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CHAPTER 1
Accounting in Action
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
A
Problems
1. Identify the activities and
users associated with
accounting.
1, 2, 3, 4, 5
1
1, 2
2. Explain the building blocks of
accounting: ethics, principles,
and assumptions.
6, 7, 8, 9, 10
2
3, 4
3. State the accounting
equation, and define its
components.
11, 12, 13, 22
1, 2, 3, 4, 5, 8
3, 5
5
1A, 2A 4A
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time Allotted
(min.)
1A
Analyze transactions and compute net income.
Moderate
40–50
2A
Analyze transactions and prepare income statement,
owner’s equity statement, and balance sheet.
Moderate
50–60
3A
Prepare income statement, owner’s equity statement, and
balance sheet.
Moderate
50–60
WEYGANDT ACCOUNTING PRINCIPLES 12E
CHAPTER 1
ACCOUNTING IN ACTION
Number
LO
BT
Difficulty
Time (min.)
BE1
3
AP
Simple
2–4
BE2
3
AP
Simple
3–5
BE3
3
AP
Moderate
4–6
BE4
3
AP
Moderate
4–6
BE9
4
C
Simple
1–2
BE10
5
AP
Simple
3–5
BE11
5
C
Simple
2–4
DI1
1
K
Simple
2–4
DI2
2
K
Simple
2–4
DI3
3
AP
Simple
6–8
DI4
4
AP
Moderate
8–10
DI5
3, 5
AP
Moderate
10–12
EX1
1
C
Moderate
5–7
EX2
1
C
Simple
6–8
EX3
2
C
Moderate
6–8
EX4
2
C
Moderate
6–8
EX5
3
C
Simple
4–6
EX6
4
C
Simple
6–8
EX7
4
C
Simple
4–6
ACCOUNTING IN ACTION (Continued)
Number
LO
BT
Difficulty
Time (min.)
P1A
3, 4
AP
Moderate
40–50
BYP1
5
AN
Simple
10–15
BYP2
5
AN, E
Simple
10–15
BYP3
BYP4
5
6
AN, E
C, AN
Simple
Simple
10–15
15–20
BLOOM’ S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Identify the activities and users
associated with accounting.
DI1-1
Q1-1
Q1-2
Q1-3
Q1-4
Q1-5
E1-1
E1-2
3. Explain the building blocks of
accounting: ethics, principles,
and assumptions.
Q1-7
Q1-8
Q1-9
Q1-10
DI1-1
Q1-6
E1-3
E1-4
3. State the accounting equation,
and define its components.
DI1-2
BE1-5
Q1-11
Q1-12
Q1-13
BE1-4
BE1-8
BE1-9
E1-5
BE1-1
BE1-2
BE1-3
DI1-5
P1-1A
P1-2A
P1-4A
4. Analyze the effects of business
transactions on the accounting
equation.
Q1-14
Q1-15
Q1-16
Q1-18
BE1-6
BE1-7
E1-6
E1-7
DI1-4
E1-8
P1-1A
P1-2A
P1-4A
P1-5A
5. Describe the four financial
statements and how they are
prepared.
Q1-17
Q1-19
BE1-11
Q1-20
Q1-21
BE1-10
DI1-5
E1-8
E1-14
E1-15
E1-16
E1-17
P1-2A
E1-13
ANSWERS TO QUESTIONS
1. Yes, this is correct. Virtually every organization and person in our society uses accounting
information. Businesses, investors, creditors, government agencies, and not-for-profit organizations
must use accounting information to operate effectively.
2. Accounting is the process of identifying, recording, and communicating the economic events of
an organization to interested users of the information. The first step of the accounting process is
therefore to identify economic events that are relevant to a particular business. Once identified
3. (a) Internal users are those who plan, organize, and run the business and therefore are officers
and other decision makers.
4. (a) Investors (owners) use accounting information to make decisions to buy, hold, or sell owner-
ship shares of a company.
(b) Creditors use accounting information to evaluate the risks of granting credit or lending money.
6. Trenton Travel Agency should report the land at $90,000 on its December 31, 2017 balance
sheet. This is true not only at the time the land is purchased, but also over the time the land is
held. In determining which measurement principle to use (cost or fair value) companies weigh the
factual nature of cost figures versus the relevance of fair value. In general, companies use cost.
Only in situations where assets are actively traded do companies apply the fair value principle.
An important concept that accountants follow is the historical cost principle.
7. The monetary unit assumption requires that only transaction data that can be expressed in terms
of money be included in the accounting records. This assumption enables accounting to quantify
(measure) economic events.
Questions Chapter 1 (Continued)
10. One of the advantages Rachel Hipp would enjoy is that ownership of a corporation is represented
by transferable shares of stock. This would allow Rachel to raise money easily by selling
11. The basic accounting equation is Assets = Liabilities + Owner’s Equity.
12. (a) Assets are resources owned by a business. Liabilities are claims against assets. Put more
13. The liabilities are: (b) Accounts payable and (g) Salaries and wages payable.
14. Yes, a business can enter into a transaction in which only the left side of the accounting equation
is affected. An example would be a transaction where an increase in one asset is offset by
15. Business transactions are the economic events of the enterprise recorded by accountants
because they affect the basic accounting equation.
