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FINANCIAL ACCOUNTING - Eighth Edition Solutions Manual
S 1-1
(5 min.)
Learning Objective 3: Using the accounting equation
Suppose you manage a Pizza Sauce restaurant. Identify the missing amount
for each situation:
Solution:
Computed amounts in boxes.
Total Assets = Total + Stockholders’

Liabilities Equity
a.
b.
c.
Chapter 1: The Financial Statements Page 1 of 87

S 1-2
(5 min.)
Learning Objective 5: Making ethical judgments
Good business and accounting practices require the exercise of good

judgment. How should ethics be incorporated into making accounting
judgments? Why is ethics important?
Solution:

S 1-3
(10 min.)
Learning Objective 1: Organizing a business
A Healthy Planet, Inc., needs funds, and Mary Barry, the president,
has asked you to consider investing in the business. Answer the
following questions about the different ways that Barry might organize
the business.
Explain each answer.
a. What forms of organization will enable the owners of A Healthy

Planet to limit their risk of loss to the amounts they have invested
in the business?
b. What form of business organization will give Barry the most

freedom to manage the business as she wishes?
c. What form of organization will give creditors the maximum

protection in the event that A Healthy Planet fails and cannot pay
its debts?
Solution:
a.
b.
c.

S 1-4
(5 min.)
Learning Objective 2: Applying accounting assumptions
Daniel Newman is chairman of the board of Quality Food Brands, Inc.

Suppose Mr. Newman has just founded Quality Food Brands, and
assume that he treats his home and other personal assets as part of
Quality Food Brands. Answer these questions about the evaluation of
Quality Food Brands, Inc.
1. Which accounting assumption governs this situation?
2. How can the proper application of this accounting concept give

Newman and others a realistic view of Quality Food Brands, Inc.?
Explain in detail.
Solution:
1.
2.

S 1-5
(5-10 min.)
Learning Objective 2: Applying accounting concepts,

assumptions, and principles
Identify the accounting concept, assumption or principle that best

applies to each of the following situations:
a. Arby’s, the restaurant chain, sold a store location to McDonald’s.

How can Arby’s determine the sale price of the store—by a
professional appraisal, Arby’s cost, or the amount actually
received from the sale?
b. Inflation has been around 6.25% for some time. Ridgeview

Realtors is considering measuring its land values in inflation-
adjusted amounts.
c. Honda wants to determine which division of the company—Honda

or Acura—is more profitable.
d. You get an especially good buy on a television, paying only

$1,100 for a television that normally costs $1,900. What is your
accounting value for this television?
Solution:
a.
b.
c.
d.

S 1-6
(5 min.)
1. Use the accounting equation to show how to determine the

amount of a company’s owners’ equity. How would your answer
change if you were analyzing your own household or a single
Denny’s restaurant?
2. If you know the assets and the owners’ equity of a business, how
can you measure its liabilities? Give the equation.
Solution:
1.
2.

S 1-7
(5 min.)
Learning Objective 1: Defining key accounting terms
Accounting definitions are precise, and you must understand the

vocabulary to properly use accounting. Sharpen your understanding of
key
1. terms
How do by the
answering the following
assets and questions:
owners’ equity of Microsoft Corporation
differ from each other? Which one (assets or owners’ equity) must
be at least as large as the other? Which one can be smaller than
the other?
2. How are Microsoft’s liabilities and owners’ equity similar?

Different?
Solution:
1.
2.

S 1-8
(5-10 min.)
Learning Objective 1: Classifying assets, liabilities, and owners’

equity
Consider Target, a large retailer. Classify the following items as an Asset
(A), a Liability (L), or Stockholders’ Equity (S) for Target:
Solution:
a. Accounts payable g. Accounts receivable

b. Common stock h. Long-term debt
c. Supplies i. Merchandise inventory
d. Retained earnings j. Notes payable
e. Land k. Expenses payable
f. Prepaid expenses l. Equipment

S 1-9
Learning Objectives 1, 4: Using accounting vocabulary; using the

income statement
1. Identify the two basic categories of items on an income statement.
2. What do we call the bottom line of the income statement?
Solution:
1.
2.

S 1-10
(5 min.)
Learning Objective 4: Preparing an income statement
Call Anywhere Wireless, Inc., began 2010 with total assets of $130 million and
ended 2010 with assets of $165 million. During 2010 Call Anywhere earned
revenues of $94 million and had expenses of $23 million. Call Anywhere paid
dividends of $13 million in 2010. Prepare the company’s income statement for
the year ended December 31, 2010, complete with an appropriate heading.
Solution:
Call Anywhere Wireless, Inc.

Income Statement
Year Ended December 31, 2010

S 1-11
(5 min.)
Learning Objective 4: Preparing a statement of retained earnings
Roam Corp. began 2010 with retained earnings of $210 million. Revenues
during the year were $380 million and expenses totaled $250 million. Roam
declared dividends of $43 million. What was the company’s ending balance of
retained earnings? To answer this question, prepare Roam’s statement of
retained earnings for the year ended December 31, 2010, complete with its
proper heading.
Solution:
Roam Corp.
Statement of Retained Earnings

S 1-12
(10 min.)
Learning Objective 4: Preparing a balance sheet
At December 31, 2010, Tommer Products has cash of $12,000, receivables of

$5,000, and inventory of $42,000. The company’s equipment totals $82,000.
Tommer owes accounts payable of $17,000, and long-term notes payable of
$78,000. Common stock is $14,800.
Prepare Tommer’s balance sheet at December 31, 2010, complete with its proper
heading. Use the accounting equation to compute retained earnings.
Solution:
Tommer Products
Balance Sheet
31-Dec-10


S 1-13
(10-15 min.)
Learning Objective 4: Preparing a statement of cash flows
Lanos Medical, Inc., ended 2009 with cash of $25,000. During 2010, Lanos earned
net income of $95,000 and had adjustments to reconcile net income to net cash
provided by operations
Prepare Lanos’ totaling
statement $20,000
of cash (thisthe
flows for is year
a negative
endedamount).
DecemberLanos paid
31, 2010,
$35,000 to purchase equipment
complete with its proper heading. during 2010. During 2010, the company paid
dividends of $15,000.
Solution:
Lanos Medical, Inc.

