Chapter 02 – Investing and Financing Decisions and the Balance Sheet
Chapter 2
Investing and Financing Decisions and
the Balance Sheet
ANSWERS TO QUESTIONS
1. The primary objective of financial reporting for external users is to provide useful
economic information about a business to help external parties, primarily
2. (a) An asset is a probable future economic benefit owned 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.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
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
5. An account is a standardized format used by organizations to accumulate the
6. The fundamental accounting model is provided by the equation:
Assets = Liabilities + Stockholders’ Equity
7. A business transaction is (a) an exchange of resources (assets) and obligations
(debts) between a business and one or more outside parties, and (b) certain
8. Debit is the left side of a T-account and credit is the right side of a T-account. A
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
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:
(1) identify and classify accounts and the direction and amount of the
10. The equalities in accounting are:
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,
13. The current ratio is computed as current assets divided by current liabilities. It
1.0 and 2.0 (twice as many current assets as current liabilities), but sophisticated
14. Investing activities on the statement of cash flows include the buying and selling
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-4
MULTIPLE CHOICE
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-5
Authors’ Recommended Solution Time
(Time in minutes)
Alternate
Cases and
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* 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
frustration and anxiety by making your expectations clear. For example, when our goal
is to sharpen research skills, we devote class time discussing research strategies.
When we want the students to focus on a real accounting issue, we offer suggestions
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Chapter 02 – Investing and Financing Decisions and the Balance Sheet
MINI-EXERCISES
M2–1.
G
M2–2.
D
(1) Journal entry
C
(2) A = L + SE, and Debits = Credits
(4) Liabilities
M2–3.
(1) Y
(2) N
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
M2–4.
CL
CA
NCA
CA
SE
NCA
CA
CL
NCA
NCL
CA
CA
SE
CA
CL
CL
M2–5.
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Cash
+20,000
Notes payable
+20,000
b.
Cash
–7,000
Notes
receivable
+7,000
c.
Cash
+1,000
Contributed
d.
Cash
Equipment
Notes payable
e.
Cash
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-8
M2–6.
Debit
Credit
Assets
Increases
Decreases
M2–7.
Increase
Decrease
Assets
Debit
Credit
Liabilities
Credit
Debit
Credit
Debit
M2–8.
a.
Cash (+A) ………………………………………………………………….
20,000
Notes Payable (+L) ………………………………………………..
20,000
b.
Notes Receivable (+A) …………………………………………………
7,000
c.
Cash (+A) ………………………………………………………………….
1,000
Contributed Capital (+SE) ……………………………………….
d.
Equipment (+A) ………………………………………………………….
Notes Payable (+L) ………………………………………………..
M2–9.
Cash
Notes Receivable
Equipment
Beg.
800
Beg.
900
Beg.
15,000
(a)
20,000
7,000
(b)
(b)
7,000
(d)
15,000
(c)
1,000
6,000
(d)
2,000
(e)
6,800
7,900
30,000
Notes Payable
Contributed Capital
Retained Earnings
Beg.
Beg.
Beg.
20,000
(a)
1,000
(c)
(e)
2,000
9,000
(d)
31,700
6,000
7,000
Liabilities
Decreases
Increases
Decreases
Increases
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-9
M2–10.
Pitt Inc.
Balance Sheet
At January 31, 2012
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 6,800
Notes payable
$ 31,700
M2–11.
Current Ratio =
Current Assets
÷
Current Liabilities
2007
240,000
÷
160,000
=
1.50
2008
260,000
÷
220,000
=
1.18
M2–12.
(a) F
Notes receivable
Total current liabilities
Contributed capital
Equipment
Retained earnings
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
EXERCISES
E2–1.
E
(1) Transaction
F
(2) Continuity assumption
B
(3) Balance sheet
P
(4) Liabilities
K
(6) Note payable
S
(7) Conservatism
H
(8) Historical cost principle
I
(9) Account
(10) Dual effects
(11) Retained earnings
A
(12) Current assets
C
(13) Separate-entity assumption
W
(14) Reliability
D
(15) Debits
J
(16) Accounts receivable
N
(17) Unit-of-measure assumption
U
(18) Materiality
T
(19) Relevance
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-11
E2–2.
