CH01SM

Chapter 1Role of Accounting in Starting a Business

ANSWERS TO QUESTIONS

1. A sole proprietorship is a business owned by one individual. It is relatively inexpensive to form a sole proprietorship, but the owner is personally liable for all debts of the business.

A partnership is legally similar to a sole proprietorship, but has two or more owners of the business.

Unlike proprietorships and partnerships, a corporation is a separate entity both legally and from an accounting perspective. Although it is much more expensive to form a corporation than a partnership or sole proprietorship, two major advantages of a corporation are that (1) owners cannot be held responsible for debts that are greater than their investment in the company and (2) shareholders can sell their shares at any time if they wish to leave the business.

2. Accounting is an information system that collects and processes (analyzes, measures, and records) information about an organization and communicates that information to decision makers both inside and outside the organization.

3. Financial accounting involves preparation of the four basic financial statements and related disclosures for external decision makers. Managerial accounting involves the preparation of detailed plans and continually updated performance reports for internal decision makers.

Accountants employed by a single business or nonprofit organization are in private accounting. Accountants who charge fees for services to a variety of businesses and nonprofit organizations are in public accounting.

4. Financial reports are used by both internal and external groups and individuals. The internal groups are comprised of the various managers of the entity. The external groups include the owners, investors, creditors, governmental agencies, other interested parties, and the public at large.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010 Principles of Accounting 1-1

5. Assets = Liabilities + Owner’s Equity

Assets are the measurable economic resources owned by the business that are likely to provide future benefits to the firm. Liabilities are the measurable and probable obligations that require the business to pay goods or services to others in the future. Owner’s Equity is the difference between the assets the business owns and the liabilities that the business owes.

6. Revenues – Expenses = Net Income (or net loss)

Revenues are the amounts earned when goods or services are delivered to customers. Expenses are the dollar amount of resources used by an entity to generate revenues during the period. Net income and net loss are defined in the next question.

7. Net income is the positive difference between revenues earned during a period and the expenses that were incurred to generate the revenues during the period. Net loss is the result when expenses exceed revenues during the period.

8. Beginning Owner’s Equity + Additional Investments – Withdrawals + Net Income (or – net loss) = Ending Owner’s Equity

Beginning and Ending Owner’s Equity is the difference between the assets the business owns and the liabilities the business owes at the beginning and ending of the accounting period, respectively. Additional investments is the amount of additional money that the owner invested in the business during the period, while withdrawals represent money that the owner withdrew from the business. Net income and net loss were defined in the previous question.

9. +/- Cash from Operating Activities +/- Cash from Investing Activities +/- Cash from Financing Activities Change in cash during the period + Cash at beginning of period Cash at end of period

Cash from operating activities is the cash received and used in running the business to earn profit. Cash from investing activities is the cash received and used in buying and selling productive resources with long lives. Cash from financing activities is cash received and used in financing the business itself, such as through bank loans or additional investments/withdrawals by owners.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010 1-2 Solutions Manual

10. (a) The purpose of the balance sheet is to report the financial position of an entity at a point in time – information about the assets, obligations, and owners’ equity of the entity as of a specific date.

(b) The purpose of the income statement is to present information about the revenues, expenses, and net income (or loss) of the entity for a specified period of time.

(c) The statement of owner’s equity reports the changes in owner’s equity during the period from any additional amounts invested, earnings, and any amounts withdrawn.

(d) The purpose of the statement of cash flows is to present information about the flow of cash into the entity (sources), the flow of cash out of the entity (uses), and the net increase or decrease in cash during the period.

11. The heading of each of the four required financial statements should include the following:(a) Name of the entity(b) Name of the statement(c) Date of the statement, or the period of time(d) Unit of measure

12. The purpose of the notes to the financial statements is to provide information to help those who study the statements to understand how the amounts were measured and what additional relevant information may affect their decisions.

13. The Securities and Exchange Commission (SEC) is the U.S. government agency that supervises the work of the Financial Accounting Standards Board (FASB) and Public Company Accounting Oversight Board (PCAOB). The Financial Accounting Standards Board (FASB) is the private sector body given the primary responsibility for setting detailed rules of accounting which become generally accepted accounting principles.

14. Ethical dilemmas in accounting arise when managers and owners decide between reporting fraudulently or accurately in the face of personal greed and the desire to appear successful. Ethical dilemmas harm many: employees, the business’ reputation, the corporation’s stock price, lenders, and the public in general.


