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Who are the internal users of accounting data? How does accounting provide
relevant data to the internal users?
Internal users are managers who plan, organize, and run a business. To assist management,
accounting provides timely internal reports. Examples include financial comparisons of operating
alternatives, projections of income from new sales campaigns, forecasts of cash needs for the
next year, and financial statements.
What are the three main types of business activity? Give examples of each
activity.
The three types of business activity are financing activities, investing activities, and operating
activities. Financing activities include borrowing money and selling shares of stock. Investing
activities include the purchase and sale of property, plant, and equipment. Operating activities
include selling goods, performing services, and purchasing inventory.
Example
of
transactions:
Common
business
Payment of a Liability
July 9: Makes a partial payment of the amount owed for the office supplies received on
July 5, $2,600.
Revenue in Cash
July 10: Performs a service for an investment advisor by designing a series of brochures
and collects a fee in cash, $2,800.
Revenue on Credit
July 15: Performs a service for a department store by designing a TV commercial; bills
for the fee now but will collect the fee later, $9,600.
Collection on Account
July 22: Receives cash from customer previously billed on July 15, $5,000.
Withdrawals
July 31: Withdraws $2,800 in cash.
Joan Robinson opens her own law office on July 1, 2012. During the first month of operations,
the following transactions occurred.
1. Joan invested $11,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Provided legal services to clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries and wages $500, utilities $300, and supplies $100.
8. Joan withdraws $1,000 cash for personal use.
Instructions
(a) Prepare a tabular summary of the transactions.
EXERCISE 1
The following situations involve accounting principles and assumptions.
1. Rex Company owns buildings that are worth substantially more than they
originally cost. In an effort to provide more relevant information, Rex reports
the buildings at fair value in its accounting reports.
2. Levi Company includes in its accounting records only transaction data that
can be expressed in terms of money.
3. Josh Borke, owner of Joshs Photography, records his personal living costs
as expenses of the business.
Instructions
For each of the three situations, say if the accounting method used is correct
or incorrect. If correct, identify which principle or assumption supports the
method used. If incorrect, identify which principle or assumption has been
violated.
EXERCISE 2
Thornton Computer Timeshare Company entered into the following
transactions during May 2012.
1. Purchased computer terminals for $20,000 from Digital Equipment on
account.
2. Paid $4,000 cash for May rent on storage space.
3. Received $17,000 cash from customers for contracts billed in April.
4. Provided computer services to Fisher Construction Company for $3,000
cash.
5. Paid Northern States Power Co. $11,000 cash for energy usage in May.
6. Thornton invested an additional $29,000 in the business.
7. Paid Digital Equipment for the terminals purchased in (1) above.
8. Incurred advertising expense for May of $1,200 on account.
Instructions
Indicate with the appropriate letter whether each of the transactions above
results in:
(a) An increase in assets and a decrease in assets.
(b) An increase in assets and an increase in owners equity.
(c) An increase in assets and an increase in liabilities.
EXERCISE 3
Natalie Koebel spent much of her childhood learning the art of cookie-making
from her grandmother. They passed many happy hours mastering every type
of cookie imaginable and later creating new recipes that were both healthy
and delicious. Now at the start of her second year in college, Natalie is
investigating various possibilities for starting her own business as part of the
requirements of the entrepreneurship program in which she is enrolled. A
long-time friend insists that Natalie has to somehow include cookies in her
business plan. After a series of brainstorming sessions, Natalie settles on the
idea of operating a cookie-making school. She will start on a part-time basis
and offer her services in peoples homes. Now that she has started thinking
about it, the possibilities seem endless. During the fall, she will concentrate
on holiday cookies. She will offer individual lessons and group sessions
(which will probably be more entertainment than education for the
participants). Natalie also decides to include children in her target market.
The first difficult decision is coming up with the perfect name for her
business. In the end, she settles on Cookie Creations and then moves on to
more important issues.
EXERCISE 4
Carla Quentin started her own consulting firm, Quentin Consulting, on May 1, 2012. The
following transactions occurred during the month of May.
May 1 Carla invested $7,000 cash in the business.
2
Paid $900 for office rent for the month.
3
Purchased $600 of supplies on account.
5
Paid $125 to advertise in the County News.
9
Received $4,000 cash for services provided.
12
Withdrew $1,000 cash for personal use.
15
Performed $5,400 of services on account.
17
Paid $2,500 for employee salaries.
20
Paid for the supplies purchased on account on May 3.
23
Received a cash payment of $4,000 for services provided on account on May 15.
26
Borrowed $5,000 from the bank on a note payable.
29
Purchased office equipment for $4,200 on account.
30
Paid $275 for utilities.
Instructions
Show the effects of the previous transactions on the accounting equation using the following
format.
Exercise 5