Chapter 1
The Financial Statements
Short Exercises
(5 min.) S 1-1
Computed amounts in boxes
Total Assets
=
Total Liabilities
+
Stockholders’ Equity
a.
$660,000
=
$320,000
+
$340,000
b.
135,000
=
57,000
+
78,000
c.
401,000
=
45,000
+
356,000
(5 min.) S 1-2
1-2 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
(10 min.) S 1-3
a. Corporation, limited partners of a Limited-liability partnership (LLP)
and Limited-liability company (LLC). If any of these businesses
fails and cannot pay its liabilities, creditors cannot force the
owners to pay the business’s debts from the owners’ personal
assets. Creditors can go after the general partner of a limited
liability partnership.
b. Proprietorship. There is a single owner of the business, so the
owner is answerable to no other owner.
c. Partnership. If the partnership fails and cannot pay its liabilities,
creditors can force the partners to pay the business’s debts from
their personal assets. A partnership affords more protection for
creditors than a proprietorship because there are two or more
owners to share this liability.
(5 min.) S 1-4
1. The entity assumption applies.
(5-10 min.) S 1-5
(5 min.) S 1-6
1. Liabilities = Assets − Owners’ Equity
(5 min.) S 1-7
1. Assets are the economic resources of a business that are expected
to produce a benefit in the future.
(5-10 min.) S 1-8
Accounts receivable A
g.
Notes payable L
Long-term debt L
h.
Retained earnings S
Merchandise inventory A
i.
Land A
Prepaid expenses A
j.
Accounts payable L
Accrued expenses payable L
k.
Common stock S
Equipment A
l.
Supplies A
(5 min.) S 1-9
1. Revenues and expenses
2. Net income (or net loss)
(5 min.) S 1-10
O’Malley Services, Inc.
Income Statement
Year Ended December 31, 2014
(millions)
Revenues ……………………………………………….
$398
Expenses ……………………………………………….
167
Net income ……………………………………………..
$231
(5 min.) S 1-11
Canada Corp.
Statement of Retained Earnings
Year Ended December 31, 2014
(millions)
Retained earnings, December 31, 2013 …….
$286
Add: Net income ($482 − $337) ……………….
145
Less: Dividends declared ………………………..
(59)
Retained earnings, December 31, 2014 …….
$372
(10 min.) S 1-12
Washington Products
Balance Sheet
December 31, 2014
ASSETS
Current assets:
Cash ………………………………………………………………………
$ 21,000
Receivables ……………………………………………………………
17,600
Inventory ……………………………………………………………….
79,000
Total current assets ………………………………………………..
117,600
Equipment ……………………………………………………………..
185,000
Total assets ……………………………………………………………
$302,600
LIABILITIES
Current liabilities:
Accounts payable ………………………………………………
$ 25,000
Total current liabilities ……………………………………….
25,000
Long-term liabilities:
Long-term notes payable ……………………………………
169,000
Total liabilities ………………………………………………………..
194,000
STOCKHOLDERS’ EQUITY
Common stock ……………………………………………………….
30,500
Retained earnings …………………………………………………..
78,100*
Total stockholders’ equity ……………………………………….
108,600
Total liabilities and stockholders’ equity ………………….
$302,600
_____
*Computation of retained earnings:
Total assets ($302,600) − current liabilities ($25,000) − long-term notes
payable ($169,000) − common stock ($30,500) = $78,100
(10-15 min.) S 1-13
Guling Legal Services, Inc.
Statement of Cash Flows
Year Ended December 31, 2014
Cash flows from operating activities:
Net income …………………………………………………………
$ 75,000
Adjustments to reconcile net income to net cash
provided by operating activities .. …………………..
(8,000)
Net cash provided by operating activities …….
67,000
Cash flows from investing activities:
Purchases of equipment ………………..
$(29,000)
Net cash used for investing activities …………..
(29,000)
Cash flows from financing activities:
Payment of dividends …………………….
$(31,000)
Net cash used for financing activities …………..
(31,000)
Net increase in cash ………………………………………………..
7,000
Cash balance, December 31, 2013 …………………………...
15,000
Cash balance, December 31, 2014 …………………………...
$ 22,000
(10 min.) S 1-14
a. Accounts payable BS
b. Inventory BS
1-8 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
(15-20 min.) S 1-15
a. Paying large dividends will cause retained earnings to be low.
b. Heavy investing activity and paying off debts can result in a cash
shortage even if net income has been high.
c. The single best source of cash for a business is operating activities.
This source of cash is best because it results from the core
operations of the business. Operating activities should be the main
Exercises
(10-15 min.) E 1-16A
Amounts in billions; (computed amounts in boxes)
Stockholders’
Assets
=
Liabilities
+
Equity
Beautiful Florals
$83
$ 47
$36
Corner Groceries
26
7
19
State Bank
33
11
22
Corner Groceries appears to have the strongest financial position
(10-15 min.) E 1-17A
Req. 1
(Amounts in millions)
Assets
=
Liabilities
+
Stockholders’
Equity
$180
$105
300
280
110
Total
$590
=
$385
+
$205
Req. 2
Resources
to work with
Req. 3 Amount
owed to
creditors
Req. 4 Actually
owned by company
stockholders
(10-20 min.) E 1-18A
Situation
1
2
3
(Millions)
Total stockholders’ equity,
January 31, 2014 ($52 − $14) ……………….
$38
$38
$38
Add: Issuances of stock ………………………….
7
-0-
29
Net income …………………………………………
8*
20*
-0-
Less: Dividends declared ………………………..
-0-
(5)
(8)
Net loss ……………………………………………..
-0-
-0-
(6)*
Total stockholders’ equity,
January 31, 2015 ($76 − $23) ……………….
