Chapter 03 – Operating Decisions and the Accounting System
Chapter 3
Operating Decisions and
the Accounting System
ANSWERS TO QUESTIONS
3. Net Income = Revenues + Gains – Expenses – Losses.
Each element is defined as follows:
Revenues — increases in assets or settlements of liabilities from ongoing
4. Both revenues and gains are inflows of net assets. However, revenues occur in
the normal course of operations, whereas gains occur from transactions
5. Accrual accounting requires recording revenues when earned and recording
expenses when incurred, regardless of the timing of cash receipts or payments.
Chapter 03 – Operating Decisions and the Accounting System
Financial Accounting, 8/e 3-3
13. Total net profit margin ratio is calculated as Net Income Net Sales (or
its sales and expenses effectively.
ANSWERS TO MULTIPLE CHOICE
Chapter 03 – Operating Decisions and the Accounting System
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Alternate
Problems
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
5
1
10
1
20
1
30
1
20
2
6
2
15
2
20
2
30
2
30
3
6
3
20
3
25
3
35
3
30
4
5
4
20
4
40
4
40
4
20
5
5
5
20
5
20
5
20
5
30
6
5
6
20
6
40
6
40
6
60
7
5
7
18
7
30
7
30
8
6
8
20
8
*
9
6
9
20
10
6
10
20
11
6
11
20
12
15
13
20
14
20
1
30
15
20
16
20
17
20
18
10
students often benefit from the extra effort, we find that some 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 is to sharpen research
Continuing
Case
Chapter 03 – Operating Decisions and the Accounting System
MINI-EXERCISES
M3–1.
TERM
G
(1) Losses
C
(2) Expense matching principle
F
(3) Revenues
E
(4) Time period assumption
B
(5) Operating cycle
M3–2.
Cash Basis
Income Statement
Accrual Basis
Income Statement
Revenues:
Cash sales
Customer deposits
$8,000
5,000
Revenues:
Sales to customers
$18,000
Expenses:
Inventory purchases
Wages paid
1,000
900
Expenses:
Cost of sales
Wages expense
Utilities expense
9,000
900
300
Net Income
$11,100
Net Income
$7,800
Chapter 03 – Operating Decisions and the Accounting System
M3–5.
a.
Cash (+A) ………………………………………………………………….
15,000
Games Revenue (+R, +SE) …………………………………….
15,000
b.
Cash (+A) ………………………………………………………………….
3,000
Accounts Receivable (+A) ……………………………………………
5,000
Sales Revenue (+R, +SE) ……………………………………….
8,000
c.
Cash (+A) ………………………………………………………………….
4,000
Accounts Receivable (−A) ……………………………………….
4,000
d.
Cash (+A) ………………………………………………………………….
2,500
Unearned Revenue (+L) ………………………………………….
2,500
M3–6.
e.
Cost of Goods Sold (+E, −SE) ………………………………………
6,800
Inventory (−A) ………………………………………………………..
6,800
f.
Accounts Payable (–L) ………………………………………………..
800
Cash (−A) ……………………………………………………………..
800
g.
Wages Expense (+E, −SE) …………………………………………..
3,500
Cash (−A) ……………………………………………………………..
3,500
h.
Insurance Expense (+E, −SE) ………………………………………
500
Prepaid Expenses (+A) ………………………………………………..
1,00
Cash (−A) ……………………………………………………………..
1,500
i.
Repairs Expense (+E, −SE) ………………………………………….
700
Cash (−A) ……………………………………………………………..
700
j.
Utilities Expense (+E, −SE) ………………………………………….
900
Accounts Payable (+L) ……………………………………………
900
Chapter 03 – Operating Decisions and the Accounting System
M3–9.
Craig’s Bowling, Inc.
Income Statement
For the Month of July 2014
Revenues:
Games revenue
$15,000
Sales revenue
8,000
Total revenues
23,000
Expenses:
Cost of goods sold
6,800
Utilities expense
900
Wages expense
3,500
Insurance expense
500
Repairs expense
700
Total expenses
12,400
Net income
$ 10,600
M3–10.
Transaction
O, I, or F Activity (or No
Effect) on Statement of
Cash Flows
Direction and Amount
of Effect
a.
O
+15,000
b.
O
+3,000
c.
O
+4,000
d.
O
+2,500
e.
NE
NE
f.
O
–800
g.
O
-3,500
h.
O
-1,500
i.
O
–700
j.
NE
NE
Chapter 03 – Operating Decisions and the Accounting System
EXERCISES
E3–1.
TERM
K
(1) Expenses
E
(2) Gains
G
(3) Revenue realization principle
I
(4) Cash basis accounting
M
(5) Unearned revenue
C
(6) Operating cycle
D
(7) Accrual basis accounting
F
(8) Prepaid expenses
J
(9) Revenues − Expenses = Net Income
L
(10) Ending Retained Earnings =
Beginning Retained Earnings + Net Income − Dividends Declared
E3–2.
Req. 1
Cash Basis
Income Statement
Accrual Basis
Income Statement
Revenues:
Cash sales
Customer deposits
$500,000
70,000
Revenues:
Sales to customers
$750,000
Expenses:
Inventory purchases
Wages paid
Utilities paid
90,000
180,300
17,200
Expenses:
Cost of sales
Wages expense
Utilities expense
485,000
184,000
19,130
Net Income
$282,500
Net Income
$61,870
Req. 2
Accrual basis financial statements provide more useful information to external users.
Financial statements created under cash basis accounting normally postpone (e.g.,
$250,000 credit sales) or accelerate (e.g., $70,000 customer deposits) recognition of
revenues and expenses long before or after goods and services are produced and
delivered (until cash is received or paid). They also do not necessarily reflect all assets
or liabilities of a company on a particular date.
