122 Chapter 4
CHAPTER 4
THE MECHANICS OF FINANCIAL ACCOUNTING
BRIEF EXERCISES
BE4–1
Transaction Assets = Liabilities + Stockholders’ Equity
Paid $11,027 to purchase + 11,027
property, plant and equip. – 11,027
b. The transaction to purchase property, plant and equipment does not appear to affect the accounting
BE4–2
Transaction Assets = Liabilities + Stockholders’ Equity
Repaid $57 – 57 = – 57
of long-term debt
b. Both transactions reduce assets and equity and can be viewed as alternate ways to return cash to
shareholders, by either paying cash in the form of dividends or paying cash in return for shares.
BE4–3
Transaction Assets = Liabilities + Stockholders’ Equity
Recognized revenues +6,325 = +6,325
of $6,325, in exchange for
accounts receivable.
Paid $1,264 for sales and –1,264 = –1,264
marketing.
b. The first and second transactions would be reflected on the income statement. Yahoo would show
$6,325 of revenue on the income statement. Yahoo would also show sales and marketing expense of
$1,264.
EXERCISES
E4–1
Assets = Liabilities + Stockholders’ Equity
(1) + 30,000 + 30,000
(2) – 20,000
(5) – 5,500 – 5,500
(6) – 500 – 500
E4–2
Assets = Liabilities + Stockholders’ Equity
Accounts Notes Contributed Retained
Cash + Receivable + Land = Payable + Capital + Earnings
(1) + 30,000 +30,000
(2) – 20,000 +20,000
(3) + 9,000 + 9,000
E4–3
X Company
Income Statement
For the Year Ended
Revenues …………………………..………………………………………………………………….. $ 8,000
X Company
Statement of Stockholders’ Equity
For the Year Ended
Contributed Retained
Capital Earnings
Beginning balance $ 0 $ 0
X Company
Balance Sheet
As of
Assets Liabilities and Stockholders’ Equity
Cash …………………………………. $ 13,000 Notes payable ……………………….. $ 9,000
Accounts receivable……………… 8,000 Contributed capital ………………… 30,000
E4–3 Concluded
X Company
Statement of Cash Flows
For the Year Ended
Cash flows from operating activities:
Cash payments for expenses ……………………………………… $ (5,500)
Cash flows from investing activities:
Purchase of land …………………………..………………………….. (20,000)
Cash flows from financing activities:
E4–4
Assets = Liabilities + Stockholders’ Equity
(1) +10,000 + 10,000
(2) + 8,000 + 8,000
(5) – 400 – 400
(6) + 7,000 + 1,000
Cathedral Enterprises
Income Statement
For the Year Ended
Fees earned ………………………………………………………………………………………………. $ 8,000
E4–4 Concluded
Cathedral Enterprises
Statement of Stockholders’ Equity
For the Year Ended
Contributed Retained
Capital Earnings
Beginning balance $ 0 $ 0
Net income 3,000
Cathedral Enterprises
Balance Sheet
As of
Assets Liabilities and Stockholders’ Equity
Cash …………………………………. $ 17,600 Misc. payable ………………………… $ 3,000
Receivables …………………………. 2,000 Long-term note ……………………… 10,000
Cathedral Enterprises
Statement of Cash Flows
For the Year Ended
Cash flows from operating activities:
Cash collected from customers ………………………………….. $ 6,000
Cash paid for expenses ……………………………………………… (3,000)
Net cash increase from operating activities …………….. $ 3,000
Cash flows from investing activities:
Proceeds from sale of land ………………………………………… $ 7,000
$2,000 of cash was used this year.
E4–5
(1) This financial event does not have accounting significance. Entries are made to record financial events
(2) This financial event does have accounting significance. The receipt of cash in exchange for issuing debt
affects the company’s current financial position by increasing both the amount of cash the company
has and the obligations the company has to other entities. Thus, an entry is necessary, and the entry
would be:
(3) This event does not have accounting significance. The retirement of an official does not influence the
company’s current financial position.
