Solution Manual for Financial Managerial Accounting, 4th edition

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Chapter 01 – Introducing Accounting in Business
1-1
Chapter 1
Introducing Accounting in Business
QUESTIONS
1. The purpose of accounting is to provide decision makers with relevant and reliable
information to help them make better decisions. Examples include information for
people making investments, loans, and business plans.
2. Technology reduces the time, effort, and cost of recordkeeping. There is still a
demand for people who can design accounting systems, supervise their operation,
analyze complex transactions, and interpret reports. Demand also exists for people
who can effectively use computers to prepare and analyze accounting reports.
Technology will never substitute for qualified people with abilities to prepare, use,
analyze, and interpret accounting information.
3. External users and their uses of accounting information include: (a) lenders, to
measure the risk and return of loans; (b) shareholders, to assess whether to buy,
sell, or hold their shares; (c) directors, to oversee their interests in the organization;
(d) employees and labor unions, to judge the fairness of wages and assess future
employment opportunities; and (e) regulators, to determine whether the organization
is complying with regulations. Other users are voters, legislators, government
officials, contributors to nonprofits, suppliers and customers.
4. Business owners and managers use accounting information to help answer
questions such as: What resources does an organization own? What debts are
owed? How much income is earned? Are expenses reasonable for the level of
sales? Are customers’ accounts being promptly collected?
5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch,
Southwest Airlines, CitiCorp, Humana, Charles Schwab, and Prudential. Businesses
offering products include Nike, Reebok, Gap, Apple Computer, Ford Motor Co.,
Philip Morris, Coca-Cola, Best Buy, and Circuit City.
6. The internal role of accounting is to serve the organization’s internal operating
functions. It does this by providing useful information for internal users in
completing their tasks more effectively and efficiently. By providing this information,
accounting helps the organization reach its overall goals.
7. Accounting professionals offer many services including auditing, management
advice, tax planning, business valuation, and money management.

Chapter 01 – Introducing Accounting in Business
1-2
8. Marketing managers are likely interested in information such as sales volume,
advertising costs, promotion costs, salaries of sales personnel, and sales
commissions.
9. Accounting is described as a service activity because it serves decision makers by
providing information to help them make better business decisions.
10. Some accounting-related professions include consultant, financial analyst,
underwriter, financial planner, appraiser, FBI investigator, market researcher, and
system designer.
11. Ethics rules require that auditors avoid auditing clients in which they have a direct
investment, or if the auditor’s fee is dependent on the figures in the client’s reports.
This will help prevent others from doubting the quality of the auditor’s report.
12. In addition to preparing tax returns, tax accountants help companies and individuals
plan future transactions to minimize the amount of tax to be paid. They are also
actively involved in estate planning and in helping set up organizations. Some tax
accountants work for regulatory agencies such as the IRS or the various state
departments of revenue. These tax accountants help to enforce tax laws.
13. The objectivity concept means that financial statement information is supported by
independent, unbiased evidence other than someone’s opinion or imagination. This
concept increases the reliability and verifiability of financial statement information.
14. This treatment is justified by both the cost principle and the going-concern
assumption.
15. The revenue recognition principle provides guidance for managers and auditors so
they know when to recognize revenue. If revenue is recognized too early, the
business looks more profitable than it is. On the other hand, if revenue is
recognized too late the business looks less profitable than it is. This principle
demands that revenue be recognized when it is both earned (when service or
product provided) and can be measured reliably. The amount of revenue should
equal the value of the assets received or expected to be received from the
business’s operating activities covering a specific time period.
16. Business organizations can be organized in one of three basic forms: sole
proprietorship, partnership, or corporation. These forms have implications for legal
liability, taxation, continuity, number of owners, and legal status as follows:
Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no* no* yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
*Proprietorships and partnerships that are set up as LLCs provide limited liability.
17. (a) Assets are resources owned or controlled by a company that are expected to
yield future benefits. (b) Liabilities are creditors’ claims on assets that reflect
obligations to provide assets, products or services to others. (c) Equity is the
owner’s claim on assets and is equal to assets minus liabilities. (d) Net assets refer
to equity.

