2-12
ANSWERS TO QUESTIONS – CHAPTER 2
1. Accrual accounting attempts to record the effects of accounting
2. Recognition is the act of recording an event in the financial
3. Deferral is the recognition of revenue or expenses in a period after
4. If cash is collected in advance for services, the revenue is recognized
5. An asset source transaction increases assets and increases either
6. The issue of common stock, which is capital acquired from owners,
7. The recognition of revenue on account increases the corresponding
8. Asset Source Transaction Effect on Accounting Equation
Issue of Common Stock Increases Assets, Increases
2-13
9. Revenue is recognized under accrual accounting when a revenue-
10. The collection of cash for accounts receivable is an asset exchange
transaction. Only the asset side of the accounting equation is
11. If cash is collected in advance for services, a liability is created
equation.
12. Unearned revenue is cash that has been collected for services that
13. The recognition of expenses affects the accounting equation by
14. A claims exchange transaction is one where the claims of creditors
15. Cash payments to creditors are asset use transactions. These
16. Expenses are recognized under accrual accounting at the time the
17. Net cash flows from operations on the cash flow statement may be
2-14
payment of cash that is reported on the cash flow statement.
18. The income statement reflects the change in net assets associated
with operating a business, as shown by revenues and expenses.
19. Net income increases stockholders’ claims on business assets by
20. A cost can be either an asset or an expense. If the item acquired has
21. A cost is held in the asset account until the item is used to produce
revenue. When the revenue is generated, the asset is converted into
22. Supplies used during the accounting period are recognized in a
single adjusting entry at the end of the period. The amount of
23. An expense is a decrease in assets or an increase in liabilities that
24. Revenue is an increase in assets or a decrease in liabilities that
25. The purpose of the statement of changes in stockholders’ equity is
2-15
that an entity’s equity increased and decreased as a result of its
26. The purpose of the balance sheet is to provide information about an
entity’s assets, liabilities, and stockholders’ equity and their
27. The balance sheet is dated as of a specific date because it shows
information about an entity’s assets, liabilities, and stockholders’
28. Assets are listed on the balance sheet in accordance with their
cash).
29. The statement of cash flows explains the change in cash from one
used.
30. An adjusting entry is an entry that updates account balances prior to
preparation of the financial statements. The entry means that there
31. Temporary accounts (revenue, expense and dividends) are closed at
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32. Period costs are costs that are recognized in an accounting period.
33. Salary of the tax return preparer could be directly matched with the
34. The four stages of the accounting cycle: Record transactions; adjust
the accounts; prepare statements; and close the temporary accounts.
The adjustment and closing processes have been added to the cycle
2-17
EXERCISE 2-1A
Holloway Company
Effect of Events on the 2016 Accounting Equation
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Accounts
Rec.
=
+
Common
Stock
+
Retained
Earnings
Earned Revenue
+
18,000
=
+
+
18,000
Coll. Acct. Rec.
14,000
+
(14,000)
=
+
+
Ending Balance
14,000
+
4,000
=
-0-
+
-0-
+
18,000
f. Accounts Receivable: $18,000 – $14,000 = $4,000
g. $18,000 Net Income
h. $14,000 cash collected from accounts receivable.
i. $18,000
j. $18,000 of revenue was earned but only $14,000 of it was collected.
EXERCISE 2-2A
a.
Chung Corporation Accounting Equation – 2016
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
=
Salaries
Payable
+
Common
Stock
+
Retained
Earnings
Earned Rev.
8,000
8,000
Accrued Sal.
5,000
(5,000)
Ending Bal.
8,000
=
5,000
+
-0-
+
3,000
Assets
Cash
$8,000
Total Assets
Liabilities
Salaries Payable
$5,000
Total Liabilities
$3,000
Total Stockholders’ Equity
Computation of Net Income
Revenue
Less: Expenses
Net Income
2-19
EXERCISE 2-2A (cont.)
c.
Cash Flow from Operating Activities
Cash from Revenue
$8,000
Net Cash Flow from Operating Act.
$8,000
e. The salary expense is deducted from revenue in computing net
income, but it has not been paid. This creates a difference of $5,000
between net income and cash flow from operating activities. The
revenue is the same because it has been earned and collected.
2-20
EXERCISE 2-3A
a.
Milea, Inc.
General Ledger Accounts
For the Year Ended December 31, 2016
Assets
=
Liabilities
+
Stockholders’
Equity
Event
Cash
Acct.
Rec.
=
Salaries
Pay.
+
Common
Stock
Retained
Earn.
Acct. Title
for RE
1.
20,000
20,000
2.
56,000
56,000
Revenue
3.
(2,500)
(2,500)
Util. Exp.
4.
48,000
(48,000)
5.
10,000
(10,000)
Sal. Exp.
6.
(2,000)
(2,000)
Dividends
Totals
63,500
8,000
=
10,000
+
20,000
41,500
b.
Milea, Inc.
Income Statement
For the Year Ended December 31, 2016
Revenue
$56,000
Expenses
Utility Expense
$ 2,500
Salaries Expense
10,000
Total Expenses
(12,500)
Net Income
$43,500
EXERCISE 2-3A b. (cont.)
