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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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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
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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.
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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
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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
Stockholders' Equity
Stockholders' Equity
$150,000
Liabilities
Stockholders' Equity
$240,000
$240,000 $90,000
$40,000
$40,000
$10,000$50,000
0.2Assets
Assets
Stockholders' Equity
+ 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
Stockholders' Equity
$96,000$ 50,000
– 30,000
Chapter 1, SE 6.
Stockholders' Equity
$96,000
Chapter 1, SE 7.
End of year
Assets
$280,000
Stockholders' Equity
$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
$108,000
During year
Investment
Dividends
Net income
Beginning of year
Liabilities
+
+
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$ 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
Stockholders' Equity
Balance Sheet
June 30, 2009
22,000
Assets
$ 5,800 *
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$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
Total liabilities and
$2,890 stockholders' equity $2,890
Retained earnings, December 31, 2010
Net income for the year
Subtotal
Less dividends
December 31, 2010
Cash
Stockholders' Equity
Tarech CorporationBalance Sheet
Tarech CorporationStatement of Retained Earnings
Retained earnings, December 31, 2009
Tarech CorporationIncome Statement
For the Year Ended December 31, 2010
Total assets
Chapter 1, SE 9.
Revenue
Service revenue
Expenses
Total expenses
Net income
For the Year Ended December 31, 2010
Assets Liabilities
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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,
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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
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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
=
=
=
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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
Stockholders' Equity
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
$355,000
Stockholders' Equity
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$ 12,500 Accounts payable $ 25,000
31,250
56,250 Common stock $62,500
25,000 Retained earnings 43,750
Total stockholders' equity 106,250
Total liabilities and
$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
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$26,400
2,400$
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
Retained earnings 3,900
Total stockholders' equity 5,900
$ 6,800 $ 6,800
Accounts receivable
Cash
stockholders' equity
Stockholders' Equity
Total liabilities and
Accounts payable
Total assets
Proviso CorporationBalance Sheet
200
Land
Supplies
Retained earnings, December 31, 2009
Assets Liabilities
December 31, 2009
Income before income taxes
Proviso CorporationIncome Statement
For the Year Ended December 31, 2009
Subtotal
Less dividends
For the Year Ended December 31, 2009
Retained earnings, December 31, 2008
Net income for the year
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
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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
Change in Stockholders' Equity
$40,750
+ Dividends
Net income
$3,000
$13,250
Net loss is:
Change in Stockholders' Equity
Net income is:
68,750
$ 13,250
$13,250
Chapter 1, E 12.
$124,500111,250
Net income
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$ 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
Net income for the year
Subtotal
Less dividends
Retained earnings, January 31, 2010
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
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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
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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.
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$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
Statement of Retained Earnings
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
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$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
Retained earnings 54,500
Total stockholders' equity 83,500
$122,800 $122,800
December 31, 2011Balance Sheet
Subtotal
Less dividends
Retained earnings, December 31, 2011
Cash
Assets
stockholders' equityTotal assets
Stockholders' Equity
Total liabilities and
For the Year Ended December 31, 2011
Supplies
Total liabilities
Liabilities
Accounts receivable
Retained earnings, December 31, 2010
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
Income before income taxes
Chapter 1, P 3.
1. Financial statements prepared
Income taxes expense
Net income for the year
Total expenses
Revenue
Commission sales revenue
Expenses
Special Assets, Inc.Income Statement
For the Year Ended December 31, 2011
Equipment
Wages expense
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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
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$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
Retained earnings 2,040
Total stockholders' equity 7,040
$ 28,300 $ 28,300
Net income
For the Year Ended January 31, 2010
LiabilitiesAssets
Stockholders' Equity
Revenue
Advertising service revenue
Expenses
Unique Ad, Inc.Income Statement
For the Year Ended January 31, 2010
Chapter 1, P 4.
1. Financial statements prepared
Unique Ad, Inc.Statement of Retained Earnings
Equipment rental expense
Marketing expense
Salaries expense
Supplies expense
Office rent expense
Income before income taxes
Income taxes expense
Unique Ad, Inc.
January 31, 2010
Accounts receivable
Cash
Income taxes payable
Supplies
Total liabilities
stockholders' equity
Total liabilities and
Total assets
Balance Sheet
Subtotal
Less dividends
Retained earnings, January 31, 2010
Total expenses
Net income for the year
Retained earnings, January 31, 2009
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Chapter 1, P 4. (Continued)
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
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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
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$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
Statement of Retained Earnings
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.
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$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
Retained earnings 130,350
Total stockholders' equity 145,350
$168,450 $168,450
Net income for the year
Retained earnings, November 30, 2010
Statement of Retained Earnings
Retained earnings, November 30, 2011
stockholders' equity
Total liabilities and
Total assets
Assets
Cash
Income taxes payable
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.
