ch01 introduction acounting & business
-
Upload
kuncoroooo -
Category
Documents
-
view
38 -
download
0
description
Transcript of ch01 introduction acounting & business
DISCUSSION QUESTIONS
CHAPTER 1 INTRODUCTION TO ACCOUNTINGAND BUSINESS
CLASS discussion questions
1.The objective of most businesses is to maximize profits. Profit is the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide those goods or services.
2.The stakeholders of a business normally include owners, managers, employees, customers, creditors, and the government.
3.Simply put, the role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.
4.Three sound principles that form the foundation for ethical behavior are (1) avoid small ethical lapses, (2) focus on your long-term reputation, and (3) be willing to suffer adverse personal consequences for holding to an ethical position.
5.Accountants serving a business firm, governmental agency, not-for-profit organization, etc., as an employee are engaged in private accounting. Accountants who provide accounting services to clients on a fee basis are engaged in public accounting.
6.FASB stands for the Financial Accounting Standards Board. The FASB sets generally accepted accounting principles by first identifying specific issues in financial accounting. As these issues arise, the FASB conducts extensive research to identify the primary concerns involved and possible solutions. Generally, after issuing discussion memoranda and preliminary proposals and evaluating comments from interested parties, the Board issues Statements of Financial Accounting Standards. These standards become part of generally accepted accounting principles. To explain, clarify, or elaborate on existing standards, the Board also issues Interpretations, which have the same authority as the Standards.
7.No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $3,500 is a personal transaction of Lynda Lyons and should not be recorded by Fast Delivery Service.
8.The land should be recorded at its cost of $97,500 to Neece Repair Service. This is consistent with the cost concept.
9.a.No. The offer of $400,000 and the increase in the assessed value should not be recognized in the accounting records.
b.Cash would increase by $400,000, land would decrease by $350,000, and owners equity would increase by $50,000.
10.The two principal rights to the properties of a business are liabilities (the rights of creditors) and owner's equity (the rights of the owner).
11.The three elements of the accounting equation are assets, liabilities, and owner's equity.12.An account receivable is a claim against a customer for goods or services sold. An account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the records of the seller is an account payable in the records of the purchaser.
13.The business incurred a net loss of $15,000.
14.The business realized net income of $10,000.
15.The two types of transactions that increase the owners equity of a proprietorship are revenue and an investment by the owner.
16.The income statement presents a summary of the revenues and expenses of a business for a specific period of time. The statement of owners equity indicates the changes in owners equity that have occurred over a specific period of time. The balance sheet presents a listing of the assets, liabilities, and owner's equity of a business as of a specific date. The statement of cash flows presents a summary of the cash receipts and cash payments of a business entity for a specific period of time.
17.An income statement, a statement of owners equity, and a statement of cash flows are for a specific period of time. The balance sheet is for a specific date.
18.Net income or net loss
Owners equity at the end of the period
19.The statement of cash flows reports cash flows from operating activities, investing activities, and financing activities.
exercises
Ex. 11
As in many ethics issues, there is no one right answer. The Naples Daily News reported on this issue in these terms: "The company covered up the first report, and the local newspaper uncovered the company's secret. The company was forced to not locate here (Collier County). It became patently clear that doing the least that is legally allowed is not enough."
Ex. 12
1.B
2.F
3.R
4.B
5.B
6.F
7.X
8.R
9.B
10.X
Ex. 13
Coca-Cola owners equity:$21,623 $12,110 = $9,513
PepsiCo owners equity:$17,551 $10,670 = $6,881
Ex. 14
a.$51,500 ($20,000 + $31,500)
b.$52,750 ($62,750 $10,000)
c.$19,000 ($57,000 $38,000)
Ex. 15
a.$183,000 ($325,000 $142,000)
b.$230,000 ($183,000 + $84,000 $37,000)
c.$158,000 ($183,000 $8,000 $17,000)
d.$275,500 ($183,000 + $75,000 + $17,500)
e.Net income: $137,000 ($425,000 $105,000 $183,000)
Ex. 16
a.owner's equity
b.asset
c.owner's equity
d.asset
e.liability
f.asset
Ex. 17
a.Increases assets and increases owners equity.
b.Increases assets and increases owners equity.
c.Increases assets and decreases assets.
d.Decreases assets and decreases owners equity.
e.Increases assets and increases liabilities.
Ex. 18
a.(1)Total assets increased $50,000.
(2)No change in liabilities.
(3)Owners equity increased $50,000.
b.(1)Total assets decreased $28,000.
(2)Total liabilities decreased $28,000.
(3)No change in owners equity.
Ex. 19
1.increase
2.increase
3.decrease
4.decrease
Ex. 110
1.c6.a
2.d7.e
3.c8.a
4.e9.e
5.c10.e
Ex. 111
a.(1)Sale of catering services for cash, $15,000.