Authors' Recommended Solution Time(Time in minutes)

Mini-exercises Exercises ProblemsSkill

Development Cases

No. Time No. Time No. Time No. Time1 3 1 12 PA1-1 45 1 202 3 2 12 PA1-2 45 2 203 5 3 12 PA1-3 45 3 *4 3 4 20 PA1-4 45 4 305 3 5 25 PA1-5 45 5 206 3 6 20 PA1-6 45 6 607 5 7 15 PB1-1 458 5 8 25 PB1-2 459 5 9 25 PB1-3 45

10 3 10 30 PB1-4 4511 6 11 15 PB1-5 4512 3 12 20 PB1-6 4513 10 13 12

14 3015 3016 1517 20

* Due to the nature of this project, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sharpen research skills, we devote class time discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries.


MINI-EXERCISES

M1–1

Firm type

B (1) Manufacturing business

C (2) Merchandising business

A (3) Service business

M1–2

B (1) Sole proprietorship

A (2) Partnership

C (3) Corporation

M1–3

1.) The primary internal users are a company’s managers and owner/managers (sole proprietors and partners) who make business decisions affecting the operating, investing, and financing activities of the organization.

2.) The primary external users are bankers, suppliers, governments, and owners (stockholders in corporations) who are not directly involved in the business but make decisions such as whether to lend the firm money, whether to extend credit to the firm, how much to collect in taxes from the firm, and whether to invest additional money in the firm as well as evaluate how current investments are doing.


M1–4

L (1) Accounts Payable

A (2) Accounts Receivable

A (3) Cash

E (4) Cost of Goods Sold

A (5) Buildings

E (6) Interest Expense

A (7) Inventories

E (8) Selling and Administrative Expenses

R (9) Sales Revenue

L (10) Notes Payable

M1–5

A (1) Inventories

L (2) Accounts payable

R (3) Sales revenue

A (4) Property and equipment

L (5) Notes payable

OE (6) Owner’s capital

A (7) Accounts receivable

A (8) Cash

E (9) Promotion expense

E (10) Cost of goods sold


M1–6

Element Financial Statement

B (1) Expenses A. Balance sheet

D (2) Cash flows from investing activities B. Income statement

A (3) Assets C. Statement of owner’s equity

C* (4) Withdrawals D. Statement of cash flows

B (5) Revenues

D (6) Cash flows from operating activities

A (7) Liabilities

D (8) Cash flows from financing activities

*Withdrawals paid in cash are also subtracted in the Financing section of the Statement of Cash Flows

M1–7

The Tea RoomIncome Statement

For the year ended December 31, 2010

M1–8


The Tea RoomStatement of Owner’s Equity

For the year ended December 31, 2010

Gerry Stayman, Capital, January 1, 2010 $ 0 Add: Additional investments 100,000 Net income 70,000Less: Gerry Stayman, Drawing (20,000)Gerry Stayman, Capital, December 31, 2010 $ 150,000

M1–9The Tea RoomBalance SheetDecember 31, 2010

Assets $180,000 Total assets $180,000

Liabilities $ 30,000Owner’s Equity 150,000 Total liabilities and owner’s equity $180,000

M1–10

Assets = Liabilities + Owner’s EquityExample: Borrowed $30,000 from a bank. Cash +30,000

Notes Payable +30,000

a. Received $10,000 contribution from owner, Alecia Simpson.

Cash +10,000 A. Simpson, Capital +10,000

b. Purchased a $4,000 computer for use in the business on account.

Equipment +4,000 Accounts Payable +4,000

c. Provided $22,000 of service to customers for cash.

Cash +22,000 Service Revenue +22,000

d. Paid employees $15,000 cash.

Cash -15,000 Salaries Expense -15,000

e. Withdrew $1,200 cash from the profits of the business.

Cash -1,200 A. Simpson, Drawing -1,200


M1–11

Abbreviation Full Designation(1)

(2)

(3)

(4)

CPA

GAAP

FASB

SEC

Certified Public Accountant.

Generally Accepted Accounting Principles.

Financial Accounting Standards Board.

Securities and Exchange Commission.

M1–12

1.) This is an example of an ethical dilemma. The government will be harmed because an insufficient amount of tax revenue will be collected from the client, which will in turn harm the public as well.

2.) This is an example of an ethical dilemma. Both of you will be harmed if you are caught, but you will be harmed regardless of whether you are caught because without doing the homework for yourself you lose an opportunity to learn the material.

