Chapter 01 - An Introduction to Accounting

CHAPTER 1 - An Introduction to Accounting

ANSWERS TO QUESTIONS 2. Accounting provides important information to the stakeholders of both profit oriented and nonprofit oriented organizations. Such information is useful in making decisions by all participants in the market for resource goods and services. Because of this communicative role of accounting, it is often called the language of business. The U.S. rules of accounting information measurement are called generally accepted accounting principles (GAAP). The term liabilities is used to describe creditors' claims on the assets of a business.

10. 16.

17. The accounting equation is: ASSETS LIABILITIES = STOCKHOLDERS EQUITY or ASSETS = LIABILITIES + STOCKHOLDERS EQUITY

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Chapter 01 - An Introduction to Accounting

Assets are the economic resources used by a business for the production of revenue. Liabilities are obligations of a business that can be settled by relinquishing assets, providing goods or services, or accepting other obligations. Equity, also called residual interest or net assets, is the portion of the assets remaining after the creditors' claims have been satisfied (i.e., Assets Liabilities). 18. The owners ultimately bear the risk and collect the rewards associated with operating a business. SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 1 EXERCISE 1-5 Title or Account Common Stock Financial Statement(s) Balance Sheet; Statement of Changes in Stockholders Equity Land Balance Sheet Ending Cash Balance Balance Sheet; Statement of Cash Flows Beginning Cash Balance Statement of Cash Flows Notes Payable Balance Sheet Retained Earnings Balance Sheet; Statement of Changes in Stockholders Equity Revenue Income Statement Dividends Statement of Changes in Stockholders Equity Financing Activities Statement of Cash Flows Salaries Expense Income Statement

a. b. c. d. e. f. g. h. i. j.

EXERCISE 1-15

Event 1. 2. 3. 4. 5. 6. 7. 8.

Classification Asset Source Asset Source Asset Exchange Asset Source Asset Source Asset Exchange Asset Use NA
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Chapter 01 - An Introduction to Accounting

9. 10. 11.

Asset Use Asset Use NA

EXERCISE 1-16

Event a. b. c. d. e. f. g. h. i. j.

Statement of Cash Flow Classification OA FA FA IA OA OA IA FA NA FA

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 1-22
City Consulting Services Horizontal Statements Model for 2012 Assets Event No. 1 2 3 4 5 6 7 Cash I I I D D D NA
+ + + + + + + +

Land NA NA NA I NA NA NA

Balance Sheet Liab. + Stockholders Equity Notes Common Retained = Payable + Stock + Earnings + + = NA I NA = + + NA NA I = + + I NA NA = + + NA NA NA = + + NA NA D = + + NA NA D = + + NA NA NA
=

Income Statement Revenue Expense = Net Inc.

Statement of Cash Flows

NA I NA NA NA NA NA

NA NA NA NA I NA NA

= = = = = = =

NA I NA NA D NA NA

I I I D D D NA

FA OA FA IA OA FA

EXERCISE 1-24 a.
Solito, Inc. Horizontal Statements Model for 2012 Balance Sheet Assets = Liab. + Stockholders Equity Notes Commo Retained + Land Cash = Payable + n Stock + Earning s 50,000 NA NA 50,000 NA (12,000) 12,000 NA NA NA 50,000 NA NA NA 50,000
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Income Statement Revenue Expense = Net Inc.

