Financial Accounting, 9th Edition Solution Manual

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Chapter 1 The Financial Statements 1-1
Chapter 1
The Financial Statements
Short Exercises
(5 min.) S 1-1
Computed amounts in boxes
Total Assets = Total Liabilities + Stockholders’ Equity
a. $300,000 = $150,000 + $150,000
b. 280,000 = 110,000 + 170,000
c. 210,000 = 50,000 + 160,000
(5 min.) S 1-2
Ethics is a factor that should be included in every business and
accounting decision, beyond the potential economic and legal
consequences. Ideally, for each decision, honesty and truthfulness
should prevail, considering the rights of others. The decision guidelines
at the end of the chapter spell out the considerations we should take
when making decisions. Simply, we might ask ourselves three
questions: (1) is the action legal? (2) Who will be affected by the
decision? (3) How will the decision make me feel afterward?

Financial Accounting 9/e Solutions Manual1-2
(10 min.) S 1-3
a. Corporation, Limited-liability partnership (LLP) and Limited-liability
company (LLC). If any of these businesses fails and cannot pay its
liabilities, creditors cannot force the owners to pay the business’s
debts from the owners’ personal assets.
b. Proprietorship. There is a single owner of the business, so the owner
is answerable to no other owner.
c. Partnership. If the partnership fails and cannot pay its liabilities,
creditors can force the partners to pay the business’s debts from their
personal assets. A partnership affords more protection for creditors
than a proprietorship because there are two or more owners to share
this liability.
(5 min.) S 1-4
1. The entity assumption applies.
2. Application of the entity assumption will separate Newberry’s
personal assets from the assets of Healthy Food Brands. This will
help Newberry, investors, and lenders know how much assets,
liabilities and equity the business has, and this knowledge will help all
parties evaluate the business realistically.
(5-10 min.) S 1-5
a. Historical cost principle
b. Stable-monetary-unit assumption
c. Entity assumption
d. Historical cost principle

Chapter 1 The Financial Statements 1-3
(5 min.) S 1-6
1. Owners’ Equity = Assets − Liabilities
This way of determining the amount of owners’ equity applies to any
company, your household, or a single IHOP restaurant.
2. Liabilities = Assets − Owners’ Equity
(5 min.) S 1-7
1. Assets are the economic resources of a business that are expected to
produce a benefit in the future.
Owners’ equity represents the insider claims of a business, the
owners’ interest in its assets.
Assets and owners’ equity differ in that assets are resources and
owners’ equity is a claim to assets. Assets must be at least as large
as owners’ equity, so equity can be smaller than assets.
2. Both liabilities and owners’ equity are claims to assets.
Liabilities are the outsider claims to the assets of a business; they are
obligations to pay creditors.
Owners’ equity represents the insider claims to the assets of the
business; they are the owners’ interest in its assets.
(5-10 min.) S 1-8
a. Accounts payable L g. Accounts receivable A
b. Common stock S h. Long-term debt L
c. Supplies A i. Merchandise inventory A
d. Retained earnings S j. Notes payable L
e. Land A k. Accrued expenses payable L
f. Prepaid expenses A l. Equipment A

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Financial Accounting 9/e Solutions Manual1-4
(5 min.) S 1-9
1. Revenues and expenses
2. Net income (or net loss)
(5 min.) S 1-10
Split Second Wireless, Inc.
Income Statement
Year Ended December 31, 2012
(millions)
Revenues…………………………………….. $ 97
Expenses…………………………………….. 26
Net income…………………………………... $ 71
(5 min.) S 1-11
CellPhone Corp.
Statement of Retained Earnings
Year Ended December 31, 2012
(millions)
Retained earnings, December 31, 2011……. $290
Add: Net income ($360 − $250)…….………. 110
Less: Dividends………………………............. (44)
Retained earnings, December 31, 2012……. $356