Statement of Cash Flows

S 1-14
(10 min.)
Learning Objectives 1, 4: Using accounting vocabulary;

identifying items with the appropriate financial statement
Suppose you are analyzing the financial statements of Murphy Radiology, Inc.
Identify each item with its appropriate financial statement, using the following
abbreviations: Income statement (IS), Statement of retained earnings (SRE),
Balance sheet (BS), and Statement of cash flows (SCF). Three items appear
on two financial statements, and one item shows up on three statements.
Solution:
a. Dividends
b. Salary expense
c. Inventory
d. Sales revenue
e. Retained earnings
f. Net cash provided by operating activities
g. Net income
h. Cash
i. Net cash used for financing activities
j. Accounts payable
k. Common stock
l. Interest revenue
m. Long-term debt
n. Increase or decrease in cash

S 1-15
(15-20 min.)
Learning Objectives 2, 4: Applying accounting concepts, assumptions and

principles to explain business activity
Apply your understanding of the relationships among the financial statements to
answer these questions.
a. How can a business earn large profits but have a small balance of retained
earnings?
b. Give two reasons why a business can have a steady stream of net income
over a six year period and still experience a cash shortage.
c. If you could pick a single source of cash for your business, what would it be?
Why?
d. How can a business lose money several years in a row and still have plenty
of cash?
Solution:
a.
b.
c.
d.

E 1-16A
(10-15 min.)
Learning Objectives 3, 4: Using the accounting equation; evaluating

business operations; explain business activity
Compute the missing amount in the accounting equation for each company
(amounts in billions):
Which company appears to have the strongest financial position? Explain your
reasoning.
Solution:
(Amounts in billions; computed amounts in boxes)
Assets = Liabilities + Owners’ Equity
Fresh Produce
Hudson Bank
Pet Lovers

E 1-17A
(10-15 min.)

business operations
Hombran Doughnuts has current assets of $290 million; property, plant, and
equipment $150 million and long-term liabilities total $310 million.of $490 million;
and other assets totaling $150 million. Current liabilities are $150 million and long-
term liabilities total $310 million.
Requirements
1. Use these data to write Hombran Doughnuts’ accounting equation.
2. How much in resources does Hombran have to work with?
3. How much does Hombran owe creditors?
4. How much of the company’s assets do the Hombran stockholders

actually own?
Solution:
Req. 1
(Amounts in millions)
Assets = Liabilities + Stockholders’ Equity
Total
Req. 2
Req. 3
Req. 4

E 1-18A
(10-20 min.)
Learning Objectives 3, 4: Using the accounting equation; evaluating business

operations
Nelson, Inc.’s comparative balance sheet at January 31, 2011, and 2010, reports (in
millions):
2011 2010
Total Assets $39 $31
Total Liabilities 10 9
Three situations about Nelson’s issuance of stock and payment of dividends during
the year ended January 31, 2011, follow. For each situation, use the accounting
equation and the statement of retained earnings to compute the amount of Nelson’s
net income or net loss during the year ended January 31, 2011.
1. Nelson issued $11 million of stock and paid no dividends.
2. Nelson issued no stock but paid dividends of $11 million.
3. Nelson issued $55 million of stock and paid dividends of $32 million.
Solution:
Situation
1 2 3
Millions

E 1-19A
(10-15 min.)
Answer these questions about two companies.
1. Clay, Inc., began the year with total liabilities of $50,000 and total stockholders’
equity of $80,000. During the year, total assets increased by 35%. How much are
total assets at the end of the year?
2. EastWest Airlines Ltd. began the year with total assets of $100,000 and total
liabilities of $7,000. Net income for the year was $25,000, and dividends were
zero. How much is stockholders’ equity at the end of the year?
Solution:
1. Clay, Inc.
Stockholders’
Assets = Liabilities + Equity
2. EastWest Airlines, Inc.

Stockholders’
Assets − Liabilities = Equity

E 1-20A
(10-15 min.)
Learning Objectives 4, 5: Evaluating business operations; making

business decisions
Assume Facebook is expanding into Ireland. The company must decide where
to locate and how to finance the expansion. Identify the financial statement
where these decision makers can find the following information about
Facebook, Inc. In some cases, more than one statement will report the needed
data.
a. Common stock i. Cash spent to acquire the building

b. Income tax payable j. Selling, general, and administrative
expenses
c. Dividends k. Adjustments to reconcile net income
to net cash provided by operations
d. Income tax expense l. Ending cash balance
e. Ending balance of m. Current liabilities
retained earnings
f. Total assets n. Net income
g. Long-term debt
h. Revenue
Solution:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.

n.

E 1-21A
(10-20 min.)
Learning Objectives 3, 4: Using the accounting equation; preparing a balance

sheet
Amounts of the assets and liabilities of Ellen Samuel Banking Company, as of

January 31, 2010, are given as follows. Also included are revenue and expense
figures for the year ended on that date (amounts in millions):
Total revenue ........................ $37.8 Investment assets..................... $169.6

Receivables........................... 0.9 Property and equipment, net .. 1.9
Current liabilities .................. 151.1 Other expenses....................... 6.9
Common stock...................... 14.0 Retained earnings, beginning 8.6
Interest expense…………… 0.8 Retained earnings, ending ..... ?
Salary and other
employee expenses………. 17.7 Cash.......................................... 2.1
Long-term liabilities……….. 2.8 Other assets............................. 14.4
Prepare the balance sheet of Ellen Samuel Banking Company at January 31, 2010.
Use the accounting equation to compute ending retained earnings.
Solution:
Ellen Samuel Banking Company

Balance Sheet (Amounts in millions)
January 31, 2010

E 1-22A
(15-25 min.)
Learning Objective 4: Preparing an income statement and a statement of

retained earnings
This exercise should be used with Exercise 1-21A. Refer to the data of Ellen
Samuel Banking Company in Exercise 1-21A.
1. Prepare the income statement of Ellen Samuel Banking

Company, for the year ended January 31, 2010.
2. What amount of dividends did Ellen Samuel declare during the

year ended January 31, 2010? Hint: Prepare a statement of
retained earnings.
Solution:
Req. 1
Ellen Samuel Banking Company
Income Statement (Amounts in millions)
Year Ended January 31, 2010
Req. 2

E 1-23A
(15-20 min.)
Lucky, Inc., began 2010 with $87,000 in cash. During 2010, Lucky earned net income of
$410,000, and adjustments to reconcile net income to net cash provided by operations
totaled $70,000, a positive amount. Investing activities used cash of $420,000, and
financing activities provided cash of $72,000. Lucky ended 2010 with total assets of
$260,000 and total liabilities of $115,000.
1. Prepare Lucky, Inc.’s statement of cash flows for the year ended December 31,
2010. Identify the data items given that do not appear on the statement of cash
flows. Also identify the financial statement that reports the unused items.
Solution:
Lucky, Inc.