3.) This is an example of an ethical dilemma. The owner(s) of the store will be harmed because of lost revenue, and both you and your manager will likely lose your jobs if you are caught.

M1–13

Private 1. Preparing financial statements for external users.

Public 2. Consulting

Private 3. Cost accounting.

Public 4. Auditing by CPA.

Private 5. Internal auditing.

Both 6. Reviewing financial information for compliance with generally accepted accounting principles.


EXERCISES

E1–1

1. Partnership (P)

2. Sole proprietorship (S)

3. Corporation (C)

4. Sole proprietorship (S)

E1–2

CaseTotal

Revenues - Total Expenses =

Net Income or

(Loss)Total

Assets = Total Liabilities + Owner’s

Equity

A $100,000 - $82,000 = $18,000 $150,000 = $70,000 + $80,000

B 92,000 - 80,000 = 12,000 112,000 = 52,000 + 60,000

C 80,000 - 86,000 = (6,000) 104,000 = 26,000 + 78,000

D 50,000 - 37,000 = 13,000 99,000 = 22,000 + 77,000

E 75,000 - 81,000 = (6,000) 101,000 = 73,000 + 28,000

E1–3

SOE, B/S1. 1. Total owners’ equity

I/S 2. Sales Revenue

B/S 3. 3. Total assets

SCF 4. 4. Cash flows from operating activities

B/S 5. 5. Total liabilities

I/S, SOE6. 6. Net income

SCF 7. 7. Cash flows from financing activities


E1–4

A (1) Inventories L (6) Notes Payable

L (2) Accounts Payable OE (7) Owners’ Capital

E (3) Income Tax Expense E (8) Cost of Goods Sold

A (4) Equipment E (9) Selling and Administrative Expense

A (5) Accounts Receivable R (10) Sales Revenue

E1–5

L (1) Accounts Payable A (7) Cash

A (2) Accounts Receivable A (8) Machinery

L (3) Wages Payable E (9) Promotion and Advertising Expenses

OE (4) Owners’ Capital R (10) Sales Revenue

E (5) Income Tax Expense L (11) Notes Payable to Banks

A (6) Inventory E (12) Selling and Administrative Expenses


E1–6

Req. 1Clay Company

Income StatementFor the Month Ended January 31, 2010

Revenue: Service Revenue $130,000 Expenses: Wages Expense 15,000 Other Expenses 80,000 Net income $ 35,000

Clay CompanyStatement of Owner's Equity

For the Month Ended January 31, 2010

J. Clay, Capital, January 1, 2010 $ 0 Add: Additional investments by owner 26,000 Net income 35,000 Less: J. Clay, Drawing (0)J. Clay, Capital, January 31, 2010 $ 61,000

Clay CompanyBalance Sheet

At January 31, 2010

AssetsCash $ 30,000 Accounts Receivable 15,000 Supplies 42,000

Total Assets $ 87,000

LiabilitiesAccounts Payable $ 26,000 Total liabilities 26,000

Owner's EquityJ. Clay, Capital 61,000

Total liabilities and owner's equity $ 87,000

Req. 2

Clay Company should be able to pay its liabilities because its cash balance is $30,000 and its liabilities are only $26,000.


E1–7

a)Lucas Rock Company

Income StatementFor the Year Ended December 31, 2011

(in thousands)

Revenue $ 10,500 Expenses 9,200

Net income $ 1,300

b)

Lucas Rock CompanyStatement of Owner's Equity

For the Year Ended December 31, 2011(in thousands)

L. Rock, Capital, January 1, 2011 $ 3,500 Add: Additional investments by owner 150 Net income 1,300 Less: L. Rock, Drawings (500)L. Rock, Capital, December 31, 2011 $ 4,450

c)Lucas Rock Company

Balance SheetAt December 31, 2011

(in thousands)

Assets $ 18,200 Total Assets $ 18,200

Liabilities and Owner’s Equity Total liabilities $ 13,750 L. Rock, Capital 4,450



E1–7 (continued)

d)

Lucas Rock CompanyStatement of Cash Flows

For the Year Ended December 31, 2011(in thousands)

Cash flows from operating activities $ 1,600 Cash flows from investing activities (1,000)Cash flows from financing activities (900)Change in cash (300)Cash at January 1, 2011 1,000 Cash at December 31, 2011 $ 700

E1–8

Req. 1FedEx

Income StatementFor the Year Ended May 31, 2007

(in millions)

Revenue: Delivery Revenue $ 22,527 Expenses: Salaries Expense 8,051 Fuel Expense 2,946 Rent Expense 1,598 Maintenance and Repairs Expense 1,440 Other Expenses 7,241 Total expenses 21,276Net income $ 1,251

Req. 2

FedEx’s largest expense is Salaries Expense.


