Warren9e01 Final

CHAPTER 1
INTRODUCTION TO ACCOUNTING
AND BUSINESS
QUESTION INFORMATION
Number
Objective
EO1-1
EO 1-2
EO 1-3
EO 1-4
EO 1-5
EO 1-6
Description
Time
AACSB
AICPA
1-1
1-1
1-1
1-1
1-1
1-2
Difficult
y
Easy
Easy
Easy
Easy
Easy
Easy
5
5
5
5
5
5
min
min
min
min
min
min
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
EO 1-7
1-2
Easy
5 min
Analytic
EO 1-8
1-2, 1-3
Easy
5 min
Analytic
EO 1-9
1-3
Easy
5 min
Analytic
EO 1-10
1-5
Easy
5 min
Analytic
EO 1-11
1-5
Easy
5 min
Analytic
EO 1-12
1-5
Easy
5 min
Analytic
PE1-1A
1-2
Cost concept
Easy
5 min
Analytic
PE1-1B
1-2
Cost concept
Easy
5 min
Analytic
PE1-2A
1-3
Accounting equation
Easy
5 min
Analytic
PE1-2B
1-3
Accounting equation
Easy
5 min
Analytic
PE1-3A
1-4
Transactions
Easy
Analytic
PE1-3B
1-4
Transactions
Easy
PE1-4A
1-5
Income statement
Easy
PE1-4B
1-5
Income statement
Easy
PE1-5A
1-5
Easy
PE1-5B
1-5
Easy
5 min
Analytic
PE1-6A
1-5
Retained earnings
statement
Retained earnings
statement
Balance sheet
10
min
10
min
10
min
10
min
5 min
Easy
Analytic
PE1-6B
1-5
Balance sheet
Easy
PE1-7A
1-5
Easy
PE1-7B
1-5
Ex1-1
Ex1-2
Ex1-3
1-1
1-1
1-2
Statement of cash
flows
Statement of cash
flows
Types of businesses
Professional ethics
Business entity
10
min
10
min
10
min
10
min
5 min
5 min
10
BB-Industry
BB-Industry
BB-Industry
BB-Industry
BB-Industry
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
BB-Industry
BB-Industry
BB-Industry
Easy
Easy
Easy
Easy
1
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Ethics
Analytic
SS
GL
Number
Objective
Description
Difficult
y
Time
AACSB
AICPA
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
Ex1-4
1-3
concept
Accounting equation
Easy
min
5 min
Analytic
Ex1-5
1-3
Accounting equation
Easy
5 min
Analytic
Ex1-6
1-3
Accounting equation
Easy
5 min
Analytic
Ex1-7
1-3, 1-4
Accounting equation
1-3
Ex1-9
1-4
Easy
5 min
Analytic
FNMeasurement
Ex1-10
1-4
Asset, liability,
stockholders equity
items
Effect of transactions
on accounting
equation
on accounting
equation
10
min
5 min
Analytic
Ex1-8
Moderat
e
Easy
Easy
5 min
Analytic
FNMeasurement
Ex1-11
1-4
Easy
5 min
Analytic
FNMeasurement
Ex1-12
1-4
on stockholders
equity
Transactions
Easy
Analytic
Ex1-13
1-4
Ex1-14
1-5
Moderat
e
Easy
Ex1-15
1-5
Moderat
e
10
min
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
Ex1-16
1-5
Nature of
transactions
Net income and
dividends
Net income and
stockholders equity
for four businesses
Balance sheet items
10
min
15
min
5 min
Easy
5 min
Analytic
Ex1-17
1-5
Easy
5 min
Analytic
Ex1-18
1-5
Easy
5 min
Analytic
Ex1-19
1-5
Income statement
items
Retained earnings
statement
Income statement
Easy
5 min
Analytic
Ex1-20
1-5
Moderat
e
10
min
Analytic
Ex1-21
1-5
1-5
Moderat
e
Easy
15
min
5 min
Analytic
Ex1-22
Missing amounts
from balance sheet
and income
statement data
Balance sheets, net
income
Financial statements
Ex1-23
1-5
Easy
5 min
Analytic
Ex1-24
1-5
Easy
1-5
Pr1-1A
1-4
Transactions
Moderat
e
Easy
Pr1-2A
1-5
Easy
Pr1-3A
1-5
Moderat
e
10
min
10
min
30
min
30
min
45
min
Analytic
Ex1-25
Statement of cash
flows
Statement of cash
flows
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
SS
Exl
Exl
Exl
Exl
Exl
GL
Number
Objective
Description
Difficult
y
Moderat
e
Moderat
e
Difficult
Time
AACSB
AICPA
SS
Pr1-4A
1-4, 1-5
Pr1-5A
1-4, 1-5
Pr1-6A
1-5
Pr1-1B
1-4
Transactions;
financial statements
Transactions;
Missing amounts
from financial
statements
Transactions
1 hr
Analytic
Exl
1 1/2
hr
1 1/2
hr
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
Easy
30
min
30
min
45
min
1 hr
Analytic
Pr1-2B
1-5
Easy
Pr1-3B
1-5
Pr1-4B
1-4,1-5
Pr1-5B
1-4,1-5
Pr1-6B
1-5
DM-1
SA1-1
1-1
SA1-2
1-4
Transactions;
Transactions;
Missing amounts
from financial
statements
Continuing Problem
Ethics and
professional conduct
in business
Net income
Moderat
e
Moderat
e
Moderat
e
Difficult
1 1/2
hr
1 1/2
hr
Analytic
Moderat
e
30
min
Ethics
BB-Industry
Easy
10
min
1 hr
Analytic
15
min
Analytic
FNMeasurement
FNMeasurement
BB-Industry
SA1-3
1-4
SA1-4
1-1
SA1-5
1-5
SA1-6
1-5
Analytic
Analytic
Analytic
Analytic
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
Exl
GL
KA
Exl
Exl
Exl
Exl
Exl
KA
Exl
KA
Transactions and
Certification
requirements for
accountants
Cash flows
Moderat
e
Easy
Analytic
Easy
5 min
Analytic
Financial analysis of
Enron Corporation
Moderat
e
30
min
Reflective
Thinking
FNMeasurement
BB-Critical
Thinking
EYE OPENERS
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. A manufacturing business changes basic
inputs into products that are then sold to
customers. A service business provides
services rather than products to customers.
A restaurant such as Applebees has
characteristics of both a manufacturing and
a service business in that Applebees takes
raw inputs such as cheese, fish, and beef
and processes them into products for
consumption by its customers. At the same
time, Applebees provides services of
waiting on its customers as they dine.
3. The corporate form allows the company to

