TENTH EDITION - test bank and solution manual you need- …testbank360.eu/sample/solution-manual-financial... · 2017-03-03 · TENTH EDITION Belverd E. Needles, Jr., Ph.D., C.P.A.,

FINANCIAL ACCOUNTING

TENTH EDITION

SOLUTIONS MANUAL

Belverd E. Needles, Jr., Ph.D., C.P.A., C.M.A.

DePaul University

Marian Powers, Ph.D.

Northwestern University

Australia ● Brazil ● Japan ● Korea ● Mexico ● Singapore ● Spain ● United Kingdom ● United States

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ISBN-13: 978-0-547-19329-8

ISBN-10: 0-547-19329-7

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Contents

Chapter:

1: Uses of Accounting Information and the Financial Statements 1

2: Analyzing Business Transactions 37

3: Measuring Business Income 93

Supplement to Chapter 3: Closing Entries and the Work Sheet 140

4: Financial Reporting and Analysis 176

5: The Operating Cycle and Merchandising Operations 229

6: Inventories 272

7: Cash and Receivables 329

8: Current Liabilities and Fair Value Accounting 365

9: Long-Term Assets 402

10: Long-Term Liabilities 437

11: Contributed Capital 489

12: The Corporate Income Statement and the Statement of Stockholders’ Equity 535

13: The Statement of Cash Flows 579

14: Financial Performance Management 611

15: Investments 668

Appendix A: Accounting for Unincorporated Businesses A-1

Web Appendix A: The Merchandising Work Sheet and Closing Entries Web A-1

Web Appendix B: Special-Purpose Journals Web B-1



To the Instructor

The Solutions Manual to accompany Financial Accounting, tenth edition, provides answers to all Short

Exercises, Exercises, Problems, and Cases for each chapter of the text. All answers have been prepared

by the authors and checked by other accounting professors and independent accountants. Answers to the

classroom exercises are presented in a clear, step-by-step format to facilitate your classroom demonstra-

tion. If you prefer to use the exercises as brief homework assignments, you will find that the answers

provide a good model for judging your students’ work. Finally, answers to the Problems and Alternate

Problems have been carefully worked out to show each part of the solution and to demonstrate the proper

accounting format.

The solutions in this manual have been formulated on Excel spreadsheets. They are also available

electronically. Solutions may be projected in class, and all cells are “hot,” allowing you to do “what if”

analysis. One consequence of this advance, however, is that when some calculations are made, the results

may not be exactly the same as they would be if the computations were done manually or with a calcula-

tor. This result occurs because manual computations are rounded at intermediate steps, whereas Excel

computations are not. The differences between the manual and electronic computations are very small,

usually one cent in a dollar amount or one decimal point in a ratio.



1. 6.

2. 7.

3. 8.

4. 9.

5. 10.

1. 4.

2. 5.

3.

1. 4.

2. 5.

3. 6.

1.

2.

3.

b a

c j

$100,000

Assets

Stockholders' Equity

Chapter 1, SE 1.

g i

f d

e h

c

c a

Chapter 1, SE 4.

$ 72,000

=

a

=

=

Liabilities

a c

b

b b

a

Chapter 1, SE 3.

c

USES OF ACCOUNTING INFORMATION AND THE FINANCIAL STATEMENTS

CHAPTER 1—Solutions

Chapter 1, SE 2.

$120,000

Cengage Learning. All rights reserved. 1


1. = +

= +

– =

=

2. = +

Assets – 0.2 Assets =

0.8 Assets =

= ÷÷÷÷

=

= x =

1. = +

=

= +

= + Stockholders' Equity

=

2. = +

=

= +

= +

=

=

= +

= +

= +

$260,000 – ) – + =

Beginning:

End:

Chapter 1, SE 5.

$150,000

Assets

$90,000

Assets



$150,000

Liabilities


$240,000

$240,000 $90,000

$40,000

$40,000

$10,000$50,000

0.2Assets

Assets


+ 30,000

$75,000

$ 45,000

Liabilities

$ 45,000

0.2

Change:

Change:

End:

Beginning:

Liabilities

$50,000

$40,000

$40,000

Assets

0.8

$25,000

$25,000

Assets

Assets

Liabilities

$ 20,000

$ 20,000

5,000

$ 25,000

$ 50,000

$ 50,000

$146,000

$ 20,000

$166,000

$146,000

+ 40,000

$186,000


$96,000$ 50,000

– 30,000

Chapter 1, SE 6.


$96,000

Chapter 1, SE 7.

End of year

Assets

$280,000


$160,000$120,000

$ 40,000

48,000

108,000

$108,000

Net Income*

$160,000 $40,000

$400,000 $140,000

*( $48,000

$260,000

$108,000

During year

Investment

Dividends

Net income

Beginning of year

Liabilities

+

+

2 Cengage Learning. All rights reserved. .


$ 700

28,700

$29,400$29,400Total assets

Total liabilities and

*To balance

stockholders' equity

1,600Accounts receivable

Building

Cash

Chapter 1, SE 8.

Global Company

Wages payable

Common stock

Liabilities

Retained earnings

Total stockholders' equity

4,700

$24,000


Balance Sheet

June 30, 2009

22,000

Assets

$ 5,800 *



$4,800

2,450

$2,350

$ —

2,350

$2,350

410

$1,940

$1,890 Accounts payable $ 450

Other assets 1,000

Common stock $ 500

Retained earnings 1,940

Total stockholders' equity 2,440


$2,890 stockholders' equity $2,890

Retained earnings, December 31, 2010

Net income for the year

Subtotal

Less dividends

December 31, 2010

Cash


Tarech CorporationBalance Sheet

Tarech CorporationStatement of Retained Earnings


Tarech CorporationIncome Statement

For the Year Ended December 31, 2010

Total assets

Chapter 1, SE 9.

Revenue

Service revenue

Expenses

Total expenses

Net income


Assets Liabilities



Net Income $15,000

Average Total Assets $110,000

1.

2.

3.

4.

1.

2.

3.

4.

$ 15,000

earnings component of stockholders' equity. They are different in that ex-

business for which financial performance must be measured and reported.

for-profit organizations must report to those who fund them, and they must op-

erate their organizations in a financially prudent way.

Unethical ways of accounting include recording and reporting business trans-

$ 80,000

$140,000

Total assets:

Beginning balance

Ending balance

Financial statements are unethically prepared when they misrepresent a com-

as improved methods of accounting are introduced.

actions that did not occur or being dishonest in recording those that did occur.

main goals: profitability and liquidity. How companies such as CVS and South-

GAAP differ from the laws of science in that they are not unchanging but rather

whereas Southwest buys and leases aircraft.

Chapter 1, SE 10.

Expenses and dividends are the same in that they both reduce the retained

Chapter 1, E 2.

Accounting treats sole proprietorships, partnerships, and corporations as en-

tities separate and apart from their owners because each form represents a

penses are also a component of net income, whereas dividends are a distribu-

tion of assets to stockholders resulting from net income.

CVS and Southwest are comparable in that like all companies they have two

pany's financial situation or contain false information.

are constantly evolving. They may change as business conditions change or

Chapter 1, E 1.

The primary purpose of accounting is to provide decision makers with the finan-

No. Not all economic events involve exchanges of value between a business

and someone else. For example, when a customer places an order, it is an

economic event, but until the order is fulfilled, no exchange of value has taken

Like managers of profit-seeking businesses, managers of government and not-

Return on Assets

cial information they need to make intelligent decisions. It is a valuable disci-

pline because of the usefulness of the information it generates.

=

Average total assets ($140,000 + $80,000) ÷ 2

= = 13.6%0.136 or

Net income

$110,000

place.

west achieve these goals may make them incomparable in certain ways. For

instance, CVS is a retail (pharmacy and related) company, whereas Southwest

is a service (air transportation) company. CVS buys and leases retail stores,



1. a 5. k 9. g

2. l 6. e 10. d

3. c 7. b 11. f

4. i 8. j 12. h

1.

2.

3.

4.

People who are interested in Gottlieb's financial statements are the following:

Chapter 1, E 4.

Chapter 1, E 3.

Management

Regulators

Labor unions

Customers

Investors (stockholders in the company)

Creditors

Tax authorities

Economic planners

A partnership is a business that has two or more owners. A corporation is a busi-

ness unit that has been granted a charter from the state and is legally separate from

its owners (stockholders). A major advantage of the corporate form of business

over the partnership is that the stockholders' liability is limited to the amount of the

Chapter 1, E 5.

to repay the loan).

stockholders' investments in the company, whereas the personal assets of partners

can be called upon to pay the obligations of the partnership. Also, the transfer of

ownership is easier with the corporation because the shares owned by a stock-

holder can be sold to another party. When ownership of a partnership changes, the

This is not a business transaction because no economic exchange has taken

place.

Yes, this is properly an expense of the business.

partnership must be dissolved and another one formed.

Yes, this is properly an expense of the business.

Yes, this is properly an expense of the business (assuming that Velu intends



1. 6.

2. 7.

3. 8.

4. 9.

5. 10.

2,750,000 x $2,750,000

5,000,000 x $ 650,000

350,000,000 x $3,150,000

3,500,000 x $5,145,000

1,300,000 x $1,300,000

2,800,000 x $ 364,000

290,000,000 x $2,610,000

3,900,000 x $5,733,000

Chapter 1, E 7.

Chapter 1, E 6.

=

a

c

b

c

Holstein

Nanhai

Tova

Company

Tova

US.Chip

=

1.000 =

US.Chip

Nanhai 0.130

0.009

Sales

=

1.000

=

a

b

AssetsCompany

1.470Holstein

c

b

aa

Holstein is the largest in terms of sales and assets due to the high value of the Euro.

0.130

0.009

1.470

=

=

=



1. = Liabilities +

= Liabilities +

= $225,000

2. = Liabilities +

= $ 65,000 +

= $144,500

3. = 1/3 Assets +

= $180,000

= $270,000

= 1/3 x $270,000 = $90,000

4. = Liabilities +

= $160,000

= $160,000 +– 22,500

= $137,500 +

= $217,500

1. a. 2. a.

b. b.

c. c.

d. d.

e. e.

f. f.

g. g.

Liabilities

Liabilities

$79,500

Assets Stockholders' Equity

IS

BS

IS


Assets Stockholders' Equity

$380,000 $155,000

Chapter 1, E 8.

A IS

$150,000

$150,000

End:

Assets

Assets

RE

L

A

SE

A

L

BS

A

+ 45,000

Chapter 1, E 9.