(a) The death of the owner of the company is not a business transaction as it does not affect
the basic accounting equation.
16. (a) Decrease assets and decrease owner’s equity.
(b) Increase assets and decrease assets.
(c) Increase assets and increase owner’s equity.
(d) Decrease assets and decrease liabilities.
18. No, this treatment is not proper. While the transaction does involve a receipt of cash, it does not
represent revenues. Revenues are the gross increase in owner’s equity resulting from business
activities entered into for the purpose of earning income. This transaction is simply an additional
investment made by the owner in the business.
Questions Chapter 1 (Continued)
19. Yes. Net income does appear on the income statement—it is the result of subtracting expenses
from revenues. In addition, net income appears in the owner’s equity statement—it is shown as
an addition to the beginning-of-period capital. Indirectly, the net income of a company is also
included in the balance sheet. It is included in the capital account which appears in the owner’s
equity section of the balance sheet.
20. (a) Ending capital balance ..................................................................................... $198,000
Beginning capital balance ................................................................................ 168,000
Net income ....................................................................................................... $ 30,000
21. (a) Total revenues ($20,000 + $70,000) ................................................................ $90,000
(b) Total expenses ($26,000 + $40,000) ................................................................ $66,000
22. Apple’s accounting equation at September 28, 2013 was $207,000,000,000 = $83,451,000,000 +
$123,549,000,000.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 1-1
BRIEF EXERCISE 1-2
(a) $120,000 + $232,000 = $352,000 (Total assets).
BRIEF EXERCISE 1-3
(a) ($800,000 + $150,000) – ($300,000 – $60,000) = $710,000
(Owner’s equity).
BRIEF EXERCISE 1-4
Owner’s Equity
Assets
=
Liabilities
+
Owner’s
Capital
–
Owner’s
Drawings
+
Revenues
–
Expenses
(a)
X
=
$90,000
+
$150,000
–
$40,000
+
$450,000
–
$320,000
X
=
$90,000
+
$240,000
X
=
$330,000
(b)
$57,000
=
X
+
$25,000
–
$7,000
+
$52,000
–
$35,000
(c)
$600,000
=
($600,000 x 2/3)
+
X (Owner’s equity)
BRIEF EXERCISE 1-5
A (a) Accounts receivable A (d) Supplies
BRIEF EXERCISE 1-6
Assets
Liabilities
Owner’s Equity
(a)
+
+
NE
BRIEF EXERCISE 1-7
Assets
Liabilities
Owner’s Equity
(a)
+
NE
+
(b)
–
NE
–
(c)
NE
NE
NE
BRIEF EXERCISE 1-8
E (a) Advertising expense D (e) Owner’s drawings
BRIEF EXERCISE 1-9
BRIEF EXERCISE 1-10
MENDOZA COMPANY
Balance Sheet
December 31, 2017
Assets
Cash ............................................................................................... $ 49,000
Liabilities and Owner’s Equity
Liabilities
Accounts payable .................................................................. $ 90,000
Owner’s equity
BRIEF EXERCISE 1-11
BS (a) Notes payable
IS (b) Advertising expense
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 1-1
1. False. The three steps in the accounting process are identification,
recording, and communication.
2. True.
DO IT! 1-2
1. False. Congress passed the Sarbanes-Oxley Act to reduce unethical
behavior and decrease the likelihood of future corporate scandals.
2. False. The standards of conduct by which actions are judged as right
DO IT! 1-3
1. Drawings is owner’s drawings (D); it decreases owner’s equity.
2. Rent Revenue is revenue (R); it increases owner’s equity.
DO IT! 1-4
Assets
=
Liabilities
+
Owner’s Equity
Cash
+
Accounts
Receivable
=
Accounts
Payable
+
Owner’s
Capital
–
Owner’s
Drawings
+
Revenues
–
Expenses
(1)
+$20,000
+$20,000
DO IT! 1-5
(a) The total assets are $49,000, comprised of Cash $6,500, Accounts
Receivable $13,500, and Equipment $29,000.
(b) Net income is $20,500, computed as follows:
Revenues
Service revenue.................................................. $53,500
Expenses
(c) The ending owner’s equity balance of Kirby Company is $21,000. By
rewriting the accounting equation, we can compute Owner’s Equity as
Assets minus Liabilities, as follows:
Total assets [as computed in (a)] ............................. $49,000
Less: Liabilities
Notes payable ..................................................... $25,000
SOLUTIONS TO EXERCISES
EXERCISE 1-1
C Analyzing and interpreting information.
R Classifying economic events.
C Explaining uses, meaning, and limitations of data.