Milea, Inc.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2016
Beginning Common Stock
$ -0-
Plus: Common Stock Issued
20,000
Ending Common Stock
$20,000
Beginning Retained Earnings
-0-
Plus: Net Income
$43,500
Less: Dividends
(2,000)
Ending Retained Earnings
41,500
Total Stockholders’ Equity
$61,500
Assets
Cash
$63,500
Accounts Receivable
Total Assets
$71,500
Liabilities
Salaries Payable
$10,000
Stockholders’ Equity
Common Stock
41,500
Total Stockholders’ Equity
61,500
2-22
2-23
EXERCISE 2-3A b. (cont.)
Milea, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flow From Operating Activities
Cash Received from Customers
$48,000
Cash Paid for Expenses
(2,500)
Net Cash Flow from Operating Act.
$45,500
Cash Flow From Investing Activities
-0-
Cash Flow From Financing Activities
Issue of Stock
$20,000
Paid Dividends
(2,000)
Net Cash Flow from Financing Act.
18,000
Net Change in Cash
63,500
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$63,500
2-24
EXERCISE 2-4A
a.
Lewis and Harper
Statements Model for 2016
Balance Sheet
Income Statement
Statement of
Assets
=
Liabilities
+
S. Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flows
Event
No.
Cash
+
Accts.
Rec.
=
Acct.
Payable
+
Sal.
Pay.
+
Retained
Earn.
1.
NA
70,000
NA
NA
70,000
70,000
NA
70,000
NA
2.
40,000
NA
NA
NA
40,000
40,000
NA
40,000
40,000 OA
3.
NA
NA
36,000
NA
(36,000)
NA
36,000
(36,000)
NA
4.
(10,000)
NA
NA
NA
(10,000)
NA
10,000
(10,000)
(10,000) OA
5.
47,000
(47,000)
NA
NA
NA
NA
NA
NA
47,000 OA
6.
(16,000)
NA
(16,000)
NA
NA
NA
NA
NA
(16,000) OA
7.
(8,000)
NA
NA
NA
(8,000)
NA
NA
NA
(8,000) FA
8.
NA
NA
NA
2,000
(2,000)
NA
2,000
(2,000)
NA
Totals
53,000
+
23,000
=
20,000
+
2,000
+
54,000
110,000
−
48,000
=
62,000
53,000 NC
b. Total assets: $76,000 ($53,000 + $23,000)
2-25
EXERCISE 2-5A
a.
Computation of Net Income
Revenue recognized on account
$68,000
Less accrued salary expense
(46,000)
Net Income
$22,000
b.
Computation of Cash Collected from Accounts Receivable
Beginning balance of Accounts Receivable
$ 4,000
Add revenue recognized on account
68,000
Less ending balance of Accounts Receivable
(4,500)
Cash collected from accounts receivable
$67,500
Computation of Cash Paid for Salaries Expense
Beginning balance of Salaries Payable
$ 2,600
Add accrued salary expense recognized
46,000
Less ending balance of Salaries Payable
(1,500)
Cash paid for Salary Expense
$47,100
Cash Flow from Operating Activities
Cash from Accounts Receivable
$67,500
Cash paid for Salary Expense
(47,100)
Net Cash Flow from Operating Act.
$20,400
2-26
EXERCISE 2-6A
a. & c.
Event
Revenue
Expense
Statement of
Cash Flows
1.
NA
NA
$40,000 FA
2.
$82,000
NA
NA
3.
NA
NA
(6,000) FA
4.
NA
NA
76,000 OA
5.
NA
$53,000
(53,000) OA
6.
19,000
NA
19,000 OA
7.
NA
3,500
NA
b.
Computation of Net Income
Revenue
$101,000
Less: Expenses
(56,500)
Net Income
$44,500
d.
Cash Flow from Operating Activities
Cash from Revenue
$95,000
Cash paid for expenses
(53,000)
Net Cash Flow from Operating Act.
$42,000
2-27
EXERCISE 2-7A
Lee, Inc.
Effect of Events on the General Ledger Accounts
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
Accounts
Receivable
Land
=
Accounts
Payable
+
Com.
Stock
+
Retained
Earnings
1. Sales on
Account
62,000
62,000
2. Coll.
Accts. Rec.
51,000
(51,000)
3. Incurred
Expense
39,000
(39,000)
4. Pd. Acc.
Pay.
(31,000)
(31,000)
5. Issue of
Stock
40,000
40,000
6. Purchase
Land
(21,000)
21,000
Totals
39,000
11,000
21,000
=
8,000
+
40,000
+
23,000
a. Revenue recognized, $62,000.
2-28
2-29
EXERCISE 2-8A
a. Retained Earnings is a permanent account, meaning that one period’s
ending balance becomes the next period’s beginning balance. Since
the December 31, 2016 balance is $42,100, this was also the balance on
January 1, 2017.
EXERCISE 2-9A
a.
Permanent Accounts
Cash
Notes Payable
Land
Common Stock
Retained Earnings
Accounts
Revenue
Expenses
Dividends
Beginning Retained Earnings
Add: Revenue
Less: Expenses
Less: Dividends
Ending Retained Earnings
Computation of Net Income
Revenue
Less: Expenses
Net Income
2-31
EXERCISE 2-10A
a.
Account
Classification
1. Other Operating Expense
T
2. Utilities Expense
T
3. Retained Earnings
P
4. Salaries Expense
T
5. Land
P
6. Dividends
T
7. Service Revenue
T
8. Cash
P
9. Salaries Payable
P
10. Common Stock
P
b. The four stages of the accounting cycle are:
recording transactions
adjusting the accounts