Chap001

Chapter 1 Accounting in Business PROBLEM SET B Problem 1-1B (25 minutes) Balance Sheet Income Statement Statement of Cash Flows Transaction Total Assets Total Liab. Owner Equity Net Income Operating Activities Financing Activities Investing Activities 1 Owner invests cash + + + 2 Buys building by signing note payable + + 3 Pays cash for salaries incurred – – – – 4 Provides ser-vices for cash + + + + 5 Pays cash for rent incurred – – – – 6 Incurs utilities costs on credit + – – 7 Buys store equip-ment for cash +/– – 8 Owner withdraws cash – – – 9 Provides ser-vices on credit + + + 10 Collects cash on receivable from (9) +/– + Problem 1-2B (40 minutes) Part 1 Company V: (a) and (b) Calculation of equity: 12/31/2010 12/31/2011 Assets $45,000 $49,000 Liabilities (30,000) (26,000) Equity $15,000 $23,000 (c) Calculation of net income for 2010: Equity, December 31, 2010 $15,000 Plus owner investments 6,000 Plus net income ? Less owner withdrawals (4,500) Equity, December 31, 2011 $23,000 Therefore, net income must have been $ 6,500 Part 2 Company W: (a) Calculation of Equity at December 31, 2010: Assets $70,000 Liabilities (50,000) Equity $20,000 (b) Calculation of Equity at December 31, 2011: Equity, December 31, 2010 $20,000 Plus owner investments 10,000 Plus net income 30,000 Less owner withdrawals (2,000) Equity, December 31, 2011 $58,000 (c) Calculation of the amount of liabilities at December 31, 2011: Assets $90,000 Equity (58,000) Liabilities $32,000 Problem 1-2B (Continued) Part 3 Company X: First, calculate the beginning and ending equity balances: 12/31/2010 12/31/2011 Assets $121,500 $136,500 Liabilities (58,500) (55,500) Equity $ 63,000 $ 81,000 Then, find the amount of owner investments during 2011 as follows: Equity, December 31, 2010 $ 63,000 Plus owner investments ? Plus net income 16,500 Less owner withdrawals  0 Equity, December 31, 2011 $81,000 Thus, the owner investments must have been $ 1,500 Part 4 Company Y: First, calculate the beginning balance of equity: Dec. 31, 2010 Assets $82,500 Liabilities 61,500 Equity $21,000 Next, find the ending balance of equity as follows: Equity, December 31, 2010 $21,000 Plus owner investments 38,100 Plus net income 24,000 Less owner withdrawals (18,000) Equity, December 31, 2011 $65,100 Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of liabilities: Dec. 31, 2011 Liabilities $ 72,000 Equity 65,100 Assets $137,100 Problem 1-2B (Concluded) Part 5 Company Z: First, calculate the balance of equity as of December 31, 2011: Assets $160,000 Liabilities (52,000) Equity $108,000 Next, find the beginning balance of equity as follows: Equity, December 31, 2010 $ ?   Plus owner investments 40,000 Plus net income 32,000 Less owner withdrawals (6,000) Equity, December 31, 2011 $108,000 Thus, the beginning balance of equity is $42,000. Finally, find the beginning amount of liabilities by subtracting the beginning balance of equity from the beginning balance of assets: Dec. 31, 2010 Assets $124,000 Equity (42,000) Liabilities $ 82,000 Problem 1-3B (15 minutes) RWB Company Balance Sheet December 31, 2011 Assets $114,000 Liabilities $ 74,000 Equity 40,000 Total assets $114,000 Total liabilities and equity $114,000 Problem 1-4B (15 minutes) Online Co. Income Statement For Year Ended December 31, 2011 