E1–9

Req. 1Dave & Buster's Inc.

Balance SheetAt February 4, 2007

(in millions)

AssetsCash $ 10 Supplies 13 Property and Equipment 317 Other Assets 167

Total Assets $ 507

LiabilitiesAccounts Payable $ 19 Notes Payable 254 Wages Payable 46 Other Liabilities 91 Total liabilities 410

Owners’ EquityOwners’ Capital 97

Total liabilities and owner's equity $ 507

Req. 2

Dave & Buster’s largest asset is its property and equipment.

Req. 3

Most of the financing for assets come from creditors ($410 million in liabilities vs. $97 million in owners’ equity)


E1–10

Req. 1READ MORE STORE

Balance SheetAt December 31, 2010

ASSETS LIABILITIES

Cash $48,900 Accounts Payable $ 8,000Accounts Receivable 26,000 Notes Payable 2,120Equipment 48,000 Total liabilities $10,120

OWNER’S EQUITY

T. Lopez, Capital 112,780

Total assets $122,900Total liabilities and owner’s equity $122,900

Req. 2

T. Lopez, Capital, January 1, 2010 $ 0+ Additional owner contributions 100,000+ Net income ?- Owner withdrawals (0)T. Lopez, Capital, December 31, 2010 $112,780

$100,000 + Net income = 112,780 Net Income = $12,780

Req. 3

Most of the financing comes from the owner, Terry Lopez.


E1–11

COLLEGIATE LAUNDRY SERVICEIncome Statement

For the Month of October 2010

Revenue:Laundry services for cash $ 12,000Laundry services on credit 1,000 Total service revenue 13,000

Expenses:Wages expense 3,500Supplies expense 800Advertising expense 600Other expenses 500 Total expenses 5,400

Net Income $ 7,600

E1–12

TNT Cleaning ServiceIncome Statement

For the Year Ended December 31, 2009

Cleaning Service Revenue $ 166,000 Expenses:

Wages Expense 102,775Supplies Expense 18,500 Advertising Expense 9,025Fuel Expense 525

Total expenses 130,825 Net income $ 35,175


E1–13 O, I or F + or –

O – A. Cash paid to suppliers and employees

O + B. Cash collected from customers

F + C. Cash received from borrowing long-term debt

F + D. Cash received from owners as additional investments

I – E. Cash paid to purchase equipment

E1–14

O, I, or F + or -

I - A. Cash paid for purchases of buildings and equipment.

F - B. Cash paid to owners as distributions of profits.

I + C. Cash received on sales of buildings and equipment.

O - D. Cash paid to suppliers and employees.

F + E. Cash received from owners as additional investments.

F + F. Cash received from borrowing long-term debt.

O + G. Cash received from customers.

F - H. Cash paid on long-term debt.

E1–15

Req. AGeneral Mills will report $6,375 million on its cash flow statement.

Req. BMicrosoft will report $25.4 billion on its cash flow statement.


E1–16

Assets = Liabilities + Owner’s EquityEx. Cash +100,000 C. Reyes,

Capital +100,000

1. Cash - 30,000Building +40,000

Note Payable +10,000

2. Supplies +1,000 Accounts Payable +1,000

3. Accounts Receivable +31,000

Service Revenue +31,000

4. Cash -19,000 Wages Expense -19,000

5. Accounts Payable +600

Utilities Expense -600

6. Cash +6,200 Service Revenue +6,200

7. Cash -3,000Equipment +3,000

8. Cash -5,000 C.Reyes, Drawing -5,000


E1–17

I 1. SEC

F 2. Investing activities

D 3. Private company

E 4. Corporation

A 5. Accounting

C 6. Partnership

J 7. FASB

G 8. Financing activities

B 9. Monetary unit

L 10. GAAP

K 11. Public company

H 12. Operating activities


PROBLEMS – SET A

PA1–1

Req. 1NUCLEAR COMPANY Income Statement


Revenue: Service Revenue $140,000Expenses: Wages Expense 60,000 Advertising Expense 1,100 Other Expenses 38,000

