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1-12
Totals
14,600
+
=
5,000
+
9,000
+
600
4,000
–
2,900
=
1,100
14,600 NC
2016
Assets
=
Liab.
+
Equity
Rev.
Ä
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. bal.
14,600
+
=
5,000
+
9,000
+
600
–
=
1
4,500
+
=
+
4,500
+
–
=
4,500 FA
2
(2,000)
+
=
(2,000)
+
+
–
=
(2,000) FA
3
6,700
+
=
+
+
6,700
6,700
–
=
6,700
6,700 OA
4
(4,300)
+
=
+
+
(4,300)
–
4,300
=
(4,300)
(4,300) OA
5
(700)
+
=
+
+
(700)
–
=
(700) FA
Totals
18,800
+
=
3,000
+
13,500
+
2,300
6,700
–
4,300
=
2,400
4,200 NC
2017
Assets
=
Liab.
+
Equity
Rev.
Ä
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Ear.
Beg. bal.
18,800
+
=
3,000
+
13,500
+
2,300
–
=
1
2,500
+
=
+
2,500
+
–
=
2,500 FA
2
1,000
+
=
1,000
+
+
–
=
1,000 FA
3
7,400
+
+
+
+
7,400
7,400
–
=
7,400
7,400 OA
4
(7,900)
+
+
+
+
(7,900)
–
7,900
=
(7,900)
(7,900) OA
5
(300)
+
+
+
+
(300)
–
=
(300) FA
6
(9,000)
+
9,000
+
+
+
–
=
(9,000) IA
Totals
12,500
+
9,000
+
4,000
+
16,000
+
1,500
7,400
–
7,900
=
(500)
(6,300) NC
1-13
Demonstration Problem 1-1 Solution, part b. Financial Statements
Computer Services Company
Income Statements
For the Years Ended December 31,
2015
2016
2017
Services revenue
$4,000
$6,700
$7,400
Operating expenses
(2,900)
(4,300)
(7,900)
Net income (loss)
$1,100
$2,400
$( 500)
Statements of Changes in Stockholders’ Equity
Beginning common stock
$ 0
$ 9,000
$13,500
Plus: Common stock issued
9,000
4,500
2,500
Ending common stock
9,000
13,500
16,000
Beginning retained earnings
0
600
2,300
Plus: Net income (loss)
1,100
2,400
(500)
Less: Dividends
(500)
(700)
(300)
Ending retained earnings
600
2,300
1,500
Total stockholders’ equity
$9,600
$15,800
$17,500
Balance Sheets at December 31
Assets
Cash
$14,600
$18,800
$12,500
Land
0
0
9,000
Total assets
$14,600
$18,800
$21,500
Liabilities
$ 5,000
$ 3,000
$ 4,000
Stockholders’ equity
Common stock
9,000
13,500
16,000
Retained earnings
600
2,300
1,500
Total stockholders’ equity
9,600
15,800
17,500
Total liabilities and stockholders’ equity
$14,600
$18,800
$21,500
Statements of Cash Flows
Cash flows from operating activities
Cash inflows from revenue
$ 4,000
$ 6,700
$ 7,400
Cash outflows for operating expenses
(2,900)
(4,300)
(7,900)
Net cash flow from operating activities
1,100
2,400
(500)
Cash flow from investing activities
Cash outflow for land
(9,000)
Cash flows from financing activities
Cash inflows from borrowing
5,000
1,000
Cash outflows to reduce debt
(2,000)
Cash inflows from stock issues
9,000
4,500
2,500
Cash outflows for dividends
(500)
(700)
(300)
Net cash flows from financing activities
13,500
1,800
3,200
Net change in cash
14,600
4,200
(6,300)
Beginning cash balance
0
14,600
18,800
1-14
Ending cash balance
$14,600
$18,800
$12,500
1-15
Demonstration Problem 1-1 Workpaper, part a.
2015
Assets
=
Liab.
+
Equity
Rev.
Ä
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Earn.
Beg. bal.
+
=
+
+
–
=
1
+
=
+
+
–
=
2
+
=
+
+
–
=
3
+
=
+
+
–
=
4
+
=
+
+
–
=
5
+
=
+
+
–
=
Totals
14,600
+
=
5,000
+
9,000
+
600
4,000
–
2,900
=
1,100
14,600 NC
2016
Assets
=
Liab.
+
Equity
Rev.
Ä
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Earn.
Beg. bal.
