1-21
E1-27 Using the accounting equation to analyze business transactions
Learning Objective 4
Indicate the effects of the following business transactions on the accounting equation for Sam’s Snack
Foods, a supplier of snack foods. Transaction (a) is answered as a guide.
a. Sam’s Snack Foods received cash from issuance of common stock to stockholders.
e. Performed service for a customer on account.
f. Employees worked for the week but will be paid next Tuesday.
g. Received cash from a customer on accounts receivable.
h. Borrowed money from the bank.
i. Cash dividends paid to stockholders.
j. Incurred utilities expense on account.
SOLUTION
a. Increase asset (Cash); Increase equity (Common Stock)
E1-28 Using the accounting equation to analyze business transactions
Learning Objective 4
The analysis of the first eight transactions of Advanced Accounting Service follows. Describe each
transaction.
SOLUTION
Transaction Descriptions:
1. Issuance of common stock to stockholders
1-23
E1-29 Using the accounting equation to analyze business transactions
Learning Objective 4
Samantha Stamford opened a medical practice. During July, the first month of operation, the business,
titled Samantha Stamford, M.D., experienced the following events:
1-24
SOLUTION
Assets
=
Liabilities
+
Equity
Contributed
Capital
+
Retained Earnings
Date
+
Medical
Supplies
+
Land
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Salaries
Expense
–
Rent
Expense
–
Utilities
Expense
July 6
+
+
+
+
+
+
1-25
E1-30 Preparing the financial statements
Learning Objective 5
Estella Osage publishes an online travel magazine. In need of cash, the business applies for a loan with
National Bank. The bank requires borrowers to submit financial statements. With little knowledge of
accounting, Estella Osage, a stockholder, does not know how to proceed.
Requirements
1. What are the four financial statements that the business will need to prepare?
2. Is there a specific order in which the financial statements must be prepared?
3. Explain how to prepare each statement.
SOLUTION
Requirement 1
a. Income statement
Requirement 2
Yes, the financial statements should be prepared in the order listed above in Requirement 1.
Requirement 3
Income Statement:
a. The header includes the name of the business, the title of the statement, and the time
period. An income statement always represents a period of time, for example, a month or
a year.
b. The revenue accounts are always listed first and then subtotaled if necessary.
c. Each expense account is listed separately from largest to smallest and then subtotaled if
necessary.
d. Net income is calculated as total revenues minus total expenses.
Statement of Retained Earnings:
a. The header includes the name of the business, the title of the statement, and the time
period. A statement of retained earnings always represents a period of time, for example,
Balance Sheet:
a. The header includes the name of the business and the title of the statement but the date is
different. The balance sheet shows the date as a specific date and not a period of time.
b. Each asset account is listed separately and then totaled. Cash is always listed first.
c. Liabilities are listed separately and then totaled. Liabilities that are to be paid first are
listed first.
1-26
Statement of Cash Flows:
a. The header includes the name of the business, the title of the statement, and the time
period. A statement of cash flows always represents a period of time, for example, a
month or a year.
Use the following information to answer Exercises E1-31 through E1-33.
The account balances of Wilford Towing Service at June 30, 2016, follow:
E1-31 Preparing the income statement
Learning Objective 5
Net Income $10,300
Requirements
1. Prepare the income statement for Wilford Towing Service for the month ending June 30, 2016.
2. What does the income statement report?
1-27
SOLUTION
Requirement 1
WILFORD TOWING SERVICE
Requirement 2
The income statement reports revenues and expenses for a period of time.
E1-32 Preparing the statement of retained earnings
Learning Objective 5
Ending Retained Earnings $12,000
Requirements
1. Prepare the statement of retained earnings for Wilford Towing Service for the month ending June 30,
2016.
2. What does the statement of retained earnings report?
SOLUTION
Requirement 1
WILFORD TOWING SERVICE
Statement of Retained Earnings
1-28
Requirement 2
The statement of retained earnings reports the changes in retained earnings for a corporation during a
time period. The statement of retained earnings reports a corporation’s net income or net loss and
dividends declared.
