Accounting in Business Answer Key For Chapter 1

Accounting in Business QUESTIONS 1. The purpose of accounting is to provide decision makers with relevant and reliable information to help them make better decisions. Examples include information for people making investments, loans, and business plans. 2. Technology reduces the time, effort, and cost of recordkeeping. There is still a demand for people who can design accounting systems, supervise their operation, analyze complex transactions, and interpret reports. Demand also exists for people who can effectively use computers to prepare and analyze accounting reports. Technology will never substitute for qualified people with abilities to prepare, use, analyze, and interpret accounting information. 3. External users and their uses of accounting information include: (a) lenders, to measure the risk and return of loans; (b) shareholders, to assess whether to buy, sell, or hold their shares; (c) directors, to oversee their interests in the organization; (d) employees and labor unions, to judge the fairness of wages and assess future employment opportunities; and (e) regulators, to determine whether the organization is complying with regulations. Other users are voters, legislators, government officials, contributors to nonprofits, suppliers, and customers. 4. Business owners and managers use accounting information to help answer questions such as: What resources does an organization own? What debts are owed? How much income is earned? Are expenses reasonable for the level of sales? Are customers’ accounts being promptly collected? 5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch, Southwest Airlines, CitiCorp, Humana, Charles Schwab, and Prudential. Businesses offering products include Nike, Reebok, Gap, Apple, Ford Motor Co., Philip Morris, Coca-Cola, Best Buy, and WalMart. 6. The internal role of accounting is to serve the organization’s internal operating functions. It does this by providing useful information for internal users in completing their tasks more effectively and efficiently. By providing this information, accounting helps the organization reach its overall goals. 7. Accounting professionals offer many services including auditing, management advice, tax planning, business valuation, and money management. 8. Marketing managers are likely interested in information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions. 9. Accounting is described as a service activity because it serves decision makers by providing information to help them make better business decisions. 10. Some accounting-related professions include consultant, financial analyst, underwriter, financial planner, appraiser, FBI investigator, market researcher, and system designer. 11. Ethics rules require that auditors avoid auditing clients in which they have a direct investment, or if the auditor’s fee is dependent on the figures in the client’s reports. This will help prevent others from doubting the quality of the auditor’s report. 12. In addition to preparing tax returns, tax accountants help companies and individuals plan future transactions to minimize the amount of tax to be paid. They are also actively involved in estate planning and in helping set up organizations. Some tax accountants work for regulatory agencies such as the IRS or the various state departments of revenue. These tax accountants help to enforce tax laws. 13. The objectivity concept means that financial statement information is supported by independent, unbiased evidence other than someone’s opinion or imagination. This concept increases the reliability and verifiability of financial statement information. 14. This treatment is justified by both the cost principle and the going-concern assumption. 15. The revenue recognition principle provides guidance for managers and auditors so they know when to recognize revenue. If revenue is recognized too early, the business looks more profitable than it is. On the other hand, if revenue is recognized too late the business looks less profitable than it is. This principle demands that revenue be recognized when it is both earned (when service or product provided) and can be measured reliably. The amount of revenue should equal the value of the assets received or expected to be received from the business’s operating activities covering a specific time period. 16. Business organizations can be organized in one of three basic forms: sole proprietorship, partnership, or corporation. These forms have implications for legal liability, taxation, continuity, number of owners, and legal status as follows: Proprietorship Business entity Legal entity Limited liability Unlimited life Business taxed One owner allowed yes no no* no no yes Partnership yes no no* no no no Corporation yes yes yes yes yes yes *Proprietorships and partnerships that are set up as LLCs provide limited liability. 17. (a) Assets are resources owned or controlled by a company that are expected to yield future benefits. (b) Liabilities are creditors’ claims on assets that reflect obligations to provide assets, products, or services to others. (c) Equity is the owner’s claim on assets and is equal to assets minus liabilities. (d) Net assets refer to equity. 18. Equity is increased by investments from the owner and by net income (which is the excess of revenues over expenses). It is decreased by withdrawals by the owner and by a net loss (which is the excess of expenses over revenues). 19. Accounting principles consist of (a) general and (b) specific principles. General principles are the basic assumptions, concepts, and guidelines for preparing financial statements. They stem from long-used accounting practices. Specific principles are detailed rules used in reporting on business transactions and events. They usually arise from the rulings of authoritative and regulatory groups such as the Financial Accounting Standards Board or the Securities and Exchange Commission. 20. Revenue (or sales) is the amount received from selling products and services. 21. Net income (also called income, profit, or earnings) equals revenues minus expenses (if revenues exceed expenses). Net income increases equity. If expenses exceed revenues, the company has a net loss. Net loss decreases equity. 22. The four basic financial statements are: income statement, statement of owner’s equity, balance sheet, and statement of cash flows. 23. An income statement reports a company’s revenues and expenses along with the resulting net income or loss over a period of time. 24. Rent expense, utilities expense, administrative expenses, advertising and promotion expenses, maintenance expense, and salaries and wages expenses are some examples of business expenses. 25. The statement of owner’s equity explains the changes in equity from net income or loss, and from any owner contributions and withdrawals over a period of time. 26. The balance sheet describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 27. The statement of cash flows reports on the cash inflows and outflows from a company’s operating, investing, and financing activities. 28. Return on assets, also called return on investment, is a profitability measure that is useful in evaluating management, analyzing and forecasting profits, and planning activities. It is computed as net income divided by the average total assets. For example, if we have an average annual balance of $100 in a bank account and it earns interest of $5 for the year, then our return on assets is $5 / $100 or 5%. The return on assets is a popular measure for analysis because it allows us to compare companies of different sizes and in different industries. 29A. Return refers to income, and risk is the uncertainty about the return we expect to make. The lower the risk of an investment, the lower the expected return. For example, savings accounts pay a low return because of the low risk of a bank not returning the principal with interest. Higher risk implies higher, but riskier, expected returns. 30B. Organizations carry out three major activities: financing, investing, and operating. Financing provides the means used to pay for resources. Investing refers to the acquisition and disposing of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. (Planning is the glue that connects these activities, including the organization’s ideas, goals, and strategies.) 