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CHAPTER 1 INTRODUCTION TO ACCOUNTING AND BUSINESS CLASS DISCUSSION QUESTIONS 1. The objective of most businesses is to maximize profits. Profit is the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide those goods or services. 2. The stakeholders of a business normally include owners, managers, employees, customers, creditors, and the government. 3. Simply put, the role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business. 4. Three sound principles that form the foundation for ethical behavior are (1) avoid small ethical lapses, (2) focus on your long-term reputation, and (3) be willing to suffer adverse personal consequences for holding to an ethical position. 5. Accountants serving a business firm, governmental agency, not- for-profit organization, etc., as an employee are engaged in private accounting. Accountants who provide accounting services to clients on a fee basis are engaged in public accounting. 6. FASB stands for the Financial Accounting Standards Board. The FASB sets generally accepted accounting principles by first identifying specific issues in financial accounting. As these issues arise, the FASB conducts extensive research to identify the primary concerns involved and possible solutions. Generally, after issuing discussion memoranda and preliminary proposals and evaluating comments from interested parties, the Board issues Statements of Financial Accounting Standards. These standards become part of generally accepted accounting principles. To explain, clarify, or elaborate on existing standards, the Board also issues Interpretations, which have the same authority as the Standards. 7. No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $3,500 is a personal transaction of Lynda Lyons and should not be recorded by Fast Delivery Service. 8. The land should be recorded at its cost of $97,500 to Neece Repair Service. This is consistent with the cost concept. 9. a. No. The offer of $400,000 and the increase in the assessed value should not be recognized in the accounting records. b. Cash would increase by $400,000, land would decrease by $350,000, and owner’s equity would increase by $50,000. 10. The two principal rights to the properties of a business are liabilities (the rights of creditors) and owner's equity (the rights of the owner). 1

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DISCUSSION QUESTIONS

CHAPTER 1 INTRODUCTION TO ACCOUNTINGAND BUSINESS

CLASS discussion questions

1.The objective of most businesses is to maximize profits. Profit is the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide those goods or services.

2.The stakeholders of a business normally include owners, managers, employees, customers, creditors, and the government.

3.Simply put, the role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.

4.Three sound principles that form the foundation for ethical behavior are (1) avoid small ethical lapses, (2) focus on your long-term reputation, and (3) be willing to suffer adverse personal consequences for holding to an ethical position.

5.Accountants serving a business firm, governmental agency, not-for-profit organization, etc., as an employee are engaged in private accounting. Accountants who provide accounting services to clients on a fee basis are engaged in public accounting.

6.FASB stands for the Financial Accounting Standards Board. The FASB sets generally accepted accounting principles by first identifying specific issues in financial accounting. As these issues arise, the FASB conducts extensive research to identify the primary concerns involved and possible solutions. Generally, after issuing discussion memoranda and preliminary proposals and evaluating comments from interested parties, the Board issues Statements of Financial Accounting Standards. These standards become part of generally accepted accounting principles. To explain, clarify, or elaborate on existing standards, the Board also issues Interpretations, which have the same authority as the Standards.

7.No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $3,500 is a personal transaction of Lynda Lyons and should not be recorded by Fast Delivery Service.

8.The land should be recorded at its cost of $97,500 to Neece Repair Service. This is consistent with the cost concept.

9.a.No. The offer of $400,000 and the increase in the assessed value should not be recognized in the accounting records.

b.Cash would increase by $400,000, land would decrease by $350,000, and owners equity would increase by $50,000.

10.The two principal rights to the properties of a business are liabilities (the rights of creditors) and owner's equity (the rights of the owner).

11.The three elements of the accounting equation are assets, liabilities, and owner's equity.12.An account receivable is a claim against a customer for goods or services sold. An account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the records of the seller is an account payable in the records of the purchaser.

13.The business incurred a net loss of $15,000.

14.The business realized net income of $10,000.

15.The two types of transactions that increase the owners equity of a proprietorship are revenue and an investment by the owner.

16.The income statement presents a summary of the revenues and expenses of a business for a specific period of time. The statement of owners equity indicates the changes in owners equity that have occurred over a specific period of time. The balance sheet presents a listing of the assets, liabilities, and owner's equity of a business as of a specific date. The statement of cash flows presents a summary of the cash receipts and cash payments of a business entity for a specific period of time.

17.An income statement, a statement of owners equity, and a statement of cash flows are for a specific period of time. The balance sheet is for a specific date.

18.Net income or net loss

Owners equity at the end of the period

19.The statement of cash flows reports cash flows from operating activities, investing activities, and financing activities.

exercises

Ex. 11

As in many ethics issues, there is no one right answer. The Naples Daily News reported on this issue in these terms: "The company covered up the first report, and the local newspaper uncovered the company's secret. The company was forced to not locate here (Collier County). It became patently clear that doing the least that is legally allowed is not enough."

