Chapter Opener: Thinking Critically
Fast Facts
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Managerial Implications: Thinking Critically
Discussion Questions
1.
2.
4.
5.
7.
9.
Note to instructor: These questions are designed to check students’ understanding of new terms,
concepts, and procedures presented in the chapter.
Assets = Liabilities + Owner’s Equity
Southwest Airlines opened in 1971 with three planes flying between Houston, Dallas, and San
Antonio. Southwest Airlines currently flies almost 100 million passengers a year to 63 cities all
across the country.
For the fiscal year 2009, the company’s net income was $99 million while its total operating
revenue was $10.4 billion.
Beginning-of-period capital balance, additional investments, net income/loss for period, less
withdrawal ending capital balance
f. assets increase, liabilities increase
CHAPTER 2
ANALYZING BUSINESS TRANSACTIONS
In 2009 Southwest served 63.2 million cans of soda, juices, and water; 14.3 million alcoholic
beverages; 14 million bags of pretzels; 90 million bags of peanuts; 17.7 million Select-A-Snacks;
and 33.5 million other snacks.
Answers will vary. Students should mention total assets and the type of assets, the liabilities the business
would be responsible for, and whether the business is making a profit.
Answers will vary but students should recognize that happy employees are more productive and present
a positive image to the company. Happy employees are also loyal which leads to lower employee
turnover, and lower training and recruiting expenses. Happy employees are much less likely to steal from
the company, and of course, happy employees mean happy customers who become repeat customers.
Firm name, title of statement, date of statement or the period of time covered
b. one asset increase and another decrease; no change in total assets
e. assets decrease, owner’s equity decrease
c. assets decrease, liabilities decrease
d. assets increase, owner’s equity increase
Outflow of money/assets for costs used to produce revenue
a. assets increase, owner’s equity increase
Revenue and expenses; net income or loss
Discussion Questions (continued)
10.
12.
EXERCISE 2.1
EXERCISE 2.2
1. $21,740
EXERCISE 2.3
Assets = Liabilities +
1. I I = Increase D = Decrease
EXERCISE 2.4
=+
1. Cash $12,500
2. Dental Supplies 3,150 = Accounts Payable $21,680 + Donna Wells, Capita
l
$26,520
Owner’s EquityLiabilitiesAssets
Transaction
Increases owner’s equity
Assets, liabilities, and owner’s equity.
Owners’ Equity
I
EXERCISE 2.5
= Liabilities +
Cash +
Accounts
Receivable + Equipment =
Accounts
Payable +
Amos
Roberts
Capital + Revenue – Expenses
1. +$50,000 +$50,000
2. +$17,000 +$17,000
EXERCISE 2.6
Net income of $20,000
Revenue
Repair Fees …………………………………
…
$45,150
Expenses
…
EXERCISE 2.
7
1. Services were performed for cash.
Owner’s EquityAssets
Revenue
Fees Income 7280000
Expenses
Advertising Expense 550000
Salaries Expense 1500000
EXERCISE 2.9
Net loss of $950
Revenue
Service Revenue …………………………………………..
Expenses
Advertising Expense…………… $2,600
EXERCISE 2.10
Alexander Parker, Capital, September 1, 2013 2570000
Net Income for September 5160000
Parker Investment Services
Income Statement
Month Ended September 30, 2013
EXERCISE 2.8
Statement of Owner’s Equity
Month Ended September 30, 2013
$4,800
Parker Investment Services
Assets Liabilities
Cash 3210000 Accounts Payable 470000
EXERCISE 2.10 (continued)
Parker Investment Services
Balance Sheet
Month Ended September 30, 2013
y
Accounts
Payable +
Owner’s
Capital
PROBLEM 2.2A (continued)
Cash + Accounts + Office + Auto = Payable +Capital + Revenue – Expenses
68,600 + 11,980 + 36,400 + $22,500 = 10,200 + 90,500 + 62,180 – 23,400
4. -780 +780
67,820 + 11,980 + 36,400 + $22,500 = 10,200 + 90,500 + 62,180 – 24,180
5. -2,500 -2,500
65,320 + 11,980 + 36,400 + $22,500 = 7,700 + 90,500 + 62,180 – 24,180
6. -8,700 +8,700
56,620 + 11,980 + 36,400 + $22,500 = 7,700 + 90,500 + 62,180 – 32,880
7. -1020 +1020
55,600 + 11,980 + 36,400 + $22,500 = 7,700 + 90,500 + 62,180 – 33,900
8. +9,500 +9,500
65,100 + 11,980 + 36,400 + $22,500 = 7,700 + 90,500 + 71,680 – 33,900
9. -2,250 +2,250
62,850 + 11,980 + 36,400 + $22,500 = 7,700 + 90,500 + 71,680 – 36,150
10. + +11,500 +11,500
$62,850 + $23,480 + $36,400 + $22,500 = $7,700 + $90,500 + $83,180 – $36,150
Analyze: Total assets equal $145,230.
