1
CHAPTER 1
THE ROLE OF ACCOUNTING IN BUSINESS
CLASS DISCUSSION QUESTIONS
1. The objective of most businesses is to max–
imize profits. Profit is the difference between
the amounts received from customers for
goods or services provided and the amounts
paid for the inputs used to provide those
goods or services.
2. A manufacturing business changes basic
inputs into products that are then sold to
and Walmart.
3. A manufacturing business changes basic
inputs into products that are then sold to
customers. A service business provides ser-
vices rather than products to customers. A
4. The corporate form allows the company to
obtain large amounts of resources by issu-
ing stock. In addition, in a corporation the
5. The business emphasis of KIA is a low-cost
emphasis. In contrast, the business empha-
sis of BMW is a premium-price emphasis.
The difference in emphases is directly
reflected in the prices of the autos. For
Walmart a competitive advantage over your
friend in the ability to offer low prices. Thus,
your friend should attempt to compete using
a premium-price emphasis. For example,
your friend could offer personalized service
to customers such as knowing customers’
names and providing a friendly atmosphere,
home delivery of medicines, help in filing in-
tronics, and a host of practical and miscella-
neous items.
8. No. The stakeholders within a group do not
always share the same interests. For exam-
ple, bankers are primarily concerned about
west Airlines could include issuing stock,
borrowing from banks, and paying divi-
dends. Examples of investing activities could
include purchasing new aircraft, acquiring
business. In addition, accounting provides
information to other stakeholders to use in
assessing the economic performance and
condition of the business.
and stockholders’ equity of a business as of
a specific date. The statement of cash flows
presents a summary of the cash receipts
and cash payments of a business entity for a
specific period of time.
12. Net income, $2,929 million ($69,865 million
– $66,936 million)
13. Net income or net loss will appear on both
the income statement and the retained earn-
14. No. The business entity concept limits the
recording of economic data to transactions
directly affecting the activities of the busi-
ness. The payment of the interest of $5,000
is a personal transaction of Billy Jessop and
should not be recorded by Valley Delivery
Service.
15. The land should be recorded at its cost of
$110,000 to Wok Repair Service. This is
EXERCISES
E1–1
1. service
2. merchandise
6. merchandise
7. manufacturing
11. manufacturing
12. service
E1–2
1. a—low-cost
5. a—low-cost
9. b—premium-price
E1–3
Best Buy stockholders’ equity: $16,005 – $12,260 = $3,745
Gamestop stockholders’ equity: $4,847 – $1,805 = $3,042
E1–4
E1–5
a. $160,000 ($70,000 + $90,000)
E1–6
a. $12,361 ($27,140 – $14,779)
E1–7
It would be incorrect to say that the business had incurred a net loss of $10,000.
E1–8
Company Chang
Stockholders’ equity at end of year ($900,000 – $300,000) ………………… $600,000
Stockholders’ equity at beginning of year ($775,000 – $400,000) ………. 375,000
Net income (increase in stockholders’ equity) …………………………..… $225,000
5
E1–9
a. (1) $6,415,471 ($13,430,622 – $7,015,151)
(2) $6,943,710 ($13,911,667 – $6,967,957)
b. $984,656 ($25,022,192 – $18,280,364 – $5,048,492 – $233,372 – $475,308)
E1–11
Income statement items: 4, 5, 6, 9, 10
E1–12
1. a—asset
6. a—asset
6
E1–13
COIL COMPANY
Retained Earnings Statement
For the Month Ended June 30, 20Y7
Retained earnings, June 1, 20Y7………………………………….. $615,000
E1–14
MOONLIGHT SERVICES
Income Statement
For the Month Ended February 28, 20Y5
Fees earned ……………………………………………………………….. $925,000
Operating expenses:
7
E1–15
In each case, solve for a single unknown, using the following equation:
Stockholders’ Equity (beginning) + Additional Issue of Capital Stock – Dividends
+ Revenue – Expenses = Stockholders’ Equity (ending)
AL Stockholders’ equity at end of year ($800,000 – $450,000) …….. $ 350,000
Stockholders’ equity at beginning of year ($400,000 – $200,000). 200,000
CO Stockholders’ equity at end of year ($460,000 – $110,000) …….. $ 350,000
Stockholders’ equity at beginning of year ($300,000 – $130,000). 170,000
Increase in stockholders’ equity ………………………………………….. $ 180,000
Add dividends …………………………………………………………………….. 20,000
$ 200,000
KS Stockholders’ equity at end of year ($660,000 – $360,000) …….. $ 300,000
