, 2014
(Amounts in millions)
Revenues
Ticket Revenues $ 9,861
Other Revenue 336
Total Revenue 10,197
Expenses
Salaries Expense 3,213
Aircraft Fuel Expense 2,536
Other Operating Expenses 2,145
Repairs and Maintenance Expense 616
Landing Fees Expense 560
Interest Expense 69
Income Tax Expense 413
Total Expenses 9,552
Net Income $ 645
Req. 2
WESTJET AIRLINES, LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2014
(Amounts in millions)
Retained Earnings, January 1, 2014 $ 4,157
Add: Net Income 645
Subtract: Dividends (14)
Retained Earnings, December 31, 2014 $ 4,788
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-13
M1-16 (continued)
Req. 3
WESTJET AIRLINES, LTD.
Balance Sheet
At December 31, 2014
(Amounts in millions)
Assets
Cash $ 2,213
Accounts Receivable 845
Supplies 259
Property and Equipment 10,874
Other Assets 2,581
Total Assets $ 16,772
Liabilities
Accounts Payable $ 1,731
Notes Payable 4,993
Other Liabilities 3,107
Total Liabilities 9,831
Shareholders’ Equity
Contributed Capital 2,153
Retained Earnings 4,788
Total Shareholders’ Equity 6,941
Total Liabilities and Shareholders’ Equity $ 16,772
Req. 4
Westjet Airlines financed its assets primarily with liabilities ($9,831) as opposed to
shareholders’ equity ($6,941).
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-13
M1-16 (continued)
Req. 3
WESTJET AIRLINES, LTD.
Balance Sheet
At December 31, 2014
(Amounts in millions)
Assets
Cash $ 2,213
Accounts Receivable 845
Supplies 259
Property and Equipment 10,874
Other Assets 2,581
Total Assets $ 16,772
Liabilities
Accounts Payable $ 1,731
Notes Payable 4,993
Other Liabilities 3,107
Total Liabilities 9,831
Shareholders’ Equity
Contributed Capital 2,153
Retained Earnings 4,788
Total Shareholders’ Equity 6,941
Total Liabilities and Shareholders’ Equity $ 16,772
Req. 4
Westjet Airlines financed its assets primarily with liabilities ($9,831) as opposed to
shareholders’ equity ($6,941).
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-14
ANSWERS TO EXERCISES
E1-1
a) Assets = Liabilities + Shareholders’ Equity
= $13,750 + $4,450
= $18,200
= Assets reported on the balance sheet
b) Net Income = Revenue – Expenses
= $10,500 - $9,200
= $1,300
= Net income reported on the income statement
c) Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E
$3,500 + $1,300 - $500 = $4,300
d) Beginning Cash + Cash Flows from Operating Activities + Cash Flows from Investing
Activities + Cash Flows from Financing Activities = Ending Cash
$1,000 + $1,600 + ($1,000) + ($900) = $700
E1-2
a) Assets = Liabilities + Shareholders’ Equity
= $18,500 + $61,000
= $79,500
= Assets reported on the balance sheet
b) Net Income = Revenue – Expenses
= $32,100 – $18,950
= $13,150
= Net income reported on the income statement
c) Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E
$20,500 + $13,150 – $4,900 = $28,750
d) Beginning Cash + Cash Flows from Operating Activities + Cash Flows from Investing
Activities + Cash Flows from Financing Activities = Ending Cash
$3,200 + $15,700 + ($7,200) + ($5,300) = $6,400
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-14
ANSWERS TO EXERCISES
E1-1
a) Assets = Liabilities + Shareholders’ Equity
= $13,750 + $4,450
= $18,200
= Assets reported on the balance sheet
b) Net Income = Revenue – Expenses
= $10,500 - $9,200
= $1,300
= Net income reported on the income statement
c) Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E
$3,500 + $1,300 - $500 = $4,300
d) Beginning Cash + Cash Flows from Operating Activities + Cash Flows from Investing
Activities + Cash Flows from Financing Activities = Ending Cash
$1,000 + $1,600 + ($1,000) + ($900) = $700
E1-2
a) Assets = Liabilities + Shareholders’ Equity
= $18,500 + $61,000
= $79,500
= Assets reported on the balance sheet
b) Net Income = Revenue – Expenses
= $32,100 – $18,950
= $13,150
= Net income reported on the income statement
c) Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E
$20,500 + $13,150 – $4,900 = $28,750
d) Beginning Cash + Cash Flows from Operating Activities + Cash Flows from Investing
Activities + Cash Flows from Financing Activities = Ending Cash
$3,200 + $15,700 + ($7,200) + ($5,300) = $6,400
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-15
E1-3
Req. 1
Designer Footwear Inc.
