1–1
CHAPTER 1
INTRODUCTION TO ACCOUNTING AND BUSINESS
DISCUSSION QUESTIONS
2. The role of accounting is to provide information for managers to use in operating the business. In addition,
3. The corporate form allows the company to obtain large amounts of resources by issuing stock. For this
4. No. The business entity assumption limits the recording of economic data to transactions directly affecting
5. The land should be recorded at its cost of $167,500 to Reliable Repair Service. This is consistent with the
cost principle.
6. a. No. The offer of $2,000,000 and the increase in the assessed value should not be recognized in the
7. An account receivable is a claim against a customer for goods or services sold. An account payable is an
9. (a) The business incurred a net loss of $75,000 ($640,000 – $715,000).
10. (a) Net income or net loss
CHAPTER 1 Introduction to Accounting and Business
BASIC EXERCISES
BE 1–1
BE 1–2
a.
A
=
L + SE
$395,000
=
$97,000
SE
=
$298,000
b.
A
=
L + SE
–$65,000
=
$36,000
SE
=
–$101,000
SE on December 31, 20Y2
=
$298,000
SE on December 31, 20Y3
=
$197,000
BE 1–3
(3) Asset (Supplies) increases by $2,100;
Liability (Accounts Payable) increases by $2,100.
BE 1–4
Paradise Travel Service
Income Statement
For the Year Ended May 31, 20Y6
Fees earned
$ 900,000
Expenses:
Wages expense
$450,000
Office expense
300,000
Miscellaneous expense
15,000
Total expenses
(765,000)
Net income
$ 135,000
1–3
BE 1–5
Paradise Travel Service
Statement of Stockholders’ Equity
For the Year Ended May 31, 20Y6
Common
Stock
Retained
Earnings
Total
Balances, June 1, 20Y5
$ 60,000
$300,000
$360,000
Issued common stock
40,000
40,000
Net income
135,000
135,000
Dividends
(10,000)
(10,000)
Balances, May 31, 20Y6
$100,000
$425,000
$525,000
BE 1–6
Paradise Travel Service
Balance Sheet
May 31, 20Y6
Assets
Cash
$ 52,000
Accounts receivable
38,000
Supplies
3,000
Land
450,000
Total assets
$ 543,000
Liabilities
Accounts payable
$ 18,000
Stockholders’ Equity
Common stock
$100,000
Retained earnings
425,000
Total stockholders’ equity
525,000
Total liabilities and stockholders’ equity
$ 543,000
CHAPTER 1 Introduction to Accounting and Business
1–4
BE 1–7
Paradise Travel Service
Statement of Cash Flows
For the Year Ended May 31, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers
$ 880,000
Cash paid for operating expenses
(758,000)
Net cash flows from operating activities
$ 122,000
Cash flows from (used for) investing activities:
Cash paid for purchase of land
(150,000)
Cash flows from (used for) financing activities:
Cash received from issuing common stock
$ 40,000
Cash paid for dividends
(10,000)
Net cash flows from financing activities
30,000
Net increase in cash
$ 2,000
Cash balance, June 1, 20Y5
50,000
Cash balance, May 31, 20Y6
$ 52,000
BE 1–8
a.
Dec. 31,
20Y4
Dec. 31,
20Y3
Total liabilities …………………………………………………..
Total stockholders’ equity ………………………………….
Ratio of liabilities to stockholders’ equity ……………
$4,085,000
$4,300,000
0.95*
$2,880,000
$3,600,000
0.80**
* $4,085,000 ÷ $4,300,000
** $2,880,000 ÷ $3,600,000
b.
Increased
CHAPTER 1 Introduction to Accounting and Business
1–5
EXERCISES
Ex. 1–1
a.
1.
manufacturing
6.
manufacturing
11.
service
2.
manufacturing
7.
service
12.
service
3.
manufacturing
8.
service
13.
manufacturing
4.
service
9.
manufacturing
14.
service
5.
retail
10.
retail
15.
retail
accounting information system.
Ex. 1–2
As in many ethics issues, there is no one right answer. Oftentimes, disclosing only what is
Ex. 1–3
a.
1.
M
5.
O
9.
X
2.
L
6.
O
10.
O
3.
O
7.
X
4.
M
8.
L
financial condition or results of operations.
