Chapter 02 – Investing and Financing Decisions and the Accounting System
Chapter 2
Investing and Financing Decisions and
the Accounting System
ANSWERS TO QUESTIONS
1. The primary objective of financial reporting for external users is to provide
financial information about the reporting entity that is useful to existing and
2. (a) An asset is a probable future economic benefit owned or controlled by the
entity as a result of past transactions.
(b) A current asset is an asset that will be used or turned into cash within one
year; inventory is always considered a current asset regardless of how
Chapter 02 – Investing and Financing Decisions and the Accounting System
9. Transaction analysis is the process of studying a transaction to determine its
economic effect on the entity in terms of the accounting equation:
Assets = Liabilities + Stockholders’ Equity
11. The journal entry is a method for expressing the effects of a transaction on
accounts in a debits-equal-credits format. The title of the account(s) to be
12. The T-account is a tool for summarizing transaction effects for each account,
13. The current ratio is computed as current assets divided by current liabilities. It
measures the ability of the company to pay its short-term obligations with current
14. Investing activities on the statement of cash flows include the buying and selling
of productive assets and investments. Financing activities include borrowing and
Chapter 02 – Investing and Financing Decisions and the Accounting System
MULTIPLE CHOICE
1. d
6. c
2. d
7. a
3. a
8. d
4. a
9. b
5. d
10. a
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
3
1
8
1
20
1
20
1
15
2
3
2
15
2
25
2
25
2
15
3
4
3
8
3
40
3
40
3
15
4
4
4
10
4
15
4
15
4
20
5
5
5
10
5
40
5
15
6
3
6
10
6
20
6
20
7
3
7
10
7
30
8
6
8
15
8
20
9
6
9
20
9
*
10
6
10
20
11
6
11
15
12
4
12
20
13
4
13
20
14
20
1
40
15
20
16
15
17
10
18
10
19
10
20
10
become frustrated by the perceived difficulty of the task. You can reduce student
frustration and anxiety by making your expectations clear. For example, when our goal
Continuing
Case
Chapter 02 – Investing and Financing Decisions and the Accounting System
MINI-EXERCISES
M2–1.
F
(1) Continuity assumption
H
(2) Historical cost principle
G
(3) Credits
A
(4) Assets
I
(5) Account
M2–2.
D
(1) Journal entry
C
(2) A = L + SE, and Debits = Credits
A
(3) Assets = Liabilities + Stockholders’ Equity
I
(4) Liabilities
B
(5) Income statement, balance sheet, statement of stockholders’ equity, and
statement of cash flows
M2–3.
Chapter 02 – Investing and Financing Decisions and the Accounting System
M2–6.
Debit
Credit
Assets
Increases
Decreases
Liabilities
Decreases
Increases
Stockholders’ equity
Decreases
Increases
M2–7.
Increase
Decrease
Assets
Debit
Credit
Liabilities
Credit
Debit
Stockholders’ equity
Credit
Debit
M2–8.
a.
Cash (+A) ………………………………………………………………….
30,000
Notes Payable (+L) ………………………………………………..
30,000
b.
Notes Receivable (+A) …………………………………………………
10,000
Cash (−A) ……………………………………………………………..
10,000
c.
Cash (+A) ………………………………………………………………….
500
Common Stock (+SE) …………………………………………….
Additional Paid-in Capital (+SE)………………………….
10
490
d.
Equipment (+A) ………………………………………………………….
15,000
Cash (−A) ……………………………………………………………..
5,000
Notes Payable (+L) ………………………………………………..
10,000
e.
Retained Earnings (−SE) ……………………………………………..
2,000
Cash (−A) ……………………………………………………………..
2,000
Chapter 02 – Investing and Financing Decisions and the Accounting System
M2–11.
Dennen Inc.
Balance Sheet
At January 31, 2015
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 14,400
Notes payable
$ 43,000
Notes receivable
11,000
Total current liabilities
43,000
Total current assets
25,400
Stockholders’ Equity
Common stock
1,010
Equipment
30,100
Additional paid-in capital
Retained earnings
3,490
8,000
Total stockholders’ equity
12,500
Total Assets
$55,500
Total Liabilities &
Stockholders’ Equity
$55,500
M2–12.
Current Ratio =
Current Assets
÷
Current Liabilities
2011
280,000
÷
155,000
=
1.806
2012
270,000
÷
250,000
=
1.080
M2–13.
(a) F
(b) I
(c) F
(d) I
(e) F
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E2–1.
E
(1) Transaction
F
(2) Continuity assumption
B
(3) Balance sheet
P
(4) Liabilities
K
(5) Assets = Liabilities + Stockholders’ Equity
M
(6) Notes payable
L
(7) Common stock
H
(8) Historical cost principle
I
(9) Account
Q
(10) Dual effects
O
(11) Retained earnings
A
(12) Current assets
C
(13) Separate-entity assumption
X
(14) Par value
D
(15) Debits
J
(16) Accounts receivable
N
(17) Stable monetary unit assumption
W
(18) Faithful representation
T
(19) Relevance
R
(20) Stockholders’ Equity
Chapter 02 – Investing and Financing Decisions and the Accounting System
E2–2.