Total expenses 99,100Net Income $ 40,900

Req. 2 NUCLEAR COMPANY Statement of Owner’s Equity For the Year Ended December 31, 2010

C. Reed, Capital, January 1, 2010 $ 0Add: Additional investments by owner 87,000 Net income (from req. 1) 40,900Less: C. Reed, Drawing (15,270)C. Reed, Capital, December 31, 2010 $ 112,630

Req. 3 NUCLEAR COMPANY Balance Sheet At December 31, 2010Assets: Cash $25,000 Accounts Receivable 12,000 Supplies 90,000 Equipment 45,000 Total Assets $172,000

Liabilities: Accounts Payable $ 57,370 Notes Payable 2,000

Total Liabilities 59,370Owner’s Equity:

C. Reed, Capital 112,630Total liabilities and owner’s equity $172,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010 Principles of Accounting 1-21

PA1–2

Req. 1FAMILY MEDICINE Income Statement

For the Year Ended June 30, 2009

Revenue: Medical Service Revenue $ 90,000Expenses: Wages Expense 46,000 Utilities Expense 6,500 Other Expenses 2,000 Total expenses 54,500Net Income $ 35,500

Req. 2 FAMILY MEDICINE Statement of Owner’s Equity

For the Year Ended June 30, 2009

A. Jones, Capital, July 1, 2008 $ 0Add: Additional investments by owner 62,000 Net income (from req. 1) 35,500Less: A. Jones, Drawing (6,000)A. Jones, Capital, June 30, 2009 $ 91,500

Req. 3 FAMILY MEDICINE Balance Sheet At June 30, 2009

Assets: Cash $13,500 Accounts Receivable 9,500 Supplies 17,000 Equipment 76,000 Total Assets $116,000

Liabilities and Owner’s Equity:Liabilities: Accounts Payable $ 3,500 Notes Payable 21,000 Total liabilities 24,500Owner’s Equity: A. Jones, Capital 91,500Total liabilities and owner’s equity $116,000


PA1–3


PA1-3 (continued)


PA1–4

Req. 1Average monthly revenue, $216,000 ¸ 12 = $18,000.

Req. 2Average monthly wages expense, $84,000 ÷ 12 = $7,000

Req. 3“Supplies Expense" is an expense because it represents the cost of the supplies that the company used during the period.

Req. 4“Advertising Expense” is an expense because it represents the amount of advertising completed during the period to generate revenues.

Req. 5No, the cash balance at December 31, 2011 cannot be determined from the information provided. The amount of cash the company had on December 31, 2011, is not the same as net income because net income represents the profit or loss of the company during the preceding year, regardless of whether purchases or sales were made with cash or credit.

PA1-5a.)

Hannah CompanyIncome Statement

For the Quarter Ended September 30, 2010

Revenue $ 32,100

Expenses 18,95

0 Net income $ 13,150

b.)

Hannah CompanyStatement of Owner's Equity


D. Hannah, Capital , June 30, 2010 $ 51,000Add: Additional investments by owner 1,750 Net income 13,150Less: D. Hannah, Drawings (4,900)D. Hannah, Capital, September 30, 2010 $ 61,000


PA1-5 (continued)

c)

Hannah CompanyBalance Sheet

At September 30, 2010

Assets: $ 79,500 Total Assets $ 79,500

Liabilities and Owner’s Equity: Total liabilities $ 18,500

Owner’s Equity D. Hannah, Capital 61,000


d)

Hannah CompanyStatement of Cash Flows


Cash flows from operating activities $ 15,700 Cash flows from investing activities (7,200)Cash flows from financing activities (5,300)Change in cash 3,200Cash at the beginning of the period 3,200Cash at the end of the period $ 6,400


PA1-6

a)

OSI Restaurant Partners, Inc.Income Statement

For the Year Ended December 31, 2006(in millions)

Revenues: Restaurant Sales Revenue $ 3,920 Other Revenues 21 Total revenues 3,941 Expenses: Food and Supplies Expenses 1,415 General and Administrative Expenses 235 Wages Expenses 1,087 Utilities and Other Expenses 1,104 Total expenses 3,841 Net income $ 100

b)

OSI Restaurant Partners, Inc.Statement of Owners’ Equity


Owners’ Capital, January 1, 2006 $ 1,144 Add: Additional investments by owners 16 Net income 100 Less: Owners’ Drawings (distributions) (39) Owners’ Capital, December 31, 2006 $ 1,221


