Financial Accounting, 9/e 2-1
Chapter 2
Investing and Financing Decisions and
the Accounting System
ANSWERS TO QUESTIONS
1. The primary objective of financial reporting for external users is to provide
financial information about the reporting entity that is useful to existing and
2. (a) An asset is a probable future economic benefit owned or controlled by the
entity as a result of past transactions.
(b) A current asset is an asset that will be used or turned into cash within one
year; inventory is always considered a current asset regardless of how
long it takes to produce and sell the inventory.
3. (a) The separate entity assumption requires that business transactions are
separate from the transactions of the owners. For example, the purchase
of a truck by the owner for personal use is not recorded as an asset of the
business.
4. Accounting assumptions are necessary because they reflect the scope of
accounting and the expectations that set certain limits on the way accounting
information is reported.
5. An account is a standardized format used by organizations to accumulate the
dollar effects of transactions on each financial statement item. Accounts are
necessary to keep track of all increases and decreases in the fundamental
accounting model.
8. Debit is the left side of a T-account and credit is the right side of a T-account. A
debit is an increase in assets and a decrease in liabilities and stockholders’
equity. A credit is the opposite — a decrease in assets and an increase in
liabilities and stockholders’ equity.
Financial Accounting, 9/e 2-3
9. Transaction analysis is the process of studying a transaction to determine its
economic effect on the entity in terms of the accounting equation:
10. The equalities in accounting are:
(a) Assets = Liabilities + Stockholders’ Equity
(b) Debits = Credits
11. The journal entry is a method for expressing the effects of a transaction on
accounts in a debits-equal-credits format. The title of the account(s) to be
12. The T-account is a tool for summarizing transaction effects for each account,
determining balances, and drawing inferences about a company’s activities. It is
a simplified representation of a ledger account with a debit column on the left and
a credit column on the right.
13. The current ratio is computed as current assets divided by current liabilities. It
measures the ability of the company to pay its short-term obligations with current
14. Investing activities on the statement of cash flows include the buying and selling
of productive assets and investments. Financing activities include borrowing and
repaying debt, issuing and repurchasing stock, and paying dividends.
MULTIPLE CHOICE
1. d
6. c
3. a
8. d
4. a
9. b
5. d
10. a
Financial Accounting, 9/e 2-5
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
3
1
8
1
20
1
20
1
15
2
3
2
15
2
25
2
25
2
15
9
6
9
20
9
*
10
6
10
20
11
6
11
20
12
4
12
20
13
4
13
20
14
20
15
20
1
40
16
20
17
20
18
10
19
10
20
10
* Due to the nature of these cases and projects, it is very difficult to estimate the
amount of time students will need to complete the assignment. As with any open-ended
project, it is possible for students to devote a large amount of time to these
assignments. While students often benefit from the extra effort, we find that some
become frustrated by the perceived difficulty of the task. You can reduce student
3
4
3
8
3
40
3
40
3
15
4
4
4
10
4
15
4
15
4
20
5
5
5
10
5
40
5
15
6
3
6
10
6
20
6
20
7
3
7
10
7
30
8
6
8
15
8
20
MINI-EXERCISES
M2–1.
F
(1) Going concern assumption
H
(2) Historical cost
G
(3) Credits
A
(4) Assets
(5) Account
M2–2.
D
(1) Journal entry
C
(2) A = L + SE, and Debits = Credits
A
(4) Liabilities
M2–3.
(1) N
(2) N
Financial Accounting, 9/e 2-7
M2–4.
CL
(1) Accounts Payable
CA
(2) Accounts Receivable
NCA
(3) Buildings
CA
(4) Cash
SE
(5) Common Stock
M2–5.
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Cash
+30,000
Notes payable
+30,000
b.
Cash
–10,000
Notes
receivable
+10,000
c.
Cash
+500
d.
Cash
Equipment
Notes payable
e.
Cash
Common
stock
+10
NCA
(6) Land
CA
(7) Merchandise Inventory
CL
(8) Income Taxes Payable
NCA
(9) Long-Term Investments
NCL
CA
CA
SE
CA
CL
CL
M2–6.
Debit
Credit
Assets
Increases
Decreases
Liabilities
Decreases
Increases
Decreases
Increases
M2–7.
Increase
Decrease
Assets
Debit
Credit
Liabilities
Credit
Debit
Credit
Debit
M2–8.
a.
