Chapter 01 – An Introduction to Accounting
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
1-1
Demonstration Problem 1-1: Solution, part a. Equation Approach
Effect of Events on the Accounting Equation
For Year 2014
Equity
Events
Assets
=
Liabilities
+
Common
Stock
+
Retained
Earnings
Beginning Balances
$ 0
=
$ 0
+
$ 0
+
$ 0
1. Effect of Stock Issue
9,000
9,000
2. Effect of Borrowing
5,000
5,000
3. Effect of Revenue
4,000
4,000
4. Effect of Expense
(2,900)
(2,900)
5. Effect of Dividends
(500)
(500)
−−−−−
−−−−−
−−−−−
−−−−−
Ending Balances
$14,600
=
$5,000
+
$9,000
+
$ 600
=====
═════
═════
═════
For Year 2015
Equity
Events
Assets
=
Liabilities
+
Common
Stock
+
Retained
Earnings
Beginning Balances
$14,600
=
$5,000
+
$ 9,000
+
$ 600
1. Effect of Stock Issue
4,500
4,500
2. Effect of Debt Repay.
(2,000)
(2,000)
3. Effect of Revenue
6,700
6,700
4. Effect of Expense
(4,300)
(4,300)
5. Effect of Dividends
(700)
(700)
−−−−−
−−−−−
−−−−−
−−−−−
Ending Balances
$18,800
=
$3,000
+
$13,500
+
$ 2,300
═════
═════
═════
═════
For Year 2016
Assets
=
Liab.
+
Equity
Events
Cash
+
Land
=
Liab.
+
Common
Stock
+
Retained
Earnings
Beginning Balances
$18,800
$3,000
+
$13,500
+
$ 2,300
1. Effect of Stock Issue
2,500
2,500
2. Effect of Borrowing
1,000
1,000
3. Effect of Revenue
7,400
7,400
4. Effect of Expense
(7,900)
(7,900)
5. Effect of Dividends
(300)
(300)
6. Effect of Land Purch.
(9,000)
$9,000
−−−−−
−−−−
−−−−
−−−−−
−−−−−
Ending Balances
$12,500
+
$9,000
=
$4,000
+
$16,000
+
$1,500
═════
════
════
═════
═════
Demonstration Problem 1-1: Solution, part b. Financial Statements
Chapter 01 – An Introduction to Accounting
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
1-2
Video Services Company
Income Statements
For the Years Ended December 31,
2014
2015
2016
Services Revenue
$4,000
$6,700
$7,400
Expenses
(2,900)
(4,300)
(7,900)
Net Income (Loss)
$1,100
$2,400
$( 500)
Statements of Changes in Stockholders’ Equity
Beginning Common Stock
$ 0
$ 9,000
$13,500
Plus: Common Stock Issued
9,000
4,500
2,500
Ending Common Stock
$9,000
$13,500
$16,000
Beginning Retained Earnings
$ 0
$ 600
$ 2,300
Net Income (Loss)
1,100
2,400
(500)
Dividends
(500)
(700)
(300)
Ending Retained Earnings
$ 600
$ 2,300
$ 1,500
Total Stockholders’ Equity
$9,600
$15,800
$17,500
Balance Sheets at December 31
Assets
Cash
$14,600
$18,800
$12,500
Land
9,000
Total Assets
$14,600
$18,800
$21,500
Liabilities
$ 5,000
$ 3,000
$ 4,000
Stockholders’ Equity
Common Stock
$ 9,000
$13,500
$16,000
Retained Earnings
600
2,300
1,500
Total Stockholders’ Equity
$ 9,600
$15,800
$17,500
Total Liabilities and Stockholders’ Equity
$14,600
$18,800
$21,500
Statements of Cash Flows
Cash Flows from Operating Activities
Cash Inflows from Revenue
$ 4,000
$ 6,700
$ 7,400
Cash Outflows for Expenses
(2,900)
(4,300)
(7,900)
Net Cash Flow from Operating Activities
$ 1,100
$ 2,400
$ (500)
Cash Flow from Investing Activities
Cash Outflow for Land
$(9,000)
Cash Flows from Financing Activities
Cash Inflows from Borrowed Funds
$ 5,000
$ 1,000
Cash Outflows to Reduce Debt
$(2,000)
Cash Inflows from Stock Issues
9,000
4,500
2,500
Cash Outflows for Dividends
(500)
(700)
(300)
Net Cash Flows from Financing Activities
$13,500
$ 1,800
$ 3,200
Net Change in Cash
$14,600
$ 4,200
$ (6,300)
Beginning Cash Balance
0
14,600
18,800
Ending Cash Balance
$14,600
$18,800
$12,500
Demonstration Problem 1-1: Solution, part a.