Ex. 12

1.B

2.F

3.R

4.B

5.B

6.F

7.X

8.R

9.B

10.X

Ex. 13

Coca-Cola owners equity:$21,623 $12,110 = $9,513

PepsiCo owners equity:$17,551 $10,670 = $6,881

Ex. 14

a.$51,500 ($20,000 + $31,500)

b.$52,750 ($62,750 $10,000)

c.$19,000 ($57,000 $38,000)

Ex. 15

a.$183,000 ($325,000 $142,000)

b.$230,000 ($183,000 + $84,000 $37,000)

c.$158,000 ($183,000 $8,000 $17,000)

d.$275,500 ($183,000 + $75,000 + $17,500)

e.Net income: $137,000 ($425,000 $105,000 $183,000)

Ex. 16

a.owner's equity

b.asset

c.owner's equity

d.asset

e.liability

f.asset

Ex. 17

a.Increases assets and increases owners equity.

b.Increases assets and increases owners equity.

c.Increases assets and decreases assets.

d.Decreases assets and decreases owners equity.

e.Increases assets and increases liabilities.

Ex. 18

a.(1)Total assets increased $50,000.

(2)No change in liabilities.

(3)Owners equity increased $50,000.

b.(1)Total assets decreased $28,000.

(2)Total liabilities decreased $28,000.

(3)No change in owners equity.

Ex. 19

1.increase

2.increase

3.decrease

4.decrease

Ex. 110

1.c6.a

2.d7.e

3.c8.a

4.e9.e

5.c10.e

Ex. 111

a.(1)Sale of catering services for cash, $15,000.

(2)Purchase of land for cash, $2,000.

(3)Payment of expenses, $11,250.

(4)Purchase of supplies on account, $500.

(5)Withdrawal of cash by owner, $1,500.

(6)Payment of cash to creditors, $5,300.

(7)Recognition of cost of supplies used, $800.

b.($5,050) ($950 $6,000)

c.$1,450 ($30,700 $29,250)

d.$2,950 ($15,000 $11,250 $800)

e.$1,450 ($2,950 $1,500)

Ex. 112

It would be incorrect to say that the business had incurred a net loss of $7,250. The excess of the withdrawals over the net income for the period is a decrease in the amount of owners equity in the business.

Ex. 113

Company W

Owner's equity at end of year ($600,000 $325,000)

$275,000

Owner's equity at beginning of year

($375,000 $150,000)

225,000

Net income (increase in owner's equity)

$50,000Company X

Increase in owner's equity (as determined for W)

$50,000

Add withdrawals

30,000

Net income

$80,000Company Y

Increase in owner's equity (as determined for W)

$50,000

Deduct additional investment

75,000

Net loss

$(25,000)

Company Z

Increase in owner's equity (as determined for W)

$50,000

Deduct additional investment

75,000

$(25,000)

Add withdrawals

30,000

Net income

$5,000Ex. 114

Balance sheet items: 3, 5, 6, 8, 9, 10

Ex. 115

Income statement items: 1, 2, 4, 7

Ex. 116

DOUMA COMPANY

Statement of Owners Equity

For the Month Ended June 30, 2003

Meg Douma, capital, June 1, 2003

$317,500

Net income for the month

$91,250

Less withdrawals

15,000

Increase in owners equity

76,250

Meg Douma, capital, June 30, 2003

$393,750

Ex. 117

SURGERY SERVICES

Income Statement

For the Month Ended April 30, 2003

Fees earned

$165,800

Operating expenses:

Wages expense

$71,500

Rent expense

25,000

Supplies expense

3,250

Miscellaneous expense

2,250

Total operating expenses

102,000

Net income

$63,800Ex. 118

In each case, solve for a single unknown, using the following equation:

Owners equity (beginning) + Investments Withdrawals + Revenues

Expenses = Owners equity (ending)

I.Owner's equity at end of year ($745,000 $325,000)

$420,000

Owner's equity at beginning of year ($600,000 $360,000)

240,000

Increase in owner's equity

$180,000

Deduct increase due to net income ($197,750 $108,000)

89,750

$90,250

Add withdrawals

40,000

Additional investment in the business

(a)$130,250

II.Owner's equity at end of year ($175,000 $55,000)

$120,000

Owner's equity at beginning of year ($125,000 $65,000)

60,000

Increase in owner's equity

$60,000

Add withdrawals

8,000

$68,000

Deduct additional investment

25,000

Increase due to net income

$43,000

Add expenses

32,000

Revenue

(b)$75,000

III.Owner's equity at end of year ($90,000 $80,000)

$10,000

Owner's equity at beginning of year ($100,000 $76,000)

24,000

Decrease in owner's equity

$(14,000)

Deduct decrease due to net loss ($115,000 $122,500)

(7,500)

$(6,500)

Deduct additional investment

10,000

Withdrawals from the business

(c)$(16,500)

IV.Owner's equity at end of year ($310,000 $170,000)

$140,000

Add decrease due to net loss ($140,000 $160,000)

20,000

$160,000

Add withdrawals

75,000

$235,000

Deduct additional investment

50,000

$185,000

Add liabilities at beginning of year

150,000

Assets at beginning of year

(d)$335,000Ex. 119a.