E1-33 Preparing the balance sheet
Learning Objective 5
Total Assets $28,900
Requirements
1. Prepare the balance sheet for Wilford Towing Service as of June 30, 2016.
2. What does the balance sheet report?
SOLUTION
Requirement 1
WILFORD TOWING SERVICE
Requirement 2
The balance sheet reports an entity’s assets, liabilities, and stockholders’ equity as of a specific date.
Use the following information to answer Exercises E1-34 through E1-36.
The assets, liabilities, and equities of Drought Design Studio have the following balances at December
31, 2016. The retained earnings was $31,000 at the beginning of the year with common stock of $20,000
and dividends of $55,000 at year end.
E1-34 Preparing the income statement
Learning Objective 5
Net Income $63,500
Prepare the income statement for Drought Design Studio for the year ending December 31, 2016.
SOLUTION
DROUGHT DESIGN STUDIO
Year Ended December 31, 2016
1-30
E1-35 Preparing the statement of retained earnings
Learning Objective 5
Ending Retained Earnings $39,500
Prepare the statement of retained earnings for Drought Design Studio for the year ending December 31,
2016.
SOLUTION
DROUGHT DESIGN STUDIO
Statement of Retained Earnings
E1-36 Preparing the balance sheet
Learning Objective 5
Total Assets $73,000
Prepare the balance sheet for Drought Design Studio as of December 31, 2016.
SOLUTION
DROUGHT DESIGN STUDIO
Balance Sheet
1-31
E1-37 Preparing the statement of cash flows
Learning Objective 5
For each transaction, identify the appropriate section on the statement of cash flows to report the
transaction. Choose from: Cash flows from operating activities (O), Cash flows from investing activities
(I), Cash flows from financing activities (F), or Is not reported on the statement of cash flows (X). If
reported on the statement, decide whether the transaction should be shown as a positive cash flow (+) or
a negative cash flow (–):
a. The business received cash from the issuance of common stock.
b. Paid cash on accounts payable for office supplies purchased.
c. Performed services for a customer on account.
SOLUTION
a. F +
f. I –
b. O –
g. O –
c. X
h. X
d. F –
i. O –
e. O +
j. X
E1-38 Preparing the statement of cash flows
Learning Objective 5
Decrease in cash $9,300
Bean Town Food Equipment Company had the following transactions for the month ending February
29, 2016. Bean Town’s cash balance on February 1, 2016, was
$16,400.
Prepare the statement of cash flows of Bean Town Food Equipment Company for the month ended
February 29, 2016.
1-32
SOLUTION
BEAN TOWN FOOD EQUIPMENT COMPANY
Statement of Cash Flows
Month Ended February 29, 2016
E1-39 Calculating return on assets (ROA)
Learning Objective 6
Alec Appliance Service had net income for the year of $18,200. In addition, the balance sheet reports the
following balances:
Calculate the return on assets (ROA) for Alec Appliance Service for the year ending December 31,
2016.
1-33
SOLUTION
Average total assets = (Beginning total assets + ending total assets) / 2
Problems (Group A)
P1-40A Using the accounting equation for transaction analysis
Learning Objective 4
Cash $7,350
Missy Mansion opened a public relations firm called Solid Gold on August 1, 2016. The following
amounts summarize her business on August 31, 2016:
During September 2016, the business completed the following transactions:
a. Missy Mansion contributed $8,000 cash in exchange for common stock.
b. Performed service for a client and received cash of $1,300.
c. Paid off the beginning balance of accounts payable.
d. Purchased office supplies from OfficeMax on account, $400.
e. Collected cash from a customer on account, $2,200.
f. Cash dividends of $1,800 were paid to stockholders.
g. Consulted for a new band and billed the client for services rendered, $6,500.
h. Recorded the following business expenses for the month:
Paid office rent: $1,400.
Paid advertising: $350.
Analyze the effects of the transactions on the accounting equation of Solid Gold using the format
presented on page 43.
SOLUTION
Assets
=
Liabilities
+
Equity
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Land
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Advertising
Expense
Bal.
+
+
=
+
Bal.