14,600
+
=
5,000
+
9,000
+
600
–
=
1
+
=
+
+
–
=
2
+
=
+
+
–
=
3
+
=
+
+
–
=
4
+
=
+
+
–
=
5
+
=
+
+
–
=
Totals
18,800
+
=
3,000
+
13,500
+
2,300
6,700
–
4,300
=
2,400
4,200 NC
2017
Assets
=
Liab.
+
Equity
Rev.
Ä
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Land
=
Liab.
+
C. Stk.
+
Ret. Earn.
Beg. bal.
18,800
+
=
3,000
+
13,500
+
2,300
–
=
1
+
=
+
+
–
=
2
+
=
+
+
–
=
3
+
+
+
+
–
=
4
+
+
+
+
–
=
5
+
+
+
+
–
=
6
+
+
+
+
–
=
Totals
12,500
+
9,000
+
4,000
+
16,000
+
1,500
7,400
–
7,900
=
(500)
(6,300) NC
1-16
Demonstration Problem 1-1 Workpaper, part b.
Computer Services Company
Income Statements
For the Years Ended December 31,
2015
2016
2017
Services revenue
Operating expenses
Net income (loss)
$1,100
$2,400
$( 500)
Statements of Changes in Stockholders’ Equity
Beginning common stock
$ 0
$ 9,000
$13,500
Plus: Common stock issued
Ending common stock
Beginning retained earnings
0
600
2,300
Plus: Net income (loss)
Less: Dividends
Ending retained earnings
Total stockholders’ equity
$9,600
$15,800
$17,500
Balance Sheets at December 31
Assets
Cash
Land
Total assets
Liabilities
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$14,600
$18,800
$21,500
Statements of Cash Flows
Cash flows from operating activities
Cash inflows from revenue
$ 4,000
$ 6,700
$ 7,400
Cash outflows for operating expenses
Net cash flow from operating activities
Cash flow from investing activities
Cash outflow for land
Cash flows from financing activities
Cash inflows from borrowing
Cash outflows to reduce debt
Cash inflows from stock issues
Cash outflows for dividends
Net cash flows from financing activities
Net change in cash
14,600
4,200
Beginning cash balance
18,800
Ending cash balance
$12,500
1-17
Quiz Questions for Chapter 1
The following information pertains to the next three questions. At the beginning of 2016, X Company had
assets of $600, liabilities of $300, and common stock of $100. During 2016 the company earned revenue of
$750, incurred expenses of $500, and paid dividends of $100. All transactions were cash transactions.
1. The amount of net income reported on the 2016 income statement would be
a. $250.
b. $300.
c. $150.
d. none of the above.
2. The amount of retained earnings reported on the December 31, 2016 balance sheet would be
a. $150.
b. $250.
c. $200.
d. none of the above.
3. The amount of total assets reported on the December 31, 2016 balance sheet would be
a. $750.
b. $600.
c. $850.
d. $100.
4. P Company borrowed $400 cash from Citizens Bank. As a result of this transaction, P Company’s
a. assets would decrease by $400.
b. liabilities would increase by $400.
c. equity would increase by $400.
d. expenses would increase by $400.
The following information pertains to the next two questions. ABC Company borrowed $600 from Sun
Bank and used $500 of this money to purchase land.
5. XYZ's total assets would increase by
a. $1,100.
b. $ 500.
c. $ 600.
d. $ 100.
6. The statement of cash flows for ABC Company would report
a. an inflow of $600 from operating activities.
b. an outflow of $500 for investing activities.
c. an inflow of $500 from financing activities.
d. an outflow of $500 for operating activities.
7. Select the correct statement from the choices listed below.
a. Revenue is a decrease in assets resulting from operating activities.
b. Dividends are decreases in assets incurred for the purpose of producing revenue.
c. A company incurs expenses when it borrows money.
d. Net income is an increase in equity resulting primarily from operating activities.
8. If revenue exceeds expenses, there are no dividends, and total liabilities remain unchanged, then
a. Equity will decrease.
b. Net assets will increase.
c. Total assets will decrease.
d. a and c.
1-18
The following information pertains to the next two questions. Company A paid $20,000 cash to buy land
from Company B.
9. Select the statement that is true.
a. Total liabilities of Company B would increase.
b. Total assets of Company A would be unaffected.
c. Company A's equity would increase.
d. None of the above.
10. Select the statement that is true.
a. Company A would have a cash outflow from investing activities.
b. Company B would have a cash inflow from investing activities.
c. The balance in the cash account on Company A's books would decrease, while the balance in the
cash account on Company B’s books would increase.
d. All of the above statements are true.
