Solution Manual For Fundamental Accounting Principles with Best Buy Annual Report, 19th Edition
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 1
Chapter 1
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.
8. Marketing managers are likely interested in information such as sales volume,
advertising costs, promotion costs, salaries of sales personnel, and sales
commissions.
Solutions Manual, Chapter 1 1
Chapter 1
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.
8. Marketing managers are likely interested in information such as sales volume,
advertising costs, promotion costs, salaries of sales personnel, and sales
commissions.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 1
Chapter 1
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.
8. Marketing managers are likely interested in information such as sales volume,
advertising costs, promotion costs, salaries of sales personnel, and sales
commissions.
Solutions Manual, Chapter 1 1
Chapter 1
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.
8. Marketing managers are likely interested in information such as sales volume,
advertising costs, promotion costs, salaries of sales personnel, and sales
commissions.
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition2
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 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 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.
18. Equity is increased by investments from the owner and by net income. It is
decreased by withdrawals by the owner and by a net loss (which is the excess of
expenses over revenues).
Fundamental Accounting Principles, 19th Edition2
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 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 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.
18. Equity is increased by investments from the owner and by net income. It is
decreased by withdrawals by the owner and by a net loss (which is the excess of
expenses over revenues).
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 3
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 owner’s
equity, 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 owner’s equity explains the changes in equity from net income or
loss, and from any owner contributions and withdrawals 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.
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.)
Solutions Manual, Chapter 1 3
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 owner’s
equity, 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 owner’s equity explains the changes in equity from net income or
loss, and from any owner contributions and withdrawals 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.
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.)
Loading page 4...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition4
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 Best Buy’s financial statements are rounded to the nearest
$1,000,000. Best Buy’s consolidated statement of earnings (or income statement)
covers the fiscal year (consisting of 53 weeks) ended March 3, 2007. Best Buy also
reports comparative income statements for the previous two years (consisting of 52
weeks).
33. In thousands, Circuit City’s accounting equation is:
Assets = Liabilities + Equity
$4,007,283 = $2,216,039 + $1,791,244
34. At December 31, 2006, RadioShack had (in millions) assets of $2,070.0, liabilities of
$1,416.2, and equity of $653.8.
35. The independent auditor for Apple, Inc., is KPMG LLP. The auditor expressly states
that “our responsibility is to express an opinion on these consolidated financial
statements based on our audits.” The auditor also states that “these consolidated
financial statements are the responsibility of the Company’s management.”
Fundamental Accounting Principles, 19th Edition4
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 Best Buy’s financial statements are rounded to the nearest
$1,000,000. Best Buy’s consolidated statement of earnings (or income statement)
covers the fiscal year (consisting of 53 weeks) ended March 3, 2007. Best Buy also
reports comparative income statements for the previous two years (consisting of 52
weeks).
33. In thousands, Circuit City’s accounting equation is:
Assets = Liabilities + Equity
$4,007,283 = $2,216,039 + $1,791,244
34. At December 31, 2006, RadioShack had (in millions) assets of $2,070.0, liabilities of
$1,416.2, and equity of $653.8.
35. The independent auditor for Apple, Inc., is KPMG LLP. The auditor expressly states
that “our responsibility is to express an opinion on these consolidated financial
statements based on our audits.” The auditor also states that “these consolidated
financial statements are the responsibility of the Company’s management.”
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 5
QUICK STUDIES
Quick Study 1-1
a. E g. E
b. E h. E
c. I i. E
d. E j. E
e. E k. I
f. I l. E
Quick Study 1-2
(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.
Solutions Manual, Chapter 1 5
QUICK STUDIES
Quick Study 1-1
a. E g. E
b. E h. E
c. I i. E
d. E j. E
e. E k. I
f. I l. E
Quick Study 1-2
(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.
Loading page 6...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition6
Quick Study 1-3
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
Quick Study 1-4
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.
Fundamental Accounting Principles, 19th Edition6
Quick Study 1-3
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
Quick Study 1-4
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.
Loading page 7...
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 7
Quick Study 1-5
a. Revenue recognition principle
b. Cost principle (also called historical cost)
c. Business entity assumption
Quick Study 1-6
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 1-7
Assets = Liabilities + Equity
$375,000 (a) $125,000 $250,000
(b) $250,000 $ 90,000 $160,000
$185,000 $ 60,000 (c) $125,000
Quick Study 1-8
Assets = Liabilities + Equity
$500,000 (a) $180,000 $320,000
$900,000 (b) $450,000 (b) $450,000
Quick Study 1-9
a. For September 30, 2006, the account and its dollar amount (in millions)
for Apple are:
(1) Assets = $17,205
(2) Liabilities = $ 7,221
(3) Equity = $ 9,984
Solutions Manual, Chapter 1 7
Quick Study 1-5
a. Revenue recognition principle
b. Cost principle (also called historical cost)
c. Business entity assumption
Quick Study 1-6
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 1-7
Assets = Liabilities + Equity
$375,000 (a) $125,000 $250,000
(b) $250,000 $ 90,000 $160,000
$185,000 $ 60,000 (c) $125,000
Quick Study 1-8
Assets = Liabilities + Equity
$500,000 (a) $180,000 $320,000
$900,000 (b) $450,000 (b) $450,000
Quick Study 1-9
a. For September 30, 2006, the account and its dollar amount (in millions)
for Apple are:
(1) Assets = $17,205
(2) Liabilities = $ 7,221
(3) Equity = $ 9,984
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©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition8
Quick Study 1-9—continued
b. Using Apple’s amounts from (a) we verify that (in millions):
Assets = Liabilities + Equity
$17,205 = $ 7,221 + $ 9,984
Quick Study 1-10
(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 1-11
[Code: Income statement (I), Balance sheet (B), Statement of owner’s equity (OE), or Statement
of cash flows (CF).]
a. B d. CF g. B
b. I e. I h. CF
c. B f. B i. OE (and CF*)
*The more advanced student might know that this item would also appear in CF.
Quick Study 1-12
Return on assets = = = 11.9%
Interpretation: Its return of 11.9% is slightly below the 12% of its competitors.
Home Depot’s performance can be rated as average.
$5,761
$48,334
Net income
Average total assets
Fundamental Accounting Principles, 19th Edition8
Quick Study 1-9—continued
b. Using Apple’s amounts from (a) we verify that (in millions):
Assets = Liabilities + Equity
$17,205 = $ 7,221 + $ 9,984
Quick Study 1-10
(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 1-11
[Code: Income statement (I), Balance sheet (B), Statement of owner’s equity (OE), or Statement
of cash flows (CF).]
a. B d. CF g. B
b. I e. I h. CF
c. B f. B i. OE (and CF*)
*The more advanced student might know that this item would also appear in CF.
Quick Study 1-12
Return on assets = = = 11.9%
Interpretation: Its return of 11.9% is slightly below the 12% of its competitors.
Home Depot’s performance can be rated as average.
$5,761
$48,334
Net income
Average total assets
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 9
EXERCISES
Exercise 1-1 (20 minutes)
External users and some questions they seek to answer with accounting
information include:
1. Shareholders (investors), who seek answers to questions such as:
a. Are resources owned by a business adequate to carry out plans?
b. Are the debts owed excessive in amount?
c. What is the current level of income (and its components)?
