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
C 5. Every business is accounted for separately from
its owner or owners.
Business entity
assumption
transactions.
Exercise 1-8 (10 minutes)
Assets = Liabilities + Equity
(a) $ 65,000 = $ 20,000 + $45,000
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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
Alternative approach to solving part (b):
Assets($80,000) = Liabilities($50,000) + Equity(?)
where “” refers to “change in.”
Thus: Ending Equity = $100,000 + $30,000 = $130,000
b. Using the accounting equation:
Assets = Liabilities + Equity
$123,000 = $47,000 + ?
Thus, equity = $76,000
c. Using the accounting equation at the end of the year:
Assets = Liabilities + Equity
Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
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Exercise 1-10 (20 minutes)
a. Started the business with the owner investing $40,000 cash in the
business.
Exercise 1-11 (20 minutes)
a. Purchased land for $4,000 cash.
Exercise 1-12 (15 minutes)
Examples of transactions that fit each case include:
a. Cash withdrawals (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).
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Exercise 1-13 (30 minutes)
Assets =Liabilities +Equity
Cash +Accounts
Receivable +Equip-
ment =Accounts
Payable +M.Chen,
Capital –
M.Chen,
With-
drawals +Revenues –Expenses
a. +$60,000 + $15,000 = + $75,000
b. – 1,500 ______ ______ – $1,500
Bal. 58,500 + + 15,000 = + 75,000 – 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 ______ _______ ______ _____ _____
Bal. 57,000 + 3,000 + 31,000 = 10,000 + 75,000 + 10,500 – 4,500
i. – 10,000 ______ ______ – 10,000 ______ _____ _____
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Exercise 1-14 (10 minutes)
Interpretation: Swiss Group’s return on assets of 16% is markedly above
the 10% return of its competitors. Accordingly, its performance is
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
Total expenses………….………..………… 11 ,890
Net income………………………………………….. $ 2 ,110
Exercise 1-16 (15 minutes)
ERNST CONSULTING
Statement of Owner’s Equity
For Month Ended October 31
E. Ernst, Capital, October 1…..…………..………. $ 0
Add: Owner’s investment…..…………......... 84,000
Net income (from Exercise 1-15)........ 2 ,110
86,110
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Exercise 1-17 (15 minutes)
ERNST CONSULTING
Balance Sheet
October 31
Assets Liabilities
Cash……………………….… $11,360 Accounts payable................. $ 8,500
Accounts receivable.... 14,000
* 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 for miscellaneous expenses……………………….... (580)
Net cash used by operating activities.………..………………... ( 6,640)
Cash flows from investing activities
Purchase of office equipment………….…..………………..…….. (18,000)
Net cash used by investing activities……………...………….. (18,000)
Cash flows from financing activities
Net increase in cash…………………………………………………..… $11,360
Cash balance, October 1…………………………………….……..…. 0
Cash balance, October 31…………………………………………….. $11,360
1$7,000 Salaries Expense – $5,250 still owed = $1,750 paid to employees.
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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.
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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
Financing
Activities
Investing
Activities
1 Owner invests
cash in business + + +
2 Receives cash
for services
provided
+ + + +
payable
8 Provides ser-
vices on credit + + +
9 Owner
withdraws cash – – –
10 Collects cash
on receivable
from (8)
+/– +
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Problem 1-2A (40 minutes)
Part 1
Company A
(a) Equity on December 31, 2014:
Assets……………………………………………….... $55,000
Liabilities…………………………………………….. (24 ,500)
Equity…………………….………..……………….... $30 ,500
(b) Equity on December 31, 2015:
Equity, December 31, 2014.……………..…... $30,500
Plus investment by owner……….…………… 6,000
(c) Liabilities on December 31, 2015:
Assets……………………………………………….... $58,000
Part 2
Company B
(a) and (b)
Equity: 12/31/2014 12/31/2015
Assets……………………….……. $34,000 $40,000
Liabilities………………..………. (21 ,500) (26 ,500)
Equity…………………………….. $12 ,500 $13 ,500
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Problem 1-2A (Continued)
Part 3
Company C
First, calculate the beginning balance of equity:
Dec. 31, 2014
Assets……………………………………………….... $24,000
Liabilities…………………………………………….. ( 9 ,000)
Equity…………………….………..……………….... $15 ,000
Next, find the ending balance of equity by completing this table:
Part 4
Company D
First, calculate the beginning and ending equity balances:
12/31/2014 12/31/2015
Assets……………………………..... $60,000 $85,000
Liabilities………………….……….. (40 ,000) (24 ,000)
Equity……………………………….. $20 ,000 $61 ,000
Then, find the amount of investment by owner during 2015:
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