BS

2/3 Assets

Assets

Assets $180,000

Beginning:

Change:

$310,000

Liabilities

$310,000

$355,000




$ 12,500 Accounts payable $ 25,000

31,250

56,250 Common stock $62,500

25,000 Retained earnings 43,750



$131,250 stockholders' equity $131,250

6,250Supplies Stockholders' Equity

Total assets

Cash

Accounts receivable

Building

Equipment

December 31, 2010

Liabilities

Chapter 1, E 10.

Assets

Uptime Services Company

Balance Sheet



$26,400

2,400$

16,680

2,700

1,800

23,580

$ 2,820

400

$ 2,420

$ 2,880

2,420

$ 5,300

1,400

$ 3,900

$ 3,100 $ 900

1,500

2,000 Common stock $2,000



$ 6,800 $ 6,800

Accounts receivable

Cash




Accounts payable

Total assets

Proviso CorporationBalance Sheet

200

Land

Supplies


Assets Liabilities

December 31, 2009

Income before income taxes

Proviso CorporationIncome Statement


Subtotal

Less dividends




Statement of Retained Earnings

Revenue

Service revenue

Expenses

Rent expense

Wages expense

Income taxes expense

Utilities expense

Total expenses

Net income

Chapter 1, E 11.

Advertising expense

Proviso Corporation



1.

= +

= +

= +

2.

3.

4.

$13,25029,000

$42,25012,500

$29,750

– Stockholders' investments

Net income

Net loss

Net income is:

Assets

End: $275,000

180,000Beginning:

Change in Stockholders' Equity

– Stockholders' investments

$13,250

$40,750

Net income is:

Stockholders' EquityLiabilities

$150,500

$29,750

16,250

($ 3,000)

27,500

+ Dividends


$40,750

+ Dividends

Net income

$3,000

$13,250

Net loss is:


Net income is:

68,750

$ 13,250

$13,250

Chapter 1, E 12.

$124,500111,250

Net income



$ 38,000

($ 7,800)

11,700 3,900

$ 41,900

($125,000)

( 125,000)

$ 78,000

( 19,500)

58,500

($ 24,600)

55,900

$ 31,300

$105,000

54,490

$159,490

—

$159,490

Retained earnings, January 31, 2009


Subtotal

Less dividends


The board of directors of Mrs. Kitty's Cookies may have decided not to pay any divi-

dends because it wanted to use the funds for other purposes such as to finance

the company's growth or pay off debt.

Retained earnings represent the equity of the stockholders generated from the

income-producing activities of the business and kept for use in the business.

Chapter 1, E 13.

Mrs. Kitty's Cookies, Inc.

Net income

Chapter 1, E 14.

Net cash flows from investing activities

Cash flows from financing activities

Cash flows from operating activities

Adjustments to reconcile net income to net

Net cash flows from operating activities

Borrowed from bank

Cash at beginning of year

Cash at end of year

Increase in accounts payable

Statement of Retained EarningsFor the Year Ended January 31, 2010

cash flows from operating activities

Cash flows from investing activities

Net increase (decrease) in cash

Purchased equipment

Statement of Cash FlowsFor the Year Ended December 31, 2009

Martin Service Corporation

Paid dividends

Net cash flows from financing activities

(Increase) in accounts receivable



AICPA:

SEC:

PCAOB:

GAAP:

FASB:

IRS:

GASB:

IASB:

IMA:

CPA:

2009

$400,000

$480,000

$440,000

$ 48,000

10.91%

$50,000

$520,000

$48,000

$440,000

or

Ending balance

Return on assets

= = or

2009 Return on Assets

0.109

Total assets

Beginning balance

Return on assets has decreased from 10.91 percent to 9.62 percent. The decrease is

Net income

$560,000

$520,000

$ 50,000

9.62%

Chapter 1, E 15.

Institute of Management Accountants

International Accounting Standards Board

Certified public accountant

American Institute of Certified Public Accountants

Securities and Exchange Commission

growth in net income.

caused by the fast growth of the asset base that has not been matched by adequate

Net Income

Public Company Accounting Oversight Board

Generally accepted accounting principles

Financial Accounting Standards Board

Internal Revenue Service

Governmental Accounting Standards Board

Average total assets

Chapter 1, E 16.

Average Total Assets0.096 9.6%==

2010 Return on Assets

Net Income

Average Total Assets10.9%

2010

$480,000



Utilities expense BS Accounts payable

Building IS Rent expense

Common stock RE Dividends

Net income IS Income taxes expense

Land IS Fees earned

Equipment BS Cash

Revenues BS Supplies

Accounts receivable IS Wages expense

BS

BS

IS

BS

IS

BS

BS

IS/RE

2. User Insight: Statement associated with profitability identified

The income statement is most closely associated with the goal of profitability.

1. Matching completed

Chapter 1, P 1.



$5,320 $ 8,600 $2,460 (m)

4,810 (a) 7,000 (g) 2,010

$ 510 $ 1,600 (h) $ 450 (n)

$1,780 $15,400 $ 200

510 (b) 1,600 (i) 450

190 (c) 1,000 100 (o)

$2,100 (d) $16,000 $ 550 (p)

$2,700 (e) $26,000 (j) $1,900

$ 400 (f) $ 2,000 $1,300

200 8,000 50

2,100 16,000 (k) 550 (q)

$2,700 $26,000 (l) $1,900 (r)

Revenue

Set A

Income Statement

Chapter 1, P 2.

Net income

1. Financial statements completed

Expenses


Less dividends

Ending balance

Beginning balance

Total assets

Common stock

Liabilities

Stockholders’ equity

Net income

Balance Sheet

2. User Insight: Income statement discussed

Total liabilities and stockholders’ equity

Set CSet B

The income statement must be prepared first because the amount of net income is

necessary to determine the ending balance of retained earnings. The ending bal-

ance of retained earnings is necessary for the preparation of the balance sheet.

Retained earnings



$400,000

$225,000

20,100

36,000

2,600

5,100

32,000

320,800

$ 79,200

27,000

$ 52,200

$ 35,300

52,200

$ 87,500

33,000

$ 54,500

$ 57,700 Accounts payable $ 3,600

4,500 Income taxes payable 13,000

700 Commissions payable 22,700

59,900 $ 39,300

Common stock $29,000



$122,800 $122,800

December 31, 2011Balance Sheet

Subtotal

Less dividends


Cash

Assets

stockholders' equityTotal assets




Supplies

Total liabilities

Liabilities

Accounts receivable


Special Assets, Inc.

Special Assets, Inc.Statement of Retained Earnings

Commissions expense

Marketing expense

Office rent expense

Supplies expense

Telephone and computer expenses

Net income


Chapter 1, P 3.

1. Financial statements prepared



Total expenses

Revenue

Commission sales revenue

Expenses

Special Assets, Inc.Income Statement


Equipment

Wages expense



The statement of cash flows is very useful in assessing whether a company's opera-

to obtain outside financing from creditors or owners.

2. User Insight: Useful statement identified

Chapter 1, P 3. (Continued)

tions are generating sufficient funds to support expansion. The statement tells

whether operations are producing enough cash or whether the company will need



$165,200

$37,200

6,800

86,000

19,100

13,500

162,600

$ 2,600

560

$ 2,040

$ —

2,040

$ 2,040

—

$ 2,040

$ 1,800 Accounts payable $19,400

24,900 560

1,600 Salaries payable 1,300

$ 21,260

Common stock $ 5,000



$ 28,300 $ 28,300

Net income

For the Year Ended January 31, 2010

LiabilitiesAssets


Revenue

Advertising service revenue

Expenses

Unique Ad, Inc.Income Statement

For the Year Ended January 31, 2010

Chapter 1, P 4.


Unique Ad, Inc.Statement of Retained Earnings

Equipment rental expense

Marketing expense

Salaries expense

Supplies expense

Office rent expense



Unique Ad, Inc.

January 31, 2010

Accounts receivable

Cash

Income taxes payable

Supplies

Total liabilities



Total assets

Balance Sheet

Subtotal

Less dividends


Total expenses






is low in that it has earned only $2,040 on revenues of $165,200. Liquidity is low be-

cause the company has cash of only $1,800 and liabilities of $21,260.

The company is challenged both in terms of profitability and liquidity. Profitability

2. User Insight: Financial challenges identified



1.

2.

3.

4.

Chapter 1, P 5.

When deciding whether to make a loan to a company, a banker evaluates the

The income statement shows net income of $3,175 earned by the company over

a period of time. The amount of net income is necessary for the preparation of

the statement of retained earnings. The statement of retained earnings shows

most closely associated with the goal of liquidity, because it shows the

income on revenues of $6,100. It has also paid dividends in the amount of

company's ability to pay interest charges and repay the loan at the appropriate

time. Accordingly, a banker studies the company's liquidity and cash flows as

well as its profitability. That information is represented in financial statements,

The company appears to be very profitable because it has earned $3,175 of net

$2,400. However, the return on total assets (net income divided by total assets)

the ending balance of $6,250. The ending balance of retained earnings appears

changes in cash.

The income statement is most closely associated with the goal of profitability,

because it shows the earnings of the business. The cash flow statement is

is only 5.87 percent, or $0.0587 on each dollar of assets invested. Moreover, the

company might experience some challenges in its liquidity position in the future

because it has liabilities of $13,350 and cash of only $6,700.

which are prepared by a company's management and can be falsified for per-

sonal gain. To lend credibility to the financial statements, the banker may re-

ments present the data fairly and conform to GAAP in all material respects.

quest an independent CPA audit. The audit would verify that the financial state-

User Insight: Role of CPA

User Insight: Relationship of financial statements

in the stockholders' equity section of the balance sheet. The statement of cash

flows explains the changes in the cash balance on the balance sheet during

the year.

User Insight: Liquidity and profitability

User Insight: Company's performance evaluated



$1,200 $ 6,600 (g) $240

810 (a) 5,000 92 (m)

$ 390 (b) $ 1,600 (h) $148

$2,900 $15,400 $132

390 (c) 1,600 148 (n)

200 1,000 (i) — (o)

$3,090 $16,000 (j) $280 (p)

$6,690 (d) $30,000 $580 (q)

$1,600 $ 5,000 $200 (r)

2,000 9,000 100

3,090 (e) 16,000 (k) 280

$6,690 (f) $30,000 (l) $580

Retained earnings

Total liabilities and stockholders’ equity

Liabilities

Stockholders’ equity

Common stock

Total assets

Balance Sheet

Chapter 1, P 6.

1. Financial statements completed

Beginning balance

Income Statement

Revenue

Set A

2. User Insight: Financial statement order explained


Net income

Less dividends

Ending balance

Set B Set C

Net income

Expenses

The income statement must be prepared first because the amount of net income is

necessary to determine the ending balance of retained earnings. The statement of

retained earnings is prepared second because it provides the ending balance of

retained earnings for the balance sheet, which is prepared last.