2. Creditors, who seek answers for questions such as:
a. Does the business have the ability to repay its debts?
b. Can the business take on additional debt?
c. Are resources sufficient to cover current amounts owed?
3. Employees, who seek answers to questions such as:
a. Is the business financially stable?
b. Can the business afford to pay higher salaries?
c. What are growth prospects for the organization?
Internal users and some ways they use accounting information on their
jobs include:
1. Research and development managers, who need information on
projected costs and revenues of any proposed changes in products or
services.
2. Purchasing managers, who need to know what, when, and how much to
purchase.
3. Human resource managers, who need information about employees’
payroll, benefits, performance, and compensation.
4. Production managers, who depend on information to monitor costs and
ensure quality.
5. Distribution managers, who need reports for timely, accurate, and
efficient delivery of products and services.
Solutions Manual, Chapter 1 9
EXERCISES
Exercise 1-1 (20 minutes)
External users and some questions they seek to answer with accounting
information include:
1. Shareholders (investors), who seek answers to questions such as:
a. Are resources owned by a business adequate to carry out plans?
b. Are the debts owed excessive in amount?
c. What is the current level of income (and its components)?
2. Creditors, who seek answers for questions such as:
a. Does the business have the ability to repay its debts?
b. Can the business take on additional debt?
c. Are resources sufficient to cover current amounts owed?
3. Employees, who seek answers to questions such as:
a. Is the business financially stable?
b. Can the business afford to pay higher salaries?
c. What are growth prospects for the organization?
Internal users and some ways they use accounting information on their
jobs include:
1. Research and development managers, who need information on
projected costs and revenues of any proposed changes in products or
services.
2. Purchasing managers, who need to know what, when, and how much to
purchase.
3. Human resource managers, who need information about employees’
payroll, benefits, performance, and compensation.
4. Production managers, who depend on information to monitor costs and
ensure quality.
5. Distribution managers, who need reports for timely, accurate, and
efficient delivery of products and services.
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©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition10
Exercise 1-2 (10 minutes)
1. C 5. B
2. C 6. A
3. A 7. B
4. A 8. B
Exercise 1-3 (20 minutes)
a. 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.
b. 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.
c. 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.
d. 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.
Fundamental Accounting Principles, 19th Edition10
Exercise 1-2 (10 minutes)
1. C 5. B
2. C 6. A
3. A 7. B
4. A 8. B
Exercise 1-3 (20 minutes)
a. 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.
b. 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.
c. 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.
d. 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.
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 11
Exercise 1-4 (10 minutes)
Code Description Principle or Assumption
E 1. Usually created by a pronouncement from an
authoritative body.
Specific accounting
principle
G 2. Financial statements reflect the assumption that
the business continues operating.
Going-concern
assumption
A 3. Derived from long-used and generally accepted
accounting practices.
General accounting
principle
C 4. Every business is accounted for separately from
its owner or owners.
Business entity
assumption
D 5. Revenue is recorded only when the earnings
process is complete.
Revenue recognition
principle
B 6. Information is based on actual costs incurred in
transactions.
Cost principle
F 7. A company reports details behind financial
statements that would influence users' decisions.
Full disclosure
principle
H 8. A company records the expenses incurred to
generate the revenue reported.
Matching principle
Exercise 1-5 (10 minutes)
a. Sole proprietorship e. Corporation
b. Corporation f. Partnership
c. Sole proprietorship g. Sole proprietorship
d. Corporation
Exercise 1-6 (10 minutes)
Assets = Liabilities + Equity
(a) $180,000 = $164,000 + $16,000
$ 90,000 = $ 39,000 + (b) $51,000
$201,000 = (c) $139,000 + $62,000
Solutions Manual, Chapter 1 11
Exercise 1-4 (10 minutes)
Code Description Principle or Assumption
E 1. Usually created by a pronouncement from an
authoritative body.
Specific accounting
principle
G 2. Financial statements reflect the assumption that
the business continues operating.
Going-concern
assumption
A 3. Derived from long-used and generally accepted
accounting practices.
General accounting
principle
C 4. Every business is accounted for separately from
its owner or owners.
Business entity
assumption
D 5. Revenue is recorded only when the earnings
process is complete.
Revenue recognition
principle
B 6. Information is based on actual costs incurred in
transactions.
Cost principle
F 7. A company reports details behind financial
statements that would influence users' decisions.
Full disclosure
principle
H 8. A company records the expenses incurred to
generate the revenue reported.
Matching principle
Exercise 1-5 (10 minutes)
a. Sole proprietorship e. Corporation
b. Corporation f. Partnership
c. Sole proprietorship g. Sole proprietorship
d. Corporation
Exercise 1-6 (10 minutes)
Assets = Liabilities + Equity
(a) $180,000 = $164,000 + $16,000
$ 90,000 = $ 39,000 + (b) $51,000
$201,000 = (c) $139,000 + $62,000
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©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition12
Exercise 1-7 (10 minutes)
1. D 4. F
2. G 5. A
3. C
Exercise 1-8 (20 minutes)
a. Using the accounting equation:
Assets = Liabilities + Equity
$137,000 = $110,000 + ?
Thus, equity = $27,000
b. Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
$259,000 = ? + $194,250
Thus, beginning liabilities = $64,750
Using the accounting equation at the end of the year:
Assets = Liabilities + Equity
$259,000 + $80,000 = $64,750 + $52,643 + ?
$339,000 = $117,393 + ?
Thus, ending equity = $221,607
Alternative approach to solving part (b):
Assets($80,000) = Liabilities($52,643) + Equity(?)
where “” refers to “change in.”
Thus: Ending Equity = $194,250 + $27,357 = $221,607
c. Using the accounting equation at the end of the year:
Assets = Liabilities + Equity
$190,000 = $57,000 - $16,000 + ?
$190,000 = $41,000 + $149,000
Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
$190,000 - $60,000 = $57,000 + ?
$130,000 = $57,000 + ?
Thus: Beginning Equity = $73,000
Fundamental Accounting Principles, 19th Edition12
Exercise 1-7 (10 minutes)
1. D 4. F
2. G 5. A
3. C
Exercise 1-8 (20 minutes)
a. Using the accounting equation:
Assets = Liabilities + Equity
$137,000 = $110,000 + ?
Thus, equity = $27,000
b. Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
$259,000 = ? + $194,250
Thus, beginning liabilities = $64,750
Using the accounting equation at the end of the year:
Assets = Liabilities + Equity
$259,000 + $80,000 = $64,750 + $52,643 + ?
$339,000 = $117,393 + ?
Thus, ending equity = $221,607
Alternative approach to solving part (b):
Assets($80,000) = Liabilities($52,643) + Equity(?)
where “” refers to “change in.”
Thus: Ending Equity = $194,250 + $27,357 = $221,607
c. Using the accounting equation at the end of the year:
Assets = Liabilities + Equity
$190,000 = $57,000 - $16,000 + ?
$190,000 = $41,000 + $149,000
Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
$190,000 - $60,000 = $57,000 + ?
$130,000 = $57,000 + ?