Statements Model Approach
Chapter 01 – An Introduction to Accounting
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
1-3
2014
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. Bal.
+
=
+
+
–
=
1
9,000
+
=
+
9,000
+
–
=
9,000 FA
2
5,000
+
=
5,000
+
+
–
=
5,000 FA
3
4,000
+
=
+
+
4,000
4,000
–
=
4,000
4,000 OA
4
(2,900)
+
=
+
+
(2,900)
–
2,900
=
(2,900)
(2,900) OA
5
(500)
+
=
+
+
(500)
–
=
(500) FA
Totals
14,600
+
=
5,000
+
9,000
+
600
4,000
–
2,900
=
1,100
14,600 NC
2015
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. Bal.
14,600
+
=
5,000
+
9,000
+
600
–
=
1
4,500
+
=
+
4,500
+
–
=
4,500 FA
2
(2,000)
+
=
(2,000)
+
+
–
=
(2,000) FA
3
6,700
+
=
+
+
6,700
6,700
–
=
6,700
6,700 OA
4
(4,300)
+
=
+
+
(4,300)
–
4,300
=
(4,300)
(4,300) OA
5
(700)
+
=
+
+
(700)
–
=
(700) FA
Totals
18,800
+
=
3,000
+
13,500
+
2,300
6,700
–
4,300
=
2,400
4,200 NC
2016
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. Bal.
18,800
+
=
3,000
+
13,500
+
2,300
–
=
1
2,500
+
=
+
2,500
+
–
=
2,500 FA
2
1,000
+
=
1,000
+
+
–
=
1,000 FA
3
7,400
+
+
+
+
7,400
7,400
–
=
7,400
7,400 OA
4
(7,900)
+
+
+
+
(7,900)
–
(7,900)
=
(7,900)
(7,900) OA
5
(300)
+
+
+
+
(300)
–
=
(300) FA
6
(9,000)
+
9,000
+
+
+
–
=
(9,000) IA
Totals
12,500
+
9,000
+
4,000
+
16,000
+
1,500
7,400
–
7,900
=
(500)
(6,300) NC
WORK PAPERS FOR
DEMONSTRATION PROBLEM
Chapter 01 – An Introduction to Accounting
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1-4
The work papers are designed for student use. You may copy them
and distribute the hard copies to your students. However, a more
efficient way to distribute them is to cut and paste them into a
Demonstration Problem 1-1: Work Paper, part a. Equation Approach
Effect of Events on the Accounting Equation
For Year 2014
Equity
Events
Assets
=
Liabilities
+
Common
Stock
+
Retained
Earnings
Beginning Balances
$ 0
=
$ 0
+
$ 0
+
$ 0
1. Effect of Stock Issue
2. Effect of Borrowing
3. Effect of Revenue
4. Effect of Expense
5. Effect of Dividends
−−−−−
−−−−−
−−−−−
−−−−−
Ending Balances
$14,600
=
$5,000
+
$9,000
+
$ 600
═════
═════
═════
═════
For Year 2015
Equity
Events
Assets
=
Liabilities
+
Common
Stock
+
Retained
Earnings
Beginning Balances
=
+
+
1. Effect of Stock Issue
2. Effect of Debt Repay.
3. Effect of Revenue
4. Effect of Expense
5. Effect of Dividends
−−−−−
−−−−−
−−−−−
−−−−−
Ending Balances
$18,800
=
$3,000
+
$13,500
+
$ 2,300
═════
═════
═════
═════
For Year 2016
Assets
=
Liab.
+
Equity
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1-5
Events
Cash
+
Land
=
Liab.
