Chapter 1: Accounting as a Form of Communication
Essay
215. List the names of three companies with which you are familiar that are manufacturers or producers. Also list the
names of three companies that are retailers. Finally, provide the names of three service providers.
ANSWER:
Answers will vary. Students will provide a number of different examples of real companies
that are manufacturers, retailers, and service providers.
DIFFICULTY:
Moderate
REFERENCES:
pp. 4-5
LEARNING OBJECTIVES:
FACC.PONO.13.01-01 – LO: 01-01
KEYWORDS:
Bloom’s: Applying
216. Presented below are condensed data from the financial statements of Gallo Factory for 2017 and 2016. The figures
are expressed in thousands. Use this information to answer the questions that follow.
Statement A
2017
2016
Total current assets
$ 82,309
$ 80,080
Property, plant & equipment
(net of accumulated depreciation)
63,451
62,724
Investments
303
1,061
Other assets
3,438
2,606
Total assets
$149,501
$146,471
Total current liabilities
$ 33,928
$ 28,668
Long-term debt
20,491
25,676
Deferred income taxes and contingencies
4,174
5,208
Total liabilities
$ 58,593
$ 59,552
Total stockholders’ equity
90,908
86,919
Total liabilities & stockholders’ equity
$149,501
$146,471
Statement B
2017
2016
Net sales
$209,203
$174,206
Cost of sales
136,225
114,284
Gross profit
$ 72,978
$ 59,922
Selling, general and administrative expenses
63,895
53,520
Other income (expense)
693
(118)
Income (loss) before income taxes
9,776
6,284
Income tax expense
3,534
2,388
Net income (loss)
$ 6,242
$ 3,896
Required: Based on the information provided, is Gallo Factory considered a business or non-business entity? How do
you know by examining the financial statements?
ANSWER:
Gallo Factory is a business entity, because its purpose is to make a profit, not simply provide
a service. Non-business entities have no owners, and Gallo Factory has owners, as evidenced
by examining the stockholders’ equity section of the balance sheet.
DIFFICULTY:
Easy
REFERENCES:
pp. 6-7
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-02 – LO: 01-02
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
217. In 2016, you invested $12,000 along with 5 other investors in a new theatre, Rock-On, that offers Broadway play
productions. Because you live out of state, you have not been actively involved in the daily affairs of the theatre. On
January 10, 2017, you are excited because you received $12,000 as a dividend after the end of the 1st year of the theatre’s
existence. Included with your $12,000 check are financial statements and some supplemental information regarding the
accounting. The supplemental information explains:
(1) During the last three months of 2016, an aggressive advertising campaign resulted in the sale of 600 season tickets for
the 2017 productions. Each season ticket cost $120 and the resulting $72,000 was included in 2016 income.
(2) Along with the advertising campaign, the general manager was able to secure pledges of $7,500 for advertising by
local merchants in the playbills for the first two productions for 2017. This amount is included as advertising revenue in
the 2016 financial statements.
Required:
Are there any problems related to the supplementary disclosures? If so, explain and indicate what effects (over- or
understatements) these items will have on the financial statements.
ANSWER:
The recognition of the 2017 season ticket sales as revenue in 2016 should not be recognized
as revenue in the current year, because Rock-On has not provided these ticketholders with
any service yet.
The recognition of $7,500 in advertising revenue is currently just a pledge for 2017 playbills.
It is not clear whether a contract has been signed with the advertisers and it sounds as if no
money has changed hands. In any event, this revenue will need to be matched with the period
in which the playbills are used (or 2017) rather than the current year of 2016.
As a result, the 2016 net income will be overstated by $79,500 and the 2017 net income will
be understated by $79,500.
DIFFICULTY:
Moderate
REFERENCES:
pp. 11-21
pp. 26-30
LEARNING OBJECTIVES:
FACC.PONO.13.01-04 – LO: 01-04
FACC.PONO.13.01-05 – LO: 01-05
FACC.PONO.13.01-08 – LO: 01-08
KEYWORDS:
Bloom’s: Applying
218. List three different groups of users of accounting information. Indicate the type of decisions each group typically
makes from accounting information.
ANSWER:
The groups and their decisions are:
Stockholders:
Is the company profitable enough to pay dividends?
Did the company make a profit for the period?
Management:
How should an item be priced? Should we continue operations? Can we
give employees raises?
Bankers:
Can the company pay interest and principal when it comes due?
Creditors:
Can the company pay bills when they are due?
