978-0077633059 Chapter 1 Solution Manual Part 2

EXERCISES

Exercise 1-1 (10 minutes)

C 1. Analyzing and interpreting reports

C 2. Presenting financial information

Exercise 1-2 (20 minutes)

Part A.

Part B.

1. I 5. I

4. E 8. I

Exercise 1-3 (10 minutes)

1. B 5. C

4. B 8. A

Exercise 1-4 (10 minutes)

3. D

Exercise 1-5 (20 minutes)

a. Auditing professionals with competing audit clients are likely to learn

valuable information about each client that the other clients would

b. Accounting professionals who prepare tax returns can face situations

where clients wish to claim deductions they cannot substantiate. Also,

c. Managers face several situations demanding ethical decision making

in their dealings with employees. Examples include fairness in

d. Situations involving ethical decision making in coursework include

performing independent work on examinations and individually

period to not detract from others’ instructional benefits.

Exercise 1-6 (10 minutes)

a. (C) Corporation e. (C) Corporation

d. (SP) Sole proprietorship

Exercise 1-7 (10 minutes)

Code Description Principle/Assumption

H. 1. A company reports details behind financial

statements that would impact users’ decisions.

Full disclosure

principle

G 2. Financial statements reflect the assumption that

the business continues operating.

Going-concern

assumption

E 7. Usually created by a pronouncement from an

authoritative body.

Specific accounting

principle

B 8. Information is based on actual costs incurred in

transactions.

Cost principle

Exercise 1-8 (10 minutes)

Assets = Liabilities + Equity

(a) $ 65,000 = $ 20,000 + $45,000

Exercise 1-9 (20 minutes)

a. Using the accounting equation at the beginning of the year:

Assets = Liabilities + Equity

Using the accounting equation at the end of the year:

Assets = Liabilities + Equity

$300,000 + $80,000 = $200,000+ $50,000 + ?

Alternative approach to solving part (b):

Assets($80,000) = Liabilities($50,000) + Equity(?)

where “” refers to “change in.”

b. Using the accounting equation:

Assets = Liabilities + Equity

$123,000 = $47,000 + ?

c. Using the accounting equation at the end of the year:

Assets = Liabilities + Equity

$190,000 = $70,000 – $5,000 + ?

Using the accounting equation at the beginning of the year:

Assets = Liabilities + Equity

$190,000 – $60,000 = $70,000 + ?

$130,000 = $70,000 + ?

Exercise 1-10 (20 minutes)

a. Started the business with the owner investing $40,000 cash in the

business in exchange for common stock.

e. Provided services for $1,000 cash.

Exercise 1-11 (20 minutes)

a. Purchased land for $4,000 cash.

b. Purchased $1,000 of office supplies on credit.

Exercise 1-12 (15 minutes)

Examples of transactions that fit each case include:

a. Cash dividends (or some other asset) paid to the owner of the

business; OR, the business incurs an expense paid in cash.

b. Business purchases equipment (or some other asset) on credit.

g. Owner invests cash (or some other asset) in the business; OR, the

business earns revenue and accepts cash (or another asset).

Exercise 1-13 (30 minutes)

Assets =Liabilities +Equity

Cash +Accounts

Receivable +Equip-

ment =Accounts

Payable +Common

Stock –Dividends +Revenues –Expenses

a. +$60,000 + $15,000 = + $75,000

b. – 1,500 ______ ______ – $1,500

f. – 6,000 ______ + 6,000 _______ ______ _____ _____

Bal. 55,000 + 8,000 + 31,000 = 10,000 + 75,000 + 10,500 – 1,500

g. – 3,000 ______ ______ _______ ______ _____ – 3,000

Bal. 52,000 + 8,000 + 31,000 = 10,000 + 75,000 + 10,500 – 4,500

h. + 5,000 – 5,000 ______ _______ ______ _____ _____

Exercise 1-14 (10 minutes)

Return on assets = Net income / Average total assets

assessed as superior to its competitors.

Exercise 1-15 (15 minutes)

ERNST CONSULTING

Income Statement

For Month Ended October 31

Revenues

Consulting fees earned….…….……….. $14,000

Expenses

Salaries expense………………….…..…… $7,000

Rent expense………………………………… 3,550

Exercise 1-16 (15 minutes)

ERNST CONSULTING

Statement of Retained Earnings

For Month Ended October 31

Retained earnings, October 1…………..………... $ 0

Add: Net income (from Exercise 1-15)........ 2 ,110

Exercise 1-17 (15 minutes)

ERNST CONSULTING

Balance Sheet

October 31

Assets Liabilities

Cash…………………………. $11,360 Accounts payable….............. $ 8,500

Accounts receivable.... 14,000

Office supplies………….. 3,250 Equity

* For the computation of this amount see Exercise 1-16.

Exercise 1-18 (15 minutes)

ERNST CONSULTING

Statement of Cash Flows

For Month Ended October 31

Cash flows from operating activities

Cash received from customers……………………………….……. $ 0

Cash paid to employees1……..…..….………………………………. (1,750)

Cash flows from investing activities

Purchase of office equipment…………….….….……….………… (18,000)

Net cash used by investing activities………………..………… (18,000)

Cash flows from financing activities

Cash investment from stockholders……………………………... 38,000

Cash dividends…………….…………………………………….……….. (2,000 )

Exercise 1-19 (10 minutes)

I 1. Cash purchase of equipment O 5. Cash paid on an account payable

Exercise 1-20 (20 minutes)

BMW GROUP

Income Statement

For Year Ended December 31, 2013

(Euros in millions)

Revenues ………………………………….………………………… € 68,821

Expenses

Cost of sales………….………………….….…….………….. €54,276

Exercise 1-21B (10 minutes)

a. Financing*

* Would also be listed as “investing” if resources contributed by owner were in the

form of nonfinancial resources.

PROBLEM SET A

Problem 1-1A (25 minutes)

Balance Sheet

Income

Statement

Statement of

Cash Flows

Transaction

Total

Assets

Total

Liab.

Total

Equity

Net

Income

Operating

Activities

Investing

Activities

Financing

Activities

1 Owner invests

cash for its stock + + +

note payable

6 Buys office

equipment

for cash

+/– –

7 Buys land by

signing note

payable

+ +

8 Provides ser-

vices on credit + + +