New
Balances
New
Balances
New
Balances
New
Balances
Assets Owner’s Equity
New
Balances
New
Balances
New
Balances
New
Balances
Assets
Cash 3330000 2300000
Supplies 538000
Balance Sheet
PROBLEM 2.3A
Valdez Equipment Repair
February 28, 2013
Liabilities
Accounts Payable
PROBLEM 2.4A (continued)
Assets
Cash 569600 440000
Liabilities
Accounts Payable
West Cleaning Service
Balance Sheet
May 31, 2013
PROBLEM 2.1B
Cash +
Accounts
Receivable + Supplies + Equipment =
Accounts
Payable +
Owner’s
Capital
1. +$36,000 +$36,000
2. -$16,000 +$16,000
3. +$6,000 +$6,000
4. -$3,000 -$3,000
5. +$6,000 +$6,000
6. +$4,200 +$4,200
7. +$3,650 +$3,650
8. -$2,600 -$2,600
9. +$2,500 -$2,500
10. -$3,150 + $3,150
11. -$5,000 -$5,000
Totals $18,950 + $1,150 + $3,150 + $22,000 = $3,000 + $42,250
Analyze: Transaction 3 increased the Company’s debt by $6,000.
PROBLEM 2.2B
Cash +
Accounts
Receivable +Supplies +
Office
Furniture =
Accounts
Payable +
R. Johnson
Capital + Revenue – Expenses
$19,000 + $6,000 + $6,400 + $12,000 = $5,000 + $24,900 + $26,000 – $12,500
1. +4,000 +4,000
19,000 + 10,000 + 6,400 + 12,000 = 5,000 + 24,900 + 30,000 – 12,500
2. -1,440 +1,440
17,560 + 10,000 + 6,400 + 12,000 = 5,000 + 24,900 + 30,000 – 13,940
3. +5,000 +5,000
Assets
Assets Owner’s Equity
Beginning
Balances
New
Balances
New
Balances
PROBLEM 2.2B (continued)
Cash
+ Accounts
Receivable
+
Supplies +
Office
Furniture =
Accounts
Payable +
R. Johnson
Capital + Revenue – Expenses
22,560 + 10,000 + 6,400 + 12,000 = 5,000 + 24,900 + 35,000 – 13,940
4. -800 +800
21,760 + 10,000 + 6,400 + 12,000 = 5,000 + 24,900 + 35,000 – 14,740
5. -2,400 -2,400
19,360 + 10,000 + 6,400 + 12,000 = 2,600 + 24,900 + 35,000 – 14,740
6. -960 +960
18,400 + 10,000 + 6,400 + 12,000 = 2,600 + 24,900 + 35,000 – 15,700
7. -7,000 +7,000
11,400 + 10,000 + 6,400 + 12,000 = 2,600 + 24,900 + 35,000 – 22,700
8. +5,600 +5,600
17,000 + 10,000 + 6,400 + 12,000 = 2,600 + 24,900 + 40,600 – 22,700
9. +1,000 +1,000
17,000 + 10,000 + 7,400 + 12,000 = 3,600 + 24,900 + 40,600 – 22,700
10. +3,000 + -3,000
$20,000 + $7,000 + $7,400 + $12,000 = $3,600 + $24,900 + $40,600 – $22,700
Analyze: Owner’s Equity balance is $42,800; $24,900 + ($40,600 – $22,700).