(2)Purchase of land for cash, $2,000.
(3)Payment of expenses, $11,250.
(4)Purchase of supplies on account, $500.
(5)Withdrawal of cash by owner, $1,500.
(6)Payment of cash to creditors, $5,300.
(7)Recognition of cost of supplies used, $800.
b.($5,050) ($950 $6,000)
c.$1,450 ($30,700 $29,250)
d.$2,950 ($15,000 $11,250 $800)
e.$1,450 ($2,950 $1,500)
Ex. 112
It would be incorrect to say that the business had incurred a net loss of $7,250. The excess of the withdrawals over the net income for the period is a decrease in the amount of owners equity in the business.
Ex. 113
Company W
Owner's equity at end of year ($600,000 $325,000)
$275,000
Owner's equity at beginning of year
($375,000 $150,000)
225,000
Net income (increase in owner's equity)
$50,000Company X
Increase in owner's equity (as determined for W)
$50,000
Add withdrawals
30,000
Net income
$80,000Company Y
Increase in owner's equity (as determined for W)
$50,000
Deduct additional investment
75,000
Net loss
$(25,000)
Company Z
Increase in owner's equity (as determined for W)
$50,000
Deduct additional investment
75,000
$(25,000)
Add withdrawals
30,000
Net income
$5,000Ex. 114
Balance sheet items: 3, 5, 6, 8, 9, 10
Ex. 115
Income statement items: 1, 2, 4, 7
Ex. 116
DOUMA COMPANY
Statement of Owners Equity
For the Month Ended June 30, 2003
Meg Douma, capital, June 1, 2003
$317,500
Net income for the month
$91,250
Less withdrawals
15,000
Increase in owners equity
76,250
Meg Douma, capital, June 30, 2003
$393,750
Ex. 117
SURGERY SERVICES
Income Statement
For the Month Ended April 30, 2003
Fees earned
$165,800
Operating expenses:
Wages expense
$71,500
Rent expense
25,000
Supplies expense
3,250
Miscellaneous expense
2,250
Total operating expenses
102,000
Net income
$63,800Ex. 118
In each case, solve for a single unknown, using the following equation:
Owners equity (beginning) + Investments Withdrawals + Revenues
Expenses = Owners equity (ending)
I.Owner's equity at end of year ($745,000 $325,000)
$420,000
Owner's equity at beginning of year ($600,000 $360,000)
240,000
Increase in owner's equity
$180,000
Deduct increase due to net income ($197,750 $108,000)
89,750
$90,250
Add withdrawals
40,000
Additional investment in the business
(a)$130,250
II.Owner's equity at end of year ($175,000 $55,000)
$120,000
Owner's equity at beginning of year ($125,000 $65,000)
60,000
Increase in owner's equity
$60,000
Add withdrawals
8,000
$68,000
Deduct additional investment
25,000
Increase due to net income
$43,000
Add expenses
32,000
Revenue
(b)$75,000
III.Owner's equity at end of year ($90,000 $80,000)
$10,000
Owner's equity at beginning of year ($100,000 $76,000)
24,000
Decrease in owner's equity
$(14,000)
Deduct decrease due to net loss ($115,000 $122,500)
(7,500)
$(6,500)
Deduct additional investment
10,000
Withdrawals from the business
(c)$(16,500)
IV.Owner's equity at end of year ($310,000 $170,000)
$140,000
Add decrease due to net loss ($140,000 $160,000)
20,000
$160,000
Add withdrawals
75,000
$235,000
Deduct additional investment
50,000
$185,000
Add liabilities at beginning of year
150,000
Assets at beginning of year
(d)$335,000Ex. 119a.
REVIVAL INTERIORS
Balance Sheet
August 31, 20
AssetsLiabilities
Cash
$15,000Accounts payable
$3,850
Accounts receivable
8,500
Supplies
750
Owners Equity
Laura Fedro, capital
20,400
Total liabilities and
Total assets
$24,250
owners equity
$24,250REVIVAL INTERIORS
Balance Sheet
September 30, 20
AssetsLiabilitiesCash
$25,500Accounts payable
$4,150
Accounts receivable
9,780
Supplies
600
Owners Equity
Laura Fedro, capital
31,730
Total liabilities and
Total assets
$35,880
owners equity
$35,880b.Owner's equity, September 30
$31,730
Owner's equity, August 31
20,400
Net income
$11,330c.Owner's equity, September 30
$31,730
Owner's equity, August 31
20,400
Increase in owner's equity
$11,330
Add withdrawal
7,500
Net income
$18,830Ex. 120
Balance sheet: b, c, e, f, h, i, j, l, m, n, o
Income statement: a, d, g, k
Ex. 121
1.cfinancing activity
2.binvesting activity
3.aoperating activity
4.aoperating activity
Ex. 122
1.All financial statements should contain the name of the business in their heading. The statement of owners equity is incorrectly headed as Lynn Soby rather than Aspen Realty. The heading of the balance sheet needs the name of the business.