Ex. 1–4
Ex. 1–5
CHAPTER 1 Introduction to Accounting and Business
1–6
Ex. 1–6
Ex. 1–7
a. $3,650,000 ($5,250,000 – $1,600,000)
Ex. 1–8
a. (2) liability
f. (3) stockholders’ equity (expense)
Ex. 1–9
a. Increases assets and increases stockholders’ equity.
Ex. 1–10
a. (1) Total assets increased $183,000 ($298,000 – $115,000).
(3) Stockholders’ equity increased $183,000.
b. (1) Total assets decreased $80,000.
CHAPTER 1 Introduction to Accounting and Business
1–7
Ex. 1–11
1.
(a) increase
2.
(a) increase
3.
(b) decrease
4.
(b) decrease
Ex. 1–12
1.
c
6.
c
2.
a
7.
d
3.
e
8.
a
4.
e
9.
e
5.
c
10.
e
Ex. 1–13
a. (1) Provided catering services for cash, $71,800.
b. $300 ($40,300 – $40,000)
Ex. 1–14
CHAPTER 1 Introduction to Accounting and Business
1–8
Ex. 1–15
Amber
Stockholders’ equity at end of year ($1,730,000 – $1,150,000) …………………….
$ 580,000
Deduct stockholders’ equity at beginning of year ($1,220,000 – $990,000) ……….
(230,000)
Net income (increase in stockholders’ equity) ……………………………………….
$ 350,000
Blue
Increase in stockholders’ equity (as determined for Amber) ………………………
$ 350,000
Add dividends …………………………………………………………………………………………
60,000
Net income ………………………………………………………………………………………….
$ 410,000
Coral
Increase in stockholders’ equity (as determined for Amber) ………………………
$ 350,000
Deduct additional issuance of common stock …………………………………………..
(140,000)
Net income ………………………………………………………………………………………….
$ 210,000
Daffodil
Increase in stockholders’ equity (as determined for Amber) ………………………
$ 350,000
Deduct additional issuance of common stock …………………………………………..
(140,000)
$ 210,000
Add dividends …………………………………………………………………………………………
60,000
Net income ………………………………………………………………………………………….
$ 270,000
Ex. 1–16
Ex. 1–17
CHAPTER 1 Introduction to Accounting and Business
1–9
Ex. 1–18
a.
Organic Products Company
Statement of Stockholders’ Equity
For the Month Ended June 30, 20Y9
Common
Stock
Retained
Earnings
Total
Balances, June 1, 20Y9
$180,000
$1,630,000
$1,810,000
Issued common stock
50,000
50,000
Net income
115,000
115,000
Dividends
(25,000)
(25,000)
Balances, June 30, 20Y9
$230,000
$1,720,000
$1,950,000
b. The statement of stockholders’ equity is prepared before the June 30, 20Y9, balance sheet
Ex. 1–19
Imaging Services
Income Statement
For the Month Ended March 31, 20Y5
Fees earned
$ 482,000
Expenses:
Wages expense
$300,000
Rent expense
41,500
Supplies expense
3,600
Miscellaneous expense
1,900
Total expenses
(347,000)
Net income
$ 135,000
CHAPTER 1 Introduction to Accounting and Business
1–10
Ex. 1–20
In each case, solve for a single unknown, using the following equation:
Stockholders’ Equity (beginning) + Additional Common Stock Issued – Dividends +
Revenues – Expenses = Stockholders’ Equity (ending)
Freeman
Stockholders’ equity at end of year ($1,260,000 – $330,000) ……………………..
$ 930,000
Stockholders’ equity at beginning of year ($900,000 – $360,000) ……………….
(540,000)
Increase in stockholders’ equity ……………………………………………………….
$ 390,000
Deduct increase due to net income ($570,000 – $240,000) …………………………
(330,000)
$ 60,000
Add dividends ……………………………………………………………………………………
75,000
Additional common stock issued ……………………………………………………….
(a)
$ 135,000
Heyward
Stockholders’ equity at end of year ($675,000 – $220,000) ………………………..
$ 455,000
Stockholders’ equity at beginning of year ($490,000 – $260,000) ……………….
(230,000)
Increase in stockholders’ equity ……………………………………………………….
$ 225,000
Add dividends ……………………………………………………………………………………
32,000
$ 257,000
Deduct additional common stock issued …………………………………………………
(150,000)
Increase due to net income …………………………………………………………………….
$ 107,000
Add expenses ……………………………………………………………………………………
128,000
Revenue …………………………………………………………………………………………….