1. Financial statements prepared
Income taxes expense
Net income
Stockholders' Equity
Income StatementFor the Year Ended November 30, 2011
Expenses
Metro Labs
Income before income taxes
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Chapter 1, P 7. (Continued)
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
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$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.
1. Financial statements prepared
Net income
Gino's Painting Specialists, Inc.
Painting service revenue
Expenses
Gino's Painting Specialists, Inc.Income Statement
Truck rent expense
Income before income taxes
Income taxes expense
Total expenses
Equipment rental expense
Marketing expense
Salaries expense
Supplies expense
September 30, 2010
Statement of Retained Earnings
Accounts receivable
Cash
Income taxes payable
Gino's Painting Specialists, Inc.
For the Year Ended September 30, 2010
Balance Sheet
Subtotal
Total liabilities
Liabilities
Stockholders' Equity
Assets
Supplies
stockholders' equity
Total liabilities and
Common stock
Total assets
Less dividends
Retained earnings, September 30, 2010
Retained earnings
Total stockholders' equity
Accounts payable
Salaries payable
Net income for the year
Retained earnings, September 30, 2009
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The corporation has several advantages over the partnership, including limited
2. User Insight: Form of business discussed
Chapter 1, P 8. (Continued)
liability for its stockholders and the ability to exchange shares easily.
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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.
26 Cengage Learning. All rights reserved. .
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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
Cengage Learning. All rights reserved. 27
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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-
*
+
**
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$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
Total liabilities and
Liabilities
Total assets
Total liabilities and
stockholders' equity
Cash Loan payable
Balance SheetJune 1, 2010
Chapter 1, C 6.
1. Balance sheets prepared
stockholders' equity
Accounts receivable
Murphy Lawn Services, Inc.
August 31, 2010
Supplies
Deposit
Accounts payable
Wages payable
Loan payable
Total liabilities
Assets Liabilities
Stockholders' Equity
Common stock
Retained earnings
Total stockholders' equity
Stockholders' Equity
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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.
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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-
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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.
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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
Cengage Learning. All rights reserved. 33
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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
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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.
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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
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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-
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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
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$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.
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Item Ref. Debit Credit Debit Credit
Sept. 16 J4 1,800 1,800
Item Ref. Debit Credit Debit Credit
Sept. 6 J4 3,800 3,800
16 J4 1,800 2,000
Item Ref. Debit Credit Debit Credit
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
40 Cengage Learning. All rights reserved. .
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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
Programming Service Revenue
Programming Service Revenue
Billed a customer for services
Invested in company's common
May
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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.
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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.
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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
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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)
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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 $2,500.
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Debit Credit
a. Paid for supplies purchased on credit last month. 5 1
b. Received cash from customers billed last month. 1 2
c. Made a payment on accounts payable. 5 1
d. Purchased supplies on credit. 3 5
e. Billed a client for lawn services. 2 6
f. Made a rent payment for the current month. 8 1
g. Received cash from customers for current lawn
services. 1 6
h. Paid employee wages. 7 1
i. Ordered equipment.
j. Received and paid for the equipment ordered in i . 4 1
Chapter 2, E 8.
No entry
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f. 400 c. 1,100
g. 3,720 d. 600 Bal. 700
e. 900
h. 1,000 a. 5,900
8,020 3,700
Bal. 4,320
h. 1,000
c. 1,100 g. 3,720
a. 1,600 e. 900
d. 600
Bal. 2,200
b. 800
Accounts Payable
Common Stock
Dividends
Rent Expense
4,300a.
Repair Fees Earned
Salaries Expense
400f.
800b.
Cash
Repair Supplies
Repair Equipment
Chapter 2, E 9.
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$ 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
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$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
$10,710
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$ 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
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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
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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
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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
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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
Ref. Debit Debit Credit
14 J10 6,000 6,000
Ref. Debit Debit Credit
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
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( $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
Key ratio calculated
=
2010 =$5,000
$40,000
56 Cengage Learning. All rights reserved. .
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15
,00
02
2,0
00
18
,00
01
05
,00
05
,94
0
48
0
62
,00
0
= =
=$
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
$2
4,5
90
C
engage L
earn
ing.
All
rights
reserv
ed.
57
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Debit Credit
a. Paid for supplies purchased on credit last month. 7 1
b. Billed customers for services performed. 2 11
c. Paid the current month's rent. 12 1
d. Purchased supplies on credit. 3 7
e. Received cash from customers for services per- 1 11
formed but not yet billed.
f. Purchased equipment on account. 5 7
g. Received a bill for repairs. 13 7
h. Returned part of the equipment purchased in f for 7 5
a credit.
i. Received payments from customers previously 1 2
billed.
j. Paid the bill received in g . 7 1
k. Received an order for services to be performed.
l. Paid for repairs with cash. 13 1
m. Made a payment to reduce the principal of the note 6 1
payable.
n. Declared and paid a dividend. 10 1
No entry
Chapter 2, P 2.
