CHAPTER 1
THE ROLE OF ACCOUNTING IN BUSINESS
CLASS DISCUSSION QUESTIONS
1. The objective of most businesses is to
maximize profits. Profit is the difference
between the amounts received from
customers for goods or services provid-
ed and the amounts paid for the inputs
used to provide those goods or services.
3. A manufacturing business changes
basic inputs into products that are sold
to customers. A service business pro–
vides services rather than products to
customers. A restaurant, such as
McDonald’s, has characteristics of both
a manufacturing and a service business
in that McDonald’s takes raw inputs,
such as cheese, fish, and beef, and pro-
tion. For these reasons, most large
companies that require large invest-
ments in property, plant, and equipment
are organized as corporations.
5. The business emphasis of KIA is a low-
cost emphasis. In contrast, the business
6. Super Walmart will compete for customers using
a low-cost strategy. The size and buying power
of Walmart Inc. provides 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
host of practical and miscellaneous items.
8. No. The stakeholders within a group do not al-
ways share the same interests. For example,
bankers are primarily concerned about the ability
of the business to repay its debt, including inter-
est. In contrast, stockholders are more con-
cerned about the long-term profitability of the
business, the business’s ability to pay dividends,
and the future appreciation of their stock.
In addition, accounting provides information to
other stakeholders to use in assessing the
economic performance and condition of the
business.
11. The income statement presents a summary of
the revenues and expenses of a business for a
2
ment 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 loss of $(1,636) million ($72,618
million – $74,254 million).
13. Net income or net loss will appear on
the income statement and the statement
cash flows.
14. No. The business entity concept limits the re-
cording of economic data to transactions directly
affecting the activities of the business. The pay-
ment of the interest of $6,000 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
3
EXERCISES
E1–1
1. service
2. merchandising
6. merchandising
7. manufacturing
11. manufacturing
12. service
E1–2
1. a—low-cost
2. a—low-cost
5. a—low-cost
6. b—premium-price
10. a—low-cost
11. b—premium-price
E1–3
Best Buy stockholders’ equity (in millions): $13,856 – $9,147 = $4,709
Gamestop stockholders’ equity (in millions): $4,976 – $2,722 = $2,254
E1–4
E1–5
a. $262,500 + $450,000 = $712,500
b. $1,320,000 – $787,500 = $532,500
4
E1–6
a. $36,347 – $25,268 = $11,079
E1–7
It would be incorrect to say the business had incurred a net loss of $10,000. The
E1–8
Company Chang
Stockholders’ equity at end of year ($900,000 – $300,000) …..…………… $600,000
Deduct stockholders’ equity at beginning of year
($775,000 – $400,000) ………………………………….…………………………….. 375,000
Net income (increase in stockholders’ equity) …………….……………… $225,000
Company Henry
5
E1–9
a. (1) $8,271 – $3,696 = $4,575
E1–10
Balance sheet items: 1, 2, 3, 7, 8
E1–11
Income statement items: 4, 5, 6, 9, 10
E1–12
1. a—asset
2. b—liability
6. a—asset
7. b—liability
6
E1–13
ALL SEASONS COMPANY
Statement of Stockholders’ Equity
For the Month Ended June 30, 20Y7
Common Stock Retained Earnings Total
Balances, June 1, 20Y7 ……………… $30,000 $145,000 $175,000
E1–14
JLM SERVICES
Income Statement
For the Month Ended August 31, 20Y5
Fees earned ………………………………………………………………… $2,550,000
Operating expenses:
Wages expense ……………………………………………………… $1,612,500
Rent expense ………………………………………….……………… 240,000
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
CO Stockholders’ equity at end of year ($460,000 – $110,000) ……… $ 350,000
Deduct stockholders’ equity at beginning of year
($300,000 – $130,000). ……………………………………………………….. 170,000
Increase in stockholders’ equity …………………………………………… $ 180,000
Add dividends ………………………………………..…………………………… 20,000
KS Stockholders’ equity at end of year ($660,000 – $360,000) ……… $ 300,000
Deduct 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
Add dividends ………………………………………..…………………………… 90,000
$ 650,000
Deduct additional issue of capital stock ………………..……………… 100,000
8
E1–16
a. MONTANA INTERIORS
Balance Sheet
October 31, 20Y8
Assets
Cash ……………………………………………………………………… $110,000
Liabilities
Accounts payable……………………………………….………….. $ 40,000
Stockholders’ Equity
Capital stock ………………………………………………………….. $ 60,000
Retained earnings ……………………………………..…………… 100,000* 160,000
MONTANA INTERIORS
Balance Sheet
November 30, 20Y8
Assets
Cash ……………………………………………………………………… $ 140,000
Accounts receivable ………………………………………………. 118,000
Supplies ………………………………………………………………… 20,000
Total assets ………………………………………….……………….. $ 278,000
Liabilities
Accounts payable……………………………………….………….. $ 65,000
9
E1–16, Concluded
b. Retained earnings, November 30 ………………………..……………………… $ 153,000
Deduct retained earnings, October 31 …………………….………………….. 100,000
Net income ……………………………………………………………………………….. $ 53,000
Add dividends …………………………………………………………………………… 20,000
Net income ……………………………………………………………………………….. $ 73,000
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 (used for) operating activities:
Cash received from customers …………………………….. $ 600,000
Cash paid 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 information
on whether the company’s business emphasis is working and, thus, whether the
company will be around to provide warranty and other support services 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.