Balance Sheet
At November 1, 2014
(in thousands)
Assets
Cash $ 45,570
Accounts Receivable 11,888
Property, Plant, and Equipment 233,631
Other Assets 494,294
Total Assets $785,383
Liabilities
Accounts Payable $136,405
Notes Payable 99,044
Other Liabilities 79,148
Total Liabilities 314,597
Shareholders’ Equity
Contributed Capital 291,248
Retained Earnings 179,538
Total Shareholders’ Equity 470,786
Total Liabilities and Shareholders’ Equity $785,383
Req. 2
Most of the financing as of November 1 came from shareholders. The shareholders have
financed $470,786 of the total assets and creditors have financed only $314,597 of the total
assets of the company.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-15
E1-3
Req. 1
Designer Footwear Inc.
Balance Sheet
At November 1, 2014
(in thousands)
Assets
Cash $ 45,570
Accounts Receivable 11,888
Property, Plant, and Equipment 233,631
Other Assets 494,294
Total Assets $785,383
Liabilities
Accounts Payable $136,405
Notes Payable 99,044
Other Liabilities 79,148
Total Liabilities 314,597
Shareholders’ Equity
Contributed Capital 291,248
Retained Earnings 179,538
Total Shareholders’ Equity 470,786
Total Liabilities and Shareholders’ Equity $785,383
Req. 2
Most of the financing as of November 1 came from shareholders. The shareholders have
financed $470,786 of the total assets and creditors have financed only $314,597 of the total
assets of the company.
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-16
E1-4
Req. 1
READER DIRECT
Balance Sheet
At December 31, 2014
Assets Liabilities
Cash $
47,500
Accounts Payable $ 8,000
Accounts Receivable 26,900 Note Payable 2,850
Property and Equipment 48,000
Total Liabilities 10,850
Shareholders’ Equity
Contributed Capital 98,000
Retained Earnings 13,550
Total Shareholders’ Equity 111,550
Total Assets $122,400
Total Liabilities and
Shareholders’ Equity $122,400
Req. 2
Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E, so
Net Income= Ending R/E + Dividends - Beginning R/E
= $13,550 + 0 – 0
= $13,550
Net income for the year was $13,550. This is the first year of operations and no dividends
were declared or paid to shareholders; therefore, retained earnings is $13,550 (which
represents income for one year).
Req. 3
Most of the financing as of December 31, 2014 came from shareholders. The shareholders
have financed $111,550 of the total assets and creditors have financed only $10,850 of the
total assets of the company.
Req.4
Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E, so
Ending R/E = $13,550 + 3,000 – 2,000
= $14,550
Retained Earnings at December 31, 2015 would be $14,550.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-16
E1-4
Req. 1
READER DIRECT
Balance Sheet
At December 31, 2014
Assets Liabilities
Cash $
47,500
Accounts Payable $ 8,000
Accounts Receivable 26,900 Note Payable 2,850
Property and Equipment 48,000
Total Liabilities 10,850
Shareholders’ Equity
Contributed Capital 98,000
Retained Earnings 13,550
Total Shareholders’ Equity 111,550
Total Assets $122,400
Total Liabilities and
Shareholders’ Equity $122,400
Req. 2
Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E, so
Net Income= Ending R/E + Dividends - Beginning R/E
= $13,550 + 0 – 0
= $13,550
Net income for the year was $13,550. This is the first year of operations and no dividends
were declared or paid to shareholders; therefore, retained earnings is $13,550 (which
represents income for one year).
Req. 3
Most of the financing as of December 31, 2014 came from shareholders. The shareholders
have financed $111,550 of the total assets and creditors have financed only $10,850 of the
total assets of the company.
Req.4
Beginning Retained Earnings (R/E) + Net Income – Dividends = Ending R/E, so
Ending R/E = $13,550 + 3,000 – 2,000
= $14,550
Retained Earnings at December 31, 2015 would be $14,550.