Government:
How much did the company earn? (i.e., how much taxes should be paid?)
DIFFICULTY:
Moderate
REFERENCES:
pp. 11-13
LEARNING OBJECTIVES:
FACC.PONO.13.01-04 – LO: 01-04
KEYWORDS:
Bloom’s: Applying
219. What is the purpose of an income statement?
ANSWER:
An income statement reports the company’s revenues and expenses for a period of time and
shows the company’s profitability (or lack of). The income statement is sometimes called the
“statement of income.”
DIFFICULTY:
Easy
REFERENCES:
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
220. List the four financial statements. Explain the connection between these four statements.
ANSWER:
1. Balance sheet
2. Income statement
3. Statement of retained earnings
4. Statement of cash flows
Net income on the income statement increases retained earnings on the statement of retained
earnings. The ending balance in the statement of retained earnings goes to the balance sheet.
Finally, the net increase in cash at the bottom of the statement of cash flows equals the
amount shown in cash on the balance sheet.
DIFFICULTY:
Moderate
REFERENCES:
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
221. Presented below are condensed data from the financial statements of Gallo Factory for 2017 and 2016. The figures
are expressed in thousands. Use this information to answer the questions that follow.
Statement A
2017
2016
Total current assets
$ 82,309
$ 80,080
Property, plant & equipment
(net of accumulated depreciation)
63,451
62,724
Investments
303
1,061
Other assets
3,438
2,606
Total assets
$149,501
$146,471
Total current liabilities
$ 33,928
$ 28,668
Long-term debt
20,491
25,676
Deferred income taxes and contingencies
4,174
5,208
Total liabilities
$ 58,593
$ 59,552
Total stockholders’ equity
90,908
86,919
Total liabilities & stockholders’ equity
$149,501
$146,471
Statement B
2017
2016
Net sales
$209,203
$174,206
Cost of sales
136,225
114,284
Gross profit
$ 72,978
$ 59,922
Selling, general and administrative expenses
63,895
53,520
Other income (expense)
693
(118)
Income (loss) before income taxes
9,776
6,284
Income tax expense
3,534
2,388
Net income (loss)
$ 6,242
$ 3,896
Required:
1.
2.
ANSWER:
1. Statement A is the Balance Sheet
2. Statement B is the Income Statement
DIFFICULTY:
Moderate
REFERENCES:
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
222. Presented below are condensed data from the financial statements of Gallo Factory for 2017 and 2016. The figures
are expressed in thousands. Use this information to answer the questions that follow.
Statement A
2017
2016
Total current assets
$ 82,309
$ 80,080
Property, plant & equipment
(net of accumulated depreciation)
63,451
62,724
Investments
303
1,061
Other assets
3,438
2,606
Total assets
$149,501
$146,471
Total current liabilities
$ 33,928
$ 28,668
Long-term debt
20,491
25,676
Deferred income taxes and contingencies
4,174
5,208
Total liabilities
$ 58,593
$ 59,552
Total stockholders’ equity
90,908
86,919
Total liabilities & stockholders’ equity
$149,501
$146,471
Statement B
2017
2016
Net sales
$209,203
$174,206
Cost of sales
136,225
114,284
Gross profit
72,978
59,922
Selling, general and administrative expenses
63,895
53,520
Other income (expense)
693
(118)
Income (loss) before income taxes
9,776
6,284
Income tax expense
3,534
2,388
Net income (loss)
$ 6,242
$ 3,896
Required: Which statement indicates the financial position of the company? What information is provided on that
statement that indicates the “financial position” of the company? Explain.
ANSWER:
The balance sheet, Statement A, provides information on the financial position of the
company. It is expressed in terms of the accounting equation. When total liabilities are
subtracted from total assets, the difference is owners’ or stockholders’ equity. This amount
represents net worth or the financial position of a company at the balance sheet date.
DIFFICULTY:
Easy
REFERENCES:
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
223. Presented below are condensed data from the financial statements of Gallo Factory for 2017 and 2016. The figures
are expressed in thousands. Use this information to answer the questions that follow.