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Chapter 1 The Financial Statements 1-5
(10 min.) S 1-12
Landy Products
Balance Sheet
December 31, 2012
ASSETS
Current assets:
Cash ..................................................................... $ 12,000
Receivables .......................................................... 8,000
Inventory .............................................................. 44,000
Total current assets ............................................. 64,000
Equipment………………………………………………. 88,000
Total assets…………………………………………….. $152,000
LIABILITIES
Current liabilities:
Accounts payable…………………………………… $ 13,000
Total current liabilities……………………………... 13,000
Long-term liabilities:
Long-term notes payable………………………….. 80,000
Total liabilities………………………………………... .. 93,000
STOCKHOLDERS’ EQUITY
Common stock…………………………………………. 15,300
Retained earnings……………………………………… 43,700*
Total stockholders’ equity………………………… 59,000
Total liabilities and stockholders’ equity………….. $152,000
_____
*Computation of retained earnings:
Total assets ($152,000) − current liabilities ($13,000) − long-term notes
payable ($80,000) − common stock ($15,300) = $43,700

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Financial Accounting 9/e Solutions Manual1-6
(10-15 min.) S 1-13
Yidas Medical, Inc.
Statement of Cash Flows
Year Ended December 31, 2012
Cash flows from operating activities:
Net income………………………………………..... $ 80,000
Adjustments to reconcile net income to net cash
provided by operating activities…………. (11,000)
Net cash provided by operating activities 69,000
Cash flows from investing activities:
Purchases of equipment………………. $(32,000)
Net cash used for investing activities …. (32,000)
Cash flows from financing activities:
Payment of dividends………………… $(25,000)
Net cash used for financing activities… .. (25,000)
Net increase in cash………………… .... …………… 12,000
Cash balance, December 31, 2011. .. ……………… 30,000
Cash balance, December 31, 2012………………… $ 42,000

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Chapter 1 The Financial Statements 1-7
(10 min.) S 1-14
a. Dividends SRE, SCF
b. Salary expense IS
c. Inventory BS
d. Sales revenue IS
e. Retained earnings SRE, BS
f. Net cash provided by operating activities SCF
g. Net income IS, SRE, SCF
h. Cash BS, SCF
i. Net cash used for financing activities SCF
j. Accounts payable BS
k. Common stock BS
l. Interest revenue IS
m. Long-term debt BS
n. Increase or decrease in cash SCF
(15-20 min.) S 1-15
a. Paying large dividends will cause retained earnings to be low.
b. Heavy investing activity and paying off debts can result in a cash
shortage even if net income has been high.
c. The single best source of cash for a business is collections from
customers. This source of cash is best because it results from the core
operations of the business.
d. Borrowing, issuing stock, and selling land, buildings, and equipment
can bring in cash even when the company has experienced losses.
Reducing accounts receivable and inventory can also increase cash
flow.

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Financial Accounting 9/e Solutions Manual1-8
Exercises
(10-15 min.) E 1-16A
Amounts in billions; (computed amounts in boxes)
Assets = Liabilities + Owners’ Equity
Perfect Cleaners $33 $ 15 $18
Ernie’s Bank 35 13 22
Hudson Gift and
Cards
27 17 10
Ernie’s Bank appears to have the strongest financial position because
its liabilities make up the smallest percentage of company assets
($13/$35 = .37). Stated differently, Ernie’s Bank’s equity is the highest
percentage of company assets ($22/$35 = .63).
(10-15 min.) E 1-17A
Req. 1
(Amounts in millions)
Assets = Liabilities +
Stockholders’
Equity
$280 $170
430 300
170
Total $880 = $470 + $410
Req. 2 Resources
to work with
Req. 3 Amount
owed to
creditors
Req. 4 Actually
owned by company
stockholders

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Chapter 1 The Financial Statements 1-9
(10-20 min.) E 1-18A
Situation
1 2 3
Millions
Total stockholders’ equity,
January 31, 2012 ($28 − $5)…………… $23 $23 $23
Add: Issuances of stock……………………… 1 -0- 33
Net income……………………………….. 7 12* -0-
Less:Dividends…………………………........... -0- (4) (8)
Net loss…………………………………… -0-* -0- (17)*
Total stockholders’ equity,
January 31, 2013 ($48 − $17)………….. $31 $31 $31
_____
*Must solve for these amounts.
(10-15 min.) E 1-19A
1. Diamond, Inc.
Assets = Liabilities +
Stockholders’
Equity
Beginning amount $130,000 = $95,000 + $35,000
Multiplier for increase × 1.05
Ending amount $136,500
2. NorthWest Airlines, Ltd.
Assets − Liabilities =
Stockholders’
Equity
Beginning amount $100,000 − $52,000 = $48,000
Net income 27,000
Ending amount $75,000

