Chapter 1
Introducing Financial Statements
QUESTIONS
1. The purpose of accounting is to provide decision makers with relevant and reliable
2. Technology reduces the time, effort, and cost of recordkeeping. There is still a
demand for people who can design accounting systems, supervise their operation,
3. External users and their uses of accounting information include: (a) lenders, to
4. Business owners and managers use accounting information to help answer
5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch,
6. The internal role of accounting is to serve the organization’s internal operating
7. Accounting professionals offer many services including auditing, management
10. Some accounting-related professions include consultant, financial analyst,
12. In addition to preparing tax returns, tax accountants help companies and individuals
15. The revenue recognition principle provides guidance for managers and auditors so
they know when to recognize revenue. If revenue is recognized too early, the
16. Business organizations can be organized in one of three basic forms: sole
proprietorship, partnership, or corporation. These forms have implications for legal
liability, taxation, continuity, number of owners, and legal status as follows:
Proprietorship Partnership Corporation
17. (a) Assets are resources owned or controlled by a company that are expected to
18. Equity is increased by investments from the owner and by net income (which is the
19. Accounting principles consist of (a) general and (b) specific principles. General
24. Rent expense, utilities expense, administrative expenses, advertising and promotion
28. Return on assets, also called return on investment, is a profitability measure that is
29A. Return refers to income, and risk is the uncertainty about the return we expect to
30B. Organizations carry out three major activities: financing, investing, and operating.
31B. An organization’s financing activities (liabilities and equity) pay for investing
32. The dollar amounts in Apple’s financial statements are rounded to the nearest million
34. Confirmation of Samsung’s accounting equation follows (numbers in KRW millions):
Assets
=
Liabilities
+
Equity
35. The independent auditor for Apple, is Ernst & Young, LLP. The auditor expressly
QUICK STUDIES
Quick Study 1-1 (10 minutes)
Quick Study 1-2 (10 minutes)
a.
E
g.
c.
E
d.
E
e.
I
k.
Quick Study 1-3 (10 minutes)
a. The choice of an accounting method when more than one alternative
b. Internal controls serve several purposes:
• They involve monitoring an organization’s activities to promote
Quick Study 1-4 (5 minutes)
Quick Study 1-5 (10 minutes)
Attribute Present
Proprietorship
Partnership
Corporation
Business taxed
Business entity
Legal entity
Quick Study 1-6 (10 minutes)
Quick Study 1-7 (5 minutes)
Assets = Liabilities + Equity
Quick Study 1-8 (10 minutes)
1.
Assets = Liabilities + Equity
2.
Assets =
Liabilities
+ Common Stock
– Dividends
+ Revenues
– Expenses
Quick Study 1-9 (10 minutes)
a. For December 31, 2014, the account and its dollar amount (in KRW
millions) for Samsung are:
(1)
=
(2)
=
(3)
=
b. Using Samsung’s amounts from (a) we verify that (in KRW millions):
Assets
=
Liabilities
+
Equity
=
+
Quick Study 1-10 (15 minutes)
Assets
=
Liabilities
+
Equity
Cash
+
Accounts
Recble.
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Revenues
–
Expenses
(a)
$5,500
=
$5,500
Consulting
Quick Study 1-11 (15 minutes)
Assets
=
Liabilities
+
Equity
Cash
+
Supplies
+
Equip.
+
Land
=
Accts.
Pay.
+
Notes
Pay.
+
Common
Stock
–
Divi-
dends
+
Rev.
–
Exp.
(a)
$15,000
=
$15,000
(b)
–500
+
$500
=
+
=
+
(d)
+
=
+$200
Quick Study 1-12 (10 minutes)
[Code: Income statement (I), Balance sheet (B), Statement of retained earnings (E), or
Statement of cash flows (CF).]
Quick Study 1-13 (5 minutes)
Quick Study 1-14 (5 minutes)
1. A
Quick Study 1-15 (10 minutes)
Quick Study 1-16 (10 minutes)
Quick Study 1-17 (10 minutes)
1. D
EXERCISES
Exercise 1-1 (10 minutes)
Exercise 1-2 (20 minutes)
Part A.
1.
I
5.
I
2.
E
6.
E
3.
I
7.
I
4.
E
Part B.
1.
I
5.
I
2.
I
6.
E
3.
E
7.
I
4.
E
8.
