Chapter 1
The Financial Statements
Ethics Check
(5-10 min.) EC 1-1
a. Integrity
b. Objectivity and independence
c. Integrity
d. Due care
Short Exercises
(5 min.) S 1-1
1. Assets are the economic resources of a business that are expected
to produce a benefit in the future.
Owners’ equity represents the insider claims of a business, the
owners’ interest in its assets.
2. Both liabilities and owners’ equity are claims to assets.
Liabilities are the outsider claims to the assets of a business; they
are obligations to pay creditors.
Owners’ equity represents the insider claims to the assets of the
business; they are the owners’ interest in its assets.
(5 min.) S 1-2
a.
Accounts receivable A
g.
Notes payable L
Prepaid expenses A
Accounts payable L
e.
Accrued expenses payable L
Common stock S
1. Revenues and expenses 2. Net income (or net loss)
(10 min.) S 1-4
a. Corporation, limited partners of a Limited-liability partnership (LLP)
and Limited-liability company (LLC). If any of these businesses
b. Proprietorship. There is a single owner of the business, so the
owner is answerable to no other owner.
c. Partnership. If the partnership fails and cannot pay its liabilities,
(5 min.) S 1-5
1. The entity assumption applies.
2. Application of the entity assumption will separate Olson’s personal
assets from the assets of Healthy Fast Foods. This will help Olson,
(5-10 min.) S 1-6
a. Historical cost principle; the sale price is the amount actually
received from the sale
b. Entity assumption
(5 min.) S 1-7
Computed amounts in boxes
Total Assets
=
Total Liabilities
+
Stockholders’ Equity
a.
$610,000
=
$270,000
+
$340,000
c.
=
+
(5 min.) S 1-8
1. Liabilities = Assets − Owners’ Equity
2. Owners’ Equity = Assets − Liabilities
(10 min.) S 1-9
a. Accounts payable B
b. Inventory B
c. Interest revenue I
d. Long-term debt B
(15-20 min.) S 1-10
a. Paying large dividends will cause retained earnings to be low.
b. Heavy investing activity and paying off debts can result in a cash
shortage even if net income has been high.
c. The single best source of cash for a business is operating activities.
d. Borrowing, issuing stock, and selling land, buildings, and equipment
(5 min.) S 1-11
a. I f. B
b. R g. C
(5 min.) S 1-12
O’Conner Services, Inc.
Income Statement
Year Ended December 31, 2016
(millions)
Revenues ……………………………………………….
$397
Expenses ……………………………………………….
Net income ……………………………………………..
$233
(5 min.) S 1-13
Roam Corp.
Statement of Retained Earnings
Year Ended December 31, 2016
(millions)
Retained earnings, December 31, 2015 …….
$230
Add: Net income ($490 − $340) ……………….
150
Less: Dividends declared ………………………..
(10-15 min.) S 1-14
Aloha Enterprises
Balance Sheet
December 31, 2016
ASSETS
(in millions)
Current assets:
Cash …………………………………………………………………
$ 50
Accounts receivable …………………………………………..
19
Total current assets …………………………………………..
69
Long-term assets ……………………………………………………
Total assets ……………………………………………………………
LIABILITIES
Current liabilities:
Accounts payable ………………………………………………
$ 13
Total current liabilities ……………………………………….
13
Long-term liabilities:
Long-term notes payable ……………………………………
25
Total liabilities ………………………………………………………..
STOCKHOLDERS’ EQUITY
Common stock ……………………………………………………….
20
Retained earnings …………………………………………………..
50
Total stockholders’ equity ……………………………………….
Total liabilities and stockholders’ equity ………………….
(10-15 min.) S 1-15
Harmon Corporation
Balance Sheet
September 30, 2016
ASSETS
(in millions)
Current assets:
Cash …………………………………………………………………
$ 75
Accounts receivable …………………………………………..
22
Total current assets …………………………………………..
97
Property and equipment ………………………………………….
28
Other long-term assets ……………………………………………
17
Total assets ……………………………………………………………
LIABILITIES
Current liabilities:
Accounts payable ………………………………………………
$ 33
Total current liabilities ……………………………………….
33
Long-term liabilities:
Long-term notes payable ……………………………………
15
Total liabilities ………………………………………………………..
48
STOCKHOLDERS’ EQUITY
Common stock ……………………………………………………….
30
Retained earnings …………………………………………………..
64*
Total stockholders’ equity ……………………………………….
94
_____
*Computation of retained earnings: Total assets ($142) − total liabilities
(10-15 min.) S 1-16
Avalon Legal Services, Inc.
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Net income …………………………………………………………
$105,000
Net cash provided by operating activities …….
Cash flows from investing activities:
Purchases of equipment ………………..
$(32,000)
Net cash used for investing activities …………..
(32,000)
Cash flows from financing activities:
Payment of dividends …………………….
$(80,000)
Net cash used for financing activities …………..
Net decrease in cash ……………………………………………….
Cash balance, December 31, 2015 …………………………...
Cash balance, December 31, 2016 …………………………...
