eu/
A partnership is legally similar to a sole proprietorship, but has two or more owners
of the business.
3. Financial accounting involves preparation of the four basic financial statements and
related disclosures for external decision makers. Managerial accounting involves
the preparation of detailed plans and continually updated performance reports for
internal decision makers.
4. Financial reports are used by both internal and external groups and individuals.
The internal groups are comprised of the various managers of the entity. The
external groups include the owners, investors, creditors, governmental agencies,
other interested parties, and the public at large.
Assets are the measurable economic resources owned by the business that are
likely to provide future benefits to the firm. Liabilities are the measurable and
probable obligations that require the business to pay goods or services to others in
the future. Owner’s Equity is the difference between the assets the business owns
and the liabilities that the business owes.
Revenues are the amounts earned when goods or services are delivered to
customers. Expenses are the dollar amount of resources used by an entity to
generate revenues during the period. Net income and net loss are defined in the
next question.
7. Net income is the positive difference between revenues earned during a period and
the expenses that were incurred to generate the revenues during the period. Net
loss is the result when expenses exceed revenues during the period.
Beginning and Ending Owner’s Equity is the difference between the assets the
business owns and the liabilities the business owes at the beginning and ending of
the accounting period, respectively. Additional investments is the amount of
additional money that the owner invested in the business during the period, while
withdrawals represent money that the owner withdrew from the business. Net
income and net loss were defined in the previous question.
11. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
12. The purpose of the notes to the financial statements is to provide information to
help those who study the statements to understand how the amounts were
measured and what additional relevant information may affect their decisions.
13. The Securities and Exchange Commission (SEC) is the U.S. government agency
that supervises the work of the Financial Accounting Standards Board (FASB) and
Public Company Accounting Oversight Board (PCAOB). The Financial Accounting
Standards Board (FASB) is the private sector body given the primary responsibility
for setting detailed rules of accounting which become generally accepted
accounting principles.
14. Ethical dilemmas in accounting arise when managers and owners decide between
reporting fraudulently or accurately in the face of personal greed and the desire to
appear successful. Ethical dilemmas harm many: employees, the business’
reputation, the corporation’s stock price, lenders, and the public in general.
Skill
Mini-exercises Exercises Problems Development
Cases
No. Time No. Time No. Time No. Time
1 3 1 12 PA1-1 45 1 20
2 3 2 12 PA1-2 45 2 20
3 5 3 12 PA1-3 45 3 *
4 3 4 20 PA1-4 45 4 30
5 3 5 25 PA1-5 45 5 20
6 3 6 20 PA1-6 45 6 60
7 5 7 15 PB1-1 45
8 5 8 25 PB1-2 45
9 5 9 25 PB1-3 45
10 3 10 30 PB1-4 45
11 6 11 15 PB1-5 45
12 3 12 20 PB1-6 45
13 10 13 12
14 30
15 30
16 15
17 20
* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time discussing research strategies. When we want the students
to focus on a real accounting issue, we offer suggestions about possible companies or
industries.
MINI-EXERCISES
M1–1
Firm type
B (1) Manufacturing business
C (2) Merchandising business
A (3) Service business
M1–2
M1–3
1.) The primary internal users are a company’s managers and owner/managers
(sole proprietors and partners) who make business decisions affecting the
operating, investing, and financing activities of the organization.
2.) The primary external users are bankers, suppliers, governments, and owners
(stockholders in corporations) who are not directly involved in the business but
make decisions such as whether to lend the firm money, whether to extend credit
to the firm, how much to collect in taxes from the firm, and whether to invest
additional money in the firm as well as evaluate how current investments are
doing.
M1–5
A (1) Inventories
L (2) Accounts payable
R (3) Sales revenue
A (4) Property and equipment
L (5) Notes payable
OE (6) Owner’s capital
A (7) Accounts receivable
A (8) Cash
E (9) Promotion expense
E (10) Cost of goods sold
*Withdrawals paid in cash are also subtracted in the Financing section of the Statement
of Cash Flows
M1–7
Liabilities $ 30,000
Owner’s Equity 150,000
Total liabilities and owner’s equity $180,000
M1–10
M1–12
2.) This is an example of an ethical dilemma. Both of you will be harmed if you are
caught, but you will be harmed regardless of whether you are caught because
without doing the homework for yourself you lose an opportunity to learn the
material.