2.The income statement and statement of owners equity cover a period of time and should be labeled For the Month Ended March 31, 2003.
3.The year in the heading for the statement of owners equity should be 2003 rather than 2002.
4.The balance sheet should be labeled as of March 31, 2003, rather than For the Month Ended March 31, 2003.
5.In the income statement, the miscellaneous expense amount should be listed as the last operating expense.
6.In the income statement, the total operating expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $3,625.00. This also affects the statement of owners equity and the amount of Lynn Soby, capital, that appears on the balance sheet.
7.In the statement of owners equity, the additional investment should be added first to Lynn Soby, capital, as of March 1, 2003. The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield a net increase in owners equity.
8.Accounts payable should be listed as a liability on the balance sheet.
9.Accounts receivable and supplies should be listed as assets on the balance sheet.
10. The balance sheet assets should equal the sum of the liabilities and owners equity.
Ex. 122Concluded
Corrected financial statements appear as follows:
ASPEN REALTY
Income Statement
For the Month Ended March 31, 2003
Sales commissions
$37,100
Operating expenses:
Office salaries expense
$23,150
Rent expense
7,800
Automobile expense
1,750
Supplies expense
225
Miscellaneous expense
550
Total operating expenses
33,475Net income
$3,625ASPEN REALTY
Statement of Owners Equity
For the Month Ended March 31, 2003
Lynn Soby, capital, March 1, 2003
$7,450
Additional investment during March
$1,500
Net income for March
3,625
$5,125
Less withdrawals during March
1,000Increase in owners equity
4,125Lynn Soby, capital, March 31, 2003
$11,575
ASPEN REALTY
Balance Sheet
March 31, 2003
AssetsLiabilitiesCash
$2,350Accounts payable
$2,300
Accounts receivable
10,200
Supplies
1,325
Owners Equity
Lynn Soby, capital
11,575
Total liabilities and
Total assets
$13,875
owners equity
$13,875 Ex. 123
a.2000: 0.20 ($5,196,000,000 $26,497,000,000)
1999: 0.26 ($3,038,000,000 $11,811,000,000)
b.The margin of protection to the creditors increased in 2000. A comparison with the ratio for similar businesses and with earlier periods for Cisco Systems might be useful in assessing these ratios further.
problems
Prob. 11A
1.
Owners
Assets=Liabilities+Equity
AccountsAccountsLinda Neece,
Cash+Receivable+Supplies=Payable+Capital
a.+10,000
+10,000Investment
b.
+ 1,150
+ 1,150
Bal.
10,000
1,150
1,150
10,000
c. +4,500
+4,500Fees earned
Bal.
14,500
1,150
1,150
14,500
d. 2,500
2,500Rent expense
Bal.
12,000
1,150
1,150
12,000
e. 675
675
Bal.
11,325
1,150
475
12,000
f.
+ 3,250
+3,250Fees earned
Bal.
11,325
3,250
1,150
475
15,250
g. 1,755
980Auto expense
775Misc. expense
Bal.
9,570
3,250
1,150
475
13,495
h. 1,500
1,500Salaries exp.
Bal.
8,070
3,250
1,150
475
11,995
i.
935
935Supplies exp.
Bal.
8,070
3,250
215
475
11,060
j. 1,000
1,000Withdrawal
Bal.
7,070
3,250
215
475
10,060
2.Owner's equity is the right of owners to the assets of the business. These rights are increased by owners investments and revenues and decreased by owner's withdrawals and expenses.
Prob. 12A
1.
FLY AWAY TRAVEL AGENCY
Income Statement
For the Year Ended December 31, 2003
Fees earned
$117,480
Operating expenses:
Wages expense
$35,500
Rent expense
27,000
Utilities expense
10,240
Supplies expense
2,125
Miscellaneous expense
1,750
Total operating expenses
76,615Net income
$40,865
2.
FLY AWAY TRAVEL AGENCY
Statement of Owners Equity
For the Year Ended December 31, 2003
Ryan Stecker, capital, January 1, 2003
$14,500
Net income for the year
$40,865
Less withdrawals
30,000Increase in owners equity
10,865Ryan Stecker, capital, December 31, 2003
$25,365
3.
FLY AWAY TRAVEL AGENCY
Balance Sheet
December 31, 2003
AssetsLiabilitiesCash
$7,200Accounts payable
$3,200
Accounts receivable
19,500
Supplies
1,865
Owners Equity
Ryan Stecker, capital
25,365
Total liabilities and
Total assets
$28,565
owners equity
$28,565Prob. 13A
1.