Stockholders’ equity at beginning of year ($550,000 – $325,000). 225,000
Increase in stockholders’ equity ………………………………………….. $ 75,000
Add decrease due to net loss ($115,000 – $130,000) ……………… 15,000
$ 90,000
Deduct additional issue of capital stock ………………………………. (100,000)
Dividends ………………………………………………………………………. (c) $ (10,000)
MT Stockholders’ equity at end of year ($1,200,000 – $700,000) ….. $ 500,000
Add decrease due to net loss ($420,000 – $480,000) ……………… 60,000
8
E1–16
a. MONTANA INTERIORS
Balance Sheet
October 31, 20Y8
Assets
Cash ……………………………………………………….…………….. $110,000
Accounts receivable ………………………………………………. 75,000
Supplies ………………………………………………………………… 15,000
Total assets …………………………………………………………… $200,000
MONTANA INTERIORS
Balance Sheet
November 30, 20Y8
Assets
Cash ……………………………………………………….…………….. $ 140,000
Accounts receivable ………………………………………………. 118,000
Supplies ………………………………………………………………… 20,000
Total assets …………………………………………………………… $ 278,000
E1–16, Concluded
b. Retained earnings, November 30 ……………………………………………….. $ 153,000
Retained earnings, October 31 …………………………………………………… 100,000
E1–17
Balance sheet: a, b, c, d, f, g, h, i, j, l, m
Income statement: e, k, n, o
E1–18
1. c—financing activity
2. a—operating activity
6. b—investing activity
7. a—operating activity
E1–19
1. c—financing activity
3. a—operating activity
10
E1–20
LOONEY INC.
Statement of Cash Flows
For the Month Ended July 31, Year 1
Cash flows from operating activities:
Cash received from customers……………………. $600,000
Deduct cash payments for expenses …………… 380,000
Net cash flows from operating activities ……… $220,000
E1–21
Situation 1: The income statement of Dell would provide the most useful infor-
mation on whether the company’s business emphasis is working and thus
whether the company will be around to provide warranty and other support ser-
vices for your personal computer.
11
E1–21, Concluded
Situation 4: The income statements of Sears and JCPenney would provide the
most useful information on which company’s business emphasis is working best
and thus generating profits. Both Sears and JCPenney are under considerable
pressure from low-cost retailers such as Walmart.
E1–22
1. BS
2. BS
6. IS
7. BS
11. IS
12. BS
12
E1–23
AMAZON.COM INC.
Income Statement
For the Year Ended December 31, 20Y1
(in Millions)
Revenues:
Net sales ……………………………………………………………….. $48,077
Other income …………………………………………………………. 125
Total revenue ……………………………………………………………… $48,202
Expenses:
E1–24
1. BS
2. BS
6. IS
7. IS
11. IS, RE
12. SCF
16. IS
17. BS
E1–25
1. All financial statements should contain the name of the business in their
2. The income statement, retained earnings statement, and statement of cash
flows cover a period of time and should be labeled “For the Month Ended
August 31, Year 1.”
4. The balance sheet should be labeled “August 31, Year 1,” rather than “For the
Month Ended August 31, Year 1.”
6. In the income statement, the total operating expenses are incorrectly sub-
tracted from the sales commissions, resulting in an incorrect net income
7. In the retained earnings statement, the net income should be presented be-
8. Accounts payable should be listed as a liability on the balance sheet.
9. Accounts receivable and prepaid expenses should be listed as assets on the
balance sheet.
10. The balance sheet assets should equal the sum of the liabilities and stock-
holders’ equity.
11. The statement of cash flows omits the cash flows from investing activities
12. The net cash flow and cash balance should be dated August 31, Year 1, and
14
E1–25, Continued
Corrected financial statements appear as follows:
OUTLAW REALTY
Income Statement
For the Month Ended August 31, Year 1
Sales commissions …………………………………………………….. $408,400
Operating expenses:
OUTLAW REALTY
Retained Earnings Statement
For the Month Ended August 31, Year 1
Retained earnings, August 1, Year 1 ……………………………. $ 0
Net income for August ………………………………………………… $94,500
Less dividends during August …………………………………….. 12,000
Increase in retained earnings ………………………………………. 82,500
Retained earnings, August 31, Year 1 ………………………….. $82,500
OUTLAW REALTY
Balance Sheet
August 31, Year 1
15
E1–25, Concluded
OUTLAW REALTY
Statement of Cash Flows
For the Month Ended August 31, Year 1
Cash flows from operating activities:
Cash received from customers……………………………….. $327,200
Cash paid for operating expenses ………………………….. 303,600
Net cash flows from operating activities …………………. $ 23,600
E1–26
1. G
2. D
6. D
7. C
E1–27
1. C
2. C
5. B
6. C
9. X
10. M