(b)
$ 235,000
Jones
Stockholders’ equity at end of year ($100,000 – $80,000) ………………………….
$ 20,000
Stockholders’ equity at beginning of year ($115,000 – $81,000) …………………
(34,000)
Decrease in stockholders’ equity ……………………………………………………….
$ (14,000)
Decrease in stockholders’ equity due to net loss ……………………………………..
($115,000 – $122,500) …………………………..……………………………………………..
7,500
$ (6,500)
Deduct common stock issued …………………………………………………………………
(10,000)
Dividends ……………………………………………………………………………………
(c)
$ (16,500)
Ramirez
Stockholders’ equity at end of year ($270,000 – $136,000) ………………………..
$ 134,000
Add decrease due to net loss ($115,000 – $128,000) …………………………..
13,000
$ 147,000
Add dividends ……………………………………………………………………………………
39,000
Stockholders’ equity at beginning of year ……………………………………………….
$ 186,000
Deduct additional investment …………………………………………………………………
(55,000)
$ 131,000
Add liabilities at beginning of year ……………………………………………………….
120,000
Assets at beginning of year ………………………………………………………………..
(d)
$ 251,000
CHAPTER 1 Introduction to Accounting and Business
1–11
Ex. 1–21
a.
Ebony Interiors
Balance Sheet
February 28, 20Y3
Assets
Cash
$ 320,000
Accounts receivable
800,000
Supplies
30,000
Total assets
$1,150,000
Liabilities
Accounts payable
$ 310,000
Stockholders’ Equity
Common stock
$200,000
Retained earnings
640,000*
Total stockholders’ equity
840,000
Total liabilities and stockholders’ equity
$1,150,000
* $640,000 = $320,000 + $800,000 + $30,000 – $310,000 – $200,000
Ebony Interiors
Balance Sheet
March 31, 20Y3
Assets
Cash
$ 380,000
Accounts receivable
960,000
Supplies
35,000
Total assets
$1,375,000
Liabilities
Accounts payable
$ 400,000
Stockholders’ Equity
Common stock
$200,000
Retained earnings
775,000*
Total stockholders’ equity
975,000
Total liabilities and stockholders’ equity
$1,375,000
* $775,000 = $380,000 + $960,000 + $35,000 – $400,000 – $200,000
CHAPTER 1 Introduction to Accounting and Business
1–12
Ex. 1–21 (Concluded)
c. Stockholders’ equity, March 31 …………………………………………………………… $ 975,000
Stockholders’ equity, February 28 ……………………………………………………….. (840,000)
Ex. 1–22
a. Balance sheet: 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 13
Ex. 1–23
1. (c) financing activity
Ex. 1–24
Parker Consulting Group
Statement of Cash Flows
For the Year Ended January 31, 20Y4
Cash flows from (used for) operating activities:
Cash received from customers
$1,200,000
Cash paid for expenses
(800,000)
Net cash flows from operating activities
$ 400,000
Cash flows from (used for) investing activities:
Cash paid for purchase of land
(300,000)
Cash flows from (used for) financing activities:
Cash received from issuing common stock
$ 90,000
Cash paid for dividends
(36,000)
Net cash flows from financing activities
54,000
Net increase in cash
$ 154,000
Cash balance, February 1, 20Y3
66,000
Cash balance, January 31, 20Y4
$ 220,000
CHAPTER 1 Introduction to Accounting and Business
1–13
Ex. 1–25
a. 1. All financial statements should contain the name of the business in their heading. The
3. The year in the heading for the statement of stockholders’ equity should be 20Y7
rather than 20Y6.
5. On the income statement, the miscellaneous expense amount should be listed as the
last expense.