(4) This financial event does have accounting significance. Receiving cash from a customer would change
the company’s current financial position. The entry would be:
(5) This financial event does have accounting significance. Payment of a liability will change a company‘s
current financial position by decreasing both the amount of cash the company has and the company‘s
obligations to other entities. The entry would be:
(6) This financial event does not have accounting significance. Long-lived assets are reported at original
(7) This financial event does have accounting significance. The purchase of an insurance policy represents a
change in the company’s financial position because the company has less cash and because the
company has acquired the benefit of insurance coverage. However, the value of the policy has no
influence on the company. The appropriate entry would be:
(8) This financial event does not have accounting significance. Simply placing an order does not affect a
E4–6
Account Financial Statement Accounting Equation
Flight Equipment Balance Sheet Assets
Passenger Revenue Income Statement Owners’ Equity
Retained Earnings Balance Sheet Owners’ Equity
Notes Payable Balance Sheet Liabilities
Interest Expense Income Statement Owners’ Equity
Accounts Receivable Balance Sheet Assets
E4–7
Bristol-Myers Squibb
Income Statement
For the Year Ended December 31, 2012
Net Sales …………………………..…………………………………………. $ 17,621
Expenses:
Cost of goods sold ……………………………………………………. $ 4,610
Selling and adm. Expense ………………………………………….. 4,220
Bristol-Myers Squibb
Balance Sheet
As of December 31, 2012
Assets Liabilities and Stockholders’ Equity
Cash and equivalents ……………. $ 1,656 Accounts payable …………………… $ 2,202
Marketable securities …………… 1,173 Accrued payables …………………… 2,573
Accounts receivable……………… 3,083 Short-term borrowings …………… 826
Other current assets …………….. 3,609 Other current liabilities …………… 2,678
E4–7 Concluded
Bristol-Myers Squibb
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities:
Net income ………………………………………………… $ 2,501
Adjustments:
Total adjustments ………………………………….. 4,440
Net cash increase (decrease)
due to operating activities ………………….. $ 6,941
Cash flows from investing activities:
E4–8
a. Ending cash = Beginning cash + Cash inflows – Cash outflows
E4-8 Concluded
b.
Miller Manufacturing
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collections from customers ……………………………….. $ 95,000
Payment of salaries ………………………………………………….. (26,500)
Purchase of long-term investments ……………………………. (10,000)
Purchase of equipment …………………………………………….. (24,000)
Net cash decrease from investing activities …………….. (26,500)
Cash flows from financing activities:
Proceeds from issuance of common stock …………………… $ 15,000
Proceeds from borrowing………………………………………….. 16,000
E4–9
a.
(1) Cash (+A) …………………………………………………………………………. 15,000
Common Stock (+SE) ……………………………………………………. 15,000
Issued common stock.
Incurred and paid wages.
(4) Investment in Land (+A) ……………………………………………………. 9,000
Cash (–A)…………………………………………………………………….. 9,000
Purchased land as an investment.
E4–9 Continued
(6) Cash (+A) …………………………………………………………………………. 3,500
Land (–A) ……………………………………………………………………. 3,000
Gain on Sale of Land (Ga, +SE)……………………………………….. 500
Sold land.
(7) Interest Expense (E, –SE) …………………………………………………… 600
Note Payable (+L) …………………………………………………………….. 900
b.
Cash
B.B. 5,000
(2) 4,000 (4) 9,000
E.B. 11,600
c.
Small and Associates
Statement of Cash Flows
For the Month Ended January 31, 2015
Cash flows from operating activities:
Collections from customers ……………………………………….. $ 4,000
Payment of wages ……………………………………………………. (1,600)
Net cash from operating activities …………………………. $ 0
Cash flows from investing activities:
Proceeds from sale of land ………………………………………… $ 3,500
Purchase of land …………………………..………………………….. (9,000)
Net cash decrease from investing activities …………….. (5,500)
Cash flows from financing activities:
Beginning cash balance …………………………………………………. 5,000
Ending cash balance ……………………………………………………… $ 11,600
E4–10
a. Assets = Liabilities + Stockholders’ Equity
Accounts Notes Contributed Retained
Cash + Receivable + Land = Payable + Capital + Earnings
(1) + 12,000 +12,000
(6) – 4,000 – 4,000
(7) + 2,800 – 3,000 – 200
Ed’s Lawn Service
Income Statement
For the Year Ended December 31, 2015
Revenue …………………………..………………………………………….. $14,000
Rent expense ……………………………………………………………….. (5,000)
Ed’s Lawn Service
Statement of Stockholders’ Equity
For the Year Ended December 31, 2015
Contributed Retained
Capital Earnings
Beginning balance, January 1, 2015 $ 0 $ 0
Net income 4,800
Ed’s Lawn Service
Balance Sheet
As of December 31, 2015
Assets Liabilities and Stockholders’ Equity
Cash …………………………………. $ 8,600 Notes payable ……………………….. $ 5,000
Accounts receivable……………… 4,000 Contributed capital ………………… 12,000
E4–10 Continued
Ed’s Lawn Service
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collected from customers ………………………………….. $ 10,000
Cash flows from investing activities:
Proceeds from sale of land ………………………………………… $ 2,800
Cash paid for land …………………………………………………….. (10,000)
Dividend payments …………………………………………………… (2,200)
Net cash increase from financing activities……………… 14,800
Increase in cash ……………………………………………………………. $ 8,600
b.