$300,000

$96,000

19,700

25,000

5,500

146,200

$153,800

38,850

$114,950

$ 55,400

114,950

$170,350

40,000

$130,350

$115,750 Accounts payable $ 7,400

51,900 13,000

800 Salaries payable 2,700

$ 23,100

Common stock $ 15,000



$168,450 $168,450


Retained earnings, November 30, 2010


Retained earnings, November 30, 2011



Total assets

Assets

Cash


Supplies

Total liabilities

Accounts receivable

Office rent expense

Supplies expense

Liabilities

Metro Labs

For the Year Ended November 30, 2011

Balance Sheet

Subtotal

Less dividends

November 30, 2011

Metro Labs

Revenue

Testing service revenue

Total expenses

Salaries expense

Marketing expense

Chapter 1, P 7.



Net income


Income StatementFor the Year Ended November 30, 2011

Expenses

Metro Labs





cash of $115,750 and total liabilities of only $23,100.

The company's ability to pay its bills or its liquidity appears good because it has

2. User Insight: Ability to pay bills evaluated



$82,000

$ 2,900

1,500

56,000

4,1007,200

71,700

$10,3003,000

$ 7,300

$ —7,300

$ 7,3001,000

$ 6,300

$ 2,600 $10,500

13,200 3,000

400 700

6,300 $ 14,200

$ 2,0006,300

8,300

$22,500 $ 22,500

Revenue

For the Year Ended September 30, 2010

Equipment

Chapter 1, P 8.


Net income

Gino's Painting Specialists, Inc.

Painting service revenue

Expenses

Gino's Painting Specialists, Inc.Income Statement

Truck rent expense



Total expenses

Equipment rental expense

Marketing expense

Salaries expense

Supplies expense

September 30, 2010


Accounts receivable

Cash


Gino's Painting Specialists, Inc.

For the Year Ended September 30, 2010

Balance Sheet

Subtotal

Total liabilities

Liabilities


Assets

Supplies



Common stock

Total assets

Less dividends

Retained earnings, September 30, 2010

Retained earnings


Accounts payable

Salaries payable


Retained earnings, September 30, 2009



The corporation has several advantages over the partnership, including limited

2. User Insight: Form of business discussed


liability for its stockholders and the ability to exchange shares easily.



The three basic activities Costco will engage in to achieve its goals are financing

Chapter 1, C 1.

future operations. The people in an organization are not assets of the business be-

cause they are not owned by the business. Businesses pay their employees on a

periodic basis (hourly, weekly, monthly, annually); they do not buy employees.

creditors and paying a return to the owners. Investing activities include buying land,

buildings, equipment, and other long-lived resources needed in the operation of the

business and the sale of these resources when they are no longer needed by the

business. Operating activities include selling merchandise and services to cus-

activities (obtaining adequate funds or capital to operate its business), investing ac-

tivities (spending the capital it receives so that it will be productive), and operating

activities (running its business). Financing activities include obtaining capital from

owners and from creditors, such as banks and suppliers. They also include repaying

tomers; employing managers and workers; buying, producing, and selling goods

and services; and paying taxes to the government.

Costco's management is the group of people who have overall responsibility for op-

erating the business and for meeting the company's profitability and liquidity goals.

The functions management must perform to fulfill its responsibility are obtaining

financial resources so the company can continue operating (financial management);

investing the financial resources of the business in productive assets that support

Assets are economic resources owned by a business that are expected to benefit

the company's goals (asset management); developing and producing goods and

services (operations management); selling, advertising, and distributing goods and

services (marketing management); hiring, evaluating, and compensating employees

(human resource management); and capturing, organizing, and communicating data

Southwest Airlines considers its people to be its most important asset because of

Chapter 1, C 2.

about all aspects of the company's operations (information management). Account-

ing is covered by the last function.

they provide.

the costs of hiring, training, motivating, and compensating high-quality employees

who will benefit future operations. Airlines depend on their ability to develop and

keep competent and motivated individuals. And their success in attracting and re-

taining high-quality employees depends on the opportunities and compensation

Salaries, wages, and other costs associated with employment are considered ex-

penses and appear on the income statement.



Chapter 1, C 3.

the financial statements and will be able to assess a company's performance with

confidence.

Some bodies that influence GAAP are as follows:

Generally accepted accounting principles (GAAP) encompass the conventions, rules,

and procedures necessary to define accepted practice at a particular time. When fi-

nancial statements are prepared in accordance with GAAP and audited by an inde-

pendent CPA, financial analysts will understand the significance of the amounts in

Financial Accounting Standards Board (FASB): The most important body that

Public Company Accounting Oversight Board (PCAOB): Appoints the FASB

to issue rules on accounting practice.

issues rules on accounting practice.

American Institute of Certified Public Accountants (AICPA): Influences account-

ing practice through its senior technical committees.

Governmental Accounting Standards Board (GASB): Sets accounting standards

income tax liabilities.

Internal Revenue Service (IRS): Influences practice through rules for determining

for government entities.

International Accounting Standards Board (IASB): Sets international accounting

standards.

Chapter 1, C 4.

survive in the long term, because profitability is necessary to attract and keep the

investments of stockholders.

Liquidity was more important than profitability to Lechters' short-term survival be-

cause without the ability to pay its debts, the company was forced into bankruptcy.

With the $86 million in new financing, which provided additional liquidity, the com-

pany was able to return to profitability. Achieving profitability enables a company to



1.

2.

$359,227

( 100,174)

$459,401

—

$459,401

Chapter 1, C 5.

Student A's assumption that an increase in total assets is equal to net income is

false. It is true that net income results in an increase in assets, but so do many

other transactions. For example, investments by owners and loans from banks

cash but not net income. Moreover, revenue can be recorded before cash is re-

also increase assets. Also, assets can be reduced by transactions that do not

affect net income—for example, repayment of a loan.

ceived, as when RIM bills a customer for services performed. And expenses

Student C is correct. To estimate net income from an examination of the bal-

ance sheet, the change in retained earnings must be considered. Net income in-

creases retained earnings. So net income can be estimated by taking the differ-

ence in retained earnings from one year to the next (there are no dividends).

Less RIM, Retained Earnings, December 31, 2006

can be recorded before cash is paid, as when RIM is billed by a supplier for

services already received.

Student B's assumption that the change in cash from one year to the next is

equal to net income or loss is also false. All the examples cited above affect

RIM, Retained Earnings, December 31, 2007

Increase in RIM, Retained Earnings in 2007

Net income for 2007 was $459,401,000.

Plus dividends paid in 2007

Net income in 2007

sidered at this point in the course.

* All numbers are in thousands.

** Net income is approximate because there may be effects that are not being con-

*

+

**



$2,700 $1,000

1,700

$2,700 $2,700

$3,520 $ 525

875 100

50 700

200 $1,325

$1,700

1,620

3,320

$4,645 $4,645

Murphy Lawn Services, Inc.Balance Sheet

Cash

Assets

Common stock

Total assets


Liabilities

Total assets



Cash Loan payable

Balance SheetJune 1, 2010

Chapter 1, C 6.

1. Balance sheets prepared


Accounts receivable

Murphy Lawn Services, Inc.

August 31, 2010

Supplies

Deposit

Accounts payable

Wages payable

Loan payable

Total liabilities

Assets Liabilities


Common stock

Retained earnings





Date:

To:

From:

Re:

2. Memorandum prepared

$1,620. Since you did not pay any dividends to yourself, the only factors that can af-

Finally, I suggest in the future that you also prepare an income statement, which will

show details of your revenues and expenses related to profitability, and the statement

of cash flows, which will show the details of the changes to your cash balance.

during the period from $0 to $1,620, your net income must have been $1,620.

Chapter 1, C 6. (Continued)

Beth Murphy

(Student's name)

Today's date

Assessment of Performance

Memorandum

I have reviewed the balance sheets for Murphy Lawn Services, Inc., at June 1, 2010,

and August 31, 2010.

With regard to your business goal of profitability, your net income for the summer is

fect retained earnings are revenues and expenses. Since retained earnings increased

Let me know if you have any further questions.

With regard to your business goal of liquidity, you have increased your cash from

$2,700 to $3,520, an increase of $820. At the same time, your liabilities increased only

$325 from $1,000 to $1,325. Also, you have total assets of $4,645.



1.

2.

= Liabilities + Stockholders' Equity

= $23,400.0 + $31,321.9

3.

4.

5.

6.

7.

used by investing activities were negative in both 2006 and 2007, and cash flows

panying information are prepared in accordance with generally accepted ac-

counting principles. If this is so, then the reader of the financial statements

can rely on them and analyze them. The auditor's report lends credibility to the

CVS was audited by Ernst & Young LLP. The auditor's report is important be-

cause it tells whether or not the company's financial statements and accom-

financial statements.

December 30, 2006 and December 29, 2007 balance sheets.

Cash flows from operating activities increased from 2006 to 2007. Cash flows

computed by taking the difference of the cash and cash equivalents from the

Yes, the company's cash and cash equivalents increased by $525.9 million. This

number can be found toward the bottom of the statement of cash flows or can be

dividends are distributions to owners.)

Total revenues of CVS for the year ended December 29, 2007 were $76,329.5

from financing activities decreased from 2006 to 2007.

The names CVS gives its four basic financial statements are as follows:

Consolidated Statements of Operations (Income Statement)

Chapter 1, C 7.

earnings

The accounting equation for CVS on December 29, 2007, is as follows:

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders' Equity; includes data for retained

ings of $1,368.9 million for the year ended December 30, 2006. (Note: Preference

$54,721.9

million.

(in millions)

Assets

Yes. The company earned $2,637.0 million. This was an increase from net earn-



1.

2.

3.

4.

larger than Southwest, which has revenues of $9,861 million and total assets of

company. Assets tell how large a company's resources are, and revenues tell

how well the company is able to generate revenue. Both are useful measures

of a company's size.

over the three years, whereas Southwest's net income rose slightly from 2005 to

$20,574.1) ÷ 2]), and Southwest had return on assets of 4.3 ($645 ÷ [($16,772 +

$13,460) ÷ 2]). By this measure, CVS is more profitable than Southwest. Return

2006 and increased more from 2006 to 2007.

on assets is a better measure than net income of the two companies' profit-

companies.

the measure of cash flows from operating activities, it has more liquidity.