Revenues $58,000 Expenses 30,000 Net income $28,000 Problem 1-5B (15 minutes) ComEx Statement of Owner’s Equity For Year Ended December 31, 2011 C. Tex, Capital, Dec. 31, 2010 $ 49,000 Add: Investments by owner 0 Net income 6,000 55,000 Less: Withdrawals by owner (8,000) C. Tex, Capital, Dec. 31, 2011 $47,000 Problem 1-6B (15 minutes) BuyRight Co. Statement of Cash Flows For Year Ended December 31, 2011 Cash used by operating activities $(4,000) Cash from investing activities 2,600 Cash from financing activities 2,800 Net increase in cash $ 1,400 Cash, December 31, 2010 1,300 Cash, December 31, 2011 $ 2,700  Problem 1-7B (60 minutes) Parts 1 and 2 Assets = Liabilities + Equity Cash + Accounts Receivable + Office Supplies + Office Equipment + Building = Accounts Payable + Notes Payable + T.Moore,Capital - T.Moore, Withdrawals + Reve-nues - Expen-ses a. + $95,000 + $20,000 + $115,000 b. - 20,000 + $120,000 + $100,000 Bal. 75,000 + 20,000 + 120,000 = 100,000 + 115,000 c. - 20,000 + 20,000 Bal. 55,000 + 40,000 + 120,000 = 100,000 + 115,000 d. + $1,400 + 3,000 + $4,400 Bal. 55,000 1,400 + 43,000 + 120,000 = 4,400 + 100,000 + 115,000 e. - 400 - $ 400 Bal. 54,600 + 1,400 + 43,000 + 120,000 = 4,400 + 100,000 + 115,000 - 400 f. + $1,800 + $1,800 Bal. 54,600 + 1,800 + 1,400 + 43,000 + 120,000 = 4,400 + 100,000 + 115,000 + 1,800 - 400 g. + 2,000 + 2,000 Bal. 56,600 + 1,800 + 1,400 + 43,000 + 120,000 = 4,400 + 100,000 + 115,000 + 3,800 - 400 h - 5,000 - $5,000 Bal. 51,600 + 1,800 + 1,400 + 43,000 + 120,000 = 4,400 + 100,000 + 115,000 - 5,000 + 3,800 - 400 i + 1,800 - 1,800 Bal. 53,400 + 0 + 1,400 + 43,000 + 120,000 = 4,400 + 100,000 + 115,000 - 5,000 + 3,800 - 400 j - 2,000 - 2,000 Bal. 51,400 + 0 + 1,400 + 43,000 + 120,000 = 2,400 + 100,000 + 115,000 - 5,000 + 3,800 - 400 k - 2,000 - 2,000 Bal. $49,400 + $ 0 + $1,400 + $43,000 + $120,000 = $2,400 + $100,000 + $115,000 - $5,000 + $3,800 - $2,400 3. Tiana’s Solutions’ net income = $3,800 - $2,400 = $1,400  Problem 1-8B (60 minutes) Parts 1 and 2 Assets = Liabilities + Equity Date Cash + Accounts Receivable + Equipment = Accounts Payable + K. Stone, Capital – K. Stone, Withdrawals + Revenues – Expenses June 1 +$120,000 = + $120,000 2 – 4,500 = – $4,500 4 + $2,400 = + $2,400 6 – 1,125 = – 1,125 8 + 750 = + $ 750 14 + $6,300 = + 6,300 16 – 900 = – 900 20 + 6,300 – 6,300 = 21 + 3,500 = + 3,500 24 + 825 = + 825 25 + 3,500 – 3,500 = 26 – 2,400 = - 2,400 28 – 900 = – 900 29 – 2,000 = - $2,000 30 – 120 = – 120 30 – 525 = – 525 $118,080 + $ 825 + $2,400 = $ 0 + $120,000 - $2,000 + $11,375 – $8,070  Problem 1-8B (Continued) Part 3 KEN’S MAINTENANCE CO. Income Statement For Month Ended June 30 Revenues: Maintenance services revenue $11,375 Expenses: Rent expense $4,500 Salaries expense 1,800 Advertising expense 1,125 Utilities expense 525 Telephone expense 120 Total expenses 8,070 Net income $ 3,305 KEN’S MAINTENANCE CO. Statement of Owner’s Equity For Month Ended June 30 K. Stone, Capital, June 1 $ 0 Plus: Investment by owner 120,000 Net income 3,305 123,305 Less: Owner withdrawals (2,000) K. Stone, Capital, June 30 $121,305 Problem 1-8B (Concluded) KEN’S MAINTENANCE CO. Balance Sheet June 30 Assets Liabilities Cash $118,080 Accounts payable $ 0 Accounts receivable 825 Equity Equipment 2,400 K. Stone, Capital 121,305 Total