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-17
E1-5
Req. 1
Label
Req. 2
Type
a. Coins, bullion, and currency Inventory A
b. Amounts Collectibles Canada owes to suppliers
of coins, bullion and currency Accounts Payable L
c. Amounts Collectibles Canada can collect from
customers Accounts Receivable A
d. Amounts owed to bank for loan to buy building Notes Payable L
e. Property on which buildings will be built Land A
f. Amounts distributed from profits to shareholders Dividends SE
g. Earned by Collectibles Canada by selling coin
collecting supplies Revenue R
h. Unused paper in Collectibles Canada head office Supplies A
i. Cost of paper used up during month Supplies Expense E
j. Amounts contributed to Collectibles Canada by
shareholders Contributed Capital SE
E1-6
Req. 1
CINEPLEX ENTERTAINMENT
Income Statement
For the Quarter Ended June 26, 2014
(in thousands)
Revenues
Admissions Revenues
$455,700
Concessions Revenues 188,900
Other Revenues
31,200
Total Revenues 675,800
Expenses
Film Rental Expenses 247,000
Rent Expense 90,000
General, Selling and Administrative Expenses 65,700
Concessions Expenses 25,500
Other Expenses
233,800
Total Expenses
662,000
Net Income $ 13,800
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-17
E1-5
Req. 1
Label
Req. 2
Type
a. Coins, bullion, and currency Inventory A
b. Amounts Collectibles Canada owes to suppliers
of coins, bullion and currency Accounts Payable L
c. Amounts Collectibles Canada can collect from
customers Accounts Receivable A
d. Amounts owed to bank for loan to buy building Notes Payable L
e. Property on which buildings will be built Land A
f. Amounts distributed from profits to shareholders Dividends SE
g. Earned by Collectibles Canada by selling coin
collecting supplies Revenue R
h. Unused paper in Collectibles Canada head office Supplies A
i. Cost of paper used up during month Supplies Expense E
j. Amounts contributed to Collectibles Canada by
shareholders Contributed Capital SE
E1-6
Req. 1
CINEPLEX ENTERTAINMENT
Income Statement
For the Quarter Ended June 26, 2014
(in thousands)
Revenues
Admissions Revenues
$455,700
Concessions Revenues 188,900
Other Revenues
31,200
Total Revenues 675,800
Expenses
Film Rental Expenses 247,000
Rent Expense 90,000
General, Selling and Administrative Expenses 65,700
Concessions Expenses 25,500
Other Expenses
233,800
Total Expenses
662,000
Net Income $ 13,800
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-18
E1-6 (continued)
The question marks in the exercise correspond to Total Expenses of $662,000 and Net
Income of $13,800, as determined above.
Req. 2
Cineplex’s main source of revenue is admissions and its biggest expense is its film rental
expense and other expenses.
E1-7
HOME REALTY, INCORPORATED
Income Statement
For the Year Ended December 31, 2014
Revenue:
Sales Revenue $166,000
Expenses:
Selling Expenses 97,000
Promotion and Advertising Expenses 9,025
Interest Expense 6,300
Income Tax Expense 18,500
Total Expenses 130,825
Net Income $ 35,175
Note that dividends declared are not an expense. As a distribution of the company’s prior
profits, they will be deducted from Retained Earnings.
E1-8
A Net Income = $100,000 - $82,000 = $18,000
Shareholders’ Equity = $150,000 - $70,000 = $80,000
B Total Revenues = $80,000 + $12,000 = $92,000
Total Liabilities = $112,000 - $60,000 = $52,000
C Net Income (Loss) = $80,000 - $86,000 = $(6,000)
Shareholders’ Equity = $104,000 - $26,000 = $78,000
D Total Expenses = $50,000 - $13,000 = $37,000
Total Assets = $22,000 + $77,000 = $99,000
E Total Revenues = $81,000 - $6,000 = $75,000
Total Assets = $73,000 + $28,000 = $101,000
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
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E1-6 (continued)
The question marks in the exercise correspond to Total Expenses of $662,000 and Net
Income of $13,800, as determined above.
Req. 2
Cineplex’s main source of revenue is admissions and its biggest expense is its film rental
expense and other expenses.
E1-7
HOME REALTY, INCORPORATED
Income Statement
For the Year Ended December 31, 2014
Revenue:
Sales Revenue $166,000
Expenses:
Selling Expenses 97,000
Promotion and Advertising Expenses 9,025
Interest Expense 6,300
Income Tax Expense 18,500
Total Expenses 130,825
Net Income $ 35,175
Note that dividends declared are not an expense. As a distribution of the company’s prior
profits, they will be deducted from Retained Earnings.