REVIVAL INTERIORS

Balance Sheet

August 31, 20

AssetsLiabilities

Cash

$15,000Accounts payable

$3,850

Accounts receivable

8,500

Supplies

750

Owners Equity

Laura Fedro, capital

20,400

Total liabilities and

Total assets

$24,250

owners equity

$24,250REVIVAL INTERIORS

Balance Sheet

September 30, 20

AssetsLiabilitiesCash

$25,500Accounts payable

$4,150

Accounts receivable

9,780

Supplies

600

Owners Equity

Laura Fedro, capital

31,730

Total liabilities and

Total assets

$35,880

owners equity

$35,880b.Owner's equity, September 30

$31,730

Owner's equity, August 31

20,400

Net income

$11,330c.Owner's equity, September 30

$31,730

Owner's equity, August 31

20,400

Increase in owner's equity

$11,330

Add withdrawal

7,500

Net income

$18,830Ex. 120

Balance sheet: b, c, e, f, h, i, j, l, m, n, o

Income statement: a, d, g, k

Ex. 121

1.cfinancing activity

2.binvesting activity

3.aoperating activity

4.aoperating activity

Ex. 122

1.All financial statements should contain the name of the business in their heading. The statement of owners equity is incorrectly headed as Lynn Soby rather than Aspen Realty. The heading of the balance sheet needs the name of the business.

2.The income statement and statement of owners equity cover a period of time and should be labeled For the Month Ended March 31, 2003.

3.The year in the heading for the statement of owners equity should be 2003 rather than 2002.

4.The balance sheet should be labeled as of March 31, 2003, rather than For the Month Ended March 31, 2003.

5.In the income statement, the miscellaneous expense amount should be listed as the last operating expense.

6.In the income statement, the total operating expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $3,625.00. This also affects the statement of owners equity and the amount of Lynn Soby, capital, that appears on the balance sheet.

7.In the statement of owners equity, the additional investment should be added first to Lynn Soby, capital, as of March 1, 2003. The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield a net increase in owners equity.

8.Accounts payable should be listed as a liability on the balance sheet.

9.Accounts receivable and supplies should be listed as assets on the balance sheet.

10. The balance sheet assets should equal the sum of the liabilities and owners equity.

Ex. 122Concluded

Corrected financial statements appear as follows:

ASPEN REALTY

Income Statement

For the Month Ended March 31, 2003

Sales commissions

$37,100

Operating expenses:

Office salaries expense

$23,150

Rent expense

7,800

Automobile expense

1,750

Supplies expense

225

Miscellaneous expense

550

Total operating expenses

33,475Net income

$3,625ASPEN REALTY

Statement of Owners Equity

For the Month Ended March 31, 2003

Lynn Soby, capital, March 1, 2003

$7,450

Additional investment during March

$1,500

Net income for March

3,625

$5,125

Less withdrawals during March

1,000Increase in owners equity

4,125Lynn Soby, capital, March 31, 2003

$11,575

ASPEN REALTY

Balance Sheet

March 31, 2003

AssetsLiabilitiesCash

$2,350Accounts payable

$2,300

Accounts receivable

10,200

Supplies

1,325

Owners Equity

Lynn Soby, capital

11,575

Total liabilities and

Total assets

$13,875

owners equity

$13,875 Ex. 123

a.2000: 0.20 ($5,196,000,000 $26,497,000,000)

1999: 0.26 ($3,038,000,000 $11,811,000,000)

b.The margin of protection to the creditors increased in 2000. A comparison with the ratio for similar businesses and with earlier periods for Cisco Systems might be useful in assessing these ratios further.

problems

Prob. 11A

1.

Owners

Assets=Liabilities+Equity

AccountsAccountsLinda Neece,

Cash+Receivable+Supplies=Payable+Capital

a.+10,000

+10,000Investment

b.

+ 1,150

+ 1,150

Bal.

10,000

1,150

1,150

10,000

c. +4,500

+4,500Fees earned

Bal.

14,500

1,150

1,150

14,500

d. 2,500

2,500Rent expense

Bal.

12,000

1,150

1,150

12,000

e. 675

675

Bal.

11,325

1,150

475

12,000

f.

+ 3,250

+3,250Fees earned

Bal.

11,325

3,250

1,150

475

15,250

g. 1,755

980Auto expense

775Misc. expense

Bal.

9,570

3,250

1,150

475

13,495

h. 1,500

1,500Salaries exp.

Bal.

8,070

3,250

1,150

475

11,995

i.

935

935Supplies exp.

Bal.

8,070

3,250

215

475

11,060

j. 1,000

1,000Withdrawal

Bal.

7,070

3,250

215

475

10,060

2.Owner's equity is the right of owners to the assets of the business. These rights are increased by owners investments and revenues and decreased by owner's withdrawals and expenses.

Prob. 12A

1.