(10–15 min.) S 1-17
Solve in this order:
a. $81
b. $81
c. $143
(5 min.) S 1-18
Ethics is a factor that should be included in every business and
accounting decision, beyond the potential economic and legal
consequences. Ideally, for each decision, honesty and truthfulness
should prevail, considering the rights of others. The decision
Exercises
(10-15 min.) E 1-19A
Amounts in billions; (computed amounts in boxes)
Stockholders’
Assets
=
Liabilities
+
Equity
Preston Drycleaners
$89
$52
$37
Pam’s Florals appears to have the strongest financial position
because its liabilities make up the smallest percentage of company
Liabilities as a percent of total assets:
Preston Drycleaners: $52/$89 = 0.58
First Street Bank: $9/$26 = 0.35
Pam’s Florals: $10/$36 = 0.28
(10-15 min.) E 1-20A
Req. 1
(Amounts in millions)
Assets
=
Liabilities
+
Stockholders’
Equity
$200
$170
(10-20 min.) E 1-21A
Situation
1
2
3
(Millions)
Total stockholders’ equity,
January 31, 2016 ($53 − $15) ……………….
$38
$38
$38
Add: Issuances of stock ………………………….
12
-0-
88
Net income …………………………………………
2*
26*
-0-
Less: Dividends declared ………………………..
(12)
Net loss ……………………………………………..
Total stockholders’ equity,
January 31, 2017 ($75 − $23) ……………….
$52
$52
(10-15 min.) E 1-22A
a. Income statement
b. Statement of retained earnings, Statement of cash flows
c. Balance sheet, Statement of cash flows
d. Balance sheet
e. Income statement
(10-20 min.) E 1-23A
Womack Products
Balance Sheet
December 31, 2016
ASSETS
Current assets:
Cash ………………………………………………………………………
$ 23,000
Receivables ……………………………………………………………
15,000
Inventory ……………………………………………………………….
77,000
Total current assets ……………………………………………….
Equipment …………………………………………………………………..
184,000
Total assets ………………………………………………………………..
LIABILITIES
Current liabilities:
Accounts payable ………………………………………………….
$ 24,000
Total current liabilities ……………………………………………
24,000
Long-term liabilities:
Long-term notes payable ……………………………………….
165,000
Total liabilities …………………………………………………………….
189,000
STOCKHOLDERS’ EQUITY
Common stock …………………………..……………………………….
Retained earnings ……………………………………………………….
77,500*
Total stockholders’ equity …………………………………………..
110,000
(10-20 min.) E 1-24A
Req. 1
Ellen Samuel Realty Company
Balance Sheet
May 31, 2016
(Amounts in millions)
ASSETS
LIABILITIES
Cash
$ 1.6
Current liabilities
$ 2.6
Receivables
0.5
Long-term liabilities
102.8
Property and equipment, net
1.7
Total liabilities
105.4
Investment assets
135.7
STOCKHOLDERS’
EQUITY
Other assets
10.5
Common stock
27.7
Retained earnings
(15-25 min.) E 1-25A
Req. 1
Ellen Samuel Realty Company
Income Statement
Year Ended May 31, 2016
(Amounts in millions)
Total revenue ……………………………………………………….
$37.9
Expenses:
Salary and other employee expenses ……………….
$13.6
Other expenses ……………………………………………….
Total expenses ………………………………………………..
Net income…………………………………………………………..
$18.5
Req. 2
The statement of retained earnings helps to compute dividends, as
follows:
Ellen Samuel Realty Company
Statement of Retained Earnings
Year Ended May 31, 2016
(Amounts in millions)
Retained earnings, beginning of year ………………………………
$16.8
Add: Net income for the year (Req. 1) ………………………………
Subtotal
Retained earnings, end of year (from Exercise 1-24A) ………
(15-20 min.) E 1-26A
Req. 1
Carson Coffee Roasters Corp.
Income Statement
For the Month Ended August 31, 2017
Revenue:
Service revenue ……………………………………..
$279,600
Expenses:
Salary expense ……………………………………….
$78,400
Utilities expense …………………………………….
5,400
Rent expense …………………………………………
Total expenses ……………………………………….
Net income …………………………………………………
Carson Coffee Roasters Corp.
Statement of Retained Earnings
For the Month Ended August 31, 2017
Retained earnings, August 1, 2017 ……………………..
$ -0-
Add: Net income for the month …………………………..
193,900
Subtotal
Less: Dividends declared …………………………………..
(15-20 min.) E 1-27A
Req. 1
Carson Coffee Roasters Corp.
Balance Sheet
August 31, 2017
Assets
Liabilities
Cash ………………………..
$ 5,900
Accounts payable …………………..
$ 9,000
Office supplies …………
7,500
Equipment ………………..
200,400
Stockholders’ Equity
Common stock ………………………
Retained earnings ………………….
Total liabilities and
Total assets ……………..
(15-20 min.) E 1-28A
Req. 1
Carson Coffee Roasters Corp.
Statement of Cash Flows
For the Month Ended August 31, 2017
Cash flows from operating activities:
Net income ……………………………………………………..
$193,900
Adjustments to reconcile net income to net
cash provided by operating activities …………….
1,500
Net cash provided by operating activities ……
195,400
Cash flows from investing activities:
Acquisition of equipment ………………………………..
$(200,400)
Net cash used for investing activities ………….
Cash flows from financing activities:
Issuance (sale) of stock to owners …………………..
$ 13,200
Payment of dividends ……………………………………..
Net cash provided by financing activities ……
Net increase in cash ……………………………………………
Cash balance, August 1, 2017 ……………………………..
0
Cash balance, August 31, 2017 …………………………...