E1-8
A Net Income = $100,000 - $82,000 = $18,000
Shareholders’ Equity = $150,000 - $70,000 = $80,000
B Total Revenues = $80,000 + $12,000 = $92,000
Total Liabilities = $112,000 - $60,000 = $52,000
C Net Income (Loss) = $80,000 - $86,000 = $(6,000)
Shareholders’ Equity = $104,000 - $26,000 = $78,000
D Total Expenses = $50,000 - $13,000 = $37,000
Total Assets = $22,000 + $77,000 = $99,000
E Total Revenues = $81,000 - $6,000 = $75,000
Total Assets = $73,000 + $28,000 = $101,000
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-19
E1-9
Req. 1
MONCTON CLAY CORPORATION
Income Statement
For the Month Ended January 31, 2014
Total Revenues $131,000
Operating Expenses 90,500
Net Income $ 40,500
MONCTON CLAY CORPORATION
Balance Sheet
At January 31, 2014
Assets:
Cash $30,800
Accounts Receivable 25,300
Supplies 40,700
Total Assets $96,800
Liabilities:
Accounts Payable $25,700
Total Liabilities 25,700
Shareholders’ Equity:
Contributed Capital (2,600 shares) 30,600
Retained Earnings (from the income statement above) 40,500
Total Shareholders’ Equity 71,100
Total Liabilities and Shareholders’ Equity $96,800
Req. 2
Moncton Clay Corporation should have no problem paying its liabilities since it has more total
assets than total liabilities. In fact, it has over three times as many total assets as liabilities
($96,800/$25,700 = 3.77 times). This means that Moncton Clay Corporation could pay its
liabilities more than three times over if all assets on hand at January 31, 2014, were converted
to cash. Of course, not all assets will be converted into cash right away. Even so, looking only
at the amount of cash at the end of January, we see that Moncton Clay has enough cash to
cover all its liabilities. This is a very strong financial position.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-19
E1-9
Req. 1
MONCTON CLAY CORPORATION
Income Statement
For the Month Ended January 31, 2014
Total Revenues $131,000
Operating Expenses 90,500
Net Income $ 40,500
MONCTON CLAY CORPORATION
Balance Sheet
At January 31, 2014
Assets:
Cash $30,800
Accounts Receivable 25,300
Supplies 40,700
Total Assets $96,800
Liabilities:
Accounts Payable $25,700
Total Liabilities 25,700
Shareholders’ Equity:
Contributed Capital (2,600 shares) 30,600
Retained Earnings (from the income statement above) 40,500
Total Shareholders’ Equity 71,100
Total Liabilities and Shareholders’ Equity $96,800
Req. 2
Moncton Clay Corporation should have no problem paying its liabilities since it has more total
assets than total liabilities. In fact, it has over three times as many total assets as liabilities
($96,800/$25,700 = 3.77 times). This means that Moncton Clay Corporation could pay its
liabilities more than three times over if all assets on hand at January 31, 2014, were converted
to cash. Of course, not all assets will be converted into cash right away. Even so, looking only
at the amount of cash at the end of January, we see that Moncton Clay has enough cash to
cover all its liabilities. This is a very strong financial position.
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Chapter 01 - Business Decisions and Financial Accounting
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Page 1-20
E1-10
Req. 1
Average monthly revenue, $216,000 12 = $18,000
Req. 2
Average monthly salaries and wages expense, $33,000 12 = $2,750
Req. 3
Advertising is an expense because it represents the cost of ads that were run during the
period to generate revenue.
Req. 4
The dividends are not reported as an expense because they represent a distribution of prior
profits to shareholders. Consequently, they appear only on the statement of retained earnings,
not the income statement.
Req. 5
Standing alone, the income statement does not report, or make it possible to determine, the
ending cash balance. Some revenues might not have been collected, and some expenses
might not have been paid by the end of the year. The amount of cash on December 31, 2014,
would be reported on the balance sheet under assets and on the cash flow statement as the
final amount shown.
E1-11
(O) 1. Cash paid to suppliers and employees
O 2. Cash received from customers
F 3. Cash received from borrowing long-term debt
F 4. Cash received from issuing shares
(I) 5. Cash paid to purchase equipment
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-20
E1-10
Req. 1
Average monthly revenue, $216,000 12 = $18,000
Req. 2
Average monthly salaries and wages expense, $33,000 12 = $2,750
Req. 3
Advertising is an expense because it represents the cost of ads that were run during the
period to generate revenue.
Req. 4
The dividends are not reported as an expense because they represent a distribution of prior
profits to shareholders. Consequently, they appear only on the statement of retained earnings,
not the income statement.
Req. 5
Standing alone, the income statement does not report, or make it possible to determine, the
ending cash balance. Some revenues might not have been collected, and some expenses
might not have been paid by the end of the year. The amount of cash on December 31, 2014,
would be reported on the balance sheet under assets and on the cash flow statement as the
final amount shown.