FLY AWAY TRAVEL AGENCY

Income Statement

For the Year Ended December 31, 2003

Fees earned

$117,480

Operating expenses:

Wages expense

$35,500

Rent expense

27,000

Utilities expense

10,240

Supplies expense

2,125

Miscellaneous expense

1,750

Total operating expenses

76,615Net income

$40,865

2.

FLY AWAY TRAVEL AGENCY

Statement of Owners Equity

For the Year Ended December 31, 2003

Ryan Stecker, capital, January 1, 2003

$14,500

Net income for the year

$40,865

Less withdrawals

30,000Increase in owners equity

10,865Ryan Stecker, capital, December 31, 2003

$25,365

3.

FLY AWAY TRAVEL AGENCY

Balance Sheet

December 31, 2003

AssetsLiabilitiesCash

$7,200Accounts payable

$3,200

Accounts receivable

19,500

Supplies

1,865

Owners Equity

Ryan Stecker, capital

25,365

Total liabilities and

Total assets

$28,565

owners equity

$28,565Prob. 13A

1.

EAGLE FINANCIAL SERVICES

Income Statement

For the Month Ended January 31, 2003

Fees earned

$13,100

Operating expenses:

Rent expense

$2,500

Salaries expense

2,000

Auto expense

1,250

Supplies expense

1,050

Miscellaneous expense

350

Total operating expenses

7,150

Net income

$5,9502.

EAGLE FINANCIAL SERVICES

Statement of Owners Equity

For the Month Ended January 31, 2003

Loren Thurlow, capital, January 1, 2003

$0

Investment on January 1, 2003

$12,500

Net income for January

5,950

$18,450

Less withdrawals

3,000Increase in owners equity

15,450Loren Thurlow, capital, January 31, 2003

$15,4503.

EAGLE FINANCIAL SERVICES

Balance Sheet

January 31, 2003

AssetsLiabilitiesCash

$11,250Accounts payable

$425

Accounts receivable

4,350

Supplies

275

Owners Equity

Loren Thurlow, capital

15,450

Total liabilities and

Total assets

$15,875

owners equity

$15,875Prob. 14A

1.

Owners

Assets=Liabilities+Equity

AccountsDori French,

Cash+Supplies=Payable+Capital

a.+5,000

+5,000Investment

b.

+1,250+1,250

Bal.

5,000

1,250

1,250

5,000

c.850

850

Bal.

4,150

1,250

400

5,000

d.+16,200

+16,200Sales commissions

Bal.

20,350

1,250

400

21,200

e.2,000

2,000Rent expense

Bal.

18,350

1,250

400

19,200

f.4,500

4,500Withdrawal

Bal.

13,850

1,250

400

14,700

g.2,250

1,900Auto expense

350Misc. expense

Bal.

11,600

1,250

400

12,450

h.4,250

4,250Salaries expense

Bal.

7,350

1,250

400

8,200

i.

650

650Supplies expense

Bal.

7,350

600

400

7,5502.DEAL REALTY

Income Statement

For the Month Ended March 31, 20

Sales commissions

$16,200

Operating expenses:

Office salaries expense

$4,250

Rent expense

2,000

Automobile expense

1,900

Supplies expense

650

Miscellaneous expense

350

Total operating expenses

9,150Net income

$7,050

Prob. 14AConcluded

DEAL REALTY

Statement of Owners Equity

For the Month Ended March 31, 20

Dori French, capital, March 1, 20

$0

Investment on March 1, 20

$5,000

Net income for March

7,050

$12,050

Less withdrawals

4,500

Increase in owners equity

7,550Dori French, capital, March 31, 20

$7,550DEAL REALTY

Balance Sheet

March 31, 20

AssetsLiabilities

Cash

$7,350Accounts payable

$400

Supplies

600

Owners Equity

Dori French, capital

7,550

Total liabilities and

Total assets

$7,950

owners equity

$7,950Prob. 15A

1.

Assets=Liabilities+Owner's Equity

AccountsAccounts

Cash+Receivable+Supplies+Land=Payable+Bea Cheever, Capital

6,250+18,100+2,200+40,000=7,800+Bea Cheever, Capital

66,550

=7,800+Bea Cheever, Capital

58,750

=

Bea Cheever, Capital

Prob. 15AContinued

2.

Owners

Assets=Liabilities+Equity

AccountsAccountsBea Cheever,

Cash+Receivable+Supplies+Land=Payable+Capital

Bal.

6,250

18,100

2,200

40,000

7,800

58,750

a.+15,750

+15,750Dry cleaning sales

Bal.

22,000

18,100

2,200

40,000

7,800

74,500

b.2,500

2,500Rent expense

Bal.

19,500

18,100

2,200

40,000

7,800

72,000

c.

+1,650

+1,650

Bal.

19,500

18,100

3,850

40,000

9,450

72,000

d.5,100

5,100

Bal.

14,400

18,100

3,850

40,000

4,350

72,000

e.

+8,920

+8,920Dry cleaning sales

Bal.