assets $121,305 Total liabilities and equity $121,305 KEN’S MAINTENANCE CO. Statement of Cash Flows For Month Ended June 30 Cash flows from operating activities: Cash received from customers $ 10,550 Cash paid for rent (4,500) Cash paid for advertising (1,125) Cash paid for telephone (120) Cash paid for utilities (525) Cash paid to employees (1,800) Net cash provided by operating activities $ 2,480 Cash flows from investing activities: Purchase of equipment (2,400) Net cash used by investing activities (2,400) Cash flows from financing activities: Cash investment by owner 120,000 Cash withdrawal by owner (2,000) Net cash provided by financing activities 118,000 Net increase in cash $118,080 Cash balance, June 1 0 Cash balance, June 30 $118,080  Problem 1-9B (60 minutes) Parts 1 and 2 Assets = Liabilities + Equity Date Cash + Accounts Receivable + Office Supplies + Office Equipment + Excavating Equipment = Accounts Payable + P.Swender,Capital - P.Swender, Withdrawals + Reve-nues - Expen-ses July 1 + $60,000 = + $60,000 2 - 500 - $500 Bal. 59,500 = 60,000 - 500 3 - 800 + $4,000 + $3,200 Bal. 58,700 + 4,000 = 3,200 + 60,000 - 500 6 - 500 + $ 500 Bal. 58,200 + 500 + 4,000 = 3,200 + 60,000 - 500 8 + 2,200 + $2,200 Bal. 60,400 + 500 + 4,000 = 3,200 + 60,000 + 2,200 - 500 10 + $3,800 + 3,800 Bal. 60,400 + 500 + 3,800 + 4,000 = 7,000 + 60,000 + 2,200 - 500 15 + $2,400 + 2,400 Bal. 60,400 + 2,400 + 500 + 3,800 + 4,000 = 7,000 + 60,000 + 4,600 - 500 17 + 1,920 + 1,920 Bal. 60,400 + 2,400 + 2,420 + 3,800 + 4,000 = 8,920 + 60,000 + 4,600 - 500 23 - 3,800 - 3,800 Bal. 56,600 + 2,400 + 2,420 + 3,800 + 4,000 = 5,120 + 60,000 + 4,600 - 500 25 5,000 + 5,000 Bal. 56,600 + 7,400 + 2,420 + 3,800 + 4,000 = 5,120 + 60,000 + 9,600 - 500 28 + 2,400 - 2,400 Bal. 59,000 + 5,000 + 2,420 + 3,800 + 4,000 = 5,120 + 60,000 + 9,600 - 500 30 - 1,260 - 1,260 Bal. 57,740 + 5,000 + 2,420 + 3,800 + 4,000 = 5,120 + 60,000 + 9,600 - 1,760 31 - 260 - 260 Bal. 57,480 + 5,000 + 2,420 + 3,800 + 4,000 = 5,120 + 60,000 + 9,600 - 2,020 31 - 1,200 - $1,200 Bal. $56,280 + $ 5,000 + $2,420 + $3,800 + $4,000 = $5,120 + $60,000 - $1,200 + $9,600 - $2,020  Problem 1-9B- continued Part 3 SWENDER EXCAVATING CO. Income Statement For Month Ended July 31 Revenues: Excavating fees earned $9,600 Expenses: Rent expense $ 500 Salaries expense 1,260 Utilities expense 260 Total expenses 2,020 Net income $7,580 SWENDER EXCAVATING CO. Statement of Owner’s Equity For Month Ended July 31 P. Swender, Capital, July 1 $ 0 Plus: Investment by owner……………… 60,000 Net income 7,580 67,580 Less: Owner withdrawals 1,200 P. Swender, Capital, July 31 $66,380 SWENDER EXCAVATING CO. Balance Sheet July 31 Assets Liabilities Cash $56,280 Accounts payable $ 5,120 Accounts receivable 5,000 Office supplies 2,420 Equity Office equipment 3,800 Excavating equipment 4,000 P. Swender, Capital 66,380 Total assets $71,500 Total liabilities & equity $71,500 Problem 1-9B (Concluded) Part 3—continued SWENDER EXCAVATING CO. Statement of Cash Flows For Month Ended July 31 Cash flows from operating activities: Cash received from customers $4,600 Cash paid for rent (500) Cash paid for supplies (500) Cash paid for utilities (260) Cash paid to employees (1,260) Net cash provided by operating activities $2,080 Cash flows from investing activities: Purchase