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f. 2,040 j. 1,380 e. 330
1,380 c. 190 2,040 1,380
Bal. 660
i. 40
k. 90
l. 440
m. 300
7,080 1,650
5,430
5,000 a. 3,600 h. 330 e. 330
480 g. 380 g. 860
5,480 Bal. 3,980 330 1,190
Bal. 860
a. 14,300 m. 300 f. 2,040
440 k. 90 b. 260
40 c. 190
No entry
Computers
a.
Cash
Chapter 2, P 3.
Accounts Receivable Supplies
Bal.
T accounts set up
Transactions recorded in the accounts
1.
2.
5,700 b. 260
h. 330
j.
Repair Expense
i.
Rent Expense
d.
Salaries Expense
l.
Office Equipment
Bal.
Utilities Expense
Advertising Expense
Common Stock
g.
a.
Accounts Payable
Dividends Tuition Revenue
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$ 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.
Chapter 2, P 3. (Continued)
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
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2 7,200
7,200
To issue 7,200 shares of $1 par value
common stock
3 150
150
To purchase supplies on account
4 2,500
1,200
1,300
To purchase bicycles; made partial pay-
ment and agreed to pay the rest later
5 2,900
2,900
To purchase shed to store bicycles
8 400
400
To install shed
9
10 75
75
To pay for cleanup
13 970
970
To record rentals made for cash
17 150
150
To pay for supplies purchased on June 3
Chapter 2, P 4.
Common Stock
June
Shed
Shed
1. Transactions entered in journal form
Cash
Rental Revenue
Supplies
Accounts Payable
Cash
Accounts Payable
Cash
Cash
Bicycles
Cash
No entry
Maintenance Expense
Cash
Cash
Accounts Payable
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18 55
55
To repair bicycles
23 110
110
To bill company for rentals
25 100
100
To pay monthly concession fee
27 960
960
To record rentals made for cash
29 240
240
To pay wages of assistant
30 500
500
To declare and pay a dividend
Rental Revenue
Concession Fee Expense
Cash
Chapter 2, P 4. (Continued)
Accounts Receivable
Rental Revenue
Cash
Dividends
June
Wages Expense
Cash
Repair Expense
Cash
Cash
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7,200 6/4 1,200 6/23 110 6/3 150
970 6/5 2,900
960 6/8 400
6/10 75
6/17 150
6/18 55
6/25 100
6/29 240
6/30 500
9,130 5,620
3,510
2,900 6/4 2,500 6/17 150 6/3 150
400 6/4 1,300
3,300 150 1,450
Bal. 1,300
6/2 7,200 6/30 500 6/13 970
6/23 110
6/27 960
Bal. 2,040
240 6/10 75 6/18 55
1006/25
Maintenance Expense Repair ExpenseWages Expense
Expense
Concession Fee
Dividends Rental Revenue
6/29
Common Stock
Accounts PayableShed Bicycles
Bal.
6/5
6/8
Chapter 2, P 4. (Continued)
Accounts Receivable
6/13
Supplies
2. T accounts set up and entries posted from the journal
Cash
6/2
6/27
Bal.
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$ 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
Chapter 2, P 4. (Continued)
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
64 Cengage Learning. All rights reserved. .
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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
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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
Chapter 2, P 5. (Continued)
2010
Date
Cash
Description
66 Cengage Learning. All rights reserved. .
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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
Ref. Debit Credit Debit Credit
31 5,500
3 J22 2,300 3,200
10 J22 2,800 6,000
29 J23 2,700 8,700
Ref. Debit Credit Debit Credit
31 610
14 J22 380 990
17 J22 80 910
July Balance
Item
2010
Supplies Account No. 115
Balance
2010
July
Chapter 2, P 5. (Continued)
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.
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Ref. Debit Credit Debit Credit
31 4,200
Ref. Debit Credit Debit Credit
31 2,600
12 J22 1,300 1,300
14 J22 380 1,680
17 J22 80 1,600
26 J22 700 2,300
Ref. Debit Credit Debit Credit
31 12,000
Ref. Debit Credit Debit Credit
31 6,300
Ref. Debit Credit Debit Credit
31 J23 1,200 1,200
July Balance
2010
Aug.
Post. Balance
Item
Account No. 212Accounts Payable
Chapter 2, P 5. (Continued)
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.