Thus: Beginning Equity = $73,000
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 13
Exercise 1-9 (15 minutes)
Examples of transactions that fit each case include:
a. Business purchases equipment (or some other asset) on credit.
b. Business signs a note payable to extend the due date on an account
payable.
c. Business pays an account payable (or some other liability) with cash
(or some other asset).
d. Business purchases office supplies (or some other asset) for cash (or
some other asset).
e. Business incurs an expense that is not yet paid (for example, when
employees earn wages that are not yet paid).
f. Owner(s) invest cash (or some other asset) in the business; OR, the
business earns revenue and accepts cash (or another asset).
g. Cash withdrawals (or some other asset) paid to the owner(s) of the
business; OR, the business incurs an expense paid in cash.
Exercise 1-10 (20 minutes)
a. Started the business with the owner investing $20,000 cash in the
company.
b. Purchased office supplies for $3,000 by paying $2,000 cash and putting
the remaining $1,000 balance on credit.
c. Purchased office furniture by paying $8,000 cash.
d. Billed a customer $6,000 for services earned.
e. Provided services for $1,000 cash.
Solutions Manual, Chapter 1 13
Exercise 1-9 (15 minutes)
Examples of transactions that fit each case include:
a. Business purchases equipment (or some other asset) on credit.
b. Business signs a note payable to extend the due date on an account
payable.
c. Business pays an account payable (or some other liability) with cash
(or some other asset).
d. Business purchases office supplies (or some other asset) for cash (or
some other asset).
e. Business incurs an expense that is not yet paid (for example, when
employees earn wages that are not yet paid).
f. Owner(s) invest cash (or some other asset) in the business; OR, the
business earns revenue and accepts cash (or another asset).
g. Cash withdrawals (or some other asset) paid to the owner(s) of the
business; OR, the business incurs an expense paid in cash.
Exercise 1-10 (20 minutes)
a. Started the business with the owner investing $20,000 cash in the
company.
b. Purchased office supplies for $3,000 by paying $2,000 cash and putting
the remaining $1,000 balance on credit.
c. Purchased office furniture by paying $8,000 cash.
d. Billed a customer $6,000 for services earned.
e. Provided services for $1,000 cash.
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©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition14
Exercise 1-11 (15 minutes)
a. Purchased land for $4,000 cash.
b. Purchased $1,000 of office supplies on credit.
c. Billed a client $1,900 for services provided.
d. Paid the $1,000 account payable created by the credit purchase of
office supplies in transaction b.
e. Collected $1,900 cash for the billing in transaction c.
Exercise 1-12 (30 minutes)
Cash + Accounts
Receivable + Equip-
ment = Accounts
Payable + L. Diamond,
Capital – L. Diamond,
Withdrawals + Revenue – Expenses
a. +$70,000 + $20,000 = + $90,000
b. – 2,000 ______ ______ – $2,000
Bal. 68,000 + + 20,000 = + 90,000 – 2,000
c. _______ + 25,000 +$25,000 ______ _____
Bal. 68,000 + + 45,000 = 25,000 + 90,000 – 2,000
d. + 3,000 ______ _______ ______ + $3,000 _____
Bal. 71,000 + + 45,000 = 25,000 + 90,000 + 3,000 – 2,000
e. _______ + $9,500 ______ _______ ______ + 9,500 _____
Bal. 71,000 + 9,500 + 45,000 = 25,000 + 90,000 + 12,500 – 2,000
f. – 5,000 ______ + 5,000 _______ ______ _____ _____
Bal. 66,000 + 9,500 + 50,000 = 25,000 + 90,000 + 12,500 – 2,000
g. – 3,500 ______ ______ _______ ______ _____ – 3,500
Bal. 62,500 + 9,500 + 50,000 = 25,000 + 90,000 + 12,500 – 5,500
h. + 6,500 - 6,500 ______ _______ ______ _____ _____
Bal. 69,000 + 3,000 + 50,000 = 25,000 + 90,000 + 12,500 – 5,500
i. – 25,000 ______ ______ – 25,000 ______ _____ _____
Bal. 44,000 + 3,000 + 50,000 = 0 + 90,000 + 12,500 – 5,500
j. – 1,500 ______ ______ _______ ______ – $1,500 ______ _____
Bal. $42,500 + $3,000 + $50,000 = $ 0 + $90,000 – $1,500 + $12,500 – $5,500
Fundamental Accounting Principles, 19th Edition14
Exercise 1-11 (15 minutes)
a. Purchased land for $4,000 cash.
b. Purchased $1,000 of office supplies on credit.
c. Billed a client $1,900 for services provided.
d. Paid the $1,000 account payable created by the credit purchase of
office supplies in transaction b.
e. Collected $1,900 cash for the billing in transaction c.
Exercise 1-12 (30 minutes)
Cash + Accounts
Receivable + Equip-
ment = Accounts
Payable + L. Diamond,
Capital – L. Diamond,
Withdrawals + Revenue – Expenses
a. +$70,000 + $20,000 = + $90,000
b. – 2,000 ______ ______ – $2,000
Bal. 68,000 + + 20,000 = + 90,000 – 2,000
c. _______ + 25,000 +$25,000 ______ _____
Bal. 68,000 + + 45,000 = 25,000 + 90,000 – 2,000
d. + 3,000 ______ _______ ______ + $3,000 _____
Bal. 71,000 + + 45,000 = 25,000 + 90,000 + 3,000 – 2,000
e. _______ + $9,500 ______ _______ ______ + 9,500 _____
Bal. 71,000 + 9,500 + 45,000 = 25,000 + 90,000 + 12,500 – 2,000
f. – 5,000 ______ + 5,000 _______ ______ _____ _____
Bal. 66,000 + 9,500 + 50,000 = 25,000 + 90,000 + 12,500 – 2,000
g. – 3,500 ______ ______ _______ ______ _____ – 3,500
Bal. 62,500 + 9,500 + 50,000 = 25,000 + 90,000 + 12,500 – 5,500
h. + 6,500 - 6,500 ______ _______ ______ _____ _____
Bal. 69,000 + 3,000 + 50,000 = 25,000 + 90,000 + 12,500 – 5,500
i. – 25,000 ______ ______ – 25,000 ______ _____ _____
Bal. 44,000 + 3,000 + 50,000 = 0 + 90,000 + 12,500 – 5,500
j. – 1,500 ______ ______ _______ ______ – $1,500 ______ _____
Bal. $42,500 + $3,000 + $50,000 = $ 0 + $90,000 – $1,500 + $12,500 – $5,500
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 15
Exercise 1-13 (15 minutes)
REAL ANSWERS
Income Statement
For Month Ended October 31
Revenues
Consulting fees earned ...................... $14,000
Expenses
Salaries expense ................................. $5,600
Rent expense....................................... 2,520
Telephone expense............................. 760
Miscellaneous expenses .................... 580
Total expenses .................................... 9,460
Net income .................................................. $ 4,540
Exercise 1-14 (15 minutes)
REAL ANSWERS
Statement of Owner’s Equity
For Month Ended October 31
K. King, Capital, October 1 .............................. $ 0
Add: Investments by owner ............................ 84,360
Net income (from Exercise 1-13) ............. 4,540
88,900
Less: Withdrawals by owner ........................... 2,000
K. King, Capital, October 31 ............................ $86,900
Exercise 1-15 (15 minutes)
REAL ANSWERS
Balance Sheet
October 31
Assets Liabilities
Cash ............................... $ 11,500 Accounts payable ................. $ 25,037
Accounts receivable .... 12,000
Office supplies .............. 24,437 Equity
Office equipment .......... 18,000
Land ............................... 46,000 K. King, Capital* .................... 86,900
Total assets ................... $111,937 Total liabilities and equity .... $111,937
* For the computation of this amount see Exercise 1-14.