Statement of Cash Flows

Event No. 1 2 3

NA NA 50,000

NA NA NA

NA NA 50,000

50,000 FA (12,000) IA 50,000 OA

Chapter 02 - Understanding the Accounting Cycle

4 5 6 7 8 9 10 Total

(9,500) NA 5,000 NA 10,000 NA (10,000) 10,000 (8,000) NA (2,800) NA NA NA 72,700 + 22,000

NA NA 10,000 NA NA NA NA 10,000 +

NA 5,000 NA NA NA NA NA 55,000 +

(9,500) NA NA NA (8,000) (2,800) NA 29,700

NA NA NA NA NA NA NA 50,000

9,500 NA NA NA 8,000 NA NA 17,500

(9,500) NA NA NA (8,000) NA NA 32,500

(9,500) 5,000 10,000 (10,000) (8,000) (2,800) NA 72,700

OA FA FA IA OA FA NC

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Chapter 02 - Understanding the Accounting Cycle

CHAPTER 2 - Understanding the Accounting Cycle

ANSWERS TO QUESTIONS 1. Accrual accounting attempts to record the effects of accounting events in the period when such events occur, regardless of when cash is received or paid. The goal is to match expenses with the revenues that they produce. If cash is collected in advance for services, the revenue is recognized when the services are rendered. The issue of common stock, which is capital acquired from owners, increases business assets (usually cash) and equity (common stock). Revenue is recognized under accrual accounting when a revenue-producing transaction occurs, i.e., when the revenue is earned, even if no cash is collected at the time of the transaction. Net cash flows from operations on the cash flow statement may be different from net income because of the application of accrual accounting. Revenues and expenses reported on the income statement may be recognized before or after the actual collection or payment of cash that is reported on the cash flow statement. The balance sheet is dated as of a specific date because it gives information about an entity's assets, liabilities, and stockholders equity as of that date, not measured over a time period. Whereas, the statement of changes in stockholders equity, the income statement, and the cash flow statement reflect transactions that occur over a period of time. Hence, they are dated with the phrase for the period ended.

4.

6.

9.

17.

27.

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Chapter 02 - Understanding the Accounting Cycle

SOLUTIONS TO EXERCISES - CHAPTER 2 EXERCISE 2-4 a.

Green Copy Service Effect of Events on Financial Statements for 2012 Assets Event No. Beg. Bal. 1. 2. 3. 4. Totals = Liab. Accts. Pay. + Stockholders Equity Com. Retained Stock Earnings 6,000 NA 39,000 NA (7,400) 37,600 Income Statement Net = Income Cash Flows -0NA 39,000 OA (7,000) OA NA 32,000 NC

Cash 16,000 NA 39,000 (7,000) NA 48,000

Supplies -09,600 NA NA (7,400) 2,200

Rev.

Exp.

-010,000 9,600 NA NA NA (7,000) NA NA NA 2,600 + 10,000

-0NA 39,000 NA NA 39,000

-0-0NA NA NA 39,000 NA NA 7,400 (7,400) 7,400 = 31,600

b.

The difference in net income and cash flow from operating activities of $400 ($31,600 $32,000) is attributed to recognizing supplies expense of $7,400 in the income statement, whereas the cash payment on accounts payable (for supplies) was $7,000.

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 2-14

Horizontal Statement Model Stk. Equity Com. Ret. + Stock + Earn. I NA NA NA NA NA NA NA NA I NA NA NA D NA NA NA D NA D NA NA NA NA NA D NA I NA D NA NA Income Statement Net Rev. Exp. = Inc. NA NA NA NA NA NA NA NA NA NA NA NA I NA I NA NA NA NA I D NA NA NA NA NA NA NA I D NA NA NA NA NA NA NA I D I NA I NA I D NA NA NA

Event a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p.

Type of Event AS AE AE AE AS AE/AS AU AE AU CE AU AS CE AS AU AU

Assets I I/D I/D I/D I I D I/D D NA D I NA I D D

= Liab. NA NA NA NA NA I NA NA NA I D I I NA NA D

Cash Flows I FA D IA D OA I OA I OA D IA D OA D OA D FA NA D OA I OA NA NA NA D OA

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 2-17 Cherry Design Effect of Events on the General Ledger Accounts
Assets Accounts Receivable 58,000 46,000 (46,000) 41,000 (30,000) 40,000 (20,000) 36,000 20,000 20,000 = (30,000) 40,000 (41,000) = Land = Liabilities Accounts Payable + + Stockholders Equity Com. Retained Stock + Earnings 58,000

