ch01 Introduction Acounting & Business

CHAPTER 1
INTRODUCTION TO ACCOUNTING
AND BUSINESS
CLASS DISCUSSION QUESTIONS
1. The objective of most businesses is to
maximize profits. Profit is the difference
between the amounts received from
customers for goods or services provided
and the amounts paid for the inputs used to
provide those goods or services.
2. The stakeholders of a business normally
include owners, managers, employees,
customers, creditors, and the government.
3. Simply put, the role of accounting is to
provide information for managers to use in
operating the business. In addition,
accounting provides information to other
stakeholders to use in assessing the
economic performance and condition of the
business.
4. Three sound principles that form the
foundation for ethical behavior are (1) avoid
small ethical lapses, (2) focus on your longterm reputation, and (3) be willing to suffer
adverse personal consequences for holding
to an ethical position.
5. Accountants serving a business firm,
governmental
agency,
not-for-profit
organization, etc., as an employee are
engaged in private accounting. Accountants
who provide accounting services to clients
on a fee basis are engaged in public
accounting.
6. FASB stands for the Financial Accounting
Standards Board. The FASB sets generally
accepted accounting principles by first
identifying specific issues in financial
accounting. As these issues arise, the FASB
conducts extensive research to identify the
primary concerns involved and possible
solutions. Generally, after issuing discussion
memoranda and preliminary proposals and
evaluating comments from interested
parties, the Board issues Statements of
Financial Accounting Standards. These
standards become part of generally
accepted accounting principles. To explain,
clarify, or elaborate on existing standards,
the Board also issues Interpretations, which
have the same authority as the Standards.
7. No. The business entity concept limits the

recording of economic data to transactions
directly affecting the activities of the
business. The payment of the interest of
$3,500 is a personal transaction of Lynda
Lyons and should not be recorded by Fast
Delivery Service.
8. The land should be recorded at its cost of
$97,500 to Neece Repair Service. This is
consistent with the cost concept.
9. a. No. The offer of $400,000 and the
increase in the assessed value should
not be recognized in the accounting
records.
b. Cash would increase by $400,000, land
would decrease by $350,000, and
owners equity would increase by
$50,000.
10. The two principal rights to the properties of
a business are liabilities (the rights of
creditors) and owner's equity (the rights of
the owner).
11. The three elements of the accounting
equation are assets, liabilities, and owner's
equity.
12. An account receivable is a claim against a
customer for goods or services sold. An
account payable is an amount owed to a
creditor for goods or services purchased.
Therefore, an account receivable in the
records of the seller is an account payable
in the records of the purchaser.
13. The business incurred a net loss of $15,000.
14. The business realized net income of
$10,000.
15. The two types of transactions that increase
the owners equity of a proprietorship are
revenue and an investment by the owner.
16. The income statement presents a summary
of the revenues and expenses of a business
for a specific period of time. The statement
of owners equity indicates the changes in
owners equity that have occurred over a
specific period of time. The balance sheet
presents a listing of the assets, liabilities,
17.
and owner's equity of a business as of a

specific date. The statement of cash flows
presents a summary of the cash receipts
and cash payments of a business entity for
a specific period of time.
An income statement, a statement of
owners equity, and a statement of cash
flows are for a specific period of time. The

balance sheet is for a specific date.
18. Net income or net loss
Owners equity at the end of the period
19. The statement of cash flows reports cash
flows from operating activities, investing
activities, and financing activities.
EXERCISES
Ex. 11
As in many ethics issues, there is no one right answer. The Naples Daily News
reported on this issue in these terms: "The company covered up the first report,
and the local newspaper uncovered the company's secret. The company was
forced to not locate here (Collier County). It became patently clear that doing the
least that is legally allowed is not enough."
Ex. 12
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
B
F
R
B
B
F
X
R
B
X
Ex. 13
Coca-Cola owners equity: $21,623 $12,110 = $9,513
PepsiCo owners equity: $17,551 $10,670 = $6,881
Ex. 14
a. $51,500 ($20,000 + $31,500)
b. $52,750 ($62,750 $10,000)
c. $19,000 ($57,000 $38,000)
Ex. 15
a.
b.
c.
d.
e.
$183,000 ($325,000 $142,000)

$230,000 ($183,000 + $84,000 $37,000)
$158,000 ($183,000 $8,000 $17,000)
$275,500 ($183,000 + $75,000 + $17,500)
Net income: $137,000 ($425,000 $105,000 $183,000)
Ex. 16
a.
b.
c.
d.
e.
f.
owner's equity
asset
owner's equity
asset
liability
asset
Ex. 17
a.
b.
c.
d.
e.
Increases assets and increases owners equity.

Increases assets and increases owners equity.
Increases assets and decreases assets.
Decreases assets and decreases owners equity.
Increases assets and increases liabilities.
Ex. 18
a. (1)
(2)
(3)
Total assets increased $50,000.

