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Introduction to Financial Statements
1-55
Ex. 198
John Tate is the bookkeeper for Gabelli Company. John has been trying to get the balance sheet
of Gabelli Company to balance. It finally balanced, but now he's not sure it is correct.
GABELLI COMPANY
Balance Sheet
December 31, 2017
Assets Liabilities and Stockholders' Equity
Cash $12,500 Accounts payable $18,000
Supplies 9,500 Accounts receivable (12,000)
Equipment 50,000 Common stock 40,000
Dividends 13,000 Retained earnings 39,000
Total assets $85,000 Total liabilities and
stockholders' equity $85,000
Instructions
Prepare a correct balance sheet.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
1-56
Ex. 199
The summaries of data from the balance sheet, income statement, and retained earnings
statement for two corporations, Bates Corporation and Wilson Enterprises, are presented below
for 2017.
Bates Corporation Wilson Enterprises
Beginning of year
Total assets $110,000 $130,000
Total liabilities 80,000 (d)
Total stockholders' equity (a) 70,000
End of year
Total assets (b) 190,000
Total liabilities 120,000 65,000
Total stockholders' equity 70,000 (e)
Changes during year in retained
earnings
Dividends (c) 5,000
Total revenues 225,000 (f)
Total expenses 165,000 80,000
Instructions
Determine the missing amounts. Assume all changes in stockholders' equity are due to changes
in retained earnings.
Introduction to Financial Statements
FOR INSTRUCTOR USE ONLY
1-57
Ex. 200
This information is for Campo Corporation for the year ended December 31, 2017.
Cash received from lenders $20,000
Cash received from customers 65,000
Cash paid for new equipment 30,000
Cash dividends paid 9,000
Cash paid to suppliers 28,000
Cash balance 1/1/17 12,000
Instructions
Prepare the 2017 statement of cash flows for Campo Corporation.
FOR INSTRUCTOR USE ONLY
Ex. 201
One item is omitted in each of the following summaries of balance sheet and income statement
data for three different corporations, A, B, and C.
Determine the amounts of the missing items, identifying each corporation by letter.
Corporation
A B C
Beginning of the Year:
Assets $410,000 $150,000 $199,000
Liabilities 250,000 115,000 166,000
End of the Year:
Assets 460,000 195,000 205,000
Liabilities 280,000 95,000 169,000
During the Year:
Additional Investment by stockholders ? 79,000 78,000
Dividends 70,000 83,000 ?
Revenue 195,000 ? 187,000
Expenses 155,000 113,000 183,000
Introduction to Financial Statements
1-59
COMPLETION STATEMENTS
202. A business organized as a separate legal entity owned by stockholders is a ___________.
203. _______________ of accounting information are managers who plan, organize, and run a
business.
204. _________________ activities involve collecting the necessary funds to start the business.
205. The ________________ reports the assets, liabilities, and stockholders’ equity of a
business at a specific date.
206. The claims of owners on the assets of a corporation are known as ________________.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-60
207. The basic accounting equation is Assets = ____________ + _______________.
208. The primary purpose of a ________________ is to provide financial information about the
cash receipts and cash payments of a business.
209. The _________________ is prepared by an independent auditor stating the auditor’s
opinion as to the fairness of the presentation of the financial statements.
Answers to Completion Statements
MATCHING
210. Match the items below by entering the appropriate code letter in the space provided.
A. Internal users F. Corporation
B. Management discussion and analysis G. Assets
C. Annual report H. Liabilities
D. Sole proprietorship I. Expenses
E. Dividends J. Investing activities
____ 1. Distributions of cash from a corporation to its stock holders.
____ 2. Consumed assets or services.
____ 3. Ownership is limited to one person.
____ 4. Officers and others who manage the business.
____ 5. Creditor claims against the assets of the business.
____ 6. A separate legal entity under state laws.
____ 7. A report prepared by management that presents financial information.
____ 8. A section of the annual report that presents management’s views.
____ 9. Future economic benefits.
____ 10. Involves acquiring the resources necessary to run the business.
Introduction to Financial Statements
FOR INSTRUCTOR USE ONLY
1-61
SHORT-ANSWER ESSAY QUESTIONS
S-A E 211
What are the advantages to a business of being formed as a corporation? What are the
disadvantages?
S-A E 212
Why would it be safer for a wealthy individual to set up his or her business as a corporation rather
than as a proprietorship or partnership?