Chapter 01 – Introducing Accounting in Business
1-3
18. Equity is increased by investments from the owner and by net income (which is the
excess of revenues over expenses). It is decreased by dividends to the owner and
by a net loss (which is the excess of expenses over revenues).
19. Accounting principles consist of (a) general and (b) specific principles. General
principles are the basic assumptions, concepts, and guidelines for preparing
financial statements. They stem from long-used accounting practices. Specific
principles are detailed rules used in reporting on business transactions and events.
They usually arise from the rulings of authoritative and regulatory groups such as
the Financial Accounting Standards Board or the Securities and Exchange
Commission.
20. Revenue (or sales) is the amount received from selling products and services.
21. Net income (also called income, profit or earnings) equals revenues minus expenses
(if revenues exceed expenses). Net income increases equity. If expenses exceed
revenues, the company has a net loss. Net loss decreases equity.
22. The four basic financial statements are: income statement, statement of retained
earnings, balance sheet, and statement of cash flows.
23. An income statement reports a company’s revenues and expenses along with the
resulting net income or loss over a period of time.
24. Rent expense, utilities expense, administrative expenses, advertising and promotion
expenses, maintenance expense, and salaries and wages expenses are some
examples of business expenses.
25. The statement of retained earnings explains the changes in retained earnings from
net income or loss, and from any dividends over a period of time.
26. The balance sheet describes a company’s financial position (types and amounts of
assets, liabilities, and equity) at a point in time.
27. The statement of cash flows reports on the cash inflows and outflows from a
company’s operating, investing, and financing activities.
28. Return on assets, also called return on investment, is a profitability measure that is
useful in evaluating management, analyzing and forecasting profits, and planning
activities. It is computed as net income divided by the average total assets. For
example, if we have an average annual balance of $100 in a bank account and it
earns interest of $5 for the year, then our return on assets is $5 / $100 or 5%. The
return on assets is a popular measure for analysis because it allows us to compare
companies of different sizes and in different industries.
29A. Return refers to income, and risk is the uncertainty about the return we expect to
make. The lower the risk of an investment, the lower the expected return. For
example, savings accounts pay a low return because of the low risk of a bank not
returning the principal with interest. Higher risk implies higher, but riskier, expected
returns.

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Chapter 01 – Introducing Accounting in Business
1-4
30B. Organizations carry out three major activities: financing, investing, and operating.
Financing provides the means used to pay for resources. Investing refers to the
acquisition and disposing of resources necessary to carry out the organization’s
plans. Operating activities are the actual carrying out of these plans. (Planning is the
glue that connects these activities, including the organization’s ideas, goals and
strategies.)
31B. An organization’s financing activities (liabilities and equity) pay for investing
activities (assets). An organization cannot have more or less assets than its
liabilities and equity combined and, similarly, it cannot have more or less liabilities
and equity than its total assets. This means: assets = liabilities + equity. This
relation is called the accounting equation (also called the balance sheet equation),
and it applies to organizations at all times.
32. The dollar amounts in Research In Motion’s financial statements are rounded to the
nearest thousand ($1,000). Research In Motion’s consolidated statement of earnings
(or income statement) covers the fiscal year (consisting of 52 weeks) ended
February 27, 2010. Research In Motion also reports comparative income statements
for the previous two years (consisting of 52 weeks).
33. At September 26, 2009, Apple had ($ in millions) assets of $47,501, liabilities of
$15,861, and equity of $31,640.
34. Confirmation of Nokia’s accounting equation follows (numbers in EUR millions):
Assets = Liabilities + Equity
35,738 = 20,989 + 14,749
35. The independent auditor for Palm, Inc., is Deloitte and Touché LLP. The auditor
expressly states that “our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.” The auditor also states that “these consolidated financial statements and
financial statement schedule are the responsibility of the Company’s management.”

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Chapter 01 – Introducing Accounting in Business
1-5
QUICK STUDIES
Quick Study 1-1
(a) and (b)
GAAP: Generally Accepted Accounting Principles
Importance: GAAP are the rules that specify acceptable accounting
practices.
SEC: Securities and Exchange Commission
Importance: The SEC is charged by Congress to set reporting rules for
organizations that sell ownership shares to the public. The
SEC delegates part of this responsibility to the FASB.
FASB: Financial Accounting Standards Board
Importance: FASB is an independent group of full-time members who are
responsible for setting accounting rules.
IASB: International Accounting Standards Board.
Importance: Its purpose is to issue standards that identify preferred
practices in the desire of harmonizing accounting practices
across different countries. The vast majority of countries and
financial exchanges support its activities and objectives.
IFRS: International Financial Reporting Standards.
Importance: A global set of accounting standards issued by the IASB.
Many countries require or permit companies to comply with
IFRS in preparing their financial statements. The FASB is
undergoing a process with the IASB to converge GAAP and
IFRS and to create a single set of accounting standards for
global use.
Quick Study 1-2
Internal controls serve several purposes:
• They involve monitoring an organization’s activities to promote
efficiency and to prevent wrongful use of its resources.
• They help ensure the validity and credibility of accounting reports.
• They are often crucial to effective operations and reliable reporting.
More generally, the absence of internal controls can adversely affect the
effectiveness of domestic and global financial markets.
Examples of internal controls include cash registers with internal tapes or
drives, scanners at doorways to identify tagged products, overhead video
cameras, security guards, and many others.