3.) This is an example of an ethical dilemma. The owner(s) of the store will be
harmed because of lost revenue, and both you and your manager will likely lose
your jobs if you are caught.
M1–13
1. Partnership (P)
3. Corporation (C)
E1–2
Net
Total Total Income or Total Total Owner’s
Case Revenues - Expenses = = Liabilities +
(Loss) Assets Equity
E1–3
SOE, B/S
1. 1. Total owners’ equity
I/S 2. Sales Revenue
B/S 3. 3. Total assets
SCF 4. 4. Cash flows from operating activities
B/S 5. 5. Total liabilities
I/S, SOE6. 6. Net income
SCF 7. 7. Cash flows from financing activities
E1–5
L (1) Accounts Payable A (7) Cash
A (2) Accounts Receivable A (8) Machinery
L (3) Wages Payable E (9) Promotion and Advertising Expenses
OE (4) Owners’ Capital R (10) Sales Revenue
E (5) Income Tax Expense L (11) Notes Payable to Banks
A (6) Inventory E (12) Selling and Administrative Expenses
Req. 1
Clay Company
Income Statement
For the Month Ended January 31, 2010
Revenue:
Service Revenue $130,000
Expenses:
Wages Expense 15,000
Other Expenses 80,000
Net income $ 35,000
Clay Company
Statement of Owner's Equity
For the Month Ended January 31, 2010
J. Clay, Capital, January 1, 2010 $ 0
Add: Additional investments by owner 26,000
Net income 35,000
Less: J. Clay, Drawing (0)
J. Clay, Capital, January 31, 2010 $ 61,000
Clay Company
Balance Sheet
At January 31, 2010
Assets
Cash $ 30,000
Accounts Receivable 15,000
Supplies 42,000
Total Assets $ 87,000
Liabilities
Accounts Payable $ 26,000
Total liabilities 26,000
Owner's Equity
J. Clay, Capital 61,000
Total liabilities and owner's equity $ 87,000
Req. 2
Clay Company should be able to pay its liabilities because its cash balance is $30,000
and its liabilities are only $26,000.
a)
Lucas Rock Company
Income Statement
For the Year Ended December 31, 2011
(in thousands)
Revenue $ 10,500
Expenses 9,200
Net income $ 1,300
b)
Lucas Rock Company
Statement of Owner's Equity
For the Year Ended December 31, 2011
(in thousands)
c)
Lucas Rock Company
Balance Sheet
At December 31, 2011
(in thousands)
Assets $ 18,200
Total Assets $ 18,200
d)
Lucas Rock Company
Statement of Cash Flows
For the Year Ended December 31, 2011
(in thousands)
E1–8
Req. 1
FedEx
Income Statement
For the Year Ended May 31, 2007
(in millions)
Revenue:
Delivery Revenue $ 22,527
Expenses:
Salaries Expense 8,051
Fuel Expense 2,946
Rent Expense 1,598
Maintenance and Repairs Expense 1,440
Other Expenses 7,241
Total expenses 21,276
Net income $ 1,251
Req. 2
Assets
Cash $ 10
Supplies 13
Property and Equipment 317
Other Assets 167
Total Assets $ 507
Liabilities
Accounts Payable $ 19
Notes Payable 254
Wages Payable 46
Other Liabilities 91
Total liabilities 410
Owners’ Equity
Owners’ Capital 97
Total liabilities and owner's equity $ 507
Req. 2
Dave & Buster’s largest asset is its property and equipment.
Req. 3
Most of the financing for assets come from creditors ($410 million in liabilities vs. $97
million in owners’ equity)
Req. 1
READ MORE STORE
Balance Sheet
At December 31, 2010
ASSETS LIABILITIES
Cash $48,900 Accounts Payable $ 8,000
Accounts Receivable 26,000 Notes Payable 2,120
Equipment 48,000 Total liabilities $10,120
OWNER’S EQUITY
T. Lopez, Capital 112,780
Total liabilities and
Total assets $122,900 owner’s equity $122,900
Req. 2
Req. 3
Revenue:
Laundry services for cash $ 12,000
Laundry services on credit 1,000
Total service revenue 13,000
Expenses:
Wages expense 3,500
Supplies expense 800
Advertising expense 600
Other expenses 500
Total expenses 5,400
Net Income $ 7,600
E1–12
O, I or F + or –
O – A. Cash paid to suppliers and employees
O + B. Cash collected from customers
F + C. Cash received from borrowing long-term debt
F + D. Cash received from owners as additional investments
I – E. Cash paid to purchase equipment
E1–14
O, I, or F + or -
I - A. Cash paid for purchases of buildings and equipment.