+
+
=
+
Bal.
+
+
=
+
Bal.
+
+
=
+
+
Bal.
+
+
+
=
+
+
Bal.
+
+
+
=
+
+
Bal.
+
+
+
=
+
+
Bal.
+
+
+
=
+
+
Bal.
+
+
+
=
+
+
1-35
P1-41A Using the accounting equation for transaction analysis
Learning Objective 4
Cash $18,550
Cameron Turnbull started a new business, Turnbull Gymnastics, and completed the following
transactions during December:
Analyze the effects of the transactions on the accounting equation of Turnbull Gymnastics using a
format similar to Exhibit 1-6.
1-36
SOLUTION
Assets
=
Liabilities
+
Equity
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Utilities
Expense
–
Salaries
Expense
–
Advertising
Expense
1
+21,000
+21,000
2
+2,400
+2,400
Bal.
$23,400
=
+
$21,000
+
$2,400
5
Bal.
+
=
+
$21,000
+
$2,400
9
+1,500
Bal.
+
$1,500
+
=
+
$21,000
+
$3,900
Bal.
+
$1,500
+
=
+
$21,000
+
$3,900
Bal.
$22,750
+
$1,500
+
=
+
$21,000
+
$3,900
Bal.
$22,650
+
$1,500
+
=
+
$21,000
+
$3,900
+1,500
Bal.
$24,150
+
+
=
+
$21,000
+
$3,900
Bal.
$20,250
+
=
+
$21,000
+
$3,900
+2,800
+2,800
Bal.
+
=
+
$21,000
+
$6,700
Bal.
+
+
=
+
$21,000
+
$6,700
1-37
P1-42A Preparing financial statements
Learning Objective 5
1. Net Income $97,800
Presented here are the accounts of Golden City Barbershop for the year ended December 31, 2016.
Requirements
1. Prepare Golden City Barbershop’s income statement.
2. Prepare the statement of retained earnings.
3. Prepare the balance sheet.
SOLUTION
Requirement 1
GOLDEN CITY BARBERSHOP
Income Statement
Year Ended December 31, 2016
Revenue:
Service Revenue
$ 195,000
Expenses:
Salaries Expense
Advertising Expense
Rent Expense
11,000
Interest Expense
Property Tax Expense
2,700
Insurance Expense
2,500
Total Expenses
Net Income
1-38
Requirement 2
GOLDEN CITY BARBERSHOP
Statement of Retained Earnings
Year Ended December 31, 2016
Retained Earnings, December 31, 2015
$ 49,000
Net income for the year
97,800
146,800
Dividends
Retained Earnings, December 31, 2016
$ 114,800
Requirement 3
GOLDEN CITY BARBERSHOP
Balance Sheet
December 31, 2016
Assets
Liabilities
Cash
$ 3,800
Accounts Payable
$ 17,000
Accounts Receivable
900
Notes Payable
37,000
Office Supplies
9,000
Salaries Payable
900
Equipment
Total Liabilities
Building
Total Assets
Equity
1-39
P1-43A Preparing financial statements
Learning Objective 5
b. Ending Retained Earnings $76,800
Click a Pix Photography works weddings and prom-type parties. The balance of retained earnings was
$26,000 at December 31, 2015. At December 31, 2016, the business’s accounting records show these
balances:
Prepare the following financial statements for Click a Pix Photography for the year ended December 31,
2016:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
SOLUTION
Part a.
CLICK A PIX PHOTOGRAPHY
Income Statement
Year Ended December 31, 2016
Part b.
CLICK A PIX PHOTOGRAPHY
Statement of Retained Earnings
Year Ended December 31, 2016
Retained Earnings, December 31, 2015
$ 26,000
Net income for the year
60,800
86,800
Dividends
(10,000)
Retained Earnings, December 31, 2016
$ 76,800
Part c.
CLICK A PIX PHOTOGRAPHY
Balance Sheet
December 31, 2016
Cash
Accounts Payable
Accounts Receivable
Notes Payable
Common Stock
Retained Earnings
Total Stockholders’ Equity