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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.
M2.3.
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.
E2.8.
2, 4
Easy, 3-5 min.
See E2.7.
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
E2.13.
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
P2.17.
2, 3, 4
Med., 15-20 min.
Straight-forward problem emphasizing financial statement
relationships. Students respond well.
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.
P2.21.
2, 3
Med., 5-8 min.
Can use later as a Chapter 4 assignment.
P2.23.
2, 3, 5
Med., 7-10 min.
Stress the importance of the historical cost principle.
P2.25.
2, 4
Med., 10-12 min.
Group learning problem. Emphasizes the structure of the
income statement.
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 + ?
-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
-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)
Cash……………………………………………
A
BS
Accounts payable…………….………………..
L
BS
Common stock…………………………………
SE
BS
Depreciation expense…………………………..
E
IS
E2.8.
Category
Financial
Statement(s)
Accumulated depreciation……………………...
A
BS
Long-term debt…………………………………
L
BS
Equipment………………………………………
A
BS
Loss on sale of investments…………..………...
LS
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 )
$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 = ? )
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 )
$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 = ? )
E2.11.
Prepare the retained earnings portion of a statement of changes in stockholders' equity
for the year ended December 31, 2016:
E2.12.
Retained Earnings, December 31, 2015……………………………….… ?
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
