1-1
CHAPTER 1
Accounting as a Form
of Communication
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Outcomes Exercises Minutes Level
Module 1
1. Explain what business is about.
Module 2
4. Define accounting and identify the primary users of accounting 2 5 Easy
information and their needs. 15* 10 Mod
Module 3
6. Identify and explain the primary assumptions made in 12 10 Mod
preparing financial statements. 16* 10 Mod
7. Identify the various groups involved in setting accounting standards 13 10 Mod
and the role of auditors in determining whether the standards are
followed.
1-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Outcomes Alternates Minutes Level
Module 1
1. Explain what business is about.
Module 2
4. Define accounting and identify the primary users of accounting 1 30 Mod
information and their needs. 2 20 Mod
9 20 Mod
Module 3
6. Identify and explain the primary assumptions made in 10* 45 Diff
preparing financial statements.
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-3
Estimated
Time in
Learning Outcomes Cases Minutes Level
Module 1
1. Explain what business is about.
Module 2
4. Define accounting and identify the primary users of accounting 1* 25 Mod
information and their needs. 4 30 Mod
6* 75 Diff
Module 3
6. Identify and explain the primary assumptions made in
preparing financial statements.
1-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISES
LO 3 EXERCISE 1-1 TYPES OF BUSINESS ACTIVITIES
F 1. Issued shares of stock to each of the four owners.
I 2. Purchased two limousines.
LO 4 EXERCISE 1-2 USERS OF ACCOUNTING INFORMATION AND THEIR NEEDS
1. Company management
2. Stockholder
3. Labor union
LO 5 EXERCISE 1-3 THE ACCOUNTING EQUATION
A = L + SE
Case 1: $125,000 = $75,000 + SE
SE = $50,000
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-5
LO 5 EXERCISE 1-4 THE ACCOUNTING EQUATION
1. A = L + SE
$500,000 = $250,000 + SE
SE = $250,000
2. A = L + SE
($500,000 + $100,000) = ($250,000 + $77,000) + SE
SE = $273,000*
*SE = ($500,000 + $100,000) – ($250,000 + $77,000) = $273,000
LO 5 EXERCISE 1-5 THE ACCOUNTING EQUATION
1. A = L + SE
Beginning of year $100,000 = $80,000 + $20,000
Net income + 25,000
Dividends – 0
Stockholders’ equity at end of year $45,000
1-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 1-6 CHANGES IN OWNERS’ EQUITY
1. First, compute the amount of stockholders’ equity at the end of each year. Then,
compute the change.
A = L + SE
2014: $25,000 = $12,000 + SE
SE = $13,000
2. 2015:
($1,000) = Income – $0 in dividends
Net loss = ($1,000)
3. 2016:
$35,000 = Income – $10,000 in dividends
Net income = $45,000*
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-7
LO 5 EXERCISE 1-7 THE ACCOUNTING EQUATION
(In thousands of dollars)
A = L + CS + (Beg. RE + Income – Div.)
Case 1:
40 = L + 10 + (15 + 8 – 2)
Liabilities = 9
Case 2:
A = 15 + 5 + (8 + 7 – 1)
Assets = 34
LO 5 EXERCISE 1-8 CLASSIFICATION OF FINANCIAL STATEMENT ITEMS
Appears on the Classified as
1. IS E
2. BS A
3. BS L
1-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 1-9 CLASSIFICATION OF FINANCIAL STATEMENT ITEMS
Item Appears on the Classified as
1. Trade and other receivables, net BS A
2. Class A common stock BS SE
3. Inventories BS L
LO 5 EXERCISE 1-10 NET INCOME (OR LOSS) AND RETAINED EARNINGS
1. Revenue – Expenses = Net Income
$25,000 – ($6,500 + $12,000) = $6,500
4. Total Liabilities:
Accounts payable …………….. $5,000
5. Stockholders’ Equity:
Capital Stock + Retained Earnings = Stockholders’ Equity
$8,000 + $12,000 = $20,000
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-9
LO 5 EXERCISE 1-11 STATEMENT OF RETAINED EARNINGS
ACE CORPORATION
STATEMENT OF RETAINED EARNINGS
FOR THE MONTH ENDED FEBRUARY 29, 2016
Retained earnings, beginning of month ……………………………………… $229,800*
Net income ……………………………………………………………………………. 14,000**
LO 6 EXERCISE 1-12 ACCOUNTING PRINCIPLES AND ASSUMPTIONS
1. Going concern (also economic entity)
2. Cost principle
LO 7 EXERCISE 1-13 ORGANIZATIONS AND ACCOUNTING
1. Securities and Exchange Commission
2. Financial Accounting Standards Board
1-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 1-14 CLASSIFICATION OF ITEMS ON THE STATEMENT OF CASH FLOWS
Item Section
1. Cash paid for land I
2. Cash received from issuance of note F
MULTI-CONCEPT EXERCISES
LO 4,5 EXERCISE 1-15 USERS OF ACCOUNTING INFORMATION AND THE FINANCIAL
STATEMENTS
USER FINANCIAL STATEMENT
Stockholder IS
Banker BS
Supplier BS
LO 5,6 EXERCISE 1-16 CHIPOTLE’S LAND
Land would be included in “Leasehold improvements, property and equipment, net” on
Chipotle’s balance sheet. The amount represents how much the company paid for the
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-11
PROBLEMS
LO 4 PROBLEM 1-1 YOU WON THE LOTTERY
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
information.