EXERCISE 1-2
(a) Internal users
Marketing manager
Production supervisor
Store manager
Vice-president of finance
External users
Customers
Internal Revenue Service
Labor unions
Securities and Exchange Commission
Suppliers
(b) I Can we afford to give our employees a pay raise?
E Did the company earn a satisfactory income?
I Do we need to borrow in the near future?
EXERCISE 1-3
Angela Duffy, president of Duffy Company, instructed Jana Barth, the head
of the accounting department, to report the company’s land in its
accounting reports at its fair value of $170,000 instead of its cost of $100,000,
in an effort to make the company appear to be a better investment. The
historical cost principle requires that assets be recorded and reported at
their cost, because cost is faithfully representative and can be objectively
measured and verified. In this case, the historical cost principle should be
used and Land reported at $100,000, not $170,000.
The stakeholders include stockholders and creditors of Duffy Company,
potential stockholders and creditors, other users of Duffy’s accounting
reports, Angela Duffy, and Jana Barth. All users of Duffy’s accounting
reports could be harmed by relying on information that may be unreliable.
EXERCISE 1-4
1. Incorrect. The historical cost principle requires that assets (such as
buildings) be recorded and reported at their cost.
2. Correct. The monetary unit assumption requires that companies include
in the accounting records only transaction data that can be expressed
in terms of money.
EXERCISE 1-5
Asset
Liability
Owner’s Equity
Cash
Accounts payable
Owner’s capital
Equipment
Notes payable
EXERCISE 1-6
1. Increase in assets and increase in owner’s equity.
2. Decrease in assets and decrease in owner’s equity.
3. Increase in assets and increase in liabilities.
4. Increase in assets and increase in owner’s equity.
EXERCISE 1-7
1. (c) 5. (d)
EXERCISE 1-8
(a) 1. Owner invested $15,000 cash in the business.
2. Purchased equipment for $5,000, paying $2,000 in cash and the
balance of $3,000 on account.
EXERCISE 1-8 (Continued)
6. Owner withdrew $2,000 cash for personal use.
7. Paid $650 cash for rent.
8. Collected $450 cash from customers on account.
9. Paid salaries and wages of $4,800.
10. Incurred $400 of utilities expense on account.
(b) Investment ............................................................................... $15,000
Service revenue ...................................................................... 8,500
Drawings ................................................................................. (2,000)
Rent expense .......................................................................... (650)
Salaries and wages expense ................................................. (4,800)
Utilities expense ..................................................................... (400)
Increase in owner’s equity ..................................................... $15,650
EXERCISE 1-9
ARTHUR COOPER & CO.
Income Statement
For the Month Ended August 31, 2017
Revenues
Service revenue ......................................................... $8,500
Expenses
EXERCISE 1-9 (Continued)
ARTHUR COOPER & CO.
Owner’s Equity Statement
For the Month Ended August 31, 2017
Owner’s capital, August 1 ............................................ $ 0
Add: Investments ....................................................... $15,000
Net income ......................................................... 2,650 17,650
17,650
Less: Drawings ............................................................ 2,000
Owner’s capital, August 31 .......................................... $15,650
ARTHUR COOPER & CO.
Balance Sheet
August 31, 2017
Assets
Cash ............................................................................................... $ 8,350
Accounts receivable ...................................................................... 3,450
Liabilities and Owner’s Equity
Liabilities
Accounts payable .................................................................. $ 1,900
Owner’s equity
Owner’s capital ...................................................................... 15,650
Total liabilities and owner’s equity ............................... $17,550
EXERCISE 1-10
EXERCISE 1-10 (Continued)
(b) Owner’s equity—12/31/17 ($460,000 – $300,000) ............... $160,000
Owner’s equity—1/1/17—see (a) ......................................... 150,000
Increase in owner’s equity .................................................. 10,000
Less: Additional investment .............................................. 45,000
Net loss for 2017 .................................................................. $ (35,000)
EXERCISE 1-11
(a) Total assets (beginning of year) ......................................... $110,000
Total liabilities (beginning of year) ..................................... 85,000
Total owner’s equity (beginning of year) ........................... $ 25,000
(b) Total owner’s equity (end of year) ...................................... $ 40,000
Total owner’s equity (beginning of year) ........................... 25,000
Increase in owner’s equity .................................................. $ 15,000
EXERCISE 1-11 (Continued)
(d) Total owner’s equity (end of year) ...................................... $130,000
Total owner’s equity (beginning of year) ........................... 80,000
Increase in owner’s equity .................................................. $ 50,000
EXERCISE 1-12
ARMANDA CO.
Income Statement
For the Year Ended December 31, 2017
Revenues
Service revenue .................................................... $63,600
Expenses
Salaries and wages expense ................................ $29,500
Rent expense ........................................................ 10,400
Utilities expense ................................................... 3,100
ARMANDA CO.
Owner’s Equity Statement
For the Year Ended December 31, 2017
Owner’s capital, January 1 ............................................................. $48,000