No change in liabilities.
Owners equity increased $50,000.
b. (1)
(2)
(3)
Total assets decreased $28,000.

Total liabilities decreased $28,000.
No change in owners equity.
Ex. 19
1.
2.
3.
4.
increase
increase
decrease
decrease
Ex. 110
1.
2.
3.
4.
5.
c
d
c
e
c
6.
7.
8.
9.
10.
a
e
a
e
e
Ex. 111
a. (1)
(2)
(3)
(4)
(5)
(6)
(7)
Sale of catering services for cash, $15,000.

Purchase of land for cash, $2,000.
Payment of expenses, $11,250.
Purchase of supplies on account, $500.
Withdrawal of cash by owner, $1,500.
Payment of cash to creditors, $5,300.
Recognition of cost of supplies used, $800.
b. ($5,050) ($950 $6,000)

c. $1,450 ($30,700 $29,250)
d. $2,950 ($15,000 $11,250 $800)
e. $1,450 ($2,950 $1,500)
Ex. 112
It would be incorrect to say that the business had incurred a net loss of $7,250.
The excess of the withdrawals over the net income for the period is a decrease in
the amount of owners equity in the business.
Ex. 113
Company W
Owner's equity at end of year ($600,000 $325,000)..
Owner's equity at beginning of year
($375,000 $150,000)..................................................
Net income (increase in owner's equity)..............
$275,000
225,000
$ 50,000
Company X
Increase in owner's equity (as determined for W).......
Add withdrawals..............................................................
Net income...................................................................
$ 50,000
30,000
$ 80,000
Company Y
Deduct additional investment........................................
Net loss.........................................................................
$ 50,000
75,000
$ (25,000)
Company Z
Deduct additional investment........................................
Add withdrawals..............................................................
Net income...................................................................
Ex. 114
Balance sheet items: 3, 5, 6, 8, 9, 10
Ex. 115
Income statement items: 1, 2, 4, 7
$ 50,000
75,000
$ (25,000)
30,000
$ 5,000
Ex. 116
DOUMA COMPANY
Statement of Owners Equity
For the Month Ended June 30, 2003
Meg Douma, capital, June 1, 2003..............................
Net income for the month............................................
Less withdrawals..........................................................
Increase in owners equity..........................................
Meg Douma, capital, June 30, 2003............................
$317,500
$91,250
15,000
76,250
$393,750
Ex. 117
SURGERY SERVICES
Income Statement
For the Month Ended April 30, 2003
Fees earned..................................................................
Operating expenses:
Wages expense.........................................................
Rent expense............................................................
Supplies expense.....................................................
Miscellaneous expense............................................
Total operating expenses....................................
Net income....................................................................
$165,800
$71,500
25,000
3,250
2,250
102,000
$ 63,800
Ex. 118
In each case, solve for a single unknown, using the following equation:
Owners equity (beginning) + Investments Withdrawals + Revenues
Expenses = Owners equity (ending)
I.
Owner's equity at end of year ($745,000 $325,000).............

Owner's equity at beginning of year ($600,000 $360,000). .
Increase in owner's equity.........................................................
Deduct increase due to net income ($197,750 $108,000). . .
$420,000
240,000
$180,000
89,750
$ 90,250
Add withdrawals.........................................................................
40,000
Additional investment in the business................................ (a) $130,250
II.
Owner's equity at end of year ($175,000 $55,000)...............

Owner's equity at beginning of year ($125,000 $65,000)....
Increase in owner's equity.........................................................
Add withdrawals.........................................................................
Deduct additional investment...................................................
Increase due to net income.......................................................
Add expenses.............................................................................
Revenue...................................................................................
III.
$120,000
60,000
$ 60,000
8,000
$ 68,000
25,000
$ 43,000
32,000
(b) $ 75,000
Owner's equity at end of year ($90,000 $80,000).................

Owner's equity at beginning of year ($100,000 $76,000)....
Decrease in owner's equity.......................................................
Deduct decrease due to net loss ($115,000 $122,500)........
$ 10,000
24,000
$ (14,000)
(7,500)
$ (6,500)
10,000
Withdrawals from the business............................................ (c) $ (16,500)
IV. Owner's equity at end of year ($310,000 $170,000).............

Add decrease due to net loss ($140,000 $160,000).............
Add withdrawals.........................................................................
Add liabilities at beginning of year..........................................
Assets at beginning of year..................................................
$140,000
20,000
$160,000
75,000
$235,000
50,000
$185,000
150,000
(d) $335,000
Ex. 119
a.
REVIVAL INTERIORS
Balance Sheet
August 31, 20
Assets
Cash..................................
Accounts receivable........
Supplies............................
Total assets......................
Liabilities
$15,000
8,500
750
$24,250
Accounts payable...........
$ 3,850
Owners Equity
Laura Fedro, capital.......