EAGLE FINANCIAL SERVICES
Income Statement
For the Month Ended January 31, 2003
Fees earned
$13,100
Operating expenses:
Rent expense
$2,500
Salaries expense
2,000
Auto expense
1,250
Supplies expense
1,050
Miscellaneous expense
350
Total operating expenses
7,150
Net income
$5,9502.
EAGLE FINANCIAL SERVICES
Statement of Owners Equity
For the Month Ended January 31, 2003
Loren Thurlow, capital, January 1, 2003
$0
Investment on January 1, 2003
$12,500
Net income for January
5,950
$18,450
Less withdrawals
3,000Increase in owners equity
15,450Loren Thurlow, capital, January 31, 2003
$15,4503.
EAGLE FINANCIAL SERVICES
Balance Sheet
January 31, 2003
AssetsLiabilitiesCash
$11,250Accounts payable
$425
Accounts receivable
4,350
Supplies
275
Owners Equity
Loren Thurlow, capital
15,450
Total liabilities and
Total assets
$15,875
owners equity
$15,875Prob. 14A
1.
Owners
Assets=Liabilities+Equity
AccountsDori French,
Cash+Supplies=Payable+Capital
a.+5,000
+5,000Investment
b.
+1,250+1,250
Bal.
5,000
1,250
1,250
5,000
c.850
850
Bal.
4,150
1,250
400
5,000
d.+16,200
+16,200Sales commissions
Bal.
20,350
1,250
400
21,200
e.2,000
2,000Rent expense
Bal.
18,350
1,250
400
19,200
f.4,500
4,500Withdrawal
Bal.
13,850
1,250
400
14,700
g.2,250
1,900Auto expense
350Misc. expense
Bal.
11,600
1,250
400
12,450
h.4,250
4,250Salaries expense
Bal.
7,350
1,250
400
8,200
i.
650
650Supplies expense
Bal.
7,350
600
400
7,5502.DEAL REALTY
Income Statement
For the Month Ended March 31, 20
Sales commissions
$16,200
Operating expenses:
Office salaries expense
$4,250
Rent expense
2,000
Automobile expense
1,900
Supplies expense
650
Miscellaneous expense
350
Total operating expenses
9,150Net income
$7,050
Prob. 14AConcluded
DEAL REALTY
Statement of Owners Equity
For the Month Ended March 31, 20
Dori French, capital, March 1, 20
$0
Investment on March 1, 20
$5,000
Net income for March
7,050
$12,050
Less withdrawals
4,500
Increase in owners equity
7,550Dori French, capital, March 31, 20
$7,550DEAL REALTY
Balance Sheet
March 31, 20
AssetsLiabilities
Cash
$7,350Accounts payable
$400
Supplies
600
Owners Equity
Dori French, capital
7,550
Total liabilities and
Total assets
$7,950
owners equity
$7,950Prob. 15A
1.
Assets=Liabilities+Owner's Equity
AccountsAccounts
Cash+Receivable+Supplies+Land=Payable+Bea Cheever, Capital
6,250+18,100+2,200+40,000=7,800+Bea Cheever, Capital
66,550
=7,800+Bea Cheever, Capital
58,750
=
Bea Cheever, Capital
Prob. 15AContinued
2.
Owners
Assets=Liabilities+Equity
AccountsAccountsBea Cheever,
Cash+Receivable+Supplies+Land=Payable+Capital
Bal.
6,250
18,100
2,200
40,000
7,800
58,750
a.+15,750
+15,750Dry cleaning sales
Bal.
22,000
18,100
2,200
40,000
7,800
74,500
b.2,500
2,500Rent expense
Bal.
19,500
18,100
2,200
40,000
7,800
72,000
c.
+1,650
+1,650
Bal.
19,500
18,100
3,850
40,000
9,450
72,000
d.5,100
5,100
Bal.
14,400
18,100
3,850
40,000
4,350
72,000
e.
+8,920
+8,920Dry cleaning sales
Bal.
14,400
27,020
3,850
40,000
4,350
80,920
f.
+6,0006,000Dry cleaning expense
Bal.
14,400
27,020
3,850
40,000
10,350
74,920
g.5,570
2,400Wages expense
1,580Truck expense
960Utilities expense
630Miscellaneous expense
Bal.
8,830
27,020
3,850
40,000
10,350
69,350
h.+12,10012,100
Bal.
20,930
14,920
3,850
40,000
10,350
69,350
i.
1,350
1,350Supplies expense
Bal.
20,930
14,920
2,500
40,000
10,350
68,000
j.7,500
7,500Withdrawals
Bal.
13,430
14,920
2,500
40,000
10,350
60,500Prob. 15AConcluded
3. a.
