CHAPTER 2
Business Activities—The Source of Accounting Information
THINKING BEYOND THE QUESTION
How do we know how well our business is doing?
Revenues are earned when goods are transferred or services are provid-
ed to customers. In most cases, these events are associated with comple-
QUESTIONS
Q2-1 Chapter 2 illustrates two sources of money for companies—loans and
owner contributions. Chapter 1 discussed the three forms of business
organizations—proprietorships, partnerships, and corporations. To main-
Q2-2 Major sources of financing for corporations are stocks and debt. Bank
loans also are possible. Managers should consider how much stock or
24 Chapter 2
Q2-3 From the corporation’s perspective, this event was a financing activity.
The corporation raised capital (i.e., raised financing) by selling shares of
stock to Jerrilyn.
Q2-6 The accounting equation presents the relationship between resources
and claims to resources. Financial resources to acquire assets are ob-
Q2-7 Purchasing merchandise inventory is an operating activity. The operating
Q2-8 Contributed capital represents claims to resources provided by the own-
Q2–11 The left side of a balance sheet reveals how an organization’s managers
Business Activities—The Source of Accounting Information 25
Q2–12 A balance sheet reports the assets, liabilities, and equity of an organiza-
Q2–13 The accounting equation, Assets = Liabilities + Equity, illustrates that as-
Q2–14 The income statement provides information about how well a company
has performed during a period based on the operating activities for that
period. These activities may affect cash flows of prior or future periods.
Q2–15 Most companies of size have hundreds or thousands of individual ac-
counts. A mere list of accounts and balances would overwhelm the read-
EXERCISES
E2-1 Definitions of all terms are listed in the glossary.
E2-2 1. Operating activity
26 Chapter 2
E2-3 a. I
b. O
c. F
E2-4
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Retained
Earnings
Beginning Amounts
40,000
+ 60,000
=
30,000
+
+ 20,000
June 1
Merchandise Inventory
15,000
Cash
–15,000
June 15
Cash
60,000
Sales Revenue
Cost of Goods Sold
Merchandise Inventory
–28,000
June 23
Cash
250,000
Bank Loan Payable
June 25
Supplies Expense
Cash
June 28
Wages Expense
Cash
June 30
Equipment
100,000
Cash
June 30
Utilities Expense
Cash
Ending Amounts
=
+
+ 39,000
E2-5 June 1 Operating
June 15 Operating
Business Activities—The Source of Accounting Information 27
E2-6
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Beginning Amounts
70,000
+ 90,000
=
60,000
+
60,000
+ 40,000
May 1
Cash
10,000
Contributed Capital
10,000
May 5
Cash
35,000
Sales
Cost of Goods Sold
Merchandise Inventory
May 10
Merchandise Inventory
Cash
May 15
Notes Payable
Cash
May 22
Equipment
Cash
May 31
Utilities Expense
Cash
May 31
Wages Expense
Cash
Ending Amounts
=
+
70,000
E2-7 May 1 Financing
May 5 Operating
E2-8 a. Cash increased $18,000; Owners’ Investment increased $18,000.
The owners invested $18,000 in the company.
b. Equipment increased $12,000; Cash decreased $12,000.
The company purchased equipment using cash.
28 Chapter 2
used them.
E2-9
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Beginning Amounts
5,000
=
1,500
+
3,000
+ 500
Feb. 2
Cash
1,800
Revenues
1,800
Feb. 3
Rent Expense
Cash
–1,200
Feb. 4
Cash
–300
Loan Payable
Feb. 4
Miscellaneous Expense
Cash
Feb. 5
Cash
4,250
Revenues
4,250
Feb. 5
Equipment
3,200
Cash
–3,200
Feb. 6
Wages Expense
–525
Cash
–525
Feb. 6
Office Supplies Expense
Cash
–128
5,662
=
1,200
+
3,000
Amelio’s Law Firm
Income Statement
For the First Week of February
Revenues $ 6,050
Business Activities—The Source of Accounting Information 29
E2–10 Feb. 2 Operating
Feb. 3 Operating
E2–11 Assets = Liabilities + Owners’ Equity
Cash $ 1,500
Flowers and Plants 26,000
E2–12
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Retained
Earnings
Cash
220,000
Contributed Capital
Bank Loan
Equipment
Cash
–45,150
b.
Merchandise Inventory
129,600
Cash
Cash
Sales
Cost of Goods Sold
–43,200*
Merchandise Inventory
–43,200
d.