Total liabilities and
owners equity............
20,400
$24,250
REVIVAL INTERIORS
Balance Sheet
September 30, 20
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$25,500
9,780
600
$35,880
$ 4,150
Owners Equity
Laura Fedro, capital.......

31,730
$ 35,880
b.
Owner's equity, September 30.......................................

Owner's equity, August 31.............................................
Net income................................................................
$31,730
20,400
$11,330
c.
Owner's equity, September 30.......................................

Owner's equity, August 31.............................................
Increase in owner's equity.......................................
Add withdrawal................................................................
Net income................................................................
$31,730
20,400
$11,330
7,500
$18,830
Ex. 120
Balance sheet: b, c, e, f, h, i, j, l, m, n, o
Income statement: a, d, g, k
Ex. 121
1.
2.
3.
4.
cfinancing activity
binvesting activity
aoperating activity
aoperating activity
Ex. 122
1. All financial statements should contain the name of the business in their
heading. The statement of owners equity is incorrectly headed as Lynn
Soby rather than Aspen Realty. The heading of the balance sheet needs the
name of the business.
2. The income statement and statement of owners equity cover a period of time
and should be labeled For the Month Ended March 31, 2003.
3. The year in the heading for the statement of owners equity should be 2003
rather than 2002.
4. The balance sheet should be labeled as of March 31, 2003, rather than For
the Month Ended March 31, 2003.
5. In the income statement, the miscellaneous expense amount should be listed
as the last operating expense.
6. In the income statement, the total operating expenses are incorrectly
subtracted from the sales commissions, resulting in an incorrect net income
amount. The correct net income should be $3,625.00. This also affects the
statement of owners equity and the amount of Lynn Soby, capital, that
appears on the balance sheet.
7. In the statement of owners equity, the additional investment should be added
first to Lynn Soby, capital, as of March 1, 2003. The net income should be
presented next, followed by the amount of withdrawals, which is subtracted
from the net income to yield a net increase in owners equity.
8. Accounts payable should be listed as a liability on the balance sheet.
9. Accounts receivable and supplies should be listed as assets on the balance
sheet.
10. The balance sheet assets should equal the sum of the liabilities and owners
equity.
Ex. 122 Concluded

Corrected financial statements appear as follows:
ASPEN REALTY
Income Statement
For the Month Ended March 31, 2003
Sales commissions.............................................................
Operating expenses:
Office salaries expense...............................................
Rent expense................................................................
Automobile expense....................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................
$37,100
$23,150
7,800
1,750
225
550
33,475
$ 3,625
ASPEN REALTY
Lynn Soby, capital, March 1, 2003.....................................
Additional investment during March.................................
Net income for March..........................................................
Less withdrawals during March.........................................
Increase in owners equity..................................................
Lynn Soby, capital, March 31, 2003...................................
$ 7,450
$ 1,500
3,625
$ 5,125
1,000
4,125
$11,575
ASPEN REALTY
Balance Sheet
March 31, 2003
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 2,350
10,200
1,325
$13,875
$ 2,300
Owners Equity
Lynn Soby, capital..........

11,575
$13,875
Ex. 123
a. 2000: 0.20 ($5,196,000,000 $26,497,000,000)
1999: 0.26 ($3,038,000,000 $11,811,000,000)
b. The margin of protection to the creditors increased in 2000. A comparison
with the ratio for similar businesses and with earlier periods for Cisco
Systems might be useful in assessing these ratios further.
PROBLEMS
Prob. 11A
1.
Assets
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
Owners
= Liabilities + Equity
Accounts
Accounts Linda Neece,
Cash + Receivable + Supplies = Payable + Capital
+10,000
+10,000
Investment
+ 1,150
+ 1,150
10,000
1,150
1,150
10,000
+ 4,500
+ 4,500
Fees earned
14,500
1,150
1,150
14,500
2,500
2,500
Rent expense
12,000
1,150
1,150
12,000
675
675
11,325
1,150
475
12,000
+ 3,250
+ 3,250
Fees earned
11,325
3,250
1,150
475
15,250
1,755
980
Auto expense
775
Misc. expense
9,570
3,250
1,150
475
13,495
1,500
1,500
Salaries exp.
8,070
3,250
1,150
475
11,995
935
935
Supplies exp.
8,070
3,250
215
475
11,060
1,000
1,000
Withdrawal
7,070
3,250
215
475
10,060
2. Owner's equity is the right of owners to the assets of the business. These
rights are increased by owners investments and revenues and decreased by
owner's withdrawals and expenses.
Prob. 12A
1.
FLY AWAY TRAVEL AGENCY
Income Statement
For the Year Ended December 31, 2003
Fees earned..........................................................................
Operating expenses:
Wages expense............................................................
Rent expense................................................................
Utilities expense...........................................................
Net income...........................................................................
$ 117,480
$35,500
27,000
10,240
2,125
1,750
76,615
$ 40,865
2.
For the Year Ended December 31, 2003
Ryan Stecker, capital, January 1, 2003..............................
Net income for the year.......................................................
Less withdrawals.................................................................
Ryan Stecker, capital, December 31, 2003........................
$14,500
$40,865
30,000
10,865
$25,365
3.
Balance Sheet
December 31, 2003
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 7,200
19,500
1,865
$ 28,565
$ 3,200
Owners Equity
Ryan Stecker, capital.....

