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P1-4 A. Sales $4,500
Wages for occasional labor $ 700
Utilities 100
P1-5
A. Tender Sender Company
Profit Earned
For February
Resources created:
Sale of gift items $7,000
Sale of novelty items 3,200
B. Yes, the company created value. Organizations transform resources
from one form into another. Value is created when the value of the
P1-6 A. Resources created from sales ($8 × 1,000) $8,000
Resources consumed:
T-shirt costs ($5.50 × 1,000) $5,500
Paint ($0.50 × 1,000) 500
P1-7 T. Edison
Profit Earned
For September
A. Resources created from inventions $3,600
Resources consumed:
Rent $550
B. The information is useful because it permits Edison to understand
C. Edison may decide to increase or decrease her resource consump-
tion. For example, if she hires a research assistant she may eventu-
P1-8 Betsy’s Flag Co.
Profit Earned
For September
Resources created from flag sales $24,000
Resources consumed:
Rent $ 650
P1-9 A. The CFO should prepare a document such as this in order to help
predict future profits or losses.
B. If the company came to your bank requesting a loan, you would con-
P1-10 A. Return on investment = $27,000* ÷ $250,000 = 10.8%
P1-11 A. Partnership: Reasons for:
1. It is simple to set up.
B. Corporation: Reasons for:
1. The company will have need for additional financ-
2. Limited liability: both sisters (particularly Vicky) are
Reasons against:
1. More difficult to set up.
C. Corporation: Reasons for:
1. Limited liability: this situation has disaster written
Reasons against:
1. More difficult to set up.
P1-12 A. Mary is interviewing with a corporation, as evidenced by the struc-
ture that requires a board of directors.
P1-13 A. There are exchanges and contracts between the following parties:
i. Sonny and the corporation
ii. Sonny’s mother and the corporation
B. Every party has taken on risk by becoming party to a contract with
the corporation.
i. Sonny’s investment of $5,000 is at risk that the business will
lose money … his.
ii. Mother’s $8,000 loan is at risk that the business will lose money
… hers.
C. The following will rely on accounting information to determine com-
pliance with the contract.
i. The contract with Sonny’s mother … to determine when the
company is first profitable.
ii. The contract with Sonny’s friends … to determine when the
company is first profitable.
P1-14 A. The concept of risk in this context means "variability in earnings."
The greater the variability in earnings the greater is the risk of lost
investment. The ultimate risk is that one of the "down" years might
B. Given that Nancy is a bank loan officer, her only interest is in deter-
mining the probability that the loan will be repaid on time. Hill Coun-
try Enterprises has a history of steadily growing earnings. To the ex-
C. (Note: Students should be expected to vary in their answers to this
question.) Mauro is an equity (stock) investor. Given that different
role, he will use this accounting information differently than Nancy.
D. This situation presents a problem to Nancy. If Hill Country’s financial
information cannot be confirmed as conforming to GAAP, there is
additional unknown risk. That is, Nancy can’t tell for sure what Hill
P1-15 A. Selling to Company B appears less risky than selling to Company A.
B. A customer would be interested in assessing its supplier’s financial
P1-16 A. $1,600,000 × 0.03 = $48,000
B. Owners, or directors who represent them, need information to evalu-
C. There may be a short-term incentive for Taylor to misrepresent prof-
P1-17 A. The audit adds value because an independent third party evaluates
whether the financial statements are prepared in accordance with
GAAP. Since investors rely on financial information to make deci-
P1-18 A. The SEC is the Securities and Exchange Commission. It is responsi-
ble for ensuring companies report their financial information con-
sistent with GAAP and SEC requirements.
B. Companies must report financial information consistent with GAAP.
C. Without reliable information about a company’s business activities,
P1-19 A. Students’ answers will vary. Use Part B to identify consequences of
answers to Part A.
B. In the short run, you may be better off by selling the low-quality
P1-20 A. Using the lower-priced parts would increase profits by $7.50 per unit
($30 − $22.50) or $5,250 per month ($7.50 × 700).
B. This increase probably would be temporary because customers are
likely to determine the product is lower in quality than others sold at
P1-21 The Book Wermz
Profit Earned
For September 2007
Sales $ 40,000
Profit $ 4,000
P1-22 1. b
2. d
CASE
C1-1 Resources Transformation Goods
Logs
Other building
materials
Cut logs to
dimension
Ship logs and
Log homes