PERSNICKETY DRY CLEANERS
Income Statement
For the Month Ended July 31, 20
Dry cleaning sales
$24,670
Operating expenses:
Dry cleaning expense
$6,000
Rent expense
2,500
Wages expense
2,400
Truck expense
1,580
Supplies expense
1,350
Utilities expense
960
Miscellaneous expense
630
Total operating expenses
15,420Net income
$9,250b.
PERSNICKETY DRY CLEANERS
Statement of Owners Equity
For the Month Ended July 31, 20
Bea Cheever, capital, July 1, 20
$58,750
Net income for July
$9,250
Less withdrawals
7,500Increase in owners equity
1,750
Bea Cheever, capital, July 31, 20
$60,500c.
PERSNICKETY DRY CLEANERS
Balance Sheet
July 31, 20
AssetsLiabilities
Cash
$13,430Accounts payable
$10,350
Accounts receivable
14,920
Supplies
2,500
Owners EquityLand
40,000Bea Cheever, capital
60,500
Total liabilities and
Total assets
$70,850
owners equity
$70,850Prob. 16A
a.Fees earned, $15,000
b.Supplies expense, $1,500
c.Ray Conway, capital, April 1, 2003, $0
d.Net income for April, $6,200
e.$26,200
f.Increase in owners equity, $23,200
g.Ray Conway, capital, April 30, 2003, $23,200
h.Total assets, $24,000
i.Ray Conway, capital, $23,200
j.Total liabilities and owners equity, $24,000
k.Cash received from customers, $15,000
i.Net cash flow from operating activities, $5,900
m.Cash payments for acquisition of land, $(20,000)
n.Cash received as owners investment, $20,000
o.Cash withdrawal by owner, $(3,000)
p.Net cash flow from financing activities, $17,000
q.Net cash flow and April 30, 2003 cash balance, $2,900
Prob. 11B
1.
Owners
Assets=Liabilities+Equity
AccountsAccountsFran Cowles,
Cash+Receivable+Supplies=Payable+Capital
a.+15,000
+15,000Investment
b.
+750 +750
Bal.
15,000
750
750
15,000
c. 625
625
Bal.
14,375
750
125
15,000
d. +5,250
+5,250Fees earned
Bal.
19,625
750
125
20,250
e. 1,000
1,000Rent expense
Bal.
18,625
750
125
19,250
f. 1,230
880Auto expense
350Misc. expense
Bal.
17,395
750
125
18,020
g. 1,200
1,200Salaries exp.
Bal.
16,195
750
125
16,820
h.
575
575Supplies exp.
Bal.
16,195
175
125
16,245
i.
+7,350
+7,350Fees earned
Bal.
16,195
7,350
175
125
23,595
j. 1,500
1,500Withdrawal
Bal.
14,695
7,350
175
125
22,095
2.Owner's equity is the right of owners to the assets of the business. These rights are increased by owners investments and revenues and decreased by owner's withdrawals and expenses.
Prob. 12B
1.
HIAWATHA TRAVEL SERVICE
Income Statement
For the Year Ended April 30, 2003
Fees earned
$131,600
Operating expenses:
Wages expense
$65,850
Rent expense
18,900
Utilities expense
11,250
Supplies expense
3,550
Taxes expense
2,800
Miscellaneous expense
1,475
Total operating expenses
103,825Net income
$27,775
2.
HIAWATHA TRAVEL SERVICE
Statement of Owners Equity
For the Year Ended April 30, 2003
Rob Graybill, capital, May 1, 2002
$25,000
Net income for the year
$27,775
Less withdrawals
15,000Increase in owners equity
12,775Rob Graybill, capital, April 30, 2003
$37,7753.
HIAWATHA TRAVEL SERVICE
Balance Sheet
April 30, 2003
AssetsLiabilities
Cash
$26,525Accounts payable
$6,100
Accounts receivable
15,675
Supplies
1,675
Owner's Equity
Rob Graybill, capital
37,775
Total liabilities and
Total assets
$43,875
owners equity
$43,875Prob. 13B
1.
INFINET COMPUTER SERVICES
Income Statement
For the Month Ended October 31, 2003
Fees earned
$8,250
Operating expenses:
Salaries expense
$2,000
Rent expense
1,800
Auto expense
780
Supplies expense
325
Miscellaneous expense
375
Total operating expenses
5,280Net income
$2,9702.
INFINET COMPUTER SERVICES
Statement of Owners Equity
For the Month Ended October 31, 2003
Chester Hoche, capital, October 1, 2003
$0
Investment on October 1, 2003
$5,000
Net income for October
2,970
$7,970
Less withdrawals
1,000Increase in owners equity
6,970Chester Hoche, capital, October 31, 2003
$6,9703.