Cash (+A) ………………………………………………………………….
30,000
Notes Payable (+L) ………………………………………………..
30,000
b.
Notes Receivable (+A) …………………………………………………
10,000
Cash (−A) ……………………………………………………………..
10,000
c.
Cash (+A) ………………………………………………………………….
d.
Equipment (+A) ………………………………………………………….
Notes Payable (+L) ………………………………………………..
e.
Financial Accounting, 9/e 2-9
M2–9.
Cash
Notes Receivable
Equipment
Beg.
900
Beg.
1,000
Beg.
15,100
(a)
30,000
10,000
(b)
(b)
10,000
(d)
15,000
(c)
500
5,000
(d)
2,000
(e)
14,400
11,000
30,100
M2–10.
Dennen, Inc.
Trial Balance
January 31
Debit
Credit
Cash
$14,400
Notes receivable
11,000
Equipment
30,100
Notes payable
Common stock
Additional paid-in capital
Retained earnings
3,000
Beg.
30,000
(a)
10,000
(d)
43,000
Beg.
3,000
Beg.
10,000
Beg.
490
(c)
(e)
2,000
8,000
M2–11.
Dennen Inc.
Balance Sheet
At January 31
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 14,400
Notes payable
$ 43,000
Notes receivable
Total current liabilities
Stockholders’ Equity
Common stock
Equipment
Total Assets
$55,500
Total Liabilities &
Stockholders’ Equity
$55,500
M2–12.
Current Ratio =
Current Assets
÷
Current Liabilities
2013
280,000
÷
155,000
=
1.806
2014
÷
=
M2–13.
(a) F
Financial Accounting, 9/e 2-11
EXERCISES
E2–1.
E
(1) Transaction
F
(2) Going concern assumption
B
(3) Balance sheet
I
(9) Account
Q
(10) Dual effects
O
(11) Retained earnings
A
(12) Current assets
C
(13) Separate entity assumption
X
(14) Par value
D
(15) Debits
(16) Accounts receivable
N
(17) Monetary unit assumption
(18) Faithful representation
T
(19) Relevance
R
P
(4) Liabilities
K
M
(6) Notes payable
H
(8) Historical cost
E2–2.
Req. 1
Received
Given
(a)
Cash (A)
Common stock and Additional
paid-in capital (SE)
(b)
Equipment (A) [or Delivery truck]
Cash (A)
(c)
(d)
Equipment (A) [or Computer equipment]
Notes payable (L)
(e)
Cash (A)
(f)
Intangibles (A) [or Copyright]
Cash (A)
(g)
Retained earnings (SE) [Received a reduction
in the amount available for payment to
stockholders]
Dividends payable (L)
(h)
Land (A)
Cash (A)
(i)
Intangibles (A) [or Patents]
Cash (A) and Notes payable (L)
(j)
(k)
Investments (A)
Cash (A)
(l)
Cash (A)
Short-term notes payable (L)
Req. 2
The truck in (b) would be recorded as an asset of $18,000. The land in (h) would be
recorded as an asset of $50,000. These are applications of the historical cost principle.
Req. 3
Financial Accounting, 9/e 2-13
E2–3.
Account
Balance Sheet
Categorization
Debit or Credit
Balance
(1) Accounts Receivable
CA
Debit
(2) Retained Earnings
SE
Credit
(3) Accrued Expenses Payable
CL
Credit
E2–4.
Event
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Cash
+40,000
Common
stock
Additional
paid-in
capital
+1,000
+39,000
b.
Mortgage notes
Equipment
+15,000
Accounts
+12,000
(4) Prepaid Expenses
CA
Debit
(5) Common Stock
SE
Credit
(6) Long-Term Investments
Debit
(7) Plant, Property, and Equipment
Debit
(9) Short-Term Investments
CA
Debit
Credit
E2–5.
Req. 1
Event
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Buildings
Equipment
Cash
+172
+270
– 432
Notes payable
(long–term)
+10
Additional paid-in
Cash
-7,616
e.
No effects
f.
Cash
Short–term
Investments
+4,313
–4,313
Req. 2
Financial Accounting, 9/e 2-15
E2–6.
a.
Cash (+A) ………………………………………………………………….
40,000
Common stock (+SE)* …………………………………………….
Additional paid-in capital (+SE) ……………………………
1,000
39,000
b.
Equipment (+A) ………………………………………………………….
