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CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-19
PROBLEM 1-10 (Concluded)
JOE’S MACHINE REPAIR SHOP
BALANCE SHEET
JULY 31, 2016
Assets Liabilities and Owner’s Equity
Cash .............................. $ 400
Rent deposit ................... 1,000
Accounts receivable ....... 2,500
1-20 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
LO 4 PROBLEM 1-1A WHAT TO DO WITH A MILLION DOLLARS?
Obviously, there is no single, correct answer to this problem. Students should start by
considering their personal circumstances and preference for risk. They should also con-
sider their liquidity requirements. From this point, it is appropriate to consider sources of
Following are guidelines to be used:
Options
Issues Stock Bonds Bank deposit
Risk High Medium Low
Information Market price Market price Interest rate
needed Dividends Interest rate
Maturity date
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-21
LO 4 PROBLEM 1-2A USERS OF ACCOUNTING INFORMATION AND THEIR NEEDS
Information Manager Stockholders Franchisor
1. a. b. a.
2. a. b. a.
LO 5 PROBLEM 1-3A BALANCE SHEET
VICTOR CORPORATION
BALANCE SHEET
END OF THE YEAR
Assets Liabilities and Stockholders’ Equity
Cash .................................... $ 21,800 Accounts payable ..................... $ 16,900
Accounts receivable ............ 5,700 Notes payable ........................... 50,000
Butter and cheese Capital stock ............................. 25,000
inventory ........................ 12,100 Retained earnings .................... 26,300
Computerized mixers .......... 25,800
Office equipment ................. 12,000
1-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 1-4A CORRECTED BALANCE SHEET
1. ISLAND ENTERPRISES
BALANCE SHEET
END OF THE YEAR
Assets Liabilities and Stockholders’ Equity
Cash .............................. $ 14,750 Accounts payable ..................... $ 29,600
Accounts receivable ....... 23,200 Capital stock ............................. 100,000
2. Memorandum to the company president:
TO: Company president
FROM: Student’s name
DATE: Beginning of following year
SUBJECT: Corrected balance sheet
Attached please find the original balance sheet your assistant prepared, along with a
corrected version of that same statement. The differences can be explained as
follows:
4. Accounts receivable should be classified as an asset.
5. Net income for the year does not belong on the balance sheet; this amount
should appear instead on the statement of retained earnings for the year.
6. Supplies should be classified as an asset.
7. Retained earnings should appear with capital stock as a component of stock-
holders’ equity on the balance sheet. Since this is the first year of operations, the
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-23
LO 5 PROBLEM 1-5A INCOME STATEMENT, STATEMENT OF RETAINED EARNINGS,
AND BALANCE SHEET
1. STERNS AUDIO BOOK RENTAL CORP.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Rental revenue ................................................................. $125,900
Expenses:
2. STERNS AUDIO BOOK RENTAL CORP.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2016
Retained earnings, beginning of year ............................... ..................... $ 35,390
3. STERNS AUDIO BOOK RENTAL CORP.
BALANCE SHEET
DECEMBER 31, 2016
Assets Liabilities and Stockholders’ Equity
Cash .............................. $ 2,490 Accounts payable ..................... $ 4,500
Accounts receivable ....... 300 Notes payable ........................... 10,000
1-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 1-5A (Concluded)
4. On the basis of these statements alone, Sterns would appear to be a good candi-
date for an investment. It is operating at a profit and is paying dividends. It is control-
ling its costs and has a profit margin (net income divided by rental revenue) of nearly
LO 5 PROBLEM 1-6A INCOME STATEMENT AND BALANCE SHEET
1. FORT WORTH CORPORATION
INCOME STATEMENT
FOR THE MONTH ENDED JANUARY 31, 2016
Cleaning revenue .............................................................. $45,900
Expenses:
2. FORT WORTH CORPORATION
BALANCE SHEET
JANUARY 31, 2016
Assets Liabilities and Stockholders’ Equity
Cash .............................. $ 51,650 Notes payable ........................... $ 30,000
Accounts receivable ....... 24,750 Capital stock ............................. 80,000
3. To fully assess Fort Worth’s long-term viability, you would need the following infor-
mation about the $30,000 note payable:
• When is it due?