New
Balances
New
Balances
New
Balances
New
Balances
Assets Owner’s Equity
New
Balances
New
Balances
New
Balances
New
Balances
Assets
Cash 24 0 0 0 00
Furniture 800000
Revenue
Fees Income 10 8 0 0 00
Expenses
Utilities Expense 6 0 0 00
Linda Carter, Capital, Aug. 1, 2013 23 2 0 0 00
Net Income for August 420000
Less Withdrawals for August 120000
Increase in Capital 300000
Linda Carter, Capital, Aug. 31, 2013 26 2 0 0 00
Linda Carter, Attorney and Counselor of Law
Income Statement
Month Ended August 31, 2013
PROBLEM 2.4B
Liabilities
PROBLEM 2.3B
Taylor’s Tax Service
Balance Sheet
December 1, 2013
PROBLEM 2.4B (continued)
Assets
Cash 480000 60000
Accounts Receivable 660000
Analyze: Net income of $4,200 was transferred from the income statement.
Linda Carter, Attorney and Counselor at Law
Balance Sheet
August 31, 2013
Liabilities
Accounts Payable
CRITICAL THINKING PROBLEM 2.1
Revenue
Fees Earned 9 7 6 0 00
Expenses
Rent Expense 800000
Cleaning Expense 210000
Advertising Expense 8 0 0 00
Total Expenses 10 9 0 0 00
Net Loss (1 1 4 0 00)
It is not unusual for new businesses to operate at a loss. James should project his income and expenses for
the next several months to determine how much new business he will need to earn an income. Students’
suggestions for improving the accounting system might include opening a business checking account, not
using a personal credit card for business expenses, setting up a filing system for business records, and
purchasing a computer to maintain financial records.
Body Builders Fitness Center
Income Statement
Month Ended November 30, 2013
Some students may include the warm-up suits as a business expense. If the suits are a type of uniform,
their inclusion is appropriate; if they are to be worn at home and at work, their cost is not a business
expense.
The parking ticket is a personal expense. The cleaning of the studio and the printing of the flyers are
business expenses. Payment of expenses with the owner’s personal credit card would be considered an
additional investment by the owner.
CRITICAL THINKING PROBLEM 2.2
Determine the balance for Dolly Garcia, April 30, 2013.
Cash +
Accounts
Receivable + Machinery =
Accounts
Payable +
D. Garcia
Capital –
D. Garcia
Drawing + Revenue – Expenses
$26,000 + $10,800 + $19,000 = $12,800 + ? – $5,200 + $23,800 – $17,150
Solving for X:
$55,800 = $14,250 + X
$55,800 – $14,250 = $14,250 – $14,250 + X
$41,550 = X
= $41,550
Advertising Expense $3,750
Maintenance Expense 4,400
Salaries Expense 9,000
Total Expenses $17,150
Dolly Garcia, Capital,
April 1, 2013
Assets Owner’s Equity
Let Dolly Garcia, Capital = X.
$55,800 (Total Assets) = $12,800 (Accounts Payable) – $5,200 (Drawing) + $23,800 (Revenue) – $17,150 (Expenses) + X
Revenue
Fees Earned 23 8 0 0 00
Expenses
Advertising Expense 375000
Maintenance Expense 440000
CRITICAL THINKING PROBLEM 2.2 (continued)
Dolly Garcia, Certified Public Accountant
Income Statement
Month Ended April 30, 2013
SOLUTIONS TO BUSINESS CONNECTIONS
Managerial Focus:
1.
3.
4.
Organized financial information can be used to evaluate operating efficiency and to make decisions
about current and future activities.
No. Early development is expensive, risky, and time consuming. Profits may not be achieved for a
year or more.
Not necessarily. Reinvestments in assets or use of cash to pay debts affect cash. In addition, sales or
revenue may have been “on account.”
Part A True-False
1.
2.
SOLUTIONS TO PRACTICE TES
T
TRUE
FALSE