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Financial & Managerial Accounting, 5th Edition
44
Problem 1-8B (60 minutes) Parts 1 and 2
Assets
=
Liabilities
+
Equity
Date
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Office
Equipment
+
Excavating
Equipment
=
Accounts
Payable
+
Common
Stock
-
Dividends
+
Reve-
nues
-
Expen-
ses
July
1
+ $80,000
=
+
$80,000
2
- 700
-
$700
Bal.
79,300
=
80,000
-
700
3
- 1,000
+
$5,000
+ $4,000
Bal.
78,300
+
5,000
=
4,000
+
80,000
-
700
6
- 600
+
$ 600
Bal.
77,700
+
600
+
5,000
=
4,000
+
80,000
-
700
8
+ 7,600
+
$7,600
Bal.
85,300
+
600
+
5,000
=
4,000
+
80,000
+
7,600
-
700
10
+
$2,300
+ 2,300
Bal.
85,300
+
600
+
2,300
+
5,000
=
6,300
+
80,000
+
7,600
-
700
15
+
$8,200
+
8,200
Bal.
85,300
+
8,200
+
600
+
2,300
+
5,000
=
6,300
+
80,000
+
15,800
-
700
17
+
3,100
+ 3,100
Bal.
85,300
+
8,200
+
3,700
+
2,300
+
5,000
=
9,400
+
80,000
+
15,800
-
700
23
- 2,300
- 2,300
Bal.
83,000
+
8,200
+
3,700
+
2,300
+
5,000
=
7,100
+
80,000
+
15,800
-
700
25
+
5,000
+
5,000
Bal.
83,000
+
13,200
+
3,700
+
2,300
+
5,000
=
7,100
+
80,000
+
20,800
-
700
28
+ 8,200
-
8,200
Bal.
91,200
+
5,000
+
3,700
+
2,300
+
5,000
=
7,100
+
80,000
+
20,800
-
700
30
- 1,560
-
1,560
Bal.
89,640
+
5,000
+
3,700
+
2,300
+
5,000
=
7,100
+
80,000
+
20,800
-
2,260
31
- 295
-
295
Bal.
89,345
+
5,000
+
3,700
+
2,300
+
5,000
=
7,100
+
80,000
+
20,800
-
2,555
31
- 1,800
-
$1,800
Bal.
$87,545
+
$ 5,000
+
$3,700
+
$2,300
+
$5,000
=
$7,100
+
$80,000
-
$1,800
+
$20,800
-
$2,555
Problem 1-8B (Continued)
Part 3
Truro Excavating Co.
Income Statement
For Month Ended July 31
Revenues
Excavating fees earned ............................ $20,800
Expenses
Truro Excavating Co.
Statement of Retained Earnings
For Month Ended July 31
Retained earnings, July 1 .......................... $ 0
Truro Excavating Co.
Balance Sheet
July 31
Assets Liabilities
Cash .................................... $ 87,545 Accounts payable .............. $ 7,100
Accounts receivable ......... 5,000
Office supplies ................... 3,700 Equity
Office equipment ............... 2,300 Common stock ................... 80,000
Excavating equipment ...... 5,000 Retained earnings .............. 16,445 _
Total assets ........................ $103,545 Total liabilities & equity ..... $103,545
Problem 1-8B (Concluded)
Part 3—continued
Truro Excavating Co.
Statement of Cash Flows
For Month Ended July 31
Cash flows from operating activities
Cash received from customers1 .................................
$15,800
Cash paid for rent ........................................................
(700)
Cash paid for supplies ................................................
(600)
Cash paid for utilities ..................................................
(295)
Cash paid to employees ..............................................
(1,560)
Net cash provided by operating activities .................
$12,645
Cash flows from investing activities
Purchase of excavating equipment ............................
(1,000)
Purchase of office equipment .....................................
(2,300)
Net cash used by investing activities ........................
(3,300)
Cash flows from financing activities
Investments by stockholder .......................................
80,000
Dividends to stockholder ............................................
(1,800)
Net cash provided by financing activities .................
78,200
Net increase in cash ....................................................
$87,545
Cash balance, July 1 ....................................................
0
Cash balance, July 31 ..................................................
$87,545
1$7,600 + $8,200 = $15,800
Part 4
If the $5,000 purchase on July 3 had been acquired through an additional
Problem 1-9B (60 minutes) Parts 1 and 2
Assets
=
Liabilities
+
Equity
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Office
Equipment
+
Building
=
Accounts
Payable
+
Notes
Payable
+
Common
Stock
-
Dividends
+
Reve-
nues
-
Expen-
ses
a.
+ $90,000
+
$20,000
+
$110,000
b.