Chapter 03 – Operating Decisions and the Accounting System
E3–4.
Activity
Expense Account
Affected
Amount of Expense
Incurred in January
a.
Utilities expense
$3,800
b.
Advertising expense
$321
(= $963 x 1 month/3 months) incurred in January.
The remainder is a prepaid expense (A) that is
not incurred until February and March.
c.
Salaries expense
$201,500 incurred in January.
The remaining half was incurred in December.
d.
None
Expense will be recorded when the related
revenue has been earned.
e.
None
Expense will be recorded in the future when the
related revenue has been earned.
f.
Cost of goods sold
$47,500
(= 500 books x $95 per book cost)
g.
None
December expense paid in January.
h.
Commission expense
$15,560
i.
None
Expense will be recorded as depreciation (used
portion of asset’s cost) over the equipment’s
useful life.
j.
Supplies expense
$4,700
(= $3,500 + $2,600 – $1,400)
k.
Wages expense
$120
(= 8 hours x $15 per hour)
l.
Insurance expense
$400
(= $4,800 ÷ 12 months)
The remaining amount is Prepaid Insurance.
m.
Repairs expense
$600
n.
Utilities Expense
$154
o.
Consulting Expense
$2,034
p.
None
December expense paid in January.
q.
Cost of goods sold
$4500
(= 450 shirts x $10 per shirt)
3-14 Solutions Manual
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
E3–5.
Balance Sheet
Income Statement
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
a.
+
NE
+
NE
NE
NE
b.
+
+
NE
NE
NE
NE
c.
–
NE
–
NE
NE
NE
d.
+
NE
+
+
NE
+
e.
NE
+
–
NE
+
–
f.
+
NE
+
+
NE
+
g.
–
–
NE
NE
NE
NE
h.
–
NE
–
NE
+
–
i.
+
NE
+
+
NE
+
j.
+
+
NE
NE
NE
NE
k.
+ / –
NE
NE
NE
NE
NE
l.
–
NE
–
NE
+ *
–
m.
–
+
–
NE
+
–
n.
–
NE
–
NE
+
–
Transaction (k) results in an increase in an asset (cash) and a decrease in an asset
(accounts receivable). Therefore, there is no net effect on assets.
* A loss affects net income negatively, as do expenses.
Chapter 03 – Operating Decisions and the Accounting System
E3–6.
Balance Sheet
Income Statement
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
a.
+14,083
NE
+14,083
NE
NE
NE
b.
+878,418
+878,418
NE
NE
NE
NE
c.
+11,000
+11,000
NE
NE
NE
NE
d.
+1,409,068
–852,316
NE
NE
+1,409,068
–852,316
+1,409,068
NE
NE
+852,316
+1,409,068
–852,316
e.
–22,737
NE
–22,737
NE
NE
NE
f.
+/–19,397
NE
NE
NE
NE
NE
g.
–289,901
+96,633
–386,534
NE
+386,534
–386,534
h.
+370
NE
+370
+370
NE
+370
i.
NE
+1,395
–1,395
NE
+1,395
–1,395
E3–7.
(in thousands)
a.
Plant and equipment (+A) ……………………………………………
636
Cash (−A) ……………………………………………………………..
636
Debits equal credits. Assets increase and decrease by the same amount.
b.
Cash (+A) …………………………………………………………………
181
Short-term notes payable (+L) …………………………………
181
Debits equal credits. Assets and liabilities increase by the same amount.
c.
Cash (+A) …………………………………………………………………
Accounts receivable (+A) …………………………………………….
10,765
28,558
Service revenue (+R, +SE) ………………………………………
39,323
Debits equal credits. Revenue increases retained earnings (part of
stockholders’ equity). Stockholders’ equity and assets increase by the same
amount.
Chapter 03 – Operating Decisions and the Accounting System
E3–8.
Req. 1
a. Cash (+A) …………………………………………………………. 2,300,000
Short-term note payable (+L) ……………………… 2,300,000
Debits equal credits. Assets and liabilities increase by the same amount.
b. Equipment (+A) …………………………………………………. 98,000
Ski shop sales revenue (+R, +SE) ………………. 800
Debits equal credits. Revenue increases retained earnings (a part of
stockholders’ equity). Stockholders’ equity and assets increase by the same
amount.
(2) Cost of goods sold (+E, −SE) ………………………….. 500
Chapter 03 – Operating Decisions and the Accounting System
E3–9.
2/1
Rent expense (+E, −SE) ……………………………………………..
275
Cash (−A) ………………………………………………………..
275
2/2
Fuel expense (+E, −SE) …………………………..…………………
490
Accounts payable (+L) ……………………………………….
490
2/4
Cash (+A) …………………………………………………………………
820
Unearned revenue (+L) ……………………………………..
820
2/7
Cash (+A) …………………………………………………………………
910
Transport revenue (+R, +SE) ……………………………..
910
2/10
Advertising expense (+E, −SE) …………………………………….
175
Cash (−A) ………………………………………………………..
175
2/14
Wages payable (−L) …………………………………………………..
2,300
Cash (−A) ………………………………………………………..
2,300
2/18
Cash (+A) …………………………………………………………………
Accounts receivable (+A) …………………………………………….
1,600
2,200
Transport revenue (+R, +SE) ……………………………..
3,800
2/25
Parts supplies (+A) …………………………………………………….
2,550
Accounts payable (+L) ……………………………………….
2,550
2/27
Retained earnings (−SE) …………………………………………….
200
Dividends payable (+L) ………………………………………
200