• What is the interest rate?
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-25
LO 5 PROBLEM 1-7A CORRECTED FINANCIAL STATEMENTS
1. HEIDI’S BAKERY INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Revenues:
Pastry cash sales ........................................................ $23,700
2. HEIDI’S BAKERY INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2016
Retained earnings, beginning of year ..................................................... $39,900
3. HEIDI’S BAKERY INC.
BALANCE SHEET
DECEMBER 31, 2016
Assets Liabilities and Stockholders’ Equity
Cash .............................. $ 3,700 Accounts payable ..................... $ 6,800
Accounts receivable ....... 15,500 Notes payable ........................... 40,000
1-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 1-7A (Concluded)
4. Memorandum to the company president:
TO: Company president
FROM: Student’s name
1. Accounts receivable of $15,500 does not belong on the income statement; in-
stead, services provided on account of $22,100 should be shown on the income
statement; the difference is $6,600.
2. Dividends are not an expense and thus they do not belong on the income state-
ment: $5,600.
LO 5 PROBLEM 1-8A STATEMENT OF RETAINED EARNINGS FOR BRUNSWICK
CORPORATION
1. BRUNSWICK CORPORATION
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2013
(amounts in millions)
Retained earnings, beginning of year .......................................... $ 503.2
Net income for the year ................................................................ 769.2
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-27
LO 4 PROBLEM 1-9A INFORMATION NEEDS AND SETTING ACCOUNTING STANDARDS
The Financial Accounting Standards Board would have been targeting external users
with this standard. Because these users would not otherwise have access to information
ALTERNATE MULTI-CONCEPT PROBLEM
LO 5,6 PROBLEM 1-10A PRIMARY ASSUMPTIONS MADE IN PREPARING FINANCIAL
STATEMENTS
Assumptions violated:
1. Economic entity—Should have separated her personal affairs from those of the
business.
3. Matching principle—Even though this principle has not yet been introduced in the
first chapter, it can be pointed out that a portion of the cost of the long-term assets
1-28 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 1-10A (Concluded)
MILLIE’S CERAMIC STUDIO
INCOME STATEMENT
FOR THE MONTH ENDED JULY 31, 2016
Revenues:
Classes ........................................................................ $ 700
Greenware sales ......................................................... 3,000
Total revenues ....................................................... $3,700
Expenses:
*Assumes the owner brought $600 of supplies from home and used all of them
during the month of July.
MILLIE’S CERAMIC STUDIO
BALANCE SHEET
JULY 31, 2016
Assets Liabilities and Owner’s Equity
Cash .............................. $ 4,400 Unearned revenue .................... $ 700
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-29
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 4,5 DECISION CASE 1-1 AN ANNUAL REPORT AS READY REFERENCE
1. Earnings per share is reported at the bottom of the consolidated statement of
income and comprehensive income. Information about any dividends paid to stock-
3. Information about the company’s current liquid assets, such as cash and accounts
receivable, can be found on the consolidated balance sheet. The balance sheet will
also provide bankers and other creditors with information about existing debts of the
company. The statement of cash flows is also useful in learning about a company’s
operating, financing, and investing activities over the past year.
LO 5 DECISION CASE 1-2 READING AND INTERPRETING CHIPOTLE’S
FINANCIAL STATEMENTS
1. 2014 Net income: $445,374,000
2. Assets = Liabilities + Stockholders’ Equity
$2,546,285,000 = $533,916,000 + $2,012,369,000
1-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 DECISION CASE 1-3 COMPARING TWO COMPANIES IN THE SAME INDUSTRY:
CHIPOTLE AND PANERA BREAD
1. Chipotle reported total revenues for 2014 of $4,108,269,000. This amount
represented an increase of 27.8% from the prior year. Panera Bread reported total
revenues for 2014 of $2,529,195,000, which represented an increase of 6.0% from
the prior year.
2. Chipotle reported net income for 2014 of $445,374,000, an increase of 36.0% from
the prior year. Panera Bread reported net income for 2014 of $179,293,000, which
was a decrease of 8.6% from the prior year’s amount.