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Financial Accounting 9/e Solutions Manual1-10
(10-15 min.) E 1-20A
a. Balance sheet
b. Balance sheet
c. Statement of retained earnings, Statement of cash flows
d. Income statement
e. Balance sheet, Statement of retained earnings
f. Balance sheet
g. Balance sheet
h. Income statement
i. Statement of cash flows
j. Income statement
k. Statement of cash flows
l. Balance sheet, Statement of cash flows
m. Balance sheet
n. Income statement, Statement of retained earnings, Statement of
cash flows

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Chapter 1 The Financial Statements 1-11
(10-20 min.) E 1-21A
Mary Burke Banking Company
Balance Sheet (Amounts in millions)
August 31, 2012
ASSETS LIABILITIES
Cash $ 2.8 Current liabilities $155.4
Receivables 0.3 Long-term liabilities 2.6
Investment assets 169.3 Total liabilities 158.0
Property and
equipment, net 1.6 STOCKHOLDERS’
EQUITYOther assets 14.2
Common stock 14.2
Retained earnings 16.0*
Total stockholders’ equity 30.2
Total liabilities and
Total assets $188.2 stockholders’ equity $188.2
_____
*Computation of retained earnings:
Total assets ($188.2) − Total liabilities ($158.0) − Common stock
($14.2) = $16.0

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Financial Accounting 9/e Solutions Manual1-12
(15-25 min.) E 1-22A
Req. 1
Mary Burke Banking Company
Income Statement (Amounts in millions)
Year Ended August 31, 2012
Total revenue………………………………………… $31.4
Expenses:
Salary and other employee expenses.……….. $ 17.4
Other expenses…………………………………... 6.6
Interest expense..………………………………… 0.1
Total expenses……………………………………. 24.1
Net income……………………………………………. $ 7.3
Req. 2
The statement of retained earnings helps to compute dividends, as
follows:
Mary Burke Banking Company
Statement of Retained Earnings
Year Ended August 3, 2012
(Amounts in millions)
Retained earnings, beginning of year…………………….. $9.3
Add: Net income for the year (Req. 1)…………………….. 7.3
16.6
Less: Dividends…………………………………………......... 0.6
Retained earnings, end of year (from Exercise 1-21A)…. $16.0

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Chapter 1 The Financial Statements 1-13
(15-20 min.) E 1-23A
Glass, Inc.
Statement of Cash Flows
Year Ended December 31, 2012
Cash flows from operating activities:
Net income………………… ………………………… $430,000
Adjustments to reconcile net income to net
cash provided by operating activities…… ....... 75,000
Net cash provided by operating activities……….. $505,000
Cash flows from investing activities:
Net cash used for investing activities…………… .. (420,000)
Cash flows from financing activities:
Net cash provided by financing activities…… ....... 11,000
Net increase in cash………………………… ...................... 96,000
Beginning cash balance……………………....................... 83,000
Ending cash balance……………………………… .............. $179,000
Items given that do not appear on the statement of cash flows:
Total assets − Balance sheet
Total liabilities − Balance sheet

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Financial Accounting 9/e Solutions Manual1-14
(15-20 min.) E 1-24A
Dogan Copy Center, Inc.
Income Statement
For the Month Ended July 31, 2012
Revenue:
Service revenue………… ................ $540,200
Expenses:
Salary expense……………………… $160,000
Utilities expense….…………………. 10,500
Rent expense………………………… 2,700
Total expenses………………………. 173,200
Net income………………………………….. $ 367,000
Dogan Copy Center, Inc.
Statement of Retained Earnings
For the Month Ended July 31, 2012
Retained earnings, July 1, 2012……………………. $ -0-
Add: Net income …………………….………………. 367,000
367,000
Less: Dividends………………………….…………… (4,700)
Retained earnings, July 31, 2012…….……………. $362,300

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Chapter 1 The Financial Statements 1-15
(15-20 min.) E 1-25A
Dogan Copy Center, Inc.
Balance Sheet
July 31, 2012
Assets Liabilities
Cash…………….. $ 10,300 Accounts payable…………… $ 17,400
Office supplies… 14,700
Equipment……… 460,000 Stockholders’ Equity
Common stock………………. 105,300
Retained earnings…………… 362,300
Total stockholders’ equity…. 467,600
Total assets……. $485,000
Total liabilities and
stockholders’ equity……... $485,000