31B. An organization’s financing activities (liabilities and equity) pay for investing activities (assets). An organization cannot have more or less assets than its liabilities and equity combined and, similarly, it cannot have more or less liabilities and equity than its total assets. This means: assets = liabilities + equity. This relation is called the accounting equation (also called the balance sheet equation), and it applies to organizations at all times. 32. The dollar amounts in Google’s financial statements are rounded to the nearest million ($1,000,000). Google’s consolidated statement of income (or income statement) covers the calendar-year ended December 31, 2015. Google also reports comparative income statements for the previous two years. 33. The independent auditor for Apple is Ernst & Young, LLP. The auditor expressly states that “our responsibility is to express an opinion on these financial statements based on our audits.” The auditor also states that “these financial statements are the responsibility of the Company’s management.” QUICK STUDIES Quick Study 1-1 (10 minutes) 1. 2. 3. f. Technology c. Recording h. Recordkeeping (bookkeeping) Quick Study 1-2 (10 minutes) a. b. c. d. e. f. E E E E I E Quick Study 1-3 (10 minutes) 1. A. Opportunity 2. B. Pressure 3. C. Rationalization 4. A. Opportunity 5. B. Pressure 6. C. Rationalization Quick Study 1-4 (5 minutes) 1. c. constraint 2. b. assumption 3. c. constraint 4. a. principle g. h. i. j. k. l. E E I E E E Quick Study 1-5 (10 minutes) Attribute Present 1. Business taxed 2. Business entity 3. Legal entity Proprietorship Partnership no no yes yes no no Corporation yes yes yes Quick Study 1-6 (10 minutes) 1. D. Revenue recognition principle 2. B. Measurement (cost) principle 3. C. Business entity assumption Quick Study 1-7 (5 minutes) Assets = Liabilities + Equity $700,000 (a) $280,000 $420,000 $500,000 (b) $250,000 (b) $250,000 Quick Study 1-8 (10 minutes) 1. Assets (b) = Liabilities + Equity $75,000 (a) $35,000 $40,000 $95,000 $25,000 $70,000 $20,000 (c) $65,000 $85,000 2. Assets = Liabilities + Owner, Capital $40,000 $16,000 $20,000 $80,000 $32,000 $44,000 - Owner, Withdrawals + Revenues - Expenses 0 (a) $12,000 $ 8,000 (b) $2,000 $24,000 $18,000 $ Quick Study 1-9 (10 minutes) a. For December 31, 2015, the accounts and their dollar amounts (in $ millions) for Google are: (1) Assets = (2) Liabilities = $147,461 $27,130 (3) Equity = $120,331 b. Using Google’s amounts from (a) we verify that (in $ millions): Assets = Liabilities + Equity 147,461 = 27,130 + 120,331 Quick Study 1-10 (15 minutes) Assets Cash (a) + = Liabilities + Accounts Recble. $5,500 = Accounts Owner, + Payable Capital Equity - Owner, + Withdrawals = Revenues - Expenses - $1,400 - 1,400 $5,500 Consulting (b) + $4,000 = + 4,000 Commission Bal. (c) 5,500 + 4,000 -1,400 = + 9,500 = Wages Bal. (d) 4,100 + 4,000 = +1,000 + - 1,000 = 3,000 Bal. 5,100 + (e) -700 + = + 9,500 + 9,500 = - 1,400 700 Cleaning Bal. $4,400 + $3,000 = + $9,500 - $2,100 Quick Study 1-11 (15 minutes) Assets Cash (a) + Supplies + = Liabilities + Equip. + Land Accts. Pay. = $15,00 0 = (b) -500 + $500 = Bal. 14,500 + 500 = (c) + $10,000 Bal. 14,500 + (d) + Bal. 14,500 + (e) Bal. + 500 + 700 + -9,000 $5,500 + + A.Carr, With- + Rev. - Exp. drawals 15,000 10,000 = 200 - $15,000 = 10,000 Equity A. Carr, Capital + 25,000 200 + 25,000 = +$200 10,000 = + $9,000 = $700 + $10,000 + $9,000 = $200 + $25,000 Quick Study 1-12 (10 minutes) [Code: Income statement (I), Balance sheet (B), Statement of owner’s equity (E), or Statement of cash flows (CF).] a. B d. B g. CF b. CF e. I h. I c. E and CF f. B i. B Quick Study 1-13 (5 minutes) 1. 2. EX R 5. 6. EX R 3. 4. EX W 7. 8. EX R Quick Study 1-14 (5 minutes) 1. 2. A EQ 4. 5. L A 3. A 6. A Quick Study 1-15 (10 minutes) Return on assets = $6 billion Net income = Average total assets $40 billion = 15.0% Interpretation: Its return of 15.0% exceeds the 11% of its competitors. Home Depot’s performance can be judged as above average. Quick Study 1-16 (10 minutes) 1. 2. D E 3. 4. A C Quick Study 1-17 (10 minutes) a. For December 31, 2015, the accounts and their dollar amounts (in KRW millions) for Samsung are: (1) Assets = (2) Liabilities = 242,179,521 63,119,716 (3) Equity = 179,059,805 b. Using Samsung’s amounts from (a) we verify (in KRW millions): Assets = Liabilities + Equity 242,179,521 = 63,119,716 + 179,059,805 EXERCISES Exercise 1-1 (10 minutes) C C R R C I I R 1. 2. 3. 4. 5. 6. 7. 8. Analyzing and interpreting reports. Presenting financial information. Keeping a log of service costs. Measuring the costs of a product. Preparing financial statements. Seeing revenues generated from a service. Observing employee tasks behind a product. Registering cash sales of products sold. Exercise 1-2 (20 minutes) Part A. 1. I 5. 2. E 6. E 3. I 7. I 4. E I Part B. 1. I 5. I 2. I 6. E 3. E 7. I 4. E 8. I 5. 6. 7. 8. C C A A Exercise 1-3 (10 minutes) 1. 2. 3. 4. B A B B Exercise 1-4 (10 minutes) 1. A 2. G 3. D 4. F 5. C Exercise 1-5 (20 minutes) 1. I 2. H 3. G 4. F 5. E 6. D 7. C 8. B 9. A Exercise 1-6 (10 minutes) a. (C) Corporation e. (C) Corporation b. (P) Partnership f. (SP) Sole proprietorship g. (C) Corporation c. (SP) Sole proprietorship d. (SP) Sole proprietorship Exercise 1-7 (10 minutes) Code Description Principle/Assumption H 1. A company reports details behind financial statements that would impact users' decisions. Full disclosure principle G 2. Financial statements reflect the assumption that the business continues operating. Going-concern assumption F 3. A company records the expenses incurred to generate the revenues reported. Matching (expense recognition) principle A 4. Derived from long-used and generally accepted accounting practices. General accounting principle C 5. Each business is accounted for separately from its owner or owners. Business entity assumption D 6. Revenue is recorded when products and services are delivered. Revenue recognition principle E 7. Usually created by a pronouncement from an authoritative body. Specific accounting principle B 8. Information is based on actual costs incurred in transactions. Cost principle Exercise 1-8 (10 minutes) Assets = Liabilities + Equity (a) $ 65,000 = $ 20,000 + $45,000 $100,000 = $ 34,000 + (b) $66,000 $154,000 = (c) $114,000 + $40,000 Exercise 1-9 (20 minutes) a. Using the accounting equation at the beginning of the year: Assets = Liabilities + Equity $300,000 = ? + $100,000 Thus, beginning liabilities = $200,000 Using the accounting equation at the end of the year: Assets = Liabilities + Equity $300,000 + $80,000 = $200,000+ $50,000 + ? $380,000 = $250,000 + ? Thus, ending equity = $130,000 Alternative approach to solving part (b): Assets($80,000) = Liabilities($50,000) + Equity(?) where “” refers to “change in.” Thus: Ending Equity = $100,000 + $30,000 = $130,000 b. Using the accounting equation: Assets = Liabilities $123,000 = $47,000 Thus, equity = $76,000 + + Equity ? c. Using the accounting equation at the end of the year: Assets = Liabilities + Equity $190,000 = $70,000 - $5,000 + ? $190,000 = $65,000 + $125,000 Using the accounting equation at the beginning of the year: Assets = Liabilities + Equity $190,000 - $60,000 = $70,000 + ? $130,000 = $70,000 + ? Thus: Beginning Equity = $60,000 Exercise 1-10 (20 minutes) 1. d 2. e 3. a 4. f 5. h Exercise 1-11 (20 minutes) 1. f 2. a 3. g 4. h 5. b Exercise 1-12 (15 minutes) a. 3 b. 2 c. 6 d. 1 e. 4 f. 5 Exercise 1-13 (30 minutes) Assets Cash a. +$60,000 b. – d. _______ 58,500 + + e. 61,000 + – 6,000 Bal. g. 55,000 + – 3,000 Bal. h. 52,000 + + 5,000 - Bal. i. 57,000 + – 10,000 Bal. j. Bal. 15,000 = + 10,000 + 47,000 + – 1,000 $46,000 + + $8,000 8,000 + ______ + 8,000 + ______ 6,000 5,000 ______ 3,000 + ______ 10,000 + _______ 10,000 + _______ 10,000 + _______ 31,000 = ______ 31,000 = 3,000 + +$10,000 25,000 = 8,000 + ______ + 25,000 = ______ 10,000 + _______ 10,000 + _______ 31,000 = ______ 10,000 + – 10,000 31,000 = ______ Equity M.Chen, + Capital – M.Chen, With- + Revenues – Expenses drawals + $75,000 25,000 = ______ 61,000 + _______ + Bal. f. + 2,500 Bal. Accounts = Payable ______ 58,500 + Bal. Equipment + $15,000 = 1,500 Bal. c. = Liabilities + Accounts + Receivable + 0 + _______ $3,000 + $31,000 = $ ______ – 75,000 – ______ 1,500 _____ 75,000 ______ $1,500 – + $2,500 1,500 _____ 75,000 + 2,500 – 1,500 ______ + 8,000 _____ 75,000 + 10,500 – 1,500 _____ _____ ______ 75,000 + ______ 75,000 + ______ 75,000 + ______ 75,000 ______ – $1,000 + 10,500 – 1,500 _____ 3,000 – 10,500 – 4,500 _____ _____ 10,500 – 4,500 _____ _____ 10,500 – 4,500 _____ _____ 0 + $75,000 – $1,000 + $10,500 – $4,500 Exercise 1-14 (10 minutes) Return on assets = Net income / Average total assets = $40,000 / [($200,000 + $300,000)/2] = 16% Interpretation: Swiss Group’s return on assets of 16% is markedly above the 11% return of its competitors. Accordingly, its performance is assessed as superior to its competitors. Exercise 1-15 (15 minutes) ERNST CONSULTING Income Statement For Month Ended October 31 Revenues Consulting revenue............................ Expenses Salaries expense................................. Rent expense....................................... Telephone expense............................. Miscellaneous expenses.................... Total expenses.................................... Net income.................................................. $14,000 $7,000 3,550 760 580 11,890 $ 2,110 Exercise 1-16 (15 minutes) ERNST CONSULTING Statement of Owner’s Equity For Month Ended October 31 E. Ernst, Capital, October 1............................. Add: Owner’s investment.......................... Net income (from Exercise 1-15)........ Less: Withdrawals by owner....................... E. Ernst, Capital, October 31........................... $ 0 84,000 2,110 86,110 2,000 $84,110 Exercise 1-17 (15 minutes) ERNST CONSULTING Balance Sheet October 31 Assets Liabilities Cash............................... $11,360 Accounts payable................. $ 8,500 Accounts receivable.... 14,000 Equity Office supplies.............. 3,250 Office equipment.......... 18,000 E. Ernst, Capital*................... 84,110 Land............................... 46,000 _______ Total assets................... $92,610 Total liabilities and equity.... $92,610 * For the computation of this amount see Exercise 1-16. Exercise 1-18 (15 minutes) ERNST CONSULTING Statement of Cash Flows For Month Ended October 31 Cash flows from operating activities Cash received from customers............................................ Cash paid to employeesa...................................................... Cash paid for rent.................................................................. Cash paid for telephone expenses...................................... Cash paid for miscellaneous expenses............................... Net cash used by operating activities................................. $ 0 (1,750) (3,550) (760) (580) ( 6,640) Cash flows from investing activities Purchase of office equipment.............................................. Net cash used by investing activities................................ (18,000) (18,000) Cash flows from financing activities Investments by owner........................................................... Withdrawals by owner........................................................... Net cash provided by financing activities........................... 38,000 (2,000) 36,000 Net increase in cash.............................................................. Cash balance, October 1....................................................... Cash balance, October 31..................................................... $11,360 0 $11,360 a $7,000 Salaries Expense - $5,250 still owed = $1,750 paid to employees. Exercise 1-19 (10 minutes) I 1. Cash purchase of equipment O 5. Cash paid on account payable F 2. Cash withdrawal by owner O 6. Cash received from clients O 3. Cash paid for advertising F O 4. Cash paid for wages O 8. Cash paid for rent 7. Cash investment by owner Exercise 1-20 (20 minutes) Ford Motor Company Income Statement For Year Ended December 31, 2015 ($ millions) Revenues ...................................................................... $149,558 Expenses Cost of sales............................................................ $124,041 Selling and administrative costs............................ 14,999 Other expenses........................................................ 3,145 Total expenses......................................................... 142,185 Net income.................................................................... $ 7,373 Exercise 1-21B (10 minutes) a. Financing b. Financing c. Operating d. Investing e. Investing Exercise 1-22 (15 minutes) BMW GROUP Income Statement For Year Ended December 31, 2015 (Euros in millions) Revenues ...................................................................... € 92,175 Expenses Cost of sales............................................................ €74,043 Selling and administrative costs............................ 8,633 Other expenses........................................................ 3,103 Total expenses......................................................... 85,779 Net income.................................................................... € 6,396 PROBLEM SET A Problem 1-1A (25 minutes) a. Transaction 1 Owner invests $900 cash in business 2 Receives $700 cash for services provided 3 Pays $500 cash for employee wages +900 +900 +700 +700 +700 +700 –500 –500 –500 –500 –100 –100 4 Incurs $100 legal costs on credit +100 5 Purchases $200 supplies on credit +200 6 Buys equipment for $300 cash +300 –300 7 Pays $200 on accounts payable –200 8 Provides $400 services on credit +400 +400 9 Owner withdraws $50 cash –50 –50 10 Collects $400 cash on account receivable b. Income Balance Sheet Statement Statement of Cash Flows Total Total Total Net Operating Investing Financing Assets Liab. Equity Income Activities Activities Activities +400 –400 +900 +200 –300 –200 –200 +400 –50 +400 Problem 1-2A (40 minutes) Part 1 Company A (a) Equity on December 31, 2016: Assets.......................................................... Liabilities..................................................... Equity.......................................................... (b) Equity on December 31, 2017: Equity, December 31, 2016........................ Plus investment by owner......................... Plus net income.......................................... Less withdrawals by owner....................... Equity, December 31, 2017....................... (c) $55,000 (24,500) $30,500 $30,500 6,000 8,500 (3,500) $41,500 Liabilities on December 31, 2017: Assets.......................................................... Equity.......................................................... Liabilities..................................................... $58,000 (41,500) $16,500 Part 2 Company B (a) and (b) Equity: 12/31/2016 12/31/2017 $34,000 $40,000 Assets................................... Liabilities.............................. (21,500) (26,500) Equity................................... $12,500 $13,500 (c) Net income for 2017: Equity, December 31, 2016..................... Plus investment by owner...................... Plus net income....................................... Less withdrawals by owner.................... Equity, December 31, 2017..................... $12,500 1,400 ? (2,000) $13,500 Therefore, net income must have been $ 1,600 Problem 1-2A (Continued) Part 3 Company C First, compute the beginning balance of equity: Dec. 31, 2016 Assets.......................................................... $24,000 Liabilities..................................................... ( 9,000) Equity.......................................................... $15,000 Next, find the ending balance of equity by completing this table: Equity, December 31, 2016........................ Plus investment by owner......................... Plus net income.......................................... Less withdrawals by owner....................... Equity, December 31, 2017........................ $15,000 9,750 8,000 (5,875) $26,875 Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of liabilities: Dec. 31, 2017 Liabilities..................................................... $29,000 Equity.......................................................... 26,875 Assets.......................................................... $55,875 Part 4 Company D First, compute the beginning and ending equity balances: 12/31/2016 12/31/2017 Assets...................................... $60,000 $85,000 Liabilities................................. (40,000) (24,000) Equity...................................... $20,000 $61,000 Then, find the amount of investment by owner during 2017: Equity, December 31, 2016........................... Plus investment by owner........................... Plus net income............................................ Less withdrawals by owner......................... Equity, December 31, 2017........................... $20,000 ? 