Event 1. Svc. on Account 2. Coll. on Account 3. Incurred Expense 4. Pd. Acc. Pay. 5. Issue of Stock 6. Purchase Land Totals

Cash

12,000

11,000

40,000 +

17,000

a. Revenue recognized, $58,000. b. Cash flow from revenue, $46,000. c. Revenue, $58,000, less operating expenses, $41,000 = $17,000 net income. d. Accounts receivable collected, $46,000, less cash paid for expenses, $30,000 = $16,000 cash flow from operating activities. e. Income of $58,000 was earned, but only $46,000 was collected (a difference of $12,000); operating expenses incurred were $41,000 but only $30,000 was paid during the period (a difference of $11,000). Consequently, net income is $1,000 more than cash flow from operating activities. f. $20,000 cash outflow for the purchase of land.

g. $40,000 cash inflow from the issue of common stock. h. Total assets Total liabilities = = $68,000 ($36,000 + $12,000 + $20,000) $11,000 2-9

Chapter 02 - Understanding the Accounting Cycle Total equity = $57,000 ($40,000 + $17,000)

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 2-25 Item a. b. c. d. e. f. g. h. Statement BS IS IS BS CF IS NA BS Item i. j. k. l. m. n. o. Statement BS BS SE CF BS,SE IS BS/CF

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Chapter 02 - Understanding the Accounting Cycle

SOLUTIONS TO PROBLEMS - CHAPTER 2 PROBLEM 2-27

King Company Effect of Events on the Financial Statements Assets
Event 1. 2. 3. 4. 5. 6.* 7. 8.** 9. 10. 11. 12. Bal. Accts Cash + Rec. + 25,000 NA 5,000 NA NA 18,000 11,000 (11,000) (1,400) NA NA NA 3,600 NA NA NA (6,000) NA NA NA (2,000) NA (2,000) NA 33,200 + 7,000 +

Balance Sheet = Liabilities

Supp. = NA NA NA NA 1,400 (1,100) NA NA NA NA NA NA 300 =

Stock. Equity
+ Ret. Earn. NA 5,000 18,000 NA NA (1,100) NA 1,800 (6,000) (2,400) NA (2,000) 13,300

Income Statement Rev. Exp. = Net Inc.

NA 5,000 18,000 NA NA NA NA 1,800 NA NA NA NA 24,800 NA NA NA NA NA 1,100 NA NA 6,000 2,400 NA NA 9,500 = NA 5,000 18,000 NA NA (1,100) NA 1,800 (6,000) (2,400) NA NA 15,300

Stmt. of Cash Flows

Accts. Unearn Com. Pay. + Rev. + Stock NA NA 25,000 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 3,600 NA NA (1,800) NA NA NA NA 2,400 NA NA (2,000) NA NA NA NA NA 400 + 1,800 + 25,000

25,000 5,000 NA 11,000 (1,400) NA 3,600 NA (6,000) NA (2,000) (2,000) 33,200

FA OA OA OA OA OA OA FA NC

*$1,400 purchase $300 ending balance = $1,100 used

**$3,600 x = $1,800

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Chapter 02 - Understanding the Accounting Cycle

CHAPTER 3 - Accounting for Merchandising Businesses

ANSWERS TO QUESTIONS 2. Product costs are costs associated with goods for resale, usually inventory costs. Selling and administrative expenses, called period costs, are costs that are not directly traceable to products, for example, operating expenses. The cost of the items that have not been sold are allocated to merchandise inventory (asset) and are shown on the balance sheet. The cost of the items that have been sold are allocated to cost of goods sold (expense) and are shown on the income statement. Assets would both increase and decrease (cash increases by $20,000 and inventory decreases by $12,000) and stockholders equity both increases and decreases (revenue is increased by $20,000 and cost of goods sold is increased by $12,000). All four financial statements are affected. 2/10 n/30 means that a 2% discount may be taken off of the selling price if payment is made within ten days of the invoice date. If the discount is not taken, the amount of the invoice is due in 30 days. Gross margin is net sales less cost of goods sold and relates the sales of primary products. Gain from the sale of an asset is computed by subtracting the cost of the asset from its sales price, but a gain refers to profit from an incidental transaction not likely to regularly recur.