MAKING FINANCIAL DECISIONS
LO 4 DECISION CASE 1-4 AN INVESTMENT OPPORTUNITY
All investments require a trade-off between risk and return. A college education may
have intrinsic value, but it is risky in that it does not assure anyone of a job upon
graduation. However, the return may be worth the risk involved in committing one’s life
savings to a college education if the degree allows one the opportunity to make a start
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-31
LO 5 DECISION CASE 1-5 PREPARATION OF PROJECTED STATEMENTS FOR A NEW
BUSINESS
1. REMOTE FITNESS WORLD INC.
PROJECTED INCOME STATEMENT
FOR THE FIRST MONTH
Revenues:
2. REMOTE FITNESS WORLD INC.
PROJECTED BALANCE SHEET
END OF FIRST MONTH
Assets Liabilities and Stockholders’ Equity
Cash .............................. $ 200* Notes payable ........................... $10,000
Accounts receivable ....... 5,000 Capital stock ............................. 10,000
3. On the surface, the decision to invest in the business appears to be an easy one.
With net income of $5,200 per month, it seems as if the $10,000 loan from the bank
could be repaid in two months (of course, interest would have to be paid also). How-
ever, net income is not always the same as cash flow from operations. In this case,
the ability to generate $5,200 in cash flow each month depends on whether the
$5,000 in monthly memberships can be collected each month (the assumption is
that the first month’s memberships will not be collected until the second month). A
1-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ETHICAL DECISION MAKING
LO 4,5,8 DECISION CASE 1-6 IDENTIFICATION OF ERRORS IN FINANCIAL STATE-
MENTS AND PREPARATION OF REVISED STATEMENTS
1. Recognize an ethical dilemma:
Errors made in preparing the financial statements:
a. The recognition of the 2017 season ticket sales as revenue in 2016. Because
Lakeside has not provided these fans with any service yet (the games), the sale
of the 2017 season tickets does not result in revenue in 2016.
personal residence is not an asset of the business.
Revised financial statements:
LAKESIDE SLAMMERS INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Revenues:
Single-game ticket revenue ......................................... $420,000
Concessions revenue .................................................. 280,000
Total revenues ....................................................... $ 700,000
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-33
DECISION CASE 1-6 (Continued)
LAKESIDE SLAMMERS INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2016
Retained earnings, beginning of year ..................................................... $ 0
LAKESIDE SLAMMERS INC.
BALANCE SHEET
DECEMBER 31, 2016
Assets Liabilities and Stockholders’ Equity
Cash .............................. $ 5,000 Notes payable ........................... $ 50,000
Equipment ...................... 50,000 Due to parent club .................... 125,000
Capital stock ............................. 40,000
2. Analyze the key elements in the situation:
a. The owners of the company may benefit in the short term, because the bank may
be more likely to give them a loan based on the original financial statements. All
outsiders are harmed, because the financial information they receive does not
represent the economic activity of the firm.
1-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASE 1-6 (Concluded)
c. The company may lack the resources to pay the claims of the creditors (the
notes payable and the liability to the parent club). The dividend payment probably
violated the corporate charter for the company (most companies would not be
permitted to pay dividends without positive stockholders’ equity).
3. List alternatives and evaluate the impact of each on those affected:
As one of the investors, your options are to either ignore the errors made in prepar-
ing the financial statements or call them to the attention of your fellow owners.
The information in the original set of financial statements is not relevant: the
revenue numbers are not useful for predicting future revenue numbers, since they
include both earned and unearned revenue. The information regarding season ticket
revenue does not provide reliable information to the outsider. Reliable information
represents what it claims to represent. The $140,000 recognized by the initial
4. Select the best alternative:
Because you are aware of these errors, it is your responsibility to share the revisions
with the other owners as well as the bank. It appears that a deliberate attempt has
been made to overstate the assets and income of the business for the express pur-
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-35
LO 8 DECISION CASE 1-7 RESPONSIBILITY FOR FINANCIAL STATEMENTS AND THE
ROLE OF THE AUDITOR
1. Preparation of the financial statements in a company’s annual report is the responsi-
bility of that company.
3. Independence is critical to the integrity of the audit of a company’s financial state-
ments. A company’s financial statements are relied on by stockholders, bankers,
