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ANSWERS TO QUESTIONS – CHAPTER 1
1. Stakeholders are the parties that use accounting information.
Stakeholders with a direct interest include owners, managers,
creditors, suppliers, and employees. These individuals are directly
2. Accounting provides information that is useful in making decisions
5. The market for business resources involves three distinct
6. Financial Resource: money
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Physical Resource: natural resources (i.e. land, forests, mine ore,
7. Investors expect a distribution of the business’s profits as a return
8. Financial accounting provides information that is useful to external
9. Not-for-profit or nonprofit entities provide goods or services to
consumers for humanitarian or special reasons rather than to earn a
10. The U.S. rules of accounting information measurement are called
11. Careers in public accounting consist of providing services to the
general public from a public accounting firm. These services include
12. Items reported on the financial statements are organized into
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1. Assets
2. Liabilities
13. Assets, the economic resources of a business, are used to produce
14. The assets of a business belong to that business entity and there
15. Creditors are individuals and/or institutions that have provided
goods or services to the business which are not yet paid for, or
17. The accounting equation is:
ASSETS – LIABILITIES = STOCKHOLDERS’ EQUITY
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of the assets remaining after the creditors’ claims have been
18. The owners ultimately bear the risk and collect the rewards
19. A double-entry bookkeeping system is one in which every
transaction affects at least two accounts. A transaction can affect
20. The right side of the accounting equation can be viewed as either
sources of assets or as obligations and commitment of the business.
21. The business could make a distribution of $1,000, but only $800 of it
22. Capital is acquired from owners by issuing stock to them. When
23. Assets that are acquired by issuing common stock are the result of
24. Revenue increases the asset side of the accounting equation and
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25. The three primary sources of assets are (1) investments by owners
26. Retained earnings are a result of a business retaining its earned
27. Distributions to owners, called dividends, decrease the asset side of
28. Dividends and expenses are similar in that they both decrease assets
and affect the accounting equation in the same way (i.e. reduction of
29. (1) Income Statement – measures the difference between the asset
(2) Statement of Changes in Stockholders’ Equity – explains the
(3) Balance Sheet – lists the assets and the corresponding claims
(4) Statement of Cash Flows – explains how a company obtained
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32. A business liquidation is when a business ceases to operate, its
33. The going concern doctrine assumes that a business is able to
34. The matching concept is the practice of pairing revenues and
35. (1) Operating activities – explain the cash generated from revenue
(2) Investing activities – include cash received or spent by the
(3) Financing activities – include cash inflows and outflows from
36. Asset accounts are arranged on the balance sheet in accordance
37. Articulation refers to the interrelationships among the various
38. Temporary accounts are used to capture information for a single
accounting period. The balances in temporary accounts are
39. The information in the temporary accounts is transferred to Retained
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accounts have a zero balance at the beginning of the next
accounting period. This allows the income statement and statement
40. The historical cost concept requires that most assets be reported at
the amount paid for them regardless of their increase or decrease in
41. An asset source transaction results in an increase in an asset
account and an increase in one of the claims accounts; i.e.,
investments by owners (equity), borrowing funds from creditors
42. While the contents of annual reports vary from company to
company, all annual reports contain:
43. U.S. GAAP, generally accepted accounting principles in the United
States, are the measurement rules established by the (FASB)
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Reporting Standards (IFRS) are issued by the International
Accounting Standards Board and are an attempt to set a common
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SOLUTIONS TO EXERCISES – SERIES A – CHAPTER 1
EXERCISE 1-1A
The three participants in the free business market are:
Note to instructor:
The memo should discuss the fact that the resource owners are those
who own resources that are desired by others, either in the original form
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EXERCISE 1-2A
a. The most common designation held by a public accountant is the
CPA license. CPA stands for certified public accountant. CPAs are
licensed by the state government (or other jurisdiction). Although
EXERCISE 1-3A
Entities mentioned:
Effect on cash:
Vicky Hill Recovery Fund
Increase for cash contributions, $21,000
Decrease for payment of advertising, $1,000
Decrease payment for hospital bills, $12,000
Decrease for donation to National Cyclist
Fund, $8,000
Karen White
Decrease by contribution, $1,000
WKUX
Increase for advertising revenue, $1,000
Public
Decrease for contributions, $20,000
Mercy Hospital
Increase for medical care, $12,000
National Cyclist Fund
Increase for donation, $8,000
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EXERCISE 1-4A
Accounting Equation
Stockholders’ Equity
Common
Retained
Company
Assets
=
Liabilities
+
Stock
+
Earnings
A
123,000
=
25,000
+
48,000
+
50,000
B
40,000
=
3,000
+
7,000
+
30,000
C
75,000
=
15,000
+
18,000
+
42,000
D
125,000
=
45,000
+
60,000
+
20,000
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EXERCISE 1-5A
Olive Enterprises
Accounting Equation
Stockholders’
Equity
Event
Number
Assets
=
Liabilities
+
Common
Stock
Retained
Earnings
1.
I
NA
I
NA
2.
D
D
NA
NA
3.
I/D
NA
NA
NA
4.
I
NA
NA
I
5.
D
NA
NA
D
6.