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Chapter 01 – Introducing Accounting in Business
1-6
Quick Study 1-3
a. E g. E
b. I h. E
c. E i. E
d. I j. I
e. E k. E
f. E l. E
Quick Study 1-4
Accounting professionals practice in at least four main areas. These four
areas, along with a listing of some work opportunities in each, are:
1. Financial accounting
• Preparation
• Analysis
• Auditing (external)
• Consulting
• Investigation
2. Managerial accounting
• Cost accounting
• Budgeting
• Auditing (internal)
• Consulting
3. Tax accounting
• Preparation
• Planning
• Regulatory
• Consulting
• Investigation
4. Accounting-related
• Lending
• Consulting
• Analyst
• Investigator
• Appraiser

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Chapter 01 – Introducing Accounting in Business
1-7
Quick Study 1-5
The choice of an accounting method when more than one alternative
method is acceptable often has ethical implications. This is because
accounting information can have major impacts on individuals’ (and firms’)
well-being.
To illustrate, many companies base compensation of managers on the
amount of reported income. When the choice of an accounting method
affects the amount of reported income, the amount of compensation is also
affected. Similarly, if workers in a division receive bonuses based on the
division’s income, its computation has direct financial implications for
these individuals.
Quick Study 1-6
a. Cost principle (also called historical cost)
b. Business entity assumption
c. Revenue recognition principle
Quick Study 1-7
Assets = Liabilities + Equity
$40,000 (a) $30,000 $10,000
$55,000 (b) $27,500 (b) $27,500
Quick Study 1-8
Assets = Liabilities + Equity
$30,000 (a) $10,000 $20,000
(b) $80,000 $ 50,000 $30,000
$90,000 $ 10,000 (c) $80,000

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Chapter 01 – Introducing Accounting in Business
1-8
Quick Study 1-9
(a) Examples of business transactions that are measurable include:
• Selling products and services.
• Collecting funds from dues, taxes, contributions, or investments.
• Borrowing money.
• Purchasing products and services.
(b) Examples of business events that are measurable include:
• Decreases in the value of securities (assets).
• Bankruptcy of a customer owing money.
• Technological advances rendering patents (or other assets)
worthless.
• An “act of God” (casualty) that destroys assets.
Quick Study 1-10
a. For September 26, 2009, the account and its dollar amount (in millions)
for Apple are:
(1) Assets = $47,501
(2) Liabilities = $ 15,861
(3) Equity = $ 31,640
b. Using Apple’s amounts from (a) we verify that (in millions):
Assets = Liabilities + Equity
$47,501 = $ 15,861 + $ 31,640
Quick Study 1-11
Return on assets = = = 5.3%
Interpretation: Its return of 5.3% is slightly above the 5% of its competitors.
Home Depot’s performance can be rated as above average.
$2,260
$42,744
Net income
Average total assets

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Chapter 01 – Introducing Accounting in Business
1-9
Quick Study 1-12
[Code: Income statement (I), Balance sheet (B), Statement of retained earnings (RE), or
Statement of cash flows (CF).]
a. B d. B g. B
b. I e. RE (and CF*) h. CF
c. B f. I i. CF
*The more advanced student might know that this item would also appear in CF.
Quick Study 1-13 (10 minutes)
a. International Financial Reporting Standards (IFRS)
b. Convergence desires to achieve a single set of accounting standards
for global use.
c. The SEC roadmap proposes that large U.S. companies adopt IFRS by
2014.

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Chapter 01 – Introducing Accounting in Business
1-10
EXERCISES
Exercise 1-1 (10 minutes)
I 1. Determining employee tasks behind a service
I 2. Establishing revenues generated from a product
R 3. Maintaining a log of service costs
R 4. Measuring the costs of a product
C 5. Preparing financial statements
C 6. Analyzing and interpreting reports
C 7. Presenting financial information
Exercise 1-2 (20 minutes)
Part A.
1. E 5. I
2. E 6. I
3. E 7. I
4. I 8. I
Part B.
1. I 5. I
2. E 6. E
3. I 7. I
4. E
Exercise 1-3 (10 minutes)
1. B 5. A
2. C 6. A
3. C 7. B
4. B 8. A