Req. 1
Received
Given
(a)
Cash (A)
Contributed capital (SE)
(b)
Equipment (A) [or Delivery truck]
Cash (A)
(c)
No exchange transaction
—
(h)
Land (A)
Cash (A)
(i)
Intangibles (A) [or Patents]
Cash (A) and Note payable (L)
(j)
No exchange transaction
—
(k)
Investments (A)
Cash (A)
(l)
Cash (A)
Short-term note payable (L)
promise to pay]
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
The agreement in (c) involves no exchange or receipt of cash, goods, or services and
(d)
Equipment (A) [or Computer equipment]
Note payable (L)
(e)
Cash (A)
(f)
Intangibles (A) [or Copyright]
Cash (A)
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
E2–3.
Account
Balance Sheet
Categorization
Debit or Credit
Balance
(1) Accounts Receivable
CA
Debit
(2) Retained Earnings
SE
Credit
(3) Taxes Payable
CL
Credit
(4) Prepaid Expenses
CA
Debit
(5) Contributed Capital
SE
Credit
(6) Long-Term Investments
Debit
(7) Plant, Property, and Equipment
Debit
(8) Accounts Payable
CL
Credit
(9) Short-Term Investments
CA
Debit
Credit
E2–4.
Event
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Cash
+34,000
Contributed
capital
+34,000
b.
Equipment
Cash
+8,000
–1,000
Notes payable
+7,000
Cash
Notes payable
Cash
e.
Cash
–4,000
Mortgage note
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-13
E2–5.
Req. 1
Event
Assets
=
Liabilities
+
Stockholders’ Equity
a.
Buildings
Equipment
Cash
+212.0
+30.4
– 43.2
Notes payable
(long–term)
+199.2
b.
Cash
+186.6
Contributed
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.
E2–6.
a.
Cash (+A) ………………………………………………………………….
34,000
Contributed capital (+SE) ………………………………………..
34,000
b.
Equipment (+A) ………………………………………………………….
8,000
Notes payable (+L) ………………………………………………..
c.
Cash (+A) ………………………………………………………………….
9,000
Notes payable (+L) …………………………………………………
Mortgage notes payable (+L) ………………………………….
Dividends
payable
Retained
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
E2–7.
Req. 1
a.
Buildings (+A) …………………………………………………………….
212.0
Equipment (+A) …………………………………………………………
30.4
Cash (−A) ……………………………………………………………..
43.2
Note payable (+L) ………………………………………………….
199.2
b.
Cash (+A) ………………………………………………………………….
186.6
Contributed capital (+SE) ………………………………………..
186.6
Dividends payable (+L) …………………………………………..
121.4
d.
Short-term investments (+A) …………………………..…………….
Cash (−A) ……………………………………………………………..
Cash (+A) ………………………………………………………………….
Req. 2
The separate-entity assumption states that transactions of the business are separate
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-15
E2–8.
Req. 1
Cash
Note Receivable
Equipment
Beg.
0
Beg.
0
Beg.
0
(a)
63,000
5,000
(b)
(e)
2,500
(b)
20,000
(d)
4,000
2,500
(e)
59,500
2,500
20,000
Land
Note Payable
Contributed Capital
Req. 2
Assets $ 95,000 = Liabilities $ 15,000 + Stockholders’ Equity $ 80,000
Req. 3
The agreement in (c) involves no exchange or receipt of cash, goods, or services and
Beg.
0
Beg.
Beg.
(d)
13,000
15,000
(b)
63,000
(a)
17,000
(d)
13,000
15,000
80,000
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
E2–9.
Req. 1
Transaction
Brief Explanation
1
Issued capital stock to shareholders for $15,000 cash. (FastTrack
Sports Inc. is a corporation.)