14,400

27,020

3,850

40,000

4,350

80,920

f.

+6,0006,000Dry cleaning expense

Bal.

14,400

27,020

3,850

40,000

10,350

74,920

g.5,570

2,400Wages expense

1,580Truck expense

960Utilities expense

630Miscellaneous expense

Bal.

8,830

27,020

3,850

40,000

10,350

69,350

h.+12,10012,100

Bal.

20,930

14,920

3,850

40,000

10,350

69,350

i.

1,350

1,350Supplies expense

Bal.

20,930

14,920

2,500

40,000

10,350

68,000

j.7,500

7,500Withdrawals

Bal.

13,430

14,920

2,500

40,000

10,350

60,500Prob. 15AConcluded

3. a.

PERSNICKETY DRY CLEANERS

Income Statement

For the Month Ended July 31, 20

Dry cleaning sales

$24,670

Operating expenses:

Dry cleaning expense

$6,000

Rent expense

2,500

Wages expense

2,400

Truck expense

1,580

Supplies expense

1,350

Utilities expense

960

Miscellaneous expense

630

Total operating expenses

15,420Net income

$9,250b.

PERSNICKETY DRY CLEANERS

Statement of Owners Equity

For the Month Ended July 31, 20

Bea Cheever, capital, July 1, 20

$58,750

Net income for July

$9,250

Less withdrawals

7,500Increase in owners equity

1,750

Bea Cheever, capital, July 31, 20

$60,500c.

PERSNICKETY DRY CLEANERS

Balance Sheet

July 31, 20

AssetsLiabilities

Cash

$13,430Accounts payable

$10,350

Accounts receivable

14,920

Supplies

2,500

Owners EquityLand

40,000Bea Cheever, capital

60,500

Total liabilities and

Total assets

$70,850

owners equity

$70,850Prob. 16A

a.Fees earned, $15,000

b.Supplies expense, $1,500

c.Ray Conway, capital, April 1, 2003, $0

d.Net income for April, $6,200

e.$26,200

f.Increase in owners equity, $23,200

g.Ray Conway, capital, April 30, 2003, $23,200

h.Total assets, $24,000

i.Ray Conway, capital, $23,200

j.Total liabilities and owners equity, $24,000

k.Cash received from customers, $15,000

i.Net cash flow from operating activities, $5,900

m.Cash payments for acquisition of land, $(20,000)

n.Cash received as owners investment, $20,000

o.Cash withdrawal by owner, $(3,000)

p.Net cash flow from financing activities, $17,000

q.Net cash flow and April 30, 2003 cash balance, $2,900

Prob. 11B

1.

Owners

Assets=Liabilities+Equity

AccountsAccountsFran Cowles,

Cash+Receivable+Supplies=Payable+Capital

a.+15,000

+15,000Investment

b.

+750 +750

Bal.

15,000

750

750

15,000

c. 625

625

Bal.

14,375

750

125

15,000

d. +5,250

+5,250Fees earned

Bal.

19,625

750

125

20,250

e. 1,000

1,000Rent expense

Bal.

18,625

750

125

19,250

f. 1,230

880Auto expense

350Misc. expense

Bal.

17,395

750

125

18,020

g. 1,200

1,200Salaries exp.

Bal.

16,195

750

125

16,820

h.

575

575Supplies exp.

Bal.

16,195

175

125

16,245

i.

+7,350

+7,350Fees earned

Bal.

16,195

7,350

175

125

23,595

j. 1,500

1,500Withdrawal

Bal.

14,695

7,350

175

125

22,095

2.Owner's equity is the right of owners to the assets of the business. These rights are increased by owners investments and revenues and decreased by owner's withdrawals and expenses.

Prob. 12B

1.

HIAWATHA TRAVEL SERVICE

Income Statement

For the Year Ended April 30, 2003

Fees earned

$131,600

Operating expenses:

Wages expense

$65,850

Rent expense

18,900

Utilities expense

11,250

Supplies expense

3,550

Taxes expense

2,800

Miscellaneous expense

1,475

Total operating expenses

103,825Net income

$27,775

2.

HIAWATHA TRAVEL SERVICE

Statement of Owners Equity

For the Year Ended April 30, 2003

Rob Graybill, capital, May 1, 2002

$25,000

Net income for the year

$27,775

Less withdrawals

15,000Increase in owners equity

12,775Rob Graybill, capital, April 30, 2003

$37,7753.

HIAWATHA TRAVEL SERVICE

Balance Sheet

April 30, 2003

AssetsLiabilities

Cash

$26,525Accounts payable

$6,100

Accounts receivable

15,675

Supplies

1,675

Owner's Equity

Rob Graybill, capital

37,775

Total liabilities and

Total assets

$43,875

owners equity

$43,875Prob. 13B

1.

INFINET COMPUTER SERVICES

Income Statement

For the Month Ended October 31, 2003

Fees earned

$8,250

Operating expenses:

Salaries expense

$2,000

Rent expense

1,800

Auto expense

780

Supplies expense

325

Miscellaneous expense

375

Total operating expenses

5,280Net income

$2,9702.