In 2007, CVS had return on assets of 7.0 percent ($2,637.0 ÷ [($54,721.9 +

ability because return on assets takes into account the relative size of the two

Neither assets nor revenues are better than the other to measure the size of a

cash and cash equivalents of $2,213 million. CVS's cash increased by $525.9

million compared to the $823 million increase by Southwest. CVS had cash flows

from operating activities of $3,229.7 million compared with Southwest's cash flows

from operating activities of $2,845 million. CVS has less cash on hand, but by

$16,772 million. Note that CVS generates 7.7 times as much sales on about 3.3

CVS has net income (earnings) of $2,637.0 million, which is about 4 times more

than Southwest's earnings of $645 million. CVS has had increasing net income

Chapter 1, C 8.

With sales of $76,329.5 million and total assets of $54,721.9 million, CVS is much

CVS has cash and cash equivalents of $1,056.6 million compared to Southwest's

times the total assets of Southwest.



1.

2.

3.

4.

5.

6.

The alternative courses of action are to report or not to report the $200 in cash.

Accountants must maintain their integrity, which means being honest. The $200

independent, the CPA should disclose the investment and then sell the stock.

should be reported; it would be illegal not to report it.

The courses of action are to disclose the investment or not to disclose the in-

vestment. A CPA must avoid even the appearance of a conflict of interest. To be

The ethical situations are presented for discussion purposes. Students are likely to

have many different viewpoints.

of action are to do the work and not report it, to do the work and report it, or to

talk to a superior as soon as the problem is recognized. The third alternative is

the best because there may be some other reason that the job cannot be done

a conflict of interest, the appropriate action would be to return the gift.

in the allotted time. Underreporting hours usually is not tolerated by CPA firms.

bility of retribution. If the manager does not take appropriate remedial action,

the accountant should report his actions—and be prepared to look for another

job.

to report them to the home office. It might also be possible to discuss them

The alternative courses of action are to disclose or not to disclose the employ-

The alternative courses of action are to ignore the inappropriate expenses or

This is a common problem faced by young accountants. The alternative courses

Chapter 1, C 9.

with the manager in private. This is a difficult situation because of the possi-

ee's hourly rate. The information should not be disclosed because of its confi-

dential nature.

The alternative courses of action are to accept the gift or to return it. To avoid



Microsoft Intel

(June 30, 2007) (Dec. 29, 2007)

$63,171 $55,651

$51,122 $38,334

$14,065 $ 6,976

Microsoft Intel

(June 30, 2007) (Dec. 29, 2007)

27.5% 18.2%

22.3% 12.5%

Some students will recognize that it is also important to consider the ratio of net in-

Net income/Total assets

2007 and for Microsoft, from June 30, 2007. By the time this book will be used, more

Based on the above figures, Microsoft is larger on the basis of all three measures.

(Note to the instructor: Because the two companies have different fiscal years, a

judgment must be made as to which fiscal years to compare. At the time this solu-

results may differ.)

Chapter 1, C 10.

Total assets

Net income

Revenues

revenues, but Microsoft excels both in relation to return on revenues and on assets.

(in millions)

tion was written, the most recently available figures for Intel were from December 31,

recent figures will be available for both companies and should be substituted. The

On the basis of these ratios, the two companies had good profitability in relation to

come to total assets and to revenues. These ratios are as follows:

Net income/Revenues



Individual or Group Reason

1. Management To evaluate the progress of the company in achiev-

ing profitability, liquidity, and other goals

2. Stockholders To evaluate the success or failure of the company

and to assess its future potential

3. Creditors To evaluate the ability of the company to pay its

current and future debts

4. Potential stockholders To evaluate a possible investment in the company

5. Internal Revenue Service To determine taxable income and federal tax

liability

6. Securities and Exchange To determine whether the company has complied

Commission with reporting regulations

7. Teamsters' union To justify demands for salary and benefit increases

8. Consumers' group To collect data about employee work conditions at

overseas facilities

9. Economic adviser To make recommendations about the national

economy and policies related to the production,

conservation, and use of energy

Chapter 1, C 11.



Date:

To:

From:

Re:

Second, your company's financial statements provide information on how you are

much is invested in assets, including assets that are readily available for paying

meeting these goals, as follows:

Profitability: The income statement tells how much income you have earned.

Liquidity: The statement of cash flows gives a picture of your cash inflows and

outflows. Cash flows from operating activities in the top part of the statement

will tell you how much cash your company has generated from operations.

First, you need to consider two business goals:

business.

Profitability: The ability to earn a satisafactory return on your investment in the

I am pleased to provide some information that I learned in my class that I believe

will help in operating your business.

Chapter 1, C 12.

Owner

(Student's name)

Today's date

Business Goals and Financial Statements

Liquidity: The ability to generate enough cash to pay your bills on time.

I trust these comments will be helpful and I will be glad to discuss them with you

the other three statements in assessing profitability and liquidity.

and the balance sheet. It performs a necessary function but is not as important as

Memorandum

The balance sheet is related to both profitability and liquidity in that it shows how

obligations. It also shows the obligations of the company and your interest, as

further.

owner, in the company.

The statement of retained earnings shows the links between the income statement



10

15

1

a. e.

b. f.

c. g.

d. h.

a. e.

b. f.

c. g.

d. h.

ANALYZING BUSINESS TRANSACTIONS

CHAPTER 2—Solutions

The concept of valuation is applied by recording the supplies at a cost of $1,000.

nition point on June 1 when the transaction takes place. Supplies are purchased

Chapter 2, SE 3.

with cash, and the buyer takes title to the supplies.

The classification concept is applied by reducing the asset Cash and increasing

the asset Supplies. Supplies are classified as an asset because they have not

been used up and will benefit future operations. If they were used up immedi-

ately, they could be classified as Supplies Expense.

Credit Debit

Credit Debit

Debit Debit

Debit Credit

Asset

Chapter 2, SE 4.

Asset Asset

None (Stockholders' Equity) Liability

Revenue

Liability Expense

Chapter 2, SE 2.

The concept of recognition is applied by recording the transaction at the recog-

exists.

ligation to pay.

There is no obligation on the part of either party at this point.

Mar. Recognize the payment. Cash is paid, and the obligation no longer

Chapter 2, SE 1.

Jan. Do not recognize because an order is not a complete transaction.

Feb. Recognize the purchase. Delivery has been made; there is an ob-



May 2

5

7

19

22

25

31

May 2 5,000 May 5 2,500 May 22 600

19 500 25 650

22 600

6,100 3,150 May 2 5,000

Bal. 2,950

May 31 250 May 19 500

31 250

Bal. 750

May 7 300

May 25 650

May 5 2,500

May 7 300

Debit Cash; credit Programming Service Revenue

Chapter 2, SE 5.

Service Revenue

Debit Cash; credit Common Stock

Debit Rent Expense; credit Cash

Debit Accounts Receivable; credit Programming Service Revenue

Debit Office Equipment; credit Cash

Debit Supplies; credit Accounts Payable

Revenue

Accounts Payable

Debit Cash; credit Unearned Programming Service Revenue

Chapter 2, SE 6.

Cash

Unearned Programming

Programming Service

Common Stock

Rent Expense

Accounts Receivable

Office Equipment

Supplies



$2,950

250

300

2,500

$ 300

600

5,000

750

650 ______

$6,650 $6,650

1,200 1/4

Page 4

Post.

Ref. Debit Credit

Sept. 6 3,800

3,800

16 1,800

1,800

1/2 700

Unearned Programming Service Revenue

Common Stock

Programming Service Revenue

Rent Expense

Accounts Receivable

Supplies

Office Equipment

Accounts Payable

Bear's Programming Service, Inc.

Trial Balance

Chapter 2, SE 7.

May 31, 2010

Cash

Accounts Receivable

To record receipt of partial pay-

ment on account billed Sept. 6

Cash

Service Revenue

To bill customer for services

performed

Chapter 2, SE 9.

Accounts Receivable

General Journal

Description

The transactions of Jan. 2 and 4 have an immediate impact on cash, whereas

the transactions of Jan. 8 and 9 will not impact cash until later when the cash

is received or paid.

Date

Cash

Chapter 2, SE 8.



Item Ref. Debit Credit Debit Credit

Sept. 16 J4 1,800 1,800


Sept. 6 J4 3,800 3,800

16 J4 1,800 2,000


Sept. 6 J4 3,800 3,800

$1,800

2,000

_____ $3,800

$3,800 $3,800

Cash

Accounts Receivable

Trial Balance

September 16

Post.

BalancePost.

Date

Account No. 113

Date

Accounts Receivable

Chapter 2, SE 10.

Post.

Cash Account No. 111

Balance

in the general journal in SE 9.

Service Revenue

Note: At this point, the account numbers would also be posted to the accounts

Balance

Date

Account No. 411

Service Revenue



Credit

2

5,000

5

2,500

7

300

19

500

22

600

25

650

31

250

$1,500

( + $13,000 ) ÷ 2 $13,500= 0.111

Cash Return on AssetsNet Cash Flows from Operating Activities

Post.

Ref.

Received payment for programming

To record receipt of payment for

or 11.1%

=Average Total Assets

performed

services to be performed

Paid the rent for May

Rent Expense

Cash

650

Purchased a computer for cash

Purchased supplies on account

programming service

Office Equipment

Description

Cash

General Journal

Common Stock

=

Debit

5,000

2,500

300

500

600

$14,000

$1,500

250

Chapter 2, SE 12.

Accounts Receivable

Revenue

Cash

Unearned Programming Service

Date

Chapter 2, SE 11.

Key ratio calculated

stock

Supplies

Cash

Cash

Accounts Payable



Billed a customer for services

Invested in company's common

May



1.

2.

3.

4.

1.

2.

3.

4.

Assets and expenses are closely related because many assets are ex-

No issue is more important than another. Each must be resolved satis-

Chapter 2, E 1.

recording of an order as revenue before the service is performed or the

product is delivered to the customer would overstate revenues.

factorily for a transaction to be recorded correctly.

The most common violation of the recognition concept is when a revenue

is recognized before the earnings process is complete. For instance, the

Chapter 2, E 2.

penses that have not yet been used. Examples are prepaid assets and

plant and equipment. As a result, debits increase assets and expenses,

sides of the accounting equation.

and credits decrease assets and expenses. They appear on opposite

With unearned revenues (a liability), cash is received in advance for a

service to be performed later. With prepaid expenses (an asset), cash is

paid in advance of receiving a service.

Retained Earnings is the most likely account to have an abnormal balance

(debit) because of situations in which expenses exceed revenues (net

loss). It is unusual for any other account to have an abnormal balance.

A retail company selling advertising products would have the following

asset account: Merchandise Inventory.

All equipment needs normal repairs. These are considered an ongoing

cost of business and thus are expenses. However, it may be argued that if

To maintain liquidity, it can issue stock, sell long-term investments (e.g.,

the repair is major, such as a major overhaul that is done every five years,

the expenditure will benefit future years and thus could be recorded as an

asset.

unused equipment) or available-for-sale securities.