Wages Expense
–12,300
Rent Expense
–15,500
Utilities Expense
–4,800
Postage Expense
–650
Insurance Expense
–1,290
Cash
–34,540
30 Chapter 2
E2–13 Chang’s Pottery Works
Schedule of Retained Earnings
For the Month Ended November 30
Retained earnings, November 1 $ 95,000
E2–14 Christmas Cookie Company
Income Statement
For the Month Ended December 31
Sales revenue $234,000
E2–15 a. Cash flows from financing activities:
b. Cash flows from investing activities:
Proceeds from sales of plant and equipment $ 1,986
E2–16 Cash collected from customers $270,000
Cash paid for merchandise inventory (83,500)
E2–17 Wages expense Income statement
Cost of goods sold Income statement
Business Activities—The Source of Accounting Information 31
E2–18 Brothers’ Lawn Service
Income Statement
For the Six Months Ended June 30, 2007
Service revenue $ 12,300
E2–19 Brothers’ Lawn Service
Balance Sheet
At June 30, 2007
Assets
E2–20
June 1
Merchandise Inventory
15,000
Cash
15,000
June 15
Cash
60,000
Sales
60,000
Cost of Goods Sold
28,000
Merchandise Inventory
28,000
June 23
Cash
Bank Loan Payable
June 25
Supplies Expense
Cash
June 28
Wages Expense
Cash
June 30
Equipment
Cash
June 30
Utilities Expense
E2–21
May 1
Cash
10,000
32 Chapter 2
Contributed Capital
10,000
May 5
Cash
35,000
Sales
35,000
Cost of Goods Sold
14,000
Merchandise Inventory
14,000
E2–22
Feb 2
Cash
1,800
Revenues
1,800
Feb 3
Rent Expense
1,200
Cash
1,200
Feb 4
Loan Payable
Cash
Feb 4
Miscellaneous Expense
Cash
Feb 5
Cash
Revenues
Feb 5
Equipment
Cash
Feb 6
Wages Expense
Cash
Feb 6
Office Supplies Expense
Cash
E2–23
Cash
220,000
Contributed Capital
80,000
Bank Loan
140,000
a.
Equipment
45,150
Cash
45,150
Merchandise Inventory
Cash
c.
Cash
Sales
Cost of Goods Sold *
Merchandise Inventory
43,200
Wages Expense
May 10
Merchandise Inventory
45,000
Cash
45,000
May 15
Notes Payable
Cash
May 22
Equipment
Cash
4,000
May 31
Utilities Expense
Cash
May 31
Wages Expense
Cash
7,500
Business Activities—The Source of Accounting Information 33
34 Chapter 2
PROBLEMS
P2-1 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
1
Cash
–5,800
Utilities Expense
–5,800
2
Cash
89,460
Sales
89,460
Cost of Goods Sold
–60,000
B. Financing decisions: When, how much, and where to borrow.
P2-2 1. Operating
Merchandise Inventory
3
Equipment
Cash
4
Notes Payable
Cash
–4,900
5
Cash
65,000
Notes Payable
6
Salaries Expense
–59,430
Cash
7
Maintenance Expense
–11,900
Cash
8
Cash
48,600
Contributed Capital
9
Supplies Expense
–3,750
Cash
–3,750
Business Activities—The Source of Accounting Information 35
P2-3 Assets = Liabilities + Equity
Cash $10,000
P2-4 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
June 1
Cash
7,000
Contributed Capital
7,000
June 2
Rent Expense
–525
Cash
–525
Merchandise Inventory
Cash
Advertising Expenses
–800
Cash
–800
June 26
Cash
7,500
Sales Revenue
7,500
Cost of Goods Sold
Merchandise Inventory
June 30
Wages Expense
–850
Utilities Expense
–228
Cash
Ending Amounts
7,097
=
7,000
B. Davidson Enterprises
Income Statement
For the Month Ended June 30, 2007
Sales $7,500
36 Chapter 2
C. Davidson Enterprises
Balance Sheet
At June 30, 2007
Assets
Cash $7,097
P2-5 June 1 Financing
June 2 Operating
P2-6 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
1
Cash
3,000
Contributed Capital
3,000
2
Cash
4,000
Notes Payable
4,000
3
Merchandise Inventory
3,500
Cash
4
Cash
2,500
Sales
2,500
Cost of Goods Sold
Merchandise Inventory
4
Commissions Expense
Cash
*
5
Notes Payable
Cash
6
Retained Earnings
Cash
Ending Amounts
3,250
=
2,500
3,000