15,000
Cash (−A) ……………………………………………………………..
3,000
Accounts payable (+L) …………………………………………..
12,000
*Common stock at par value: 1,000 shares x $1 par value = $1,000
Additional paid-in capital is the excess over market: 1,000 shares x $39 excess =
$39,000
c.
Cash (+A) ………………………………………………………………….
10,000
Notes payable (+L) …………………………………………………
10,000
Cash (−A) ……………………………………………………………..
4,000
Mortgage notes payable (+L) ………………………………….
E2–7.
Req. 1
a.
Buildings (+A) …………………………………………………………….
172
Equipment (+A) …………………………………………………………
270
Cash (−A) ……………………………………………………………..
432
Notes payable (+L) ………………………………………………..
10
b.
Cash (+A) ………………………………………………………………….
345
Common stock (+SE) ……………………………………………..
Additional paid-in capital (+SE)
200
145
Dividends payable (+L) …………………………………………..
145
d.
Short-term investments (+A) …………………………..…………….
7,616
Cash (−A) ……………………………………………………………..
Cash (+A) ………………………………………………………………….
4,313
Req. 2
The separate entity assumption states that transactions of the business are separate
from transactions of the owners. Since transaction (e) occurs between the owners and
others in the stock market, there is no effect on the business.
Financial Accounting, 9/e 2-17
E2–8.
Req. 1
a.
Cash (+A) …………………………………………………………………
30,000
Notes payable (+L) ……………………………………………….
30,000
d.
Equipment (+A) ………………………………………………………….
20,000
Cash (−A) …………………………………………………………….
4,000
Accounts payable (+L) …………………………………………..
16,000
e.
Notes receivable (+A) ………………………………………………….
1,000
Cash (−A) ……………………………………………………………..
1,000
Cash (−A) ……………………………………………………………..
2,000
g.
Short-term investments (+A) …………………………..…………….
10,000
Cash (−A) ……………………………………………………………..
b.
Cash (+A) (500 shares x $30 market value per share) ……..
15,000
Additional paid-in capital (+SE) (difference) ……………….
c.
Buildings (+A) …………………………………………………………….
Cash (−A) ……………………………………………………………..
Notes payable (+L) ………………………………………………..
92,000
E2–9.
Req. 1
Cash
Notes Receivable
Equipment
Beg.
0
Beg.
0
Beg.
0
(a)
70,000
4,500
(b)
(e)
2,500
(b)
18,000
(d)
3,000
2,500
(e)
66,000
2,500
18,000
Land
Beg.
0
0
Beg.
0
Beg.
(d)
15,000
13,500
(b)
5,040
(a)*
(d)
15,000
13,500
5,140
Additional Paid-in Capital
0
Beg.
64,960
(a)
17,900
(d)
82,860
Req. 3
The agreement in (c) involves no exchange or receipt of cash, goods, or services and
Financial Accounting, 9/e 2-19
E2–10.
Req. 1
Cash
Notes Receivable
Equipment
Beg.
0
Beg.
0
Beg.
0
(a)
60,000
9,000
(b)
(c)
2,500
(b)
36,000
2,500
(c)
Additional Paid-in Capital
0
Beg.
94,700
(a)*
Req. 2
Assets $ 110,000 = Liabilities $ 15,000 + Stockholders’ Equity $ 95,000
Req. 3
(e)
2,500
Land
Beg.
0
0
Beg.
0
Beg.
(a)
35,000
(e)
12,000
(b)
(a)*
35,000
E2–11.
Req. 1
Transaction
Brief Explanation
1
Issued common stock to shareholders for $15,000 cash. (FastTrack
Sports Inc. is a corporation because it issues stock. Par value of the
stock was $0.10 per share because $1,500 common stock amount
divided by 15,000 shares issued equals $0.10 per share).
Borrowed $75,000 cash and signed a short-term note for this amount.
Purchased land for $16,000; paid $5,000 cash and gave an $11,000
short-term note payable for the balance.
Purchased store fixtures for $9,500 cash.
Purchased land for $4,000, paid for by signing a short-term note.
Req. 2
FastTrack Sports Inc.
Balance Sheet
At January 7
Assets
Liabilities
Current Assets
Current Liabilities
Cash
$71,500
Note payable
$90,000
Note receivable
4,000
Total Current Liabilities
90,000
Land
Additional paid-in capital
Total Assets