Solutions Manual, Chapter 1 15
Exercise 1-13 (15 minutes)
REAL ANSWERS
Income Statement
For Month Ended October 31
Revenues
Consulting fees earned ...................... $14,000
Expenses
Salaries expense ................................. $5,600
Rent expense....................................... 2,520
Telephone expense............................. 760
Miscellaneous expenses .................... 580
Total expenses .................................... 9,460
Net income .................................................. $ 4,540
Exercise 1-14 (15 minutes)
REAL ANSWERS
Statement of Owner’s Equity
For Month Ended October 31
K. King, Capital, October 1 .............................. $ 0
Add: Investments by owner ............................ 84,360
Net income (from Exercise 1-13) ............. 4,540
88,900
Less: Withdrawals by owner ........................... 2,000
K. King, Capital, October 31 ............................ $86,900
Exercise 1-15 (15 minutes)
REAL ANSWERS
Balance Sheet
October 31
Assets Liabilities
Cash ............................... $ 11,500 Accounts payable ................. $ 25,037
Accounts receivable .... 12,000
Office supplies .............. 24,437 Equity
Office equipment .......... 18,000
Land ............................... 46,000 K. King, Capital* .................... 86,900
Total assets ................... $111,937 Total liabilities and equity .... $111,937
* For the computation of this amount see Exercise 1-14.
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©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition16
Exercise 1-16 (15 minutes)
REAL ANSWERS
Statement of Cash Flows
For Month Ended October 31
Cash flows from operating activities
Cash received from customers1 .......................................... $ 2,000
Cash paid to employees2 ...................................................... (5,000)
Cash paid for rent .................................................................. (2,520)
Cash paid for telephone expenses ...................................... (760)
Cash paid for miscellaneous expenses .............................. (580)
Net cash used by operating activities ................................. ( 6,860)
Cash flows from investing activities
Purchase of office equipment .............................................. (18,000)
Net cash used by investing activities ................................. (18,000)
Cash flows from financing activities
Investments by owner ........................................................... 38,360
Withdrawals by owner .......................................................... (2,000)
Net cash provided by financing activities .......................... 36,360
Net increase in cash.............................................................. $11,500
Cash balance, October 1 ...................................................... 0
Cash balance, October 31 .................................................... $11,500
1$14,000 Consulting Fees Earned - $12,000 Accounts Receivable
2$5,600 Salaries Expense - $600 still owed = $5,000 paid to employees.
Fundamental Accounting Principles, 19th Edition16
Exercise 1-16 (15 minutes)
REAL ANSWERS
Statement of Cash Flows
For Month Ended October 31
Cash flows from operating activities
Cash received from customers1 .......................................... $ 2,000
Cash paid to employees2 ...................................................... (5,000)
Cash paid for rent .................................................................. (2,520)
Cash paid for telephone expenses ...................................... (760)
Cash paid for miscellaneous expenses .............................. (580)
Net cash used by operating activities ................................. ( 6,860)
Cash flows from investing activities
Purchase of office equipment .............................................. (18,000)
Net cash used by investing activities ................................. (18,000)
Cash flows from financing activities
Investments by owner ........................................................... 38,360
Withdrawals by owner .......................................................... (2,000)
Net cash provided by financing activities .......................... 36,360
Net increase in cash.............................................................. $11,500
Cash balance, October 1 ...................................................... 0
Cash balance, October 31 .................................................... $11,500
1$14,000 Consulting Fees Earned - $12,000 Accounts Receivable
2$5,600 Salaries Expense - $600 still owed = $5,000 paid to employees.
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 17
Exercise 1-17 (10 minutes)
O 1. Cash paid for rent O 5. Cash paid for advertising
O 2. Cash paid on an account payable O 6. Cash paid for wages
F 3. Cash investments by owner F 7. Cash withdrawal by owner
O 4. Cash received from clients I 8. Cash purchase of equipment
Exercise 1-18 (10 minutes)
Return on assets = Net income / Average total assets
= $36,000 / [($135,000 + $185,000)/2]
= 22.5%
Interpretation: Iowa Group’s return on assets of 22.5% is markedly above
the 10% return of its competitors. Accordingly, its performance is
assessed as superior to its competitors.
Exercise 1-19B (10 minutes)
a. Investing
b. Operating
c. Financing
d. Financing*
e. Investing
* Would also be listed as “investing” if resources contributed by owner were in the
form of non-financial resources.
Solutions Manual, Chapter 1 17
Exercise 1-17 (10 minutes)
O 1. Cash paid for rent O 5. Cash paid for advertising
O 2. Cash paid on an account payable O 6. Cash paid for wages
F 3. Cash investments by owner F 7. Cash withdrawal by owner
O 4. Cash received from clients I 8. Cash purchase of equipment
Exercise 1-18 (10 minutes)
Return on assets = Net income / Average total assets
= $36,000 / [($135,000 + $185,000)/2]
= 22.5%
Interpretation: Iowa Group’s return on assets of 22.5% is markedly above
the 10% return of its competitors. Accordingly, its performance is
assessed as superior to its competitors.
Exercise 1-19B (10 minutes)
a. Investing
b. Operating
c. Financing
d. Financing*
e. Investing
* Would also be listed as “investing” if resources contributed by owner were in the
form of non-financial resources.
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©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition18
PROBLEM SET A
Problem 1-1A (40 minutes)
Part 1
Company A
(a) Equity on December 31, 2008:
Assets .......................................................... $33,000
Liabilities ..................................................... (27,060)
Equity .......................................................... $ 5,940
(b) Equity on December 31, 2009:
Equity, December 31, 2008 ........................ $ 5,940
Plus owner investments ............................ 6,000
Plus net income .......................................... 7,760
Less cash withdrawals .............................. (3,500)
Equity, December 31, 2009 ........................ $16,200
(c) Liabilities on December 31, 2009:
Assets .......................................................... $36,000
Equity .......................................................... (16,200)
Liabilities ..................................................... $19,800
Part 2
Company B
(a) and (b)
Equity: 12/31/2008 12/31/2009
Assets ................................... $25,740 $25,920
Liabilities .............................. (18,018) (17,625)
Equity ................................... $ 7,722 $ 8,295
(c) Net income for 2009:
Equity, December 31, 2008 ..................... $ 7,722
Plus owner investments ......................... 1,400
Plus net income ....................................... ?
Less cash withdrawals ........................... (2,000)
Equity, December 31, 2009 ..................... $ 8,295
Therefore, net income must have been $ 1,173
Fundamental Accounting Principles, 19th Edition18
PROBLEM SET A
Problem 1-1A (40 minutes)
Part 1
Company A
(a) Equity on December 31, 2008:
Assets .......................................................... $33,000
Liabilities ..................................................... (27,060)
Equity .......................................................... $ 5,940
(b) Equity on December 31, 2009:
Equity, December 31, 2008 ........................ $ 5,940
Plus owner investments ............................ 6,000
Plus net income .......................................... 7,760
Less cash withdrawals .............................. (3,500)
Equity, December 31, 2009 ........................ $16,200
(c) Liabilities on December 31, 2009:
Assets .......................................................... $36,000
Equity .......................................................... (16,200)
Liabilities ..................................................... $19,800
Part 2
Company B
(a) and (b)
Equity: 12/31/2008 12/31/2009
Assets ................................... $25,740 $25,920
Liabilities .............................. (18,018) (17,625)
Equity ................................... $ 7,722 $ 8,295
(c) Net income for 2009:
Equity, December 31, 2008 ..................... $ 7,722
Plus owner investments ......................... 1,400
Plus net income ....................................... ?