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Financial Accounting 9/e Solutions Manual1-16
(15-20 min.) E 1-26A
Dogan Copy Center, Inc.
Statement of Cash Flows
For the Month Ended July 31, 2012
Cash flows from operating activities:
Net income…………………………………………… $ 367,000
Adjustments to reconcile net income to net
cash provided by operations……………………
2,700
Net cash provided by operating activities 369,700
Cash flows from investing activities:
Acquisition of equipment ................................ $(460,000)
Net cash used for investing activities ..... (460,000)
Cash flows from financing activities:
Issuance (sale) of stock to owners……… ...... $ 105,300
Payment of dividends……………………… ...... (4,700)
Net cash provided by financing activities 100,600
Net increase in cash……………………… ............. 10,300
Cash balance, July 1, 2012…………………… ...... 0
Cash balance, July 31, 2012……………… ........... $ 10,300

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Chapter 1 The Financial Statements 1-17
(10-15 min.) E 1-27A
TO: Owner of Dogan Copy Center, Inc.
FROM: Student Name
SUBJECT: Opinion of net income, dividends, financial position, and
cash flows
Your first month of operations was successful. Revenues totaled
$540,200 and net income was $367,000. These operating results look
very strong.
The company was able to pay a $4,700 dividend, and this should make
you happy with so quick a return on your investment. Your financial
position looks secure, with assets of $485,000 and liabilities of only
$17,400. Your stockholders’ equity is $467,600.
Operating activities generated cash of $369,700, which is respectable.
You ended the month with cash of $10,300. Based on the above facts, I
believe you should stay in business.
Student responses may vary.
(10-15 min.) E 1-28B
Amounts in billions; (computed amounts in boxes)
Assets = Liabilities + Owners’ Equity
Fresh Produce $37 $ 20 $17
Margie’s Bank 30 $18 12
Flowers and Gifts 21 6 $15
Flowers and Gifts appears to have the strongest financial position
because its liabilities make up the smallest percentage of company
assets ($6/$21 = .29). Stated differently, Flowers and Gifts’ equity is the
highest percentage of company assets ($15/$21 = .71).

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Financial Accounting 9/e Solutions Manual1-18
(10-15 min.) E 1-29B
Req. 1
(Amounts in millions)
Assets = Liabilities +
Stockholders’
Equity
$270 $160
400 340
160
Total $830 = $500 + $330
Req. 2 Resources
to work with
Req. 3 Amount
owed to
creditors
Req. 4 Actually
owned by company
stockholders
10-20 min.) E 1-30B
Situation
1 2 3
Millions
Total stockholders’ equity,
January 31, 2012 ($31 − $7)…………. $24 $24 $24
Add: Issuances of stock…………………… 4 -0- 10
Net income…………………………….. 0 3* 39
Less:Dividends…………………………........ -0- (4) (50)
Net loss…………………………………. (5)* -0- -0-*
Total stockholders’ equity,
January 31, 2013 ($35 − $12)………… $23 $23 $23
_____
*Must solve for these amounts.

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Chapter 1 The Financial Statements 1-19
(10-15 min.) E 1-31B
1. Emerald, Inc.
Assets = Liabilities +
Stockholders’
Equity
Beginning amount $160,000 = $80,000 + $80,000
Multiplier for increase × 1.25
Ending amount $200,000
2. JetWest Airlines, Ltd.
Assets − Liabilities =
Stockholders’
Equity
Beginning amount $130,000 − $37,000 = $93,000
Net income 28,000
Ending amount $121,000
(10-15 min.) E 1-32B
a. Income statement
b. Income statement, Statement of retained earnings, Statement of cash
flows
c. Balance sheet
d. Balance sheet
e. Balance sheet
f. Balance sheet, Statement of retained earnings
g. Income statement
h. Balance sheet, Statement of cash flows
i. Statement of retained earnings, Statement of cash flows
j. Balance sheet
k. Balance sheet
l. Income statement
m. Statement of cash flows
n. Statement of cash flows