F - B. Cash paid to owners as distributions of profits.
I + C. Cash received on sales of buildings and equipment.
O - D. Cash paid to suppliers and employees.
F + E. Cash received from owners as additional investments.
F + F. Cash received from borrowing long-term debt.
O + G. Cash received from customers.
F - H. Cash paid on long-term debt.
E1–15
Req. A
General Mills will report $6,375 million on its cash flow statement.
Req. B
Microsoft will report $25.4 billion on its cash flow statement.
2. Supplies Accounts
+1,000 Payable +1,000
3. Accounts Service
Receivable Revenue +31,000
+31,000
5. Accounts Utilities
Payable +600 Expense -600
7. Cash -3,000
Equipment +3,000
I 1. SEC
F 2. Investing activities
D 3. Private company
E 4. Corporation
A 5. Accounting
C 6. Partnership
J 7. FASB
G 8. Financing activities
B 9. Monetary unit
L 10. GAAP
K 11. Public company
H 12. Operating activities
PROBLEMS – SET A
PA1–1
Req. 1
NUCLEAR COMPANY
Income Statement
For the Year Ended December 31, 2010
Revenue:
Service Revenue $140,000
Expenses:
Wages Expense 60,000
Advertising Expense 1,100
Other Expenses 38,000
Total expenses 99,100
Net Income $ 40,900
Req. 2
NUCLEAR COMPANY
Statement of Owner’s Equity
For the Year Ended December 31, 2010
C. Reed, Capital, January 1, 2010 $ 0
Add: Additional investments by owner 87,000
Net income (from req. 1) 40,900
Less: C. Reed, Drawing (15,270)
C. Reed, Capital, December 31, 2010 $ 112,630
Req. 3
NUCLEAR COMPANY
Balance Sheet
At December 31, 2010
Assets:
Cash $25,000
Accounts Receivable 12,000
Supplies 90,000
Equipment 45,000
Total Assets $172,000
Liabilities:
Accounts Payable $ 57,370
Notes Payable 2,000
Total Liabilities 59,370
Owner’s Equity:
C. Reed, Capital 112,630
Total liabilities and owner’s equity $172,000
Req. 2
FAMILY MEDICINE
Statement of Owner’s Equity
For the Year Ended June 30, 2009
A. Jones, Capital, July 1, 2008 $ 0
Add: Additional investments by owner 62,000
Net income (from req. 1) 35,500
Less: A. Jones, Drawing (6,000)
A. Jones, Capital, June 30, 2009 $ 91,500
Req. 3
FAMILY MEDICINE
Balance Sheet
At June 30, 2009
Assets:
Cash $13,500
Accounts Receivable 9,500
Supplies 17,000
Equipment 76,000
Total Assets $116,000
Req. 1
Average monthly revenue, $216,000 ¸ 12 = $18,000.
Req. 2
Average monthly wages expense, $84,000 ÷ 12 = $7,000
Req. 3
“Supplies Expense" is an expense because it represents the cost of the supplies that
the company used during the period.
Req. 4
“Advertising Expense” is an expense because it represents the amount of advertising
completed during the period to generate revenues.
Req. 5
No, the cash balance at December 31, 2011 cannot be determined from the information
provided. The amount of cash the company had on December 31, 2011, is not the
same as net income because net income represents the profit or loss of the company
during the preceding year, regardless of whether purchases or sales were made with
cash or credit.
PA1-5
a.)
Hannah Company
Income Statement
For the Quarter Ended September 30, 2010
Revenue $ 32,100
18,95
Expenses 0
Net income $ 13,150
b.)
Hannah Company
Statement of Owner's Equity
For the Quarter Ended September 30, 2010
c)
Hannah Company
Balance Sheet
At September 30, 2010
Assets: $ 79,500
Total Assets $ 79,500
d)
Hannah Company
Statement of Cash Flows
For the Quarter Ended September 30, 2010
b)
OSI Restaurant Partners, Inc.
Statement of Owners’ Equity
For the Year Ended December 31, 2006
(in millions)
c)
OSI Restaurant Partners, Inc.