D
NA
NA
D
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EXERCISE 1-6A
a.
Better Corporation
Accounting Equation for 2016
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Land
=
Notes
Payable
+
Com.
Stock
+
Retained
Earnings
Acct.
Title/RE
Bal. 1/1/16
10,000
20,000
12,000
7,000
11,000
1. Pur. Land
(5,000)
5,000
NA
NA
NA
NA
2. Issued stk.
25,000
NA
NA
25,000
NA
NA
3. Provide Svc.
75,000
NA
NA
NA
75,000
Revenue
4. Paid Exp.
(42,000)
NA
NA
NA
(42,000)
Oper. Exp.
5. Loan
10,000
NA
10,000
NA
NA
NA
6. Paid Div.
(5,000)
NA
NA
NA
(5,000)
Dividend
7. Land Value
NA
NA
NA
NA
NA
NA
Totals
68,000
+
25,000
=
22,000
+
32,000
+
39,000
b.
Assets
=
Liabilities
+
Stockholders’ Equity
$93,000
=
$22,000
+
$71,000
c. The balances of total assets, liabilities and stockholders’ equity will
be the same on January 1, 2017 as the balances on December 31,
2016. (See b. above)
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EXERCISE 1-7A
a.
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
=
Note Payable
+
Common Stock
+
Retained Earnings
195,000
=
90,500
+
84,500
+
?
Retained Earnings = $195,000 – $90,500 – $84,500 = $20,000
b. & c.
Moss Company
Effect of 2017 Transactions on the Accounting Equation
Assets
=
Liabilities
+
Stockholders’ Equity
Notes
Common
Retained
Event
Cash
=
Payable
+
Stock
+
Earnings
Beginning Balances
195,000
90,500
84,500
20,000
1. Earned Revenue
42,000
NA
NA
42,000
2. Paid expenses
(24,000)
NA
NA
(24,000)
3. Paid dividend
(3,000)
NA
NA
(3,000)
Ending Balance
210,000
=
90,500
+
84,500
+
35,000
d.
Cash
=
Note Payable
+
Common Stock
+
Retained Earnings
210,000
=
90,500
+
84,500
+
35,000
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EXERCISE 1-8A
a.
Assets
=
Liabilities
+
Stockholders’ Equity
Computers
Notes Payable
Operating Expenses
Building
Utilities Payable
Utilities Expense
Cash
Accounts Payable
Gasoline Expense
Land
Rent Revenue
Trucks
Retained Earnings
Supplies
Salaries Expense
Office Furniture
Common Stock
Service Revenue
Interest Expense
Dividends
Supplies Expense
b. No. The type of accounts will vary depending on the type of business.
Some businesses will have only one revenue account; other businesses
may have more than one type of revenue account. For instance, a
business may have both service revenue and interest revenue. Also,
the expense accounts that a business has are somewhat dependent on
the type and complexity of the business. For instance, if a business
owns its own building, it will not have rent expense. If a business does
not have employees, it will not have salaries expense. The level of
detail desired by the business will also affect the type of revenue and
expense accounts that a business will have.
EXERCISE 1-9A
a.
Cash
+
Land
=
Creditors
+
Stockholders’
Equity
$16,000
$ 0
$6,000
$10,000
(12,000)
12,000
NA
NA
Bal.
$ 4,000
+
$12,000
=
$6,000
+
$10,000
b. Creditor’s Claim ÷ Total Assets = Percent of Total
d. The company cannot repay the debt. The company owes the creditors
$6,000 but has only $4,000 cash. Note there is no actual money in the
Cash
+
Land
Creditors
+
Stockholders’
Equity
Bal.
$ 4,000
+
$12,000
=
+
62.5%
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EXERCISE 1-10A
a. While the exact amount of any available dividend cannot be
determined, the maximum dividend that could be paid based on the
information would be $1,800, the amount of retained earnings. In
order to determine the amount that could be paid, the balance of the
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EXERCISE 1-11A
a. Creditors receive their $400 interest payment, leaving $1,200 ($1,600 –
$400) to be paid as dividends to the investors.
c. Creditors receive their $400 interest payment. No dividend is paid to
above.
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EXERCISE 1-12A
a. Investors put assets into the company with the expectation of sharing
profits. Creditors lend assets to the company with the expectation of
repayment of the principal plus interest on the loan.
b.
Harris Company
Accounting Equation
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Acquired assets
$7,800
$3,600
$4,200
Earned income
2,000
2,000
Balance
$9,800
$3,600
$6,200
Since creditors are owed $3,600 and there are sufficient funds to pay
them; the creditors will receive the $3,600 that they are owed. Since
the investors own the business, they are entitled to the profits earned
by the business. The investors will receive $6,200 (their original $4,200
investment plus the $2,000 of profit).
c.
Harris Company
Accounting Equation
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Acquired assets
$7,800
$3,600
$4,200
Incurred loss
(2,000)
(2,000)
Balance
$5,800
$3,600
$2,200
Since creditors are owed $3,600 and there are sufficient funds to pay
them; the creditors will receive the $3,600 that they are owed. Since
the investors own the business, they suffer the losses earned by the
business. The investors will receive $2,200 (their original $4,200
investment minus the $2,000 loss).