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Financial Accounting 9/e Solutions Manual1-20
(10-20 min.) E 1-33B
Jill Carlson Banking Company
Balance Sheet (Amounts in millions)
May 31, 2012
ASSETS LIABILITIES
Cash $ 2.3 Current liabilities $152.6
Receivables 0.8 Long-term liabilities 2.7
Investment
assets 169.5 Total liabilities 155.3
Property and
equipment, net 1.2 STOCKHOLDERS’
EQUITYOther assets 14.6
Common stock 14.8
Retained earnings 18.3*
Total stockholders’
equity
33.1
Total assets $188.4
Total liabilities and
stockholders’
equity
$188.4
_____
*Computation of retained earnings:
Total assets ($188.4) − Total liabilities ($155.3) − Common stock
($14.8) = $18.3

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Chapter 1 The Financial Statements 1-21
(15-25 min.) E 1-34B
Req. 1
Jill Carlson Banking Company
Income Statement (Amounts in millions)
Year Ended May 31, 2012
Total revenue................................................................ $34.7
Expenses:
Salary and other employee expenses ................... $ 17.3
Other expenses....................................................... 6.6
Interest expense ..................................................... 0.7
Total expenses........................................................ 24.6
Net income.................................................................... $ 10.1
Req. 2
The statement of retained earnings helps to compute dividends, as
follows:
Jill Carlson Banking Company
Statement of Retained Earnings (Amounts in millions)
Year Ended May 31, 2012
Retained earnings, beginning of year………………………… . $ 8.7
Add: Net income for the year (Req. 1)…….…………………… 10.1
18.8
Less: Dividends ....................................................................... 0.5
Retained earnings, end of year (from Exercise 1-33B) ......... $18.3

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Financial Accounting 9/e Solutions Manual1-22
(15-20 min.) E 1-35B
Groovy, Inc.
Statement of Cash Flows
Year Ended December 31, 2012
Cash flows from operating activities:
Net income ........................................................... $360,000
Adjustments to reconcile net income to net
cash provided by operating activities............ 60,000
Net cash provided by operating activities .............. $420,000
Cash flows from investing activities:
Net cash used for investing activities..................... (410,000)
Cash flows from financing activities:
Net cash provided by financing activities .............. 5,000
Net increase in cash .................................................................. 15,000
Beginning cash balance ........................................................... 95,000
Ending cash balance ................................................................. $110,000
Items given that do not appear on the statement of cash flows:
Total assets − Balance sheet
Total liabilities − Balance sheet

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Chapter 1 The Financial Statements 1-23
(15-20 min.) E 1-36B
Croyden Copy Center
Income Statement
For the Month Ended July 31, 2013
Revenue:
Service revenue………………………. $544,600
Expenses:
Salary expense……………………….. $157,000
Utilities expense……………………... 10,500
Rent expense…….…………………… 2,500
Total expenses……………………….. 170,000
Net income………………………………… $ 374,600
Croyden Copy Center
Statement of Retained Earnings
For the Month Ended July 31, 2013
Retained earnings, July 1, 2013 ............................... $ -0-
Add: Net income for the month ................................ 374,600
374,600
Less: Dividends ......................................................... (4,800)
Retained earnings, July 31, 2013 ............................. $369,800

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Financial Accounting 9/e Solutions Manual1-24
(15-20 min.) E 1-37B
Croyden Copy Center
Balance Sheet
July 31, 2013
Assets Liabilities
Cash………………... $ 11,100 Accounts payable…………… $ 17,300
Office supplies…… 14,800
Equipment………… 410,000 Stockholders’ Equity
Common stock……………….. 48,800
Retained earnings…………… 369,800
Total stockholders’ equity 418,600
Total liabilities and
Total assets……… $435,900 stockholders’ equity………. $435,900
15-20 min.) E 1-38B
Croyden Copy Center
Statement of Cash Flows
For the Month Ended July 31, 2013
Cash flows from operating activities:
Net income ......................................................... $ 374,600
Adjustments to reconcile net income to net
cash provided by operations.......................... 2,500
Net cash provided by operating activities… 377,100
Cash flows from investing activities:
Acquisition of equipment ................................. $(410,000)
Net cash used for investing activities…….. (410,000)
Cash flows from financing activities:
Issuance (sale) of stock to owners .................. $ 48,800
Payment of dividends ....................................... (4,800)
Net cash provided by financing activities… 44,000
Net increase in cash ............................................... $ 11,100
Cash balance, July 1, 2013 .................................... 0
Cash balance, July 31, 2013 .................................. $ 11,100