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Chapter 01 – Introducing Accounting in Business
1-11
Exercise 1-4 (20 minutes)
a. Situations involving ethical decision making in coursework include
performing independent work on examinations and individually
completing assignments/projects. It can also extend to promptly
returning reference materials so others can enjoy them, and to
properly preparing for class to efficiently use the time and question
period to not detract from others’ instructional benefits.
b. Auditing professionals with competing audit clients are likely to learn
valuable information about each client that the other clients would
benefit from knowing. In this situation the auditor must take care to
maintain the confidential nature of information about each client.
c. Accounting professionals who prepare tax returns can face situations
where clients wish to claim deductions they cannot substantiate. Also,
clients sometimes exert pressure to use methods not allowed or
questionable under the law. Issues of confidentiality also arise when
these professionals have access to clients’ personal records.
d. Managers face several situations demanding ethical decision making
in their dealings with employees. Examples include fairness in
performance evaluations, salary adjustments, and promotion
recommendations. They can also include avoiding any perceived or
real harassment of employees by the manager or any other employees.
It can also include issues of confidentiality regarding personal
information known to managers.
Exercise 1-5 (10 minutes)
1. G 4. F
2. A 5. D
3. C

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Chapter 01 – Introducing Accounting in Business
1-12
Exercise 1-6 (10 minutes)
Code Description Principle or Assumption
G 1. Revenue is recorded only when the earnings
process is complete.
Revenue recognition
principle
A 2. Information is based on actual costs incurred in
transactions.
Cost principle
C 3. Usually created by a pronouncement from an
authoritative body.
Specific accounting
principle
H 4. Financial statements reflect the assumption that
the business continues operating.
Going-concern
assumption
D 5. A company reports details behind financial
statements that would impact users' decisions.
Full disclosure
principle
B 6. A company records the expenses incurred to
generate the revenues reported.
Matching (expense
recognition) principle
E 7. Derived from long-used and generally accepted
accounting practices.
General accounting
principle
F 8. Every business is accounted for separately from
its owner or owners.
Business entity
assumption`
Exercise 1-7 (10 minutes)
a. Corporation e. Partnership
b. Corporation f. Sole proprietorship
c. Sole proprietorship g. Sole proprietorship
d. Corporation

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Chapter 01 – Introducing Accounting in Business
1-13
Exercise 1-8 (20 minutes)
a. Using the accounting equation:
Assets = Liabilities + Equity
$123,000 = $53,000 + ?
Thus, equity = $70,000
b. Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
$200,000 = ? + $150,000
Thus, beginning liabilities = $50,000
Using the accounting equation at the end of the year:
Assets = Liabilities + Equity
$200,000 + $70,000 = $50,000 + $30,000 + ?
$270,000 = $80,000 + ?
Thus, ending equity = $190,000
Alternative approach to solving part (b):
Assets($70,000) = Liabilities($30,000) + Equity(?)
where “” refers to “change in.”
Thus: Ending Equity = $150,000 + $40,000 = $190,000
c. Using the accounting equation at the end of the year:
Assets = Liabilities + Equity
$180,000 = $60,000 - $10,000 + ?
$180,000 = $50,000 + $130,000
Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
$180,000 - $80,000 = $60,000 + ?
$100,000 = $60,000 + ?
Thus: Beginning Equity = $40,000

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Chapter 01 – Introducing Accounting in Business
1-14
Exercise 1-9 (10 minutes)
Assets = Liabilities + Equity
(a) $95,000 = $30,000 + $65,000
$89,000 = $22,000 + (b) 67,000
$132,000 = (c) $112,000 + $20,000
Exercise 1-10 (15 minutes)
Examples of transactions that fit each case include:
a. Business acquires office supplies (or some other asset) for cash (or
some other asset). Another example is collection of cash from a
receivable.
b. Business pays an account payable (or some other liability) with cash
(or some other asset).
c. Business signs a note payable to extend the due date on an account
payable; OR, a business substitutes one note with better terms for
another note with poorer terms.
d. Business purchases equipment (or some other asset) on credit; OR, a
business takes out a cash loan.
e. Cash dividends (or some other asset) paid to the owner(s) of the
business; OR, the business incurs an expense paid in cash.
f. Business incurs an expense that is not yet paid (for example, when
employees earn wages that are not yet paid).
g. Owner(s) invest cash (or some other asset) in the business; OR, the
business earns revenue and accepts cash (or another asset).