15

2

29

10

6

Amount

$ 750

450

600

700

$2,500

Amount

$ 300

750

450

600

$2,100

e

for payment exists.

30

Total July purchases

Aug.

June Not recorded. An order does not constitute a recognition point.

Mar.

5

16

1

Recorded. The utilities expense has been incurred, and the liability

June

Order

16

23

27

Date Shipped

30

July

Date Received

10 15July

10

a

b

c

d

26

Total July purchases

2. Purchases recognized on date received

23

July

22

Date Received

July 15

22

b

c

d

Order Date Shipped

Recorded. Villa Corporation now owns the office equipment, and

a liability to pay exists.

1. Purchases recognized on date shipped

Chapter 2, E 4.

July

Chapter 2, E 3.

Feb. Not recorded. Notice of a price increase is not a transaction.

Jan. Not recorded. An offer is not a completed transaction.



1,7

25

600

900

300

375

750

450

=+

=

Div

iden

ds

Div

iden

ds

++

+S

tockh

old

ers

' E

qu

ity

Reven

ues

Exp

en

ses

– C

om

mo

n S

tock

–=

$1,7

25

$600

$1,1

25

Cash

Reta

ined

Earn

ing

s

Serv

ice

Reven

ue

Ren

t

Exp

en

se

$1,7

25

$1,7

25

Ch

ap

ter

2,

E 5

.

Acco

un

ts

Payab

le

Reta

ined

Earn

ing

s

Lia

bil

itie

sA

ssets

Co

mm

on

Sto

ck

C

en

ga

ge

Le

arn

ing

. A

ll ri

gh

ts r

ese

rve

d.

44


Common

Item Asset Liability Stock Dividends Revenue Expense Debit Credit

a. x x

b. x x

c. x x

d. x x

e. x x

f. x x

g. x x

h. x x

i. x x

j. x x

k. x x

l. x x

m. x x

n. x x

o. x x

p. x x

q. x x

r. x x

s. x x

t. x x

u. x x

v. x x

w. x x

x. x x

y. x x

z. x x

Type of Account

Stockholders' Equity Normal Balance

Chapter 2, E 6.

Retained Earnings (increases balance)



a.

b.

c.

d.

e.

f.

g. The stockholders' equity was decreased when dividends were paid to

The stockholders' equity was decreased by the utilities expense. Decreases

in stockholders' equity are recorded by debits. Debit Utilities Expense $72.

The asset Cash was decreased. Decreases in assets are recorded by cred-

its. Credit Cash $72.

Fees Earned $700.

stockholders. Decreases in stockholders' equity are recorded by debits.

Debit Dividends $100. The asset Cash was decreased. Decreases in assets

are recorded by credits. Credit Cash $100.

The liability Accounts Payable was decreased. Decreases in liabilities are

recorded by debits. Debit Accounts Payable $120. The asset Cash was de-

creased. Decreases in assets are recorded by credits. Credit Cash $120.

Increases in stockholders' equity are recorded by credits. Credit Barber

The asset Prepaid Rent was increased. Increases in assets are recorded

by debits. Debit Prepaid Rent $1,680. The asset Cash was decreased. De-

creases in assets are recorded by credits. Credit Cash $1,680.

debits. Debit Supplies $120. The liability Accounts Payable was increased.

Increases in liabilities are recorded by credits. Credit Accounts Payable

The asset Cash was increased. Increases in assets are recorded by debits.

$120.

The asset Supplies was increased. Increases in assets are recorded by

Chapter 2, E 7.

Debit Cash $700. Stockholders' equity was increased by the fees earned.

The asset account Cash was increased. Increases in assets are recorded by

debits. Debit Cash $2,500. A component of stockholders' equity, Common

Stock, was increased. Increases in stockholders' equity are recorded by

credits. Credit Common Stock $2,500.



Debit Credit

a. Paid for supplies purchased on credit last month. 5 1

b. Received cash from customers billed last month. 1 2

c. Made a payment on accounts payable. 5 1

d. Purchased supplies on credit. 3 5

e. Billed a client for lawn services. 2 6

f. Made a rent payment for the current month. 8 1

g. Received cash from customers for current lawn

services. 1 6

h. Paid employee wages. 7 1

i. Ordered equipment.

j. Received and paid for the equipment ordered in i . 4 1

Chapter 2, E 8.

No entry



f. 400 c. 1,100

g. 3,720 d. 600 Bal. 700

e. 900

h. 1,000 a. 5,900

8,020 3,700

Bal. 4,320

h. 1,000

c. 1,100 g. 3,720

a. 1,600 e. 900

d. 600

Bal. 2,200

b. 800

Accounts Payable

Common Stock

Dividends

Rent Expense

4,300a.

Repair Fees Earned

Salaries Expense

400f.

800b.

Cash

Repair Supplies

Repair Equipment

Chapter 2, E 9.



$ 4,320

1,100

2,200

$ 700

5,900

1,000

3,720

900

800 ______

$10,320 $10,320

a.

b.

c.

d.

e.

f.

g.

h.

Chapter 2, E 11.

Issued common stock for cash, $20,000.

Purchased equipment with cash, $7,500.

Billed customer for services rendered, $4,000.

Purchased equipment on account, $4,500.

Paid wages with cash, $1,800.

Paid cash on account owed, $2,250.

Received cash on account, $750.

Sold equipment (at cost) for cash, $450.

Cash

Repair Supplies

Repair Equipment

Accounts Payable

Common Stock

Repair Fees Earned

Chapter 2, E 10.

Rent Expense

Ornega Repair Service, Inc.

Trial Balance

June 30, 2010

Dividends

Salaries Expense



$10,000

10,710 *

12,000

6,870

$39,580

$39,580 – ( $10,000 + $12,000 +

a.

b.

c.

d.

be overstated by $378, and Office Supplies would be understated by $378.

Equal balance. However, both accounts would be incorrect. Cash would

Chapter 2, E 13.

Retained Earnings

Common Stock

) =

Unequal totals. The total debits would be $27 more than the total credits.

$ 5,400

2,800

660

3,120

20,400

7,200

Equal balance. However, an error has been made by debiting the wrong

asset. Therefore, Supplies would be overstated by $450, and Equipment

would be understated by $450.

Equal balance. However, both Accounts Receivable (an asset account) and

Accounts Payable (a liability account) would be overstated by $150.

Dymarski Corporation

Trial Balance

March 31, 2010

$6,870

Chapter 2, E 12.

Building

Equipment

Notes Payable

Accounts Payable

Cash

Accounts Receivable

Prepaid Insurance

Land

*

______

$39,580

$10,710



$ 2,400

3,860

3,000

7,560

5,920

______

$22,740$22,740

Advertising Expense 340

Utilities Expense 260

Salaries Expense 2,600

Rent Expense 600

Dividends 1,100

Revenues

Common Stock

Retained Earnings

5,780

Supplies 240

Prepaid Insurance 360

Chapter 2, E 14.

Marek Services, Inc.

Trial Balance

July 31, 2010

Cash $ 4,060

Equipment 7,400

Notes Payable

Accounts Payable

Accounts Receivable



750 750 550 550

900 600 350 650

1,650 1,350 900 1,200

450

900 350 650

300 300

Revenues

from Services

Cash

Expenses

Accounts

Receivable

Accounts

Payable

600

The cash balance after these transactions is $450. The amount still to be re-

ceived (the balance of Accounts Receivable) is $300. The amount still to be

paid (the balance of Accounts Payable) is $300.

Chapter 2, E 15.

Cash

Sale

Credit

Sale

Collection on

AccountCredit

Purchase

Payment on

Account

Cash

Purchase



Post.

Ref. Debit Credit

a. 4,300

1,600

5,900

Invested cash and repair equip-

ment in return for common stock

b. 800

800

Paid current month rent

c. 1,100

1,100

Purchased repair supplies on

credit

d. 600

600

Purchased additional repair equip-

ment for cash

e. 900

900

Paid salary to a helper

f. 400

400

Paid $400 of the amount purchased

on credit in transaction c

g. 3,720

3,720

Accepted cash for repairs

completed

h. 1,000

1,000

Declared and paid a dividend

Accounts Payable

Repair Equipment

Salaries Expense

Cash

Accounts Payable

Cash

Repair Fees Earned

Cash

Rent Expense

Cash

DescriptionDate

Chapter 2, E 16.

Cash

Common Stock

General Journal

Repair Equipment

Cash

Repair Supplies

Cash

Dividends



May 1 1,200

1,200

To purchase merchandise inventory

on account

2 3,000

3,000

To purchase marketable securities

3 250

250

To return part of merchandise

inventory for full credit

4 800

800

To sell merchandise inventory

5 100,000

200,000

60,000

240,000

To purchase land and building with

partial payment in cash

6 3,500

3,500

To record deposit on services of

$12,000 to be provided

Cash

Mortgage Payable

Cash

Advance Deposit or Unearned Revenue

(Note to the instructor: A full discussion might be held at this point on what

should be done to the Merchandise Inventory account.)

Building

Accounts Payable

The answer given here assumes the perpetual inventory method because it

Marketable Securities

Merchandise Inventory

Land

Chapter 2, E 17.

Cash

Accounts Payable

Merchandise Inventory

is most intuitive at this point in the course. The purpose of this exercise is

to focus on analytical thinking.

Accounts Receivable

Sales



Page 10

Post.

Ref. Debit Credit

14 144 6,000

111 2,000

212 4,000

28 212 3,000

111 3,000

Ref. Debit Debit Credit

13 �� 8,000

14 J10 6,000

28 J10 3,000


14 J10 6,000 6,000


14 J10 4,000

28 J10 3,000 1,000

Post.

Cash

Post.

Equipment

Date

Balance

Balance

CreditDate Item

Item CreditDate

Balance

Account No. 144

3,000

4,000

Post.

Accounts Payable Account No. 212

CreditItem

Dec.

2,000

Dec.

Date

Dec.

General Journal

Description

third in cash

To purchase equipment; paid one-

Chapter 2, E 18.

Balance

Account No. 111

General Ledger

Dec.

To pay for part of equipment

Cash

purchased on credit

Equipment

Cash

Accounts Payable

Accounts Payable



( $46,000 + ) ÷ 2

( $40,000 + ) ÷ 2

=$5,000

Chapter 2, E 19.

$43,000

Net cash flows from operating activities is a "flow measure," and total assets

is a "point in time" measure.

average total assets to make the components of the formula consistent.

