1-7
XERCISE 1-21 g.(cont.)
Wilson Company
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Cash Receipts from Customers
$500
Cash Payments for Expenses
(300)
Net Cash Flow from Operating Activities
$ 200
Cash Flows From Investing Activities:
0
Cash Flows From Financing Activities:
Cash Payments for Dividends
(50)
Net Cash Flow from Financing Activities
(50)
Net Increase in Cash
150
Plus: Beginning Cash Balance
200
Ending Cash Balance
$ 350
h. The income statement, statement of changes in stockholders’ equity and the statement of cash
i. The market value is not shown in the financial statements. The historical cost concept
EXERCISE 1-22
a. Since the amount in the Notes Payable account increased from zero to $3,000, Concepts, Inc.
must have received a cash inflow of $3,000 from the issue of the note payable. Similarly,
since the balance in the common stock account increased from $2,500 to $8,000, Concepts,
Inc. must have received a cash inflow $5,500 ($8,000 – $2,500) from the issue of common
stock. Finally, $900 dividend payment would have caused a net cash outflow. Therefore, the
net cash inflow from financing activities can be explained as follows:
Cash Flows From Financing Activities:
Cash Receipts from Loan
$3,000
Cash Receipts from Stock Issue
5,500
1-8
Cash Payments for Dividends
(900)
Net Cash Flow from Financing Activities
$7,600
c.
Concepts, Inc.
Income Statement
For the Year Ended December 31, 2014
Revenue
$9,900
Expenses
(4,800)
Net Income
$5,100
EXERCISE 1-22 c. (cont.)
Concepts, Inc.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2014
Beginning Common Stock
$ 2,500
Plus: Common Stock Issued
5,500
Ending Common Stock
$8,000
Beginning Retained Earnings
$ 2,000
Plus: Net Income
5,100
Less: Dividends
(900)
Ending Retained Earnings
6,200
Total Stockholders’ Equity
$14,200
Concepts, Inc.
Balance Sheet
As of December 31, 2014
Assets
Cash
$ 4,200
Land
13,000
Total Assets
$17,200
1-9
Liabilities
Notes Payable
$3,000
Total Liabilities
$ 3,000
Stockholders’ Equity
Common Stock
$8,000
Retained Earnings
6,200
Total Stockholders’ Equity
14,200
Total Liabilities and Stockholders’ Equity
$17,200
EXERCISE 1-22 c. (cont.)
Concepts, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Cash Receipts from Customers
$ 9,900
Cash Payments for Expenses
(4,800)
Net Cash Flow from Operating Activities
$ 5,100
Cash Flows From Investing Activities:
Cash Paid to Purchase Land
$(13,000)
Net Cash Flow from Investing Activities
(13,000)
Cash Flows From Financing Activities:
Cash Receipts from Loan
$ 3,000
Cash Receipts from Stock Issue
5,500
Cash Payments for Dividends
(900)
Net Cash Flow from Financing Activities
7,600
Net Decrease in Cash
(300)
Plus: Beginning Cash Balance
4,500
Ending Cash Balance
$ 4,200
EXERCISE 1-23
a.
Blue Haven Company
Accounting Equation as of December 31, 2014
Assets
=
Liabilities
+
Common Stock
+
Retained Earnings
$100,000
$30,000
$50,000
?
1-10
Retained Earnings = $100,000 – $30,000 – $50,000 = $20,000
Retained Earnings after closing:
$20,000
Less, Revenue
(16,000)
Add, Expenses
11,000
Add, Dividends
2,000
Retained Earnings before closing
$17,000
c. The balances in revenue, expense and dividends before closing are:
Revenue
16,000
Expenses
11,000
Dividends
2,000
d. After closing revenue, expense and dividends, the all of the balances will be zero.
e. Both Common Stock and Retained Earnings represent obligations the business has to
EXERCISE 1-23 (cont.)
f. The owners are no better off immediately after they contributed capital to the business.
While equity increased $40,000, the amount invested by owners also increased $40,000. The
owners are only in a better financial position if their equity exceeds the amount they have
EXERCISE 1-24
a.
Year
Cash
Revenues
Cash
Expenses
Net
Income
Retained
Earnings
2014
$20,000
$11,000
9,000
9,000
2015
30,000
14,000
16,000
25,000
2016
40,000
22,000
18,000
43,000
b. Net income is a measure of the benefits minus the sacrifices a company experiences during a
1-11
c.