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Chapter 01 – Introducing Accounting in Business
1-15
Exercise 1-11 (30 minutes)
Cash + Accounts
Receivable + Equip-
ment = Accounts
Payable + Common
Stock – Dividends + Revenues – Expenses
a. +$50,000 + $10,000 = + $60,000
b. – 1,600 ______ ______ – $1,600
Bal. 48,400 + + 10,000 = + 60,000 – 1,600
c. _______ + 12,000 +$12,000 ______ _____
Bal. 48,400 + + 22,000 = 12,000 + 60,000 – 1,600
d. + 2,000 ______ _______ ______ + $2,000 _____
Bal. 50,400 + + 22,000 = 12,000 + 60,000 + 2,000 – 1,600
e. _______ + $7,000 ______ _______ ______ + 7,000 _____
Bal. 50,400 + 7,000 + 22,000 = 12,000 + 60,000 + 9,000 – 1,600
f. – 8,000 ______ + 8,000 _______ ______ _____ _____
Bal. 42,400 + 7,000 + 30,000 = 12,000 + 60,000 + 9,000 – 1,600
g. – 2,400 ______ ______ _______ ______ _____ – 2,400
Bal. 40,000 + 7,000 + 30,000 = 12,000 + 60,000 + 9,000 – 4,000
h. + 5,000 - 5,000 ______ _______ ______ _____ _____
Bal. 45,000 + 2,000 + 30,000 = 12,000 + 60,000 + 9,000 – 4,000
i. – 12,000 ______ ______ – 12,000 ______ _____ _____
Bal. 33,000 + 2,000 + 30,000 = 0 + 60,000 + 9,000 – 4,000
j. – 500 ______ ______ _______ ______ – $500 _____ _____
Bal. $32,500 + $2,000 + $30,000 = $ 0 + $60,000 – $500 + $9,000 – $4,000
Exercise 1-12 (20 minutes)
a. Started the business with the owner investing $20,000 cash in
exchange for common stock.
b. Purchased office supplies for $1,500 by paying $1,000 cash and putting
the remaining $500 balance on credit.
c. Purchased office furniture by paying $8,000 cash.
d. Billed a customer $3,000 for services earned.
e. Provided services for $500 cash.

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Chapter 01 – Introducing Accounting in Business
1-16
Exercise 1-13 (15 minutes)
a. Purchased land for $2,000 cash.
b. Purchased $500 of office supplies on credit.
c. Billed a client $950 for services provided.
d. Paid the $500 account payable created by the credit purchase of office
supplies in transaction b.
e. Collected $950 cash for the billing in transaction c.
Exercise 1-14 (15 minutes)
REAL SOLUTIONS
Income Statement
For Month Ended October 31
Revenues:
Consulting fees earned .................... $15,000
Expenses:
Salaries expense .............................. $6,000
Rent expense .................................... 2,550
Miscellaneous expenses ................. 680
Telephone expense .......................... 660
Total expenses ................................. 9,890
Net income .................................................. $ 5,110
Exercise 1-15 (15 minutes)
REAL SOLUTIONS
Statement of Retained Earnings
For Month Ended October 31
Retained earnings, Oct. 1 ................................ $ 0
Add: Net income (from Exercise 1-14) ............. 5,110
5,110
Less: Cash dividends ...................................... 3,360
Retained earnings, Oct. 31 .............................. $ 1,750

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Chapter 01 – Introducing Accounting in Business
1-17
Exercise 1-16 (15 minutes)
REAL SOLUTIONS
Balance Sheet
October 31
Assets Liabilities
Cash ............................... $ 2,000 Accounts payable ................. $ 7,500
Accounts receivable .... 13,000 Equity
Office supplies .............. 4,250 Common stock ...................... 74,000
Office equipment .......... 28,000 Retained earnings* ............... 1,750
Land ............................... 36,000 Total equity ............................ 75,750
Total assets ................... $83,250 Total liabilities and equity .... $83,250
* Computation of amount from Exercise 1-15.
Exercise 1-17 (15 minutes)
REAL SOLUTIONS
Statement of Cash Flows
For Month Ended October 31
Cash flows from operating activities
Cash received from customers ............................................ $ 2,000
Cash paid to employees ....................................................... (2,750)
Cash paid for rent .................................................................. (2,550)
Cash paid for telephone expenses ...................................... (660)
Cash paid for miscellaneous expenses .............................. (680)
Net cash used by operating activities ................................. ( 4,640)
Cash flows from investing activities
Purchase of office equipment .............................................. (28,000)
Net cash used by investing activities ................................. (28,000)
Cash flows from financing activities
Investments by stockholders for stock............................... 38,000
Dividends to stockholders ................................................... (3,360)
Net cash provided by financing activities .......................... 34,640
Net increase in cash.............................................................. $ 2,000
Cash balance, October 1 ...................................................... 0
Cash balance, October 31 .................................................... $ 2,000

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Chapter 01 – Introducing Accounting in Business
1-18
Exercise 1-18 (10 minutes)
Return on assets = Net income / Average total assets
= $20,000 / [($100,000 + $150,000)/2]
= 16%
Interpretation: Geneva Group’s return on assets of 16% is markedly above
the 10% return of its competitors. Accordingly, its performance is
assessed as superior to its competitors.
Exercise 1-19 (10 minutes)
A 1. Cash paid for wages A 5. Cash paid on an account payable
C 2. Cash paid for dividends C 6. Cash received from stock issued
B 3. Cash purchase of equipment A 7. Cash received from clients
A 4. Cash paid for advertising A 8. Cash paid for rent
Exercise 1-20B (10 minutes)
1. F Financing*
2. I Investing
3. O Operating
4. F Financing
5. I Investing
* Would also be listed as “investing” if resources contributed by owner were in the
form of non-financial resources (assets other than cash).