- 40,000
+
$150,000
+
$110,000
Bal.
50,000
+
20,000
+
150,000
=
110,000
+
110,000
c.
- 25,000
+
25,000
Bal.
25,000
+
45,000
+
150,000
=
110,000
+
110,000
d.
+
$1,200
+
1,700
+ $2,900
Bal.
25,000
1,200
+
46,700
+
150,000
=
2,900
+
110,000
+
110,000
e.
- 750
-
$ 750
Bal.
24,250
+
1,200
+
46,700
+
150,000
=
2,900
+
110,000
+
110,000
-
750
f.
+
$2,800
+
$2,800
Bal.
24,250
+
2,800
+
1,200
+
46,700
+
150,000
=
2,900
+
110,000
+
110,000
+
2,800
-
750
g.
+ 4,000
+
4,000
Bal.
28,250
+
2,800
+
1,200
+
46,700
+
150,000
=
2,900
+
110,000
+
110,000
+
6,800
-
750
h.
- 11,500
-
$11,500
Bal.
16,750
+
2,800
+
1,200
+
46,700
+
150,000
=
2,900
+
110,000
+
110,000
-
11,500
+
6,800
-
750
i.
+ 1,800
-
1,800
Bal.
18,550
+
1,000
+
1,200
+
46,700
+
150,000
=
2,900
+
110,000
+
110,000
-
11,500
+
6,800
-
750
j.
- 700
- 700
Bal.
17,850
+
1,000
+
1,200
+
46,700
+
150,000
=
2,200
+
110,000
+
110,000
-
11,500
+
6,800
-
750
k.
- 2,500
-
2,500
Bal.
$15,350
+
$1,000
+
$1,200
+
$46,700
+
$150,000
=
$2,200
+
$110,000
+
$110,000
-
$11,500
+
$6,800
-
$3,250
Financial & Managerial Accounting, 5th Edition
48
Problem 1-9B (Concluded)
Part 3
Nico’s Solutions’ net income = $6,800 - $3,250 = $3,550
Problem 1-10B (15 minutes)
1. Return on assets equals net income divided by average total assets.
a. AT&T return: $4,184/ $269,868 = 0.016 or 1.6%
b. Verizon return: $10,198/ $225,233 = 0.045 or 4.5%
appear more appealing as an investment. We would also look for
consumer trends, market expansion, competition, and product
development and promotion plans.
Problem 1-11B (15 minutes)
1. Return on assets is net income divided by average total assets (the
2. Return on assets does not seem satisfactory for the risk involved in
3. We know that revenues less expenses equal net income. Taking the
4. We know from the accounting equation that the total of liabilities plus
equity (financing) must equal the total for assets (investing). Since
average total assets are $3,000,000, we know the average total of
liabilities plus equity (financing) must equal $3,000,000.
Problem 1-12BA (20 minutes)
Case 1. Return: No return is generated.
Risk: Moderate Risk. By hiding money at home a person
risks loss by theft or fire. Also such a strategy
might result in a loss of purchasing power in the
Problem 1-13BB (15 minutes)
1.
O
5.
O
2.
F
6.
F
3.
I
7.
O
4.
O
8.
O
Problem 1-14BB (15 minutes)
I. Financing Activities
A. Owner financing—owner invests in the company
Serial Problem — SP 1 Success Systems
Assets
=
Liabilities
+
Equity
Date
Cash
+
Accounts
Receivable
+
Computer
Supplies
+
Computer
System
+
Office
Equipment
=
Accounts
Payable
+
Common
Stock
-
Dividends
+
Revenues
-
Expenses
Oct.
1
+$55,000
$20,000
+
$8,000
+
$83,000
3
+
$1,420
+ $1,420
Bal.
55,000
+
1,420
+
20,000
+
8,000
=
1,420
+
83,000
6
+
$4,800
+
$ 4,800
Bal.
55,000
+
4,800
+
1,420
+
20,000
+
8,000
=
1,420
+
83,000
+
4,800
8
- 1,420
- 1,420
Bal.
53,580
+
4,800
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
4,800
12
+
1,400
+
1,400
Bal.
53,580
+
6,200
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
6,200
15
+ 4,800
-
4,800
Bal.
58,380
+
1,400
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
6,200
17
- 805
-
$ 805
Bal.
57,575
+
1,400
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
6,200
-
805
20
- 1,940
-
1,940
Bal.
55,635
+
1,400
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
6,200
-
2,745
22
+ 1,400
-
1,400
Bal.
57,035
+
0
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
6,200
-
2,745
28
+
5,208
+
5,208
Bal.
57,035
+
5,208
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
11,408
-
2,745
31
- 875
-
875
Bal.
