1-57
P1-51B Preparing financial statements
Learning Objective 5
Total Assets $47,400
The bookkeeper of Beautiful World Landscaping prepared the company’s balance sheet while the
accountant was ill. The balance sheet contains numerous errors. In particular, the bookkeeper knew that
the balance sheet should balance, so he plugged in the retained earnings amount needed to achieve this
balance. The retained earnings is incorrect. All other amounts are correct, but some are out of place or
should not be included on this statement. Prepare a corrected balance sheet.
SOLUTION
BEAUTIFUL WORLD LANDSCAPING
Balance Sheet
July 31, 2016
1-58
P1-52B Using the accounting equation for transaction analysis and preparing financial statements
Learning Objectives 4, 5
2c. Total Assets $76,700
Andre Simmon recently opened his own accounting firm, which he operates as a corporation. The name
of the new entity is Andre Simmon, CPA. Simmon experienced the following events during the
organizing phase of the new business and its first month of operations in 2016.
Requirements
1. Analyze the effects of the events on the accounting equation of Andre Simmon, CPA. Use a format
similar to Exhibit 1-6.
2. Prepare the following financial statements:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
1-59
SOLUTION
Requirement 1
Assets
=
Liabilities
+
Equity
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Office
Furniture
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Utilities
Expense
5
+65,000
+65,000
Bal.
$65,000
=
+
$65,000
6
Bal.
$64,700
+
=
+
$65,000
7
Bal.
+
+
=
+
$65,000
Bal.
+
+
=
+
$65,000
Bal.
$67,900
+
+
=
+
$65,000
Bal.
$67,900
+
+
+
=
+
$65,000
Bal.
$66,900
+
+
+
=
+
$65,000
Bal.
$79,400
+
+
=
+
$65,000
Bal.
$72,600
+
+
=
+
$65,000
29
Bal.
$69,600
+
+
+
=
+
$65,000
+
P1-52B, cont.
Requirement 2a
ANDRE SIMMON, CPA
Income Statement
Month Ended February 29, 2016
Revenues:
Service Revenue
$ 15,800
Expenses:
Rent Expense
Utilities Expense
Total Expenses
Net Income
Requirement 2b
Requirement 2c
ANDRE SIMMON, CPA
Balance Sheet
February 29, 2016
Assets
Liabilities
Cash
$ 69,600
Office Supplies
Office Furniture
Common Stock
$ 65,000
Retained Earnings
76,700
Total Assets
$ 76,700
Equity
$ 76,700
ANDRE SIMMON, CPA
Statement of Retained Earnings
Month Ended February 29, 2016
Retained Earnings, February 1, 2016
$ 0
Net income for the month
14,700
Dividends
Retained Earnings, February 29, 2016
$ 11,700
1-61
P1-53B Using the accounting equation for transaction analysis and preparing financial statements
Learning Objectives 4, 5
2c. Total Assets $89,060
Ariana Peterson recently opened her own law office, which she operates as a corpora- tion. The name of
the new entity is Ariana Peterson, Attorney. Peterson experienced the following events during the
organizing phase of the new business and its first month of operation, December 2016. Some of the
events were personal and did not affect the law practice. Others were business transactions and should
be accounted for by the business.
Requirements
1. Analyze the effects of the preceding events on the accounting equation of Ariana Peterson, Attorney.
Use a format similar to Exhibit 1-6.
2. Prepare the following financial statements:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
SOLUTION
Requirement 1
Assets
=
Liabilities
+
Equity
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Computer
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Utility
Expense
–
Misc.
Expense
3
+65,000
+65,000
5
–400
+400
Bal.
$64,600
+
=
+
7
Bal.
+
+
=
+
9
Bal.
$67,500
+
+
=
$6,800
+
+
Bal.
+
+
=
+
+
Bal.
+
+
+
=
$7,100
+
+
–300
Bal.
+
+
+
=
$6,800
+
+
–840
Bal.
$66,360
+
+
+
=
$6,800
+
+
Bal.
$69,160
+
+
+
=
$6,800
+
+
Bal.
$66,660
+
+
+
=
$6,800
+
+
1-63
P1-53B, cont.
Requirement 2a
ARIANA PETERSON, ATTORNEY
Income Statement
Month Ended December 31, 2016
Revenues:
Service Revenue
$ 20,900
Expenses:
Utility Expense
Miscellaneous Expense
Total Expenses
Net Income
Requirement 2b
ARIANA PETERSON, ATTORNEY
Statement of Retained Earnings
Month Ended December 31, 2016
Retained Earnings, December 1, 2016
$ 0
Net income for the month
19,760
19,760
Dividends
Retained Earnings, December 31, 2016
$ 17,260
Requirement 2c
ARIANA PETERSON, ATTORNEY
Balance Sheet
December 31, 2016
Assets
Liabilities
Cash
Accounts Payable
Accounts Receivable
Office Supplies
Computer
Common Stock
65,000
Retained Earnings
82,260
Total Assets
Equity
$ 89,060
1-64
Continuing Problem
Problem P1-54 is the first problem in a sequence that begins an accounting cycle. The cycle is continued
in Chapter 2 and completed in Chapter 5.
P1-54 Using the accounting equation for transaction analysis, preparing financial statements, and
calculating return on assets (ROA)
Daniels Consulting began operations and completed the following transactions during December 2016:
Requirements
1. Analyze the effects of Daniels Consulting’s transactions on the accounting equation. Use the format
of Exhibit 1-6, and include these headings: Cash; Accounts Receivable; Office Supplies; Equipment;
Furniture; Accounts Payable; Unearned Revenue; Common Stock; Dividends; Service Revenue;
Rent Expense; and Utilities Expense.