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
This problem provides the instructor with an opportunity to introduce the concept of the
time value of money. Certainly, it would be preferable to receive $1 million today, rather
than $200,000 over each of the next five years. If a lump sum is received immediately, it
could be put into one of the investments chosen, as opposed to spreading the invest-
ment over a five-year period.
1-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 4 PROBLEM 1-2 USERS OF ACCOUNTING INFORMATION AND THEIR NEEDS
Information Management Stockholders Banker
1. a. b. a.
2. a. c. a.
LO 5 PROBLEM 1-3 BALANCE SHEET
FREESCIA CORPORATION
BALANCE SHEET
END OF THE YEAR
Assets Liabilities and Stockholders’ Equity
Cash ……………………………… $ 4,220 Accounts payable ………………… $ 12,550
Accounts receivable ………… 23,920 Notes payable ……………………… 50,000
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-13
LO 5 PROBLEM 1-4 CORRECTED BALANCE SHEET
1. AVON CONSULTING INC.
BALANCE SHEET
END OF THE YEAR
Assets Liabilities and Stockholders’ Equity
Cash ………………………… $21,000 Accounts payable ………………… $13,000
Accounts receivable ……. 16,000 Capital stock ……………………….. 20,000
2. Memorandum to the company president:
TO: Company president
FROM: Student’s name
lows:
1. The balance sheet is always as of a certain date, in this case, the end of the cur-
rent year, rather than a period of time, such as a year.
2. Accounts payable should be classified as a liability.
3. Cash dividends do not belong on the balance sheet; this amount should appear
instead on the statement of retained earnings for the year.
4. Accounts receivable should be classified as an asset.
1-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 1-5 INCOME STATEMENT, STATEMENT OF RETAINED EARNINGS,
AND BALANCE SHEET
1. MAPLE PARK THEATRES CORP.
INCOME STATEMENT
FOR THE MONTH ENDED SEPTEMBER 30, 2016
Revenues:
Ticket sales………………………………………………………… $95,100
Concessions revenue ………………………………………….. 60,300
Total revenues ………………………………………………. $155,400
2. MAPLE PARK THEATRES CORP.
STATEMENT OF RETAINED EARNINGS
FOR THE MONTH ENDED SEPTEMBER 30, 2016
Retained earnings, beginning balance, September 1, 2016 ………………. $73,780
3. MAPLE PARK THEATRES CORP.
BALANCE SHEET
SEPTEMBER 30, 2016
Assets Liabilities and Stockholders’ Equity
Cash ………………………… $ 15,230 Accounts payable ………………… $ 17,600
Accounts receivable ……. 6,410 Notes payable ……………………… 20,000
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-15
PROBLEM 1-5 (Concluded)
4. On the basis of these statements alone, Maple Park would appear to be a good
candidate for an investment. It is operating at a profit and is paying dividends. Before
one makes an investment in Maple Park stock, it would be useful to see the state-
LO 5 PROBLEM 1-6 INCOME STATEMENT AND BALANCE SHEET
1. GREEN BAY CORPORATION
INCOME STATEMENT
FOR THE MONTH ENDED JULY 31, 2016
Revenues:
Fishing revenue ………………………………………………….. $21,300
Passenger service revenue ………………………………….. 12,560
2. GREEN BAY CORPORATION
BALANCE SHEET
JULY 31, 2016
Assets Liabilities and Stockholders’ Equity
Cash ………………………… $ 7,730 Notes payable ……………………… $ 60,000
3. To fully assess Green Bay’s long-term viability, you would need the following infor-
mation about the $60,000 note payable:
• When is it due?
• What is the interest rate?
1-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 1-7 CORRECTED FINANCIAL STATEMENTS
1. HOMETOWN CLEANERS INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Revenues:
Cleaning revenue—credit sales …………………………….. $26,200
Cleaning revenue—cash sales ……………………………… 32,500
2. HOMETOWN CLEANERS INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2016
Retained earnings, beginning of year …………………………………………….. $42,700*
3. HOMETOWN CLEANERS INC.
BALANCE SHEET
DECEMBER 31, 2016
Assets Liabilities and Stockholders’ Equity
Cash ………………………… $ 7,400 Accounts payable ………………… $ 4,500
Accounts receivable ……. 15,200 Notes payable ……………………… 50,000
CHAPTER 1 • ACCOUNTING AS A FORM OF COMMUNICATION 1-17
PROBLEM 1-7 (Concluded)
4. Memorandum to the company president:
TO: Company president
FROM: Student’s name
DATE: January 1, 2017
SUBJECT: Corrected income statement
Attached please find the original income statement you prepared, along with a cor-
rected version of that same statement. Fortunately, your disappointment with the
2016 net income is not warranted, as you will see from my revised statement. The
LO 5 PROBLEM 1-8 STATEMENT OF RETAINED EARNINGS FOR THE COCA-COLA
COMPANY
1. THE COCA-COLA COMPANY
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2013
(amounts in millions)
Retained earnings, beginning of year …………………………………………….. $58,045
Net income attributable to shareowners of the
1-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 4 PROBLEM 1-9 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
MULTI-CONCEPT PROBLEM
LO 5,6 PROBLEM 1-10 PRIMARY ASSUMPTIONS MADE IN PREPARING FINANCIAL
STATEMENTS
Assumptions violated:
1. Economic entity—Should have separated his personal affairs from those of the
business.
2. Cost principle—Should have recorded the new equipment at the amount paid to
acquire it, not its list price.