4.

9.

14.

20.

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Chapter 02 - Understanding the Accounting Cycle

SOLUTIONS TO EXERCISES - CHAPTER 3 EXERCISE 3-1 a. Eady CPAs Income Statement For the Year Ended December 31, 2012 Revenue Consulting Revenue Expenses Salaries Expense Net Income Eady CPAs Balance Sheet As of December 31, 2012 Assets Cash* Total Assets Liabilities Notes Payable Total Liabilities Stockholders Equity Retained Earnings $50,000 $50,000 $40,000 $40,000 $10,000
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$30,000 (20,000) $10,000

Chapter 02 - Understanding the Accounting Cycle

Total Stockholders Equity Total Liab. and Stockholders Equity *$40,000 + $30,000 $20,000 = $50,000 EXERCISE 3-1 a. (cont.) Eady CPAs Statement of Cash Flows For Year Ended December 31, 2012 Cash Flows From Operating Activities: Inflow from Revenue Outflow for Salaries Net Cash Flow from Operating Activ. Cash Flows From Investing Activities Cash Flows From Financing Activities: Inflow from Loan Net Cash Flow from Financing Activ. Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance $40,000 $30,000 (20,000)

10,000 $50,000

$10,000 -0-

40,000 50,000 -0$50,000

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 3-1 a. (cont.) Campus Clothing Income Statement For the Year Ended December 31, 2012 Net Sales Revenue Cost of Goods Sold Gross Margin Expenses Operating Expenses Net Income Campus Clothing Balance Sheet As of December 31, 2012 Assets Cash* Merchandise Inventory** Total Assets Liabilities Notes Payable Total Liabilities Stockholders Equity
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$30,000 (16,400) 13,600 (3,600) $10,000

$41,400 8,600 $50,000 $40,000 $40,000

Chapter 02 - Understanding the Accounting Cycle

Retained Earnings Total Stockholders Equity Total Liab. and Stockholders Equity

$10,000 10,000 $50,000

*$40,000 $25,000 + $30,000 $3,600 = $41,400 **$25,000 $16,400 = $8,600 EXERCISE 3-1a. (cont.) Campus Clothing Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows From Operating Activities: Inflow from Revenue Outflow for Inventory Outflow for Expenses Net Cash Flow from Operating Activities Cash Flows From Investing Activities Cash Flows From Financing Activities: Inflow from Loan Net Cash Flow from Financing Activities Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance $40,000 40,000 41,400 -0$41,400 30,000 (25,000) (3,600) $1,400 -0-

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Chapter 02 - Understanding the Accounting Cycle

b. Campus Clothing is a merchandising business and has inventory and cost of goods sold -product costs. Eady is a service company and does not have product costs. c. Eady is a service company and sells a service not a product. Consequently, it does not have cost of goods sold or gross margin. It only has selling and administrative expense (period expense). d. The asset in common is cash. The only asset that Eady has is Cash. Campus Clothing has cash but also has inventory. Eady does not sell a product and does not have any inventory. Campus Clothing sells products and must carry inventory available for sale to customers.

EXERCISE 3-3 a.
Knight Merchandising Company Effect of Events on the Financial Statements Assets Events
Beg. Bal. 1. Pur. Inv. 2a. Sold Inv. 2b. Inv. Cost 3. Pd. AP 4. Coll. AR 5. Pd. Exp. End. Bal.