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Chapter 01 – Introducing Accounting in Business
1-19
Exercise 1-21 (20 minutes)
NINTENDO
Income Statement
For Year Ended March 31, 2009
Net sales ...................................................................... ¥ 1,838,622
Expenses
Cost of sales ............................................................ ¥1,044,981
Selling, general and administrative expenses ...... 238,378
Other expenses ........................................................ 276,174
Total expenses ......................................................... 1,559,533
Net income .................................................................... ¥ 279,089

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Chapter 01 – Introducing Accounting in Business
1-20
PROBLEM SET A
Problem 1-1A (25 minutes)
Balance Sheet
Income
Statement
Statement of
Cash Flows
Transaction
Total
Assets
Total
Liab.
Total
Equity
Net
Income
Operating
Activities
Financing
Activities
Investing
Activities
1 Owner invests
cash for stock + + +
2 Incurs legal
costs on credit + – –
3 Pays cash for
employee wages – – – –
4 Borrows cash
by signing L-T
note payable
+ + +
5 Receives cash
for services
provided
+ + + +
6 Buys land by
signing note
payable
+ +
7 Buys office
equipment
for cash
+/– –
8 Provides ser-
vices on credit + + +
9 Collects cash
on receivable
from (8)
+/– +
10 Pays cash
dividend – – –

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Chapter 01 – Introducing Accounting in Business
1-21
Problem 1-2A (40 minutes)
Part 1
Company A:
(a) Equity on December 31, 2010:
Assets .......................................................... $45,000
Liabilities ..................................................... (23,500)
Equity .......................................................... $21,500
(b) Equity on December 31, 2011:
Equity, December 31, 2010 ........................ $21,500
Plus stock issuances ................................. 5,000
Plus net income .......................................... 7,500
Less cash dividends .................................. (2,500)
Equity, December 31, 2011 ........................ $31,500
(c) Amount of liabilities on December 31, 2011:
Assets .......................................................... $48,000
Equity .......................................................... (31,500)
Liabilities ..................................................... $16,500
Part 2
Company B:
(a) and (b)
Equity: 12/31/2010 12/31/2011
Assets ................................... $35,000 $41,000
Liabilities .............................. (22,500) (27,500)
Equity ................................... $12,500 $13,500
(c) Net income for 2011:
Equity, December 31, 2010 ..................... $12,500
Plus stock issuances .............................. 1,500
Plus net income ....................................... ?
Less cash dividends ............................... (3,000)
Equity, December 31, 2011 ..................... $13,500
Therefore, net income must have been $ 2,500.

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Chapter 01 – Introducing Accounting in Business
1-22
Problem 1-2A (continued)
Part 3
Company C:
First, calculate the beginning balance of equity:
Dec. 31, 2010
Assets .......................................................... $29,000
Liabilities ..................................................... (14,000)
Equity .......................................................... $15,000
Next, find the ending balance of equity by completing this table:
Equity, December 31, 2010 ........................ $15,000
Plus stock issuances ................................. 7,750
Plus net income .......................................... 9,000
Less cash dividends .................................. (3,875)
Equity, December 31, 2011 ........................ $27,875
Finally, find the ending amount of assets by adding the ending balance of
equity to the ending balance of liabilities:
Dec. 31, 2011
Liabilities ..................................................... $19,000
Equity .......................................................... 27,875
Assets .......................................................... $46,875
Part 4
Company D:
First, calculate the beginning and ending equity balances:
12/31/2010 12/31/2011
Assets ...................................... $80,000 $125,000
Liabilities ................................. (38,000) (64,000)
Equity ...................................... $42,000 $ 61,000
Then, find the amount of stock issuances during 2011:
Equity, December 31, 2010 .......................... $42,000
Plus stock issuances ................................... ?
Plus net income ............................................ 12,000
Less cash dividends .................................... 0
Equity, December 31, 2011 .......................... $61,000
Thus, stock issuances must have been: $ 7,000