11. Revenue is less than expenses. If liabilities and common stock were unchanged, then
a. cash flows from operating activities were greater than cash flows from investing activities.
b. retained earnings were less than net income during the period.
c. total assets decreased.
d. the company must have purchased assets with cash.
12. Among other items, the balance sheet of XYZ Company reports retained earnings of $60,000 and total
liabilities of $40,000. Based on this information alone, you would know that
a. XYZ Company has enough cash to pay off its liabilities.
b. since the company’s inception, the total amount of net income exceeded total dividends by at least
$60,000.
c. net assets of the company amounted to $20,000.
d. total assets amounted to $100,000.
13. The Southern Company began the accounting period with assets of $600, common stock of $200, and
retained earnings of $250. During the period, revenue was $300, expenses were $200, and dividends
were $50. Common stock was unchanged during the accounting period. Liabilities decreased by $100.
Based on this information,
a. net income amounted to $50.
b. total assets at the end of the period were $550.
c. retained earnings at the end of the period amounted to $350.
d. liabilities at the end of the period amounted to $100.
14. Which of the following illustrates how a cash dividend affects a company’s financial statements?
Balance Sheet
Income Statement
Statement of
Assets
=
Liab.
+
Equity
Rev.
Ä
Exp.
=
Net Inc.
Cash Flow
a.
+
n/a
+
n/a
n/a
n/a
+ FA
b.
+
n/a
+
+
n/a
+
+ OA
c.
-
n/a
-
n/a
+
-
- OA
d.
-
n/a
-
n/a
n/a
n/a
- FA
15. Which of the following accounts is not closed at the end of the accounting period?
a. Retained Earnings
b. Operating Expenses
c. Dividends
d. Service Revenue
1-19
Quiz Answers
Question
Answer
1
A
2
D
3
A
4
B
5
C
6
B
7
D
8
B
9
B
10
D
11
C
12
D
13
B
14
D
15
A
1-20
Summary Outline of a Lesson Plan for Chapter 1
(Horizontal Financial Statements Model Approach)
I. Use the problem-based learning case, “Ask Me Anything,” to introduce financial
statements to students.
II. Create a collaborative experience where students reach consensus on their ques-
tions. Have each group select a spokesperson.
III. Briefly introduce the basic financial statements. Introduce: 1) the balance sheet,
2) the income statement, and 3) the statement of cash flows.
IV. Use student input to demonstrate the usefulness of financial statement infor-
mation. Ask the group spokespersons to share the questions their group would like
to have the accountant answer. Identify information that would or would not appear
in financial statements. Students should learn to name three financial statements and
to describe the specific elements that appear in each statement.
V. Distribute copies of the Self-Study Review problem at the end of Chapter 1 in the
text. Point out that the answers to this problem are included in the text and narrated
slides are also available online for future reference. Encourage students to listen and
work along with you as you work this problem, rather than focus on taking notes re-
garding what you say.
VI. Create a horizontal financial statements model for the Self-Study Review Prob-
lem. Show students how to record business events directly into a set of financial
statements.
VII. This is an excellent time to mention the closing process without getting into pro-
cedural detail. You can point out that the revenue and expense entries actually rep-
resent the combination of 2 entries – the transaction entry and the closing entry.
VIII. Actively involve the students in learning. After working through the Self-Study
Review Problem, consider having the students work the Demonstration Problem 1-1
in this chapter of the Instructor’s Manual.
1-21
Summary Outline of a Lesson Plan for Chapter 1
(Equation Approach)
I. Distribute copies of the Self-Study Review Problem.
II. Define assets.
III. Introduce the accounting equation.
Assets
=
Claims
IV. Use the self –study review problem to introduce new terms and to elaborate on
the interrelationships represented by the accounting equation. Discuss the differ-
ence between asset source transactions, asset use transactions, and asset exchange
transactions.
V. Introduce the horizontal financial statements model.
VI. Actively involve the students in learning.
After explaining the Self-Study Review problem, ask the students to complete Exer-
cise 1-11B or the Demonstration problem (at the end of this section of the instructor’s
manual) on their own. You will probably need to make copies of whichever item you
ask them to complete, since not all students will bring their text to class every day.
VII. Introduce financial statements.
VIII. Fill in the gaps. You will find additional terms and concepts covered in the text but
not in the teaching notes.
IX. Enrichment. Appendix B contains excerpts from the Target 10-K report. It helps
students to see a ‘real world’ example of what is being covered in class. While they
are not yet ready to fully analyze financial statements as complex as those presented
in this Appendix, you can point out the fact that the 4 financial statements are includ-
ed here and discuss how they tie to the example that has been covered in class.