Borrowed $75,000 cash and signed a short-term note for this amount.
3
Purchased land for $16,000; paid $5,000 cash and gave an $11,000
short-term note payable for the balance.
4
Loaned $4,000 cash; borrower signed a short-term note for this amount
(Note Receivable).
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, 2011
Assets
Liabilities
Current Assets
Current Liabilities
Cash
$71,500
Note payable
$90,000
Note receivable
Store fixtures
Land
Contributed capital
Total Assets
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-17
E2–10.
Req. 1
Transaction
Brief Explanation
1
Issued capital stock to shareholders for $50,000 cash.
2
Purchased a delivery truck for $30,000; paid $6,000 cash and gave a
$24,000 long-term note payable for the balance.
Req. 2
Volz Cleaning, Inc.
Balance Sheet
At March 31, 2011
Assets
Liabilities
Current Assets
Notes payable
$24,000
Cash
$35,000
Total Liabilities
24,000
Investments
5,000
Note receivable
4,000
44,000
Computer equipment
4,000
Contributed capital
54,000
Delivery truck
54,000
Total Assets
$78,000
$78,000
3
Loaned $4,000 cash; borrower signed a short-term note for this
amount.
4
Purchased short-term investments for $7,000 cash.
5
Sold short-term investments at cost for $2,000 cash.
6
Issued capital stock to shareholders for $4,000 of computer equipment.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
E2–11.
a.
Cash (+A) ………………………………………………………………….
65,000
Contributed capital (+SE) ………………………………………..
65,000
b.
No transaction has occurred because there has been no
exchange or receipt of cash, goods, or services.
c.
Cash (+A) ………………………………………………………………….
10,000
Notes payable (long-term) (+L) ………………………………..
10,000
d.
Equipment (+A) ………………………………………………………….
13,000
Cash (−A) ……………………………………………………………..
Notes payable (short-term) (+L) ……………………………….
e.
Notes receivable (short-term) (+A) ………………………………..
1,000
f.
Store fixtures (+A) ………………………………………………………
20,000
Cash (−A) ……………………………………………………………..
20,000
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-19
E2–12.
a.
Retained earnings (−SE) ……………………………………………..
197
Dividends payable (+L) …………………………………………..
197
b. No transaction has occurred because there has been no exchange or receipt of
cash, goods, or services.
f.
Equipment (+A) ………………………………………………………….
1,255
Cash (−A) ……………………………………………………………..
970
Notes payable (+L) ………………………………………………..
285
g.
Investments (+A) ………………………………………………………..
2,220
Cash (−A) ……………………………………………………………..
2,220
c.
Cash (−A) ……………………………………………………………..
694
d.
Cash (+A) ………………………………………………………………….
2,655
Notes payable (+L) …………………………………………………
e.
Cash (+A) ………………………………………………………………….
Equipment (−A) ……………………………………………………..
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
E2–13.
Req. 1
Assets $ 8,500 = Liabilities $ 2,500 + Stockholders’ Equity $ 6,000
Req. 2
Cash
Short-Term Investments
Property & Equipment
Beg.
4,000
Beg.
2,000
Beg.
2,500
(a)
3,000
(b)
1,250
(c)
(b)
1,000
(c)
1,250
(d)
End.
8,950
End.
1,000
End.
1,250
Short-Term
Notes Payable
Long-Term
Notes Payable
2,200
Beg.
300
Beg.
3,000
(a)
2,200
End.
3,300
End.
Contributed Capital
Retained Earnings
4,000
Beg.
2,000
Beg.
(d)
4,000
End.
End.
Req. 3
Assets $ 11,200 = Liabilities $ 5,500 + Stockholders’ Equity $ 5,700
Req. 4
Current
=
Current Assets
=
$8,950+$1,000
=
$9,950
=
4.52
Ratio
Current Liabilities
$2,200
$2,200
This ratio indicates that, for every $1 of current liabilities, Zeber maintains $4.52 of
current assets. Zeber’s ratio is higher than the industry average of 1.50, indicating that