Balance Sheet = Liab. Inv. NA 15,000 NA (12,500) NA NA NA

Cash 14,000 NA NA NA (10,000) 11,000 (3,500)

+ A. Rec. + + NA + + NA + + 17,500 + + NA + + NA + + (11,000) + + NA +

Stkholders Equity + = A. Pay. C. Stk. + Ret. Ear.

+

Income Statement Rev. Exp. = Net Inc.

Statement of Cash Flows

= NA + 14,000 + NA = 15,000 + NA + NA = NA + NA + 17,500 = NA + NA + (12,500) = (10,000) + NA + NA = NA + NA + NA = NA + NA + (3,500) 5,000 + 14,000 + 1,500

NA NA 17,500 NA NA NA NA

NA = NA NA = NA NA = 17,500 12,500 = (12,500) NA = NA NA = NA 3,500 = (3,500) 1,500

NA NA NA NA (10,000) OA 11,000 OA (3,500) OA (2,500) NC

11,500 +

6,500 +

2,500 =

17,500 16,000 =

b. c.

$6,500 (see above) $5,000 (see above)

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Chapter 02 - Understanding the Accounting Cycle

d.

Sales Cost of Goods Sold Gross Margin Operating Exp. Net Income

$17,500 (12,500) 5,000 (3,500) $ 1,500

e.

Cash Flows From Operating Activities: Inflow from Customers $11,000 Outflow for Inventory (10,000) Outflow for Expenses (3,500) Net Cash Flow from Operating Activities $ (2,500)

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 3-3 (cont.) f. Ending retained earnings and net income are the same in this problem because this is the first year of operations and no dividends were paid. Ending Retained Earnings is calculated as follows: Beginning Retained Earnings + Net Income Dividends = Ending Retained Earnings. Generally, retained earnigs and net income are not the same. Any beginning balance in retained earnings or any payment of dividends will make these two items different.

EXERCISE 3-8 a. Transaction

Period Costs

Product Costs

Not Applicable

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 3-8 (cont.) b.

The Toy Store Horizontal Statements Model for 2012 Assets + A. Rec. + Balance Sheet = Liab. + Stkholders Equity Inv. = A. Pay. + C. Stk. + Ret. Ear.
+ NA + NA + NA + 57,400 + (35,000) + (420) + (4,000) + 2,400 + NA + NA + (1,100) + (1,000)

Income Statement Rev. Exp. = Net Inc. NA = NA NA = NA NA = NA NA = 57,400 35,000 = (35,000) 420 = (420) = NA (4,000) 2,400 (2,400) = NA = NA NA = NA 1,100 = (1,100) 1,000 = (1,000)

Statement of Cash Flows

Cash
1. Stock 2. Pur Inv. 3. Freight 4a. Sold Inv. 4b. Cost 5. Pd. Frt. 6a. Ret. Sale 6b. Ret. Inv. 7. Coll. AR 8. Pd. AP 9. Pd. Exp. 10. Pd. Exp. End. Bal.

20,000 + NA + NA = NA + 20,000 NA + NA + 56,000 56,000 + NA (600) + NA + 600 = NA + NA NA + 57,400 + NA = NA + NA + + + NA NA (35,000) = NA NA + + + (420) NA NA = NA NA NA + (4,000) + NA = NA + NA NA + NA + 2,400 = NA + NA 47,000 + (47,000) + NA = NA + NA (44,000) + NA + NA = (44,000) + NA (1,100) + NA + NA = NA + NA + + + (1,000) NA NA = NA NA 19,880 + 6,400 +

NA NA NA 57,400 NA NA (4,000) NA NA NA NA NA

20,000 FA NA (600) OA NA NA (420) OA NA NA 47,000 OA (44,000) OA (1,100) OA (1,000) OA 19,880 NC

24,000 = 12,000 + 20,000 +

18,280

53,400 35,120 = 18,280

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 3-15 Single-Step Income Statement: Healthy Foods Market Income Statement For the Year Ended December 31, 2012
Net Sales Gain on Sale of Land Total Revenue Expenses Cost of Goods Sold Advertising Expense Interest Expense Salaries Expense Supplies Expense Total Expenses Net Income (Loss) $900 200 140 260 210 (1,710) $ 765 $2,400 75 2,475