6. On the income statement, the total expenses are subtracted from the sales
8. Accounts payable should be listed as a liability on the balance sheet.
CHAPTER 1 Introduction to Accounting and Business
1–14
Ex. 1–25 (Concluded)
b. Corrected financial statements appear as follows:
We-Sell Realty
Income Statement
For the Month Ended August 31, 20Y7
Sales commissions
$ 140,000
Expenses:
Office salaries expense
$87,000
Rent expense
18,000
Automobile expense
7,500
Supplies expense
1,150
Miscellaneous expense
2,200
Total expenses
(115,850)
Net income
$ 24,150
We-Sell Realty
Statement of Stockholders’ Equity
For the Month Ended August 31, 20Y7
Common
Stock
Retained
Earnings
Total
Balances, August 1, 20Y7
$ 0
$ 0
$ 0
Issued common stock
15,000
15,000
Net income
24,150
24,150
Dividends
(10,000)
(10,000)
Balances, August 31, 20Y7
$15,000
$14,150
$ 29,150
We-Sell Realty
Balance Sheet
August 31, 20Y7
Assets
Cash
$ 8,900
Accounts receivable
38,600
Supplies
4,000
Total assets
$51,500
Liabilities
Accounts payable
$22,350
Stockholders’ Equity
Common stock
$15,000
Retained earnings
14,150
Total stockholders’ equity
29,150
Total liabilities and stockholders’ equity
$51,500
CHAPTER 1 Introduction to Accounting and Business
1–15
PROBLEMS
Prob. 1–1A
1.
Assets
=
Liabilities +
Stockholders’ Equity
Cash
+
Accts.
Rec.
+
Supplies
=
Accts.
Payable
+
Common
Stock
–
Dividends
+
Fees
Earned
–
Rent
Expense
–
Salaries
Expense
–
Supplies
Expense
–
Auto
Exp.
–
Misc.
Exp.
a.
b.
+ 60,000
+ 1,800
+ 1,800
+ 60,000
Bal.
c.
60,000
+ 22,300
1,800
1,800
60,000
+ 22,300
Bal.
d.
82,300
– 7,000
1,800
1,800
60,000
22,300
– 7,000
Bal.
e.
75,300
– 1,100
1,800
1,800
– 1,100
60,000
22,300
– 7,000
Bal.
f.
74,200
+ 3,600
1,800
700
60,000
22,300
+ 3,600
– 7,000
Bal.
g.
74,200
– 1,750
3,600
1,800
700
60,000
25,900
– 7,000
– 750
– 1,000
Bal.
h.
72,450
– 4,000
3,600
1,800
700
60,000
25,900
– 7,000
– 4,000
– 750
– 1,000
Bal.
i.
68,450
3,600
1,800
– 1,550
700
60,000
25,900
– 7,000
– 4,000
– 1,550
– 750
– 1,000
Bal.
j.
68,450
– 5,000
3,600
250
700
60,000
– 5,000
25,900
– 7,000
– 4,000
– 1,550
– 750
– 1,000
Bal.
63,450
3,600
250
700
60,000
– 5,000
25,900
– 7,000
– 4,000
– 1,550
– 750
– 1,000
2. Stockholders’ equity is the right of stockholders (owners) to the assets of the business. These rights are increased by issuing common stock and
revenues and decreased by dividends and expenses.
CHAPTER 1 Introduction to Accounting and Business
1–16
Prob. 1–2A
1.
Global Travel Agency
Income Statement
For the Year Ended December 31, 20Y5
Fees earned
$ 940,000
Expenses:
Wages expense
$415,000
Rent expense
56,000
Utilities expense
34,800
Supplies expense
12,700
Miscellaneous expense
19,500
Total expenses
(538,000)
Net income
$ 402,000
2.
Global Travel Agency
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y5
Common
Stock
Retained
Earnings
Total
Balances, January 1, 20Y5
$525,000
$1,250,000
$1,775,000
Issued common stock
50,000
50,000
Net income
402,000
402,000
Dividends
(90,000)
(90,000)
Balances, December 31, 20Y5
$575,000
$1,562,000
$2,137,000
3.
Global Travel Agency
Balance Sheet
December 31, 20Y5
Assets
Cash
$ 200,000
Accounts receivable
539,000
Supplies
6,000
Land
1,500,000
Total assets
$2,245,000
Liabilities
Accounts payable
$ 108,000
Stockholders’ Equity
Common stock
$ 575,000
Retained earnings
1,562,000
Total stockholders’ equity
2,137,000
Total liabilities and stockholders’ equity
$2,245,000
CHAPTER 1 Introduction to Accounting and Business
1–17
Prob. 1–2A (Concluded)
4. Ending common stock and retained earnings appear on both the statement of stockholders’
Prob. 1–3A
1.
Reliance Financial Services
Income Statement
For the Month Ended July 31, 20Y2
Fees earned
$144,500
Expenses:
Salaries expense
$55,000
Rent expense
33,000
Auto expense
16,000
Supplies expense
4,500
Miscellaneous expense
4,800
Total expenses
(113,300)
Net income
$ 31,200
2.