Req. 1
Received
Given
(a)
Cash (A)
Common stock and Additional
paid-in capital (SE)
(b)
Equipment (A) [or Delivery truck]
Cash (A)
(c)
No exchange transaction
—
(d)
Equipment (A) [or Computer equipment]
Notes payable (L)
(e)
Building (A) [or Construction in progress]
Cash (A)
(f)
Intangibles (A) [or Copyright]
Cash (A)
(g)
Retained earnings (SE) [Received a reduction
in the amount available for payment to
stockholders]
Cash (A)
(h)
Land (A)
Cash (A)
(i)
Intangibles (A) [or Patents]
Cash (A) and Notes payable (L)
(j)
No exchange transaction
—
(k)
Investments (A)
Cash (A)
(l)
Cash (A)
Short-term notes payable (L)
(m)
Note payable (L) [Received a reduction in its
promise to pay]
Cash (A)
Chapter 02 – Investing and Financing Decisions and the Accounting System
E2–5.
Req. 1
Event
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Buildings
Equipment
Cash
+172
+270
– 432
Notes payable
(long-term)
+10
b.
Cash
+345
Common stock
Additional paid-in
capital
+200
+145
c.
Dividends
payable
+145
Retained
earnings
–145
d.
Short-term
Investments
Cash
+7,616
-7,616
e.
No effects
f.
Cash
Short-term
Investments
+4,313
–4,313
Chapter 02 – Investing and Financing Decisions and the Accounting System
E2–7.
Req. 1
a.
Buildings (+A) …………………………………………………………….
172
Equipment (+A) …………………………………………………………
270
Cash (−A) ……………………………………………………………..
432
Notes payable (+L) ………………………………………………..
10
b.
Cash (+A) ………………………………………………………………….
345
Common stock (+SE) ……………………………………………..
Additional paid-in capital (+SE)
200
145
c.
Retained earnings (−SE) ……………………………………………..
145
Dividends payable (+L) …………………………………………..
145
d.
Short-term investments (+A) …………………………..…………….
7,616
Cash (−A) ……………………………………………………………..
7,616
e. No journal entry required.
f.
Cash (+A) ………………………………………………………………….
4,313
Short-term investments (−A) ……………………………………
4,313
Req. 2
The separate-entity assumption states that transactions of the business are separate
from transactions of the owners. Since transaction (e) occurs between the owners and
others in the stock market, there is no effect on the business.
Chapter 02 – Investing and Financing Decisions and the Accounting System
E2–9.
Req. 1
Transaction
Brief Explanation
1
Issued common stock to shareholders for $15,000 cash. (FastTrack
Sports Inc. is a corporation because it issues stock. Par value of the
stock was $0.10 per share because $1,500 common stock amount
divided by 15,000 shares issued equals $0.10 per share).
2
Borrowed $75,000 cash and signed a short-term note for this amount.
3
Purchased land for $16,000; paid $5,000 cash and gave an $11,000
short-term note payable for the balance.
4
Loaned $4,000 cash; borrower signed a short-term note for this amount
(Note Receivable).
5
Purchased store fixtures for $9,500 cash.
6
Purchased land for $4,000, paid for by signing a short-term note.
Req. 2
FastTrack Sports Inc.
Balance Sheet
At January 7, 2014
Assets
Liabilities
Current Assets
Current Liabilities
Cash
$71,500
Note payable
$90,000
Note receivable
4,000
Total Current Liabilities
90,000
Total Current Assets
75,500
Stockholders’ Equity
Store fixtures
Land
9,500
20,000
Common stock
Additional paid-in capital
1,500
13,500
Total Stockholders’ Equity
15,000
Total Assets
$105,000
Total Liabilities &
Stockholders’ Equity
$105,000
Chapter 02 – Investing and Financing Decisions and the Accounting System
E2–11.
a.
Cash (+A) ………………………………………………………………….
70,000
Common stock (+SE) ……………………………………………..
Additional paid-in capital…………………………………..
5,000
65,000
b.
No transaction has occurred because there has been no
exchange or receipt of cash, goods, or services.
c.
Cash (+A) ………………………………………………………………….
18,000
Notes payable (long-term) (+L) ………………………………..
18,000
d.
Equipment (+A) ………………………………………………………….
11,000
Cash (−A) ……………………………………………………………..
1,500
Notes payable (short-term) (+L) ……………………………….
9,500
e.
Notes receivable (short-term) (+A) ………………………………..
2,000
Cash (−A) ……………………………………………………………..
2,000
f.
Store fixtures (+A) ………………………………………………………
15,000
Cash (−A) ……………………………………………………………..
15,000