Balance Sheet
At December 31, 2006
(in millions)
Assets
Cash $ 94
Food and Supply Inventories 87
Property, Fixtures, and Equipment 1,549
Other Assets 529
Total Assets $ 2,259
d)
OSI Restaurant Partners, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2006
(in millions)
Change in cash 10
Cash at January 1, 2006 84
Cash at December 31, 2006 $ 94
Req. 1
WRITE-r-WRONG COMPANY
Income Statement
For the Year Ended April 30, 2011
Revenue:
Service Revenue $270,000
Expenses:
Wages Expense 138,500
Supplies Expense 22,000
Other Expenses 10,000
Total expenses 170,500
Net Income $ 99,500
Req. 2
WRITE-r-WRONG COMPANY
Statement of Owner’s Equity
For the Year Ended April 30, 2011
M. Waxman, Capital, May 1, 2010 $ 0
Add: Additional investments by owner 186,000
Net income (from req. 1) 99,500
Less: M. Waxman, Drawing (27,150)
M. Waxman, Capital, April 30, 2011 $ 258,350
Req. 3
WRITE-r-WRONG COMPANY
Balance Sheet
At April 30, 2011
Assets:
Cash $ 39,150
Accounts Receivable 27,500
Supplies 35,000
Equipment 208,000
Total Assets $309,650
Req. 1
SWEATERS ‘n THINGS COMPANY
Income Statement
For the Year Ended December 31, 2012
Revenue:
Sales Revenue $ 945,000
Expenses:
Cost of Goods Sold 746,000
Utilities Expense 42,500
Other Expenses 2,000
Total expenses 790,500
Net Income $ 154,500
Req. 2
SWEATERS ‘n THINGS COMPANY
Statement of Owner’s Equity
For the Year Ended December 31, 2012
Req. 3
SWEATERS ‘n THINGS COMPANY
Balance Sheet
At December 31, 2012
Assets:
Cash $ 31,500
Accounts Receivable 79,000
Inventories 152,000
Fixtures and Equipment 140,000
Total Assets $402,500
Req. 2
Average monthly expenses, $420,000 ÷ 12 = $35,000.
Req. 3
“Cost of Goods Sold" is an expense because it represents the cost of the inventory that
the company sold (used) during the period.
Req. 4
“Utilities Expense” is an expense because it represents the amount of utilities used
during the period to generate revenues.
Req. 5
No, cash at the end of the year cannot be determined from the information provided.
The amount of cash the company had on December 31, 2010, is not the same as net
income because net income represents the profit or loss of the company during the
preceding year, regardless of whether purchases or sales were made with cash or
credit.
PB1-5
a.)
Darryl Company
Income Statement
For the Year Ended December 31, 2009
Revenue $ 135,600
Expenses 128,100
Net income $ 7,500
b.)
Darryl Company
Statement of Owner's Equity
For the Year Ended December 31, 2009
c)
Darryl Company
Balance Sheet
At December 31, 2009
Assets: $ 97,500
Total Assets $ 97,500
d)
Darryl Company
Statement of Cash Flows
For the Year Ended December 31, 2009
a)
The Cheesecake Factory
Income Statement
For the Year Ended January 2, 2007
(in thousands)
Revenues:
Restaurant Sales Revenues $1,315,325
Other Revenues 8,171
Total revenues 1,323,496
Expenses:
Food and Supplies Expense 333,528
Wages Expenses 420,957
Utilities and other Expenses 414,978
General and Administrative Expenses 72,751
Total expenses 1,242,214
Net income $ 81,282
b)
The Cheesecake Factory
Statement of Owners’ Equity
For the Year Ended January 2, 2007
(in thousands)
c)
The Cheesecake Factory
Balance Sheet
At January 2, 2007
(in thousands)
Assets:
Cash $ 44,790
Accounts Receivable 11,639
Food and Supply Inventories 20,775
Prepaid Rent 43,870
Property and Equipment 732,204
Other Assets 186,453
Total Assets $1,039,731
d)
The Cheesecake Factory
Statement of Cash Flows
For the Year Ended January 2, 2007
(in thousands)
Req. 1
Req. 2
The income statement reports net income of $4,395. Note that the amounts on the
financial statements are rounded to the nearest million, so this is actually
$4,395,000,000.
Req. 3
The income statement shows that sales revenue of $77,349,000,000 was earned in the
most recent year.
Req. 4
The balance sheet shows that inventory costing $11,731,000,000 was on hand at
February 3, 2008.
Req. 5
The balance sheet and statement of cash flows show cash of $445,000,000 on hand at
February 3, 2008.