E1-11
(O) 1. Cash paid to suppliers and employees
O 2. Cash received from customers
F 3. Cash received from borrowing long-term debt
F 4. Cash received from issuing shares
(I) 5. Cash paid to purchase equipment
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Chapter 01 - Business Decisions and Financial Accounting
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Page 1-21
E1-12
(I) 1. Purchases of equipment
O 2. Cash received from customers
F 3. Cash received from issuing shares
(O) 4. Cash paid to suppliers and employees
(F) 5. Cash paid on notes payable
I 6. Cash received from selling equipment
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-21
E1-12
(I) 1. Purchases of equipment
O 2. Cash received from customers
F 3. Cash received from issuing shares
(O) 4. Cash paid to suppliers and employees
(F) 5. Cash paid on notes payable
I 6. Cash received from selling equipment
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-22
ANSWERS TO COACHED PROBLEMS
CP1-1
Req. 1
NUCLEAR COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales Revenue $ 88,000
Expenses
Operating Expenses 57,200
Other Expenses 8,850
Total Expenses 66,050
Net Income $ 21,950
Req.2
NUCLEAR COMPANY
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014 $ 0
Add: Net Income 21,950
Subtract: Dividends (200)
Retained Earnings, December 31, 2014 $ 21,750
Req. 3
NUCLEAR COMPANY
Balance Sheet
At December 31, 2014
Assets
Cash $ 12,000
Accounts Receivable 59,500
Supplies 8,000
Equipment 36,000
Total Assets $115,500
Liabilities
Accounts Payable $ 30,297
Notes Payable 1,470
Total Liabilities 31,767
Shareholders’ Equity
Contributed Capital 61,983
Retained Earnings 21,750
Total Shareholders’ Equity 83,733
Total Liabilities and Shareholders’ Equity $115,500
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-22
ANSWERS TO COACHED PROBLEMS
CP1-1
Req. 1
NUCLEAR COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales Revenue $ 88,000
Expenses
Operating Expenses 57,200
Other Expenses 8,850
Total Expenses 66,050
Net Income $ 21,950
Req.2
NUCLEAR COMPANY
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014 $ 0
Add: Net Income 21,950
Subtract: Dividends (200)
Retained Earnings, December 31, 2014 $ 21,750
Req. 3
NUCLEAR COMPANY
Balance Sheet
At December 31, 2014
Assets
Cash $ 12,000
Accounts Receivable 59,500
Supplies 8,000
Equipment 36,000
Total Assets $115,500
Liabilities
Accounts Payable $ 30,297
Notes Payable 1,470
Total Liabilities 31,767
Shareholders’ Equity
Contributed Capital 61,983
Retained Earnings 21,750
Total Shareholders’ Equity 83,733
Total Liabilities and Shareholders’ Equity $115,500
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-23
CP1-2
Req. 1
Nuclear Company’s income statement reported net income of $21,950, suggesting that the
company was profitable because revenues exceeded expenses.
Req. 2
Nuclear Company’s statement of retained earnings reported a retained earnings balance of
$21,750, after dividends of $200 had been subtracted. This suggests the company could have
sustained additional dividends of $21,750, if sufficient cash were available to pay them. As it
turns out, the company’s balance sheet reports cash of $12,000, suggesting that only $12,000
in additional dividends could be paid (without borrowing additional cash).
Req. 3
Nuclear Company’s balance sheet reports total liabilities of $31,767 and shareholders’ equity
of $83,733, indicating that the company is financed mainly by shareholders.
Req. 4
Nuclear Company was founded at the beginning of the year, so it began with no cash. The
balance sheet reports a cash balance of $12,000 at the end of the year. The reasons for this
increase of $12,000 would be shown in the statement of cash flows.
CP1-3
Req. 1
FITNESS AND FUN, INC.
Income Statement
For the Nine Months Ended September 30, 2014
(in thousands)
Gym Revenues $575,667
Expenses
Gym Operating Expenses 350,835
General, Selling and Administrative Expense 83,207
Advertising and Marketing Expense 23,608
Interest and Other Expenses 20,316
Income Tax Expense 38,895
Total Expenses 516,861
Net Income $ 58,806
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-23
CP1-2
Req. 1
Nuclear Company’s income statement reported net income of $21,950, suggesting that the
company was profitable because revenues exceeded expenses.
Req. 2
Nuclear Company’s statement of retained earnings reported a retained earnings balance of
$21,750, after dividends of $200 had been subtracted. This suggests the company could have
sustained additional dividends of $21,750, if sufficient cash were available to pay them. As it
turns out, the company’s balance sheet reports cash of $12,000, suggesting that only $12,000
in additional dividends could be paid (without borrowing additional cash).
Req. 3
Nuclear Company’s balance sheet reports total liabilities of $31,767 and shareholders’ equity
of $83,733, indicating that the company is financed mainly by shareholders.
Req. 4
Nuclear Company was founded at the beginning of the year, so it began with no cash. The
balance sheet reports a cash balance of $12,000 at the end of the year. The reasons for this
increase of $12,000 would be shown in the statement of cash flows.
CP1-3
Req. 1
FITNESS AND FUN, INC.
