Solution Manual for Financial Accounting, 10th Edition

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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. $660,000 = $320,000 + $340,000
b. 135,000 = 57,000 + 78,000
c. 401,000 = 45,000 + 356,000
(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?

1-2 Financial Accounting 10/e Solutions Manual
(10 min.) S 1-3
a. Corporation, limited partners of a 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. Creditors can go after the general partner of a limited
liability partnership.
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 Wallace’s
personal assets from the assets of New Age Foods. This will help
Wallace, investors, and lenders know how much assets, liabilities
and equity the business has, and this knowledge will help all
parties evaluate the business realistically.

Chapter 1 The Financial Statements 1-3
(5-10 min.) S 1-5
a. Stable-monetary-unit assumption
b. Historical cost principle; $300 is value of FAX machine
c. Historical cost principle; the sale price is the amount actually
received from the sale
d. Entity assumption
(5 min.) S 1-6
1. Liabilities = Assets − Owners’ Equity
2. Owners’ Equity = Assets − Liabilities
This way of determining the amount of owners’ equity applies to
any company, your household, or a single IHOP restaurant.
(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.

1-4 Financial Accounting 10/e Solutions Manual
(5-10 min.) S 1-8
a. Accounts receivable A g. Notes payable L
b. Long-term debt L h. Retained earnings S
c. Merchandise inventory A i. Land A
d. Prepaid expenses A j. Accounts payable L
e. Accrued expenses payable L k. Common stock S
f. Equipment A l. Supplies A
(5 min.) S 1-9
1. Revenues and expenses
2. Net income (or net loss)
(5 min.) S 1-10
O’Malley Services, Inc.
Income Statement
Year Ended December 31, 2014
(millions)
Revenues ....................................................... $398
Expenses ....................................................... 167
Net income..................................................... $231
(5 min.) S 1-11
Canada Corp.
Statement of Retained Earnings
Year Ended December 31, 2014
(millions)
Retained earnings, December 31, 2013 ....... $286
Add: Net income ($482 − $337) ................... 145
Less: Dividends declared ............................. (59)
Retained earnings, December 31, 2014 ....... $372

Chapter 1 The Financial Statements 1-5
(10 min.) S 1-12
Washington Products
Balance Sheet
December 31, 2014
ASSETS
Current assets:
Cash ................................................................................. $ 21,000
Receivables ..................................................................... 17,600
Inventory ......................................................................... 79,000
Total current assets ........................................................ 117,600
Equipment ....................................................................... 185,000
Total assets ..................................................................... $302,600
LIABILITIES
Current liabilities:
Accounts payable ...................................................... $ 25,000
Total current liabilities .............................................. 25,000
Long-term liabilities:

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1-6 Financial Accounting 10/e Solutions Manual
(10-15 min.) S 1-13
Guling Legal Services, Inc.
Statement of Cash Flows
Year Ended December 31, 2014
Cash flows from operating activities:
Net income .................................................................. $ 75,000
Adjustments to reconcile net income to net cash
provided by operating activities .. ....................... (8,000)
Net cash provided by operating activities ....... 67,000
Cash flows from investing activities:
Purchases of equipment .................... $(29,000)
Net cash used for investing activities .............. (29,000)
Cash flows from financing activities:
Payment of dividends ......................... $(31,000)
Net cash used for financing activities .............. (31,000)
Net increase in cash........................................................ 7

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1-8 Financial Accounting 10/e Solutions Manual
(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 operating activities.
This source of cash is best because it results from the core
operations of the business. Operating activities should be the main
source of cash for a 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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Chapter 1 The Financial Statements 1-11
(10-15 min.) E 1-19A
a. Income statement
b. Statement of retained earnings, Statement of cash flows
c. Balance sheet, Statement of cash flows
d. Balance sheet
e. Income statement
f. Statement of cash flows
g. Statement of cash flows
h. Balance sheet
i. Income statement
j. Income statement, Statement of retained earnings, Statement of
cash flows
k. Balance sheet
l. Balance sheet, Statement of retained earnings
m. Balance sheet
n. Balance sheet

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1-16 Financial Accounting 10/e Solutions Manual
(15-20 min.) E 1-24A
Island Coffee Roasters Corp.
Statement of Cash Flows
For the Month Ended August 31, 2015
Cash flows from operating activities:
Net income ............................................................ $187,100
Adjustments to reconcile net income to net
cash provided by operating activities ............. 1,400
Net cash provided by operating activities .... 188,5

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Chapter 1 The Financial Statements 1-17
(10-15 min.) E 1-25A
TO: Owner of Island Coffee Roasters Corp.
FROM: Student Name
SUBJECT: Opinion of net income, dividends, financial position,
and cash flows
Your first month of operations was successful. Revenues totaled
$272,600 and net income was $187,100. These operating results look
very strong.
The company was able to pay a $2,400 dividend, and this should
make you happy with so quick a return on your investment. Your
financial position looks secure, with assets of $217,900 and liabilities
of only $8,800. Your stockholders’ equity is $209,100.
Operating activities generated cash of $188,500, which is
respectable. Operating activities are the main source of cash, which is

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