E1–22
1. BS
2. BS
6. IS
7. BS
11. IS
12. IS
12
E1–23
AMAZON.COM, INC.
Income Statement
For the Year Ended December 31
(in millions)
Revenues:
Net sales …………………………………………….…………………. $177,866
Other income ………………………………………….……………… 548
Total revenues………………………………………..…………. $178,414
Expenses:
E1–24
1. BS
2. BS
6. IS
7. IS
11. IS, SE
12. SCF
16. IS
17. BS
13
E1–25
1. All financial statements should contain the name of the business in their
headings. The statement of stockholders’ equity is incorrectly headed as
“Julie Baxter” rather than Outlaw Realty. The headings of the balance sheet
and statement of cash flows need the name of the business.
4. The balance sheet should be labeled “August 31, 20Y7,” rather than “For the
Month Ended August 31, 20Y7.”
5. On the income statement, there is a mathematical error in the subtraction of
total operating expenses from the sales commissions. The correct net income
should be $94,500. This also affects the retained earnings statement and the
amount of retained earnings that appears on the balance sheet.
8. Accounts receivable and prepaid expenses should be listed as assets on the
balance sheet.
9. The balance sheet assets should equal the sum of the liabilities and stock-
holders’ equity.
14
E1–25, Continued
Corrected financial statements appear as follows:
OUTLAW REALTY
Income Statement
For the Month Ended August 31, 20Y7
Sales commissions …………………………………………………….. $408,400
Operating expenses:
Office salaries expense ………………………………..………… $272,600
OUTLAW REALTY
Statement of Stockholders’ Equity
For the Month Ended August 31, 20Y7
Common Stock Retained Earnings Total
Balances, August 1, 20Y7 ………….. $ 0 $ 0 $ 0
Issuance of common stock ………… 100,000 100,000
OUTLAW REALTY
Balance Sheet
August 31, 20Y7
Assets
Cash ………………………………………………….……………………….. $ 51,600
Liabilities
Accounts payable ……………………………………….………………. $ 17,500
Stockholders’ Equity
Common stock …………………………………………..……………….. $100,000
E1–25, Concluded
OUTLAW REALTY
Statement of Cash Flows
For the Month Ended August 31, 20Y7
Cash flows from (used for) operating activities:
Cash received from customers ………………………………….. $327,200
Cash paid for operating expenses ………………………..……. (303,600)
Net cash flows from operating activities …………………….. $ 23,600
Cash as of August 31 …………………………………………………….. $ 51,600
E1–26
1. G
2. D
6. D
7. C
E1–27
1. C
2. C
5. B
6. C
9. X
10. M
16
PROBLEMS
P1–1
1. VIVA TRAVEL SERVICE
Income Statement
For the Year Ended September 30, 20Y6
Fees earned …………………………………………..………………. $810,000
Operating expenses:
Wages expense ………………………………………..……….. $382,500
Rent expense ……………………………………………………. 162,000
2. VIVA TRAVEL SERVICE
Statement of Stockholders’ Equity
For the Year Ended September 30, 20Y6
Common Stock Retained Earnings Total
Balances, Oct. 1, 20Y5 ………….. $45,000 $135,000 $180,000
Issuance of common stock …… 18,000 18,000
3. VIVA TRAVEL SERVICE
Balance Sheet
September 30, 20Y6
Assets
Cash ……………………………………………………………………… $149,400
Accounts receivable ………………………………………………. 288,900
Supplies ………………………………………………………………… 11,700
Total assets ………………………………………….……………….. $450,000