Accounting Chapter 2 Homework Financial Statements And accounting Concepts principles Outline

CHAPTER

2

Financial Statements and

Accounting Concepts/Principles

CHAPTER OUTLINE:

I. Financial Statements

A. From Transactions to Financial Statements

B. Financial Statements Illustrated

1. Explanations and Definitions

a. Balance Sheet

2. Comparative Statements in Subsequent Years

3. Illustration of Financial Statement Relationships

II. Accounting Concepts and Principles

A. Schematic Model of Concepts and Principles

B. Concepts/Principles Related to the Entire Model

C. Concepts/Principles Related to Transactions

D. Concepts/Principles Related to Bookkeeping Procedures and the Accounting Process

E. Concepts/Principles Related to Financial Statements

F. Limitations of Financial Statements

III. The Corporation’s Annual Report

Chapter 2 Financial Statements and Accounting Concepts/Principles

TEACHING/LEARNING OBJECTIVES:

Principal:

1. To illustrate the four principal financial statements and their basic form.

3. To present the accounting equation.

4. To explain several of the concepts of financial accounting and financial statement

presentation.

Supporting:

6. To explain some of the limitations of financial statements.

8. To introduce and explain several business procedures and their terminology.

TEACHING OBSERVATIONS:

1. This is the keystone chapter of the text, and the material presented here becomes a foundation

for all subsequent financial accounting topics. The instructor must resist trying to teach

the entire course from this one chapter! Instead, try to help students sort out the key ideas

2. A significant amount of time should be spent illustrating and explaining the purpose and

content—by account category (asset, liability, stockholders’ equity, revenue, expense)—of each

3. It is recommended that the following models be emphasized:

a. Balance Sheet:

Assets = Liabilities + Stockholders’ Equity

Beginning of Period $ $ $

c. Statement of Changes in Stockholders’ Equity:

Beginning Balance of Stockholders’ Equity

+ Owners’ Investment

(As with the discussion of gains and losses, some instructors may wish to acknowledge

“other” sources of changes in stockholders’ equity such as treasury stock, accumulated other

comprehensive income, prior period adjustments, etc. This is a function of instructor

4. It is helpful to spend time with the concepts and principles model, explaining what each

5. It is appropriate to emphasize the limitations of financial statements now, because they can

6. The Business In Practice boxes are designed to enhance student understanding by removing

8. Remind students that the fully worked-out solutions to all odd-numbered exercises and

problems are provided on the website. The student study guide (previously a printed volume

that students were required to purchase separately) is also available on the website for free.

Chapter 2 Financial Statements and Accounting Concepts/Principles

ASSIGNMENT OVERVIEW:

This chapter provides a wide variety of assignments to choose from—ranging from the basic

association-type mini-exercises and exercises, to the more challenging, analytical-type problems.

Be careful not to over-assign or under-assign homework from this chapter.

NO.

LEARNING

OBJECTIVES

DIFFICULTY &

TIME ESTIMATE

OTHER

COMMENTS

M2.1.

2, 3

Easy, 3-5 min.

Similar to E2.9.-E2.14.

M2.2.

2, 3

Easy, 3-5 min.

See M2.1. Good in-class demo exercise.

M2.3.

2, 3

Med., 7–10 min.

Challenging mini-exercise. Requires clear-cut understanding of

M2.4.

2, 3

Med., 7–10 min.

See M2.3. Good way to review and reinforce the structure of the

income statement in class.

M2.6.

2, 4

Easy, 2-3 min.

Basic identification of income statement accounts.

E2.7.

2, 4

Easy, 3-5 min.

Simple account identification exercise.

E2.8.

2, 4

Easy, 3-5 min.

See E2.7.

E2.9.

2, 3

Med., 5-8 min.

Reinforces the balance sheet equation, and stresses the

distinction between PIC and RE.

E2.10.

2, 3

Med., 5-8 min.

See E2.9. Good homework assignment.

E2.11.

2, 3

Easy, 3-5 min.

“RE is affected only by net income (loss) and dividends.” This is

a bit of a fiction, but it works effectively in the Chapter 2. Other

E2.12.

2, 3

Easy, 3-5 min.

See E2.11. Good homework assignment.

E2.13.

2, 3

Med., 5-10 min.

The worksheet format is used to help students understand

E2.14.

2, 3

Med., 5-10 min.

See E2.13. Good in-class demonstration exercise.

P2.15.

2, 3, 6

Med., 7-10 min.

Most instructors omit this problem. Can be used to illustrate the

P2.16.

2, 3, 6

Med., 10-12 min.

See P2.15.

P2.17.

2, 3, 4

Med., 15-20 min.

Straight-forward problem emphasizing financial statement

relationships. Students respond well.

P2.18.

2, 3, 4

Med., 15-20 min.

See P2.17.

P2.19.

2, 3, 4

Med., 20-25 min.

Similar to P2.15., P2.16., but requires the preparation of financial

statements. Good for in-class demonstration.

P2.20.

2, 3, 4

Med., 20-25 min.

P2.21.

2, 3

Med., 5-8 min.

Can use later as a Chapter 4 assignment.

P2.22.

2, 3, 6

Med.-Hard, 15-20.

Group learning problem. Good in-class demonstration

problem.

P2.23.

2, 3, 5

Med., 7-10 min.

Stress the importance of the historical cost principle.

P2.24.

2, 3, 5, 6

Med., 10-12 min.

P2.25.