E 1-24A
(15-20 min.)
Learning Objective 4: Preparing an income statement and a statement of retained earnings
Assume an Earl Copy Center ended the month of July 2010 with these data:
Payments of cash:
Acquisition of equipment……… $420,000 Cash balance, June 30, 2010 … $-
Dividends.................................... 4,800 Cash balance, July 31, 2010.. 10,900
Retained earnings Cash receipts:
June 31, 2010 ............................ - Issuance (sale) of stock
Retained earnings to owners ............................. 69,500
July 31, 2010 ............................... ? Rent expense........................... 2,200
Utilities expense ............................. 10,000 Common stock........................ 69,500
Adjustments to reconcile Equipment................................ 420,000
net income to net cash Office supplies......................... 14,800
provided by operations……….. 2,200 Accounts payable ................... 17,000
Salary expense................................ 167,000 Service revenue....................... 543,200
Solution:
EARL COPY CENTER, INC.

INCOME STATEMENT
MONTH ENDED JULY 31, 2010
EARLCOPY CENTER, INC.

STATEMENT OF RETAINED EARNINGS

E 1-25A
(15-20 min.)
Learning Objective 4: Preparing a balance sheet
Refer to the data in Exercise 1-24A.
1. Prepare the balance sheet of Earl Copy Center, Inc., for July 31, 2010.
Solution:

BALANCE SHEET
31-Jul-10

E 1-26A
(15-20 min.)
Refer to the data in Exercises 1-24A and 1-25A.
Prepare the statement of cash flows of Earl Copy Center, Inc., for the month
ended July 31, 2010. Also explain the relationship among income statement,
statement of retained earnings, balance sheet, and statement of cash flows.
Solution:

STATEMENT OF CASH FLOWS

E 1-27A
(10-15 min.)
Learning Objectives 4, 5: Evaluating a business; advising a business
This exercise should be used in conjunction with Exercises 1-24A through 1-26A.
The owner of Earl Copy Center seeks your advice as to whether he should cease
operations or continue the business. Complete the report giving him your opinion of
net income, dividends, financial position, and cash flows during his first month of
operations. Cite specifics from the financial statements to support your opinion.
Conclude your memo with advice on whether to stay in business or cease operations.
Solution:

E 1-28B
(10-15 min.)

operations
Compute the missing amount in the accounting equation for each company (amounts
in billions):
Which company appears to have the strongest financial position? Explain your
reasoning.
Solution:
(Amounts in billions; computed amounts in boxes)
Assets = Liabilities + Owners’ Equity
DJ Video Rentals
Ernie’s Bank
Hudson Gift & Cards

E 1-29B
(10-15 min.)
business operations
Tinman Doughnuts has current assets of $270 million; property, plant, and
equipment of $470 million; and other assets totaling $110 million. Current liabilities
are $110 million and long-term liabilities total $370 million.
1. Use these data to write Tinman’s accounting equation.
2. How much in resources does Tinman have to work with?
3. How much does Tinman owe creditors?
4. How much of the company’s assets do the Tinman stockholders actually

own?
Solution:
Req. 1
(Amounts in millions)
Assets = Liabilities + Stockholders’ Equity
Total
Req. 2
Req. 3
Req. 4

E 1-30B
(10-20 min.)

operations
Winkler, Inc.’s comparative balance sheet at January 31, 2011, and 2010, reports
(in millions):
2011 2010
ThreeTotal Assets
situations about Winkler’s issuance of stock$38
and payment$24 of dividends during
Total
the year Liabilities
ended January 31, 2011, follow. For each11 1 accounting
situation, use the
equation and the statement of retained earnings to compute the amount of Winkler’s
net income or net loss during the year ended January 31, 2011.
1. Winkler issued $15 million of stock and paid no dividends.
2. Winkler issued no stock but paid dividends of $11 million.
3. Winkler issued $90 million of stock and paid dividends of $35 million.
Solution:
Situation
1 2 3
Millions

E 1-31B
(10-15 min.)
Learning Objective 3: Applying the accounting equation
Answer these questions about two companies.

stockholders’ equity of $35,000. During the year, total assets increased by 30%.
1. How much are total assets at the end of the year?
liabilities of $47,000. Net income for the year was $26,000, and dividends were
2. zero. How much is stockholders’ equity at the end of the year?
Solution:
1 Saphire, Inc.
Stockholders’
2 Southbound Airlines, Inc.

Stockholders’

E 1-32B
(10-15 min.)
Assume Lesley, Inc., is expanding into Sweden. The company must decide
Learning Objectives
where to locate and how4, 5:
to Evaluating business operations;
finance the expansion. making
Identify the financial
business decisions
statement where these decision makers can find the following information
about Lesley, Inc. In some cases, more than one statement will report the
needed data.
a. Income tax expense i. Dividends

b. Net income j. Total Assets
c. Current liabilities k. Long-term debt
d. Common stock l. Selling, general, and administrative
expenses
e. Income tax payable m. Cash spent to acquire the building
f. Ending balance of n. Adjustments to reconcile net income
retained earnings to net cash provided by operations
g. Revenue
h. Ending cash balance
Solution:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.