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Chapter 1 The Financial Statements 1-25
(10-15 min.) E 1-39B
TO: Owner of CROYDEN Copy Center, Inc.
FROM: Student Name
SUBJECT: Opinion of net income, dividends, financial position,
and cash flows
Your first month of operations was successful. Revenues totaled
$544,600 and net income was $374,600. These operating results look
very strong.
The company was able to pay a $4,800 dividend, and this should make
you happy with so quick a return on your investment. Your financial
position looks secure, with assets of $435,900 and liabilities of only
$17,300. Your stockholders’ equity is $418,600.
Operating activities generated cash of $377,100, which is respectable.
You ended the month with cash of $11,100. Based on the above facts, I
believe you should stay in business.
Student responses may vary.

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Financial Accounting 9/e Solutions Manual1-26
Quiz
Q1-40 c
Q1-41 c
Q1-42 c
Q1-43 b Stockholders’
Assets = Liabilities + Equity
+ $28,000 = + $9,000 + + $19,000
Q1-44 d
Q1-45 d
Q1-46 a
Q1-47 a
Q1-48 a
Q1-49 a [$55,000 − $58,000 − $21,000 − $6,000 = $(30,000)]
Q1-50 d ($200,000 + $105,000 − $45,000 = $260,000)
Q1-51 d
Q1-52 b
Q1-53 d Stockholders’
Assets = Liabilities + Equity
Beg. $25,000 = $ 4,000* + $21,000
Changes + 12,000
End. $39,000* = $16,000* + $23,000
_____
*Must solve for these amounts.
Q1-54 a Assets − Liabilities = Stockholders’ equity
Beg. bal. $530,000 − $24,000 = $506,000
+ Net income + X
− Dividends − 80,000
End. bal. $750,000 − $33,000 = $717,000

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Chapter 1 The Financial Statements 1-27
Problems
(15-30 min.) P 1-55A
Req. 1
A Division of Harrold Corporation
Income Statement
Year Ended December 31, 2013
Revenue:
Service revenue .................................... $250,000
Other revenue ....................................... 57,000
Total revenue ........................................ $307,000
Expenses:
Salary expense ..................................... $ 29,000
Other expenses .................................... 242,000
Total operating expenses .................... 271,000
Income before income tax ............................ 36,000
Income tax expense ($36,000 × .34) ............. 12,240
Net income ..................................................... $ 23,760
Req. 2
a. Faithful representation. Report revenues at their actual sale value
because that amount represents more faithfully what actually
happened than what management believes the services are worth.
b. Historical cost principle. Account for expenses at their actual cost,
not a hypothetical amount that the company might have incurred
under other conditions.
c. Historical cost principle. Account for expenses at their actual cost.

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Financial Accounting 9/e Solutions Manual1-28
(continued) P 1-55A
d. Entity assumption. Each subdivision of the company is a separate
entity, and the company as a whole constitutes an entity for
accounting purposes.
e. Stable-monetary-unit assumption. Accounting in the United States
ignores the effect of inflation.
f. Continuity (going-concern) assumption. There is no evidence that A
Division of Harrold Corporation is going out of business, so it seems
safe to assume that the division is a going concern.

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Chapter 1 The Financial Statements 1-29
(30 min.) P 1-56A
Req. 1
Computed amounts in boxes
Ruby Lars Barb
Millions
Balance sheets:
Beginning:
Assets………………………... $ 78 $ 40 $ 14
Liabilities…………………….. 45 14 1
Common stock……………... 4 3 6
Retained earnings…………. 29 23 7
Ending:
Assets………………………... $ 84 $ 59 $ 17
Liabilities…………………….. 47 26 2
Common stock……………... 4 3 6
Retained earnings…………. 33 30 9
Income statement:
Revenues……………………. $220 $170 $21
Expenses……………………. 214 160 18
Net income………………….. $ 6 $ 10 3
Statement of retained earnings:
Beginning RE……………….. $ 29 $ 23 $ 7
+ Net income………………….. 6 10 3
− Dividends……………………. (2) (3) (1)
= Ending RE…………………… $ 33 $ 30 $ 9

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