PA1-6 (continued)

c)

OSI Restaurant Partners, Inc.Balance Sheet

At December 31, 2006(in millions)

AssetsCash $ 94 Food and Supply Inventories 87 Property, Fixtures, and Equipment 1,549 Other Assets 529

Total Assets $ 2,259

Liabilities and Owners’ EquityLiabilities

Accounts Payable $ 166 Notes Payable 235 Wages and Taxes Payable 120 Unearned Revenue 187 Other Liabilities 330Total liabilities 1,038

Owners’ EquityOwners’ Capital 1,221

Total Liabilities and Owners’ Equity $ 2,259


PA1-6 (continued)

d)

OSI Restaurant Partners, Inc.Statement of Cash Flows


Cash flows from operating activitiesCash received from customers $ 2,946 Cash paid to suppliers and employees (2,578)

Cash provided by operating activities 36

8

Cash flows from investing activitiesCash paid to purchase equipment (384)Cash received from sale of fixtures & equipment 32 Other cash outflows from investing activities (2)

Cash used in investing activities (354)

Cash flows from financing activities

Cash received from bank borrowings 37

5 Additional investments by owners 16Repayments of bank borrowings (294)Withdrawals (distributions to owners) (39)Other cash outflows from financing activities (62)

Cash used in financing activities (4)

Change in cash 10Cash at January 1, 2006 84 Cash at December 31, 2006 $ 94


PROBLEMS – SET B

PB1-1

Req. 1WRITE-r-WRONG COMPANY

Income Statement For the Year Ended April 30, 2011

Revenue: Service Revenue $270,000Expenses: Wages Expense 138,500 Supplies Expense 22,000 Other Expenses 10,000 Total expenses 170,500Net Income $ 99,500

Req. 2WRITE-r-WRONG COMPANY Statement of Owner’s Equity

For the Year Ended April 30, 2011

M. Waxman, Capital, May 1, 2010 $ 0Add: Additional investments by owner 186,000 Net income (from req. 1) 99,500Less: M. Waxman, Drawing (27,150)M. Waxman, Capital, April 30, 2011 $ 258,350

Req. 3 WRITE-r-WRONG COMPANY Balance Sheet

At April 30, 2011Assets: Cash $ 39,150 Accounts Receivable 27,500 Supplies 35,000 Equipment 208,000 Total Assets $309,650

Liabilities and Owner’s Equity:Liabilities: Accounts Payable $ 47,800 Notes Payable 3,500

Total liabilities 51,300Owner’s Equity: M. Waxman, Capital 258,350 Total liabilities and owner’s equity $309,650McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010 1-30 Solutions Manual

PB1–2

Req. 1SWEATERS ‘n THINGS COMPANY

Income StatementFor the Year Ended December 31, 2012

Revenue: Sales Revenue $ 945,000Expenses: Cost of Goods Sold 746,000 Utilities Expense 42,500 Other Expenses 2,000 Total expenses 790,500Net Income $ 154,500

Req. 2SWEATERS ‘n THINGS COMPANY Statement of Owner’s Equity


E. Rosati, Capital, January 1, 2012 $ 0Add: Additional investments by owner 200,000 Net income (from req. 1) 154,500Less: E. Rosati, Drawing (58,500)E. Rosati, Capital, December 31, 2012 $ 296,000

Req. 3 SWEATERS ‘n THINGS COMPANY

Balance Sheet At December 31, 2012

Assets: Cash $ 31,500 Accounts Receivable 79,000 Inventories 152,000 Fixtures and Equipment 140,000 Total Assets $402,500

Liabilities and Owner’s Equity:Liabilities: Accounts Payable $ 71,500 Notes Payable 35,000

Total Liabilities 106,500Owner’s Equity: E. Rosati, Capital 296,000Total liabilities and owner’s equity $402,500


PB1-3


PB1-3 (continued)


PB1-4

Req. 1Average monthly revenue, $468,000 ¸ 12 = $39,000.

Req. 2Average monthly expenses, $420,000 ÷ 12 = $35,000.

Req. 3“Cost of Goods Sold" is an expense because it represents the cost of the inventory that the company sold (used) during the period.

Req. 4“Utilities Expense” is an expense because it represents the amount of utilities used during the period to generate revenues.