14,000 0 $61,000 Thus, investment by owner must have been $27,000 Problem 1-2A (Concluded) Part 5 Company E First, compute the balance of equity as of December 31, 2017: Assets.......................................................... Liabilities.................................................... Equity.......................................................... $113,000 (70,000) $ 43,000 Next, find the beginning balance of equity as follows: Equity, December 31, 2016........................ $ Plus investment by owner......................... Plus net income.......................................... Less withdrawals by owner....................... Equity, December 31, 2017....................... ? 6,500 20,000 (11,000) $43,000 Thus, the beginning balance of equity is: $27,500 Finally, find the beginning amount of liabilities by subtracting the beginning balance of equity from the beginning balance of assets: Dec. 31, 2016 Assets.......................................................... $119,000 Equity.......................................................... (27,500) Liabilities.................................................... $ 91,500 Problem 1-3A (20 minutes) Armani Company Income Statement For Year Ended December 31, 2017 Revenues Consulting revenue............................... Rental revenue....................................... Total revenues....................................... Expenses Salaries expense................................... Rent expense......................................... Selling and administrative expenses. . Total expenses....................................... Net income..................................................... $33,000 22,000 $55,000 20,000 12,000 8,000 40,000 $15,000 Problem 1-4A (20 minutes) Armani Company Statement of Owner’s Equity For Year Ended December 31, 2017 A. Armani, Capital, December 31, 2016.......... $ 4,000 Add: 1,000 15,000 20,000 13,000 $ 7,000 Owner’s investment.......................... Net income (from Problem 1-3)........... Less: Withdrawals by owner....................... A. Armani, Capital, December 31, 2017.......... Problem 1-5A (20 minutes) Armani Company Balance Sheet December 31, 2017 Assets Liabilities Cash............................... $10,000 Accounts payable................. $23,000 Accounts receivable.... 9,000 Total liabilities....................... 23,000 6,000 Equity Supplies........................ Equipment..................... 5,000 A. Armani, Capital*................ 7,000 Total assets................... $30,000 Total liabilities and equity.... $30,000 * For computation of this amount see Problem 1-4A. Problem 1-6A (15 minutes) Kia Company Statement of Cash Flows For Year Ended December 31, 2017 Cash from operating activities ........................ $ 6,000 Cash used by investing activities.................... (2,000) Cash used by financing activities.................... (2,800) Net increase in cash.......................................... $ 1,200 Cash, December 31, 2016................................. Cash, December 31, 2017................................. 2,300 $ 3,500 Problem 1-7A (60 minutes) Part 1 Assets Date Cash + Accounts Receivable + = Office = Equipment May 1 +$40,000 1 - = + $1,890 750 ` - 8 + 12 + 750 20 + 2,500 22 25 + 3,200 26 - 1,890 + Equity G. Gram, Capital - G. Gram, Withdrawals + Revenues - Expenses $40,000 $2,500 = + $5,400 = + 2,500 = 2,500 - - $2,200 - 750 - 750 = + $1,890 = 5,400 15 - Payable = 2,200 3 5 Liabilities + Accounts + = + 3,200 = - 3,200 = 27 + = - 1,890 = + 80 3,200 - 80 28 - 750 = - 750 30 - 300 = - 300 30 - 280 = - 280 31 - 1,400 = - $5,110 $42,780 + $ 0 + $1,890 = $ 80 + $40,000 - $1,400 - $1,400 + $11,100 Problem 1-7A (Continued) Part 2 The Gram Co. Income Statement For Month Ended May 31 Revenues Consulting services revenue ............ Expenses Rent expense....................................... Salaries expense................................. Cleaning expense............................... Telephone expense............................. Utilities expense.................................. Advertising expense........................... Total expenses.................................... Net income.................................................. $11,100 $2,200 1,500 750 300 280 80 5,110 $ 5,990 The Gram Co. Statement of Owner’s Equity For Month Ended May 31 G. Gram, Capital, May 1............................................ $ 0 Add: Investment by owner..................................... 40,000 Net income...................................................... 5,990 45,990 Less: Withdrawals by owner................................... 1,400 G. Gram, Capital, May 31.......................................... $44,590 The Gram Co. Balance Sheet May 31 Assets Liabilities Cash...............................$42,780 Accounts payable........................ $ 80 Equity Office equipment.......... 1,890 G. Gram, Capital.......................... 44,590 _______ Total assets...................$44,670 Total liabilities and equity........... $44,670 Problem 1-7A (Concluded) Part 3 The Gram Co. Statement of Cash Flows For Month Ended May 31 Cash flows from operating activities Cash received from customers................................. Cash paid for rent...................................................... Cash paid for cleaning............................................... Cash paid for telephone............................................ Cash paid for utilities................................................. Cash paid to employees............................................ Net cash provided by operating activities............... $11,100 (2,200) (750) (300) (280) (1,500) Cash flows from investing activities Purchase of equipment............................................. Net cash used by investing activities...................... (1,890) Cash flows from financing activities Investment by owner................................................. Withdrawal by owner................................................. Net cash provided by financing activities............... 40,000 (1,400) Net increase in cash.................................................. Cash balance, May 1.................................................. Cash balance, May 31................................................ $ 6,070 (1,890) 38,600 $42,780 0 $42,780 Problem 1-8A (60 minutes) Part 1 Assets Cash = Liabilities + Office Office Accounts + + + + Equipment Receivable Supplies a. +$70,000 + + Bal. 15,000 d. Bal. 15,000 e. - 14,500 f. + $2,800 Bal. 14,500 + 2,800 g. + Bal. i. + k. Bal. + 80,000 + 80,000 - $ 500 - 500 + 2,800 - 500 + 4,000 + 6,800 - 500 $40,000 + + 10,000 + 15,000 40,000 = + 25,000 + 40,000 = + $2,900 + $1,200 + 1,700 + 1,200 + 26,700 + 40,000 = 2,900 + 80,000 + 1,200 + 26,700 + 40,000 = 2,900 + 80,000 + + 1,200 + 26,700 + 40,000 = 2,900 + 2,800 + 1,200 + 26,700 + 40,000 = 2,900 + 80,000 15,225 + 2,800 1,800 - 1,800 17,025 + 1,000 + 1,200 + 26,700 + 40,000 = + 1,200 + 26,700 + 40,000 = - 700 16,325 + 80,000 - 3,275 Bal. Bal. $80,000 Expenses 4,000 18,500 + h. - j. - + L. Lopez, With- + Reve- nues drawals 500 Bal. Bal. Equity Accounts L. Lopez, = Payable + Capital $10,000 b. - 40,000 Bal. 30,000 c. - 15,000 Office Suite 1,000 + 1,200 + 26,700 + 40,000 = $3,275 2,900 + 80,000 - 3,275 + 6,800 - 500 2,900 + 80,000 - 3,275 + 6,800 - 500 80,000 - 3,275 + 6,800 - 500 - 1,800 $6,800 - $2,300 700 2,200 + 1,800 $14,525 + $1,000 + $1,200 + $26,700 + $40,000 = $2,800 $2,200 + $80,000 - $3,275 + Problem 1-8A (Concluded) Part 2 Biz Consulting’s net income = $6,800 - $2,300 = $4,500 Problem 1-9A (60 minutes) Part 1 Date Dec. Cash + 1 +$65,000 2 - Bal. 3 Bal. Assets = Liabilities + Equity Office Electrical Accounts S. Sony, Accounts + Office S. Sony, + + = + + Revenues - Expenses Withdrawals Receivable Supplies Equipment Equipment Payable Capital = + $65,000 1,000 64,000 = 4,800 59,200 5 Bal. 6 Bal. + + 800 58,400 + 1,200 59,600 + $ 800 800 800 8 Bal. 59,600 59,600 + + $5,000 5,000 59,600 + 5,000 15 Bal. 18 Bal. 20 Bal. 2,530 57,070 28 + Bal. - 1,000 $13,000 13,000 = + $8,200 8,200 + 65,000 + 13,000 = 8,200 65,000 13,000 = + + 800 + 13,000 = + + 800 350 + 2,530 + 13,000 = + 1,150 + 2,530 + 13,000 = + - + 1,000 $1,200 1,200 - 1,000 65,000 10,730 + 350 65,000 + + + 1,200 5,000 6,200 - 1,000 11,080 + 65,000 + 6,200 - 1,000 65,000 + + 6,200 900 1,000 65,000 1,000 + + 5,000 900 + 1,150 + 2,530 + 13,000 = 57,070 5,000 + 5,900 5,000 + 