3. 6.
3.
1. +
×0.2 = $20,000
b
Stockholders' Equity
c
0.8$80,000
$180,000
=
$480,000
=
Assets
Chapter 1, SE 1.
=
CHAPTER 1—Solutions
USES OF ACCOUNTING INFORMATION
AND THE FINANCIAL STATEMENTS
1
1. +
2. +
+
+
+
+
+
$260,000 – ) + =
$ 700
Accounts receivable
28,700
$29,400
–
Beginning of year Assets
$280,000
During year
Net Income*
End of year =
=
=
$108,000
Wages payable
Common stock
$48,000
Chapter 1, SE 8.
Globe Compan
y
Retained earnings
Total stockholders' equity
Total liabilities and
stockholders' equity
$120,000
$29,400
Stockholders' Equit
y
$24,000
4,700
Liabilities $160,000
$400,000
=
$ 40,000
48,000
108,000
Balance Sheet
June 30, 2011
$260,000$140,000
Liabilities
Building
Stockholders' Equity
$160,000
$ 5,800
1,600
22,000
$40,000*(
Assets
Liabilities
Dividends
Investment
$372,000
Stockholders' Equity
Chapter 1, SE 7.
Total assets
Cash *
Change:
=
End:
Assets
$292,000
= $292,000
+ 80,000
* To balance
=
$332,000
$ 40,000
$192,000
Net income
$100,000
–
60,000
$ 40,000
Stockholders' Equity=
=
$108,000
2
$4,800
2,450
$2,350
$—
2,350
$2,350
410
$1,940
$1,890 Accounts payable $ 450
Other assets 1,000
Retained earnings, December 31, 2010
Balance Sheet
Net income for the year
Subtotal
For the Year Ended December 31, 2011
Tarech Corporation
Income Statemen
t
For the Year Ended December 31, 2011
Revenue
Service revenue
Liabilities
December 31, 2011
Retained earnings, December 31, 2011
Assets
Statement of Retained Earnings
Less dividends
Cash
Total expenses
Net income
Tarech Corporation
Chapter 1, SE 9.
Tarech Corporation
Expenses
Chapter 1, SE 10.
Chapter 1, SE 11.
Revenues $220,000
Chapter 1, SE 12.
or= 13.6%= 0.136Profit Margin =
1.
2.
3.
4.
1.
2.
3.
4.
Chapter 1, E 1.
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-
4. i 8. j 12. h
5. b 10.
a
Chapter 1, E 3.
Chapter 1, E 4.
Management
Regulators
People who are interested in Cellhealth's financial statements are the following:
Labor unions
Customers
Investors (stockholders in the company)
Creditors
Tax authorities
8
× 1.430 =
× 1.430 =
1. = Liabilities +
2. = Liabilities +
3. = 1/3 Assets +
= $90,000
4. = Liabilities +
= $320,000
= $320,000 +
–
45,000
Chapter 1, E 7.
+ 90,000
$300,000
$620,000
Change:
2/3 Assets
Liabilities
1. a. A 2. a.
b. L b.
c. A c.
d. SE d.
e. A e.
f. L f.
g. A g.
Accounts payable $ 50,000
Common stock $125,000
Retained earnings 87,500
Total stockholders' 212,500
equity
Total liabilities and
stockholders' equity $262,500
IS
BS
RE
Chapter 1, E 9.
BS
IS
BS
Total assets
$ 25,000
62,500
12,500
112,500
50,000
$262,500
Assets
Stockholders' Equity
Liabilities
Accounts receivable
Supplies
Building
Equipment
December 31, 2011
Chapter 1, E 10.
Cash
Rojas Services Compan
y
Balance Sheet
10
$13,200
Kaisha Corporation
Income Statement
For the Year Ended December 31, 2011
Revenue
Chapter 1, E 11.
Service revenue
1. =+
=+
2.
3.
4. $26,500
58,000
$84,500
25,000
$59,500
– Stockholders' investments
Net income
Assets
End: $550,000
Change in Stockholders' Equity
Change in Stockholders' Equity
$301,000
+ Dividends
Change in Stockholders' Equity
$26,500
Chapter 1, E 12.
