CHAPTER 1
Introduction to Financial Statements
PROBLEM 1-1C
(a) Rachel should run her business as a sole proprietor. She has no real
need to raise funds, and she doesn’t need the expertise provided by
(b) The fact that the combined business expects that it will need to raise
(c) The concern over legal liability would make the corporate form a better
choice over a partnership. Also, the corporate form will allow the busi-
(d) One way to ensure control would be for Brittany 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 corpo–
(e) It is likely that this business would form as a partnership. Its needs for
additional funds would probably be minimal in the foreseeable future.
PROBLEM 1-2C
(a) In purchasing an investment that will be held for an extended period,
the investor must try to predict the future performance of Bally Total
(b) In deciding whether to extend credit for 60 days Boeing would be most
interested in the balance sheet because the balance sheet shows the
(c) The president would probably be most interested in the statement of
cash flows since it shows how much cash the company generates and
(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. The lender
would therefore be interested in predicting future income using the
PROBLEM 1-3C
(a) SPECIAL DELIVERY
Income Statement
For the Month Ended May 31, 2014
Revenues
Service revenue ……………………………. $10,400
Expenses
Maintenance and repairs expense …. $2,900
Salaries and wages expense …………. 2,000
SPECIAL DELIVERY
Retained Earnings Statement
For the Month Ended May 31, 2014
Retained earnings, May 1 …………………………………………………. $ 0
Add: Net income ……………………………………………………………. 4,300
PROBLEM 1-3C (Continued)
SPECIAL DELIVERY
Balance Sheet
May 31, 2014
Assets
Cash ………………………………………………………………. $15,800
Accounts receivable ……………………………………….. 6,200
Liabilities and Stockholders’ Equity
Liabilities
Notes payable ………………………………………….. $28,000
Accounts payable …………………………………….. 2,400
Total liabilities ………………………………….. $30,400
Stockholders’ equity
(b) Special Delivery was very profitable during its first month of operations.
(c) Many companies choose to “reinvest” in themselves by building up a
larger balance in retained earnings rather than distributing dividends as
PROBLEM 1-4C
(a) Rowe Corporation should include the following items in its statement
of cash flows:
Cash paid to suppliers
Cash dividends paid
ROWE CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash received from customers …………………… $172,000)
Cash paid to suppliers ……………………………….. (154,000)
(b) Operating activities provided $18,000 cash which was not adequate to
cover $30,000 needed for investing activities and $6,000 of dividend
PROBLEM 1-5C
(a) 1. The $3,000 of revenue that the company earned in 2013 should not
2. Since the corporation did not incur or pay the $10,000 of rent ex-
3. Including the $4,000 as vacation expense misstates the corporation’s
net income.
(b) AUSTIN CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenue ($47,000 – $3,000)*…………………………………………….. $44,000
Expenses