Req. 5No, cash at the end of the year cannot be determined from the information provided. The amount of cash the company had on December 31, 2010, is not the same as net income because net income represents the profit or loss of the company during the preceding year, regardless of whether purchases or sales were made with cash or credit.

PB1-5

a.)

Darryl CompanyIncome Statement


Revenue $ 135,600Expenses 128,100 Net income $ 7,500

b.)

Darryl CompanyStatement of Owner's Equity


J. Darryl, Capital, January 1, 2009 $ 7,400Add: Additional investments by owner 6,000 Net income 7,500Less: J. Darryl, Drawing (4,900)J. Darryl, Capital, December 31, 2009 $ 16,000


PB1-5 (continued)

c)

Darryl CompanyBalance Sheet

At December 31, 2009

Assets: $ 97,500 Total Assets $ 97,500

Liabilities and Owner’s Equity:Total liabilities $ 81,500 J. Darryl, Capital 16,000

Total Labilities and Owner's Equity $ 97,500

d)

Darryl CompanyStatement of Cash Flows


Cash flows from operating activities $ 20,200 Cash flows from investing activities (47,000)Cash flows from financing activities 40,100Change in cash 13,300Cash at the beginning of the period 8,200Cash at the end of the period $ 21,500


PB1-6

a)The Cheesecake Factory

Income StatementFor the Year Ended January 2, 2007

(in thousands)

Revenues: Restaurant Sales Revenues $1,315,325 Other Revenues 8,171 Total revenues 1,323,496 Expenses: Food and Supplies Expense 333,528 Wages Expenses 420,957 Utilities and other Expenses 414,978 General and Administrative Expenses 72,751 Total expenses 1,242,214 Net income $ 81,282

b)

The Cheesecake FactoryStatement of Owners’ Equity

For the Year Ended January 2, 2007(in thousands)

Owners’ Capital, January 3, 2006 $ 646,699 Add: Additional investments by owner 33,555 Net income 81,282 Less: Owners’ Drawings (distributions) (49,994) Owners’ Capital, January 2, 2007 $ 711,542


PB1-6 (continued)

c)

The Cheesecake FactoryBalance Sheet

At January 2, 2007(in thousands)

Assets:Cash $ 44,790 Accounts Receivable 11,639 Food and Supply Inventories 20,775 Prepaid Rent 43,870Property and Equipment 732,204Other Assets 186,453

Total Assets $1,039,731

Liabilities and Owners’ Equity:Liabilities:

Accounts Payable $ 45,570 Notes Payable 39,381 Wages and Other Expenses Payable 117,226 Other Liabilities 126,012Total liabilities 328,189

Owners’ Equity:Owners’ Capital 711,542

Total liabilities and owners’ equity $1,039,731


PB1-6 (continued)

d)

The Cheesecake FactoryStatement of Cash Flows

For the Year Ended January 2, 2007(in thousands)

Cash flows from operating activitiesCash received from customers $1,276,008

Cash paid to suppliers and employees(1,123,353

) Cash provided by operating activities 152,655

Cash flows from investing activitiesCash paid to purchase equipment (243,211)Cash received from sale of long-term assets 115,975 Cash used in investing activities (127,236)

Cash flows from financing activitiesAdditional investments by owners 33,555Borrowings 175,000 Repayments of borrowings (170,242)Withdrawals (distributions to owners) (49,994) Cash used in financing activities (11,681)

Change in cash 13,738Cash at January 3, 2006 31,052 Cash at January 2, 2007 $ 44,790


CASES AND PROJECTS

CP1-1

Req. 1

Home Depot is organized as a corporation. Only a corporation issues shares of stock to its owners in exchange for their investment.

Req. 2The income statement reports net income of $4,395. Note that the amounts on the financial statements are rounded to the nearest million, so this is actually $4,395,000,000.

Req. 3

The income statement shows that sales revenue of $77,349,000,000 was earned in the most recent year.

Req. 4

The balance sheet shows that inventory costing $11,731,000,000 was on hand at February 3, 2008.

Req. 5

The balance sheet and statement of cash flows show cash of $445,000,000 on hand at February 3, 2008.

Req. 6

Because Home Depot’s stock is traded on the New York Stock Exchange, Home Depot must be a public company.


CP1-2

Req. 1

Lowe’s net income for the year ended February 1, 2008 was $2,809,000,000. This is lower than the $4,395,000,000 earned by Home Depot for the year ended February 3, 2008.

