95
226) Below are typical transactions for a company.
Type of Business
Activity
Transactions
1.
________
Issue common stock.
2.
________
Receive cash from a bank loan.
3.
________
Sell products to customers.
4.
________
Pay employees’ wages.
5.
________
Purchase equipment.
6.
________
Pay dividends to stockholders.
7.
________
Sell building.
8.
________
Purchase office supplies.
9.
________
Pay utilities.
10.
________
Pay for maintenance on delivery vehicles.
Required:
Indicate whether each transaction is classified as a financing, investing, or operating activity.
Answer:
Type of Business
Activity
Transactions
1.
Financing
Issue common stock.
2.
Financing
Receive cash from a bank loan.
3.
Operating
Sell products to customers.
4.
Operating
Pay employees’ wages.
5.
Investing
Purchase equipment.
6.
Financing
Pay dividends to stockholders.
7.
Investing
Sell building.
8.
Operating
Purchase office supplies.
9.
Operating
Pay utilities.
10.
Operating
Pay for maintenance on delivery vehicles.
96
227) Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues,
and expenses.
Account
Classifications
Accounts
Related Transactions
1.
________
Accounts Receivable
Provide services on account.
2.
________
Land
Purchase land.
3.
________
Prepaid Rent
Pay rent in advance.
4.
________
Salaries Expense
Pay employee salaries.
5.
________
Utilities Expense
Pay utilities.
6.
________
Service Revenue
Provide services to customers.
7.
________
Accounts Payable
Purchase materials on account.
8.
________
Notes Payable
Borrow from the bank.
9.
________
Dividends
Distribute cash to stockholders.
10.
________
Common Stock
Issue stock to stockholders.
Required:
Indicate the account classification for each account name.
Asset
Accounts Receivable
Asset
Land
Asset
Prepaid Rent
Expense
Salaries Expense
Expense
Utilities Expense
Revenue
Service Revenue
Liability
Accounts Payable
Liability
Notes Payable
Dividends
Dividends
Stockholders’ Equity
Common Stock
97
228) Tiffany’s provides financial services related to investment selections, retirement planning,
and general insurance needs. For the current year, the company reports the following amounts:
Advertising Expense
$31,200
Service Revenue
$129,300
Buildings
108,000
Interest Expense
3,500
Salaries Expense
67,800
Utilities Expense
14,500
Accounts Payable
6,300
Equipment
25,700
Cash
6,400
Notes Payable
30,000
In addition, the company had common stock of $60,000 at the beginning of the year and issued
an additional $15,000 during the year. The company also had retained earnings of $20,000 at the
beginning of the year and paid dividends of $3,500.
Required:
Prepare the income statement, statement of stockholders’ equity, and balance sheet for Tiffany’s
for the year ended December 31.
99
229) Below are incomplete financial statements.
Income Statement
Statement of Stockholders’ Equity
Revenues
(a)
Common
Stock
Retained
Earnings
Expenses:
Beginning
$15,000
$8,000
Salaries
$11,000
Issuances
(c)
Rent
5,000
Net income
3,000
Advertising
7,000
Dividends
(d)
Net income
(b)
Ending
$18,000
$9,000
Balance Sheet
Assets:
Liabilities:
Cash
$6,000
Accounts payable
$5,000
Supplies
(e)
Stockholders’ Equity:
Land
7,000
Common Stock
(g)
Buildings
14,000
Retained Earnings
(h)
Total assets
(f)
Total liabilities and stockholders’
equity
(i)
Required:
Calculate the missing amounts.
101
The following information applies to problems 230 to 232.
Simplex Corporation provides the following information at the end of the year.
Salaries payable to workers at the end of the year
$3,500
Advertising expense for the year
8,700
Building that has been purchased
70,000
Supplies at the end of the year
7,500
Retained earnings at the end of the year
38,000
Utilities expense for the year
4,200
Note payable to the bank
21,500
Service revenue during the year
67,800
Salaries expense for the year
24,200
Accounts payable to suppliers
6,700
Dividends paid to stockholders during the year
?
Common stock that has been issued, including
$8,000 that was issued this year
30,000
Cash remaining
5,500
Interest expense for the year
1,800
Accounts receivable from customers
16,700
230) Prepare the income statement for the year ended December 31, 20XX.
Service revenue
Expenses:
Advertising
Utilities
Salaries
Interest
Total expenses
Net income
102
231) Prepare the statement of stockholders’ equity for the year ended December 31, 20XX. The
balance of retained earnings at the beginning of the year equals $24,500.
103
232) Prepare the balance sheet for Simplex Corporation on December 31, 20XX.
Answer: Simplex Corporation
104
233) The four underlying assumptions of generally accepted accounting principles are economic
entity, monetary unit, periodicity, and going concern. Consider the following four independent
situations.
1. Masterson has provided music cassettes for the past 30 years. Because of the advance in
electronic musical devices, customer demand has dwindled over the years to almost nothing in
the current year and the company can no longer pay its debts. For the most recent year, the
company reports its assets in the balance sheet at historical (original) cost.
2. Phillips Flooring specializes in the installation of wood flooring. The company has the usual
business expenses: salaries, supplies, utilities, advertising, and taxes. Mr. Phillips took his wife
and two sons to Six Flags. Mr. Phillips reported the airfare and hotel expenses in the income
statement of Phillips Flooring.
3. Mama’s Restaurant has over 200 stores throughout the Southeast. Approximately 100,000
customers visit its stores each day. Because of the continual nature of dining, the company does
not publish an income statement. The company feels that it has an indefinite life and a periodic
report would mislead investors.
4. Indian Packaging delivers packages between the United States and India. During the current
year, the company delivered 2,000 packages for its American customers totaling $75,000 in
revenue. For its Indian customers, the company delivered 1,000 packages totaling 1,500,000
Indian Rupee. The company’s income statement indicates that total revenue equals 3,000
packages delivered with no corresponding amount in the income statement.
Required:
For each situation, indicate which of the underlying assumptions of GAAP is violated.
Answer:
234) Listed below are several terms and definitions associated with the FASB’s conceptual
framework.
Terms Definitions
1.
________
Verifiability
a. Requires the consideration of the costs and
value of information.
2.
________
Relevance
b. Recording transactions only for the company.
3.
________
Timeliness
c. The indefinite life of a company can be broken
into definite periods.
4.
________
Cost effectiveness
d. Accounting should be useful in making
decisions.
5.
________
Decision usefulness
e. Agreement between a measure and the
phenomenon it represents.
6.
________
Faithful representation
f. Information arrives prior to the decision.
7.
________
Materiality
g. Information is related to the decision at hand.
8.
________
Economic entity
assumption
h. Implies consensus among different measures.
9.
________
Periodicity assumption
i. Concerns the relative size of an item and its
effect on decisions.
Required:
Pair each term with its related definition.
106
236) Describe the three fundamental business activities that accountants measure. What account
classifications are typically associated with each type of business activity?
237) List and describe the four financial statements most frequently provided to external users.
107
238) How does the value of an audit affect financial statements?
239) Define the four basic assumptions underlying Generally Accepted Accounting Principles:
(a) economic entity, (b) going concern, (c) periodicity, (d) monetary unit.