25,365
$ 28,565
Prob. 13A
1.
EAGLE FINANCIAL SERVICES
Income Statement
For the Month Ended January 31, 2003
Fees earned..........................................................................
Operating expenses:
Rent expense................................................................
Salaries expense..........................................................
Auto expense................................................................
Net income...........................................................................
$13,100
$2,500
2,000
1,250
1,050
350
7,150
$ 5,950
2.
For the Month Ended January 31, 2003
Loren Thurlow, capital, January 1, 2003...........................
Investment on January 1, 2003..........................................
Net income for January.......................................................
$12,500
5,950
$18,450
3,000
Loren Thurlow, capital, January 31, 2003.........................
15,450
$15,450
3.
Balance Sheet
January 31, 2003
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$11,250
4,350
275
$15,875
425
Owners Equity
Loren Thurlow, capital...

15,450
$15,875
Prob. 14A
1.
Assets
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
Cash
+ 5,000
5,000
850
4,150
16,200
20,350
2,000
18,350
4,500
13,850
2,250
11,600
4,250
7,350
7,350
= Liabilities +
+ Supplies
+1,250
1,250
1,250
1,250
1,250
1,250
1,250
1,250
650
600
Owners
Equity
Accounts Dori French,

= Payable + Capital
+ 5,000
+1,250
1,250
5,000
850
400
5,000
+ 16,200
400
21,200
2,000
400
19,200
4,500
400
14,700
1,900
350
400
12,450
4,250
400
8,200
650
400
7,550
Investment
Sales commissions
Rent expense
Withdrawal
Auto expense
Misc. expense
Salaries expense
Supplies expense
2.
DEAL REALTY
Income Statement
Operating expenses:
Rent expense................................................................
Net income...........................................................................
$16,200
$4,250
2,000
1,900
650
350
9,150
$ 7,050
Prob. 14A Concluded

DEAL REALTY
Dori French, capital, March 1, 20...................................
Investment on March 1, 20..............................................
Net income for March..........................................................
Dori French, capital, March 31, 20.................................
$ 5,000
7,050
$12,050
4,500
7,550
$7,550
DEAL REALTY
Balance Sheet
March 31, 20
Assets
Cash..................................
Supplies............................
Liabilities
$ 7,350
600
400
Owners Equity
Total assets......................
$ 7,950
Dori French, capital........

7,550
$ 7,950
Prob. 15A
1.
Assets
Liabilities
Accounts
Cash + Receivable + Supplies + Land =
6,250 + 18,100
+ 2,200 + 40,000 =
Accounts
Payable
7,800
+ Bea Cheever, Capital

7,800
66,550
58,750
Owner's Equity
Bea Cheever, Capital
Prob. 15A Continued

2.
Assets
Accounts
Cash + Receivable + Supplies +
Bal.
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
6,250
+ 15,750
22,000
2,500
19,500
18,100
19,500
5,100
14,400
18,100
14,400
5,570
27,020
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
8,830
+ 12,100
20,930
27,020
12,100
14,920
20,930
7,500
13,430
14,400
18,100
18,100
18,100
+ 8,920
27,020
2,200
2,200
Land
40,000
40,000
2,200
+ 1,650
3,850
40,000
3,850
40,000
3,850
3,850
40,000
40,000
40,000
Liabilities +
Accounts
Payable
7,800
7,800
7,800
+ 1,650
9,450
5,100
4,350
4,350
+ 6,000
10,350
3,850
40,000
10,350
40,000
10,350
14,920
3,850
1,350
2,500
40,000
10,350
14,920
2,500
40,000
10,350
Owners
Equity
Bea Cheever,
Capital
58,750
+ 15,750
74,500
2,500
72,000
Dry cleaning sales

Rent expense
72,000
72,000
+ 8,920
80,920
6,000
74,920
2,400
1,580
960
630
69,350
69,350
1,350
68,000
7,500
60,500
Dry cleaning sales

Dry cleaning expense
Wages expense
Truck expense
Utilities expense
Miscellaneous expense
Supplies expense
Withdrawals
Prob. 15A Concluded

3. a.
PERSNICKETY DRY CLEANERS
Income Statement
For the Month Ended July 31, 20
Dry cleaning sales...............................................................
Operating expenses:
Dry cleaning expense..................................................
Rent expense................................................................
Wages expense............................................................
Truck expense..............................................................
Net income...........................................................................
$24,670
$6,000
2,500
2,400
1,580
1,350
960
630
15,420
$ 9,250
b.
For the Month Ended July 31, 20
Bea Cheever, capital, July 1, 20......................................
Net income for July.............................................................
Bea Cheever, capital, July 31, 20....................................
$58,750
$9,250
7,500
1,750
$60,500
c.
Balance Sheet
July 31, 20
Assets
Liabilities
Cash..................................
Supplies............................
Land..................................
$13,430
14,920
2,500
40,000
Total assets......................
$70,850
$10,350
Owners Equity
Bea Cheever, capital......