S-A E 213
Your friend, James, made this comment: “My major is biology and I plan to research for cures for
major illnesses. Therefore, I have no need to study accounting.” What is your response to
James?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
1-62
S-A E 214
The information needs of a specific user of financial accounting information depends upon the
kinds of decisions that user makes. Identify the major users of accounting information and
discuss what questions financial accounting information answers for each group of users.
Introduction to Financial Statements
FOR INSTRUCTOR USE ONLY
1-63
S-A E 215
The statement of cash flows for Nyland Corporation reveals the following information:
Net cash used by operating activities ($150,000)
Net cash used by investing activities ($200,000)
Net cash provided by financing activities
Issuance of common stock $100,000
Issued note payable 250,000 $350,000
Net change in cash 0
Provide three comments about this information. Make your comments concise yet thorough.
S-A E 216
How are each of the following financial statements interrelated? (a) Retained earnings statement
and income statement. (b) Retained earnings statement and balance sheet. (c) Balance sheet
and statement of cash flows.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
1-64
S-A E 217
Broadway Corporation’s stockholders’ equity equals one-fourth of the company’s total assets.
The company’s liabilities are $270,000. What is the amount of the company’s stockholders’
equity?
S-A E 218
Which three items affect retained earnings, and how do they affect it?
S-A E 219
The framework used to record and summarize the economic activities of a business enterprise is
referred to as the accounting equation. State the basic accounting equation and define its major
components. How are financial statements related to the accounting equation?
S-A E 220
What types of information are presented in the notes to the financial statements?
Introduction to Financial Statements
1-65
S-A E 221 (Ethics)
Joe Laramie owns and operates Joe's Burgers, a small fast food store, located at the edge of City
College campus in Newton, Ohio. After several very profitable years, Joe's Burgers began to
have problems. Most of the problems were related to Joe's expansion of the eating area in the
restaurant without corresponding increases in the food preparation area. Joe does not have the
cash or financial backing to expand further. He has therefore decided to sell his business.
William Sheets is interested in purchasing the business. However, he is located in another city
and is unfamiliar with Newton. He has asked Joe why he is selling Joe's Burgers. Joe replies that
his elderly mother requires extra care, and that his brother needs help in his manufacturing
business. Both are true, but neither is his primary reason for selling. Joe reasons that William
should not have asked him anyway, since profitable businesses don't come up for sale.
Required:
1. Identify the stakeholders in this situation.
2. Did Joe act ethically in not revealing fully his reasons for selling the business? Why or why
not?
S-A E 222 (Communication)
Mary Baroni is a friend of yours from high school. She decided to become a beautician after
leaving high school, rather than to attend college. She recently opened her own shop, and has
contracted her services to a local hospital. She is paid a monthly fee for her services, and
receives a small gratuity from each of the patients.
She has just received her first set of financial statements from her accountant. She is quite upset.
The statements show a cash balance of $3,600 at the end of the month, but a net income of only
$500. She has written you a letter, asking you whether such a situation is possible, or whether
she should find another accountant.
Required:
Write a short letter to your friend. Use proper form. Answer her question completely, but briefly.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
Introduction to Financial Statements
1-67
IFRS Questions
1. Which of the following is not a reason one set of international accounting standards are
needed?
a. Multinational corporation.
b. Financial markets.
c. Information technology.
d. All of these answer choices are reasons one set of international accounting standards
are needed.
2. International standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.
3. U.S. standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.
4. International standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.
5. U.S. standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.
6. The United States and the international standard-setting environment are primarily driven
by meeting the needs of
a. investors and creditors.
b. tax authorities.
c. central government planners.
d. academic researchers.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-68
7. The internal control standards applicable to Sarbanes-Oxley apply to?
a. all U.S.and international companies.
b. U.S. and international companies listed on U.S. exchange.
c. International companies listed on U.S. exchange.
d. U.S. companies listed on U.S. exchange.
8. The concern about international companies adopting SOX-type standards centers on
a. cost-benefit analysis.
b. ethics issues.
c. the governing authorities.
d. comparability.
9. Financial accounting ethics violations are
a. not a problem in the U.S or internationally.
b. much more common in the U.S than internationally.
c. much more common internationally than in the U.S.
d. a major problem both in the U.S and internationally.
10. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.
11. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosure requirements.
12. The conceptual framework that underlines IFRS
a. is very similar to that used to develop GAAP.
b. does not define assets or liabilities.
c. does not define equity.
d. does not define income or expenses.