$249,000
12
$19,000
($ 3,900)
5,850 1,950
$20,950
($62,500)
( 62,500)
$39,000
Chapter 1, E 13.
Net income
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
Increase in accounts payable
cash flows from operating activities
Cash flows from investing activities
Purchased equipment
Statement of Cash Flows
For the Year Ended December 31, 2011
Primorsk Corporation
(Increase) in accounts receivable
12.00%
Profit margin has decreased from 12.00 percent to 10.42 percent. The decrease is a
Chapter 1, E 15.
Utilities expense BS Accounts payable
Building IS Rent expense
Common stock RE Dividends
BS
IS
BS
1. Matching completed
2. User Insight: Statement associated with profitability identified
Chapter 1, P 1.
$1,100 $ 6,800 (g) $240
800 (a) 5,200 160 (m)
$ 300 (b) $ 1,600 (h) $80
$2,900 $15,400 $200
Revenue
Set A
Income Statement
Chapter 1, P 2.
Net income
1. Financial statements completed
Expenses
Statement of Retained Earnings
Net income
2. User Insight: Financial statement order explained
Set B Set C
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
Beginning balance
$248,000
$96,000
19,700
18,200
3,100 137,000
$111,000
38,850
$ 72,150
For the Year Ended November 30, 2011
Landscape Design, Inc.
Statement of Retained Earnings
Salaries expense
Marketing expense
Office rent expense
Utilities expense
For the Year Ended November 30, 2011
Chapter 1, P 3.
1. Financial statements prepared
Net income
Total expenses
Income before income taxes
Income taxes expense
Revenue
Design service revenue
Expenses
Landscape Design, Inc.
Income Statemen
t
3. User Insight: Ability to pay bills evaluated
Chapter 1, P 3. (Continued)
The company's ability to pay its bills or its liquidity appears good because it has
$78,800
$56,000
7,200
4,100
1,500
1,300 70,100
$ 8,700
3,000
$ 5,700
Revenue
Painting service revenue
Expenses
Collegiate Painters, Inc.
Income Statemen
t
For the Year Ended September 30, 2011
For the Year Ended September 30, 2011
Chapter 1, P 4.
1. Financial statements prepared
Net income after taxes
Income taxes expense
Truck rent expense
Collegiate Painters, Inc.
Statement of Retained Earnings
Equipment rental expense
Marketing expense
Salaries expense
Utilities expense
Income before income taxes
Total expenses
The corporation has several advantages over the partnership, including limited
2. User Insight: Form of business discussed
Chapter 1, P 4. (Continued)
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 $3,000 earned by the company
over a period of time. The amount of net income is necessary for the prepara-
net income on revenues of $5,925. 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 $3,000 of
The income statement is most closely associated with the goal of profitability
$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
Revenue
Set A
Income Statement
Chapter 1, P 6.
Net income
1. Financial statements completed
Beginning balance
Net income
Expenses
Statement of Retained Earnings
Set C
Set B
The income statement must be prepared first because the amount of net income is
2. User Insight: Income statement discussed
$400,000
$225,000
36,000
32,000
20,100
5,100
2,600 320,800
$ 79,200
27,000
$ 52,200
Income before income taxes
For the Year Ended December 31, 2011
Real Deal, Inc.
Statement of Retained Earnings
Commissions expense
Marketing expense
Office rent expense
Telephone and computer expenses
Utilities expense
Net income
Chapter 1, P 7.
1. Financial statements prepared
Income taxes expense
Total expenses
Revenue
Commission sales revenue
Expenses
Real Deal, Inc.
Income Statement
For the Year Ended December 31, 2011
Wages expense
The statement of cash flows is very useful in assessing whether a company's oper-
2. User Insight: Useful statement identified
Chapter 1, P 7. (Continued)
ations are generating sufficient funds to support expansion. The statement tells
$165,200
$86,000
37,200
19,100
13,500
6,800 162,600
$ 2,600
560
$ 2,040
Net income
Revenue
Advertising service revenue
Expenses
Creative Ads, Inc.
Income Statement
For the Year Ended January 31, 2011
Equipment rental expense
Marketing expense
Office rent expense
Salaries expense
Utilities expense
Income before income taxes
Chapter 1, P 8.