By this measure the liquidity has improved by 0.3 percent. It is important to use

Cash Return on Assets

$4,300

Net Cash Flows from Operating Activities

Average Total Assets=

0.116 or 11.6%

=2009$36,000

11.3%==$4,300

$38,0000.113 or


=

2010 =$5,000

$40,000



15

,00

02

2,0

00

18

,00

01

05

,00

05

,94

0

48

0

62

,00

0

= =

=$

17

,21

0

=$

72

,79

0

3,2

10

39

,00

0

9,2

00

Ac

co

un

tin

g e

qu

ati

on

wit

ho

ut

Eq

uip

me

nt:

24

,59

0

+$

55

,58

0

Ac

co

un

tin

g e

qu

ati

on

in

ba

lan

ce

:

9,0

00

Wa

ge

s

Ex

pe

ns

e

Eq

uip

me

nt

Un

ea

rne

d

Re

ve

nu

es

5,0

00

Te

lep

ho

ne

Ex

pe

ns

e

Lo

an

s

Pa

ya

ble

$7

2,7

90

As

se

ts

$7

2,7

90

Ch

ap

ter

2, P

1.

Ac

co

un

ts

Pa

ya

ble

Re

tain

ed

Ea

rnin

gs

=

Ca

sh

Ac

co

un

ts

Re

ce

iva

ble

De

sig

n

Re

ve

nu

e

Co

mm

on

Sto

ck

Div

ide

nd

s

–

Re

nt

Ex

pe

ns

e

Co

mm

on

Sto

ck

Div

ide

nd

s R

eta

ine

d

Ea

rnin

gs

Re

ve

nu

es

+–

++

Sto

ck

ho

lde

rs' E

qu

ity

Ex

pe

ns

es

Lia

bilit

ies

$4

8,2

00

Eq

uip

me

nt

+

Eq

uip

me

nt

$7

2,7

90

$2

4,5

90

C

engage L

earn

ing.

All

rights

reserv

ed.

57


Debit Credit

a. Paid for supplies purchased on credit last month. 7 1

b. Billed customers for services performed. 2 11

c. Paid the current month's rent. 12 1

d. Purchased supplies on credit. 3 7

e. Received cash from customers for services per- 1 11

formed but not yet billed.

f. Purchased equipment on account. 5 7

g. Received a bill for repairs. 13 7

h. Returned part of the equipment purchased in f for 7 5

a credit.

i. Received payments from customers previously 1 2

billed.

j. Paid the bill received in g . 7 1

k. Received an order for services to be performed.

l. Paid for repairs with cash. 13 1

m. Made a payment to reduce the principal of the note 6 1

payable.

n. Declared and paid a dividend. 10 1

No entry

Chapter 2, P 2.



f. 2,040 j. 1,380 e. 330

1,380 c. 190 2,040 1,380

Bal. 660

i. 40

k. 90

l. 440

m. 300

7,080 1,650

5,430

5,000 a. 3,600 h. 330 e. 330

480 g. 380 g. 860

5,480 Bal. 3,980 330 1,190

Bal. 860

a. 14,300 m. 300 f. 2,040

440 k. 90 b. 260

40 c. 190

No entry

Computers

a.

Cash

Chapter 2, P 3.

Accounts Receivable Supplies

Bal.

T accounts set up

Transactions recorded in the accounts

1.

2.

5,700 b. 260

h. 330

j.

Repair Expense

i.

Rent Expense

d.

Salaries Expense

l.

Office Equipment

Bal.

Utilities Expense

Advertising Expense

Common Stock

g.

a.

Accounts Payable

Dividends Tuition Revenue



$ 5,430

660

330

5,480

3,980

$ 860

14,300

300

2,040

440

90

260

40

190 ______

$17,200 $17,200

Trial Balance

(Today's Date)

Office Equipment

Common Stock

Salaries Expense

Star Secretarial Training, Inc.

Accounts Payable

Computers

Cash

Dividends

Accounts Receivable

Supplies

Advertising Expense

Repair Expense

Tuition Revenue

Rent Expense

Utilities Expense

it will not receive the cash until later and that some students will not be able to

4. User Insight: Transactions "f" and "j" examined

revenues. The company accepts credit sales to accommodate its students

pay.


Trial balance prepared3.

and encourage them to enroll. The company must consider the possibility that

The revenues were $2,040, and only $1,380 of cash was received from those



2 7,200

7,200

To issue 7,200 shares of $1 par value

common stock

3 150

150

To purchase supplies on account

4 2,500

1,200

1,300

To purchase bicycles; made partial pay-

ment and agreed to pay the rest later

5 2,900

2,900

To purchase shed to store bicycles

8 400

400

To install shed

9

10 75

75

To pay for cleanup

13 970

970

To record rentals made for cash

17 150

150

To pay for supplies purchased on June 3

Chapter 2, P 4.

Common Stock

June

Shed

Shed

1. Transactions entered in journal form

Cash

Rental Revenue

Supplies

Accounts Payable

Cash

Accounts Payable

Cash

Cash

Bicycles

Cash

No entry

Maintenance Expense

Cash

Cash

Accounts Payable



18 55

55

To repair bicycles

23 110

110

To bill company for rentals

25 100

100

To pay monthly concession fee

27 960

960

To record rentals made for cash

29 240

240

To pay wages of assistant

30 500

500

To declare and pay a dividend

Rental Revenue

Concession Fee Expense

Cash


Accounts Receivable

Rental Revenue

Cash

Dividends

June

Wages Expense

Cash

Repair Expense

Cash

Cash



7,200 6/4 1,200 6/23 110 6/3 150

970 6/5 2,900

960 6/8 400

6/10 75

6/17 150

6/18 55

6/25 100

6/29 240

6/30 500

9,130 5,620

3,510

2,900 6/4 2,500 6/17 150 6/3 150

400 6/4 1,300

3,300 150 1,450

Bal. 1,300

6/2 7,200 6/30 500 6/13 970

6/23 110

6/27 960

Bal. 2,040

240 6/10 75 6/18 55

1006/25

Maintenance Expense Repair ExpenseWages Expense

Expense

Concession Fee

Dividends Rental Revenue

6/29

Common Stock

Accounts PayableShed Bicycles

Bal.

6/5

6/8


Accounts Receivable

6/13

Supplies

2. T accounts set up and entries posted from the journal

Cash

6/2

6/27

Bal.



$ 3,510

110

150

3,300

2,500

$ 1,300

7,200

500

2,040

240

75

55

100 ______

$10,540 $10,540

gated to pay.

Maintenance Expense

Concession Fee Expense

4. User Insight: Recognition and classification discussed

June 30, 2010

Bicycles

Shed

Common Stock

Accounts Receivable


Trial Balance

3. Trial balance prepared

Patel Rentals, Inc.

Wages Expense

Rental Revenue

Dividends

Accounts Payable

Cash

Supplies

Repair Expense

June 3 and 10 are the recognition points for these transactions. June 3 is the

recognition point for the purchase of supplies, because it is on June 3 when

the title to the supplies passes and there is an obligation to pay. June 10 is the

recognition point for the cleaning work because this is when the cleaning is

done and there is an obligation to pay for it.

company to continue running. Also the purchase of supplies is classified as

Both transactions are recorded at cost, the amount that the company is obli-

The supplies purchased on June 3 are classified as an asset, Supplies, be-

Accounts Payable, a liability, because the supplies are to be paid for in the fu-

ture. Conversely, the payment to a maintenance person is classified as Cash,

an asset, because the cleaning work is paid for on the day of purchase.

cause the supplies are not used immediately but will be used up in the future.

The purchase of cleaning work is classified as stockholders' equity, Mainten-

ance Expense, because it is necessary now in the current period for the



Page 22

Post.

Ref. Debit Credit

2 512 650

111 650

To pay August rent

3 111 2,300

113 2,300

To record receipt of cash on

account

7

10 113 2,800

411 2,800

To bill customers for services

12 212 1,300

111 1,300

To pay on account

14 115 380

212 380

To purchase supplies on credit

17 212 80

115 80

To return supplies for credit

19 111 4,800

411 4,800

To record receipt of payment for

services

24 513 250

111 250

To pay August utility bill

26 515 700

212 700

To record receipt of August

advertising bill

Utilities Expense

Cash

Accounts Payable

Marketing Fees

Advertising Expense

Cash

Marketing Fees

Accounts Payable

Cash

Cash

Accounts Receivable

No entry

Accounts Payable

Chapter 2, P 5.

2010

3. Transactions entered in the general journal

(Requirements 1, 2, 4, and 5 follow)

Aug.

Supplies

Date Description

Cash

Accounts Receivable

Rent Expense

Accounts Payable

Supplies

General Journal



Page 23

Post.

Ref. Debit Credit

29 113 2,700

411 2,700

To bill customer for services

30 511 3,800

111 3,800

To pay salaries for August

31 313 1,200

111 1,200

To declare and pay dividend

General Journal

Dividends

Accounts Receivable

Marketing Fees

Aug.

Cash

Salaries Expense


2010

Date

Cash

Description



Ref. Debit Credit Debit Credit

31 10,590

2 J22 650 9,940

3 J22 2,300 12,240

12 J22 1,300 10,940

19 J22 4,800 15,740

24 J22 250 15,490

30 J23 3,800 11,690

31 J23 1,200 10,490


31 5,500

3 J22 2,300 3,200

10 J22 2,800 6,000

29 J23 2,700 8,700


31 610

14 J22 380 990

17 J22 80 910

July Balance

Item

2010

Supplies Account No. 115

Balance

2010

July


2. Amounts from July trial balance entered

1. Ledger accounts set up

Balance

Item

Entries from journal posted to ledger accounts4.

Account No. 111Cash

Date

2010

July Balance

Aug.

Accounts Receivable

Balance

Aug.

Account No. 113

ItemDate

Date

Aug.

Balance

Post.

Post.

Post.




31 4,200


31 2,600

12 J22 1,300 1,300

14 J22 380 1,680

17 J22 80 1,600

26 J22 700 2,300


31 12,000


31 6,300


31 J23 1,200 1,200

July Balance

2010

Aug.

Post. Balance

Item

Account No. 212Accounts Payable


Office Equipment Account No. 141

2010

Balance

Item

Common Stock

July Balance

Post. Balance

Account No. 311

Item

2010

July Balance

Retained Earnings Account No. 312

Item

Post. Balance

2010

July Balance

Dividends Account No. 313

Balance

Item

2010

Aug.

Post.

Date

Date

Date

Date

Date

Post.




10 J22 2,800 2,800

19 J22 4,800 7,600

29 J23 2,700 10,300


30 J23 3,800 3,800


2 J22 650 650


24 J22 250 250


26 J22 700 700

Date

Date

Date

Date

Post.

2010

Aug.