of excavating equipment (800) Purchase of office equipment (3,800) Net cash used by investing activities (4,600) Cash flows from financing activities: Cash invested by owner 60,000 Cash withdrawal by owner (1,200) Net cash provided by financing activities 58,800 Net increase in cash $56,280 Cash balance, July 1 0 Cash balance, July 31 $56,280 Part 4 If the $4,000 purchase on July 1 had been acquired through an additional owner investment of cash, then: total assets would be larger by $800, total liabilities would be $3,200 smaller, and equity would be $4,000 larger. Problem 1-10B (20 minutes) 1. Return on assets is net income divided by average total assets (the average amount invested). For Aspen Company this return is computed as: $100,000 / $2,000,000 = 0.05 or 5%. Return on assets does not seem satisfactory for the risk involved in the manufacturing, marketing, and selling of snowmobile equipment. Aspen Company’s 5% return is about one-half of the 9.5% return earned by its competitors. We know that sales less expenses equal net income. Taking the sales and net income numbers for Aspen Company we obtain: $1,200,000 - Expenses = $100,000  Expenses must equal $1,100,000. 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 $2,000,000, we know the average total of liabilities plus equity (financing) must equal $2,000,000. Problem 1-11B (15 minutes) Return on assets equals net income divided by average total assets. a. AT&T return: $12,535/ $266,999 = 0.047 or 4.7% b. Verizon return: $10,358/ $214,937 = 0.048 or 4.8% On strictly amount of sales to consumers, AT&T’s sales of $123,018 are greater than Verizon’s sales of $107,808. 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 marginally lower return on assets of 4.7% versus Verizon with a 4.8% return on assets. Problem 1-11B (concluded) 4. Current performance figures suggest both are almost equally successful in generating income based on assets. Based on this information alone, it would be difficult to differentiate between the two companies. 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. We would also look for consumer trends, market expansion, competition, and product development and promotion plans. Problem 1-12BA (20 minutes) Case 1. Return: No return is generated. Risk: Moderate Risk. By hiding money at home a person risks loss by theft or fire. Also such a strategy might result in a loss of purchasing power in the event of inflation. Case 2. Return: Expected winnings from your bet. Risk: Depends on the probability of your horse finishing the race in a position consistent with the odds assigned the horse for the race. Case 3. Return: Expected return on your stock investment (both dividends and stock price changes). Risk: Depends on the current and future performance of Nike’s stock price (and dividends). Case 4. Return: Expected return on the bond is a function of the interest rate paid on the bond. Risk: Very low because the full faith and credit of the U.S. government back savings bonds. Problem 1-13BB (15 minutes) I. Financing Activities A. Owner financing—investing resources 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.] Problem 1-14BB (15 minutes) 1. C 5. C 2. A 6. A 3. B 7. C 4. C 8. C hapter 01 - Accounting in Business Chapter 01 - Accounting in Business 1-11 1-?