Reliance Financial Services
Statement of Stockholders’ Equity
For the Month Ended July 31, 20Y2
Common
Stock
Retained
Earnings
Total
Balances, July 1, 20Y2
$ 0
$ 0
$ 0
Issued common stock
50,000
50,000
Net income
31,200
31,200
Dividends
(15,000)
(15,000)
Balances, July 31, 20Y2
$50,000
$ 16,200
$ 66,200
CHAPTER 1 Introduction to Accounting and Business
1–18
Prob. 1–3A (Concluded)
3.
Reliance Financial Services
Balance Sheet
July 31, 20Y2
Assets
Cash
$32,600
Accounts receivable
34,500
Supplies
2,500
Total assets
$69,600
Liabilities
Accounts payable
$ 3,400
Stockholders’ Equity
Common stock
$50,000
Retained earnings
16,200
Total stockholders’ equity
66,200
Total liabilities and stockholders’ equity
$69,600
4. (Optional)
Reliance Financial Services
Statement of Cash Flows
For the Month Ended July 31, 20Y2
Cash flows from (used for) operating activities:
Cash received from customers
$ 110,000
Cash paid for expenses
and to creditors*
(112,400)
Net cash flows used for operating activities
$ (2,400)
Cash flows from (used for) investing activities
0
Cash flows from (used for) financing activities:
Cash received from issuing common stock
$ 50,000
Cash paid for dividends
(15,000)
Net cash flows from financing activities
35,000
Net increase in cash
$32,600
Cash balance, July 1, 20Y2
0
Cash balance, July 31, 20Y2
$32,600
* $3,600 + $33,000 + $20,800 + $55,000; these amounts are taken from the Cash column
shown in the problem.
CHAPTER 1 Introduction to Accounting and Business
1–19
Prob. 1–4A
1.
Assets
=
Liabilities +
Stockholders’ Equity
Cash
+
Supplies
=
Accts.
Payable
+
Common
Stock
–
Dividends
+
Sales
Comm.
–
Salaries
Exp.
–
Rent
Exp.
–
Auto
Exp.
–
Supplies
Exp.
–
Misc.
Exp.
a.
b.
+ 35,000
+ 2,750
+ 2,750
+ 35,000
Bal.
c.
35,000
– 1,800
2,750
2,750
– 1,800
35,000
Bal.
d.
33,200
+ 52,800
2,750
950
35,000
+ 52,800
Bal.
e.
86,000
– 4,500
2,750
950
35,000
52,800
– 4,500
Bal.
f.
81,500
– 3,000
2,750
950
35,000
– 3,000
52,800
– 4,500
Bal.
g.
78,500
– 2,300
2,750
950
35,000
– 3,000
52,800
– 4,500
– 1,100
– 1,200
Bal.
h.
76,200
– 5,250
2,750
950
35,000
– 3,000
52,800
– 5,250
– 4,500
– 1,100
– 1,200
Bal.
i.
70,950
2,750
– 1,000
950
35,000
– 3,000
52,800
– 5,250
– 4,500
– 1,100
– 1,000
– 1,200
Bal.
70,950
1,750
950
35,000
– 3,000
52,800
– 5,250
– 4,500
– 1,100
– 1,000
– 1,200
CHAPTER 1 Introduction to Accounting and Business
1–20
Prob. 1–4A (Concluded)
2.
Western Realty
Income Statement
For the Month Ended August 31, 20Y9
Sales commissions
$ 52,800
Expenses:
Salaries expense
$5,250
Rent expense
4,500
Automobile expense
1,100
Supplies expense
1,000
Miscellaneous expense
1,200
Total expenses
(13,050)
Net income
$ 39,750
Western Realty
Statement of Stockholders’ Equity
For the Month Ended August 31, 20Y9
Common
Stock
Retained
Earnings
Total
Balances, August 1, 20Y9
$ 0
$ 0
$ 0
Issued common stock
35,000
35,000
Net income
39,750
39,750
Dividends
(3,000)
(3,000)
Balances, August 31, 20Y9
$35,000
$36,750
$71,750
Western Realty
Balance Sheet
August 31, 20Y9
Assets
Cash
$70,950
Supplies
1,750
Total assets
$72,700
Liabilities
Accounts payable
$ 950
Stockholders’ Equity
Common stock
$35,000
Retained earnings
36,750
Total stockholders’ equity
71,750
Total liabilities and stockholders’ equity
$72,700