Less cash withdrawals ........................... (2,000)
Equity, December 31, 2009 ..................... $ 8,295
Therefore, net income must have been $ 1,173
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 19
Problem 1-1A (Continued)
Part 3
Company C
First, calculate the beginning balance of equity:
Dec. 31, 2008
Assets .......................................................... $21,120
Liabilities ..................................................... (11,404)
Equity .......................................................... $ 9,716
Next, find the ending balance of equity by completing this table:
Equity, December 31, 2008 ........................ $ 9,716
Plus owner investments ............................ 9,750
Less net loss ............................................... (1,289)
Less cash withdrawals .............................. (5,875)
Equity, December 31, 2009 ........................ $12,302
Finally, find the ending amount of assets by adding the ending balance of
equity to the ending balance of liabilities:
Dec. 31, 2009
Liabilities ..................................................... $11,818
Equity .......................................................... 12,302
Assets .......................................................... $24,120
Part 4
Company D
First, calculate the beginning and ending equity balances:
12/31/2008 12/31/2009
Assets ...................................... $58,740 $65,520
Liabilities ................................. (40,530) (31,449)
Equity ...................................... $18,210 $34,071
Then, find the amount of owner investments during 2009:
Equity, December 31, 2008 .......................... $18,210
Plus owner investments .............................. ?
Plus net income ............................................ 8,861
Less cash withdrawals ................................ 0
Equity, December 31, 2009 .......................... $34,071
Thus, owner investments must have been $ 7,000
Solutions Manual, Chapter 1 19
Problem 1-1A (Continued)
Part 3
Company C
First, calculate the beginning balance of equity:
Dec. 31, 2008
Assets .......................................................... $21,120
Liabilities ..................................................... (11,404)
Equity .......................................................... $ 9,716
Next, find the ending balance of equity by completing this table:
Equity, December 31, 2008 ........................ $ 9,716
Plus owner investments ............................ 9,750
Less net loss ............................................... (1,289)
Less cash withdrawals .............................. (5,875)
Equity, December 31, 2009 ........................ $12,302
Finally, find the ending amount of assets by adding the ending balance of
equity to the ending balance of liabilities:
Dec. 31, 2009
Liabilities ..................................................... $11,818
Equity .......................................................... 12,302
Assets .......................................................... $24,120
Part 4
Company D
First, calculate the beginning and ending equity balances:
12/31/2008 12/31/2009
Assets ...................................... $58,740 $65,520
Liabilities ................................. (40,530) (31,449)
Equity ...................................... $18,210 $34,071
Then, find the amount of owner investments during 2009:
Equity, December 31, 2008 .......................... $18,210
Plus owner investments .............................. ?
Plus net income ............................................ 8,861
Less cash withdrawals ................................ 0
Equity, December 31, 2009 .......................... $34,071
Thus, owner investments must have been $ 7,000
Loading page 20...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition20
Problem 1-1A (Concluded)
Part 5
Company E
First, compute the balance of equity as of December 31, 2009:
Assets .......................................................... $ 99,360
Liabilities ..................................................... (78,494)
Equity .......................................................... $ 20,866
Next, find the beginning balance of equity as follows:
Equity, December 31, 2008 ........................ $ ?
Plus owner investments ............................ 6,500
Plus net income .......................................... 7,348
Less cash withdrawals .............................. (11,000)
Equity, December 31, 2009 ........................ $20,866
Thus, the beginning balance of equity is: $18,018
Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of assets:
Dec. 31, 2008
Assets .......................................................... $90,090
Equity .......................................................... (18,018)
Liabilities ..................................................... $72,072
Fundamental Accounting Principles, 19th Edition20
Problem 1-1A (Concluded)
Part 5
Company E
First, compute the balance of equity as of December 31, 2009:
Assets .......................................................... $ 99,360
Liabilities ..................................................... (78,494)
Equity .......................................................... $ 20,866
Next, find the beginning balance of equity as follows:
Equity, December 31, 2008 ........................ $ ?
Plus owner investments ............................ 6,500
Plus net income .......................................... 7,348
Less cash withdrawals .............................. (11,000)
Equity, December 31, 2009 ........................ $20,866
Thus, the beginning balance of equity is: $18,018
Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of assets:
Dec. 31, 2008
Assets .......................................................... $90,090
Equity .......................................................... (18,018)
Liabilities ..................................................... $72,072
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 21
Problem 1-2A (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 in business + + +
2 Receives cash
for services
provided
+ + + +
3 Pays cash for
employee wages – – – –
4 Incurs legal
costs on credit + – –
5 Borrows cash
by signing L-T
note payable
+ + +
6 Buys land by
signing note
payable
+ +
7 Provides ser-
vices on credit + + +
8 Buys office
equipment
for cash
+/– –
9 Collects cash
on receivable
from (7)
+/– +
10 Owner
withdraws cash – – –
Problem 1-3A (15 minutes)
Elko Energy Company
Income Statement
For Year Ended December 31, 2009
Revenues ................................................. $66,000
Expenses .................................................. 51,348
Net income................................................ $14,652
Solutions Manual, Chapter 1 21
Problem 1-2A (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 in business + + +
2 Receives cash
for services
provided
+ + + +
3 Pays cash for
employee wages – – – –
4 Incurs legal
costs on credit + – –
5 Borrows cash
by signing L-T
note payable
+ + +
6 Buys land by
signing note
payable
+ +
7 Provides ser-
vices on credit + + +
8 Buys office
equipment
for cash
+/– –