1,150 + 2,530 + 13,000 = 8,550 + 65,000 + 7,100 - 1,000 - 62,070 + 900 + 1,150 + 2,530 + 13,000 = 8,550 + 65,000 + 7,100 - 1,000 1,400 1,400 60,670 + 900 + 1,150 + 2,530 + 13,000 = 8,550 + 65,000 30 - 540 60,130 + 900 + 1,150 + 2,530 + 13,000 = 8,550 + 65,000 31 - 950 Bal. + + 8,200 + 2,530 10,730 + 29 Bal. Bal. $1,000 1,000 2,530 8,550 + 24 Bal. $2,530 2,530 - + + + + + 65,000 $59,180 + $ 900 + $1,150 + $2,530 + $13,000 = $8,550 + $65,000 - + 7,100 7,100 - 2,400 540 2,940 $950 + $7,100 - $2,940 + $950 Problem 1-9A (Continued) Part 2 Sony Electric Income Statement For Month Ended December 31 Revenues Electrical fees earned...................... Expenses Rent expense.................................... Salaries expense.............................. Utilities expense .............................. Total expenses.................................. Net income.................................................. $7,100 $1,000 1,400 540 2,940 $4,160 Sony Electric Statement of Owner’s Equity For Month Ended December 31 S. Sony, Capital, December 1.................... Add: Investment by owner..................... Net income...................................... Less: Withdrawals by owner................... S. Sony, Capital, December 31.................. Assets Cash................................. Accounts receivable....... Office supplies................ Office equipment............. Electrical equipment....... Total assets..................... $ 0 65,000 4,160 69,160 950 $68,210 Sony Electric Balance Sheet December 31 Liabilities $59,180 Accounts payable.................... $ 8,550 900 1,150 Equity 2,530 S. Sony, Capital........................ 68,210 13,000 _______ $76,760 Total liabilities and equity....... $76,760 Problem 1-9A (Concluded) Part 3 Sony Electric Statement of Cash Flows For Month Ended December 31 Cash flows from operating activities Cash received from customers1.................................. Cash paid for rent......................................................... Cash paid for supplies................................................. Cash paid for utilities................................................... Cash paid to employees.............................................. Net cash provided by operating activities................. $ 6,200 (1,000) (800) (540) (1,400) Cash flows from investing activities Purchase of office equipment..................................... Purchase of electrical equipment............................... Net cash used by investing activities........................ (2,530) (4,800) Cash flows from financing activities Investments by owner.................................................. Withdrawals by owner................................................. Net cash provided by financing activities................. 65,000 (950) Net increase in cash..................................................... Cash balance, Dec. 1.................................................... Cash balance, Dec. 31.................................................. 1 $ 2,460 (7,330) 64,050 $59,180 0 $59,180 $1,200 + $5,000 = $6,200 Part 4 If the December 1 investment had been $49,000 cash instead of $65,000 and the $16,000 difference was borrowed by the company from a bank, then: (a) Total assets would remain the same. (b) Total liabilities would be $16,000 greater. (c) Total equity would be $16,000 lower (due to less owner investment). Problem 1-10A (15 minutes) 1. Return on assets is net income divided by the average total assets. Kyzera’s return: $65,000 / $250,000 = 0.26 or 26%. 2. Return on assets seems satisfactory for the risk involved in the manufacturing, marketing, and selling of cellular telephones. Moreover, Kyzera’s 26% return is more than twice as high as that of its competitors’ 12% return. 3. We know that revenues less expenses equal net income. Taking the revenues and net income numbers for Kyzera we obtain: $475,000 - Expenses = $65,000  Expenses must equal $410,000. 4. We know from the accounting equation that total financing (liabilities plus equity) must equal the total for assets (investing). Since average total assets are $250,000, we know the average total of liabilities plus equity (financing) must equal $250,000. Problem 1-11A (20 minutes) 1. Return on assets equals net income divided by average total assets. a. Coca-Cola return: $8,634 / $76,448 = 0.113 or 11.3%. b. PepsiCo return: $6,462 / $70,518 = 0.092 or 9.2%. 2. Strictly on the amount of sales to consumers, Coca-Cola’s sales of $46,542 are less than PepsiCo’s $66,504. 3. Success in returning net income from the average amount invested is revealed by the return on assets. Part 1 showed that Coca-Cola’s 11.3% return is better than PepsiCo‘s 9.2% return. 4. The reported figures suggest that Coca-Cola yields a marginally higher return on assets than PepsiCo. Based on this information alone, we would be better advised to invest in Coca-Cola than PepsiCo. Nevertheless, and because the returns are not dramatically different, we would look for additional information in financial statements and other sources for further guidance. For example, if Coca-Cola could dispose of some assets without curtailing its sales level, it would look even more attractive; or, PepsiCo could do likewise, and close the gap. We would also look for consumer trends, market expansion, competition, product development, and promotion plans. Problem 1-12AA (5 minutes) a. 3 b. 2 c. 1 d. 4 Problem 1-13AB (15 minutes) 1. F 5. I 2. I 6. O 3. I 7. O 4. F 8. O Problem 1-14AB (15 minutes) An organization pursues three major business activities: financing, investing, and operating. (1) Financing is the means used to pay for resources. (2) Investing refers to the buying and selling of resources (assets) necessary to carry out the organization’s plans. (3) Operating activities are the carrying out of an organization’s plans. If financial statements are to be informative about an organization’s activities, then they will need to report on these three major activities. Also note that planning is the glue that links and coordinates these three major activities—it includes the ideas, goals, and strategies of an organization. PROBLEM SET B Problem 1-1B (25 minutes) a. Transaction 1 Owner invests $800 cash in business +800 2 Purchases $100 supplies on credit +100 3 Buys equipment for $400 cash b. Income Balance Sheet Statement Statement of Cash Flows Total Total Total Net Operating Investing Financing Assets Liab. Equity Income Activities Activities Activities +800 +800 +100 +400 –400 –400 4 Provide services for $900 cash +900 +900 +900 +900 5 Pays $400 cash for rent incurred –400 –400 –400 –400 –200 –200 –300 6 Incurs $200 utilities costs on credit +200 7 Pays $300 cash for wages incurred –300 –300 8 Owner withdraws $50 cash –50 –50 +600 +600 9 Provide $600 ser-vices on credit 10 Collects $600 cash on accounts receivable +600 –600 –300 –50 +600 +600 Problem 1-2B (40 minutes) Part 1 Company V (a) and (b) Calculation of equity: Assets.............................. Liabilities......................... Equity.............................. (c) 12/31/2016 $54,000 (25,000) $29,000 12/31/2017 $59,000 (36,000) $23,000 Calculation of net income for 2017: Equity, December 31, 2016........................ Plus investments by owner....................... Plus net income.......................................... Less withdrawals by owner....................... Equity, December 31, 2017....................... $29,000 5,000 ? (5,500) $23,000 Therefore, the net loss must have been $(5,500). Part 2 Company W (a) (b) Calculation of equity at December 31, 2016: Assets.......................................................... Liabilities..................................................... Equity.......................................................... Calculation of equity at December 31, 2017: Equity, December 31, 2016........................ Plus investments by owner....................... Plus net income.......................................... Less withdrawals by owner....................... Equity, December 31, 2017........................ (c) $80,000 (60,000) $20,000 $20,000 20,000 40,000 (2,000) $78,000 Calculation of the amount of liabilities at December 31, 2017: Assets.......................................................... Equity.......................................................... Liabilities..................................................... $100,000 (78,000) $ 22,000 Problem 1-2B (Continued) Part 3 Company X First, compute the beginning and ending equity balances: 12/31/2016 12/31/2017 Assets.............................. $141,500 $186,500 Liabilities......................... (68,500) (65,800) Equity.............................. $ 73,000 $120,700 Then, find the amount of investments by owner during 2017 as follows: Equity, December 31, 2016................................ Plus investments by owner.............................. Plus net income................................................. Less withdrawals by owner.......................... Equity, December 31, 2017................................ $ 73,000 ? 18,500 0 $120,700 Thus, the owner’s investments must have been $ 29,200 Part 4 Company Y First, compute the beginning balance of equity: Dec. 31, 2016 Assets.......................................................... $92,500 Liabilities..................................................... 51,500 Equity.......................................................... $41,000 Next, find the ending balance of equity as follows: Equity, December 31, 2016........................ Plus investments by owner....................... Plus net income.......................................... Less withdrawals by owner....................... Equity, December 31, 2017........................ $41,000 48,100 24,000 (20,000) $93,100 Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of liabilities: Dec. 31, 2017 Liabilities..................................................... $ 42,000 93,100 Equity.......................................................... Assets.......................................................... $135,100 Problem 1-2B (Concluded) Part 5 Company Z First, compute the balance of equity as of December 31, 2017: Assets.......................................................... Liabilities..................................................... Equity.......................................................... $170,000 (42,000) $128,000 Next, find the beginning balance of equity as follows: Equity, December 31, 2016........................ $ ? Plus investments by owner....................... 60,000 Plus net income.......................................... 32,000 Less withdrawals by owner...................... (8,000) Equity, December 31, 2017........................$128,000 Thus, the beginning balance of equity is $44,000. Finally, find the beginning amount of liabilities by subtracting the beginning balance of equity from the beginning balance of assets: Dec. 31, 2016 Assets.......................................................... $144,000 Equity.......................................................... (44,000) Liabilities..................................................... $100,000 Problem 1-3B (20 minutes) Audi Company Income Statement For Year Ended December 31, 2017 Revenues Consulting revenue............................... Rental revenue....................................... Total revenues....................................... Expenses Salaries expense................................... Rent expense......................................... Selling and administrative expenses. . Total expenses....................................... $6,600 4,400 $11,000 4,000 2,400 1,600 8,000 Net income..................................................... $ 3,000 Problem 1-4B (20 minutes) Audi Company Statement of Owner’s Equity For Year Ended December 31, 2017 A. Audi, Capital, December 31, 2016............... Add: Owner’s investment.......................... Net income (from Problem 1-3)........... Less: Withdrawals by owner....................... A. Audi, Capital, December 31, 2017............... $ 800 200 3,000 4,000 2,600 $1,400 Problem 1-5B (20 minutes) Assets Cash............................... Accounts receivable.... Supplies........................ Equipment..................... Total assets................... Audi Company Balance Sheet December 31, 2017 Liabilities $2,000 Accounts payable................. 1,800 Total liabilities....................... Equity 1,200 1,000 A. Audi, Capital*.................... $6,000 Total liabilities and equity.... $4,600 4,600 1,400 $6,000 * For computation of this amount see Problem 1-4B. Problem 1-6B (15 minutes) Banji Company Statement of Cash Flows For Year Ended December 31, 2017 Cash used by operating activities ...................... Cash from investing activities.............................. Cash from financing activities............................. Net increase in cash.............................................. Cash, December 31, 2016..................................... Cash, December 31, 2017..................................... $(3,000) 1,600 1,800 $ 400 1,300 $ 1,700 Problem 1-7B (60 minutes) Part 1 Assets Date Cash + Accounts Receivable June 1 +$130,000 2 - = Liabilities + Accounts Payable + N. Niko, Capital + $130,000 + Equipment = = Equity - N. Niko, + Withdrawals Revenues = 6,000 4 + $2,400 = + 1,150 = 8 + 850 = + $ 850 = + 7,500 + $7,500 Expenses - $6,000 - 1,150 - 800 - 800 $2,400 6 - 14 - 16 - 800 = 20 + 7,500 - 7,500 21 + 7,900 = + 7,900 24 + 675 = + 675 25 + 7,900 - 7,900 = 26 - 2,400 28 - 800 = 29 - 4,000 = = = - 2,400 - $4,000 30 - 150 = - 150 30 - 890 = - 890 $16,925 - $9,790 $130,060 + $ 675 + $2,400 = $ 0 + $130,000 - $4,000 + Problem 1-7B (Continued) Part 2 Niko’s Maintenance Co. Income Statement For Month Ended June 30 Revenues Maintenance services revenue.......... Expenses Rent expense....................................... Salaries expense................................. Advertising expense........................... Utilities expense.................................. Telephone expense............................. Total expenses.................................... Net income............................................... $16,925 $6,000 1,600 1,150 890 150 9,790 $ 7,135 Niko’s Maintenance Co. Statement of Owner’s Equity For Month Ended June 30 N. Niko, Capital, June 1..................................... Add: Investment by owner............................. Net income............................................. Less: Withdrawals by owner........................... N. Niko, Capital, June 30................................... $ 0 130,000 7,135 137,135 4,000 $133,135 Niko’s Maintenance Co. Balance Sheet June 30 Assets Cash..................................$130,060 Accounts receivable........ 675 Equipment........................ 2,400 _______ Total assets......................$133,135 Liabilities Accounts payable.......................... $ 0 Equity N. Niko, Capital.............................. 133,135 ________ Total liabilities and equity................. $133,135 Problem 1-7B (Concluded) Part 3 Niko’s Maintenance Co. Statement of Cash Flows For Month Ended June 30 Cash flows from operating activities Cash received from customers1.................................. Cash paid for rent......................................................... Cash paid for advertising............................................ Cash paid for telephone.............................................. Cash paid for utilities................................................... Cash paid to employees.............................................. Net cash provided by operating activities................. $ 16,250 (6,000) (1,150) (150) (890) (1,600) Cash flows from investing activities Purchase of equipment................................................ Net cash used by investing activities........................ (2,400) Cash flows from financing activities Investments by owner.................................................. Withdrawals by owner................................................. Net cash provided by financing activities................. 130,000 (4,000) Net increase in cash..................................................... Cash balance, June 1................................................... Cash balance, June 30................................................. 