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Chapter 01 – Introducing Accounting in Business
1-23
Problem 1-2A (Concluded)
Part 5
Company E:
First, compute the balance of equity as of December 31, 2011:
Assets .......................................................... $112,500
Liabilities ..................................................... (75,000)
Equity .......................................................... $ 37,500
Next, find the beginning balance of equity as follows:
Equity, December 31, 2010 ........................ $ ?
Plus stock issuances ................................. 4,500
Plus net income .......................................... 18,000
Less cash dividends .................................. (9,000)
Equity, December 31, 2011 ........................ $37,500
Thus, the beginning balance of equity was $24,000.
Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of assets:
Dec. 31, 2010
Assets .......................................................... $123,000
Equity .......................................................... (24,000)
Liabilities ..................................................... $ 99,000
Problem 1-3A (15 minutes)
Affiliated Company
Balance Sheet
December 31, 2011
Assets .............................. $ 90,000 Liabilities .................................. $ 34,000
Equity ........................................ 56,000
Total assets ..................... $ 90,000 Total liabilities and equity ....... $ 90,000

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Chapter 01 – Introducing Accounting in Business
1-24
Problem 1-4A (15 minutes)
Sun Energy Company
Income Statement
For Year Ended December 31, 2011
Revenues ................................................. $65,000
Expenses .................................................. 50,000
Net income................................................ $15,000
Problem 1-5A (15 minutes)
Boardwalk
Statement of Retained Earnings
For Year Ended December 31, 2011
Retained earnings, Dec. 31, 2010 .................... $ 8,000
Add: Net income ................................................ 9,000
17,000
Less: Cash dividends ....................................... (2,000)
Retained earnings, Dec. 31, 2011..................... $15,000
Problem 1-6A (15 minutes)
Trimark
Statement of Cash Flows
For Year Ended December 31, 2011
Cash from operating activities ........................ $ 7,000
Cash used by investing activities .................... (3,000)
Cash used by financing activities.................... (3,800)
Net increase in cash.......................................... 200
Cash, December 31, 2010 ................................. 3,300
Cash, December 31, 2011 ................................. $ 3,500

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Chapter 01 – Introducing Accounting in Business
1-25
Problem 1-7A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Cash + Accounts
Receivable + Office
Supplies + Office
Equipment + Building = Accounts
Payable + Notes
Payable + Common
Stock - Dividends + Reve-
nues - Expen-
ses
a. +$60,000 + $30,000 + $90,000
b. - 50,000 + $300,000 + $250,000
Bal. 10,000 + 30,000 + 300,000 = + 250,000 + 90,000
c. - 6,000 + 6,000
Bal. 4,000 + 36,000 + 300,000 = + 250,000 + 90,000
d. + $4,000 + 1,000 + $5,000
Bal. 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000
e. - 1,000 - $1,000
Bal. 3,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,000
f. + $4,000 + $4,000
Bal. 3,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 4,000 - 1,000
g. + 8,000 + 8,000
Bal. 11,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 12,000 - 1000
h. - 1,800 - $1,800
Bal. 9,200 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000
i. + 3,000 - 3,000
Bal. 12,200 + 1,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000
j. - 500 - 500
Bal. 11,700 + 1,000 + 4,000 + 37,000 + 300,000 = 4,500 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000
k. - 2,500 - 2,500
Bal. $9,200 + $1,000 + $4,000 + $37,000 + $300,000 = $4,500 + $250,000 + $90,000 - $1,800 + $12,000 - $3,500
Part 3
Right Consulting’s net income = $12,000 - $3,500 = $8,500

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Chapter 01 – Introducing Accounting in Business
1-26
Problem 1-8A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Date Cash + Accounts
Receivable + Office
Equipment = Accounts
Payable + Common
Stock – Dividends + Revenues – Expenses
May 1 +$60,000 = + $60,000
1 - 3,200 = – $3,200
3 + $1,680 = + $1,680
5 - 800 = – 800
8 + 4,600 = + $4,600
12 + $3,000 = + 3,000
15 - 850 = – 850
20 + 3,000 – 3,000 =
22 + 2,800 = + 2,800
25 + 2,800 – 2,800 =
26 - 1,680 = – 1,680
27 = + 60 – 60
28 - 850 = – 850
30 - 200 = – 200
30 - 480 = – 480
31 - 1,200 = – $1,200
$61,140 + $ 0 + $1,680 = $ 60 + $60,000 – $1,200 + $10,400 – $6,440