INFINET COMPUTER SERVICES

Statement of Owners Equity

For the Month Ended October 31, 2003

Chester Hoche, capital, October 1, 2003

$0

Investment on October 1, 2003

$5,000

Net income for October

2,970

$7,970

Less withdrawals

1,000Increase in owners equity

6,970Chester Hoche, capital, October 31, 2003

$6,9703.

INFINET COMPUTER SERVICES

Balance Sheet

October 31, 2003

AssetsLiabilitiesCash

$3,295Accounts payable

$470

Accounts receivable

3,750

Supplies

395

Owners Equity

Chester Hoche, capital

6,970

Total liabilities and

Total assets

$7,440

owners equity

$7,440Prob. 14B

1.

Owners

Assets=Liabilities+Equity

AccountsAngie Tate,

Cash+Supplies=Payable+Capital

a. +10,000

+10,000Investment

b. 3,600

3,600Rent expense

Bal.

6,400

6,400

c. 1,450

900Auto expense

550Misc. expense

Bal.

4,950

4,950

d.

+1,325+1,325

Bal.

4,950

1,325

1,325

4,950

e. +18,750

+18,750Sales commissions

Bal.

23,700

1,325

1,325

23,700

f. 690

690

Bal.

23,010

1,325

635

23,700

g. 4,000

4,000Salaries expense

Bal.

19,010

1,325

635

19,700

h. 3,000

3,000Withdrawal

Bal.

16,010

1,325

635

16,700

i.

725

725Supplies expense

Bal.

16,010

600

635

15,9752.

VOGUE REALTY

Income Statement

For the Month Ended August 31, 2003

Sales commissions

$18,750

Operating expenses:

Office salaries expense

$4,000

Rent expense

3,600

Automobile expense

900

Supplies expense

725

Miscellaneous expense

550

Total operating expenses

9,775Net income

$8,975

Prob. 14BConcluded

VOGUE REALTY

Statement of Owners Equity

For the Month Ended August 31, 2003

Angie Tate, capital, August 1, 2003

$0

Investment on August 1, 2003

$10,000

Net income for August

8,975

$18,975

Less withdrawals

3,000Increase in owners equity

15,975

Angie Tate, capital, August 31, 2003

$15,975

VOGUE REALTY

Balance Sheet

August 31, 2003

AssetsLiabilities

Cash

$16,010Accounts payable

$635

Supplies

600

Owners Equity

Angie Tate, capital

15,975

Total liabilities and

Total assets

$16,610

owners equity

$16,610Prob. 15B

1.

Assets

=Liabilities+Owner's Equity

AccountsAccounts

Cash+Receivable+Supplies+Land=Payable+Merritt Paisley, Capital

7,400+13,750+1,560+25,000=3,880+Merritt Paisley, Capital

47,710

=3,880+Merritt Paisley, Capital

43,830

=

Merritt Paisley, Capital

Prob. 15BContinued

2.

Owners

Assets=Liabilities+Equity

Merritt

AccountsAccountsPaisley,

Cash+Receivable+Supplies+Land=Payable+Capital

Bal.

7,400

13,750

1,560

25,000

3,880

43,830

a.3,000

3,000Rent expense

Bal.

4,400

13,750

1,560

25,000

3,880

40,830

b.

+6,150

+6,150Dry cleaning sales

Bal.

4,400

19,900

1,560

25,000

3,880

46,980

c.1,680

1,680

Bal.

2,720

19,900

1,560

25,000

2,200

46,980

d.

+840

+840

Bal.

2,720

19,900

2,400

25,000

3,040

46,980

e.+14,600

+14,600Dry cleaning sales

Bal.

17,320

19,900

2,400

25,000

3,040

61,580

f.+11,75011,750

Bal.

29,070

8,150

2,400

25,000

3,040

61,580

g.

+5,4005,400Dry cleaning expense

Bal.

29,070

8,150

2,400

25,000

8,440

56,180

h.3,225

1,800Wages expense

725Truck expense

510Utilities expense

190Miscellaneous expense

Bal.

25,845

8,150

2,400

25,000

8,440

52,955

i.

1,050

1,050Supplies expense

Bal.

25,845

8,150

1,350

25,000

8,440

51,905

j.5,000

5,000Withdrawal

Bal.

20,845

8,150

1,350

25,000

8,440

46,905Prob. 15BConcluded

3. a.

SWAN DRY CLEANERS

Income Statement

For the Month Ended November 30, 20

Dry cleaning sales

$20,750

Operating expenses:

Dry cleaning expense

$5,400

Rent expense

3,000

Wages expense

1,800

Supplies expense

1,050

Truck expense

725

Utilities expense

510

Miscellaneous expense

190

Total operating expenses

12,675Net income

$8,075

b.