1 $850 + $7,500 + $7,900 = $16,250 $ 6,460 (2,400) 126,000 $130,060 0 $130,060 Problem 1-8B (60 minutes) Part 1 Assets Cash + Accounts Office + Supplies Receivable a. + $90,000 = Liabilities + Office + Equipment + + + 40,000 + 10,000 + c. - 25,000 + 25,000 + 35,000 + Bal. 15,000 d. Bal. e. Bal. + 15,000 14,250 + + Bal. 14,250 + Bal. + $100,000 + 100,000 i. + Bal. j. Bal. k. Bal. - N. Nadal, Reve+ nues Withdrawals 50,000 = 50,000 = + + 1,700 36,700 + 50,000 = 2,900+ 100,000 1,200 + 36,700 + 50,000 = 2,900+ 100,000 + 36,700 + 50,000 = 2,900+ 100,000 2,800 + 1,200 + 36,700 + 6,750 + 2,800 + 1,800 - 1,800 8,550 + 1,000 + 50,000 = 1,200 + 36,700 + 50,000 = 1,200 + 36,700 + 50,000 = - 700 7,850 + 1,000 + 1,200 + 36,700 + $1,000 + $1,200 + $36,700 + 750 750 50,000 = $50,000 = $2,800 + 2,800 4,000 + 6,800 - 750 11,500 + 6,800 - 750 750 2,900+ 100,000 2,900+ 100,000 - 2,900+ 100,000 - 11,500 + 6,800 - 100,000 - 11,500 + 6,800 - 750 - 2,500 $6,800 - $3,250 $11,500 700 2,200+ 2,500 $ 5,350 + $ 750 - + 4,000 18,250 + - 100,000 1,200 + 1,200 + Expenses $2,900 $2,800 2,800 + - $50,000 h. - 11,500 Bal. Equity N. Nadal, Capital 750 f. g. + $1,200 + Accounts = Payable + $10,000 b. - 50,000 Bal. Office Suite $2,200+ $100,000 - $11,500 + Problem 1-8B (Concluded) Part 2 The company’s net income = $6,800 - $3,250 = $3,550 Problem 1-9B (60 minutes) Part 1 Assets Date July Cash 1 2 Bal. 3 + $80,000 700 79,300 - Bal. 6 Bal. 8 Bal. + = 1,000 78,300 Equity Accounts R. Rivera, + Capital Payable = $700 700 - 700 + $5,000 + 5,000 = + $4,000 4,000 + 80,000 + 5,000 = 4,000 + 80,000 + 600 + 5,000 = + 80,000 85,300 + 600 + 5,000 = 4,000 + 2,300 6,300 + 80,000 80,000 15 + 85,300 + Bal. $8,200 8,200 + 600 + 2,300 + 5,000 = 8,200 + + 3,100 3,700 + 2,300 + 5,000 = 17 Bal. 85,300 + $2,300 2,300 6,300 + 3,100 9,400 + 700 + 15,800 - 700 + 15,800 - 700 + 80,000 5,000 20,800 - 700 + 80,000 + 20,800 - + 3,700 + 2,300 + 5,000 = 7,100 28 5,000 13,200 8,200 91,200 + 5,000 + 3,700 + 2,300 + 5,000 = 7,100 30 - 1,560 89,640 + 5,000 + 3,700 + 2,300 + 5,000 = 7,100 + 80,000 31 - 295 89,345 + 5,000 + 3,700 + 2,300 + 5,000 = 7,100 + 80,000 + $80,000 - 31 700 + + + 83,000 + + 8,200 - Bal. 7,600 8,200 15,800 - 80,000 8,200 25 Bal. + + + + 2,300 83,000 + Bal. 700 700 80,000 - Bal. $7,600 7,600 - + + + 23 Bal. + Revenues - Expenses - $ 600 600 + + Withdrawals 80,000 + + 10 - R. Rivera, $80,000 600 77,700 + 7,600 85,300 - Bal. Bal. = Liabilities + Accounts Office Office Roofing = + + + Equipment + Equipment Receivable Supplies - 2,300 + 3,700 + 2,300 + 5,000 = 7,100 - 1,800 $87,545 + $ 5,000 + $3,700 + $2,300 + $5,000 = $7,100 + + 20,800 20,800 - $1,800 $1,800 + $20,800 - 700 1,560 2,260 295 2,555 $2,555 Problem 1-9B (Continued) Part 2 Rivera Roofing Company Income Statement For Month Ended July 31 Revenues Roofing fees earned .................................. Expenses Rent expense.............................................. Salaries expense........................................ Utilities expense ........................................ Total expenses............................................ Net income........................................................... $20,800 $ 700 1,560 295 2,555 $18,245 Rivera Roofing Company Statement of Owner’s Equity For Month Ended July 31 R. Rivera, Capital, July 1............................ Add: Investment by owner...................... Net income....................................... Less: Withdrawals by owner.................... R. Rivera, Capital, July 31.......................... $ 0 80,000 18,245 98,245 1,800 $96,445 Rivera Roofing Company Balance Sheet July 31 Assets Liabilities Cash.................................... $ 87,545 Accounts payable............... $ 7,100 Accounts receivable......... 5,000 Office supplies................... 3,700 Equity Office equipment............... 2,300 R. Rivera,Capital................. 96,445 Roofing equipment............ 5,000 ________ Total assets........................ $103,545 Total liabilities & equity...... $103,545 Problem 1-9B (Concluded) Part 3 Rivera Roofing Company Statement of Cash Flows For Month Ended July 31 Cash flows from operating activities Cash received from customers1.................................. Cash paid for rent......................................................... Cash paid for supplies................................................. Cash paid for utilities................................................... Cash paid to employees.............................................. Net cash provided by operating activities................. $15,800 (700) (600) (295) (1,560) Cash flows from investing activities Purchase of roofing equipment.................................. Purchase of office equipment..................................... Net cash used by investing activities........................ (1,000) (2,300) Cash flows from financing activities Investments by owner.................................................. Withdrawals by owner................................................. Net cash provided by financing activities................. 80,000 (1,800) Net increase in cash..................................................... Cash balance, July 1.................................................... Cash balance, July 31.................................................. 1 $12,645 (3,300) 78,200 $87,545 0 $87,545 $7,600 + $8,200 = $15,800 Part 4 If the $5,000 purchase on July 3 had been acquired through an additional owner investment of cash, then: (a) Total assets would be greater by $1,000. (b) Total liabilities would be $4,000 less. (c) Total equity would be $5,000 greater. Problem 1-10B (15 minutes) 1. Return on assets is net income divided by average total assets (the average amount invested). For Ski-Doo Company this return is computed as: $201,000 / $3,000,000 = 0.067 or 6.7%. 2. Return on assets does not seem satisfactory for the risk involved in the manufacturing, marketing, and selling of snowmobile equipment. Ski-Doo Company’s 6.7% return is less than the 9.5% return earned by its competitors. 3. We know that revenues less expenses equal net income. Taking the revenues and net income numbers for Ski-Doo Company we obtain: $1,400,000 - Expenses = $201,000  Expenses must equal $1,199,000. 4. We know from the accounting equation that the total of liabilities plus equity (financing) must equal the total for assets (investing). Since average total assets are $3,000,000, we know the average total of liabilities plus equity (financing) must equal $3,000,000. Problem 1-11B (15 minutes) 1. Return on assets equals net income divided by average total assets. a. AT&T return: b. Verizon return: $4,184/ $269,868 = 0.016 or 1.6% $10,198/ $225,233 = 0.045 or 4.5% 2. On strictly the amount of sales to consumers, AT&T’s sales of $126,723 are greater than Verizon’s sales of $110,875. 3. Success in returning net income from the amount invested is revealed by the return on assets ratio. Part 1 showed that AT&T has a much lower return on assets of 1.6% versus Verizon with a 4.5% return on assets. 4. The reported figures suggest Verizon is more successful in generating income based on assets. Based on this information alone, we would be better advised to invest in Verizon than AT&T. Nevertheless, we would look for additional information in financial statements and other sources for further guidance. For example, if AT&T could reduce its expenses, or reduce its assets without reducing income, it could potentially be a more appealing investment given its greater market share; or, Verizon could do the same and make it appear more appealing as an investment. We would also look for consumer trends, market expansion, competition, and product development and promotion plans. Problem 1-12BA (5 minutes) a. 2 b. 1 c. 4 d. 3 Problem 1-13BB (15 minutes) 1. O 5. O 2. F 6. F 3. I 7. O 4. O 8. O Problem 1-14BB (15 minutes) I. Financing Activities A. Owner financing—owner invests in the company B. Non-owner (creditor) financing—borrowing money from a bank II. Investing Activities A. Buying resources (assets) B. Selling resources (assets) III. Operating Activities A. Use of assets to carry out plans B. Management of internal functions—R&D, marketing, and so forth [Note: Planning activities are the ideas, goals, and tactics for implementing financing, investing, and operating activities.] Serial Problem — SP 1 (30 minutes) Business Solutions Assets Date Cash + Accounts Receivable + Computer Supplies + Computer System + Office Equipment $20,000 + $8,000 Oct. 1 +$45,000 3 + Bal. 45,000 + 1,420 + 20,000 + + 1,420 + 20,000 + 6 Bal. 45,000 8 - 43,580 12 Bal. 43,580 + Bal. 17 - Bal. + 4,800 - Bal. + 4,800 + 1,400 + 6,200 Bal. - $73,000 8,000 = 1,420 + 73,000 + $ 4,800 8,000 = 1,420 + 73,000 + 4,800 73,000 + 4,800 $1,420 1,420 + + Revenues - Expenses + $1,420 20,000 + 1,420 8,000 = 0 + + 1,400 + 1,420 + 20,000 + 8,000 = 0 + 73,000 + 6,200 4,800 + 1,420 + 20,000 + 8,000 = 0 + 73,000 + 6,200 1,400 + 1,420 + 20,000 + 8,000 = 0 + 73,000 + 6,200 - 805 - 1,728 805 - 1,728 - 1,400 0 + 5,208 47,247 + + 1,420 + 20,000 + 8,000 = 0 + 73,000 + 6,200 - 2,533 + 1,420 + 20,000 + 8,000 = 0 + 73,000 + 6,200 - 2,533 + 5,208 5,208 + 11,408 - + 1,420 + 20,000 + 8,000 = 0 + 73,000 875 5,208 + 1,420 + 20,000 + 8,000 = $1,420 + $20,000 + $8,000 = 0 + 3,600 $42,772 + $ 805 1,400 47,247 + 46,372 + 31 + 1,400 28 Bal. + - S. Rey, Withdrawals 4,800 - 1,400 Bal. + Equity S. Rey, Capital 48,380 + 45,847 + 22 + 31 = Accounts Payable - 47,575 + 20 Bal. $4,800 Liabilities + 1,420 Bal. 15 + = $ 0 + 875 + 11,408 - 3,408 $3,600 + $11,408 - $3,408 73,000 - $5,208 + $73,000 - 2,533 $3,600 Reporting in Action — BTN 1-1 1. An organization’s total assets are equal to its total liabilities plus total equity. Because Apple’s liabilities and equity total $290,479 (in millions), this implies its amount of assets invested is the same $290,479 (in millions). 