obtain large amounts of resources by
issuing stock. For this reason, most
companies that require large investments in
property, plant, and equipment are
organized as corporations.
4. The stakeholders of a business normally
include owners, managers, employees,
customers, creditors, and the government.
5. 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.
6. 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
$1,850 is a personal transaction of Rebecca
Olson and should not be recorded by
Aquarius
Delivery Service.
7. The land should be recorded at its cost of
$88,000 to Dependable Repair Service. This
is consistent with the cost concept.
8. a. No. The offer of $725,000 and the
increase in the assessed value should
not be recognized in the accounting
records.
b. Cash would increase by $725,000, land
would decrease by $375,000, and
stockholders equity would increase by
$350,000.
9. 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.
10. The business incurred a net loss of
$145,000 ($565,000 $420,000).
11. The business realized net income of
$180,900 ($919,500 $738,600).
12. Net income or net loss
Retained earnings at the end of the period
Cash at the end of the period
PRACTICE EXERCISES
PE 11A
$37,000. Under the cost concept, the land should be recorded at the cost to
Johnson Repair Service.
PE 11B
$100,000. Under the cost concept, the land should be recorded at the cost to
Duck Repair Service.
PE 12A
a.
A = L + OE
$617,000 = $382,000 + OE
OE = $235,000
b.
A = L + OE
+$114,000 = $29,000 + OE
OE = +$143,000
OE on December 31, 2008 =
$378,000 = $235,000 + $143,000
b.
A = L + OE
+$75,000 = $15,000 + OE
OE = +$60,000
OE on December 31, 2008 =
$223,500 = $163,500 + $60,000
PE 12B
a.
A = L + OE
$336,000 = $172,500 + OE
OE = $163,500
PE 13A
(2) Asset (Cash) decreases by $815; Liability (Accounts Payable) decreases by
$815.
(3) Asset (Accounts Receivable) increases by $3,250; Revenue (Delivery Service
Fees) increases by $3,250.
(4) Asset (Cash) increases by $1,150; Asset (Accounts Receivable) decreases
by $1,150.
(5) Asset (Cash) decreases by $500; Dividends increases by $500.
PE 13B
(2) Expense (Advertising Expense) increases by $674; Asset (Cash) decreases
by $674.
(3) Asset (Supplies) increases by $280; Liability (Accounts Payable) increases
by $280.
(4) Asset (Accounts Receivable) increases by $4,800; Revenue (Delivery Service
Fees) increases by $4,800.
(5) Asset (Cash) increases by $1,150; Asset (Accounts Receivable) decreases
by $1,150.
PE 14A
HERAT TRAVEL SERVICE
Income Statement
For the Year Ended June 30, 2008
Fees earned.......................................................................
Expenses:
Wages expense...........................................................
Office expense.............................................................
Miscellaneous expense..............................................
Total expenses........................................................
Net income.........................................................................
$ 378,200
$ 181,500
91,350
3,150
276,000
$ 102,200
PE 14B
LEOTARD TRAVEL SERVICE
Income Statement
For the Year Ended February 28, 2008
Fees earned.......................................................................
Expenses:
Wages expense...........................................................
Office expense.............................................................
Miscellaneous expense..............................................
Total expenses........................................................
Net loss..............................................................................
$ 377,000
$ 225,000
156,650
6,350
388,000
$ 11,000
PE 15A
Retained Earnings Statement
Retained earnings, July 1, 2007......................................
Net income for the year....................................................
Less dividends..................................................................
Increase in retained earnings .........................................
Retained earnings, June 30, 2008...................................
$ 45,000
$ 102,200
12,000
90,200
$ 135,200
PE 15B
Retained earnings, March 1, 2007..................................
Net loss for the year.........................................................
Less dividends..................................................................
Decrease in retained earnings........................................
Retained earnings, February 28, 2008............................
$ 110,000
$ (11,000)
(10,000)
(21,000)
$ 89,000
PE 16A
Balance Sheet
June 30, 2008
Assets
Cash..................................
Accounts receivable........
Supplies............................
Land..................................
Total assets......................
Liabilities
$ 70,800
24,350
5,350
100,000
$200,500
Accounts payable................
Stockholders Equity
Capital stock........ $ 50,000
Retained earnings 135,200
Total stockholders equity. .
Total liabilities and
stockholders equity........
$ 15,300
185,200
$200,500
PE 16B
Balance Sheet
February 28, 2008
Assets
Liabilities
Cash..................................
Supplies............................
Land..................................
Total assets......................
$ 22,700
37,750
2,550
145,000
$208,000
Accounts payable.................
$ 21,000
Stockholders Equity
Capital stock........ $98,000

Total stockholders equity...
stockholders equity.........
187,000
$208,000
PE 17A
Statement of Cash Flows
Cash flows from operating activities:
Cash received from customers.................................
Deduct cash payments for operating expenses.....
Net cash flow from operating activities....................
Cash flows from investing activities:
Cash payments for purchase of land.......................
Cash flows from financing activities:
Cash received from issuing capital stock................
Deduct dividends .......................................................
Net cash flow from financing activities....................
Net increase in cash during year....................................
Cash as of July 1, 2007....................................................
Cash as of June 30, 2008.................................................
$ 350,000
270,000
$ 80,000
(60,000)
$ 20,000
12,000
8,000
$ 28,000
42,800
$ 70,800
PE 17B
Cash received from issuing capital stock ...............
Deduct cash dividends ..............................................
Net decrease in cash during year...................................
Cash as of March 1, 2007.................................................
Cash as of February 28, 2008.........................................
$ 350,000
365,000
$ (15,000)
(27,000)
$ 18,000
10,000
8,000
$ (34,000)
56,700
$ 22,700
EXERCISES
Ex. 11
1.
2.
3.
4.
5.
service
service
merchandise
manufacturing
service
6.
7.
8.
9.
10.
manufacturing
service
manufacturing
manufacturing
service
11.
12.
13.
14.
15.
merchandise
service
merchandise
manufacturing
manufacturing
Ex. 12
As in many ethics issues, there is no one right answer. A fired researcher at the
company reported on this issue in these terms: The company covered up the
first report, and the local newspaper uncovered the companys 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. 13
1.
2.
3.
4.
F
X
S
B
5.
6.
7.
8.
F
B
X
S
9. F
10. F
Ex. 14
Coca-Cola owners (stockholders) equity: $31,327 $15,392 = $15,935
PepsiCo owners (stockholders) equity:
$27,987 $14,415 = $13,572
Ex. 15
eBay owners (stockholders) equity:
Google owners (stockholders) equity:
$7,991 $1,263 = $6,728

$3,313 $384 = $2,929
Ex. 16
a. $300,600 ($85,000 + $215,600)
b. $87,350 ($93,500 $6,150)
c. $31,225 ($42,500 $11,275)
Ex. 17
a.
b.
c.
d.
e.
$650,000 ($950,000 $300,000)

$710,000 ($650,000 + $150,000 $90,000)
$548,000 ($650,000 $75,000 $27,000)
$823,000 ($650,000 + $125,000 + $48,000)
Net income: $355,000 ($1,200,000 $195,000 $650,000)
Ex. 18
a.
b.
c.
d.
e.
f.
asset
stockholders equity (retained earnings)
liability
stockholders equity (retained earnings)
asset
asset
Ex. 19
a.
b.
c.
d.
e.
Increases assets and increases liabilities.