Statement A
2017
2016
Total current assets
$ 82,309
$ 80,080
Property, plant & equipment
(net of accumulated depreciation)
63,451
62,724
Investments
303
1,061
Other assets
3,438
2,606
Total assets
$149,501
$146,471
Total current liabilities
$ 33,928
$ 28,668
Long-term debt
20,491
25,676
Deferred income taxes and contingencies
4,174
5,208
Total liabilities
$ 58,593
$ 59,552
Total stockholders’ equity
90,908
86,919
Total liabilities & stockholders’ equity
$149,501
$146,471
Statement B
2017
2016
Net sales
$209,203
$174,206
Cost of sales
136,225
114,284
Gross profit
72,978
59,922
Selling, general and administrative expenses
63,895
53,520
Other income (expense)
693
(118)
Income (loss) before income taxes
9,776
6,284
Income tax expense
3,534
2,388
Net income (loss)
$ 6,242
$ 3,896
Required: Was Gallo Factory profitable both years? What are the amounts of the total revenues and total expenses,
respectively, for 2017? Which financial statement provides this information to you?
ANSWER:
The company was profitable in both 2017 and 2016. For 2017, total revenues include net
sales of $209,203, and other income, $693, for a total of $209,896. Total expenses are cost of
sales of $136,225, selling, general and administrative expenses of $63,895, and income tax
expense of $3,534, or a total of $203,654. This information is reported on the income
statement, Statement B.
DIFFICULTY:
Moderate
REFERENCES:
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
224. Presented below are condensed data from the financial statements of Gallo Factory for 2017 and 2016. The figures
are expressed in thousands. Use this information to answer the questions that follow.
Statement A
2017
2016
Total current assets
$ 82,309
$ 80,080
Property, plant & equipment
(net of accumulated depreciation)
63,451
62,724
Investments
303
1,061
Other assets
3,438
2,606
Total assets
$149,501
$146,471
Total current liabilities
$ 33,928
$ 28,668
Long-term debt
20,491
25,676
Deferred income taxes and contingencies
4,174
5,208
Total liabilities
$ 58,593
$ 59,552
Total stockholders’ equity
90,908
86,919
Total liabilities & stockholders’ equity
$149,501
$146,471
Statement B
2017
2016
Net sales
$209,203
$174,206
Cost of sales
136,225
114,284
Gross profit
72,978
59,922
Selling, general and administrative expenses
63,895
53,520
Other income (expense)
693
(118)
Income (loss) before income taxes
9,776
6,284
Income tax expense
3,534
2,388
Net income (loss)
$ 6,242
$ 3,896
Required: How much of Gallo Factory is financed by owners at the end of December of 2017?
ANSWER:
The financing by owners for 2017 is the amount of stockholders’ equity, $90,908. Over time,
sales of stock and earnings of the company cause this amount to increase.
DIFFICULTY:
Moderate
REFERENCES:
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
225. Presented below are condensed data from the financial statements of Gallo Factory for 2017 and 2016. The figures
are expressed in thousands. Use this information to answer the questions that follow.
Statement A
2017
2016
Total current assets
$ 82,309
$ 80,080
Property, plant & equipment
(net of accumulated depreciation)
63,451
62,724
Investments
303
1,061
Other assets
3,438
2,606
Total assets
$149,501
$146,471
Total current liabilities
$ 33,928
$ 28,668
Long-term debt
20,491
25,676
Deferred income taxes and contingencies
4,174
5,208
Total liabilities
$ 58,593
$ 59,552
Total stockholders’ equity
90,908
86,919
Total liabilities & stockholders’ equity
$149,501
$146,471
Statement B
2017
2016
Net sales
$209,203
$174,206
Cost of sales
136,225
114,284
Gross profit
72,978
59,922
Selling, general and administrative expenses
63,895
53,520
Other income (expense)
693
(118)
Income (loss) before income taxes
9,776
6,284
Income tax expense
3,534
2,388
Net income (loss)
$ 6,242
$ 3,896
Required: How much of Gallo Factory is financed by creditors at the end of December of 2017? Evaluate the change
from 2016 to 2017.
ANSWER:
The amount of financing by creditors for 2017 is the amount of liabilities reported on the
balance sheet, $58,593. For 2016, the amount was $59,552. Total liabilities decreased by
$959, or about 1.6%. The company must be keeping its debt at a steady position as
stockholders’ equity and assets have increased. The change must be examined relative to the
entire financial position.
DIFFICULTY:
Moderate
REFERENCES:
pp. 14-21
LEARNING OBJECTIVES:
FACC.PONO.13.01-05 – LO: 01-05
KEYWORDS:
Bloom’s: Applying
226. The following accounting principles and assumptions are included in the conceptual framework of accounting:
Economic entity
Going concern
Cost principle
Monetary unit
Time period
For each situation in A through C below, identify which assumption or principle applies by selecting from the list
provided above, and explain why that assumption or principle applies.