E 1-33B
(10-20 min.)
Learning Objectives 3, 4: Using the accounting equation; preparing a balance
sheet
Amounts of the assets and liabilities of Eliza Bennet Banking Company, as of May 31,
2010, are given as follows. Also included are revenue and expense figures for the
year ended on that date (amounts in millions):
Total revenue ......................... 33.5 Investment assets..................... 169.8

Receivables............................ 0.2 Property and equipment, net 1.6
Current liabilities ................... 155.1 Other expenses......................... 6.6
Common stock....................... 14.9 Retained earnings, beginning.. 8.6
Interest expense..................... 0.4 Retained earnings, ending ...... ?
Salary and other employee
expenses..... 17.5 Cash........................................... 2.7
Long-term liabilities .............. 2.3 Other assets.............................. 14.9
Prepare the balance sheet of Eliza Bennet Banking Company at May 31, 2010. Use
the accounting equation to compute ending retained earnings.
Solution:
Eliza Bennet Banking Company

Balance Sheet (Amounts in millions)
31-May-10
ASSETS LIABILITIES

E 1-34B
(15-25 min.)
Learning Objective 4: Preparing an income statement and a statement of

retained earnings
This exercise should be used with Exercise 1-33B.
1. Prepare the income statement of Eliza Bennet Banking Company,

for the year ended May 31, 2010.
2. What amount of dividends did Eliza Bennet declare during the

year ended May 31, 2010? Hint: Prepare a statement of retained
earnings.
Solution:
Req. 1
Eliza Bennet Banking Company
Income Statement (Amounts in millions)
Year Ended May 31, 2010
Req. 2


E 1-35B
(15-20 min.)
Fortune, Inc., began 2010 with $83,000 in cash. During 2010, Fortune earned net income of
$440,000, and adjustments to reconcile net income to net cash provided by operations totaled
$60,000, a positive amount. Investing activities used cash of $390,000, and financing activities
provided cash of $65,000. Fortune ended 2010 with total assets of $300,000 and total liabilities
of $120,000.
Prepare Fortune, Inc.’s statement of cash flows for the year ended December 31, 2010.
Identify the data items given that do not appear on the statement of cash flows. Also
identify the financial statement that reports each unused items.
Solution:
Fortune, Inc.

earned net income of

ed by operations totaled
, and financing activities
0,000 and total liabilities
ed December 31, 2010.

nt of cash flows. Also

E 1-36B
(15-20 min.)
Learning Objective 4: Preparing an income statement and a statement of retained earnings
Assume a Carson Copy Center ended the month of July 2011 with these data:
Payments of cash:
Acquisition of equipment……… $410,000 Cash balance, June 30, 2010 … $-
Dividends.................................... 4,100 Cash balance, July 31, 2010.. 9,500
Retained earnings Cash receipts:
June 31, 2010 ............................ - Issuance (sale) of stock
Retained earnings to owners ............................. 54,200
July 31, 2010 ............................... ? Rent expense........................... 2,900
Utilities expense ............................. 10,800 Common stock........................ 54,200
Adjustments to reconcile Equipment................................ 410,000
net income to net cash Office supplies......................... 15,000
provided by operations……….. 2,900 Accounts payable ................... 17,900
Salary expense................................ 162,000 Service revenue....................... 542,200
Solution:
CARSON COPY CENTER, INC.

INCOME STATEMENT

STATEMENT OF RETAINED EARNINGS

E 1-37B
(15-20 min.)
Learning Objective 4: Preparing a balance she
Refer to the data in Exercise 1-36B.
Prepare the balance sheet of Carson Copy Center, Inc., at July 31, 2011.
Solution:

BALANCE SHEET
July 31, 2011
**

E 1-38B
(15-20 min.)
Refer to the data in Exercises 1-36B and 1-37B.
Prepare the statement of cash flows of Carson Copy Center, Inc., for the month
ended July 31, 2011. Also explain the relationship among income statement,
statement of retained earnings, balance sheet, and statement of cash flows.
Solution:

STATEMENT OF CASH FLOWS

E 1-39B
(10-15 min.)
Learning Objectives 4, 5: Evaluating a business; advising a business
This exercise should be used in conjunction with Exercises 1-36B through 1-38B.
The owner of Carson Copy Center now seeks your advice as to whether he should
cease operations or continue the business. Complete the report giving him your
opinion of net income, dividends, financial position, and cash flows during his first
month of operations. Cite specifics from the financial statements to support your
opinion. Conclude your memo with advice on whether to stay in business or cease
operations.
Solution:

Quiz
Q1-40 The primary objective of financial reporting is to provide information

a. useful for making investment and credit decisions.
b. about the profitability of the enterprise.
c. to the federal government.
d. on the cash flows of the company.
Solution:
Q1-41 Which type of business organization provides the least amount of

protection for bankers and other creditors of the company?
a. Partnership
b. Proprietorship
c. Corporation
d. Both a and b
Solution:
Q1-42 Assets are usually reported at their

a. historical cost.
b. current market value.
c. appraised value.
d. none of the above (fill in the blank).
Solution:
Q1-43 During March, assets increased by $19,000 and liabilities increased by

$6,000. Stockholders’ equity must have
a. increased by $13,000.
b. decreased by $13,000.
c. increased by $25,000.
d. decreased by $25,000.
Solution:
Q1-44 The amount a company expects to collect from customers appears on

the
a. statement of cash flows.
b. balance sheet in the current assets section.

c. income statement in the expenses section.

d. balance sheet in the stockholders’ equity section.
Solution:
Q1-45 All of the following are current assets except

a. Inventory.
b. Sales Revenue.
c. Cash.
d. Accounts Receivable.
Solution: b
Q1-46 Revenues are

a. decreases in liabilities resulting from paying off loans.
b. increases in paid-in capital resulting from the owners
investing in the business.
c. increases in retained earnings resulting from selling products
or performing services.
d. all of the above.
Solution:
Q1-47 The financial statement that reports revenues and expenses is called the
a. statement of cash flows.

b. income statement.
c. statement of retained earnings.
d. balance sheet.
Solution:
Q1-48 Another name for the balance sheet is the

a. statement of financial position
b. statement of operations.
c. statement of profit and loss.
d. statement of earnings.
Solution:

Q1-49 Pinker Corporation began the year with cash of $30,000 and a computer
that cost $25,000. During the year Pinker earned sales revenue of
$135,000 and had the following expenses: salaries, $57,000; rent,
$11,000; and utilities, $4,000. At year-end Pinker’s cash balance was
down to $18,000. How much net income (or net loss) did Pinker
experience for the year?
a. $(12,000)
b. $135,000
c. $63,000
d. $123,000
Solution:
Q1-50 Advanced Instruments had retained earnings of $155,000 at December

31, 2009. Net income for 2010 totaled $100,000, and dividends for 2010
were $25,000. How much retained earnings should Advanced report at
December 31, 2010?
a. $255,000
b. $180,000
c. $230,000
d. $155,000
Solution:
Q1-51 Net income appears on which financial statement(s)?