+
Common
Stock
+
Retained
Earnings
Beginning Balances
+
+
1. Effect of Stock Issue
2. Effect of Borrowing
3. Effect of Revenue
4. Effect of Expense
5. Effect of Dividends
6. Effect of Land Purch.
−−−−−
−−−−
−−−−
−−−−−
−−−−−
Ending Balances
$12,500
+
$9,000
=
$4,000
+
$16,000
+
$1,500
═════
════
════
═════
═════
Demonstration Problem 1-1: Work Paper, part b. Financial Statements
Video Services Company
Income Statements
For the Years Ended December 31,
2014
2015
2016
Services Revenue
Expenses
Net Income (Loss)
$1,100
$2,400
$( 500)
Statements of Changes in Stockholders’ Equity
Beginning Common Stock
$ 0
$ 9,000
$13,500
Plus: Common Stock Issued
Ending Common Stock
Beginning Retained Earnings
Net Income (Loss)
Dividends
Ending Retained Earnings
Total Stockholders’ Equity
$9,600
$15,800
$17,500
Balance Sheets at December 31
Assets
Cash
Land
Total Assets
$14,600
$18,800
$21,500
Liabilities
Stockholders’ Equity
Common Stock
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$14,600
$18,800
$21,500
Statements of Cash Flows
Cash Flows from Operating Activities
Cash Inflows from Revenue
$ 4,000
$ 6,700
$ 7,400
Cash Outflows for Expenses
Chapter 01 – An Introduction to Accounting
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1-6
Net Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Outflows for Land
Cash Flows from Financing Activities
Cash Inflows from Borrowed Funds
Cash Outflows to Reduce Debt
Cash Inflows from Stock Issues
Cash Outflows for Dividends
Net Cash Flows from Financing Activities
Net Change in Cash
$14,600
$ 4,200
$(6,300)
Beginning Cash Balance
Ending Cash Balance
Demonstration Problem 1-1: Work Paper, part a.
Statements Model Approach
2014
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. Bal.
+
=
+
+
–
=
1
2
3
4
5
Totals
14,600
+
=
5,000
+
9,000
+
600
4,000
–
2,900
=
1,100
14,600NC
2015
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. Bal.
1
2
3
4
5
Totals
18,800
+
=
3,000
+
13,500
+
2,300
6,700
–
4,300
=
2,400
4,200NC
2016
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. Bal.
1
2
3
4
5
6
Totals
12,500
+
9,000
+
4,000
+
16,000
+
1,500
7,400
–
7,900
=
(500)
(6,300) NC
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1-7
Quiz Questions for Chapter 1
The following information pertains to the next four questions. At the beginning of 2014, X Company had assets
of $300, liabilities of $150, and common stock of $50. During 2014 the company earned revenue of $400, incurred
expenses of $250, and paid dividends of $100. All transactions were cash transactions.
1. What is the amount of retained earnings at the beginning of 2014?
a. $ 50.
b. $100.
c. $150.
d. none of the above.
2. The amount of net income reported on the 2014 income statement would be
a. $400.
b. $150.
c. $ 50.
d. none of the above.
3. The amount of retained earnings reported on the December 31, 2014 balance sheet would be
a. $100.
b. $250.
c. $650.
d. none of the above.
4. The amount of total assets reported on the December 31, 2014 balance sheet would be
a. $350.
b. $300.
c. $450.
d. $ 50.
5. Z Company borrowed $500 cash from the National Bank. As a result of this transaction, Z Company’s
a. assets would increase by $500.
b. liabilities would decrease by $500.
c. equity would increase by $500.
d. revenue would decrease by $500.
The following information pertains to the next two questions. XYZ Company borrowed $800 from the State
Bank and used $500 of this money to purchase land.
6. As a result of these transactions, XYZ’s total assets would increase by
a. $1,300.
b. $ 800.
c. $ 500.
d. $ 300.
7. The statement of cash flows for XYZ Company would report
a. an inflow of $500 from financing activities.
b. an outflow of $800 for investing activities.
c. an inflow of $800 from financing activities.
d. an outflow of $500 for operating activities.
8. Select the correct statement from the choices listed below.
a. Revenue is a decrease in assets resulting from operating activities.
b. Dividends are decreases in assets incurred for the purpose of producing revenue.
c. A company incurs expenses when it borrows money.
d. Net income is an increase in equity resulting primarily from operating activities.
Chapter 01 – An Introduction to Accounting
9. If revenue exceeds expenses, there are no dividends, and total liabilities remain unchanged, then
a. Equity will increase.
b. Retained earnings will decrease.
c. Total assets will increase.
d. Both a and c.
The following information pertains to the next two questions. Person A paid $10,000 cash to buy land from
Person B.
10. Select the statement that is true.
a. Total liabilities of Person B would increase.
b. Total assets of Person A would be unaffected.
c. Person A’s equity would increase.
d. None of the above.
11. Select the statement that is true.
a. Person A would have a cash outflow from investing activities.
b. Person B would have a cash inflow from investing activities.
c. The balance in the cash account on Person A’s books would decrease, while the balance in the cash
account on Person B’s books would increase.
d. All of the above statements are true.
12. Revenue is less than expenses. If liabilities and common stock were unchanged, then
a. cash flows from operating activities were greater than cash flows from investing activities.
b. total assets decreased.
c. retained earnings were less than net income during the period.
d. the company must have purchased assets with cash.
13. Among other items, the balance sheet of XYZ Company reports retained earnings of $50,000 and total
liabilities of $40,000. Based on this information alone, you would know that
a. since the company’s inception, the total amount of net income exceeded total dividends by at least
$50,000.
b. XYZ Company has enough cash to pay off its liabilities.
c. stockholders’ equity of the company amounted to $10,000.
d. total assets amounted to $90,000.