Multistep Income Statement: Healthy Foods Market Income Statement For the Year Ended December 31, 2012
Net Sales Cost of Goods Sold Gross Margin Operating Expenses Advertising Expense Salaries Expense $200 260
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$2,400 (900) 1,500

Chapter 02 - Understanding the Accounting Cycle

Supplies Expense Total Operating Expenses Operating Income (Loss) Non-operating Items Interest Expense Gain on Sale of Land Net Income (Loss)

210 (670) 830 (140) 75 $ 765

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Chapter 02 - Understanding the Accounting Cycle

CHAPTER 4 - Internal Controls, Accounting for Cash, and Ethics

ANSWERS TO QUESTIONS 1. The accounting scandals of WorldCom and Enron are partially responsible for the passage of the Sarbanes-Oxley Act. SOX requires public companies to evaluate their internal control system. Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. Separation of duties is the procedure whereby different individuals separately perform the authorization, recording, and custody functions for a business. An example would be to have one individual write the checks and attach appropriate documentation and have another individual sign the checks and approve the payment. The use of prenumbered documents (i.e., checks, receipts, and invoices) is a control to help ensure that all transactions are properly accounted for and recorded, and that no transactions are unrecorded or missing.

2.

7.

13.

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 4-2 1. Separation of Duties: Whenever possible, the functions of authorization, recording, and custody should be handled by different individuals. If these duties are separated, the likelihood of theft or fraud by employees is greatly reduced, because collusion among employees is necessary to accomplish the crime. Quality of Employees: Employees should be competent and adequately trained to perform the required task. Bonded Employees: Employers should hire employees with high personal integrity. Employees in positions of trust should be covered with a fidelity bond (insurance against loss from employee dishonesty). Periods of Absence: Employees should be required to take extended vacations and/or be rotated among duties in order to discover patterns of dishonesty or theft.

2. 3.

4.

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Chapter 02 - Understanding the Accounting Cycle

5. 6.

Procedures Manual: A procedures manual should be established, kept up-to-date, and enforced to assure that company procedures for processing transactions are being followed. Authority and Responsibility: A clear chain of command should be established and documented. A manual should detail this chain of command and provide guidance for specific and general authority. Prenumbered Documents: The use of prenumbered documents (checks, receipts, etc.) requires all such documents to be accounted for and reduces the likelihood of unauthorized transactions. Physical Control: All assets should be properly documented, and periodically accounted for, with access limited to authorized personnel. Performance Evaluations: A periodic and independent evaluation of employees' performance alerts management to inefficiencies of employees.

7.

8. 9.

EXERCISE 4-4

a. Cash requires additional control procedures because of its appeal. Usually possession of cash is presumed ownership. It usually cannot be traced and one dollar cannot be distinguished from another. Relatively small quantity of high-denomination currency can represent significant amounts of value. Consequently, extra controls are necessary to safeguard cash. b. Cash includes currency and other items that are payable on demand such as checks, money orders, bank drafts, and certain savings accounts. Some companies combine marketable securities with cash for balance sheet presentation.

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EXERCISE 4-10

Bank Reconciliation Unadjusted Bank Balance 6/30/2012 Add: Deposit in Transit Less: Outstanding Check True Cash Balance 6/30/2012 Unadjusted Book Balance 6/30/2012 Add: Credit Memo for Interest Earned Less: Debit Memo for Service Charge True Cash Balance 6/30/2012 $13,879.85 1,476.30 (1,843.74) $13,512.41 $13,483.75 35.00 (6.34) $13,512.41

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