2, 4

Med., 10-12 min.

Group learning problem. Emphasizes the structure of the

income statement.

P2.26.

2, 4

Med., 10-12 min.

income.

C2.27.

2, 4, 6, 7

Med., 15-20 min.

Excellent conceptual case, but be sure to relate student responses

Instructor’s Manual / Solutions Manual

SOLUTIONS:

M2.1.

A = L + SE

Beginning: $96,000 = $54,000 + ?

Changes: = +16,000 net income (increase to retained earnings)

-4,000 dividends (decrease to retained earnings)

Ending: = + ? .

Solution approach:

Beginning stockholders’ equity = $96,000 – $54,000 = $42,000. Net income increases

M2.2.

SE

Beginning: $164,000

-6,000 dividends (decrease to retained earnings)

Ending: ? .

M2.3.

Net sales ……. ……….. ……….. ……….. ……….. ……….. ……….. $250,000

Cost of goods sold … ……….. ……….. ……….. ……….. ……….. ? .= 150,000

Gross profit .. ……….. ……….. ……….. ……….. ……….. ……….. $100,000

Selling, general, and administrative expenses ……… ……….. 44,000

Income from operations ……. ……….. ……….. ……….. ……….. ? = 56,000

Interest expense ……. ……….. ……….. ……….. ……….. ……….. ? .= 6,000

Income before taxes . ……….. ……….. ……….. ……….. ……….. $ ? = 50,000

M2.4.

Net sales ……. ……….. ……….. ……….. ……….. ……….. ……….. $ ? = 200,000

Cost of goods sold … ……….. ……….. ……….. ……….. ……….. 80,000.

Gross profit .. ……….. ……….. ……….. ……….. ……….. ……….. $ ? = 120,000

Selling, general, and administrative expenses ……… ……….. 44,000

Income from operations ……. ……….. ……….. ……….. ……….. 76,000

Interest expense ……. ……….. ……….. ……….. ……….. ……….. 12,000.

Income before taxes . ……….. ……….. ……….. ……….. ……….. $ ? = 64,000

Income tax expense . ……….. ……….. ……….. ……….. ……….. 16,000

Net income … ……….. ……….. ……….. ……….. ……….. ……….. $ ? . = 48,000

M2.5.

Common stock and retained earnings are stockholders’ equity accounts; cost of goods

M2.6.

Sales and service revenues are revenues accounts on the income statement; income tax

E2.7.

Category

Financial

Statement(s)

Accumulated depreciation………………………

A

BS

Long-term debt…………………………………

L

BS

Equipment………………………………………

A

BS

Loss on sale of investments…………..…………

LS

IS

Net income………………………………………

IS

Merchandise inventory…………………………

A

BS

Other accrued liabilities…………………………

L

BS

Dividends paid………………………………….

Cost of goods sold………………………………

E

IS

Additional paid-in capital……………………….

BS

Interest income………………………………….

R

IS

E

IS

E2.9.

Use the accounting equation to solve for the missing information:

Firm A:

A = L + PIC + ( Beg. RE + NI – DIV = End. RE)

$210,000 = $108,000 + $37,000 + ( $39,000 + ? – $25,000 = ? )

In this case, the ending balance of retained earnings must be determined first:

$210,000 = $108,000 + $37,000 + End. RE

Firm B:

A = L + PIC + ( Beg. RE + NI – DIV = End. RE )

$270,000 = $72,000 + ? + ( ? + $41,000 – $9,000 = $155,000 )

Beg. RE + $41,000 – $9,000 = $155,000

$270,000 = $72,000 + PIC + $155,000

Firm C:

A = L + PIC + ( Beg. RE + NI – DIV = End. RE )

$162,000 = ? + $20,000 + ( $21,000 + $56,000 – $32,000 = ? )

$21,000 + $56,000 – $32,000 = End. RE

$162,000 = L + $20,000 + $45,000

E2.10.

Use the accounting equation to solve for the missing information:

Firm A:

A = L + PIC + ( Beg. RE + NI – DIV = End. RE )

$ ? = $80,000 + $55,000 + ( $50,000 + 68,000 – $12,000 = ? )

In this case, the ending balance of retained earnings must be determined first:

Firm B:

A = L + PIC + ( Beg. RE + NI – DIV = End. RE )

$435,000 = ? + $59,000 + ( $124,000 + $110,000 – ? = $186,000 )

$124,000 + $110,000 – DIV = $186,000

$435,000 = L + $59,000 + $186,000

Firm C:

A = L + PIC + ( Beg. RE + NI – DIV = End. RE )

$155,000 = $75,000 + $45,000 + ( ? + $25,000 – $16,000 = ? )

$155,000 = $75,000 + $45,000 + End. RE

E2.11.

Prepare the retained earnings portion of a statement of changes in stockholders’ equity

for the year ended December 31, 2016:

Less: Net loss for the year ended December 31, 2016………………….. (9,400)

E2.12.

Retained Earnings, December 31, 2015……………………………….… ?

Less: Net income for the year ended December 31, 2016……………….. 22,600

Retained Earnings, December 31, 2016…………………………………. $210,300

Solving the model, retained earnings at December 31, 2015 was $192,200.

E2.13.

SE .

A = L + PIC + RE

Beginning: $37,200 = $21,000 + $ 0 + $16,200

Changes: ? = -3,600 + 0 + 9,000 (net income)

? (dividends)

Ending: ? = ? + 0 + $18,000