SWAN DRY CLEANERS

Statement of Owners Equity

For the Month Ended November 30, 20

Merritt Paisley, capital, November 1, 20

$43,830

Net income for November

$8,075

Less withdrawals

5,000Increase in owners equity

3,075

Merritt Paisley, capital, November 30, 20

$46,905c.

SWAN DRY CLEANERS

Balance Sheet

November 30, 20

AssetsLiabilities

Cash

$20,845Accounts payable

$8,440

Accounts receivable

8,150

Supplies

1,350

Owners EquityLand

25,000Merritt Paisley, capital

46,905

Total liabilities and

Total assets

$55,345

owners equity

$55,345

Prob. 16B

a.Wages expense, $5,375

b.Net income, $11,550

c.R. J. Cain, capital, June 1, 2003, $0

d.Investment on June 1, 2003, $45,000

e.Net income for June, $11,550

f.$56,550

g.Withdrawals, $6,000

h.Increase in owners equity, $50,550

i.R. J. Cain, capital, June 30, 2003, $50,550

j.Land, $36,000

k.Total assets, $51,750

l.R. J. Cain, capital, $50,550

m.Total liabilities and owners equity, $51,750

n.Cash received from customers, $23,500

o.Net cash flow from operating activities, $11,750

p.Net cash flow from financing activities, $39,000

q.Net cash flow and June 30, 2003 cash balance, $14,750

continuing problem

1.

Owners

Assets=Liabilities+Equity

Lynn

AccountsAccountsKwan,

Cash+Receivable+Supplies=Payable+Capital

Nov.1+3,500

+3,500Investment

2+1,000

+1,000Fees earned

Bal.

4,500

4,500

Nov.2500

500Office rent exp.

Bal.

4,000

4,000

Nov.4

+175+175

Bal.

4,000

175

175

4,000

Nov.6300

300Advertising exp.

Bal.

3,700

175

175

3,700

Nov.8325

325Equip. rent exp.

Bal.

3,375

175

175

3,375

Nov. 12100

100Music expense

Bal.

3,275

175

175

3,275

Nov. 1350

50

Bal.

3,225

175

125

3,275

Nov. 16+75

+75Fees earned

Bal.

3,300

175

125

3,350

Nov. 22

+600

+600Fees earned

Bal.

3,300

600

175

125

3,950

Nov. 25+250

+250Fees earned

Bal.

3,550

600

175

125

4,200

Nov. 29120

120Music expense

Bal.

3,430

600

175

125

4,080

Nov. 30+450

+450Fees earned

Bal.

3,880

600

175

125

4,530

Nov. 30200

200Wages expense

Bal.

3,680

600

175

125

4,330

Nov. 30150

150Utilities exp.

Bal.

3,530

600

175

125

4,180

Nov. 30

90

90Supplies exp.

Bal.

3,530

600

85

125

4,090

Nov. 3075

75Misc. expense

Bal.

3,455

600

85

125

4,015

Nov. 30250

250Music expense

Bal.

3,205

600

85

125

3,765

Nov. 30125

125Withdrawal

Bal.

3,080

600

85

125

3,640Continuing ProblemConcluded

2.

DANCIN MUSIC

Income Statement

For the Month Ended November 30, 2002

Fees earned

$2,375

Operating expenses:

Office rent expense

$500

Music expense

470

Equipment rent expense

325

Advertising expense

300

Wages expense

200

Utilities expense

150

Supplies expense

90

Miscellaneous expense

75

Total operating expenses

2,110

Net income

$2653.

DANCIN MUSIC

Statement of Owners Equity

For the Month Ended November 30, 2002

Lynn Kwan, capital, November 1, 2002

$0

Investment on November 1, 2002

$3,500

Net income for November

265

$3,765

Less withdrawals

125Increase in owners equity

3,640Lynn Kwan, capital, November 30, 2002

$3,6404.

DANCIN MUSIC

Balance Sheet

November 30, 2002

AssetsLiabilitiesCash

$3,080Accounts payable

$125

Accounts receivable

600

Supplies

85

Owners Equity

Lynn Kwan, capital

3,640

Total liabilities and

Total assets

$3,765

owners equity

$3,765 SPECIAL ACTIVITIES

Activity 11

1.Acceptable professional conduct requires that Joel Phinney supply Bridger National Bank with all the relevant financial statements necessary for the bank to make an informed decision. Therefore, Joel should provide the complete set of financial statements. These can be supplemented with a discussion of the net loss in the past year or other data explaining why granting the loan is a good investment by the bank.

2.a.Owners are generally willing to provide bankers with information about the operating and financial condition of the business, such as the following:

Operating Information:

description of business operations

results of past operations

preliminary results of current operations

plans for future operations

Financial Condition:

list of assets and liabilities (balance sheet)

estimated current values of assets

owners personal investment in the business

owners commitment to invest additional funds in the business

Owners are normally reluctant to provide the following types of information to bankers:

Proprietary Operating Information. Such information, which might hurt the business if it becomes known by competitors, might include special processes used by the business or future plans to expand operations into areas that are not currently served by a competitor.

