Chapter 1: Exercises

Exercise Solutions Exercise 1-1 Classifying Activities Reflected in the Accounting System 1. 2. 3. 4. 5. 6. 7. 8. Analyzing and interpreting reports: Communicating Presenting financial information: Communicating Keeping a log of service costs: Recording Measuring the costs of a product: Identifying Preparing financial statements: Communicating Acquiring knowledge of revenue transactions: Identifying Observing transactions and events: Identifying Registering cash sales of products sold: Recording Exercise 1-2 Identifying Accounting Users and Uses Part A 1. 2. 3. 4. 5. 6. 7. Internal External Internal External Internal External Internal Part B 1. 2. 3. 4. 5. 6. 7. 8. Internal Internal External External Internal External Internal Internal Exercise 1-3 Describing Accounting Responsibilities 1. Internal auditing: Managerial accounting 2. External auditing: Financial accounting 3. 4. 5. 6. 7. 8. Cost accounting: Managerial accounting Budgeting: Managerial accounting Enforcing tax laws: Tax accounting Planning transactions to minimize taxes: Tax accounting Preparing external financial statements: Financial accounting Analyzing external financial reports: Financial accounting Exercise 1-4 Learning the Language of Business 1. Audit: An assessment of whether financial statements follow GAAP. 2. Net income: Amount a business earns in excess of all expenses and costs associated with its sales and revenues. 3. FASB: A group that sets accounting principles in the United States. 4. Public accountants: Accounting professionals who provide services to many clients. 5. Ethics: Principles that determine whether an action is right or wrong. Exercise 1-5 Identifying Ethical Terminology 1. Audit: Examines whether financial statements are prepared using GAAP. 2. Internal controls: Procedures set up to protect company property and equipment, ensure reliable accounting, promote efficiency, and encourage adherence to policies. 3. Prevention: A less expensive and more effective means to stop fraud. 4. Fraud triangle: Three factors push a person to commit fraud: opportunity, pressure, and rationalization. 5. Ethics: Beliefs that distinguish right from wrong. Exercise 1-6 Distinguishing Business Organizations 1. 2. 3. 4. 5. 6. 7. 8. Corporation Partnership Sole proprietorship Sole proprietorship Corporation Sole proprietorship Partnership Limited liability company (LLC) Exercise 1-7 Identifying Accounting Principles and Assumptions 1. Full disclosure principle: A company reports details behind financial statements that would impact users’ decisions. 2. Going-concern assumption: Financial statements reflect the assumption that the business continues operating. 3. Expense recognition principle (matching principle): A company records the expenses incurred to generate the revenues reported. 4. Business entity assumption: Each business is accounted for separately from its owner or owners. 5. Revenue recognition principle: Revenue is recorded when products and services are delivered. 6. Measurement (cost) principle: Information is based on actual costs incurred in transactions. Exercise 1-8 Applying Measurement Principle and Revenue Recognition Principle 1. Measurement principle: Byrde Co. records the truck at $10,000, the actual cost paid for it. 2. Revenue recognition principle: Snell Co. records revenue as follows: o May: $1,000 (when services were performed). o June: $0 (partial payment received). o July: $0 (final payment received). Exercise 1-9 Using the Accounting Equation 1. (a) Assets: $50,000, Liabilities: $20,000, Equity: $30,000 2. (b) Assets: $75,000, Liabilities: $45,000, Equity: $30,000 3. (c) Assets: $100,000, Liabilities: $40,000, Equity: $60,000 Exercise 1-10 Using the Accounting Equation 1. Equity at year-end: Equity=Assets−Liabilities Beginning equity = $100,000 Assets increase $80,000 → Total assets = $380,000 Liabilities increase $50,000 → Total liabilities = $150,000 Ending equity = $380,000 - $150,000 = $230,000 2. Office Store Co.'s equity at year-end: Assets = $123,000 Liabilities = $47,000 Equity = $123,000 - $47,000 = $76,000 3. Quaker Company: o Beginning assets = $130,000 (total assets = liabilities + equity). o Beginning liabilities = $70,000, so beginning equity = $60,000. o Ending assets = $190,000. o Ending liabilities = $65,000 (decreased by $5,000). o Ending equity = $190,000 - $65,000 = $125,000 Exercise 1-11 Determining Effect of Transactions on Accounting Equation 1. Lumia Company assets after the purchase: o Before purchase: Assets = $100,000, Liabilities = $60,000, Equity = $40,000 o Purchase: Assets increase by $10,000 ($4,000 cash, $6,000 liability) o New totals: Assets = $110,000, Liabilities = $66,000, Equity = $44,000 2. ABX Company's equity after paying the fine: o Before the fine: Equity = $100,000 - $30,000 = $70,000 o After the fine: Equity = $70,000 - $15,000 = $55,000 3. Lola Company's equity after the investment: o Before the investment: Assets = $30,000, Liabilities = $10,000, Equity = $20,000 o After the investment: Equity increases by $10,000 ($3,000 cash, $7,000 equipment) o New equity = $30,000