60,500
$70,850
Prob. 16A
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Fees earned, $15,000

Supplies expense, $1,500
Ray Conway, capital, April 1, 2003, $0
Net income for April, $6,200
$26,200
Increase in owners equity, $23,200
Ray Conway, capital, April 30, 2003, $23,200
Total assets, $24,000
Ray Conway, capital, $23,200
Total liabilities and owners equity, $24,000
k.
i.
m.
n.
o.
p.
q.
Cash received from customers, $15,000

Net cash flow from operating activities, $5,900
Cash payments for acquisition of land, $(20,000)
Cash received as owners investment, $20,000
Cash withdrawal by owner, $(3,000)
Net cash flow from financing activities, $17,000
Net cash flow and April 30, 2003 cash balance, $2,900
Prob. 11B
1.
Assets
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
= Liabilities +
Owners
Equity
Accounts
Accounts
Fran Cowles,
Cash + Receivable + Supplies = Payable +
Capital
+15,000
+15,000 Investment
+ 750
+ 750
15,000
750
750
15,000
625
625
14,375
750
125
15,000
+ 5,250
+ 5,250 Fees earned
19,625
750
125
20,250
1,000
1,000 Rent expense
18,625
750
125
19,250
1,230
880 Auto expense
350 Misc. expense
17,395
750
125
18,020
1,200
1,200 Salaries exp.
16,195
750
125
16,820
575
575 Supplies exp.
16,195
175
125
16,245
+ 7,350
+ 7,350 Fees earned
16,195
7,350
175
125
23,595
1,500
1,500 Withdrawal
14,695
7,350
175
125
22,095
2. Owner's equity is the right of owners to the assets of the business. These rights
are increased by owners investments and revenues and decreased by owner's
withdrawals and expenses.
Prob. 12B
1.
HIAWATHA TRAVEL SERVICE
Income Statement
For the Year Ended April 30, 2003
Fees earned..........................................................................
Operating expenses:
Wages expense............................................................
Rent expense................................................................
Taxes expense..............................................................
Net income...........................................................................
$131,600
$65,850
18,900
11,250
3,550
2,800
1,475
103,825
$ 27,775
2.
For the Year Ended April 30, 2003
Rob Graybill, capital, May 1, 2002.....................................
Net income for the year.......................................................
Rob Graybill, capital, April 30, 2003..................................
$25,000
$27,775
15,000
12,775
$37,775
3.
Balance Sheet
April 30, 2003
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$ 26,525
15,675
1,675
$ 43,875
$ 6,100
Owner's Equity
Rob Graybill, capital......

37,775
$43,875
Prob. 13B
1.
INFINET COMPUTER SERVICES
Income Statement
For the Month Ended October 31, 2003
Fees earned..........................................................................
Operating expenses:
Salaries expense..........................................................
Rent expense................................................................
Auto expense................................................................
Net income...........................................................................
$8,250
$2,000
1,800
780
325
375
5,280
$2,970
2.
For the Month Ended October 31, 2003
Chester Hoche, capital, October 1, 2003..........................
Investment on October 1, 2003..........................................
Net income for October......................................................
$5,000
2,970
$7,970
1,000
Chester Hoche, capital, October 31, 2003........................
6,970
$6,970
3.
Balance Sheet
October 31, 2003
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$3,295
3,750
395
$7,440
470
Owners Equity
Chester Hoche, capital. .

6,970
$ 7,440
Prob. 14B
1.
Assets
Cash
a.
b.
Bal.
c.
+ 10,000
3,600
6,400
1,450
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
4,950
4,950
+ 18,750
23,700
690
23,010
4,000
19,010
3,000
16,010
16,010
= Liabilities +
+ Supplies =
Owners
Equity
Accounts Angie Tate,

Payable + Capital
+ 10,000
3,600
6,400
900
550
4,950
+1,325
1,325
+1,325
1,325
1,325
1,325
1,325
690
635
1,325
635
1,325
725
600
635
635
4,950
+ 18,750
23,700
23,700
4,000
19,700
3,000
16,700
725
15,975
Investment
Rent expense
Auto expense
Misc. expense
Sales commissions
Salaries expense
Withdrawal
Supplies expense
2.
VOGUE REALTY
Income Statement
For the Month Ended August 31, 2003
Operating expenses:
Rent expense................................................................
Net income...........................................................................
$18,750
$4,000
3,600
900
725
550
9,775
$ 8,975
Prob. 14B Concluded

VOGUE REALTY
For the Month Ended August 31, 2003
Angie Tate, capital, August 1, 2003...................................
Investment on August 1, 2003............................................
Net income for August........................................................
Angie Tate, capital, August 31, 2003.................................
$10,000
8,975
$18,975
3,000
15,975
$15,975
VOGUE REALTY
Balance Sheet
August 31, 2003
Assets
Cash..................................
Supplies............................
Liabilities
$16,010
600
635
Owners Equity
Total assets......................
$16,610
Angie Tate, capital..........