Req. 2

Lowe’s reported revenue of $48,283,000,000 for the year ended February 1, 2008. This is lower than the $77,349,000,000 reported by Home Depot for the year ended February 3, 2008.

Req. 3

Lowe’s inventory as of February 1, 2008 was $7,611,000,000. This is lower than the $11,731,000,000 reported by Home Depot as of February 3, 2008.

Req. 4

Lowe’s cash as of February 1, 2008 was $281,000,000. This is lower than the $445,000,000 reported by Home Depot as of February 3, 2008.

Req. 5

Like Home Depot, Lowe’s is a public company. It trades on the New York Stock Exchange under the symbol LOW.

Req. 6

Two measures of financial success are the company’s net income and revenues. As noted for requirements 1 and 2, Home Depot reported greater amounts for both of these measures, suggesting that the company was more successful during fiscal year 2007. It is important to note, though, that Home Depot is a bigger company than Lowe’s, with more locations, more inventory (see requirement 3), and more total assets. Given these differences, it is reasonable to expect that Home Depot would produce more revenue and net income than Lowe’s. To truly determine whether Home Depot is run more successfully than Lowe’s, a complete analysis is required. Such an analysis would take into account size differences between the two companies. (You’ll learn about this kind of analysis later chapters).


CP1-3The solutions to this case will depend on the company and/or accounting period selected for analysis.

CP1-4

Req. 1

The accounting concept that the Rigas family is accused of violating is the separate entity concept.

Req. 2

Based on the limited information available, it is difficult to categorize particular dealings as appropriate or inappropriate. Dealings would clearly be inappropriate if they involved Adelphia paying for items for the owners’ personal use or to unfairly transfer some of the resources of Adelphia (and its stockholders) to the Rigas family. However, we cannot determine the propriety of the payments from the limited information available.

Req. 3

Investors should take at least two actions to ensure this kind of behavior does not occur or does not occur without their knowledge.

(1) First, they should ensure that the managers of the business are accountable for their actions. The most common way of doing this is to appoint a board of directors who are independent of top management. These directors should review and challenge the actions taken by management and require that the financial statements disclose significant transactions with related parties.

(2) Second, investors should read the financial statements, including any notes describing related party transactions. Any questionable dealings should be raised with top management at the company’s annual meeting. If investors don’t receive satisfactory answers to their concerns, they should sell their investment in the company’s stock.

Req. 4

Other parties that might be harmed by the actions committed by the Rigas family are creditors (such as suppliers and banks), the company’s auditors, governmental agencies (such as the IRS and SEC), and the public at large.


CP1-5

Req. 1

You should take the position that an independent annual audit of the financial statements is an absolute must. This is the best way to ensure that the financial statements are complete, are free from bias, and conform with GAAP. You should be prepared to reject the partner’s uncle as the auditor because there is no evidence about his competence as an accountant or auditor. Also, he does not appear independent because he is related to the partner who prepares the financial statements, resulting in a potential conflict of interest. Hire an independent CPA.

Req. 2

You should strongly recommend the selection of an independent CPA in public practice because the financial statements should be audited by a competent and independent professional who must follow prescribed accounting and auditing standards on a strictly independent basis. An audit by an uncle would not meet these requirements.


CP1–6

Although Jack owns more than Jill, he also owes more as well. Jill has $1,050 more net assets (assets – liabilities) than Jack.

Req 2. OctoberJack Jill

Own:September position $ 6,350 $ 2,050 Monthly salary 500 Lottery winnings 950 Total owned 7,300 2,550

Owe:September position 5,600 250 Rent expense paid 450 120 Other living expenses 300 300 Total owed 6,350 670

Excess $ 950 $1,880

Jack acquired more than Jill ($950 in October as compared to Jill’s $500). He also incurred higher expenses ($750 in October as compared to Jill’s $420), but they were significantly lower than Jill’s as a percentage of earnings. Thus, Jack had net profits in October of $200, while Jill had $80 in net profits. However, when these effects are added to the net assets from September, Jill clearly has done better than Jack overall. In addition, Jill has more sustainable earnings than Jack – Jack cannot depend on lottery winnings every period; he needs to get a job.


Req 1. SeptemberJack Jill

Own:PlayStation $ 350 Cash 6,000 $1,000 '75 Mustang 800 Trading cards 250 Total owned 6,350 2,050

Owe:Car loan 250 Student loan 4,800 Tuition bill 800 Total owed 5,600 250

Excess $ 750 $1,800

Documents

CH01SM