CHAPTER 1
PROBLEM 1-1B
(a) Randy should run his business as a sole proprietor. He has no real
need to raise funds, and he doesn’t need the expertise provided by
(b) The fact that the combined business expects that it will need to raise
significant funds in the near future makes the corporate form more
desirable in this case.
(c) The concern over legal liability would make the corporate form a
better choice over a partnership. Also, the corporate form will allow
(d) One way to ensure control would be for Marty to form a sole
proprietorship. However, in order for this business to thrive it will
need a substantial investment of funds early. This would suggest the
(e) It is likely that this business would form as a partnership. Its needs
for additional funds would probably be minimal in the foreseeable
PROBLEM 1-2B
(a) In purchasing an investment that will be held for an extended period,
the investor must try to predict the future performance of 24/7
Fitness. The income statement provides the most useful information
for predicting future performance.
(c) The president would probably be most interested in the statement of
cash flows since it shows how much cash the company generates
and how that cash is used. The statement of cash flows can be used
to predict the company’s future cash-generating ability.
(d) In extending a loan for a relatively long period of time the lender is
most interested in the probability that the company will generate
sufficient income to meet its interest payments and repay its principal.
PROBLEM 1-3B
(a) SHAW’S GARDEN
Income Statement
For the Month Ended May 31, 2014
Revenues
Service revenue ……………………………. $10,400
Expenses
Maintenance and repairs expense …. $2,100
SHAW’S GARDEN
Retained Earnings Statement
For the Month Ended May 31, 2014
Retained earnings, May 1 …………………………………………………. $ 0
Add: Net income …………………………………………………………….. 4,200
PROBLEM 1-3B (Continued)
SHAW’S GARDEN
Balance Sheet
May 31, 2014
Assets
Cash ………………………………………………………………. $10,800
Liabilities and Stockholders’ Equity
Liabilities
Notes payable ………………………………………….. $26,000
Accounts payable …………………………………….. 4,400
(b) Shaw’s Garden was very profitable during its first month of operations.
Net income of $4,200 represents a 9.3% return on the $45,000 invest–
ment as well as 40.4% of service revenues ($4,200 ÷ $10,400).
(c) Many companies choose to “reinvest” in themselves by building up a
larger balance in retained earnings rather than distributing dividends
PROBLEM 1-4B
(a) Preacher Corporation should include the following items in its
statement of cash flows:
Cash paid to suppliers
Cash dividends paid
PREACHER CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash received from customers …………………… $162,000
Cash paid to suppliers ……………………………….. (154,000)
Net cash provided by operating activities …… $8,000
Cash flows from investing activities
Cash paid to purchase equipment ………………. (20,000)
(b) Operating activities provided $8,000 cash, which was not adequate
to cover $20,000 needed for investing activities and $2,000 of
PROBLEM 1-5B
(a) 1. The $3,000 of revenue that the company earned in 2013 should
2. Since the corporation did not incur or pay the $10,000 of rent ex-
3. Including the $6,000 as vacation expense misstates the corpo-
ration’s net income.
(b) WALTERS CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenue ($40,000 – $3,000)* …………………………………………….. $37,000
Expenses