Year
Cash
Revenues
Cash
Expenses
Net
Income
Retained
Earnings
2014
$20,000
$11,000
9,000
9,000
2015
30,000
14,000
16,000
20,000*
2016
40,000
22,000
18,000
38,000**
*$9,000 Beginning Balance + $16,000 Net Income – $5,000 Dividends
**$20,000 Beginning Balance + $18,000 Net Income
EXERCISE 1-25
a. The balance in the Retained Earnings account as of January 31, 2014 is zero.
Explanation: The revenue is recorded in the Revenue account and is not transferred into retained
until the year end closing process is accomplished.
d. The December 31, 2014 before closing balance in the Revenue account is $56,600 ($4,600 +
$52,000). The December 31, 2014 before closing balance in the Expense account is $45,000
($3,000 + $42,000).
Explanation: The revenue and expense amounts accumulate in the Revenue and Expense
accounts throughout the year.
e. The January 1, 2015 balance in the Retained Earnings account is $11,600.
1-12
EXERCISE 1-26
a.
Event
1.
Asset Source
2.
Asset Source
3.
NA
4.
Asset Exchange
5.
Asset Use
6.
Asset Use
7.
NA
b.
Happy Pet Store
Horizontal Statements Model for 2014
Balance Sheet
Income Statement
Statement of
Assets
=
Liab.
+
Stockholders’ Equity
Revenue
−
Expense
=
Net Inc.
Cash Flows
Event
No.
Cash
+
Land
=
Notes
Payable
+
Common
Stock
+
Retained
Earnings
1
I
+
NA
=
NA
+
I
+
NA
NA
−
NA
=
NA
I FA
2
I
+
NA
=
I
+
NA
+
NA
NA
−
NA
=
NA
I FA
3
NA
+
NA
=
NA
+
NA
+
NA
NA
−
NA
=
NA
NA
4
D
+
I
=
NA
+
NA
+
NA
NA
−
NA
=
NA
D IA
5
D
+
NA
=
NA
+
NA
+
D
NA
−
I
=
D
D OA
6
D
+
NA
=
NA
+
NA
+
D
NA
−
NA
=
NA
D FA
7
NA
+
NA
=
NA
+
NA
+
NA
NA
−
NA
=
NA
NA
1-13
EXERCISE 1-27
a. The assets would be worth the same, but would be shown at different amounts on
the balance sheet depending on whether U.S. GAAP or IFRS is used.
SOLUTIONS TO PROBLEMS – CHAPTER 1
PROBLEM 1-28
a. The memo should explain that all entities must account for the use of assets, even
b. Financial accounting is designed to meet the needs of external users. External users
such as creditors and investors are interested in an objective, overall picture. For
instance, both investors and creditors would be interested in the assets and liabilities
c. Stakeholders of a not-for-profit entity that may want financial accounting reports
PROBLEM 1-29
a. Entities mentioned:
b. Effect on the cash account:
1. Chris Hann
Decrease
Classic Auto Sales
Increase
2. Sal Pearl
Decrease
Business
Increase
3. First State Bank
Decrease
Strong Co.
Increase
1-14
4. Cindy’s Restaurant
Decrease
Midwest Utilities
Increase
5. Sun Corp.
Increase/Decrease
City National Bank
Decrease
Carriage Realty
Increase
6. Sue Wang
Decrease
International Sales Corporation
Increase
7. Chris Gordon
Decrease
Daughter
Increase
8. Motor Service Co.
Increase
Customers
Decrease
9. Poy Imports
Decrease
Employees
Increase
10. Borg, Inc.
Decrease
Mark Borg
Increase
PROBLEM 1-30
Event No.
Type of Event
Effect on Total Assets
1.
Asset Use
Decrease
2.
Asset Use
Decrease
3.
Asset Source
Increase
4.
Asset Use
Decrease
5.
Asset Source
Increase
6.
Asset Exchange
No Effect
7.
NA
NA
8.
Asset Use
Decrease
9.
Asset Source
Increase
10.
Asset Exchange
No Effect
11.
Asset Exchange
No Effect
12.
Asset Use
Decrease
13.
NA
NA
14.
Asset Source
Increase
15.