(1) Cash (+A) …………………………………………………………………………. 12,000
Contributed Capital (+SE) ……………………………………………… 12,000
Collected cash from stockholders.
(4) Rent Expense (E, –SE) ……………………………………………………….. 5,000
Cash (–A)…………………………………………………………………….. 5,000
Incurred and paid rent expense.
(6) Miscellaneous Expenses (E, –SE) …………………………..……………. 4,000
E4–10 Continued
(7) Cash (+A) …………………………………………………………………………. 2,800
(8) Dividends (–SE) ………………………………………………………………… 2,200
Cash (–A)…………………………………………………………………….. 2,200
Declared and paid cash dividend.
Cash Accounts Receivable
B. B. 0 B. B. 0
(2) 5,000 (4) 5,000 _________________________________
(7) 2,800 (8) 2,200
_____________________________________
Land Notes Payable
B. B. 0 B. B. 0
Contributed Capital Retained Earnings*
B. B. 0 B. B. 0
Dividends Fees Earned
B. B. 0 B. B. 0
Rent Expense Miscellaneous Expenses
B. B. 0 B. B. 0
(4) 5,000 (6) 4,000
_____________________________________ _________________________________
E. B. 5,000 E. B. 4,000
Loss on Sale of Land
B.B. 0
E4–10 Concluded
Ed’s Lawn Service
Income Statement
For the Year Ended December 31, 2015
Revenue …………………………..…………………………………………………………………. $ 14,000
Rent expense ………………………………………………………………………………………. (5,000)
Ed’s Lawn Service
Statement of Stockholders’ Equity
For the Year Ended December 31, 2015
Contributed Retained
Capital Earnings
Ed’s Lawn Service
Balance Sheet
As of December 31, 2015
Assets Liabilities and Stockholders’ Equity
Cash …………………………………. $ 8,600 Notes payable ……………………….. $ 5,000
Ed’s Lawn Service
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collected from customers ………………………………….. $ 10,000
Rent payments on lawn equipment ……………………………. (5,000)
Payment of miscellaneous expenses …………………………... (4,000)
Proceeds from bank loan…………………………………………… 5,000
Dividend payments …………………………………………………… (2,200)
Net cash increase from financing activities……………… 14,800
Increase in cash ……………………………………………………………. $ 8,600
Beginning cash balance …………………………………………………. 0
E4–11
a. Ending cash balance = $8,000 + $109,500 – $90,000 = $27,500
b.
Holcomb Manufacturing
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collections from customers ……………………………….. $ 74,000
Payments for inventory …………………………………………….. (34,000)
Payment of wages ……………………………………………………. (16,000)
Cash flows from financing activities:
Proceeds from issuance of common stock …………………… $ 14,000
Proceeds from borrowing………………………………………….. 9,000
Repayment of bank loan …………………………………………… (10,000)
E4–12
a. (1) The entry is to record rent incurred but not yet paid.
(3) The entry is to record the expiration of a portion of a fixed asset cost.
(5) The entry is to record the earning of a deferred revenue.
b. (1) Accrual adjusting entry
(3) Cost expiration adjusting entry
(5) Accrual adjusting entry
E4–13
(1) Accrual adjusting entry (7) Investing cash flow
(3) Financing cash flow (9) Operating cash flow
(5) Cost expiration adjusting entry (11) Operating cash flow
E4–14
a. 12/31/15 Wage Expense (E, –SE) …………………………..……………. 42,000*
Wages Payable (+L) ………………………………………… 42,000
Incurred, but did not pay, wages.
_________________
c.
2015 2016 Total
Wage expense $42,000 $28,000 $70,000
d. The purpose of the adjusting journal entry on December 31, 2015 is to recognize an economic event
E4–15
a.
2012
Book value, 1/1/12 …………………………………………………………………. $856,000
2012 Depreciation expense …………………………..…………………………. $214,000
E4–15 Concluded
2013
Book value, 1/1/12 ……………………………………………………………… $856,000
2012 Depreciation expense …………………………..……………………… $214,000
2013 Depreciation expense ………………………………………………….. $214,000
2015
Book value, 1/1/12 ……………………………………………………………… $ 856,000
2012 Depreciation expense …………………………..……………………… $214,000
2013 Depreciation expense ………………………………………………….. $214,000
b. 2012 2013 2014 2015 Total
Depreciation expense $ 214,000 $214,000 $214,000 $214,000 $856,000
c. The purpose of the adjusting journal entry at the end of each period is to recognize the economic event
E4–16
a. With cash-basis accounting, cash inflows and outflows are the critical events. A company will recognize
revenue when it has cash inflows, and the company will recognize expenses when it has cash outflows.
So in this case, Washington Forest Products would recognize the following expenses under cash–basis
accounting.