INFINET COMPUTER SERVICES
Balance Sheet
October 31, 2003
AssetsLiabilitiesCash
$3,295Accounts payable
$470
Accounts receivable
3,750
Supplies
395
Owners Equity
Chester Hoche, capital
6,970
Total liabilities and
Total assets
$7,440
owners equity
$7,440Prob. 14B
1.
Owners
Assets=Liabilities+Equity
AccountsAngie Tate,
Cash+Supplies=Payable+Capital
a. +10,000
+10,000Investment
b. 3,600
3,600Rent expense
Bal.
6,400
6,400
c. 1,450
900Auto expense
550Misc. expense
Bal.
4,950
4,950
d.
+1,325+1,325
Bal.
4,950
1,325
1,325
4,950
e. +18,750
+18,750Sales commissions
Bal.
23,700
1,325
1,325
23,700
f. 690
690
Bal.
23,010
1,325
635
23,700
g. 4,000
4,000Salaries expense
Bal.
19,010
1,325
635
19,700
h. 3,000
3,000Withdrawal
Bal.
16,010
1,325
635
16,700
i.
725
725Supplies expense
Bal.
16,010
600
635
15,9752.
VOGUE REALTY
Income Statement
For the Month Ended August 31, 2003
Sales commissions
$18,750
Operating expenses:
Office salaries expense
$4,000
Rent expense
3,600
Automobile expense
900
Supplies expense
725
Miscellaneous expense
550
Total operating expenses
9,775Net income
$8,975
Prob. 14BConcluded
VOGUE REALTY
Statement of Owners Equity
For the Month Ended August 31, 2003
Angie Tate, capital, August 1, 2003
$0
Investment on August 1, 2003
$10,000
Net income for August
8,975
$18,975
Less withdrawals
3,000Increase in owners equity
15,975
Angie Tate, capital, August 31, 2003
$15,975
VOGUE REALTY
Balance Sheet
August 31, 2003
AssetsLiabilities
Cash
$16,010Accounts payable
$635
Supplies
600
Owners Equity
Angie Tate, capital
15,975
Total liabilities and
Total assets
$16,610
owners equity
$16,610Prob. 15B
1.
Assets
=Liabilities+Owner's Equity
AccountsAccounts
Cash+Receivable+Supplies+Land=Payable+Merritt Paisley, Capital
7,400+13,750+1,560+25,000=3,880+Merritt Paisley, Capital
47,710
=3,880+Merritt Paisley, Capital
43,830
=
Merritt Paisley, Capital
Prob. 15BContinued
2.
Owners
Assets=Liabilities+Equity
Merritt
AccountsAccountsPaisley,
Cash+Receivable+Supplies+Land=Payable+Capital
Bal.
7,400
13,750
1,560
25,000
3,880
43,830
a.3,000
3,000Rent expense
Bal.
4,400
13,750
1,560
25,000
3,880
40,830
b.
+6,150
+6,150Dry cleaning sales
Bal.
4,400
19,900
1,560
25,000
3,880
46,980
c.1,680
1,680
Bal.
2,720
19,900
1,560
25,000
2,200
46,980
d.
+840
+840
Bal.
2,720
19,900
2,400
25,000
3,040
46,980
e.+14,600
+14,600Dry cleaning sales
Bal.
17,320
19,900
2,400
25,000
3,040
61,580
f.+11,75011,750
Bal.
29,070
8,150
2,400
25,000
3,040
61,580
g.
+5,4005,400Dry cleaning expense
Bal.
29,070
8,150
2,400
25,000
8,440
56,180
h.3,225
1,800Wages expense
725Truck expense
510Utilities expense
190Miscellaneous expense
Bal.
25,845
8,150
2,400
25,000
8,440
52,955
i.
1,050
1,050Supplies expense
Bal.
25,845
8,150
1,350
25,000
8,440
51,905
j.5,000
5,000Withdrawal
Bal.
20,845
8,150
1,350
25,000
8,440
46,905Prob. 15BConcluded
3. a.
SWAN DRY CLEANERS
Income Statement
For the Month Ended November 30, 20
Dry cleaning sales
$20,750
Operating expenses:
Dry cleaning expense
$5,400
Rent expense
3,000
Wages expense
1,800
Supplies expense
1,050
Truck expense
725
Utilities expense
510
Miscellaneous expense
190
Total operating expenses
12,675Net income
$8,075
b.
SWAN DRY CLEANERS
Statement of Owners Equity
For the Month Ended November 30, 20
Merritt Paisley, capital, November 1, 20
$43,830
Net income for November
$8,075
Less withdrawals
5,000Increase in owners equity
3,075
Merritt Paisley, capital, November 30, 20
$46,905c.