BalancePost.

Item

Utilities Expense Account No. 513

Item

2010

Aug.

BalancePost.

Rent Expense

Aug.

Balance

Account No. 512

Item

Account No. 511Salaries Expense

2010

Balance

Item


Marketing Fees Account No. 411

Post.

2010

Aug.

Advertising Expense Account No. 515

Date Item

Post. Balance

2010

Aug.



$10,490

8,700

910

4,200

$ 2,300

12,000

6,300

1,200

10,300

3,800

650

250

700 ______

$30,900 $30,900

revenues. Also, the company received $2,300 of cash for services provided in

previous months. Not all customers pay on time, and the company has to finance

them.

The revenues were $10,300, and only $4,800 of cash was received from those

6. User Insight: Transactions for August 3, 10, 19, and 29 examined

Cash

Office Equipment

Marketing Fees

Accounts Receivable

Salaries Expense

Utilities Expense

Supplies

Rent Expense

Advertising Expense

Trial Balance

August 31, 2010

Trial balance prepared

Accounts Payable

Common Stock

Retained Earnings

Dividends

5.

Alpha Pro Corporation




6,8

80

15

,00

05

,00

03

,50

08

,70

03

,60

0

5,0

60

21

0

3,2

50

4,4

00

13

,75

0

+= =

=+

=

Ex

pe

ns

es

Re

ve

nu

es

Re

nt

Ex

pe

ns

e

+–

++

Sto

ck

ho

lde

rs' E

qu

ity

– C

om

mo

n

Sto

ck

Re

tain

ed

Ea

rnin

gs

Div

ide

nd

sL

iab

ilit

ies

As

se

ts=

Ca

sh

Div

ide

nd

s

1,9

50

10

,00

0

Uti

liti

es

Ex

pe

ns

e

Re

ve

nu

e

Ea

rne

d

Ac

co

un

ts

Pa

ya

ble

Re

tain

ed

Ea

rnin

gs

Co

mm

on

Sto

ck

$2

8,9

40

Ch

ap

ter

2,

P 6

.

Ac

co

un

ts

Re

ce

iva

ble

$2

8,9

40

$2

2,0

60

Ac

co

un

tin

g e

qu

ati

on

wit

ho

ut

Ca

sh

No

tes

Pa

ya

ble

$2

8,9

40

$1

1,9

50

$1

6,9

90

Ca

sh

$2

8,9

40

$6

,88

0C

as

h

Eq

uip

me

nt

Ac

co

un

tin

g e

qu

ati

on

in

ba

lan

ce

:

Su

pp

lie

s

Wa

ge

s

Ex

pe

ns

e

C

en

ga

ge

Le

arn

ing

. A

ll rig

hts

re

se

rve

d.

71


Oct. 21 1,340 Oct. 27 600

12 960 4 1,200 Bal. 740

27 600 9 1,080

17 1,500

24 80

31 700

16,560 7,360

Bal. 9,200

Oct. 7 3,000 Oct. 4 1,200

Oct. 3 2,800 Oct. 17 1,500 Oct. 7 3,000

Bal. 1,500

Oct. 1 15,000 Oct. 31 700

Oct. 12 960 Oct. 9 1,080

21 1,340 24 80

Bal. 2,300 Bal. 1,160

Oct. 2 No entry

Accounts Payable

Dividends

Cleaning Equipment

Common Stock

2,8003Oct.Oct. 1 15,000

2.

Cleaning Supplies Prepaid Lease

Chapter 2, P 7.

Accounts Receivable

T accounts set up

Transactions recorded in the accounts

1.

Cleaning Revenue Repair Expense

Cash



$ 9,200

740

3,000

1,200

2,800

$ 1,500

15,000

700

2,300

1,160 ______

$18,800 $18,800

Cleaning Revenue

Common Stock

Dividends

Cash

Cleaning Equipment

Cleaning Supplies

Prepaid Lease

Cupello Upholstery Cleaning, Inc.


Trial balance prepared3.

Trial Balance

October 31, 2010

Repair Expense

Accounts Receivable

Accounts Payable



passes and there is an obligation to pay. October 9 is the recognition point for

the repairs because this is when the repairs are done and there is an obligation

to pay for them.

4. User Insight: Accounting issues discussed

Both transactions are recorded at cost, the amount that the company is obli-

gated to pay.

On the other hand, the purchase of repairs is classified as stockholders' equity,

Repairs Expense, because they are necessary now in the current period for the


Payable, a liability, because the supplies are to be paid for in the future. Con-

versely, the purchase of repairs is classified as Cash, an asset, because the

van to continue running. Also, the purchase of supplies is classified as Accounts

repairs are paid for on the day of purchase.

October 7 and 9 are the recognition points for these transactions. October 7 is

the recognition point for the purchase of supplies rather than October 2 when

the supplies were ordered, because it is on October 7 when title to the supplies

The supplies purchased on October 7 are classified as an asset, Supplies, be-

cause the supplies are not used immediately but will be used up in the future.



Page 17

Post.

Ref. Debit Credit

2 511 400

111 400

To pay February rent

3 111 650

411 650

To record receipt of fees for this

month's services

4 115 85

212 85

To purchase supplies on account

5 512 40

111 40

To reimburse bus driver for gas

6

8 212 170

111 170

To make payment to creditors

9 111 1,200

113 1,200

To record receipt of payments on

account

10 113 700

411 700

To bill customers for services

No entry

Date

(Requirements 1, 2, 4, and 5 follow)

3. Transactions entered in the general journal

Gas and Oil Expense

Chapter 2, P 8.

Rent Expense

Cash

General Journal

Description

Feb.

2010

Accounts Receivable

Supplies

Service Revenue

Accounts Payable

Cash

Cash

Accounts Receivable

Accounts Payable

Cash

Cash

Service Revenue



Page 18

Post.

Ref. Debit Credit

11 212 85

111 85

To make payment to creditors

13 141 1,000

111 1,000

To purchase equipment

17 141 290

212 290

To purchase equipment on

account

19 514 145

111 145

To pay utility bill

22 111 500

113 500

To record receipt of payment on

account from customers

26 513 460

111 460

To pay part-time assistants

27 512 325

212 325

To purchase gas and oil for bus

on account

28 313 200

111 200

To declare and pay dividend

Dividends

Date

Cash

Cash

Gas and Oil Expense

Cash

Feb.

General Journal

Description

2010

Equipment

Cash

Wages Expense

Cash

Utilities Expense

Cash

Accounts Receivable

Equipment

Accounts Payable

Accounts Payable


Accounts Payable




31 2,070

2 J17 400 1,670

3 J17 650 2,320

5 J17 40 2,280

8 J17 170 2,110

9 J17 1,200 3,310

11 J18 85 3,225

13 J18 1,000 2,225

19 J18 145 2,080

22 J18 500 2,580

26 J18 460 2,120

28 J18 200 1,920


31 1,700

9 J17 1,200 500

10 J17 700 1,200

22 J18 500 700


4 J17 85 85

Date

Date

Balance

Item

Cash

Date

BalanceJan.

Accounts Receivable

2010

Post.

Balance

Account No. 113

Post.


Supplies

Feb.

2010

Account No. 111

Balance

Item

4. Entries from journal posted to ledger accounts

Feb.

Balance

Account No. 115

Item

Feb.

Post.

Ledger accounts set up1.

2010

Jan.

2. Amounts from January 31 trial balance entered




31 1,040

13 J18 1,000 2,040

17 J18 290 2,330


31 17,400


31 15,000


31 1,640

4 J17 85 1,725

8 J17 170 1,555

11 J18 85 1,470

17 J18 290 1,760

27 J18 325 2,085

Date

Balance

Feb.

Jan.

2010

Balance

Account No. 212

Jan. Balance

2010

Post.

Date

Notes Payable

ItemDate

Account No. 211

Balance

Item

BalanceJan.

2010

2010

Jan.

Balance

Account No. 143Buses

Post.

Date

Post.

Post.

Balance

Feb.

Balance


Item

Account No. 141Equipment

Accounts Payable

Item




31 4,000


31 1,570


28 J18 200 200


3 J17 650 650

10 J17 700 1,350


2 J17 400 400


5 J17 40 40

27 J18 325 365

2010

Feb.

Balance

Date Item

Post.

Gas and Oil Expense Account No. 512

2010

Feb.

Item

2010

2010

Post. Balance

Feb.

Rent Expense

Date

Jan.

Post.

Item

2010

Jan.

Balance

Balance

Balance

Balance

Balance


Common Stock

2010

Account No. 311

Item

Account No. 312Retained Earnings

Post.

Account No. 313

Item

Account No. 511

Service Revenue Account No. 411

Post.

Post.

Dividends

Date

Balance

Date

Item

Feb.

Date

Date




26 J18 460 460


19 J18 145 145

$ 1,920

700

85

2,330

17,400

$15,000

2,085

4,000

1,570

200

1,350

400

365

460

145 ______

$24,005 $24,005

Buses

Retained Earnings

Wages Expense

Utilities Expense

Cash

Accounts Receivable

Supplies

Equipment

Notes Payable

Dividends

Service Revenue

Rent Expense

Gas and Oil Expense

Accounts Payable

Common Stock

Wages Expense

2010

Trial balance prepared

Account No. 513

Post.

Item

Item

Account No. 514Utilities Expense

Date

February 28, 2010

Post.

5.

Golden Nursery School Corporation

Trial Balance


Balance

Balance

Feb.

Date

2010

Feb.



of $1,350. Cash was received on account on February 9 from last month

($1,200) and February 22 ($500) for a total of $1,700. Revenues and cash re-

ceived do not correspond when a company sells on credit.

6. User Insight: Transactions for February 3, 9, 10, and 22 examined


The main business issue that arises from this situation is that the company

may need to arrange for a loan or other financing to pay expenses until the

accounts receivable are collected.

Revenues were earned on February 3 ($650) and February 10 ($700) for a total



xxx

xxx

Chapter 2, C 1.

Memorandum

From:

Re:

Today's date

Owners

Student's name

Accounting Policy for Delivery Trucks

Date:

To:

You have asked me to record our newly purchased delivery trucks at current

market value. However, to do this will not be in accord with the cost principle.

Note that the delivery trucks are an asset on our balance sheet because they

The entry to record the purchase should be made as follows:

This principle holds that assets should be recorded initially at cost because it

reliable and do not represent the actual cost that we have incurred.

asset.