$53
$53
$53
_____
*Must solve for these amounts.
(10-15 min.) E 1-19A
a. Income statement
b. Statement of retained earnings, Statement of cash flows
c. Balance sheet, Statement of cash flows
d. Balance sheet
(10-20 min.) E 1-20A
Alan Sanders Realty Company
Balance Sheet
July 31, 2014
(Amounts in millions)
ASSETS
LIABILITIES
Cash
$ 1.8
Current liabilities
$ 2.1
Receivables
0.6
Long-term liabilities
102.2
Investment assets
135.6
Total liabilities
104.3
Property and equipment, net
1.9
STOCKHOLDERS’
EQUITY
Other assets
10.7
Common stock
21.8
Retained earnings
24.5*
Total stockholders’ equity
46.3
Total assets
$150.6
Total liabilities and
stockholders’ equity
$150.6
_____
*Computation of retained earnings:
Total assets ($150.6) − Total liabilities ($104.3) − Common stock
($21.8) = $24.5
(15-25 min.) E 1-21A
Req. 1
Alan Sanders Realty Company
Income Statement
Year Ended July 31, 2014
(Amounts in millions)
Total revenue ……………………………………………………….
$37.8
Expenses:
Salary and other employee expenses ……………….
$13.8
Other expenses ……………………………………………….
5.3
Interest expense ……………………………………………..
0.6
Total expenses ………………………………………………..
19.7
Net income…………………………………………………………..
$18.1
Req. 2
The statement of retained earnings helps to compute dividends, as
follows:
Alan Sanders Realty Company
Statement of Retained Earnings
Year Ended July 31, 2014
(Amounts in millions)
Retained earnings, beginning of year ………………………………
$16.9
Add: Net income for the year (Req. 1) ………………………………
18.1
Subtotal
35.0
Less: Dividends declared ………………………………………………..
10.5
Retained earnings, end of year (from Exercise 1-20A) ………
$24.5
(15-20 min.) E 1-22A
Island Coffee Roasters Corp.
Income Statement
For the Month Ended August 31, 2015
Revenue:
Service revenue ……………………………………..
$272,600
Expenses:
Salary expense ……………………………………….
$78,500
Utilities expense …………………………..………..
5,200
Rent expense …………………………..…………….
1,800
Total expenses …………………………..…………..
85,500
Net income …………………………………………………
$187,100
Island Coffee Roasters Corp.
Statement of Retained Earnings
For the Month Ended August 31, 2015
Retained earnings, August 1, 2015 ……………………..
$ -0-
Add: Net income for the month …………………………..
187,100
Subtotal
187,100
Less: Dividends declared …………………………………..
(2,400)
Retained earnings, August 31, 2015 ……………………
$184,700
(15-20 min.) E 1-23A
Island Coffee Roasters Corp.
Balance Sheet
August 31, 2015
Assets
Liabilities
Cash ……………………….
$ 5,500
Accounts payable …………………
$ 8,800
Office supplies ………..
7,400
Equipment ………………
205,000
Stockholders’ Equity
Common stock ……………………..
24,400
Retained earnings …………………
184,700
Total stockholders’ equity
209,100
Total liabilities and
Total assets …………….
$217,900
stockholders’ equity …………..
$217,900
(15-20 min.) E 1-24A
Island Coffee Roasters Corp.
Statement of Cash Flows
For the Month Ended August 31, 2015
Cash flows from operating activities:
Net income ……………………………………………………
$187,100
Adjustments to reconcile net income to net
cash provided by operating activities ………….
1,400
Net cash provided by operating activities ….
188,500
Cash flows from investing activities:
Acquisition of equipment ………………………………
$(205,000)
Net cash used for investing activities ………..
(205,000)
Cash flows from financing activities:
Issuance (sale) of stock to owners ………………..
$ 24,400
Payment of dividends ……………………………………
(2,400)
Net cash provided by financing activities ….
22,000
Net increase in cash …………………………..……………..
$ 5,500
Cash balance, August 1, 2015 …………………………...
0
Cash balance, August 31, 2015 ………………………….
$ 5,500
(10-15 min.) E 1-25A
TO: Owner of Island Coffee Roasters Corp.
FROM: Student Name
SUBJECT: Opinion of net income, dividends, financial position,
and cash flows
Your first month of operations was successful. Revenues totaled
$272,600 and net income was $187,100. These operating results look
very strong.
(10-15 min.) E 1-26B
Amounts in billions; (computed amounts in boxes)
Stockholders’
Assets
Liabilities
+
Equity
Clayton Homes
$38
$ 17
$21
Howard Automotive
70
24
46
Bella Boutique
51
15
36
Bella Boutique appears to have the strongest financial position
because its liabilities make up the smallest percentage of company
(10-15 min.) E 1-27B
Req. 1
(Amounts in millions)
Assets
=
Liabilities
+
Stockholders’
Equity
$208
$156
338
100
107
Total
$653
=
$256
+
$397
Req. 2
Resources
to work with
Req. 3 Amount
owed to
creditors
Req. 4 Actually
owned by company
stockholders
(10-20 min.) E 1-28B
Situation
1
2
3
Millions
Total stockholders’ equity,
January 31, 2014 ($29 − $11) ……………….
$18
$18
$18
Add: Issuances of stock ……………………………..
6
-0-
31
Net income ………………………………………..
11*
22*
-0-
Less: Dividends declared …………………………...
-0-
(5)
(3)
Net loss …………………………………………….
-0-
-0-
(11)*
Total stockholders’ equity,
January 31, 2015 ($48 − $13) ……………….
$35
$35
$35
_____
*Must solve for these amounts.
(10-15 min.) E 1-29B
a. Income statement, Statement of retained earnings, Statement of
cash flows
b. Balance sheet