Increases assets and decreases assets.
Decreases assets and decreases stockholders equity (retained earnings).
Increases assets and increases stockholders equity (retained earnings).
Increases assets and increases stockholders equity (retained earnings).
Ex. 110
a. (1)
(2)
(3)
Total assets increased $70,000.

No change in liabilities.
Stockholders equity (retained earnings) increased $70,000.
b. (1)
(2)
(3)
Total assets decreased $40,000.

Total liabilities decreased $40,000.
No change in stockholders equity (retained earnings).
Ex. 111
1.
2.
3.
4.
increase
decrease
increase
decrease
Ex. 112
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
c
c
e
d
c
a
e
a
e
e
Ex. 113
a. (1)
(2)
(3)
(4)
(5)
(6)
(7)
Sale of catering services for cash, $45,000.

Purchase of land for cash, $20,000.
Payment of expenses, $16,000.
Purchase of supplies on account, $3,000.
Paid dividends, $5,000.
Payment of cash to creditors, $12,000.
Recognition of cost of supplies used, $2,500.
b. $8,000 ($27,000 $19,000)

c. $21,500 ($5,000 + $45,000 $18,500)
d. $26,500 ($45,000 $18,500)
e. $21,500 ($26,500 $5,000)
Ex. 114
It would be incorrect to say that the business had incurred a net loss of $32,200.
The excess of the dividends over the net income for the period is a decrease in
the amount of stockholders equity in the business.
Ex. 115
Alpha
Stockholders equity at end of year
($2,160,000 $900,000)....................................................
Stockholders equity at beginning of year
($1,350,000 $540,000)....................................................
Net income (increase in stockholders equity).........
$1,260,000
810,000
$ 450,000
Bravo
Increase in stockholders equity
(as determined for Alpha)................................................
Add dividends ......................................................................
Net income.........................................................................
$450,000
120,000
$570,000
Charlie
Deduct additional capital stock issued.............................
Net income.........................................................................
$450,000
270,000
$180,000
Delta
Deduct additional capital stock issued.............................
Add dividends ......................................................................
Net income.........................................................................
Ex. 116
Balance sheet items: 1, 2, 4, 5, 6, 10
Ex. 117
Income statement items: 3, 7, 8, 9
$450,000
270,000
$180,000
120,000
$300,000
Ex. 118
PICKEREL COMPANY
For the Month Ended June 30, 2008
Retained earnings, June 1, 2008................................
Net income for the month...........................................
Less dividends.............................................................
Increase in retained earnings.....................................
Retained earnings, June 30, 2008..............................
$682,900
$196,350
15,000
181,350
$864,250
Ex. 119
GIBLET SERVICES
Income Statement
For the Month Ended February 28, 2008
Fees earned..................................................................
Expenses:
Wages expense.........................................................
Rent expense............................................................
Supplies expense.....................................................
Miscellaneous expense...........................................
Total expenses.....................................................
Net income....................................................................
$479,280
$310,600
60,000
6,200
11,150
387,950
$ 91,330
Ex. 120
In each case, solve for a single unknown, using the following equation:
Stockholders equity (beginning) + Additional issuance of capital stock
Dividends + Revenues Expenses = Stockholders equity (ending)
Oscar
Stockholders equity at end of year ($670,500 $292,500)...

($540,000 $324,000).............................................................
Increase in stockholders equity..............................................
Deduct increase due to net income ($177,975 $97,200).....
$378,000
Stockholders equity at end of year ($175,000 $55,000).....

($125,000 $65,000)................................................................
Increase in stockholders equity..............................................
Add dividends............................................................................
$120,000
216,000
$162,000
80,775
$ 81,225
Add dividends............................................................................
36,000
Additional issuance of capital stock................................... (a) $117,225
Papa
$
Deduct additional issuance of capital stock .........................
Increase due to net income.......................................................
$
Add expenses.............................................................................
Revenue.................................................................................. (b) $
Quebec Stockholders equity at end of year ($180,000 $160,000)...
($200,000 $152,000).............................................................
Decrease in stockholders equity.............................................
(28,000)
Deduct decrease due to net loss ($230,000 $245,000).......
60,000
60,000
8,000
68,000
25,000
43,000
32,000
75,000
$ 20,000
48,000
$
(15,000)
$
(13,000)
Deduct additional issuance of capital stock..........................
20,000
Dividends................................................................................ (c) $
(33,000)
Romeo Stockholders equity at end of year ($248,000 $136,000)...
Add decrease due to net loss ($112,000 $128,000).............
Add dividends............................................................................
Owners equity at beginning of year .......................................
Deduct additional issuance of capital stock .........................
Stockholders equity at beginning of year..............................
$148,000
$112,000
16,000
$128,000
60,000
$188,000
40,000
Add liabilities at beginning of year..........................................

120,000
Assets at beginning of year.................................................. (d) $268,000
Ex. 121
a.
BURST INTERIORS
Balance Sheet
March 31, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 72,000
40,800
3,600
$116,400
$ 18,480
Stockholders Equity
Capital stock ....... $20,000

97,920
$116,400
BURST INTERIORS
Balance Sheet
April 30, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$122,400
46,950
3,000
$172,350
Accounts payable................. $ 19,920

Stockholders Equity

Total stockholders equity... 152,430
stockholders equity......... $172,350
b.
Stockholders equity, April 30.......................................

Stockholders equity, March 31.....................................
Net income................................................................
$152,430
97,920
$ 54,510
c.
Stockholders equity, April 30.......................................