Delivery Trucks

Cash

will benefit future periods. The fact that we made a bargain purchase will be re-

flected in increased profits as we allocate a lower expense over the life of the

This case raises classification issues. Rebates, as the SEC says, should not be

classified as revenues. They should be classified as a reduction of costs and

expenses. Think of it this way: if you buy a product for $100 with a mail-in re-

bate of $30, you would consider its cost to be $70, not a cost of $100 and rev-

enue of $30. The latter would not affect your income, but you would be over-

Chapter 2, C 2.

stating costs and revenues by the same amount. The same situation applies to

the companies. The SEC does not want them to overstate revenues through

incorrect classification.

is a verifiable amount. Market values are more subjective and thus are not as



(b) 2,000 (a)

(c)

(a) 2,000

(c) 5,000

(b)

which increases accounts receivable and delays the receipt of cash. It is also

Chapter 2, C 4.

Loans to Customers

Chapter 2, C 3.

Cash and Due from Banks

Deposits by Customers

Securities Available for Sale

Asset

Asset

Asset

1.

Liability

Accounts classified

Cash and Due from Banks

Loans to Customers

Securities Available for Sale

Deposits by Customers

2. T accounts set up and transactions recorded

of an effort to collect its accounts receivable and possibly change its credit

policies to encourage more cash sales and faster payments. With regard to

Financial statements are prepared on the accrual basis, which will differ from

increasing inventory or investing in long-term assets, both of which use cash.

2,000

5,000

2,000

accounts payable, the company could work with its suppliers to get better

terms. Although it cannot be determined from the facts, the company may be

cash flows. In this case, it appears that the company is making sales on credit,

paying off accounts payable, which uses cash. The company could make more



a. 14,375

14,375

To issue 575 shares of $25 par value

common stock

b. 875

875

To pay attorney

c. 6,250

6,250

To record receipt of loan from bank

d. 250

75

325

To make payment on bank loan, including

interest

e. 12,375

3,125

9,250

To purchase truck, making $3,125 down

payment

f. 1,125

1,125

To pay three months' rent in advance

g. 1,000

1,000

To purchase office equipment; payment

due April 10

h. 625

625

To purchase material handling equipment;

payment due April 10

Material Handling Equipment

Accounts Payable

Office Equipment

Accounts Payable

Cash

Truck Loan Payable

Prepaid Rent

Cash

Loan Payable

Loan Payable

Cash

Truck

Interest Expense

1.

Cash

Cash

Cash

Common Stock

Chapter 2, C 5.

Legal Expense

March transactions recorded in journal form



i. 500

1,125

1,625

To record delivery revenues for March

j. 375

375

To record receipt of payments on accounts

k. 562

562

To pay wages for March

l. 93

93

To record receipt of utility bill for March

m. 62

62

To record receipt of payment in advance for

a delivery order


Utilities Expense

Accounts Payable

Wages Expense

Cash

Accounts Receivable

Cash

Delivery Revenue

Cash

Unearned Revenue

Accounts Receivable

Cash



i.1

,12

5j.

37

5f.

1,1

25

6,2

50

d.

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al.

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5

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k.

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,56

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5g

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,00

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d.

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,25

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h.

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00

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86


$15,550

750

1,125

12,375

1,000

625

$ 1,718

62

6,000

9,250

14,375

1,625

562

93

75

875 ______

$33,030 $33,030

Information in trial balance evaluated

Material Handling Equipment

Unearned Revenue

benefit future periods. For example, the company purchased a truck and other

Accounts Receivable

Truck Loan Payable

Common Stock

Loan Payable

Wages Expense

Utilities Expense

Interest Expense

Legal Expense

Takla Delivery Service Corporation


4. Trial balance prepared

the Cash account is a poor indicator of whether a company is profitable. There

The activity of the Cash account is important because a business needs to

maintain enough cash to operate and to pay its bills. However, the balance in

Trial Balance

March 31, 2010

Cash

5.

Office Equipment

Delivery Revenue

Truck

Accounts Payable

Prepaid Rent

are several reasons. One is that cash can be used to purchase assets that

and recorded, but not collected.

assets that will benefit future periods. A second reason is that some cash re-

ceived may not be revenue. The bank loan to the company is an example. A

third reason is that expenses can be incurred that have not yet been paid. The

nues may be forthcoming from customers who have bought on credit but not

yet paid their outstanding balances. There is a $750 balance in Accounts Re-

utility bill that has not been paid is an example. A fourth reason is that reve-

ceivable at the end of March, for which revenues have already been recognized



1.

2.

3.

Chapter 2, C 6.

CVS's notes to the financial statements state that "Advertising costs are

expensed when the related advertising takes place."

CVS's notes to the financial statements state that "Cash and cash equiva-

lents consist of cash and temporary investments with maturities of three

months or less when purchased."

CVS's notes to the financial statements state that "Inventory is stated at

the lower of cost or market."

It would be unethical to record an order as revenue. An order does not meet

yond the Cash account. Some indication of profitability can be obtained by

examining the revenues and expenses listed in the trial balance. But this ap-

proach has limitations too. For example, the expenses may be incomplete. In

the Takla Delivery case, an examination of the trial balance shows revenues

of $1,625 and expenses of $1,605 ($562 + $93 + $75 + $875), but there is no

The trial balance proves only that the accounts are in balance. It does not


prove that a company has made a profit over the period.

$375, to the expenses, total expenses are $1,980, which exceeds the revenues.

Other assets also may be partially "used up" by the end of the month.

account as yet for rent expense. Part of the amount in Prepaid Rent has now

been used up; it should be treated as an expense. If we add one month's rent,

To determine if a company is making a profit, the accountant must look be-

6. Ethical implications identified

the criteria for revenue recognition under generally accepted accounting prin-

ciples. It does not represent an obligation to pay, and delivery has not taken

place.



( $54,721.9 + ) ÷ 2

( $20,574.1 + ) ÷ 2

( $16,772 + ) ÷ 2

( $13,460 + ) ÷ 2

=$3,229.7

=$37,648.0

to 2007. Southwest was growing assets faster than cash flows, whereas CVS had

=$1,742.4

= 0.097 9.7%or

$14,003

or 8.6%

2007$20,574.1

$3,229.7

0.086


=

2007 =$2,845

$13,460

CVS

2006 =$1,742.4

$15,283.4

=

$2,845=

$1,40610.2%==

$13,731.5or

Southwest

=2006

$17,928.8

Cash Return on Assets

0.102

$1,406

Net Cash Flows from Operating Activities

Average Total Assets=

Southwest improved cash flow return, whereas CVS's return declined from 2006

a large increase in assets (due to the acquisition of CareMark). Also, Southwest's

returns were higher in both years. This is a good illustration of why Southwest is

Chapter 2, C 7.

$15,1160.188 or 18.8%

a leader among airlines.



In a normal sale, which this appears to be, title passes when the sale is made.

No set solution. Note to the instructor: This case is another effort to familiarize

students with Internet resources by having them access a company's website,

locate the company's annual report or Form 10K, and find examples of recogni-

tion, valuation, and classification in the notes that follow the financial statements.

supply firm would routinely accept such a large return. If a company is in a

Chapter 2, C 8.

Chapter 2, C 9.

So the transaction was recorded properly as a sale when shipment was made

on December 31. But Shah undoubtedly was taking advantage of the com-

pany's accounting policy. In some companies, a very liberal return policy is

offered to encourage customers to buy. Other companies limit returns, especi-

ally of commodities like copier paper, to a small percentage of a sale. We do

not know the company's policy in this case, but it is unlikely that an office

business in which substantial returns are usual—publishing, for example—it

aggressive sales tactic. They may claim that the purchaser might very well have

kept the large order. However, if both transactions stand, Quality Office Supplies

Corporation loses in two ways: First, it must pay Shah a bonus that he did not

is appropriate to estimate returns in the financial statements.

Opinions will vary about the ethics of Shah's action. Most students will argue

that his behavior was not ethical. Others may insist that the action fell within

earn; second, it incurs the costs associated with the return (possibly shipping,

insurance, handling, or even damage).

the company's rules and that the conversation with the buyer was simply an



a.

b.

c.

months and at the same price as those arm's-length transactions, which may

be less than the regular rates.

advertisement to other companies, but it receives no cash and has no ac-

worlds for Amazon: the revenue is recorded at a high amount and no off-

should be placed on the transaction. By recording the transaction at its reg-

ular rates, Amazon is showing maximum revenue. The SEC believes that

the transaction should be recorded only if the company has been able to

sell similar advertisements in arm's-length transactions over the past six

vertisement, but at the value of the stock received in the transaction. Since

there is no cash or accounts receivable, what is the debit? The debit is

made to Investments, not to an expense account. Thus, it is the best of both

This transaction is recorded as revenue, not at the regular rate of the ad-

should only be $4, the amount of commission Amazon receives for selling

the Gameboy. The SEC says that since Amazon did not own the Gameboy, it

for the advertisement that the other company will place on its website.

Thus, it is a wash: revenue equals expense. The main issue is what value

occur if the Gameboy does not sell or if it becomes obsolete. The income to

counts receivable. What is debited? The debit is to Advertising Expense

as much under the approach taken by Amazon.

Amazon classifies the transaction as revenue at its normal rates for selling

(revenue). The main issue is how much revenue should be recorded.

dot-com companies are often restricted or difficult to sell. Over the past

several years, these dot-com stocks have declined in value, and many of

the companies have gone out of business. The stock held by Amazon now

has lost its value. The SEC is concerned that revenues were overstated

setting expense is recorded. However, the stocks received from other

The transaction is classified as cash received and stockholders' equity

Amazon wants to record the sale at the full price of $28 with a correspond-

ing cost of $24. The SEC believes, on the other hand, that the revenue

Chapter 2, C 10.

and should have been recorded at a discounted value originally.

does not assume any of the risk of ownership, such as the loss that might

Amazon is the same under both approaches, but revenues are seven times



Date:

To:

From:

Re:

Chapter 2, C 11.

Memorandum

Today's date

Note to the instructor: In discussing this case, students may anticipate the

It is generally not the purpose of accounting to record changes in "value"

concept of going concern and the need to allocate cost to future periods

through the process of depreciation. A discussion of these issues can prepare

students for the chapter on measuring business income.

generally accepted accounting principles state that all transactions are re-

corded at either their cost or their exchange price at the point of recognition.

This cost principle applies to the purchase of property, plant, and equipment.

cepted accounting practice.

that occur after an asset is purchased. Thus, Nike's policy agrees with ac-

Management

Student's name

According to our "Summary of Significant Accounting Policies," "Property,

Accounting Policy for Property, Plant, and Equipment

plant, and equipment are recorded at cost." The reason for this policy is that



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TENTH EDITION - test bank and solution manual you need- …testbank360.eu/sample/solution-manual-financial... · 2017-03-03 · TENTH EDITION Belverd E. Needles, Jr., Ph.D., C.P.A.,