1-65
SOLUTION
Requirement 1
Assets
=
Liabilities
+
Equity
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Equipment
+
Furniture
=
Accounts
Payable
+
Unearned
Revenue
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Utilities
Expense
2
+20,000
+20,000
2
–2,000
–2,000
Bal.
$18,000
=
+
$20,000
–
$2,000
3
–3,600
Bal.
$14,400
+
=
+
$20,000
–
$2,000
4
+3,000
Bal.
$14,400
+
+
=
+
$20,000
5
+800
Bal.
+
+
+
=
+
$20,000
–
9
+2,500
Bal.
+
+
+
+
=
+
$20,000
+
Bal.
+
+
+
+
=
+
$20,000
+
–
–
+2,100
Bal.
+
+
+
+
=
+
$20,000
+
–
–
Bal.
+
+
+
+
=
+
+
$20,000
+
–
–
– 200
Bal.
$18,550
+
+
+
+
=
+
+
$20,000
+
–
–
Bal.
$18,950
+
+
+
+
=
+
+
$20,000
+
–
–
–1,000
$17,950
+
+
+
+
$20,000
–
+
–
–
P1-54, cont.
Requirement 2
DANIELS CONSULTING
Income Statement
Month Ended December 31, 2016
Revenue:
Service Revenue
$ 4,600
Expenses:
Rent Expense
Utilities Expense
Total Expense
Net Income
$ 2,450
Requirement 3
DANIELS CONSULTING
Statement of Retained Earrings
Month Ended December 31, 2016
Retained Earnings, December 1, 2016
$ 0
Net income for the month
2,450
2,450
Dividends
Retained Earnings, December 31, 2016
Requirement 4
DANIELS CONSULTING
Balance Sheet
December 31, 2016
Assets
Liabilities
Cash
$ 17,950
Accounts Payable
$ 3,600
Accounts Receivable
2,100
Unearned Revenue
2,400
Office Supplies
800
Total Liabilities
6,000
Equipment
3,600
Furniture
3,000
Stockholders’ Equity
Retained Earnings
Total Assets
$ 27,450
Equity
1-67
Critical Thinking
Decision Case 1-1
Let’s examine a case using Greg’s Tunes and Sal’s Silly Songs. It is now the end of the first year of
operations, and the stockholders want to know how well each business came out at the end of the year.
Neither business kept complete accounting records, and no dividends were paid. The businesses throw
together the following data at year-end:
Requirements
1. Which business has more assets?
2. Which business owes more to creditors?
3. Which business has more stockholders’ equity at the end of the year?
4. Which business brought in more revenue?
5. Which business is more profitable?
6. Which of the foregoing questions do you think is most important for evaluating these two
businesses? Why?
7. Which business looks better from a financial standpoint?
1-68
SOLUTION
Requirement 1
Greg’s Tunes has more assets.
Sal’s $23,000, Greg’s $25,000 ($10,000 + $6,000 + $9,000)
1-69
Ethical Issues 1-1
The tobacco companies have paid billions because of smoking-related illnesses. In particular, Philip
Morris, a leading cigarette manufacturer, paid more than $3,000,000,000 in settlement payments in one
year.
Requirements
1. Suppose you are the chief financial officer (CFO) responsible for the financial statements of Philip
Morris. What ethical issue would you face as you consider what to report in your company’s annual
report about the cash payments? What is the ethical course of action for you to take in this situation?
2. What are some of the negative consequences to Philip Morris for not telling the truth? What are
some of the negative consequences to Philip Morris for telling the truth?
SOLUTION
Requirement 1
The chief financial officer (CFO) of Philip Morris would be torn between addressing the fact that the
payments are related to illnesses caused by the company’s products, or alternatively, omitting or
1-70
Fraud Case 1-1
Exeter is a building contractor on the Gulf Coast. After losing a number of big lawsuits, it was facing its
first annual net loss as the end of the year approached. The owner, Hank Snow, was under intense
pressure from the company’s creditors to report positive net income for the year. However, he knew that
the controller, Alice Li, had arranged a short-term bank loan of $10,000 to cover a temporary shortfall of
cash. He told Alice to record the incoming cash as “construction revenue” instead of a loan. That would
nudge the company’s income into positive territory for the year, and then, he said, the entry could be
corrected in January when the loan was repaid.
Requirements
1. How would this action affect the year-end income statement? How would it affect the year-end
balance sheet?
2. If you were one of the company’s creditors, how would this fraudulent action affect you?
SOLUTION
Requirement 1
The proposed action would increase net income by increasing revenues. It would distort the balance
Financial Statement Case 1-1
This and similar cases in later chapters focus on the financial statements of a real company—Starbucks
Corporation, a premier roaster and retailer of specialty coffee. As you work each case, you will gain
Requirements
1. How much in cash (including cash equivalents) did Starbucks Corporation have on September 29,
2013?
2. What were the company’s total assets at September 29, 2013? At September 30, 2012?
3. Write the company’s accounting equation at September 29, 2013, by filling in the dollar amounts:
Assets = Liabilities + Equity
4. Identify total net sales (revenues) for the year ended September 29, 2013. How much did total
revenue increase or decrease from 2012 to 2013?
5. How much net income (net earnings) or net loss did Starbucks earn for 2013 and for 2012? Based on
net income, was 2013 better or worse than 2012?
6. Calculate Starbucks Corporation’s return on assets for the year ending September 29, 2013.
7. How did Starbucks Corporation’s return on assets compare to Green Mountain Coffee Roasters,
Inc.’s return on assets?
SOLUTION
Requirement 1
$2,575.7 (in millions)