Stockholders equity, March 31.....................................
Increase in stockholders equity............................
Add dividends ................................................................
Net income................................................................
$152,430
97,920
$ 54,510
15,000
$ 69,510
Ex. 122
Balance sheet: a, b, c, d, f, g, h, i, j, k, m
Income statement: e, l, n, o
Ex. 123
1.
2.
3.
4.
cfinancing activity
aoperating activity
binvesting activity
aoperating activity
Ex. 124
WEBSTER CONSULTING GROUP
For the Year Ended July 31, 2008
Cash received from issuance of capital stock .......
Deduct cash dividends ..............................................
Net increase in cash during year....................................
Cash as of August 1, 2007...............................................
Cash as of July 31, 2008.................................................
$495,000
371,500
$123,500
(40,000)
$ 20,000
9,000
11,000
$ 94,500
46,750
$141,250
Ex. 125
1. All financial statements should contain the name of the business in their
heading. The retained earnings statement is incorrectly headed as Ora
Tasker rather than Galaxy Realty. The heading of the balance sheet needs
the name of the business.
2. The income statement and retained earnings statement cover a period of
time and should be labeled For the Month Ended November 30, 2008.
3. The year in the heading for the retained earnings statement should be 2008
rather than 2007.
4. The balance sheet should be labeled as of November 30, 2008, rather than
For the Month Ended November 30, 2008.
5. In the income statement, the miscellaneous expense amount should be listed
as the last expense.
6. In the income statement, the total expenses are incorrectly subtracted from
the sales commissions, resulting in an incorrect net income amount. The
correct net income should be $9,800. This also affects the retained earnings
statement and the amount of retained earnings that appears on the balance
sheet.
7. In the retained earnings statement, the additional issuance of capital stock
should not be added to retained earnings as of November 1, 2008. The net
income should be presented, followed by the amount of dividends, which is
subtracted from the net income to yield a net increase in retained earnings.
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
stockholders equity.
Ex. 125 Concluded

Corrected financial statements appear as follows:
GALAXY REALTY
Income Statement
For the Month Ended November 30, 2008
Sales commissions.............................................................
Expenses:
Office salaries expense...............................................
Rent expense................................................................
Automobile expense....................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total expenses..........................................................
Net income...........................................................................
$103,800
$64,800
22,000
5,000
600
1,600
94,000
$ 9,800
GALAXY REALTY
Retained earnings, November 1, 2008..............................
Net income for November...................................................
Less dividends during November.....................................
Increase in retained earnings............................................
Retained earnings, November 30, 2008............................
$15,800
$ 9,800
4,000
5,800
$21,600
GALAXY REALTY
Balance Sheet
November 30, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 6,600
28,600
4,000
$39,200
$ 7,600
Stockholders Equity
Capital stock......... $10,000

Total stockholders equity..
stockholders equity.......
31,600
$39,200
PROBLEMS
Prob. 11A
1.
Assets
Cash
a.
+ 25,000
b.
Bal.
25,000
c.
+ 4,500
Bal.
29,500
d.
1,500
Bal.
28,000
e.
600
Bal.
27,400
f.
Bal.
27,400
g.
580
Bal.
26,820
h.
1,200
Bal.
25,620
i.
Bal.
25,620
j.
1,000
Bal.
24,620
Stockholders
Equity
= Liabilities +
Accts.
Accts.
Capital
Rec. + Supplies = Payable + Stock
Fees
Rent
Sal.
Supp.
Auto
Misc.
Dividends + Earned Exp. Exp. Exp. Exp. Exp.
+ 25,000
+ 1,150
1,150
+ 1,150
1,150
1,150
1,150
1,150
2,250
2,250
2,250
25,000
25,000
4,500
1,150
25,000
1,150
550
25,000
4,500
+ 2,250
6,750
1,150
2,250
+ 4,500
4,500
1,150
600
550
+ 2,250
2,250
25,000
1,150
770
380
380 =
550
550
550
550
25,000
6,750
25,000
6,750
25,000
25,000
1,000
1,000
1,500
1,500
1,500
1,500
1,500
1,500
1,200
1,200
6,750
1,500
1,200
770
770
6,750
1,500
1,200
770
400
400
180
180
400
180
400
180
400
180
2. Stockholders equity is the right of stockholders to the assets of the business. These rights are increased by
stockholders investments and revenues and decreased by dividends and expenses.
Prob. 12A
1.
PEDIGREE TRAVEL AGENCY

Income Statement
For the Year Ended December 31, 2008
Fees earned..........................................................................
Expenses:
Wages expense............................................................
Rent expense................................................................
Utilities expense...........................................................
Total expenses..........................................................
Net income...........................................................................
2.
$ 250,000
$65,000
25,000
18,200
2,800
1,500
112,500
$ 137,500

For the Year Ended December 31, 2008
Retained earnings, January 1, 2008..................................

Net income for the year......................................................
Less dividends....................................................................
Increase in retained earnings ...........................................
Retained earnings, December 31, 2008............................
3.
$ 75,000
$137,500
40,000
97,500
$172,500

Balance Sheet
December 31, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$180,000
42,300
2,700
$225,000
Accounts payable................. $ 12,500

Stockholders Equity

Total stockholders equity... 212,500
stockholders equity......... $225,000
Prob. 13A
1.
MARINER FINANCIAL SERVICES
Income Statement
For the Month Ended January 31, 2008
Fees earned..........................................................................
Expenses:
Salaries expense..........................................................
Rent expense................................................................
Auto expense................................................................
Total expenses..........................................................
Net income...........................................................................
$52,400
$ 15,000
7,500
4,500
455
1,280
28,735
$23,665
2.
Retained earnings, January 1, 2008..................................
Net income for January......................................................
Less dividends....................................................................
Retained earnings, January 31, 2008................................
$23,665
9,000
14,665
$14,665
3.
Balance Sheet
January 31, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 29,140
10,400
725
$ 40,265
600
Stockholders Equity

39,665
$40,265
Prob. 13A
Concluded
4. (Optional)
Cash received from customers..................................
Deduct cash payments for expenses
and payments to creditors......................................
Net cash flow used for operating activities .............
$ 42,000
28,860*
$ 13,140
Cash flows from investing activities.................................

Cash received from issuing capital stock.................
Deduct cash dividends ...............................................
Net cash flow from financing activities.....................
Net cash flow and January 31, 2008, cash balance........
*$580 + $7,500 + $5,780 + $15,000
0
$ 25,000
9,000
16,000
$ 29,140
Prob. 14A
1.
Assets
Cash
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
Accts.
Capital
+ Supplies = Payable + Stock Dividends +
+ 30,000
30,000
1,500
28,500
36,750
65,250
5,200
60,050
8,000
52,050
3,700
48,350
9,250
39,100
39,100
Stockholders
Equity
= Liabilities +
Sales
Comm.
Office
Sal.
Exp.
Rent
Auto
Exp. Exp.
Supp.
Exp.
Misc.
Exp.
+30,000
+ 2,650
+ 2,650
2,650
+ 2,650
2,650
1,500
1,150
2,650
1,150
30,000
+ 36,750
36,750
2,650
1,150
30,000
36,750
5,200
5,200
2,650
1,150
30,000
8,000
8,000
36,750
5,200
2,650
1,150
30,000
8,000
36,750
5,200
2,500
2,500
1,200
1,200
2,650
1,750
900
1,150
30,000
8,000
36,750
9,250
9,250
5,200
2,500
1,200
1,150
30,000
8,000
36,750
9,250
5,200
2,500
1,200
30,000
30,000
1,750
1,750
Prob. 14A
Concluded
2.
SELTZER REALTY
Income Statement
For the Month Ended March 31, 2008
Expenses:
Rent expense................................................................
Total expenses..........................................................
Net income...........................................................................
$36,750
$9,250
5,200
2,500
1,750
1,200
19,900
$16,850
SELTZER REALTY
For the Month Ended March 31, 2008
Retained earnings, March 1, 2008.....................................
Net income for March..........................................................
Less dividends....................................................................
Retained earnings, March 31, 2008...................................
$16,850
8,000
8,850
$8,850
SELTZER REALTY
Balance Sheet
March 31, 2008
Assets
Cash..................................
Supplies............................
Liabilities
$39,100
900
$ 1,150
Stockholders Equity
Total assets......................
$40,000