a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Both a and b
Solution:
Q1-52 Cash paid to purchase a building appears on the statement of cash

flows among the
a. Stockholders’ equity.
b. Investing activities.
c. Financing activities.
d. Operating activities.
Solution:

Q1-53 The stockholders’ equity of Diakovsky Company at the beginning and

end of 2010 totaled $15,000 and $20,000, respectively. Assets at the
beginning of 2010 were $27,000. If the liabilities of Diakovsky Company
increased by $9,000 in 2010, how much were total assets at the end of
2010? Use the accounting equation.
a. $45,000
b. $34,000
c. $50,000
d. $41,000
Solution:
Q1-54 Robbin Company had the following on the dates indicated:
Total assets $740,000 $510,000

Total liabilities $290,000 $190,000
Robbin had no stock transactions in 2010 and, thus, the change in

stockholders’ equity for 2010 was due to net income and dividends. If
dividends were $55,000, how much was Robbin’s net income for 2010?
Use the accounting equation and the statement of retained earnings.
a. $185,000
b. $245,000
c. $155,000
d. $215,000
Solution:

P 1-55A
(15-30 min.)
Learning Objectives 1, 2, 4: Applying accounting vocabulary, concepts, and

principles; evaluating business operations
Assume that the A division of Smith Corporation experienced the following

transactions during the year ended December 31, 2011:
a. Suppose division A supplied copy products for a customer for the discounted
price of $252,000. Under normal conditions they would have provided these
services for $300,000. Other revenues totaled $52,000.
b. Salaries cost the division $21,000 to provide these services. The division had
to pay employees overtime occasionally. Ordinarily the salary cost for these
services would have been $18,000.
c. All other expenses totaled $247,000 for the year. Income tax expense was
35% of income before tax.
d. The A division has two operating subdivisions: basic retail and special
contracts. Each subdivision is accounted for separately to indicate how well
each is performing. However the A division combines the statements of all
subdivisions to show results for the A division as a whole.
e. Inflation affects the amounts that the A division must pay for copy machines.
To show the effects of inflation, net income would drop by $4,000.
f. If the A division were to go out of business, the sale of its assets would bring in
$147,000 in cash.
Requirements
1. Prepare the A division’s income statement for the year ended December 31,
2011.
2. For items a through f, identify the accounting concept, assumption, or principle

that provides guidance in accounting for the item. State how you have applied
the concept or principle in preparing the income statement.

Solution:
Req. 1
A Division of Smith Corporation

Income Statement
Req. 2
a.
b.
c.
d.
e.

f.

P 1-56A
(30 min.)

operations
Compute the missing amount (?) for each company—amounts in millions.
At the end of the year, which company has the

■ Highest net income?
■ Highest percent of net income to revenues?
Solution:
Req. 1 Computed amounts in boxes

Sapphire Lance Branch
Balance sheets: Millions
Beginning:
Assets………………..
Liabilities……………..
Common stock……….
Retained earnings……
Ending:
Common stock………
Retained earnings….. 4.
Income statement:
Revenues……………
Expenses……………
Net income…………. 5.
Statement of retained earnings:

Beginning RE……….
+ Net income……….. e.
− Dividends…………
= Ending RE……….. d.
_____
1. from Net income (a.) above
2. from Ending RE (b.) below
3. from Net income (c.) below

4. from Ending RE (d.) below

5. from Net income (e.) below
Req. 2
Sapphire Lance Branch

Millions
Net income…………………….
$8 $10 $3
Highest
% of net income $8 $10 $3

= 3.6% = 6.2% = 17.0%
to revenues…………………….
$221 $162 $18
Highest

P 1-57A
(20-25 min.)
Learning Objectives 3, 4, 5: Using the accounting equation; preparing a balance

sheet; making decisions
The manager of Headlines, Inc., prepared the company’s balance sheet while the
accountant was ill. The balance sheet contains numerous errors. In particular, the
manager knew that the balance sheet should balance, so he plugged in the stockholders’
equity amount needed to achieve this balance. The stockholders’ equity amount is not
correct. All other amounts are accurate.
Prepare the correct balance sheet and date it properly. Compute total assets, total
liabilities, and stockholders’ equity.
Is Headlines actually in better (or worse) financial position than the erroneous balance
sheet reports? Give the reason for your answer.
Identify the accounts listed on the incorrect balance sheet that should not be reported on
the balance sheet. State why you excluded them from the correct balance sheet you
prepared for Requirement 1. On which financial statement should these accounts
appear?
Solution:
Req. 1
Headlines, Inc.
Balance Sheet
June 30, 2010
ASSETS LIABILITIES

Req. 2
Req. 3

P 1-58A
(20-25 min.)
Learning Objectives 2, 4, 5: Preparing a balance sheet; applying the entity

assumption; making business decisions
Sandy Healey is a realtor. She organized the business as a corporation on April

16, 2011. The business received $95,000 cash from Healey and issued common
stock. Consider the following facts as of April 30, 2011.
a. Healey has $16,000 in her personal bank account and $71,000 in the
business bank account.
b. Healey owes $1,000 on a personal charge account with The Loft.
c. Healey acquired business furniture for $41,000 on April 25. Of this amount,
the business owes $33,000 on accounts payable at April 30.
d. Office supplies on hand at the real estate office total $11,000.
e. Healey’s business owes $36,000 on a note payable for some land acquired
for a total price of $110,000.
f. Healey’s business spent $24,000 for a Realty Universe franchise, which

entitles her to represent herself as an agent. Realty Universe is a national
affiliation of independent real estate agents. This franchise is a business
asset.
g. Healey owes $140,000 on a personal mortgage on her personal residence,

which she acquired in 2003 for a total price of $340,000.
Requirements
1. Prepare the balance sheet of the real estate business of Sandy Healey
Realtor, Inc., at April 30, 2011.
2. Does it appear that the realty business can pay its debts? How can you tell?
3. Identify the personal items given in the preceding facts that should not be
reported on the balance sheet of the business.


Solution:
Req. 1
Sandy Healey, Realtor, Inc.