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Chapter 01 – Introducing Accounting in Business
1-27
Problem 1-8A (Continued)
Part 3
THE SIMPSON CO.
Income Statement
For Month Ended May 31
Revenues:
Consulting services revenue ............ $10,400
Expenses:
Rent expense....................................... $3,200
Salaries expense ................................. 1,700
Advertising expense ........................... 60
Cleaning expense ............................... 800
Telephone expense............................. 200
Utilities expense.................................. 480
Total expenses .................................... 6,440
Net income .................................................. $ 3,960
THE SIMPSON CO.
Statement of Retained Earnings
For Month Ended May 31
Retained earnings, May 1 .......................................... $ 0
Plus: Net income ....................................................... 3,960
3,960
Less: Cash dividends ................................................ 1,200
Retained earnings, May 31 ........................................ $ 2,760
THE SIMPSON CO.
Balance Sheet
May 31
Assets Liabilities
Cash ............................... $61,140 Accounts payable ................ $ 60
Office equipment .......... 1,680 Equity
Common stock .................... 60,000
Retained earnings ............... 2,760
Total equity .......................... 62,760
Total assets ................... $62,820 Total liabilities and equity .. $62,820

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Chapter 01 – Introducing Accounting in Business
1-28
Problem 1-8A (Concluded)
Part 3—continued
THE SIMPSON CO.
Statement of Cash Flows
For Month Ended May 31
Cash flows from operating activities
Cash received from customers ................................ $10,400
Cash paid for rent ...................................................... (3,200)
Cash paid for cleaning .............................................. (800)
Cash paid for telephone ............................................ (200)
Cash paid for utilities ................................................ (480)
Cash paid to employees ........................................... (1,700)
Net cash provided by operating activities .............. $ 4,020
Cash flows from investing activities
Purchase of equipment ............................................. (1,680)
Net cash used by investing activities ...................... (1,680)
Cash flows from financing activities
Investments by stockholder ..................................... 60,000
Dividends to stockholder .......................................... (1,200)
Net cash provided by financing activities ............... 58,800
Net increase in cash .................................................. $61,140
Cash balance, May 1 ................................................. 0
Cash balance, May 31 ............................................... $61,140

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Chapter 01 – Introducing Accounting in Business
1-29
Problem 1-9A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Date Cash + Accounts
Receivable + Office
Supplies + Office
Equipment + Electrical
Equipment = Accounts
Payable + Common
Stock - Dividends + Revenues - Expenses
Dec. 1 +$56,000 = + $56,000
2 - 800 - $800
Bal. 55,200 = 56,000 - 800
3 - 3,200 + $14,000 + $10,800
Bal. 52,000 + 14,000 = 10,800 + 56,000 - 800
5 - 900 + $ 900
Bal. 51,100 + 900 + 14,000 = 10,800 + 56,000 - 800
6 + 1,000 + $1,000
Bal. 52,100 + 900 + 14,000 = 10,800 + 56,000 + 1,000 - 800
8 + $3,800 + 3,800
Bal. 52,100 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 1,000 - 800
15 + $4,000 + 4,000
Bal. 52,100 + 4,000 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 5,000 - 800
18 + 500 + 500
Bal. 52,100 + 4,000 + 1,400 + 3,800 + 14,000 = 15,100 + 56,000 + 5,000 - 800
20 - 3,800 - 3,800
Bal. 48,300 + 4,000 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,000 - 800
24 + 600 + 600
Bal. 48,300 + 4,600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 800
28 + 4,000 - 4,000
Bal. 52,300 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 800
29 - 1,200 - 1,200
Bal. 51,100 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,000
30 - 440 - 440
Bal. 50,660 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,440
31 - 700 - $700
Bal. $49,960 + $ 600 + $1,400 + $3,800 + $14,000 = $11,300 + $56,000 - $700 + $5,600 - $2,440

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Chapter 01 – Introducing Accounting in Business
1-30
Problem 1-9A (Continued)
Part 3
HAMILTON ELECTRIC
Income Statement
For Month Ended December 31
Revenues:
Electrical fees earned ...................... $5,600
Expenses:
Rent expense .................................... $ 800
Salaries expense .............................. 1,200
Utilities expense .............................. 440
Total expenses ................................. 2,440
Net income .................................................. $3,160
HAMILTON ELECTRIC
Statement of Retained Earnings
For Month Ended December 31
Retained earnings, December 1 ................ $ 0
Plus: Net income ....................................... 3,160
3,160
Less: Cash dividends ................................ 700
Retained earnings, December 31 .............. $ 2,460
HAMILTON ELECTRIC
Balance Sheet
December 31
Assets Liabilities
Cash ................................. $49,960 Accounts payable .................... $11,300
Accounts receivable ...... 600 Equity
Office supplies ................ 1,400 Common stock ........................ 56,000
Office equipment ............ 3,800 Retained earnings ................... 2,460
Electrical equipment ...... 14,000 Total equity .............................. 58,460
Total assets ..................... $69,760 Total liabilities and equity ...... $69,760

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