15,975
$16,610
Prob. 15B
1.
Assets
= Liabilities +
Accounts
Cash + Receivable + Supplies + Land =
7,400 + 13,750
+ 1,560
+ 25,000 =
47,710
43,830
Owner's Equity
Accounts
Payable + Merritt Paisley, Capital
3,880
+ Merritt Paisley, Capital
3,880
+ Merritt Paisley, Capital

Merritt Paisley, Capital
Prob. 15B Continued

2.
Assets
Bal.
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
Cash
7,400
3,000
4,400
= Liabilities +
Accounts
+ Receivable + Supplies + Land
13,750
1,560
25,000
Accounts
Payable +
3,880
13,750
+ 6,150
19,900
1,560
25,000
3,880
1,560
25,000
19,900
1,560
+ 840
2,400
25,000
25,000
3,880
1,680
2,200
+ 840
3,040
19,900
11,750
8,150
2,400
25,000
3,040
2,400
25,000
29,070
3,225
8,150
2,400
25,000
3,040
+ 5,400
8,440
25,845
8,150
4,400
1,680
2,720
2,720
+ 14,600
17,320
+ 11,750
29,070
25,845
5,000
20,845
19,900
8,150
8,150
2,400
1,050
1,350
1,350
25,000
25,000
25,000
8,440
8,440
8,440
Owners
Equity
Merritt
Paisley,
Capital
43,830
3,000
40,830
+ 6,150
46,980
Rent expense
Dry cleaning sales
46,980
46,980
+ 14,600
61,580
61,580
5,400
56,180
1,800
725
510
190
52,955
1,050
51,905
5,000
46,905
Dry cleaning sales
Dry cleaning expense

Wages expense
Truck expense
Utilities expense
Miscellaneous expense
Supplies expense
Withdrawal
Prob. 15B Concluded

3. a.
SWAN DRY CLEANERS
Income Statement
For the Month Ended November 30, 20
Dry cleaning sales...............................................................
Operating expenses:
Dry cleaning expense..................................................
Rent expense................................................................
Wages expense............................................................
Truck expense..............................................................
Net income...........................................................................
$20,750
$5,400
3,000
1,800
1,050
725
510
190
12,675
$ 8,075
b.
SWAN DRY CLEANERS
Merritt Paisley, capital, November 1, 20........................
Net income for November...................................................
Merritt Paisley, capital, November 30, 20......................
$43,830
$8,075
5,000
3,075
$46,905
c.
SWAN DRY CLEANERS
Balance Sheet
November 30, 20
Assets
Liabilities
Cash..................................
Supplies............................
Land..................................
$20,845
8,150
1,350
25,000
Total assets......................
$55,345
$ 8,440
Owners Equity
Merritt Paisley, capital....

46,905
$55,345
Prob. 16B
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Wages expense, $5,375

Net income, $11,550
R. J. Cain, capital, June 1, 2003, $0
Investment on June 1, 2003, $45,000
Net income for June, $11,550
$56,550
Withdrawals, $6,000
Increase in owners equity, $50,550
R. J. Cain, capital, June 30, 2003, $50,550
Land, $36,000
k.
l.
m.
n.
o.
p.
q.
Total assets, $51,750

R. J. Cain, capital, $50,550
Total liabilities and owners equity, $51,750
Cash received from customers, $23,500
Net cash flow from operating activities, $11,750
Net cash flow from financing activities, $39,000
Net cash flow and June 30, 2003 cash balance, $14,750
CONTINUING PROBLEM
1.
Owners
Assets
Lynn
Accounts
Accounts
Kwan,
Cash + Receivable + Supplies = Payable + Capital
Nov. 1
2
Bal.
Nov. 2
Bal.
Nov. 4
Bal.
Nov. 6
Bal.
Nov. 8
Bal.
Nov. 12
Bal.
Nov. 13
Bal.
Nov. 16
Bal.
Nov. 22
Bal.
Nov. 25
Bal.
Nov. 29
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
+ 3,500
+ 1,000
4,500
500
4,000
+ 3,500 Investment
+ 1,000 Fees earned
4,500
500 Office rent exp.