SWAN DRY CLEANERS
Balance Sheet
November 30, 20
AssetsLiabilities
Cash
$20,845Accounts payable
$8,440
Accounts receivable
8,150
Supplies
1,350
Owners EquityLand
25,000Merritt Paisley, capital
46,905
Total liabilities and
Total assets
$55,345
owners equity
$55,345
Prob. 16B
a.Wages expense, $5,375
b.Net income, $11,550
c.R. J. Cain, capital, June 1, 2003, $0
d.Investment on June 1, 2003, $45,000
e.Net income for June, $11,550
f.$56,550
g.Withdrawals, $6,000
h.Increase in owners equity, $50,550
i.R. J. Cain, capital, June 30, 2003, $50,550
j.Land, $36,000
k.Total assets, $51,750
l.R. J. Cain, capital, $50,550
m.Total liabilities and owners equity, $51,750
n.Cash received from customers, $23,500
o.Net cash flow from operating activities, $11,750
p.Net cash flow from financing activities, $39,000
q.Net cash flow and June 30, 2003 cash balance, $14,750
continuing problem
1.
Owners
Assets=Liabilities+Equity
Lynn
AccountsAccountsKwan,
Cash+Receivable+Supplies=Payable+Capital
Nov.1+3,500
+3,500Investment
2+1,000
+1,000Fees earned
Bal.
4,500
4,500
Nov.2500
500Office rent exp.
Bal.
4,000
4,000
Nov.4
+175+175
Bal.
4,000
175
175
4,000
Nov.6300
300Advertising exp.
Bal.
3,700
175
175
3,700
Nov.8325
325Equip. rent exp.
Bal.
3,375
175
175
3,375
Nov. 12100
100Music expense
Bal.
3,275
175
175
3,275
Nov. 1350
50
Bal.
3,225
175
125
3,275
Nov. 16+75
+75Fees earned
Bal.
3,300
175
125
3,350
Nov. 22
+600
+600Fees earned
Bal.
3,300
600
175
125
3,950
Nov. 25+250
+250Fees earned
Bal.
3,550
600
175
125
4,200
Nov. 29120
120Music expense
Bal.
3,430
600
175
125
4,080
Nov. 30+450
+450Fees earned
Bal.
3,880
600
175
125
4,530
Nov. 30200
200Wages expense
Bal.
3,680
600
175
125
4,330
Nov. 30150
150Utilities exp.
Bal.
3,530
600
175
125
4,180
Nov. 30
90
90Supplies exp.
Bal.
3,530
600
85
125
4,090
Nov. 3075
75Misc. expense
Bal.
3,455
600
85
125
4,015
Nov. 30250
250Music expense
Bal.
3,205
600
85
125
3,765
Nov. 30125
125Withdrawal
Bal.
3,080
600
85
125
3,640Continuing ProblemConcluded
2.
DANCIN MUSIC
Income Statement
For the Month Ended November 30, 2002
Fees earned
$2,375
Operating expenses:
Office rent expense
$500
Music expense
470
Equipment rent expense
325
Advertising expense
300
Wages expense
200
Utilities expense
150
Supplies expense
90
Miscellaneous expense
75
Total operating expenses
2,110
Net income
$2653.
DANCIN MUSIC
Statement of Owners Equity
For the Month Ended November 30, 2002
Lynn Kwan, capital, November 1, 2002
$0
Investment on November 1, 2002
$3,500
Net income for November
265
$3,765
Less withdrawals
125Increase in owners equity
3,640Lynn Kwan, capital, November 30, 2002
$3,6404.
DANCIN MUSIC
Balance Sheet
November 30, 2002
AssetsLiabilitiesCash
$3,080Accounts payable
$125
Accounts receivable
600
Supplies
85
Owners Equity
Lynn Kwan, capital
3,640
Total liabilities and
Total assets
$3,765
owners equity
$3,765 SPECIAL ACTIVITIES
Activity 11
1.Acceptable professional conduct requires that Joel Phinney supply Bridger National Bank with all the relevant financial statements necessary for the bank to make an informed decision. Therefore, Joel should provide the complete set of financial statements. These can be supplemented with a discussion of the net loss in the past year or other data explaining why granting the loan is a good investment by the bank.
2.a.Owners are generally willing to provide bankers with information about the operating and financial condition of the business, such as the following:
Operating Information:
description of business operations
results of past operations
preliminary results of current operations
plans for future operations
Financial Condition:
list of assets and liabilities (balance sheet)
estimated current values of assets
owners personal investment in the business
owners commitment to invest additional funds in the business
Owners are normally reluctant to provide the following types of information to bankers:
Proprietary Operating Information. Such information, which might hurt the business if it becomes known by competitors, might include special processes used by the business or future plans to expand operations into areas that are not currently served by a competitor.
Personal Financial Information. Owners may have little choice here because banks often require owners of small businesses to pledge their personal assets as security for a business loan. Personal financial information requested by bankers often includes the owner's net worth, salary, and other income. In addition, bankers usually request information about factors that might affect the personal financial condition of the owner. For example, a pending divorce by the owner might significantly affect the owner's personal wealth.