Retained earnings
8,850
Total stockholders equity..
stockholders equity.......
38,850
$ 40,000
Prob. 15A
1.
Assets
Liabilities
+ Stockholders Equity
Accounts
Payable
Capital
Retained
Stock + Earnings
+ 18,000 = 5,200 + 15,000
Retained Earnings
43,600 = 5,200 + 15,000
Retained Earnings
Accts.
Cash + Rec. + Supplies + Land
8,500 + 15,500 + 1,600
23,400 =
Retained Earnings
This page left intentionally blank.
Prob. 15A
Continued
2.
Assets
Cash
Bal.
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
8,500
Accounts
+ Receivable + Supplies +
f.
Bal.
i.
Bal.
j.
Bal.
15,500
1,600
18,000
5,200
45,000
23,400
15,500
1,600
40,000
5,200
45,000
23,400
15,500
1,600
40,000
5,200
45,000
23,400
31,400
15,500
1,600
40,000
5,200
45,000
23,400
31,400
15,500
3,150
40,000
45,000
23,400
15,500
3,150
40,000
1,800
45,000
23,400
1,800
45,000
23,400
+ 30,000
38,500
l.
Bal.
23,400
+ 30,000
22,000
16,500
15,000
Retained
+ Earnings Dividends
5,200
+ 22,000
+ 17,900
34,400
3,000
+ 1,550
+ 1,550
4,950
26,450
6,750
4,950
+ 12,350
26,450
27,850
3,150
40,000
26,450
27,850
3,150
40,000
9,680
45,000
23,400
18,400
27,850
3,150
40,000
9,680
45,000
23,400
+ 13,200
13,200
31,600
14,650
3,150
40,000
9,680
45,000
23,400
31,600
14,650
1,275
40,000
9,680
45,000
23,400
14,650
1,275
40,000 =
9,680
45,000
23,400
+ 7,880
8,050
k.
Bal.
Capital
Stock
18,000
h.
Bal.
Accounts
Payable +
1,600
g.
Bal.
Land
15,500
e.
Bal.
Stockholders
Equity
= Liabilities +
1,875
5,000
26,600
5,000
5,000
Stockholders Equity (Continued)

Dry
Cleaning
+ Sales
Dry
Cleaning
Exp.
Wages
Exp.
Rent
Exp.
Supplies
Exp.
Truck
Exp.
Utilities
Exp.
Misc.
Exp.
Bal.
a.
Bal.
b.
Bal.
c.
Bal.
+ 17,900
17,900
d.
Bal.
3,000
17,900
3,000
17,900
3,000
17,900
3,000
3,000
3,000
e.
Bal.
f.
Bal.
g.
Bal.
+ 12,350
30,250
h.
Bal.
7,880
30,250
7,880
5,100
1,200
800
950
30,250
7,880
5,100
3,000
1,200
800
950
30,250
7,880
5,100
3,000
1,200
800
950
1,875
30,250
7,880
5,100
3,000
1,875
1,200
800
950
30,250
7,880
5,100
3,000
1,875
1,200
800
950
i.
Bal.
j.
Bal.
k.
Bal.
l.
Bal.
Prob. 15A
Continued
3. a.
ARGON DRY CLEANERS
Income Statement
For the Month Ended July 31, 2008
Dry cleaning sales...............................................................
Expenses:
Dry cleaning expense..................................................
Wages expense............................................................
Rent expense................................................................
Truck expense..............................................................
Total expenses..........................................................
Net income...........................................................................
$ 30,250
$7,880
5,100
3,000
1,875
1,200
800
950
20,805
$ 9,445
b.
ARGON DRY CLEANERS
Retained earnings, July 1, 2008.........................................
Net income for July.............................................................
Less dividends....................................................................
Retained earnings, July 31, 2008.......................................
$ 23,400
$9,445
5,000
4,445
$ 27,845
c.
ARGON DRY CLEANERS
Balance Sheet
July 31, 2008
Assets
Cash..................................
Supplies............................
Land..................................
Total assets......................
Liabilities
$26,600
14,650
1,275
40,000
$82,525
$ 9,680
Stockholders Equity

72,845
$82,525
Prob. 15A
Concluded
4. (Optional)
ARGON DRY CLEANERS
and payments to creditors........................................
Net cash flow from operating activities.....................
$31,100*
16,000**
$ 15,100

Purchase of land..........................................................
Deduct cash dividends................................................
Increase in cash..................................................................
Cash balance, July 1, 2008.................................................
Cash balance, July 31, 2008...............................................
*$17,900 + $13,200
**$3,000 + $4,950 + $8,050
(22,000)
$30,000
5,000
25,000
$ 18,100
8,500
$ 26,600
Prob. 16A
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Fees earned, $120,000 ($49,600 + $70,400)

Supplies expense, $12,000 ($70,400 $34,000 $12,800 $7,200 $4,400)
Retained earnings, June 1, 2008, $0
Net income for June, $49,600
Increase in retained earnings, $25,600 ($49,600 $24,000)
Retained earnings, June 30, 2008, $25,600
Total assets, $192,000 ($17,800 + $14,200 + $160,000)
Retained earnings, $25,600; this is the same as (e).
Total stockholders equity, $185,600 ($160,000 + $25,600)
Total liabilities and stockholders equity, $192,000
k. Cash received from customers, $120,000; this is the same as fees earned (a)
since there are no accounts receivable.
l. Net cash flow from operating activities, $41,800 ($120,000 $78,200)
m. Cash payments for acquisition of land, ($160,000)
n. Cash received from issuing capital stock, $160,000
o. Cash dividends, ($24,000)
p. Net cash flow from financing activities, $136,000 ($160,000 $24,000)
q. Net cash flow and June 30, 2008, cash balance, $17,800
Prob. 11B
1.
Assets
Cash
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
Accts.
Accts.
Capital
Rec. + Supplies = Payable + Stock
+ 40,000
Fees
Rent
Sal.
Supp.
Auto
Misc.
Dividends + Earned Exp. Exp. Exp. Exp. Exp.
+ 40,000
+ 1,500
1,500
1,500
+ 1,500
1,500
800
700
1,500
700
40,000
1,500
700
40,000
7,250
2,500
2,500
1,500
700
40,000
7,250
2,500
1,500
1,100
400
700
40,000
7,250
2,500
2,000
2,000
700
40,000
2,500
+ 9,350
9,350
400
700
40,000
7,250
+ 9,350
16,600
9,350
400
700
40,000
16,600
40,000
800
39,200
7,250
46,450
2,500
43,950
1,400
42,550
2,000
40,550
40,550
40,550
3,000
37,550
Stockholders
Equity
= Liabilities +
40,000
40,000
+ 7,250
7,250
3,000
3,000
1,000
1,000
400
400
1,000
400
2,000
1,100
1,100
1,000
400
2,500
2,000
1,100
1,000
400
2,500
2,000 1,100 1,000
400
2. Stockholders equity is the right of stockholders to the assets of the business. These rights are increased by
stockholders investments and revenues and decreased by dividends and expenses.
Prob. 12B
1.
ABYSS TRAVEL SERVICE