4,000
+ 175
175
4,000
300
3,700
325
3,375
100
3,275
50
3,225
75
3,300
3,300
250
3,550
120
3,430
450
3,880
200
3,680
150
3,530
4,000
300 Advertising exp.
3,700
325 Equip. rent exp.

3,375
100 Music expense

3,275
175
175
175
175
175
175
175
50
125
+
175
+ 600
600
125
+
175
125
+
600
175
125
600
175
125
+
600
175
125
600
175
125
600
3,530
75
3,455
250
3,205
125
3,080
+ 175
175
600
175
90
85
125
125
600
85
125
600
85
125
600
85
125
3,275
75
3,350
600
3,950
250
4,200
120
4,080
450
4,530
200
4,330
150
4,180
90
4,090
75
4,015
250
3,765
125
3,640
Fees earned
Fees earned
Fees earned
Music expense
Fees earned
Wages expense
Utilities exp.
Supplies exp.
Misc. expense
Music expense
Withdrawal
Continuing Problem
Concluded
2.
DANCIN MUSIC
Income Statement
Fees earned..........................................................................
Operating expenses:
Office rent expense......................................................
Music expense..............................................................
Equipment rent expense..............................................
Advertising expense....................................................
Wages expense............................................................
Net income...........................................................................
$2,375
$
500
470
325
300
200
150
90
75
2,110
265
3.
DANCIN MUSIC
Lynn Kwan, capital, November 1, 2002.............................
Investment on November 1, 2002......................................
Net income for November...................................................
Lynn Kwan, capital, November 30, 2002...........................
$3,500
265
$3,765
125
3,640
$3,640
4.
DANCIN MUSIC
Balance Sheet
November 30, 2002
Assets
Cash..................................
Supplies............................
Total assets......................
Liabilities
$3,080
600
85
$3,765
$ 125
Owners Equity
Lynn Kwan, capital.........

3,640
$3,765
SPECIAL ACTIVITIES
Activity 11
1. Acceptable professional conduct requires that Joel Phinney supply Bridger
National Bank with all the relevant financial statements necessary for the
bank to make an informed decision. Therefore, Joel should provide the
complete set of financial statements. These can be supplemented with a
discussion of the net loss in the past year or other data explaining why
granting the loan is a good investment by the bank.
2. a. Owners are generally willing to provide bankers with information about the
operating and financial condition of the business, such as the following:
Operating Information:
description of business operations
results of past operations
preliminary results of current operations
plans for future operations
Financial Condition:
list of assets and liabilities (balance sheet)
estimated current values of assets
owners personal investment in the business
owners commitment to invest additional funds in the business

Owners are normally reluctant to provide the following types of
information to bankers:
Proprietary Operating Information. Such information, which might hurt
the business if it becomes known by competitors, might include special
processes used by the business or future plans to expand operations
into areas that are not currently served by a competitor.
Personal Financial Information. Owners may have little choice here
because banks often require owners of small businesses to pledge their
personal assets as security for a business loan. Personal financial
information requested by bankers often includes the owner's net worth,
salary, and other income. In addition, bankers usually request
information about factors that might affect the personal financial
condition of the owner. For example, a pending divorce by the owner
might significantly affect the owner's personal wealth.
Activity 11
Concluded
b. Bankers typically want as much information as possible about the ability

of the business and the owner to repay the loan with interest. Examples of
such information are described above.
c. Both bankers and business owners share the common interest of the
business doing well and being successful. If the business is successful,
the bankers will receive their loan payments on time with interest, and the
owners will increase their personal wealth.
Activity 12
The difference in the two bank balances, $150,000 ($180,000 $30,000), may not
be pure profit from an accounting perspective. To determine the accounting profit
for the seven-month period, the revenues for the period would need to be
matched with the related expenses. The revenues minus the expenses would
indicate whether the business generated net income (profit) or a net loss for the
period. Using only the difference between the two bank account balances ignores
such factors as amounts due from customers (receivables), liabilities (accounts
payable) that need to be paid for wages or other operating expenses, additional
investments that Dr. North may have made in the business during the period, or
withdrawals during the period that Dr. North might have taken for personal
reasons unrelated to the business.
Some businesses that have few, if any, receivables or payables may use a cash
basis of accounting. The cash basis of accounting ignores receivables and
payables because they are assumed to be insignificant in amount. However, even
with the cash basis of accounting, additional investments during the period and
any withdrawals during the period have to be considered in determining the net
income (profit) or net loss for the period.
Activity 13
1.
Owners
Assets
a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
k.
Bal.
+
+
Cash
500
160
340
80
260
70
190
800
990
150
1,140
300
840
75
765
300
1,065
Supplies
+ 160
160
160
+
160
1,065
400
665
30
30
160
30
+
160
30
160
30
160
30
+
Yvonne
Accounts
Tobin,
=
Payable + Capital
+ 500
160
85
75
30
30
75
30
500
80
420
100
320
800
1,120
150
1,270
300
970
75
895
300
1,195
85
1,110
400
710
Investment
Rent expense
Rent expense
Service revenue
Service revenue
Salary expense
Misc. expense
Service revenue
Supplies expense
Withdrawal
2.
FORTYLOVE
Income Statement
For the Month Ended September 30, 20
Service revenue...................................................................
Operating expenses:
Salary expense.............................................................
Rent expense................................................................
Net income...........................................................................
$1,250
$300
180
85
75
$
640
610
Activity 13Continued
3.
FORTYLOVE
For the Month Ended September 30, 20
Yvonne Tobin, capital, September 1, 20........................
Investment on September 1, 20......................................
Net income for September..................................................
Yvonne Tobin, capital, September 30, 20......................
$ 500
610
$1,110
400
710
$710
4.
FORTYLOVE
Balance Sheet
September 30, 20
Assets
Cash..................................
Supplies............................
Liabilities
$665
75
$ 30
Owners Equity
Total assets......................
5.
$740
Yvonne Tobin, capital.....