Activity 11Concluded
b.Bankers typically want as much information as possible about the ability of the business and the owner to repay the loan with interest. Examples of such information are described above.
c.Both bankers and business owners share the common interest of the business doing well and being successful. If the business is successful, the bankers will receive their loan payments on time with interest, and the owners will increase their personal wealth.
Activity 12
The difference in the two bank balances, $150,000 ($180,000 $30,000), may not be pure profit from an accounting perspective. To determine the accounting profit for the seven-month period, the revenues for the period would need to be matched with the related expenses. The revenues minus the expenses would indicate whether the business generated net income (profit) or a net loss for the period. Using only the difference between the two bank account balances ignores such factors as amounts due from customers (receivables), liabilities (accounts payable) that need to be paid for wages or other operating expenses, additional investments that Dr. North may have made in the business during the period, or withdrawals during the period that Dr. North might have taken for personal reasons unrelated to the business.
Some businesses that have few, if any, receivables or payables may use a cash basis of accounting. The cash basis of accounting ignores receivables and payables because they are assumed to be insignificant in amount. However, even with the cash basis of accounting, additional investments during the period and any withdrawals during the period have to be considered in determining the net income (profit) or net loss for the period.
Activity 13
1.
Owners
Assets=Liabilities+Equity
Yvonne
AccountsTobin,
Cash+Supplies=Payable+Capital
a.+500
+500Investment
b.160+160
Bal.
340
160
500
c.80
80Rent expense
Bal.
260
160
420
d.70
+30100Rent expense
Bal.
190
160
30
320
e.+800
+800Service revenue
Bal.
990
160
30
1,120
f.+150
+150Service revenue
Bal.
1,140
160
30
1,270
g.300
300Salary expense
Bal.
840
160
30
970
h.75
75Misc. expense
Bal.
765
160
30
895
i.+300
+300Service revenue
Bal.
1,065
160
30
1,195
j.
85
85Supplies expense
Bal.
1,065
75
30
1,110
k.400
400Withdrawal
Bal.
665
75
30
710
2.
FORTYLOVE
Income Statement
For the Month Ended September 30, 20
Service revenue
$1,250
Operating expenses:
Salary expense
$300
Rent expense
180
Supplies expense
85
Miscellaneous expense
75
Total operating expenses
640
Net income
$610Activity 13Continued
3.
FORTYLOVE
Statement of Owners Equity
For the Month Ended September 30, 20
Yvonne Tobin, capital, September 1, 20
$0
Investment on September 1, 20
$500
Net income for September
610
$1,110
Less withdrawals
400Increase in owners equity
710
Yvonne Tobin, capital, September 30, 20
$7104.
FORTYLOVE
Balance Sheet
September 30, 20
AssetsLiabilitiesCash
$665Accounts payable
$30
Supplies
75
Owners Equity
Yvonne Tobin, capital
710
Total liabilities and
Total assets
$740
owners equity
$7405.a.Forty-Love would provide Yvonne with $50 more income per month than working as a waitress. This amount is computed as follows:
Net income of Forty-Love, per month
$610
Earnings as waitress, per month:
20 hours per week $7 per hour 4 weeks
560
Difference
$50Activity 13Concluded
b.Other factors that Yvonne should consider before discussing a long-term arrangement with the Racquet Club include the following:
Yvonne should consider whether the results of operations for September are indicative of what to expect each month. For example, Yvonne should consider whether club members will continue to request lessons or use the ball machine during the winter months when interest in tennis may slacken. Yvonne should evaluate whether the additional income of $50 per month from FortyLove is worth the risk being taken and the effort being expended.
Yvonne should also consider how much her investment in FortyLove could have earned if invested elsewhere. For example, if the initial investment of $500 had been deposited in a money market or savings account at 3% interest, it would have earned $1.25 interest in September, or $15 for the year.
Note to Instructors: Numerous other considerations could be mentioned by students, such as the ability of Yvonne to withdraw cash from FortyLove for personal use. Unlike a money market account or savings account, some of her investment in FortyLove will be in the form of supplies (tennis balls, etc.) which may not be readily convertible to cash. The objective of this case is not to mention all possible considerations, but rather to encourage students to begin thinking about the use of accounting information in making business decisions.
Activity 14
Note to Instructors: The purpose of this activity is to familiarize students with the certification requirements and their on-line availability.
Activity 15
1998
1997
1996
Net cash flows from operating activitiespositivepositivenegative
Net cash flows from investing activitiesnegativenegativenegative
Net cash flows from financing activitiespositivepositivepositive
Start-up companies normally experience negative cash flows from operating and investing activities. Also, start-up companies normally have positive cash flows from financing activitiesactivities from raising capital.
PAGE 1