56,160
+
5,208
+
1,420
+
20,000
+
8,000
=
0
+
83,000
+
11,408
-
3,620
31
- 3,600
-
$3,600
Bal.
$52,560
+
$5,208
+
$1,420
+
$20,000
+
$8,000
=
$ 0
+
$83,000
-
$3,600
+
$11,408
-
$3,620
Financial & Managerial Accounting, 5th Edition
52
Reporting in Action — BTN 1-1
1. An organization’s total assets are equal to its total liabilities plus total
000s).
2. Return on assets is net income divided by the average total assets
3. We know that net income equals total revenues less total expenses. For
4. Polaris’s return on assets of 19.9% is good given that it slightly exceeds
its competitors’ return on assets of approximately 18% for this period.
5. Answer depends on the current annual report information obtained.
Comparative Analysis — BTN 1-2
($ thousands)
Polaris
Arctic Cat
1. Total assets =
Liabilities + Equity
$1,228,024
$272,906
2. Return on assets
$227,575
$13,007
[($1,061,647 + $1,228,024)/2]
[($246,084 + $272,906)/2]
19.9%
5.0%
3. Revenues-Expenses
= Net income
$2,656,949-
Expenses =$227,575
$464,651 -
Expenses =$13,007
→ Expenses =
Expenses = $2,429,374
Expenses = $451,644
4. Analysis of return on assets: Polaris’s 19.9% return is good given the
5. Analysis conclusions: Arctic Cat’s return is undesirable (poor when
compared to the industry norm); Polaris’s return is arguably very good.
Ethics Challenge — BTN 1-3
1. There are several parties affected. They include the users of financial
2. A major factor in the value of an auditor's report is the auditor's
independence. If an auditor accepted a fee that increases when the client’s
3. Thorne should not accept this fee arrangement. To avoid compromising
the auditor's independence, Thorne should reject it. (Further, the AICPA
4. Ethical considerations guiding this decision include the potential harm to
affected parties by allowing such a fee arrangement to exist. The
unacceptable nature of such a fee arrangement guards the profession
against unethical actions that could undermine its real and perceived value
to society.
Communicating in Practice — BTN 1-4
1. Deciding whether Twitter is a good loan risk can be difficult because the
planned expansion is risky if customer demand does not meet
expectations. As a loan officer in this situation you would want information
2. How the company is organized is important to a loan officer. If it is a pro-
proprietorship (and not LLC), the personal assets of the owners are
available to repay the loan. In this case, a loan officer will want information
Financial & Managerial Accounting, 5th Edition
54
Taking It to the Net — BTN 1-5
(in thousands)
2011
2010
2009
2008
2007
Revenues ............
$31,128
$28,437
$28,539
$31,878
$31,573
Net income ..........
3,911
3,580
3,719
4,961
4,745
1. Rocky Mountain Chocolate Factory’s (RMCF) revenues grew slightly
2. Net income performance for RMCF improved from 2007 to 2008 and from
2010 to 2011. Its net income grew nearly 5% and 9.5%, respectively.
However, 2009 and 2010 net income declined 25% and 4%, respectively..
Although 2009 and 2010 were recessionary times, management must
continue to work to sustain and increase profitability levels.
Teamwork in Action — BTN 1-6
Suggestions for forming support/learning teams are in the Instructor’s
forming these teams. The IRM also includes other administrative materials
helpful in creating an active learning environment for studying accounting.
[Note: Instructors often have students use the copy function in e-mail to keep
them advised of meeting times and other important team activities. This also
encourages students to use and explore additional features of e-mail.]
Entrepreneurial Decision — BTN 1-7
1. (a) AccounTwit’s total amount of liabilities and equity consists of the
bank loan and the owner investments. Specifically:
2. Return on assets = $80,250 / $750,000 = 0.107 = 10.7%
AccounTwit’s 10.7% return slightly exceeds its competitors’ average
return of 10%. Assuming AccounTwit can continue to earn 10.7% or more,
the owners should consider further investment in the new company.
Hitting the Road — BTN 1-8
Check each student’s report for the following content:
1. (a) Identification of the form of business organization for the business
2. Identification of the reasons why the owner(s) chose this particular
form of business organization.
3. Identification of advantages or disadvantages of the form of business
organization chosen.
Financial & Managerial Accounting, 5th Edition
56
Global Decision — BTN 1-9
1. KTM’s net income and revenues figures are computed using Euros,
which is the currency of Europe. In contrast, Polaris and Arctic Cat
compute their financial figures in U.S. dollars. Accordingly, one must
2. KTM’s return on assets ratio eliminates differences in monetary units
(between Euros and dollars). Consequently, we need not focus on
differences in Euros and dollars for ratio comparisons provided we are