Balance Sheet
April 30, 2011
ASSETS LIABILITIES
Req. 2
Req. 3

P 1-59A
(30-45 min.)
Learning Objectives 4, 5: Preparing an income statement, a statement of retained

earnings and a balance sheet; using accounting information to make decisions
The assets and liabilities of Post Maple, Inc., as of December 31, 2010, and revenues
and expenses for the year ended on that date follow.
Land.............................. $8,200 Equipment................ $33,000

Note payable................ 28,000 Interest expense...... 4,200
Property tax expense .. 1,900 Interest payable …. 1,200
Rent expense................ 14,000 Accounts payable .. 11,000
Accounts receivable..... 24,000 Salary expense....... 34,000
Service revenue............ 145,000 Building.................... 126,000
Supplies......................... 2,200 Cash......................... 15,000
Utilities expense ........... 3,000 Common stock........ 1,300
Beginning retained earnings was $117,000, and dividends totaled $38,000 for the
year.
Solution:
Req. 1
Post Maple, Inc.

Income Statement

Req. 2
Post Maple, Inc.

Retained earnings, December 31, 2009…………….. $117,000
Add: Net income for the year……….…………………. 87,900
204,900
Less: Dividends………………………………………… (38,000)
Retained earnings, December 31, 2010…………….. $166,900
Req. 3
Post Maple, Inc.

Balance Sheet
December 31, 2010
Req. 4
a.
b.
c.

P 1-60A
(20 min.)
The following data come from the financial statements of The Water Sport
Company for the year ended May 31, 2011 (in millions):
Purchases of property, Other investing cash

plant, and equipment ........ $3,516 payments............................
Net income.......................... 3,031 Accounts receivable..........
Adjustments to reconcile net Payment of dividends .......
income to net cash provided
by operating
activities ............................. 2,371
Revenues............................ 59,201 Common stock...................
Cash, beginning of year..... 276 Issuance of common stock
end of year ................. 1,891 Sales of property, plant,
and equipment ...................
Cost of goods sold............. 37,451 Retained earnings..............
Requirements
1. Prepare a cash flows statement for the year ended May 31, 2011. Not all
items given appear on the cash flows statement.
2. What activities provided the largest source amount of cash? Is this a sign
of financial strength or weakness?

Solution:
Req. 1
The Water Sport Company

Millions
Req. 2

$180
500
290
4,850
170
30
12,990

Millions

P 1-61A
(40-50 min.)
Learning Objective 4: Analyzing a company’s financial statements
Summarized versions of Cora Corporation’s financial statements are given for two
recent years.
1. Determine the missing amounts denoted by the letters.
Solution:
2010 2009
(Thousands)

P 1-62B
(15-20 min.)
Learning Objectives 1, 2, 4: Applying accounting vocabulary, concepts, and

principles to the income statement; evaluating business operations
Assume that the A division of Perez Corporation experienced the following

transactions during the year ended December 31, 2011:
a. Suppose division A supplied copy products for a customer for the discounted
price of $263,000. Under normal conditions they would have provided these
services for $296,000. Other revenues totaled $55,000.
b. Salaries cost the division $24,000 to provide these services. The division had
to pay employees overtime occasionally. Ordinarily the salary cost for these
services would have been $18,100.
c. All other expenses, excluding income taxes, totaled $235,000 for the year.
Income tax expense was 33% of income before tax.
d. The A division has two operating subdivisions: basic retail and special
contracts. Each division is accounted for separately to indicate how well each
is performing. However, the A division combines the statements of all
subdivisions to show results for the A division as a whole.
e. Inflation affects the amounts that the A division must pay for copy machines.
To show the effects of inflation, net income would drop by $1,000.
f. If A division were to go out of business, the sale of its assets would bring in
$145,000 in cash.

Solution:
Req. 1
Perez Corporation
Income Statement
Thousands
Req. 2
a.
b.
c.
d.
e.
f.

P 1-63B
(30 min.)
Learning Objective 3, 4: Using the accounting equation; evaluating business
operations
Compute the missing amount (?) for each company—amounts in millions.
Which company has the

■ Highest net income?
■ Highest percent of net income to revenues?
Solution:
Req. 1 Computed amounts in boxes.

Diamond Lally Bryant
Balance sheets: Millions
Beginning:
Common stock……….
Retained earnings……
Ending:
Common stock………
Retained earnings…..
Income statement:
Revenues……………
Expenses……………
Net income………….
Statement of retained earnings:
Beginning RE……….
+ Net income………..
− Dividends…………
= Ending RE………..
_____

P 1-64B
(20-25 min.)
Learning Objectives 3, 4, 5: Using the accounting equation; preparing a

balance sheet; making decisions
The manager of News Maker, Inc., prepared the company’s balance sheet while
the accountant was ill. The balance sheet contains numerous errors. In
particular, the manager knew that the balance sheet should balance, so he
plugged in the stockholders’ equity amount needed to achieve this balance. The
stockholders’ equity amount is not correct. All other amounts are accurate.
Prepare the correct balance sheet and date it properly. Compute total assets,
total liabilities, and stockholders’ equity.
Is News Maker in better (or worse) financial position than the erroneous balance
sheet reports? Give the reason for your answer.
Identify the accounts that should not be reported on the balance sheet. State
why you excluded them from the correct balance sheet you prepared for
Requirement 1. On which financial statement should these accounts appear?
Solution:
Req. 1
News Maker, Inc.
Balance Sheet
30-Nov-10

Req. 2
Req. 3

P 1-65B
(20-25 min.)
Learning Objectives 2, 4, 5: Preparing a balance sheet; applying the entity

assumption; making business decisions
Jeana Hart is a realtor. She organized her business as a corporation on

September 16, 2011. The business received $95,000 from Hart and issued
common stock. Consider these facts as of September 30, 2011.
a. Hart has $15,000 in her personal bank account and $70,000 in the business
bank account.
b. Hart owes $2,000 on a personal charge account with The Gap.
c. Hart acquired business furniture for $45,000 on September 25. Of this

amount, the business owes $31,000 on accounts payable at September 30.
d. Office supplies on hand at the real estate office total $7,000.
e. Hart’s business owes $36,000 on a note payable for some land acquired for a
total price of $116,000.
f. Hart’s business spent $29,000 for a Realty Region franchise, which entitles
her to represent herself as an agent. Realty Region is a national affiliation of
independent real estate agents. This franchise is a business asset.
g. Hart owes $140,000 on a personal mortgage on her personal residence,

which she acquired in 2003 for a total price of $360,000.
Requirements
1. Prepare the balance sheet of the real estate business of Jeana Hart Realtor,
Inc., at September 30, 2011.
2. Does it appear that the realty business can pay its debts? How can you tell?
3. Identify the personal items given in the preceding facts that should not be
reported on the balance sheet of the business.