14. The Southern Company began the accounting period with assets of $600, common stock of $200, and
retained earnings of $250. During the period, revenue was $300, expenses were $200, and dividends were
$50. Common stock was unchanged during the accounting period. Liabilities decreased by $100. Based on
this information,
a. net income amounted to $50.
b. total assets at the end of the period were $550.
c. retained earnings at the end of the period amounted to $350.
d. liabilities at the end of the period amounted to $100.
15. Which of the following illustrates how a cash dividend affects a company’s financial statements?
Balance Sheet
Income Statement
Statement of
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
a.
+
n/a
+
n/a
n/a
n/a
+ FA
b.
+
n/a
+
+
n/a
+
+ OA
c.
−
n/a
−
n/a
+
−
− OA
d.
−
n/a
−
n/a
n/a
n/a
− FA
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1-9
Solutions to Quiz Questions
Question
Answer
1
B
2
B
3
D
4
A
5
A
6
B
7
C
8
D
9
D
10
B
11
D
12
B
13
A
14
B
15
D
Summary Outline of a Lesson Plan for Chapter 1
(Equation Approach)
Chapter 01 – An Introduction to Accounting
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
1-10
I. Distribute copies of Demonstration Problem 1-1.
II. Define assets. Assets are things of value to a business. The value is the capacity of the
asset to be used in the production of greater quantities of other assets.
III. Introduce the accounting equation.
IV. Use the demonstration problem to introduce new terms and to elaborate on the
interrelationships represented by the accounting equation. There are three primary
sources of assets.
A. Event No. 1 introduces common stock (owner interest).
B. Event No. 2 introduces liabilities (creditor interest).
C. Event No. 3 introduces revenue (increase in assets from earnings activities).
There are two asset use transactions.
D. Event No. 4 introduces expenses (decreases in assets from earnings activities).
E. Event No. 5 introduces dividends (wealth transfer).
V. Have students record the events for the second accounting cycle in an accounting
equation.
VI. Time considerations. Introducing the accounting equation, including student
participation with 2015 data, requires approximately one hour.
. VII. Homework assignments. Problem 1-32 is similar to the demonstration problem.
VIII. Introduce financial statements.
A. Income Statement. Because revenues increase and expenses decrease assets, net
income represents the change in wealth resulting from business operations during
the accounting period.
B. Statement of Changes in Stockholders’ Equity. Distinguish between expenses and
dividends.
C. Balance Sheet. This statement summarizes the accounting equation.
D. Statement of Cash Flows. Use the direct method; analyze the cash account.
IX. Have students prepare financial statements for the 2015 transactions.
X. Introduce the horizontal financial statements model.
XI. Filling in the gaps. Remind students they must read the text to fill in the gaps.
XII. Enrichment. If time permits, have students complete ATC Case 1-1 (financial statement
analysis).
Summary Outline of a Lesson Plan for Chapter 1
(Statements Model Approach)
I. Use the problem-based learning case, “Ask Me Anything,” to introduce financial
statements to students.
Chapter 01 – An Introduction to Accounting
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1-11
II. Create a collaborative experience where students reach consensus on their
questions. Have each group select a spokesperson.
III. Briefly introduce the basic financial statements. Introduce: 1) the balance sheet, 2)
the income statement, and 3) the statement of cash flows.
IV. Use student input to demonstrate the usefulness of financial statement information.
Ask the group spokespersons to share the questions their group would like to have the
accountant answer. Identify information that would or would not appear in financial
statements. Students should learn to name three financial statements and to describe the
specific elements that appear in each statement.
V. Distribute copies of Demonstration Problem 1-1. Show students how to record
business events directly into a set of financial statements (part b).
VI. Create a financial statements model for Demonstration Problem 1-1 (part a). Present
and explain a financial statements model for the students. Analyze and record the
transactions.
VII. Actively involve the students in learning. After explaining the 2014 accounting
transactions, show how this year’s ending balances become next year’s beginning
balances. Require the students to record the transactions for the 2015 accounting cycle in
the model. Assist as needed. Instruct the faster students to record 2016 transactions.
Have those students who do not finish the third cycle in class complete part a of the
problem as a homework assignment.
VIII. Introduce the accounting equation. Explain that the accounting equation can be
represented, Assets = Claims, and that it is the logic underlying the balance sheet.
IX. Assign homework. Problem 1-34 will give students practice in recording transactions in
horizontal financial statements models.
X. Filling in the gaps. Remind students that they are responsible for reading the textbook to
fill in the gaps because not all information can be presented in class.
XI. Enrichment. If time permits, have students complete ATC Case 1-1 (financial statement
analysis).