Personal Financial Information. Owners may have little choice here because banks often require owners of small businesses to pledge their personal assets as security for a business loan. Personal financial information requested by bankers often includes the owner's net worth, salary, and other income. In addition, bankers usually request information about factors that might affect the personal financial condition of the owner. For example, a pending divorce by the owner might significantly affect the owner's personal wealth.

Activity 11Concluded

b.Bankers typically want as much information as possible about the ability of the business and the owner to repay the loan with interest. Examples of such information are described above.

c.Both bankers and business owners share the common interest of the business doing well and being successful. If the business is successful, the bankers will receive their loan payments on time with interest, and the owners will increase their personal wealth.

Activity 12

The difference in the two bank balances, $150,000 ($180,000 $30,000), may not be pure profit from an accounting perspective. To determine the accounting profit for the seven-month period, the revenues for the period would need to be matched with the related expenses. The revenues minus the expenses would indicate whether the business generated net income (profit) or a net loss for the period. Using only the difference between the two bank account balances ignores such factors as amounts due from customers (receivables), liabilities (accounts payable) that need to be paid for wages or other operating expenses, additional investments that Dr. North may have made in the business during the period, or withdrawals during the period that Dr. North might have taken for personal reasons unrelated to the business.

Some businesses that have few, if any, receivables or payables may use a cash basis of accounting. The cash basis of accounting ignores receivables and payables because they are assumed to be insignificant in amount. However, even with the cash basis of accounting, additional investments during the period and any withdrawals during the period have to be considered in determining the net income (profit) or net loss for the period.

Activity 13

1.

Owners

Assets=Liabilities+Equity

Yvonne

AccountsTobin,

Cash+Supplies=Payable+Capital

a.+500

+500Investment

b.160+160

Bal.

340

160

500

c.80

80Rent expense

Bal.

260

160

420

d.70

+30100Rent expense

Bal.

190

160

30

320

e.+800

+800Service revenue

Bal.

990

160

30

1,120

f.+150

+150Service revenue

Bal.

1,140

160

30

1,270

g.300

300Salary expense

Bal.

840

160

30

970

h.75

75Misc. expense

Bal.

765

160

30

895

i.+300

+300Service revenue

Bal.

1,065

160

30

1,195

j.

85

85Supplies expense

Bal.

1,065

75

30

1,110

k.400

400Withdrawal

Bal.

665

75

30

710

2.

FORTYLOVE

Income Statement

For the Month Ended September 30, 20

Service revenue

$1,250

Operating expenses:

Salary expense

$300

Rent expense

180

Supplies expense

85

Miscellaneous expense

75

Total operating expenses

640

Net income

$610Activity 13Continued

3.

FORTYLOVE

Statement of Owners Equity

For the Month Ended September 30, 20

Yvonne Tobin, capital, September 1, 20

$0

Investment on September 1, 20

$500

Net income for September

610

$1,110

Less withdrawals

400Increase in owners equity

710

Yvonne Tobin, capital, September 30, 20

$7104.

FORTYLOVE

Balance Sheet

September 30, 20

AssetsLiabilitiesCash

$665Accounts payable

$30

Supplies

75

Owners Equity

Yvonne Tobin, capital

710

Total liabilities and

Total assets

$740

owners equity

$7405.a.Forty-Love would provide Yvonne with $50 more income per month than working as a waitress. This amount is computed as follows:

Net income of Forty-Love, per month

$610

Earnings as waitress, per month:

20 hours per week $7 per hour 4 weeks

560

Difference

$50Activity 13Concluded

b.Other factors that Yvonne should consider before discussing a long-term arrangement with the Racquet Club include the following:

Yvonne should consider whether the results of operations for September are indicative of what to expect each month. For example, Yvonne should consider whether club members will continue to request lessons or use the ball machine during the winter months when interest in tennis may slacken. Yvonne should evaluate whether the additional income of $50 per month from FortyLove is worth the risk being taken and the effort being expended.

Yvonne should also consider how much her investment in FortyLove could have earned if invested elsewhere. For example, if the initial investment of $500 had been deposited in a money market or savings account at 3% interest, it would have earned $1.25 interest in September, or $15 for the year.

Note to Instructors: Numerous other considerations could be mentioned by students, such as the ability of Yvonne to withdraw cash from FortyLove for personal use. Unlike a money market account or savings account, some of her investment in FortyLove will be in the form of supplies (tennis balls, etc.) which may not be readily convertible to cash. The objective of this case is not to mention all possible considerations, but rather to encourage students to begin thinking about the use of accounting information in making business decisions.

Activity 14

Note to Instructors: The purpose of this activity is to familiarize students with the certification requirements and their on-line availability.

Activity 15

1998

1997

1996

Net cash flows from operating activitiespositivepositivenegative

Net cash flows from investing activitiesnegativenegativenegative

Net cash flows from financing activitiespositivepositivepositive

Start-up companies normally experience negative cash flows from operating and investing activities. Also, start-up companies normally have positive cash flows from financing activitiesactivities from raising capital.

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