Income Statement
For the Nine Months Ended September 30, 2014
(in thousands)
Gym Revenues $575,667
Expenses
Gym Operating Expenses 350,835
General, Selling and Administrative Expense 83,207
Advertising and Marketing Expense 23,608
Interest and Other Expenses 20,316
Income Tax Expense 38,895
Total Expenses 516,861
Net Income $ 58,806
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Chapter 01 - Business Decisions and Financial Accounting
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Page 1-24
CP1-3 (continued)
Req. 2
FITNESS AND FUN, INC.
Statement of Retained Earnings
For the Nine Months Ended September 30, 2014
(in thousands)
Retained Earnings, January 1, 2014 $199,890
Add: Net Income 58,806
Subtract: Dividends 0
Retained Earnings, September 30, 2014 $258,696
Req. 3
FITNESS AND FUN, INC.
Balance Sheet
At September 30, 2014
(in thousands)
Assets
Cash $ 7,119
Accounts Receivable 5,318
Supplies 14,739
Property and Equipment 1,451,641
Other Assets 117,108
Total Assets $1,595,925
Liabilities
Accounts Payable $ 102,665
Accrued Liabilities 119,482
Notes Payable 647,120
Other Liabilities 86,234
Total Liabilities 955,501
Shareholders’ Equity
Contributed Capital 381,728
Retained Earnings 258,696
Total Shareholders’ Equity 640,424
Total Liabilities and Shareholders’ Equity $1,595,925
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-24
CP1-3 (continued)
Req. 2
FITNESS AND FUN, INC.
Statement of Retained Earnings
For the Nine Months Ended September 30, 2014
(in thousands)
Retained Earnings, January 1, 2014 $199,890
Add: Net Income 58,806
Subtract: Dividends 0
Retained Earnings, September 30, 2014 $258,696
Req. 3
FITNESS AND FUN, INC.
Balance Sheet
At September 30, 2014
(in thousands)
Assets
Cash $ 7,119
Accounts Receivable 5,318
Supplies 14,739
Property and Equipment 1,451,641
Other Assets 117,108
Total Assets $1,595,925
Liabilities
Accounts Payable $ 102,665
Accrued Liabilities 119,482
Notes Payable 647,120
Other Liabilities 86,234
Total Liabilities 955,501
Shareholders’ Equity
Contributed Capital 381,728
Retained Earnings 258,696
Total Shareholders’ Equity 640,424
Total Liabilities and Shareholders’ Equity $1,595,925
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Chapter 01 - Business Decisions and Financial Accounting
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Page 1-25
CP1-3 (continued)
Req. 4
FITNESS AND FUN, INC.
Statement of Cash Flows
For the Nine Months Ended September 30, 2014
(in thousands)
Cash Flows from Operating Activities:
Cash received from customers $574,824
Cash paid to suppliers and employees (472,265)
Cash Provided by Operating Activities 102,559
Cash Flows from Investing Activities:
Cash paid to purchase equipment (354,255)
Cash received from sale of long-term assets 161,885
Cash Used in Investing Activities (192,370)
Cash Flows from Financing Activities:
Cash received from issuing common shares 9,061
Repayments of borrowings (13,043)
Cash received from borrowings 95,558
Cash Provided by Financing Activities 91,576
Change in Cash 1,765
Beginning Cash Balance, January 1, 2014 5,354
Ending Cash Balance, September 30, 2014 $ 7,119
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-25
CP1-3 (continued)
Req. 4
FITNESS AND FUN, INC.