Asset Use
Decrease
PROBLEM 1-31
1-15
Item
Income
Statement
Statement of
Changes in
Stk. Equity
Balance Sheet
Statement of
Cash Flows
For the Period Ended (Date)
Net income
Investing activities
Net loss
Ending cash balance
Salary expense
Consulting revenue
Dividends
Financing activities
Ending common stock
Interest expense
As of (date)
Land
Beginning cash balance
Notes payable
Beginning common stock
Service revenue
Utility expense
Stock issue
Operating activities
PROBLEM 1-32
a.
Susan’s Consulting
Accounting Equation for 2014
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Land
=
Notes
Payable
+
Common
Stock
+
Retained
Earnings
Acct.
Title/RE
1. Issued stk
50,000
NA
NA
50,000
NA
NA
2. Revenue
100,000
NA
NA
NA
100,000
Svc. Rev.
3. Loan
15,000
NA
15,000
NA
NA
NA
4. Paid Exp.
(60,000)
NA
NA
NA
(60,000)
Expense
5. Pur. Land
(40,000)
40,000
NA
NA
NA
NA
Totals
65,000
+
40,000
=
15,000
+
50,000
+
40,000
Susan’s Consulting
Accounting Equation for 2015
1-16
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Land
=
Notes
Payable
+
Common
Stock
+
Retained
Earnings
Acct.
Title/RE
Beg. Bal.
65,000
40,000
15,000
50,000
40,000
1. Issued stk
20,000
NA
NA
20,000
NA
NA
2. Revenue
130,000
NA
NA
NA
130,000
Svc. Rev.
3. Paid Loan
(10,000)
NA
(10,000)
NA
NA
NA
4. Paid Exp.
(75,000)
NA
NA
NA
(75,000)
Expense
5. Paid Div.
(15,000)
NA
NA
NA
(15,000)
Dividends
6. Land Val.
NA
NA
NA
NA
NA
NA
Totals
115,000
+
40,000
=
5,000
+
70,000
+
80,000
PROBLEM 1-32 (cont.)
b.
Susan’s Consulting
Income Statement
For the Period Ended December 31, 2014
Service Revenue
$100,000
Expenses
(60,000)
Net Income
$40,000
Susan’s Consulting
Statement of Changes in Stockholders’ Equity
For the Period Ended December 31, 2014
Beginning Common Stock
$ -0-
Plus: Common Stock Issued
50,000
Ending Common Stock
$50,000
Beginning Retained Earnings
$ -0-
Plus: Net Income
40,000
Ending Retained Earnings
40,000
Total Stockholders’ Equity
$90,000
PROBLEM 1-32 b. (cont.)
1-17
Susan’s Consulting
Balance Sheet
As of December 31, 2014
Assets
Cash
$65,000
Land
40,000
Total Assets
$105,000
Liabilities
Notes Payable
$ 15,000
Stockholders’ Equity
Common Stock
$50,000
Retained Earnings
40,000
Total Stockholders’ Equity
90,000
Total Liabilities and Stockholders’ Equity
$105,000
PROBLEM 1-32 b. (cont.)
Susan’s Consulting
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Cash Receipts from Customers
$100,000
Cash Payments for Expenses
(60,000)
Net Cash Flow from Operating Activities
$40,000
Cash Flows From Investing Activities:
Cash Payment for Land
$(40,000)
Net Cash Flow from Investing Activities
(40,000)
Cash Flows From Financing Activities:
Cash Receipts from Borrowing
$15,000
Cash Receipts from Stock Issue
50,000
Net Cash Flow from Financing Activities
65,000
Net Increase in Cash
65,000
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$65,000
1-18
PROBLEM 1-32 b. (cont.)
Susan’s Consulting
Income Statement
For the Period Ended December 31, 2015
Service Revenue
$130,000
Expenses
(75,000)
Net Income
$55,000
Susan’s Consulting
Statement of Changes in Stockholders’ Equity
For the Period Ended December 31, 2015
Beginning Common Stock
$50,000
Plus: Common Stock Issued
20,000
Ending Common Stock
$ 70,000
Beginning Retained Earnings
$40,000
Plus: Net Income
55,000
Less: Dividends
(15,000)
Ending Retained Earnings
80,000
Total Stockholders’ Equity
$150,000