9 Collects cash
on receivable
from (7)
+/– +
10 Owner
withdraws cash – – –
Problem 1-3A (15 minutes)
Elko Energy Company
Income Statement
For Year Ended December 31, 2009
Revenues ................................................. $66,000
Expenses .................................................. 51,348
Net income................................................ $14,652
Loading page 22...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition22
Problem 1-4A (15 minutes)
Amity Company
Balance Sheet
December 31, 2009
Assets .............................. $142,000 Liabilities ..................................$ 54,244
Equity ........................................ 87,756
Total assets ..................... $142,000 Total liabilities and equity .......$142,000
Problem 1-5A (15 minutes)
Fortune Company
Statement of Cash Flows
For Year Ended December 31, 2009
Cash from operating activities ........................ $ 8,050
Cash used by investing activities .................... (3,250)
Cash used by financing activities.................... (4,050)
Net increase in cash.......................................... $ 750
Cash, December 31, 2008 ................................. 4,100
Cash, December 31, 2009 ................................. $ 4,850
Problem 1-6A (15 minutes)
Atlee Company
Statement of Owner’s Equity
For Year Ended December 31, 2009
A. Atlee, Capital, Dec. 31, 2008 ...................... $11,000
Add: Investments by owner........................... 0
Net income ............................................. 7,750
18,750
Less: Withdrawals by owner .......................... (2,000)
A. Atlee, Capital, Dec. 31, 2009 ...................... $16,750
Fundamental Accounting Principles, 19th Edition22
Problem 1-4A (15 minutes)
Amity Company
Balance Sheet
December 31, 2009
Assets .............................. $142,000 Liabilities ..................................$ 54,244
Equity ........................................ 87,756
Total assets ..................... $142,000 Total liabilities and equity .......$142,000
Problem 1-5A (15 minutes)
Fortune Company
Statement of Cash Flows
For Year Ended December 31, 2009
Cash from operating activities ........................ $ 8,050
Cash used by investing activities .................... (3,250)
Cash used by financing activities.................... (4,050)
Net increase in cash.......................................... $ 750
Cash, December 31, 2008 ................................. 4,100
Cash, December 31, 2009 ................................. $ 4,850
Problem 1-6A (15 minutes)
Atlee Company
Statement of Owner’s Equity
For Year Ended December 31, 2009
A. Atlee, Capital, Dec. 31, 2008 ...................... $11,000
Add: Investments by owner........................... 0
Net income ............................................. 7,750
18,750
Less: Withdrawals by owner .......................... (2,000)
A. Atlee, Capital, Dec. 31, 2009 ...................... $16,750
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©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 23
Problem 1-7A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Date Cash + Accounts
Receivable
+ Office
Equipment
= Accounts
Payable
+ H. Graham,
Capital - H. Graham,
Withdrawals
+ Revenues - Expenses
May 1 +$43,000 = + $43,000
1 - 2,200 = - $2,200
3 + $1,940 = + $1,940
5 - 750 ` = - 750
8 + 5,800 = + $5,800
12 + $2,800 = + 2,800
15 - 850 = - 850
20 + 2,800 - 2,800 =
22 + 4,000 = + 4,000
25 + 4,000 - 4,000 =
26 - 1,940 = - 1,940
27 = + 85 - 85
28 - 850 = - 850
30 - 400 = - 400
30 - 260 = - 260
31 - 2,000 = - $2,000
$46,350 + $ 0 + $1,940 = $ 85 + $43,000 - $2,000 + $12,600 - $5,395
Solutions Manual, Chapter 1 23
Problem 1-7A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Date Cash + Accounts
Receivable
+ Office
Equipment
= Accounts
Payable
+ H. Graham,
Capital - H. Graham,
Withdrawals
+ Revenues - Expenses
May 1 +$43,000 = + $43,000
1 - 2,200 = - $2,200
3 + $1,940 = + $1,940
5 - 750 ` = - 750
8 + 5,800 = + $5,800
12 + $2,800 = + 2,800
15 - 850 = - 850
20 + 2,800 - 2,800 =
22 + 4,000 = + 4,000
25 + 4,000 - 4,000 =
26 - 1,940 = - 1,940
27 = + 85 - 85
28 - 850 = - 850
30 - 400 = - 400
30 - 260 = - 260
31 - 2,000 = - $2,000
$46,350 + $ 0 + $1,940 = $ 85 + $43,000 - $2,000 + $12,600 - $5,395
Loading page 24...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition24
Problem 1-7A (Continued)
Part 3
Graham Company
Income Statement
For Month Ended May 31
Revenues
Consulting services revenue ............ $12,600
Expenses
Rent expense....................................... $2,200
Salaries expense ................................. 1,700
Advertising expense ........................... 85
Cleaning expense ............................... 750
Telephone expense............................. 400
Utilities expense.................................. 260
Total expenses .................................... 5,395
Net income .................................................. $ 7,205
Graham Company
Statement of Owner’s Equity
For Month Ended May 31
H. Graham, Capital, May 1 ........................................ $ 0
Plus: Investments by owner ..................................... 43,000
Net income ....................................................... 7,205
50,205
Less: Withdrawals by owner .................................... 2,000
H. Graham, Capital, May 31 ...................................... $48,205
Graham Company
Balance Sheet
May 31
Assets Liabilities
Cash ............................... $46,350 Accounts payable ........................ $ 85
Office equipment .......... 1,940 Equity
H. Graham, Capital ...................... 48,205
Total assets ................... $48,290 Total liabilities and equity .......... $48,290
Fundamental Accounting Principles, 19th Edition24
Problem 1-7A (Continued)
Part 3
Graham Company
Income Statement
For Month Ended May 31
Revenues
Consulting services revenue ............ $12,600
Expenses
Rent expense....................................... $2,200
Salaries expense ................................. 1,700
Advertising expense ........................... 85
Cleaning expense ............................... 750
Telephone expense............................. 400
Utilities expense.................................. 260
Total expenses .................................... 5,395
Net income .................................................. $ 7,205
Graham Company
Statement of Owner’s Equity
For Month Ended May 31
H. Graham, Capital, May 1 ........................................ $ 0
Plus: Investments by owner ..................................... 43,000
Net income ....................................................... 7,205
50,205
Less: Withdrawals by owner .................................... 2,000
H. Graham, Capital, May 31 ...................................... $48,205
Graham Company
Balance Sheet
May 31
Assets Liabilities
Cash ............................... $46,350 Accounts payable ........................ $ 85
Office equipment .......... 1,940 Equity
H. Graham, Capital ...................... 48,205
Total assets ................... $48,290 Total liabilities and equity .......... $48,290
Loading page 25...