Statement of Cash Flows
For the Nine Months Ended September 30, 2014
(in thousands)
Cash Flows from Operating Activities:
Cash received from customers $574,824
Cash paid to suppliers and employees (472,265)
Cash Provided by Operating Activities 102,559
Cash Flows from Investing Activities:
Cash paid to purchase equipment (354,255)
Cash received from sale of long-term assets 161,885
Cash Used in Investing Activities (192,370)
Cash Flows from Financing Activities:
Cash received from issuing common shares 9,061
Repayments of borrowings (13,043)
Cash received from borrowings 95,558
Cash Provided by Financing Activities 91,576
Change in Cash 1,765
Beginning Cash Balance, January 1, 2014 5,354
Ending Cash Balance, September 30, 2014 $ 7,119
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-26
ANSWERS TO GROUP A PROBLEMS
PA1-1
Req. 1
HIGH POWER CORPORATION
Income Statement
For the Year Ended December 31, 2014
Sales Revenue $91,000
Expenses
Operating Expenses 58,700
Other Expenses 8,850
Total Expenses 67,550
Net Income $23,450
Req.2
HIGH POWER CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014 $ 0
Add: Net Income 23,450
Subtract: Dividends (1,950)
Retained Earnings, December 31, 2014 $ 21,500
Req. 3
HIGH POWER CORPORATION
Balance Sheet
At December 31, 2014
Assets
Cash $ 13,300
Accounts Receivable 9,550
Supplies 5,000
Equipment 86,000
Total Assets $113,850
Liabilities
Accounts Payable $ 32,087
Notes Payable 1,160
Total Liabilities 33,247
Shareholders’ Equity
Contributed Capital 59,103
Retained Earnings 21,500
Total Shareholders’ Equity 80,603
Total Liabilities and Shareholders’ Equity $113,850
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-26
ANSWERS TO GROUP A PROBLEMS
PA1-1
Req. 1
HIGH POWER CORPORATION
Income Statement
For the Year Ended December 31, 2014
Sales Revenue $91,000
Expenses
Operating Expenses 58,700
Other Expenses 8,850
Total Expenses 67,550
Net Income $23,450
Req.2
HIGH POWER CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014 $ 0
Add: Net Income 23,450
Subtract: Dividends (1,950)
Retained Earnings, December 31, 2014 $ 21,500
Req. 3
HIGH POWER CORPORATION
Balance Sheet
At December 31, 2014
Assets
Cash $ 13,300
Accounts Receivable 9,550
Supplies 5,000
Equipment 86,000
Total Assets $113,850
Liabilities
Accounts Payable $ 32,087
Notes Payable 1,160
Total Liabilities 33,247
Shareholders’ Equity
Contributed Capital 59,103
Retained Earnings 21,500
Total Shareholders’ Equity 80,603
Total Liabilities and Shareholders’ Equity $113,850
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Chapter 01 - Business Decisions and Financial Accounting
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Page 1-27
PA1-2
Req. 1
High Power Corporation’s income statement reported net income of $23,450, suggesting that
the company was profitable because revenues exceeded expenses.
Req. 2
High Power Corporation’s statement of retained earnings reported a retained earnings balance
of $21,500, after dividends of $1,950 had been subtracted. This suggests the company could
have sustained additional dividends of $21,500, if sufficient cash were available to pay them.
As it turns out, the company’s balance sheet reports cash of $13,300, suggesting that only
$13,300 in additional dividends could be paid (without borrowing additional cash).
Req. 3
High Power Corporation’s balance sheet reports total liabilities of $33,247 and shareholders’
equity of $80,603, indicating that the company is financed mainly by shareholders.
Req. 4
High Power Corporation was founded at the beginning of the year, so it began with no cash.
The balance sheet reports a cash balance of $13,300 at the end of the year. The reasons for
this increase of $13,300 would be shown in the statement of cash flows.
PA1-3
Req. 1
COLLEGE PARK VETERINARY CLINIC
Income Statement
For the Year Ended June 30, 2014
Sales Revenue $250,000
Expenses
Operating Expenses 185,700
General, Selling and Administrative Expenses 53,400
Advertising and Marketing Expenses 27,800
Interest Expense 5,000
Total Expenses 271,900
Net Loss ($21,900)
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-27
PA1-2
Req. 1
High Power Corporation’s income statement reported net income of $23,450, suggesting that
the company was profitable because revenues exceeded expenses.
Req. 2
High Power Corporation’s statement of retained earnings reported a retained earnings balance
of $21,500, after dividends of $1,950 had been subtracted. This suggests the company could
have sustained additional dividends of $21,500, if sufficient cash were available to pay them.
As it turns out, the company’s balance sheet reports cash of $13,300, suggesting that only
$13,300 in additional dividends could be paid (without borrowing additional cash).
Req. 3
High Power Corporation’s balance sheet reports total liabilities of $33,247 and shareholders’
equity of $80,603, indicating that the company is financed mainly by shareholders.
Req. 4
High Power Corporation was founded at the beginning of the year, so it began with no cash.
The balance sheet reports a cash balance of $13,300 at the end of the year. The reasons for
this increase of $13,300 would be shown in the statement of cash flows.