1. Financial statements prepared
Creative Ads, Inc.
Statement of Retained Earnings
Total expenses
Income taxes expense
The company is challenged both in terms of profitability and liquidity. Profitability is
3. User Insight: Financial challenges identified
Chapter 1, P 8. (Continued)
$1,100 $ 6,900 (g) $210
600 (a) 5,200 130 (m)
$ 500 (b) $ 1,700 (h) $80
$2,700 $11,400 $340
The income statement must be prepared first because the amount of net income is
Set C
Set A
Set B
2. User Insight: Income statement discussed
1. Financial statements completed
Beginning balance
Expenses
Statement of Retained Earnings
Chapter 1, P 9.
Net income
Revenue
Income Statement
$415,000
$230,000
40,000
29,200
6,300
2,700 308,200
$106,800
35,700
$ 71,100
Revenue
Commission sales revenue
Expenses
Bradford Realty, Inc.
Income Statemen
t
For the Year Ended October 30, 2011
Chapter 1, P 10.
1. Financial statements prepared
Bradford Realty, Inc.
Statement of Retained Earnings
Commissions expense
Wages expense
Office rent expense
Telephone and computer expenses
Total expenses
Income before income taxes
Income taxes expense
Net income
For the Year Ended October 31, 2011
Utilities expense
The company's ability to pay its bills or its liquidity appears good because it has
cash of $57,500 and total liabilities of only $37,500.
3. User Insight: Ability to pay bills evaluated
Chapter 1, P 10. (Continued)
29
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.
paying creditors and paying a return to the owners. Investing activities include buy-
ing land, buildings, equipment, and other long-lived resources needed in the opera-
tion of the business and selling these resources when they are no longer needed by
the business. Operating activities include selling merchandise and service to cus-
activities (obtaining adequate funds or capital to operate its business), investing
activities (spending the capital it receives so that it will be productive), and oper-
ating activities (running its business). Financing activities include obtaining capital
from owners and from creditors, such as banks and suppliers. They also include re-
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
Chapter 1, C 2.
about all aspects of the company's operations (information management). Account-
ing is covered by the last function.
Salaries, wages, and other costs associated with employment are considered ex-
penses and appear on the income statement.
Chapter 1, C 3.
1.
2.
$3,545,710
1,653,094
$1,892,616
—
Chapter 1, C 5.
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 also increase assets. Also, assets can be reduced by transactions that
do not affect net income—for example, repayment of a loan.
Less RIM, retained earnings, March 1, 2008
Student B's assumption that the change in cash from one year to the next is
equal to net income or net loss is also false. All the examples cited above affect
RIM, retained earnings, February 28, 2009
Increase in RIM, retained earnings in 2009
Plus dividends paid in 2008
*
1.
2.
4.
5.
6.
7.
prepared in accordance with generally accepted accounting principles. If this is
whether the company's financial statements and accompanying information are
Consolidated Statements of Operations (Income Statement)
Chapter 1, C 6.
(in millions)
2.
3.
4.
cash and cash equivalents of $1,114 million. CVS's cash decreased by $266 million
compared to the $254 million decrease by Southwest. CVS had cash flows from
operating activities of $4,035 million compared with Southwest's cash flows from
Neither assets nor revenues are better than the other to measure the size of a
Chapter 1, C 7.
4.3 times the total assets of Southwest.
operating activities of $985 million. CVS has slightly less cash on hand, but by the
1.
2.
4.
5.
6.
vestment. A CPA must avoid even the appearance of a conflict of interest. To be
of action are to do the work and not report it, to do the work and report it, or to
to report them to the home office. It might also be possible to discuss them
Chapter 1, C 8.
$2,700 $1,000
1,700
$2,700 $2,700
Murphy Lawn Services, Inc.
Balance Sheet
Common stock
Liabilities
Total assets Total liabilities and
stockholders' equity
Cash Loan payable
Balance Sheet
June 1, 2011
Chapter 1, C 9.
1. Balance sheets prepared
Murphy Lawn Services, Inc.
August 31, 2011
Assets Liabilities
Stockholders' Equity
Date:
To:
From:
Re:
2. Memorandum prepared
Chapter 1, C 9. (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, 2011,
and August 31, 2011.