Income Statement
Fees earned..........................................................................
Expenses:
Wages expense............................................................
Rent expense................................................................
Taxes expense..............................................................
Total expenses..........................................................
Net income...........................................................................
2.
$375,000
$145,400
50,600
31,200
8,250
6,400
3,150
245,000
$130,000

Retained earnings, July 1, 2007.........................................

Net income for the year......................................................
Less dividends....................................................................
Retained earnings, June 30, 2008.....................................
3.
$ 42,000
$130,000
50,000
80,000
$122,000

Balance Sheet
June 30, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 99,500
48,750
4,250
$152,500
$ 12,500
Stockholders Equity

140,000
$152,500
Prob. 13B
1.
FIREFLY COMPUTER SERVICES
Income Statement
For the Month Ended May 31, 2008
Fees earned..........................................................................
Expenses:
Salaries expense..........................................................
Rent expense................................................................
Auto expense................................................................
Total expenses..........................................................
Net income...........................................................................
$ 41,250
$ 10,000
9,000
3,875
1,625
1,875
26,375
$ 14,875
2.
Retained earnings, May 1, 2008.........................................
Net income for May.............................................................
Less dividends....................................................................
Retained earnings, May 31, 2008.......................................
$14,875
5,000
9,875
$ 9,875
3.
Balance Sheet
May 31, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 16,500
18,750
1,975
$ 37,225
$ 2,350
Stockholders Equity

Retained earnings
9,875
34,875
$37,225
Prob. 13B
Concluded
4. (Optional)
$ 22,500
26,000*
$ (3,500)
Cash flows from investing activities:...............................

Deduct cash dividends ...............................................
Net cash flow and May 31, 2008, cash balance...............
*$9,000 + $1,250 + $5,750 + $10,000
0
$ 25,000
5,000
20,000
$ 16,500
Prob. 14B
1.
Assets
Cash
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
Accts.
Capital
+ Supplies = Payable + Stock Dividends +
+ 30,000
2,200
27,800
1,850
25,950
25,950
20,800
46,750
150
46,600
3,600
43,000
1,500
41,500
200
200
Office
Sal.
Exp.
Rent
Exp.
Auto
Exp.
Supp.
Exp.
Misc.
Exp.
200
200
30,000
2,200
2,200
30,000
2,200
1,200
1,200
650
650
30,000
2,200
1,200
650
30,000
+ 20,800
20,800
2,200
1,200
650
200
200
150
50
30,000
20,800
2,200
1,200
650
200
50
30,000
20,800
3,600
3,600
2,200
1,200
650
200
160
40
50
30,000
1,500
1,500
20,800
3,600
2,200
1,200
650
50
30,000
1,500
20,800
3,600
2,200
1,200
650
200
41,500
Sales
Comm.
+30,000
+
+
Stockholders
Equity
= Liabilities +
160
160
Prob. 14B
Concluded
2.
UPTOWN REALTY
Income Statement
For the Month Ended April 30, 2008
Expenses:
Rent expense................................................................
Total expenses..........................................................
Net income...........................................................................
$20,800
$3,600
2,200
1,200
160
650
7,810
$12,990
UPTOWN REALTY
Retained earnings, April 1, 2008........................................
Net income for April............................................................
Less dividends....................................................................
Retained earnings, April 30, 2008......................................
$12,990
1,500
11,490
$11,490
UPTOWN REALTY
Balance Sheet
April 30, 2008
Assets
Cash..................................
Supplies............................
Liabilities
$41,500
40
50
Stockholders Equity
Total assets......................
$41,540

41,490
$41,540
Prob. 15B
1.
Assets
Liabilities
+ Stockholders Equity
Accts.
Cash + Rec. + Supplies + Land =
Accounts
Payable
Capital
Retained
+ Stock + Earnings
17,200 + 19,000 +
3,750
+ 30,000 = 8,200 + 25,000
+ Retained Earnings
69,950 = 8,200 + 25,000
+ Retained Earnings
36,750 =
Retained Earnings
Prob. 15B
Continued
2.
Assets
Cash
Bal.
a.
Bal.
b.
Bal.
c.
Bal.
17,200
e.
Bal.
g.
Bal.
h.
Bal.
j.
Bal.
19,000
3,750
30,000
8,200
75,000
36,750
19,000
3,750
75,000
8,200
75,000
36,750
19,000
3,750
75,000
8,200
75,000
36,750
34,250
3,750
75,000
8,200
75,000
36,750
11,900
34,250
3,750
75,000
75,000
36,750
11,900
34,250
6,950
75,000
5,600
75,000
36,750
34,800
34,250
6,950
75,000
5,600
75,000
36,750
+ 17,250
17,250
52,050
17,000
6,950
75,000
5,600
75,000
36,750
52,050
17,000
6,950
75,000
21,980
75,000
36,750
41,550
17,000
6,950
75,000
21,980
75,000
36,750
41,550
17,000
2,500
75,000
21,980
75,000
36,750
17,000
2,500
75,000 =
21,980
75,000
36,750
+ 50,000
67,200
l.
Bal.
36,750
+ 50,000
45,000
22,200
25,000
Retained
+ Earnings Dividends
8,200
+ 45,000
4,500
17,700
+ 15,250
17,700
5,800
5,800
+ 3,200
2,400
+ 3,200
+ 22,900
+ 16,380
10,500
k.
Bal.
Capital
Stock
30,000
i.
Bal.
Accounts
Payable +
3,750
f.
Bal.
Land
19,000
d.
Bal.
Accounts
+ Receivable + Supplies +
Stockholders
Equity
= Liabilities +
4,450
6,000
35,550
6,000
6,000