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 25
Problem 1-7A (Concluded)
Part 3—continued
Graham Company
Statement of Cash Flows
For Month Ended May 31
Cash flows from operating activities
Cash received from customers ................................ $12,600
Cash paid for rent ...................................................... (2,200)
Cash paid for cleaning .............................................. (750)
Cash paid for telephone ............................................ (400)
Cash paid for utilities ................................................ (260)
Cash paid to employees ........................................... (1,700)
Net cash provided by operating activities .............. $ 7,290
Cash flows from investing activities
Purchase of equipment ............................................. (1,940)
Net cash used by investing activities ...................... (1,940)
Cash flows from financing activities
Investments by owner ............................................... 43,000
Withdrawals by owner ............................................... (2,000)
Net cash provided by financing activities ............... 41,000
Net increase in cash .................................................. $46,350
Cash balance, May 1 ................................................. 0
Cash balance, May 31 ............................................... $46,350
Solutions Manual, Chapter 1 25
Problem 1-7A (Concluded)
Part 3—continued
Graham Company
Statement of Cash Flows
For Month Ended May 31
Cash flows from operating activities
Cash received from customers ................................ $12,600
Cash paid for rent ...................................................... (2,200)
Cash paid for cleaning .............................................. (750)
Cash paid for telephone ............................................ (400)
Cash paid for utilities ................................................ (260)
Cash paid to employees ........................................... (1,700)
Net cash provided by operating activities .............. $ 7,290
Cash flows from investing activities
Purchase of equipment ............................................. (1,940)
Net cash used by investing activities ...................... (1,940)
Cash flows from financing activities
Investments by owner ............................................... 43,000
Withdrawals by owner ............................................... (2,000)
Net cash provided by financing activities ............... 41,000
Net increase in cash .................................................. $46,350
Cash balance, May 1 ................................................. 0
Cash balance, May 31 ............................................... $46,350
Loading page 26...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition26
Problem 1-8A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Date Cash + Accounts
Receivable
+ Office
Supplies
+ Office
Equipment
+ Electrical
Equipment
= Accounts
Payable
+ H. Anderson,
Capital - H. Anderson,
Withdrawals
+ Revenues - Expenses
Dec. 1 +$68,800 = + $68,800
2 - 1,800 - $1,800
Bal. 67,000 = 68,800 - 1,800
3 - 4,800 + $13,000 + $8,200
Bal. 62,200 + 13,000 = 8,200 + 68,800 - 1,800
5 - 1,000 + $ 1,000
Bal. 61,200 + 1,000 + 13,000 = 8,200 + 68,800 - 1,800
6 + 1,600 + $1,600
Bal. 62,800 + 1,000 + 13,000 = 8,200 + 68,800 + 1,600 - 1,800
8 + $2,680 + 2,680
Bal. 62,800 + 1,000 + 2,680 + 13,000 = 10,880 + 68,800 + 1,600 - 1,800
15 + $6,000 + 6,000
Bal. 62,800 + 6,000 + 1,000 + 2,680 + 13,000 = 10,880 + 68,800 + 7,600 - 1,800
18 + 360 + 360
Bal. 62,800 + 6,000 + 1,360 + 2,680 + 13,000 = 11,240 + 68,800 + 7,600 - 1,800
20 - 2,680 - 2,680
Bal. 60,120 + 6,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 7,600 - 1,800
24 + 1,000 + 1,000
Bal. 60,120 + 7,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 1,800
28 + 6,000 - 6,000
Bal. 66,120 + 1,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 1,800
29 - 1,500 - 1,500
Bal. 64,620 + 1,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 3,300
30 - 570 - 570
Bal. 64,050 + 1,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 3,870
31 - 900 - $900
Bal. $63,150 + $ 1,000 + $1,360 + $2,680 + $13,000 = $8,560 + $68,800 - $900 + $8,600 - $3,870
Fundamental Accounting Principles, 19th Edition26
Problem 1-8A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Date Cash + Accounts
Receivable
+ Office
Supplies
+ Office
Equipment
+ Electrical
Equipment
= Accounts
Payable
+ H. Anderson,
Capital - H. Anderson,
Withdrawals
+ Revenues - Expenses
Dec. 1 +$68,800 = + $68,800
2 - 1,800 - $1,800
Bal. 67,000 = 68,800 - 1,800
3 - 4,800 + $13,000 + $8,200
Bal. 62,200 + 13,000 = 8,200 + 68,800 - 1,800
5 - 1,000 + $ 1,000
Bal. 61,200 + 1,000 + 13,000 = 8,200 + 68,800 - 1,800
6 + 1,600 + $1,600
Bal. 62,800 + 1,000 + 13,000 = 8,200 + 68,800 + 1,600 - 1,800
8 + $2,680 + 2,680
Bal. 62,800 + 1,000 + 2,680 + 13,000 = 10,880 + 68,800 + 1,600 - 1,800
15 + $6,000 + 6,000
Bal. 62,800 + 6,000 + 1,000 + 2,680 + 13,000 = 10,880 + 68,800 + 7,600 - 1,800
18 + 360 + 360
Bal. 62,800 + 6,000 + 1,360 + 2,680 + 13,000 = 11,240 + 68,800 + 7,600 - 1,800
20 - 2,680 - 2,680
Bal. 60,120 + 6,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 7,600 - 1,800
24 + 1,000 + 1,000
Bal. 60,120 + 7,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 1,800
28 + 6,000 - 6,000
Bal. 66,120 + 1,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 1,800
29 - 1,500 - 1,500
Bal. 64,620 + 1,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 3,300
30 - 570 - 570
Bal. 64,050 + 1,000 + 1,360 + 2,680 + 13,000 = 8,560 + 68,800 + 8,600 - 3,870
31 - 900 - $900
Bal. $63,150 + $ 1,000 + $1,360 + $2,680 + $13,000 = $8,560 + $68,800 - $900 + $8,600 - $3,870
Loading page 27...
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 27
Problem 1-8A (Continued)
Part 3
Anderson Electric
Income Statement
For Month Ended December 31
Revenues
Electrical fees earned ...................... $8,600
Expenses
Rent expense .................................... $1,800
Salaries expense .............................. 1,500
Utilities expense .............................. 570
Total expenses ................................. 3,870
Net income .................................................. $4,730
Anderson Electric
Statement of Owner’s Equity
For Month Ended December 31
H. Anderson, Capital, December 1............ $ 0
Plus: Investments by owner .................... 68,800
Net income ...................................... 4,730
73,530
Less: Withdrawals by owner .................... 900
H. Anderson, Capital, December 31.......... $72,630
Anderson Electric
Balance Sheet
December 31
Assets Liabilities
Cash ................................. $63,150 Accounts payable .................... $ 8,560
Accounts receivable ...... 1,000
Office supplies ................ 1,360 Equity
Office equipment ............ 2,680 H. Anderson, Capital ............... 72,630
Electrical equipment ...... 13,000 .
Total assets ..................... $81,190 Total liabilities and equity ...... $81,190
Solutions Manual, Chapter 1 27
Problem 1-8A (Continued)
Part 3
Anderson Electric
Income Statement
For Month Ended December 31
Revenues
Electrical fees earned ...................... $8,600
Expenses
Rent expense .................................... $1,800
Salaries expense .............................. 1,500
Utilities expense .............................. 570
Total expenses ................................. 3,870
Net income .................................................. $4,730
Anderson Electric
Statement of Owner’s Equity
For Month Ended December 31
H. Anderson, Capital, December 1............ $ 0
Plus: Investments by owner .................... 68,800
Net income ...................................... 4,730
73,530
Less: Withdrawals by owner .................... 900
H. Anderson, Capital, December 31.......... $72,630
Anderson Electric
Balance Sheet
December 31
Assets Liabilities
Cash ................................. $63,150 Accounts payable .................... $ 8,560
Accounts receivable ...... 1,000
Office supplies ................ 1,360 Equity
Office equipment ............ 2,680 H. Anderson, Capital ............... 72,630
Electrical equipment ...... 13,000 .
Total assets ..................... $81,190 Total liabilities and equity ...... $81,190
Loading page 28...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition28
Problem 1-8A (Concluded)
Part 3—continued
Anderson Electric
Statement of Cash Flows
For Month Ended December 31
Cash flows from operating activities
Cash received from customers1 ................................. $ 7,600
Cash paid for rent ........................................................ (1,800)
Cash paid for supplies ................................................ (1,000)
Cash paid for utilities .................................................. (570)
Cash paid to employees .............................................. (1,500)
Net cash provided by operating activities ................. $ 2,730
Cash flows from investing activities
Purchase of office equipment ..................................... (2,680)
Purchase of electrical equipment............................... (4,800)
Net cash used by investing activities ........................ (7,480)
Cash flows from financing activities
Investments by owner ................................................. 68,800
Withdrawals by owner ................................................. (900)
Net cash provided by financing activities ................. 67,900
Net increase in cash .................................................... $63,150
Cash balance, Dec. 1 ................................................... 0
Cash balance, Dec. 31 ................................................. $63,150
1$1,600 + $6,000 = $7,600
Part 4
If the December 1 investment had been $49,000 cash instead of $68,800 and
the $19,800 difference was borrowed by the company from a bank, then:
(a) total beginning and ending equity would be $19,800 less,
(b) total liabilities would be $19,800 greater, and
(c) total assets would remain the same.