I
Exercise 1-3 (10 minutes)
Exercise 1-4 (10 minutes)
Exercise 1-5 (20 minutes)
a. Auditing professionals with competing audit clients are likely to learn
c. Managers face several situations demanding ethical decision making
in their dealings with employees. Examples include fairness in
Exercise 1-6 (10 minutes)
Exercise 1-7 (10 minutes)
Code
Description
Principle/Assumption
H.
1.
A company reports details behind financial
statements that would impact users’ decisions.
Full disclosure
principle
G
Financial statements reflect the assumption that
the business continues operating.
Going-concern
assumption
F
3.
A company records the expenses incurred to
generate the revenues reported.
Matching (expense
recognition) principle
A
4.
Derived from long-used and generally accepted
accounting practices.
General accounting
principle
C
5.
Every business is accounted for separately from
its owner or owners.
Business entity
assumption
D
6.
Revenue is recorded only when the earnings
process is complete.
Revenue recognition
principle
E
7.
Usually created by a pronouncement from an
authoritative body.
Specific accounting
principle
B
8.
Information is based on actual costs incurred in
Cost principle
Exercise 1-8 (10 minutes)
Assets
=
Liabilities
+
Equity
(a) $ 65,000
=
$ 20,000
+
$45,000
Exercise 1-9 (20 minutes)
a. Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
=
+
Assets
=
Liabilities
+
Equity
+
+
b. Using the accounting equation:
Assets
=
Liabilities
+
Equity
=
+
c. Using the accounting equation at the end of the year:
Assets
=
Liabilities
+
Equity
=
+
=
+
Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
=
+
=
+
Exercise 1-10 (20 minutes)
a. Started the business with the owner investing $40,000 cash in the
Exercise 1-11 (20 minutes)
Exercise 1-12 (15 minutes)
Examples of transactions that fit each case include:
Exercise 1-13 (30 minutes)
Assets
=
Liabilities
+
Equity
Cash
+
Accounts
Receivable
+
Equip-
ment
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Revenues
–
Expenses
a.
+$60,000
+
$15,000
=
+
$75,000
$1,500
+
+
=
+
c.
_______
+
10,000
+
+
=
+
+ 2,500
+
+
+
=
+
+
e.
_______
+
+
+
+
=
+
+
+
+
+
=
+
+
+
+
=
+
+
+ 5,000
–
+
+
=
+
+
+
+
=
+
+
$1,000
Exercise 1-14 (10 minutes)
Return on assets
=
Net income / Average total assets
Exercise 1-15 (15 minutes)
ERNST CONSULTING
Income Statement
For Month Ended October 31
Revenues
Consulting revenues …………………….. $14,000
Expenses
Exercise 1-16 (15 minutes)
ERNST CONSULTING
Statement of Retained Earnings
For Month Ended October 31
Retained earnings, October 1 ……………………. $ 0
Exercise 1-17 (15 minutes)
ERNST CONSULTING
Balance Sheet
October 31
Assets Liabilities
Cash …………………………. $11,360 Accounts payable …………….. $ 8,500
Exercise 1-18 (15 minutes)
ERNST CONSULTING
Statement of Cash Flows
For Month Ended October 31
Cash flows from operating activities
Cash received from customers …………………………………….. $ 0
Cash flows from investing activities
Purchase of office equipment ………………………………………. (18,000)
Exercise 1-19 (10 minutes)
Exercise 1-20 (20 minutes)
BMW GROUP
Income Statement
For Year Ended December 31, 2014
(Euros in millions)
Revenues …………………………..……………………………….. € 80,401
Expenses
Exercise 1-21B (10 minutes)
PROBLEM SET A
Problem 1-1A (25 minutes)
Balance Sheet
Income
Statement
Statement of
Cash Flows
Transaction
Total
Assets
Total
Liab.
Total
Equity
Net
Income
Operating
Activities
Investing
Activities
Financing
Activities
1
Owner invests
cash for its stock
+
+
+
3
Pays cash for
by signing L-T
equipment
8
Provides ser-
9
Pays cash
Problem 1-2A (40 minutes)
Part 1
Company A
(a) Equity on December 31, 2015:
(b) Equity on December 31, 2016:
Equity, December 31, 2015 …………………… $30,500
Part 2
Company B
(a) and (b)
Equity: 12/31/2015 12/31/2016
(c) Net income for 2016:
Equity, December 31, 2015 ………………… $12,500