Dry
Dry
Cleaning
Cleaning
+
Sales
Exp.
Wages
Exp.
Rent
Exp.
Supplies
Exp.
Truck
Exp.
Utilities
Exp.
Misc.
Exp.
Bal.
a.
Bal.
b.
Bal.
c.
4,500
Bal.
4,500
15,250
4,500
15,250
4,500
15,250
4,500
38,150
4,500
38,150
4,500
4,500
d.
Bal.
+ 15,250
e.
Bal.
f.
Bal.
g.
Bal.
+ 22,900
h.
Bal.
i.
Bal.
16,380
38,150
16,380
6,200
38,150
16,380
6,200
4,500
4,450
38,150
16,380
6,200
4,500
38,150
16,380
6,200
4,500
j.
Bal.
k.
Bal.
1,875
1,575
850
1,875
1,575
850
4,450
1,875
1,575
850
4,450
1,875
1,575
850
l.
Bal.
Prob. 15B
Continued
3. a.
SKIVVY DRY CLEANERS
Income Statement
Dry cleaning sales...............................................................
Expenses:
Dry cleaning expense..................................................
Wages expense............................................................
Rent expense................................................................
Truck expense..............................................................
Total expenses..........................................................
Net income...........................................................................
$38,150
$ 16,380
6,200
4,500
4,450
1,875
1,575
850
35,830
$ 2,320
b.
SKIVVY DRY CLEANERS
Retained earnings, November 1, 2008..............................
Net income for November...................................................
Less dividends....................................................................
Decrease in retained earnings...........................................
Retained earnings, November 30, 2008............................
$ 36,750
$ 2,320
6,000
(3,680)
$ 33,070
c.
SKIVVY DRY CLEANERS
Balance Sheet
November 30, 2008
Assets
Cash..................................
Supplies............................
Land..................................
Total assets......................
Liabilities
$ 35,550
17,000
2,500
75,000
$130,050
$ 21,980
Stockholders Equity

Retained earnings
33,070
108,070
$130,050
Prob. 15B
Concluded
4. (Optional)
SKIVVY DRY CLEANERS
$ 40,150*
20,800**
$ 19,350

Purchase of land..........................................................
Deduct cash dividends................................................
Increase in cash..................................................................
Cash balance, November 1, 2008......................................
Cash balance, November 30, 2008....................................
*$22,900 + $17,250
**$4,500 + $5,800 + $10,500
(45,000)
$ 50,000
6,000
44,000
$ 18,350
17,200
$ 35,550
Prob. 16B
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Wages expense, $6,450 ($14,340 $2,880 $2,400 $1,620 $990)

Net income, $13,860 ($28,200 $14,340)
Retained earnings, April 1, 2008, $0
Net income for April, $13,860; this is the same as (b).
Dividends, $7,200
Increase in retained earnings, $6,660 ($13,860 $7,200)
Retained earnings, April 30, 2008, $6,660
Land, $43,200 (shown in the statement of cash flows)
Total assets, $62,100
Capital stock, $54,000; from the statement of cash flows financing activities.
k. Total stockholders equity, $60,660

l. Total liabilities and stockholders equity, $62,100 ($1,440 + $60,660)
m. Cash received from customers, $28,200; this is the same as fees earned
since there are no accounts receivable.
n. Net cash flow from operating activities, $14,100 ($28,200 $14,100)
o. Net cash flow from financing activities, $46,800 ($54,000 $7,200)
p. Net cash flow and April 30, 2008, cash balance, $17,700
This page left intentionally blank.
CONTINUING PROBLEM
1.
Assets
Cash
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Accounts
+ Receivable
1
10,000
2 + 2,500
12,500
2 1,000
11,500
4
11,500
6
750
10,750
8
800
9,950
12
300
9,650
13
100
9,550
16 +
350
9,900
22
9,900
25 +
500
10,400
29
240
10,160
30 + 1,000
11,160
30
400
10,760
30
350
10,410
30
10,410
30
150
10,260
30
800
9,460
30
300
9,160
Supplies
= Liabilities +
Stockholders Equity
Accounts
= Payable +
Capital
Fees
Stock Dividends + Earned
10,000
10,000
+ 2,500
2,500
10,000
2,500
350
350
10,000
2,500
350
350
10,000
2,500
350
350
10,000
2,500
350
100
250
10,000
2,500
350
350
350
350
10,000
2,500
350
2,850
+ 1,350
4,200
+ 500
4,700
+
350
250
10,000
+ 1,350
1,350
350
250
10,000
1,350
350
250
10,000
1,350
350
250
10,000
1,350
350
250
10,000
4,700
+ 1,000
5,700
1,350
350
250
10,000
5,700
250
10,000
5,700
1,350
350
180
170
250
10,000
5,700
1,350
170
250
10,000
5,700
1,350
170
250
10,000
1,350
1,350
170
250
10,000
5,700
300
300
5,700
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Apr.
Bal.
Music
Exp.
Office
Equip.
AdverRent
Rent
tising
Exp. Exp. Exp.
Wages
Utilities
Supplies
Exp. Exp.
Exp.
Misc.
Exp.
1
2
2
1,000
1,000
4
1,000
6
750
750
1,000
800
800
750
1,000
800
750
1,000
800
750
1,000
800
750
1,000
800
750
1,000
800
750
1,000
800
750
1,000
800
750
1,000
8
12 300
300
13
300
16
300
22
300
25
300
29 240
540
30
540
30
540
30
540
30
540
30
540
30 800
1,340
30
1,340
1,000
1,000
1,000
800
800
800
750
750
750
400
400
400
400
350
350
350
180
180
1,000
800
750
400
350
180
150
150
1,000
800
750
400
350
180
150
1,000
800
750
400
350
180
150
Continuing Problem
Concluded
2.
DANCIN MUSIC
Income Statement
Fees earned..........................................................................
Expenses:
Music expense..............................................................
Office rent expense......................................................
Equipment rent expense.............................................
Advertising expense....................................................
Wages expense............................................................
Total expenses..........................................................
Net income...........................................................................
$5,700
$1,340
1,000
800
750
400
350
180
150
4,970
$ 730
3.
DANCIN MUSIC
Retained earnings, April 1, 2008........................................
Net income for April............................................................
Less dividends....................................................................
Retained earnings, April 30, 2008......................................
$730
300
430
$430
4.
DANCIN MUSIC
Balance Sheet
April 30, 2008
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 9,160
1,350
170
$ 10,680
250
Stockholders Equity