Req. 6
Because Home Depot’s stock is traded on the New York Stock Exchange, Home Depot
must be a public company.
Req. 1
Lowe’s net income for the year ended February 1, 2008 was $2,809,000,000. This is
lower than the $4,395,000,000 earned by Home Depot for the year ended February 3,
2008.
Req. 2
Lowe’s reported revenue of $48,283,000,000 for the year ended February 1, 2008. This
is lower than the $77,349,000,000 reported by Home Depot for the year ended
February 3, 2008.
Req. 3
Lowe’s inventory as of February 1, 2008 was $7,611,000,000. This is lower than the
$11,731,000,000 reported by Home Depot as of February 3, 2008.
Req. 4
Lowe’s cash as of February 1, 2008 was $281,000,000. This is lower than the
$445,000,000 reported by Home Depot as of February 3, 2008.
Req. 5
Like Home Depot, Lowe’s is a public company. It trades on the New York Stock
Exchange under the symbol LOW.
Req. 6
Two measures of financial success are the company’s net income and revenues. As
noted for requirements 1 and 2, Home Depot reported greater amounts for both of
these measures, suggesting that the company was more successful during fiscal year
2007. It is important to note, though, that Home Depot is a bigger company than
Lowe’s, with more locations, more inventory (see requirement 3), and more total assets.
Given these differences, it is reasonable to expect that Home Depot would produce
more revenue and net income than Lowe’s. To truly determine whether Home Depot is
run more successfully than Lowe’s, a complete analysis is required. Such an analysis
would take into account size differences between the two companies. (You’ll learn
about this kind of analysis later chapters).
CP1-3
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010
1-40 Solutions Manual
Full file at https://testbanku.eu/
The solutions to this case will depend on the company and/or accounting period
selected for analysis.
CP1-4
Req. 1
The accounting concept that the Rigas family is accused of violating is the separate
entity concept.
Req. 2
Req. 3
Investors should take at least two actions to ensure this kind of behavior does not occur
or does not occur without their knowledge.
(1) First, they should ensure that the managers of the business are accountable for
their actions. The most common way of doing this is to appoint a board of
directors who are independent of top management. These directors should
review and challenge the actions taken by management and require that the
financial statements disclose significant transactions with related parties.
(2) Second, investors should read the financial statements, including any notes
describing related party transactions. Any questionable dealings should be
raised with top management at the company’s annual meeting. If investors don’t
receive satisfactory answers to their concerns, they should sell their investment
in the company’s stock.
Req. 4
Other parties that might be harmed by the actions committed by the Rigas family are
creditors (such as suppliers and banks), the company’s auditors, governmental
agencies (such as the IRS and SEC), and the public at large.
Req. 1
You should take the position that an independent annual audit of the financial
statements is an absolute must. This is the best way to ensure that the financial
statements are complete, are free from bias, and conform with GAAP. You should be
prepared to reject the partner’s uncle as the auditor because there is no evidence
about his competence as an accountant or auditor. Also, he does not appear
independent because he is related to the partner who prepares the financial
statements, resulting in a potential conflict of interest. Hire an independent CPA.
Req. 2
You should strongly recommend the selection of an independent CPA in public practice
because the financial statements should be audited by a competent and independent
professional who must follow prescribed accounting and auditing standards on a strictly
independent basis. An audit by an uncle would not meet these requirements.
Req 1. September
Jack Jill
Own:
PlayStation $ 350
Cash 6,000 $1,000
'75 Mustang 800
Trading cards 250
Total owned 6,350 2,050
Owe:
Car loan 250
Student loan 4,800
Tuition bill 800
Total owed 5,600 250
Req 2. October
Jack Jill
Own:
September position $ 6,350 $ 2,050
Monthly salary 500
Lottery winnings 950
Total owned 7,300 2,550
Owe:
September position 5,600 250
Rent expense paid 450 120
Other living expenses 300 300
Total owed 6,350 670
Jack acquired more than Jill ($950 in October as compared to Jill’s $500). He also
incurred higher expenses ($750 in October as compared to Jill’s $420), but they were
significantly lower than Jill’s as a percentage of earnings. Thus, Jack had net profits in
October of $200, while Jill had $80 in net profits. However, when these effects are
added to the net assets from September, Jill clearly has done better than Jack overall.
In addition, Jill has more sustainable earnings than Jack – Jack cannot depend on
lottery winnings every period; he needs to get a job.