Solution:
Req. 1
Jeana Hart, Realtor, Inc.

Balance Sheet
September 30, 2011
Req. 2
Req. 3

P 1-66B
(30-45 min.)
Learning Objectives 4, 5: Preparing an income statement, a statement of retained

earnings, and a balance sheet; using accounting information to make decisions
The assets and liabilities of Post Shrub as of December 31, 2010, and revenues and
expenses for the year ended on that date follow.
Beginning retained earnings was $112,000, and dividends totaled $42,000 for the year.
1. Prepare the income statement of Post Shrub, Inc., for the year ended December
31, 2010.
2. Prepare the company’s statement of retained earnings for the year.

3. Prepare the company’s balance sheet at December 31, 2010.
4. Analyze Post Shrub, Inc., by answering these questions:
Requirements
a. Was Post Shrub profitable during 2010? By how much?
b. Did retained earnings increase or decrease? By how much?
c. Which is greater, total liabilities or total equity? Who owns more of Post Shrub’s
assets, creditors of the company or Post Shrub’s stockholders?
Solution:
Req. 1
Post Shrub
Income Statement

Req. 2
Post Shrub
Req. 3
Post Shrub Corporation

Balance Sheet
December 31, 2011
Req. 4

P 1-67B
(20 min.)

The following data come from the financial statements of The High Tide
Company at the year ended May 31, 2011 (in millions).
Other investing cash
Purchases of property, payments......................
plant, and equipment ........ $3,480 ...... $170
Net income.......................... 3,030 Accounts receivable.......... 500
Adjustments to reconcile net Payment of dividends ....... 285
income to net cash provided
by operating
activities ............................. 2,390
Revenues............................ 59,400 Common stock................... 4,830
Cash, beginning of year..... 200 Issuance of common
Sales of property, stock
plant, 190
end of year ................. 1,900 and
equipment ................... 25
Cost of goods sold............. 37,550 Retained earnings.............. 13,000
Requirements
Prepare a cash flows statement for the year ended May 31, 2011. Not all the items given
appear on the cash flows statement.
Which activities provided the largest amount of cash? Is this a sign of financial strength
or weakness?

Solution:
Req. 1
High Tide Company

Millions
Req. 2

P 1-68B
(40-50 min.)
Learning Objective 4: Analyzing a company’s financial statements
Summarized versions of Espinola Corporation’s financial statements follow for two

recent years.
1. Complete Espinola Corporation’s financial statements by determining the missing
amounts denoted by the letters.
Solution:
2011 2010
(Thousands)

Decision Case 1
(30-40 min.)
Learning Objectives 1, 2, 5: Using financial statements to evaluate a loan

request
Two businesses, Blue Skies Corp., and Open Road, Inc., have sought business loans
from you. To decide whether to make the loans, you have requested their balance
sheets.
1. Using only these balance sheets, to which entity would you be more comfortable
lending money? Explain fully, citing specific items and amounts from the
respective balance sheets. (Challenge)
Blue Skies Corp.

Balance Sheet
August 31, 2011
ASSETS LIABILITIES
Cash $5,000 Accounts payable $50,000
Accounts receivable 10,000 Note payable 80,000
Furniture 15,000 Total liabilities 130,000
Land 75,000
Equipment 45,000 STOCKHOLDERS’
EQUITY
Owner's equity 20,000
Total liabilities and
Total assets $150,000 stockholders’ equity $150,000
Open Road, Inc.

Balance Sheet
August 31, 2011
ASSETS LIABILITIES
Cash $50,000 Accounts payable $6,000
Accounts receivable 10,000 Note payable 9,000
Merchandise inventory 15,000 Total liabilities 15,000
Building 35,000
STOCKHOLDERS’
EQUITY
Stockholders’ equity 50,000
Total liabilities and
Total assets $65,000 stockholders’ equity $65,000

Solution:

Decision Case 2
(20-30 min.)
Learning Objectives 2, 5: Analyzing a company as an investment
A year out of college, you have $10,000 to invest. A friend has started GrandPrize
Unlimited, Inc., and she asks you to invest in her company. You obtain the company’s
financial statements, which are summarized at the end of the first year as follows:
Visits with your friend turn up the following facts:
a. Revenues and receivables of $40,000 were overlooked and omitted.
b. Software costs of $50,000 were recorded as assets. These costs should have been
expenses. GrandPrize Unlimited paid cash for these expenses and recorded the
cash payment correctly.
c. The company owes an additional $10,000 for accounts payable.
Requirements
1. Prepare corrected financial statements.
2. Use your corrected statements to evaluate GrandPrize Unlimited’s results of

operations and financial position. (Challenge)
3. Will you invest in Grand Prize Unlimited? Give your reason. (Challenge)
GrandPrize Unlimited, Inc.

Income Statement
Year Ended Dec. 31, 2011
1.
Revenues……….. $100,000
2.
Expenses……….. 80,000
Net income……… $20,000
GrandPrize Unlimited, Inc.

Balance Sheet
Dec. 31, 2011
Cash…………… $6,000 Liabilities……… $60,000 4.
3.
Other assets…. 100,000 Equity………….. 46,000 5.

Total liabilities
Total assets…... $106,000 and equity…….. $96,000
Solution:
Req. 1
4.
5.
Req. 2
Req. 3

Ethical Issues
You are studying frantically for an accounting exam tomorrow. You are having
difficulty in this course, and the grade you make on this exam can make the
difference between receiving a final grade of B or C. If you receive a C, it will lower
your grade point average to the point that you could lose your academic scholarship.
An hour ago, a friend, also enrolled in the course but in a different section under the
same professor, called you with some unexpected news. In
her sorority test files, she has just found a copy of an old exam from the previous
year. In looking at the exam, it appears to contain questions that come right from the
class notes you have taken, even the very same numbers. She offers to make a copy
for you and bring it over.
You glance at your course syllabus and find the following: “You are expected to do
your own work in this class. Although you may study with others, giving, receiving, or
obtaining information pertaining to an examination is considered an act of academic
dishonesty, unless such action is authorized by the instructor giving the examination.
Also, divulging the contents of an essay or objective examination designated by the
instructor as an examination is considered an act of academic dishonesty. Academic
dishonesty is considered a violation of the student honor code, and will subject the
student to disciplinary procedures, which can include suspension from the
University.” Although you have heard a rumor that fraternities and sororities have
cleared their exam files with professors, you are not sure.
Requirements
1. What is the ethical issue in this situation?
2. Who are the stakeholders? What are the possible consequences to each?
3. Analyze the alternatives from the following standpoints: (a) economic, (b) legal,
and (c) ethical.
4. What would you do? How would you justify your decision? How would your
decision make you feel afterward?
5. How is this similar to a business situation?