Fundamental Accounting Principles, 19th Edition28
Problem 1-8A (Concluded)
Part 3—continued
Anderson Electric
Statement of Cash Flows
For Month Ended December 31
Cash flows from operating activities
Cash received from customers1 ................................. $ 7,600
Cash paid for rent ........................................................ (1,800)
Cash paid for supplies ................................................ (1,000)
Cash paid for utilities .................................................. (570)
Cash paid to employees .............................................. (1,500)
Net cash provided by operating activities ................. $ 2,730
Cash flows from investing activities
Purchase of office equipment ..................................... (2,680)
Purchase of electrical equipment............................... (4,800)
Net cash used by investing activities ........................ (7,480)
Cash flows from financing activities
Investments by owner ................................................. 68,800
Withdrawals by owner ................................................. (900)
Net cash provided by financing activities ................. 67,900
Net increase in cash .................................................... $63,150
Cash balance, Dec. 1 ................................................... 0
Cash balance, Dec. 31 ................................................. $63,150
1$1,600 + $6,000 = $7,600
Part 4
If the December 1 investment had been $49,000 cash instead of $68,800 and
the $19,800 difference was borrowed by the company from a bank, then:
(a) total beginning and ending equity would be $19,800 less,
(b) total liabilities would be $19,800 greater, and
(c) total assets would remain the same.
Loading page 29...
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 1 29
Problem 1-9A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Cash + Accounts
Receivable
+ Office
Supplies
+ Office
Equipment
+ Building = Accounts
Payable
+ Notes
Payable + I. Lopez,
Capital - I. Lopez,
Withdrawals
+ Reve-
nues - Expen-
ses
a. +$67,000 + $11,000 + $78,000
b. - 15,000 + $144,000 + $129,000
Bal. 52,000 + 11,000 + 144,000 = + 129,000 + 78,000
c. - 12,000 + 12,000
Bal. 40,000 + 23,000 + 144,000 = + 129,000 + 78,000
d. + $1,000 + 1,700 + $2,700
Bal. 40,000 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000
e. - 460 - $ 460
Bal. 39,540 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 - 460
f. + $2,400 + $2,400
Bal. 39,540 + 2,400 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 + 2,400 - 460
g. + 4,000 + 4,000
Bal. 43,540 + 2,400 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 + 6,400 - 460
h. - 3,025 - $3,025
Bal. 40,515 + 2,400 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 - 3,025 + 6,400 - 460
i. + 1,800 - 1,800
Bal. 42,315 + 600 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 - 3,025 + 6,400 - 460
j. - 500 - 500
Bal. 41,815 + 600 + 1,000 + 24,700 + 144,000 = 2,200 + 129,000 + 78,000 - 3,025 + 6,400 - 460
k. - 1,800 - 1,800
Bal. $40,015 + $ 600 + $1,000 + $24,700 + $144,000 = $2,200 + $129,000 + $78,000 - $3,025 + $6,400 - $2,260
Solutions Manual, Chapter 1 29
Problem 1-9A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Cash + Accounts
Receivable
+ Office
Supplies
+ Office
Equipment
+ Building = Accounts
Payable
+ Notes
Payable + I. Lopez,
Capital - I. Lopez,
Withdrawals
+ Reve-
nues - Expen-
ses
a. +$67,000 + $11,000 + $78,000
b. - 15,000 + $144,000 + $129,000
Bal. 52,000 + 11,000 + 144,000 = + 129,000 + 78,000
c. - 12,000 + 12,000
Bal. 40,000 + 23,000 + 144,000 = + 129,000 + 78,000
d. + $1,000 + 1,700 + $2,700
Bal. 40,000 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000
e. - 460 - $ 460
Bal. 39,540 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 - 460
f. + $2,400 + $2,400
Bal. 39,540 + 2,400 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 + 2,400 - 460
g. + 4,000 + 4,000
Bal. 43,540 + 2,400 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 + 6,400 - 460
h. - 3,025 - $3,025
Bal. 40,515 + 2,400 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 - 3,025 + 6,400 - 460
i. + 1,800 - 1,800
Bal. 42,315 + 600 + 1,000 + 24,700 + 144,000 = 2,700 + 129,000 + 78,000 - 3,025 + 6,400 - 460
j. - 500 - 500
Bal. 41,815 + 600 + 1,000 + 24,700 + 144,000 = 2,200 + 129,000 + 78,000 - 3,025 + 6,400 - 460
k. - 1,800 - 1,800
Bal. $40,015 + $ 600 + $1,000 + $24,700 + $144,000 = $2,200 + $129,000 + $78,000 - $3,025 + $6,400 - $2,260
Loading page 30...
©McGraw-Hill Companies, 2009
Fundamental Accounting Principles, 19th Edition30
Problem 1-9A (Concluded)
Part 3
Wiz Consulting’s net income = $6,400 - $2,260 = $4,140
Problem 1-10A (20 minutes)
1. Return on assets equals net income divided by average total assets.
a. Coca-Cola return: $5,080 / $29,695 = 0.171 or 17.1%.
b. PepsiCo return: $5,642 / $30,829 = 0.183 or 18.3%.
2. Strictly on the amount of sales to consumers, Coke’s sales of $24,088
are less than PepsiCo’s $35,187.
3. Success in returning net income from the average amount invested is
revealed by the return on assets. Part 1 showed that PepsiCo’s 18.3%
return is better than Coca-Cola’s 17.1% return.
4. Current performance figures suggest that PepsiCo yields a higher return
on assets than Coca-Cola. Based on this information alone, we would
be better advised to invest in PepsiCo than Coca-Cola.
Nevertheless, we would look for additional information in financial
statements and other sources for further guidance. For example, if
Coca-Cola could dispose of some assets without curtailing its sales
level, it would look more attractive. We would also look for consumer
trends, market expansion, competition, product development, and
promotion plans.
Fundamental Accounting Principles, 19th Edition30
Problem 1-9A (Concluded)
Part 3
Wiz Consulting’s net income = $6,400 - $2,260 = $4,140
Problem 1-10A (20 minutes)
1. Return on assets equals net income divided by average total assets.
a. Coca-Cola return: $5,080 / $29,695 = 0.171 or 17.1%.
b. PepsiCo return: $5,642 / $30,829 = 0.183 or 18.3%.
2. Strictly on the amount of sales to consumers, Coke’s sales of $24,088
are less than PepsiCo’s $35,187.
3. Success in returning net income from the average amount invested is
revealed by the return on assets. Part 1 showed that PepsiCo’s 18.3%
return is better than Coca-Cola’s 17.1% return.
4. Current performance figures suggest that PepsiCo yields a higher return
on assets than Coca-Cola. Based on this information alone, we would
be better advised to invest in PepsiCo than Coca-Cola.
Nevertheless, we would look for additional information in financial
statements and other sources for further guidance. For example, if
Coca-Cola could dispose of some assets without curtailing its sales
level, it would look more attractive. We would also look for consumer
trends, market expansion, competition, product development, and
promotion plans.
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