2. Return on assets is net income divided by the average total assets invested. For Apple this return is ($ millions): $53,394/ [($290,479 + 231,839)/2] = 0.204 or 20.4%. 3. We know that net income equals total revenues less total expenses. For Apple, we are told net income is $53,394 and revenues are $233,715. Thus, Apple’s total expenses are computed as: $233,715 - Expenses = $53,394. Total expenses must equal $180,321 ($ millions). 4. Apple’s return on assets of 20.4% is good given that it exceeds its competitors’ return on assets of 10% for this period. 5. Answer depends on the current annual report information obtained. Comparative Analysis — BTN 1-2 ($ millions) 1. Total assets = Liabilities + Equity 2. Return on assets Apple $290,479 $53,394 [($290,479 + $231,839)/2] 20.4% 3. Revenues-Expenses = Net income  Expenses = $233,715 – Expenses Google $147,461 $16,348 [($147,461 + $129,187)/2] 11.8% $74,989 – Expenses = $ 53,394 = $16,348 Expenses = $180,321 Expenses = $58,641 4. Analysis of return on assets: Apple’s 20.4% return is good given the moderate risk Apple confronts and vis-à-vis the 10% return of its competitors. Google’s 11.8% return is slightly better than competitors and is not as high as Apple’s. 5. Analysis conclusions: Google’s return is adequate (better when compared to the industry norm); Apple’s return is arguably very good. Both companies’ expenses are a large percentage of their revenues. Ethics Challenge — BTN 1-3 1. There are several parties affected. They include the users of financial statements such as shareholders, lenders, investors, analysts, suppliers, directors, unions, regulators, and others. They also include the accounting firm, which can be sued if deemed a party to misleading statements. 2. A major factor in the value of an auditor's report is the auditor's independence. If an auditor accepted a fee that increases when the client’s reported profit increases, the auditor is (or at least is perceived to be) interested in higher profits for the client. This compromises the auditor's independence. 3. Thorne should not accept this fee arrangement. To avoid compromising the auditor's independence, Thorne should reject it. (Further, the AICPA Code of Professional Conduct forbids auditors from accepting contingent fees that depend on amounts reported in a client's financial statements. This AICPA Code has been codified into law in most states and, therefore, this action would also be an illegal act for a CPA.) 4. Ethical considerations guiding this decision include the potential harm to affected parties by allowing such a fee arrangement to exist. The unacceptable nature of such a fee arrangement guards the profession against unethical actions that could undermine its real and perceived value to society. Communicating in Practice — BTN 1-4 1. Deciding whether Apple is a good loan risk can be difficult because the planned expansion is risky if customer demand does not meet expectations. As a loan officer in this situation you would want information on the company’s (1) projections of expected cash receipts and cash payments (best provided on a monthly basis); (2) assessment of the market, the company’s plans, and a strategy to achieve success; (3) cash contributions that the owners will make to the business; and (4) a listing of tangible assets (including their price and useful life) necessary to carry out the company’s plans. 2. How the company is organized is important to a loan officer. If it is a standard partnership (which it was, and not a LLC), the personal assets of the owners are available to repay the loan. In this case, a loan officer will want information about the owners’ financial condition. If it is a corporation, the amounts invested in the business by each shareholder are especially important. The loan officer can also require owners or shareholders to personally guarantee the loan for additional protection for the bank. Careful execution of these steps should minimize the bank’s risk of taking on a bad loan. Taking It to the Net — BTN 1-5 $ thousands 2015 Revenues............ $41,508 Net income.......... 3,938 2014 2013 2012 2011 $39,185 $36,315 $34,627 $31,128 4,392 1,478 3,876 3,911 1. Rocky Mountain Chocolate Factory’s (RMCF) revenues exhibit a consistent, positive trend. Specifically, its revenues consistently grew during the 5-year period of 2011 through 2015. Management must work to continue to pursue policies that grow revenues. 2. Net income performance for RMCF decreased from 2011 through 2013, but substantially rebounded in 2014. Its 2015 income was similar, but slightly lower, than 2014 income. Management must work to increase and sustain higher profitability levels for long-run success. Teamwork in Action — BTN 1-6 Suggestions for forming support/learning teams are in the Instructor’s Resource Manual (IRM). The IRM provides the master of a Student Data Form that can be duplicated and used to gather information as a basis for forming these teams. The IRM also includes other administrative materials helpful in creating an active learning environment for studying accounting. [Note: Instructors often have students use the copy function in e-mail to keep them advised of meeting times and other important team activities. This also encourages students to use and explore additional features of e-mail.] Entrepreneurial Decision — BTN 1-7 1. (a) AccountApp’s total amount of liabilities and equity consists of the bank loan and the owner investments. Specifically: Total assets = Bank Loan + Owner investment $750,000 = = Liabilities $500,000 + + Equity $250,000 (b) AccountApp’s total amount of assets equals its total amount of liabilities plus equity, which is $750,000. 2. Return on assets = $80,250 / $750,000 = 0.107 = 10.7% AccountApp’s 10.7% return slightly exceeds its competitors’ average return of 10%. Assuming the company can continue to earn 10.7% or more, the owners should consider further investment in the new company. Hitting the Road — BTN 1-8 Check each student’s report for the following content: 1. (a) Identification of the form of business organization for the business interviewed. (b) Identification of the main business activities for the business interviewed. 2. Identification of the reasons why the owner(s) chose this particular form of business organization. 3. Identification of advantages or disadvantages of the form of business organization chosen. [Note: Many instructors have students complete this assignment in teams.] Global Decision — BTN 1-9 1. Samsung’s net income and revenues figures are computed using Korean Won (KRW), which is the currency of Korea. In contrast, Apple and Google compute their financial figures in U.S. dollars. Accordingly, one must convert these figures into comparable monetary units for business decisions that depend on direct comparisons of these numbers. In addition, Samsung’s figures are computed according to International Financial Reporting Standards (IFRS) following pronouncements of the IASB, while Apple and Google use U.S. GAAP per the FASB. One should adjust these figures for any significant differences in accounting measurements to yield an ‘apples-to-apples’ comparison. 2. Samsung’s return on assets ratio eliminates differences in monetary units (between KRW and dollars). Consequently, we need not focus on differences in KRW and dollars for ratio comparisons provided we are comfortable with measurement techniques underlying the financial figures. However, any comparisons using the return on assets ratio are still impacted by potential differences in IFRS GAAP as applied by Samsung compared to U.S. GAAP applied by Apple and Google.