68 Cengage Learning. All rights reserved. .
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Ref. Debit Credit Debit Credit
10 J22 2,800 2,800
19 J22 4,800 7,600
29 J23 2,700 10,300
Ref. Debit Credit Debit Credit
30 J23 3,800 3,800
Ref. Debit Credit Debit Credit
2 J22 650 650
Ref. Debit Credit Debit Credit
24 J22 250 250
Ref. Debit Credit Debit Credit
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
Chapter 2, P 5. (Continued)
Marketing Fees Account No. 411
Post.
2010
Aug.
Advertising Expense Account No. 515
Date Item
Post. Balance
2010
Aug.
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$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
Chapter 2, P 5. (Continued)
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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
$6
,88
0C
as
h
Eq
uip
me
nt
Ac
co
un
tin
g e
qu
ati
on
in
ba
lan
ce
:
Su
pp
lie
s
Wa
ge
s
Ex
pe
ns
e
C
en
ga
ge
Le
arn
ing
. A
ll rig
hts
re
se
rve
d.
71
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Oct. 21 1,340 Oct. 27 600
12 960 4 1,200 Bal. 740
27 600 9 1,080
17 1,500
24 80
31 700
16,560 7,360
Bal. 9,200
Oct. 7 3,000 Oct. 4 1,200
Oct. 3 2,800 Oct. 17 1,500 Oct. 7 3,000
Bal. 1,500
Oct. 1 15,000 Oct. 31 700
Oct. 12 960 Oct. 9 1,080
21 1,340 24 80
Bal. 2,300 Bal. 1,160
Oct. 2 No entry
Accounts Payable
Dividends
Cleaning Equipment
Common Stock
2,8003Oct.Oct. 1 15,000
2.
Cleaning Supplies Prepaid Lease
Chapter 2, P 7.
Accounts Receivable
T accounts set up
Transactions recorded in the accounts
1.
Cleaning Revenue Repair Expense
Cash
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$ 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.
Chapter 2, P 7. (Continued)
Trial balance prepared3.
Trial Balance
October 31, 2010
Repair Expense
Accounts Receivable
Accounts Payable
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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
Chapter 2, P 7. (Continued)
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.
74 Cengage Learning. All rights reserved. .
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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
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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
Chapter 2, P 8. (Continued)
Accounts Payable
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Ref. Debit Credit Debit Credit
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
Ref. Debit Credit Debit Credit
31 1,700
9 J17 1,200 500
10 J17 700 1,200
22 J18 500 700
Ref. Debit Credit Debit Credit
4 J17 85 85
Date
Date
Balance
Item
Cash
Date
BalanceJan.
Accounts Receivable
2010
Post.
Balance
Account No. 113
Post.
Chapter 2, P 8. (Continued)
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
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Ref. Debit Credit Debit Credit
31 1,040
13 J18 1,000 2,040
17 J18 290 2,330
Ref. Debit Credit Debit Credit
31 17,400
Ref. Debit Credit Debit Credit
31 15,000
Ref. Debit Credit Debit Credit
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
Chapter 2, P 8. (Continued)
Item
Account No. 141Equipment
Accounts Payable
Item
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Ref. Debit Credit Debit Credit
31 4,000
Ref. Debit Credit Debit Credit
31 1,570
Ref. Debit Credit Debit Credit
28 J18 200 200
Ref. Debit Credit Debit Credit
3 J17 650 650
10 J17 700 1,350
Ref. Debit Credit Debit Credit
2 J17 400 400
Ref. Debit Credit Debit Credit
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
Chapter 2, P 8. (Continued)
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
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Ref. Debit Credit Debit Credit
26 J18 460 460
Ref. Debit Credit Debit Credit
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
Chapter 2, P 8. (Continued)
Balance
Balance
Feb.
Date
2010
Feb.
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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
Chapter 2, P 8. (Continued)
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
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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
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(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
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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
84 Cengage Learning. All rights reserved. .
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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
Chapter 2, C 5. (Continued)
Utilities Expense
Accounts Payable
Wages Expense
Cash
Accounts Receivable
Cash
Delivery Revenue
Cash
Unearned Revenue
Accounts Receivable
Cash
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i.1
,12
5j.
37
5f.
1,1
25
6,2
50
d.
32
5B
al.
75
0
50
0e
.3
,12
5
37
5f.
1,1
25
62
k.
56
2
21
,56
26
,01
2
15
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0
12
,37
5g
.1
,00
0h
.6
25
m.
62
d.
25
0c
.6
,25
0
h.
62
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al.
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00
l.9
3
Ba
l.1
,71
8
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93
d.
75
87
5
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i.
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ice
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. (C
on
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Inte
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xp
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k.
b.
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es
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e
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ry R
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e
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en
t
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engage L
earn
ing. A
ll rights
reserv
ed.
86
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$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
Chapter 2, C 5. (Continued)
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
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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
Chapter 2, C 5. (Continued)
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.
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( $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
Key ratio calculated
=
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.
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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
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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
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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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