710
$740
a. Forty-Love would provide Yvonne with $50 more income per month than
working as a waitress. This amount is computed as follows:
Net income of Forty-Love, per month......................................
Earnings as waitress, per month:
20 hours per week $7 per hour 4 weeks........................
Difference....................................................................................
$610
560
$ 50
Activity 13Concluded
b. Other factors that Yvonne should consider before discussing a long-term
arrangement with the Racquet Club include the following:
Yvonne should consider whether the results of operations for September are
indicative of what to expect each month. For example, Yvonne should
consider whether club members will continue to request lessons or use the
ball machine during the winter months when interest in tennis may slacken.
Yvonne should evaluate whether the additional income of $50 per month from
FortyLove is worth the risk being taken and the effort being expended.
Yvonne should also consider how much her investment in FortyLove could
have earned if invested elsewhere. For example, if the initial investment of
$500 had been deposited in a money market or savings account at 3%
interest, it would have earned $1.25 interest in September, or $15 for the year.
Note to Instructors: Numerous other considerations could be mentioned by
students, such as the ability of Yvonne to withdraw cash from FortyLove for
personal use. Unlike a money market account or savings account, some of
her investment in FortyLove will be in the form of supplies (tennis balls, etc.)
which may not be readily convertible to cash. The objective of this case is not
to mention all possible considerations, but rather to encourage students to
begin thinking about the use of accounting information in making business
decisions.
Activity 14
Note to Instructors: The purpose of this activity is to familiarize students with the
certification requirements and their on-line availability.
Activity 15
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
1998
positive
negative
positive
1997
positive
negative
positive
1996
negative
negative
positive
Start-up companies normally experience negative cash flows from operating and
investing activities. Also, start-up companies normally have positive cash flows
from financing activitiesactivities from raising capital.

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CHAPTER 1

7. No. The business entity concept limits the

and owner's equity of a business as of a

flows are for a specific period of time. The

$183,000 ($325,000 $142,000)

Increases assets and increases owners equity.

Total assets increased $50,000.

Total assets decreased $28,000.

Sale of catering services for cash, $15,000.

b. ($5,050) ($950 $6,000)

Owner's equity at end of year ($745,000 $325,000).............

Owner's equity at end of year ($175,000 $55,000)...............

Owner's equity at end of year ($90,000 $80,000).................

IV. Owner's equity at end of year ($310,000 $170,000).............

Laura Fedro, capital.......

Laura Fedro, capital.......

Owner's equity, September 30.......................................

Owner's equity, September 30.......................................

Ex. 122 Concluded

Lynn Soby, capital..........

Ryan Stecker, capital.....

Loren Thurlow, capital...

Accounts Dori French,

Prob. 14A Concluded

Dori French, capital........

+ Bea Cheever, Capital

+ Bea Cheever, Capital

Bea Cheever, Capital

Prob. 15A Continued

Dry cleaning sales

Dry cleaning sales

Prob. 15A Concluded

Bea Cheever, capital......

Fees earned, $15,000

Cash received from customers, $15,000

Rob Graybill, capital......

Chester Hoche, capital. .

Accounts Angie Tate,

Prob. 14B Concluded

Angie Tate, capital..........

+ Merritt Paisley, Capital

Prob. 15B Continued

Dry cleaning sales

Dry cleaning expense

Prob. 15B Concluded

Merritt Paisley, capital....

Wages expense, $5,375

Total assets, $51,750

500 Office rent exp.

325 Equip. rent exp.

100 Music expense

Lynn Kwan, capital.........

description of business operations

results of past operations

preliminary results of current operations

plans for future operations

list of assets and liabilities (balance sheet)

estimated current values of assets

owners personal investment in the business

owners commitment to invest additional funds in the business

b. Bankers typically want as much information as possible about the ability

Yvonne Tobin, capital.....

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