Solution:
Req. 1
Req. 2
Req. 3
Analysis of the problem:
a.
b.
c.

Req. 4
Req. 5

Amazon.com, Inc.
(30 min.)
Learning Objective 4: Identifying items from a company’s financial

statements
This and similar cases in succeeding chapters are based on the consolidated
financial statements of Amazon.com, Inc. As you work with Amazon.com, Inc.,
throughout this course, you will develop the ability to use the financial statements
of actual companies.
Requirements
1. Suppose you own stock in Amazon.com, Inc. If you could pick one item on
the company’s Consolidated Statements of Operations to increase year after
year, what would it be? Why is this item so important? Did this item increase
or decrease during fiscal 2008? Is this good news or bad news for the
company?
2. What was Amazon.com, Inc.’s largest expense each year? In your own
words, explain the meaning of this item. Give specific examples of items that
make up this expense. The chapter gives another title for this expense. What
is it?
3. Use the Consolidated Balance Sheets of Amazon.com, Inc., in Appendix A to

answer these questions: At the end of fiscal 2008, how much in total
resources did Amazon.com, Inc., have to work with? How much did the
company owe? How much of its assets did the company’s stockholders
actually own? Use these amounts to write Amazon.com, Inc.’s accounting
equation at December 31, 2008.
4. How much cash did Amazon.com, Inc., have at the beginning of the most
recent year? How much cash did Amazon.com have at the end of the year?

Solution:

Foot Locker, Inc.

(30 min.)
Learning Objectives 3, 4: Evaluating a leading company
This and similar cases in each chapter are based on the consolidated financial
statements of Foot Locker, Inc., given in Appendix B at the end of this book. As you
work with Foot Locker, Inc., you will develop the ability to analyze the financial
statements of actual companies.
Requirements
1. Write Foot Locker, Inc.’s accounting equation at February 2, 2008, the end of
fiscal 2007 (express all items in millions and round to the nearest $1 million).
Does Foot Locker, Inc.’s financial condition look strong or weak? How can you
tell?
2. What was the result of Foot Locker, Inc.’s operations during fiscal 2007?
Identify both the name and the dollar amount of the result of operations for
fiscal 2007. Does an increase (decrease) signal good news or bad news for the
company and its stockholders?
3. Examine retained earnings in the Consolidated Statements of Shareholders’

Equity. What caused retained earnings to increase during fiscal 2007?
4. Which statement reports cash as part of Foot Locker, Inc.’s financial position?
Which statement tells why cash increased (or decreased) during the year?
What two individual items caused Foot Locker, Inc.’s cash to change the most
during fiscal 2007?

Solution:
1 (Amounts in millions)
Shareholders’
Assets = Liabilities + equity

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FINANCIAL ACCOUNTING - Eighth Edition Solutions Manual

Learning Objective 3: Using the accounting equation

Computed amounts in boxes.

Total Assets = Total + Stockholders’

Chapter 1: The Financial Statements Page 1 of 87

Learning Objective 5: Making ethical judgments

Good business and accounting practices require the exercise of good

Chapter 1: The Financial Statements Page 2 of 87

Learning Objective 1: Organizing a business

a. What forms of organization will enable the owners of A Healthy

b. What form of business organization will give Barry the most

c. What form of organization will give creditors the maximum

Chapter 1: The Financial Statements Page 3 of 87

Learning Objective 2: Applying accounting assumptions

Daniel Newman is chairman of the board of Quality Food Brands, Inc.

1. Which accounting assumption governs this situation?

2. How can the proper application of this accounting concept give

Chapter 1: The Financial Statements Page 4 of 87

Learning Objective 2: Applying accounting concepts,

Identify the accounting concept, assumption or principle that best

a. Arby’s, the restaurant chain, sold a store location to McDonald’s.

b. Inflation has been around 6.25% for some time. Ridgeview

c. Honda wants to determine which division of the company—Honda

d. You get an especially good buy on a television, paying only

Chapter 1: The Financial Statements Page 5 of 87

Learning Objective 3: Using the accounting equation

1. Use the accounting equation to show how to determine the

Chapter 1: The Financial Statements Page 6 of 87

Learning Objective 1: Defining key accounting terms

Accounting definitions are precise, and you must understand the

2. How are Microsoft’s liabilities and owners’ equity similar?

Chapter 1: The Financial Statements Page 7 of 87

Learning Objective 1: Classifying assets, liabilities, and owners’

a. Accounts payable g. Accounts receivable

Chapter 1: The Financial Statements Page 8 of 87

Learning Objectives 1, 4: Using accounting vocabulary; using the

2. What do we call the bottom line of the income statement?

Chapter 1: The Financial Statements Page 9 of 87

Learning Objective 4: Preparing an income statement

Call Anywhere Wireless, Inc.

Chapter 1: The Financial Statements Page 10 of 87

Learning Objective 4: Preparing a statement of retained earnings

Chapter 1: The Financial Statements Page 11 of 87

Learning Objective 4: Preparing a balance sheet

At December 31, 2010, Tommer Products has cash of $12,000, receivables of

Chapter 1: The Financial Statements Page 12 of 87

Chapter 1: The Financial Statements Page 13 of 87

Learning Objective 4: Preparing a statement of cash flows

Lanos Medical, Inc.

Chapter 1: The Financial Statements Page 14 of 87

Learning Objectives 1, 4: Using accounting vocabulary;

Chapter 1: The Financial Statements Page 15 of 87

Learning Objectives 2, 4: Applying accounting concepts, assumptions and

Chapter 1: The Financial Statements Page 16 of 87

Learning Objectives 3, 4: Using the accounting equation; evaluating

(Amounts in billions; computed amounts in boxes)

Assets = Liabilities + Owners’ Equity

Chapter 1: The Financial Statements Page 17 of 87

Learning Objectives 3, 4: Using the accounting equation; evaluating