Retained earnings
430
Total stockholders equity.... 10,430
stockholders equity.......... $10,680
SPECIAL ACTIVITIES
SA 11
1. Acceptable professional conduct requires that Chester Hunter supply
Belgrade National Bank with all the relevant financial statements necessary
for the bank to make an informed decision. Therefore, Chester 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 owners 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 owners personal wealth.
SA 11
Concluded
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 in (a).
c. Both bankers and business owners share the common interest of the
business 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.
SA 12
The difference in the two bank balances, $90,000 ($140,000 $50,000), may not
be pure profit from an accounting perspective. To determine the accounting
profit for the six-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. Dejong may have made in the business during the period or
dividends paid during the period.
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 dividends paid during the period have to be considered in determining
the net income (profit) or net loss for the period.
SA 13
1.
Assets
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
k.
Bal.
+
+
= Liabilities +
Owners
Equity
Kathy
Kathy
Accts.
Hoss,
Hoss,
Service
Salary
Rent
Cash + Supplies = Payable + Capital Drawing + Revenue Expense Expense
1,500
+ 1,500
250
+ 250
1,250
250
1,500
160
160
1,090
250
1,500
160
140
+
60
200
950
250
60
1,500
360
1,600
+ 1,600
2,550
250
60
1,500
1,600
360
350
+
350
2,900
250
60
1,500
1,950
360
600
600
2,300
250
60
1,500
1,950
600
360
150
2,150
250
60
1,500
1,950
600
360
600
+
600
2,750
250
60
1,500
2,550
600
360
100
2,750
150
60
1,500
2,550
600
360
500
500
2,250
150 =
60
1,500
500
2,550
600
360
Supplies
Expense
Misc.
Expense
150
150
150
100
100
150
100
150
SA 13
Continued
2.
ADVANTAGE
Income Statement
Service revenue...................................................................
Expenses:
Salary expense.............................................................
Rent expense................................................................
Total expenses..........................................................
Net income...........................................................................
$2,550
$600
360
100
150
1,210
$1,340
3.
ADVANTAGE
Statement of Owners Equity
Kathy Hoss, capital, June 1, 2007.....................................
Investment on June 1, 2007...............................................
Net income for June............................................................
Less withdrawals.................................................................
Increase in owners equity.................................................
Kathy Hoss, capital, June 30, 2007...................................
$1,500
1,340
$2,840
500
2,340
$2,340
4.
ADVANTAGE
Balance Sheet
June 30, 2007
Assets
Cash..................................
Supplies............................
Liabilities
$2,250
150
Accounts payable..........
60
Owners Equity
Total assets......................
$2,400
Kathy Hoss, capital........

owners equity............
2,340
$2,400
SA 13
5.
Concluded
a. Advantage would provide Kathy with $380 more income per month than
working as a waitress. This amount is computed as follows:
Net income of Advantage, per month......................................
Earnings as waitress, per month:
30 hours per week $8 per hour 4 weeks........................
Difference....................................................................................
$1,340
960
$ 380
b. Other factors that Kathy should consider before discussing a long-term

arrangement with the Racquet Club include the following:
Kathy should consider whether the results of operations for June are
indicative of what to expect each month. For example, Kathy 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.
Kathy should evaluate whether the additional income of $380 per month from
Advantage is worth the risk being taken and the effort being expended.
Kathy should also consider how much her investment in Advantage could
have earned if invested elsewhere. For example, if the initial investment of
$1,500 had been deposited in a money market or savings account at 3%
interest, it would have earned $3.75 interest in June, or $45 for the year.
Note to Instructors: Numerous other considerations could be mentioned by
students, such as the ability of Kathy to withdraw cash from Advantage for
personal use. Unlike a money market account or savings account, some of
her investment in Advantage 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.
SA 14
Note to Instructors: The purpose of this activity is to familiarize students with the
certification requirements and their online availability.
SA 15
Net cash flow from operating activities

Net cash flow from investing activities
Net cash flow from financing activities
First
Year
negative
negative
positive
Second
Year
positive
negative
positive
Third
Year
positive
negative
positive
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.
SA 16
As can be seen from the balance sheet data in the case, Enron was financed
largely by debt as compared to equity. Specifically, Enrons stockholders equity
represented only 17.5% ($11,470 divided by $65,503) of Enrons total assets. The
remainder of Enrons total assets, 82.5%, were financed by debt. When a
company is financed largely by debt, it is said to be highly leveraged.
In late 2001 and early 2002, allegations arose as to possible misstatements of
Enrons financial statements. These allegations revolved around the use of
special purpose entities (partnerships) and related party transactions. The use
of special purpose entities allowed Enron to hide a significant amount of
additional debt off its balance sheet. The result was that Enrons total assets
were even more financed by debt than the balance sheet indicated.
After the allegations of misstatements became public, Enrons stock rapidly
declined and the company filed for bankruptcy. Subsequently, numerous
lawsuits were filed against the company and its management. In addition, the
Securities and Exchange Commission, the Justice Department, and Congress
launched investigations into Enron.
Note to Instructors: The role of the auditors and board of directors of Enron
might also be discussed. However, these topics are not covered in Chapter 1 but
are covered in later chapters.

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CHAPTER 1

3. The corporate form allows the company to

6. No. The business entity concept limits the

Capital stock........ $98,000

$7,991 $1,263 = $6,728

$650,000 ($950,000 $300,000)

Increases assets and increases liabilities.

Total assets increased $70,000.

Total assets decreased $40,000.

Sale of catering services for cash, $45,000.

b. $8,000 ($27,000 $19,000)

Stockholders equity at end of year ($670,500 $292,500)...

Stockholders equity at end of year ($175,000 $55,000).....

Add liabilities at beginning of year..........................................

Capital stock ....... $20,000

Accounts payable................. $ 19,920

Capital stock........ $ 20,000

Stockholders equity, April 30.......................................

Stockholders equity, April 30.......................................

Ex. 125 Concluded

Capital stock......... $10,000

PEDIGREE TRAVEL AGENCY

PEDIGREE TRAVEL AGENCY

Retained earnings, January 1, 2008..................................

PEDIGREE TRAVEL AGENCY

Accounts payable................. $ 12,500

Capital stock........ $ 40,000

Capital stock........ $25,000

Cash flows from investing activities.................................

Capital stock......... $30,000

+ 18,000 = 5,200 + 15,000

43,600 = 5,200 + 15,000

This page left intentionally blank.

Stockholders Equity (Continued)

Capital stock........ $45,000

Cash flows from investing activities:

Fees earned, $120,000 ($49,600 + $70,400)

2,000 1,100 1,000

ABYSS TRAVEL SERVICE

ABYSS TRAVEL SERVICE

Retained earnings, July 1, 2007.........................................

ABYSS TRAVEL SERVICE

Capital stock........ $ 18,000

Capital stock......... $25,000

Cash flows from investing activities:...............................

Capital stock........ $30,000

+ 30,000 = 8,200 + 25,000

69,950 = 8,200 + 25,000

Stockholders Equity (Continued)

Capital stock......... $75,000

Cash flows from investing activities:

Wages expense, $6,450 ($14,340 $2,880 $2,400 $1,620 $990)

k. Total stockholders equity, $60,660

This page left intentionally blank.

Stockholders Equity (Continued)

Capital stock......... $10,000

b. Bankers typically want as much information as possible about the ability

Kathy Hoss, capital........

b. Other factors that Kathy should consider before discussing a long-term

Net cash flow from operating activities

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