PA1-3
Req. 1
COLLEGE PARK VETERINARY CLINIC
Income Statement
For the Year Ended June 30, 2014
Sales Revenue $250,000
Expenses
Operating Expenses 185,700
General, Selling and Administrative Expenses 53,400
Advertising and Marketing Expenses 27,800
Interest Expense 5,000
Total Expenses 271,900
Net Loss ($21,900)
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Chapter 01 - Business Decisions and Financial Accounting
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-28
PA1-3 (continued)
Req.2
COLLEGE PARK VETERINARY CLINIC
Statement of Retained Earnings
For the Year Ended June 30, 2014
Retained Earnings, July 1, 2013 $ 50,000
Add: Net Loss (21,900)
Subtract: Dividends (27,500)
Retained Earnings, June 30, 2014 $ 600
Req. 3
COLLEGE PARK VETERINARY CLINIC
Balance Sheet
At June 30, 2014
Assets
Cash $ 5,000
Accounts Receivable 125,600
Supplies 25,000
Property and Equipment 242,500
Other Assets 13,500
Total Assets $411,600
Liabilities
Accounts Payable $ 87,000
Notes Payable 150,000
Other Liabilities 37,000
Total Liabilities 274,000
Shareholders’ Equity
Contributed Capital 137,000
Retained Earnings 600
Total Shareholders’ Equity 137,600
Total Liabilities and Shareholder’s Equity $411,600
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-28
PA1-3 (continued)
Req.2
COLLEGE PARK VETERINARY CLINIC
Statement of Retained Earnings
For the Year Ended June 30, 2014
Retained Earnings, July 1, 2013 $ 50,000
Add: Net Loss (21,900)
Subtract: Dividends (27,500)
Retained Earnings, June 30, 2014 $ 600
Req. 3
COLLEGE PARK VETERINARY CLINIC
Balance Sheet
At June 30, 2014
Assets
Cash $ 5,000
Accounts Receivable 125,600
Supplies 25,000
Property and Equipment 242,500
Other Assets 13,500
Total Assets $411,600
Liabilities
Accounts Payable $ 87,000
Notes Payable 150,000
Other Liabilities 37,000
Total Liabilities 274,000
Shareholders’ Equity
Contributed Capital 137,000
Retained Earnings 600
Total Shareholders’ Equity 137,600
Total Liabilities and Shareholder’s Equity $411,600
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Page 1-29
PA1-4
Req. 1
College Park Veterinary Clinic’s income statement reported net loss of $21,900, suggesting
that the company was not profitable because expenses exceeded revenues.
Req. 2
College Park Veterinary Clinic’s statement of retained earnings reported a retained earnings
balance of $600, after dividends of $27,500 had been subtracted. This suggests the company
could have sustained additional dividends of $600, if sufficient cash were available to pay
them. As it turns out, the company’s balance sheet reports cash of $5,000, suggesting that
additional dividends could be paid (without borrowing additional cash).
Req. 3
College Park Veterinary Clinic’s balance sheet reports total liabilities of $274,000 and
shareholders’ equity of $137,600, indicating that the company is financed mainly by
debt/creditors.
Req. 4
It is not possible to determine the amount of cash increase or decrease that would be shown
in the statement of cash flows from the information presented. To determine this change, we
would either require the opening cash balance at July 1, 2014, or would require the necessary
information to calculate the cash from or cash used in the operating, investing and financing
activities for the current year. None of this information is available in the information currently
provided.
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-29
PA1-4
Req. 1
College Park Veterinary Clinic’s income statement reported net loss of $21,900, suggesting
that the company was not profitable because expenses exceeded revenues.
Req. 2
College Park Veterinary Clinic’s statement of retained earnings reported a retained earnings
balance of $600, after dividends of $27,500 had been subtracted. This suggests the company
could have sustained additional dividends of $600, if sufficient cash were available to pay
them. As it turns out, the company’s balance sheet reports cash of $5,000, suggesting that
additional dividends could be paid (without borrowing additional cash).
Req. 3
College Park Veterinary Clinic’s balance sheet reports total liabilities of $274,000 and
shareholders’ equity of $137,600, indicating that the company is financed mainly by
debt/creditors.
Req. 4
It is not possible to determine the amount of cash increase or decrease that would be shown
in the statement of cash flows from the information presented. To determine this change, we
would either require the opening cash balance at July 1, 2014, or would require the necessary
information to calculate the cash from or cash used in the operating, investing and financing
activities for the current year. None of this information is available in the information currently
provided.
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Chapter 01 - Business Decisions and Financial Accounting
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Page 1-30
PA1-5
Req. 1
OSI RESTAURANT PARTNERS, INC.
Income Statement
For the Year Ended December 31, 2014
(in millions)
Revenues:
Restaurant Sales Revenue $ 3,920
Other Revenues 21
Total Revenues 3,941
Expenses:
Food and Supplies Expenses 1,415
Utilities and Other Expenses 1,104
Wages Expense 1,087
General, Selling and Administrative Expenses 235
Total Expenses 3,841
Net Income $ 100
Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual
Page 1-30
PA1-5
Req. 1
OSI RESTAURANT PARTNERS, INC.
Income Statement
For the Year Ended December 31, 2014
(in millions)
Revenues:
Restaurant Sales Revenue $ 3,920
Other Revenues 21
Total Revenues 3,941
Expenses:
Food and Supplies Expenses 1,415
Utilities and Other Expenses 1,104
Wages Expense 1,087
General, Selling and Administrative Expenses 235
Total Expenses 3,841
Net Income $ 100
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Subject
Accounting