Exercise 1-4 (10 minutes)
1.
A
4.
F
2.
G
5.
C
3.
D
Exercise 1-5 (20 minutes)
a. Auditing professionals with competing audit clients are likely to learn
valuable information about each client that the other clients would
benefit from knowing. In this situation the auditor must take care to
maintain the confidential nature of information about each client.
Exercise 1-6 (10 minutes)
a.
(C) Corporation
e.
(C) Corporation
b.
(P) Partnership
f.
(SP) Sole proprietorship
c.
(SP) Sole proprietorship
(C) Corporation
d.
(SP) Sole proprietorship
Exercise 1-7 (10 minutes)
Code
Description
Principle/Assumption
H.
1.
A company reports details behind financial
statements that would impact users’ decisions.
Full disclosure
principle
G
2.
Financial statements reflect the assumption that
the business continues operating.
Going-concern
assumption
F
3.
A company records the expenses incurred to
generate the revenues reported.
Matching (expense
recognition) principle
A
4.
Derived from long-used and generally accepted
accounting practices.
General accounting
principle
C
5.
Every business is accounted for separately from
its owner or owners.
Business entity
assumption
D
6.
Revenue is recorded only when the earnings
process is complete.
Revenue recognition
principle
E
7.
Usually created by a pronouncement from an
authoritative body.
Specific accounting
principle
B
8.
Information is based on actual costs incurred in
transactions.
Cost principle
Exercise 1-8 (10 minutes)
Assets
=
Liabilities
+
Equity
(a) $ 65,000
=
$ 20,000
+
$45,000
$100,000
=
$ 34,000
+
(b) $66,000
$154,000
=
(c) $114,000
+
$40,000
Exercise 1-9 (20 minutes)
a. Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
$300,000
=
?
+
$100,000
Thus, beginning liabilities = $200,000
Assets
=
Liabilities
+
Equity
$300,000 + $80,000
=
$200,000+ $50,000
+
?
$380,000
=
$250,000
+
?
Thus, ending equity = $130,000
Alternative approach to solving part (b):
Assets($80,000) = Liabilities($50,000) + Equity(?)
where “” refers to “change in.”
Thus: Ending Equity = $100,000 + $30,000 = $130,000
b. Using the accounting equation:
Assets
=
Liabilities
+
Equity
$123,000
=
$47,000
+
?
Thus, equity = $76,000
c. Using the accounting equation at the end of the year:
Assets
=
Liabilities
+
Equity
$190,000
=
$70,000 – $5,000
+
?
$190,000
=
$65,000
+
$125,000
Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
$190,000 – $60,000
=
$70,000
+
?
$130,000
=
$70,000
+
?
Thus: Beginning Equity = $60,000
Exercise 1-10 (20 minutes)
a. Started the business with the owner investing $40,000 cash in the
Exercise 1-11 (20 minutes)
a. Purchased land for $4,000 cash.
Exercise 1-12 (15 minutes)
Examples of transactions that fit each case include:
a. Cash dividends (or some other asset) paid to the owner of the
business; OR, the business incurs an expense paid in cash.
Exercise 1-13 (30 minutes)
Assets
=
Liabilities
+
Equity
Cash
+
Accounts
Receivable
+
Equip-
ment
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Revenues
–
Expenses
a.
+$60,000
+
$15,000
=
+
$75,000
b.
– 1,500
______
______
–
$1,500
Bal.
58,500
+
+
15,000
=
+
75,000
–
1,500
c.
_______
+
10,000
+$10,000
______
_____
Bal.
58,500
+
+
25,000
=
10,000
+
75,000
–
1,500
d.
+ 2,500
______
_______
______
+
$2,500
_____
Bal.
61,000
+
+
25,000
=
10,000
+
75,000
+
2,500
–
1,500
e.
_______
+
$8,000
______
_______
______
+
8,000
_____
Bal.
61,000
+
8,000
+
25,000
=
10,000
+
75,000
+
10,500
–
1,500
f.
– 6,000
______
+
6,000
_______
______
_____
_____
Bal.
55,000
+
8,000
+
31,000
=
10,000
+
75,000
+
10,500
–
1,500
g.
– 3,000
______
______
_______
______
_____
–
3,000
Bal.
52,000
+
8,000
+
31,000
=
10,000
+
75,000
+
10,500
–
4,500
h.
+ 5,000
–
5,000
______
_______
______
_____
_____
Bal.
57,000
+
3,000
+
31,000
=
10,000
+
75,000
+
10,500
–
4,500
i.
– 10,000
______
______
– 10,000
______
_____
_____
Bal.
47,000
+
3,000
+
31,000
=
0
+
75,000
+
10,500
–
4,500
j.
– 1,000
______
______
_______
______
–
$1,000
_____
_____
Bal.
$46,000
+
$3,000
+
$31,000
=
$ 0
+
$75,000
–
$1,000
+
$10,500
–
$4,500
Exercise 1-14 (10 minutes)
Return on assets
=
Net income / Average total assets
=
$40,000 / [($200,000 + $300,000)/2]
=
16%
Interpretation: Swiss Group’s return on assets of 16% is markedly above
the 10% return of its competitors. Accordingly, its performance is
assessed as superior to its competitors.
Exercise 1-15 (15 minutes)
ERNST CONSULTING
Income Statement
For Month Ended October 31
Revenues
Consulting fees earned …………………. $14,000
Expenses
Exercise 1-16 (15 minutes)
ERNST CONSULTING
Statement of Retained Earnings
For Month Ended October 31
Retained earnings, October 1 ……………………. $ 0
Exercise 1-17 (15 minutes)
ERNST CONSULTING
Balance Sheet
October 31
Assets Liabilities
Cash …………………………. $11,360 Accounts payable …………….. $ 8,500
* For the computation of this amount see Exercise 1-16.
Exercise 1-18 (15 minutes)
ERNST CONSULTING
Statement of Cash Flows
For Month Ended October 31
Cash flows from operating activities
Cash received from customers …………………………………….. $ 0
Cash paid to employees1 ……………………………………………… (1,750)
Cash paid for rent …………………………..……………………………. (3,550)
Cash paid for telephone expenses ……………………………….. (760)
1$7,000 Salaries Expense – $5,250 still owed = $1,750 paid to employees.
Exercise 1-19 (10 minutes)
I 1. Cash purchase of equipment O 5. Cash paid on an account payable
Exercise 1-20 (20 minutes)
BMW GROUP
Income Statement
For Year Ended December 31, 2013
Exercise 1-21B (10 minutes)
a. Financing*
b. Financing
PROBLEM SET A
Problem 1-1A (25 minutes)
Balance Sheet
Income
Statement
Statement of
Cash Flows
Transaction
Total
Assets
Total
Liab.
Total
Equity
Net
Income
Operating
Activities
Investing
Activities
Financing
Activities
1
Owner invests
cash for its stock
+
+
+
2
Receives cash
for services
provided
+
+
+
+
3
Pays cash for
employee wages
–
–
–
–
4
Incurs legal
costs on credit
+
–
–
5
Borrows cash
by signing L-T
note payable
+
+
+
6
Buys office
equipment
for cash
+/–
–
7
Buys land by
signing note
payable
+
+
8
Provides ser-
vices on credit
+
+
+
9
Pays cash
dividend
–
–
–
10
Collects cash
on receivable
from (8)
+/–
+
Problem 1-2A (40 minutes)
Part 1
Company A
(a) Equity on December 31, 2014:
Assets …………………………………………………. $55,000
Liabilities …………………………..………………… (24,500)
Equity………………………………………………….. $30,500