A)
Global Corp. has divisions in several countries around the world. Each of these countries
has a currency different from the U.S. dollar. Global Corp. is a U.S. company and must
include the financial data of its worldwide divisions in its financial statements.
B)
Steve and Mike operate a security business as a partnership. They are considering the
advantages of changing over to the corporate form of business.
C)
Island Pasta is a locally owned and operated fast-food business. The owners have
decided to expand into nearby cities. Expansion will require more capital, but
management doesn’t expect it will stay in business for more than a year or so regardless
if it expands or not.
ANSWER:
A)
Monetary unit. Financial statements must be denominated in one currency—the
standard monetary unit. In the United States, this unit is the dollar.
B)
Economic entity. A business can take three forms. Regardless of form, however, the
unit itself is distinct from other units.
C)
Going concern. A business is assumed to continue indefinitely to more accurately
reflect the valuation of assets and appropriately allocate costs to accounting periods.
DIFFICULTY:
Moderate
REFERENCES:
pp. 22-24
LEARNING OBJECTIVES:
FACC.PONO.13.01-06 – LO: 01-06
KEYWORDS:
Bloom’s: Applying
227. What is meant by generally accepted accounting principles?
ANSWER:
Generally accepted accounting principles (GAAP) are a set of guidelines that are based on a
conceptual framework. They represent the various rules, practices, and other procedures used
as a basis for accounting principles. GAAP was created in response to the need for some
form of regulation over the preparation of financial statements.
DIFFICULTY:
Easy
REFERENCES:
p. 25
LEARNING OBJECTIVES:
FACC.PONO.13.01-07 – LO: 01-07
KEYWORDS:
Bloom’s: Applying
228. Discuss the four steps in the ethical decision model used by accountants. Expand the discussion to include questions
that you would ask to analyze the key elements in the situation.
ANSWER:
The four steps in the ethical decision model include:
1. Identification: Recognize an ethical dilemma.
2. Analysis: Analyze the key elements in the situation.
3. Alternatives and Evaluation : List alternatives and evaluate the impact of each on those
affected.
4. Resolution: Select the best alternative.
During the analysis phase, analyze the key elements in the situation by answering these
questions in sequence:
a. Who may benefit or be harmed?
b. How are they likely to benefit or be harmed?
c. What rights or claims may be violated?
d. What specific interests are in conflict?
e. What are my responsibilities and obligations?
DIFFICULTY:
Easy
REFERENCES:
pp. 26-30
LEARNING OBJECTIVES:
FACC.PONO.13.01-08 – LO: 01-08
KEYWORDS:
Bloom’s: Applying
229. From an ethical standpoint, if various alternatives are available to report a transaction, what are some of the questions
an accountant should ask about the alternatives?
ANSWER:
As the text points out, when determining alternative methods for reporting transactions,
situations, or events, an accountant should answer the following questions:
a. Which of the alternatives is most relevant and a faithful representation? Timeliness should
be considered; potential bias must be identified.
b. Does the report accurately represent the situation it claims to describe?
c. Is the information free from bias?
DIFFICULTY:
Easy
REFERENCES:
pp. 26-30
LEARNING OBJECTIVES:
FACC.PONO.13.01-08 – LO: 01-08
KEYWORDS:
Bloom’s: Applying
230. Develop an ethical dilemma scenario that an accountant may face and give examples of key elements (listed below)
that should be considered when analyzing the decision:
1. Those who may benefit or be harmed
2. What potential benefits or harm could result from the situation
3. The rights or claims violated
4. The specific interests in conflict
5. The responsibilities and obligations
ANSWER:
Student answers will vary but may include some of the following:
1. Players in the scenario: Management, shareholders, potential investors, the auditor,
creditors, and employees may benefit or be harmed.
2. Benefits including higher pay, promotion, increased status in the community and harm
including loss of job, bankruptcy, customer’s failure to pay debt.
3. Rights or claims including payments to creditors and obligations to customers.
4. Conflicting interests including a member of the board of directors who is also a company
employee or a manager whose bonus is based on the manipulation of sales and/or other
reporting.
5. Responsibility of the accountant to provide the most accurate information and report fraud.
DIFFICULTY:
Easy
REFERENCES:
pp. 26-30
LEARNING OBJECTIVES:
FACC.PONO.13.01-08 – LO: 01-08
KEYWORDS:
Bloom’s: Applying