(Solution Manual) FINANCIAL AND MANAGERIAL ACCOUNTING

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Solution Manual

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HP [COMPANY NAME] [Company address] FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual 1. What is accounting? Chapter 1: Accouting and the Business Environment Page 1 of 84 Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. Accounting is the language of business. 2. Briefly describe the two major fields of accounting. Financial accounting provides information for external decision makers, such as outside investors, lenders, customers, and the federal government. Managerial accounting focuses on information for internal decision makers, such as the company’s managers and employees. 3. Describe the various types of individuals who use accounting information and how they use that information to make important decisions. Individuals use accounting information to help them manage their money, evaluate a a new job, and better decide whether they can afford to make a new purchase. Business owners use accounting information to set goals, measure progress toward those goals, and make adjustments when needed. Investors use accounting information to help them decide whether or not a company is a good investment and once they have invested, they use a company’s financial statements to analyze how their investment is performing. Creditors use accounting information to decide whether to lend money to a business and to evaluate a company’s ability to make the loan payments. Taxing authorities use accounting information to calculate the amount of income tax that a company has to pay. 4. What are two certifications available for accountants? Briefly explain each certification. Certified Public Accountants (CPAs) are licensed professional accountants who serve the general public. They work for public accounting firms, businesses, government, or educational institutions. To be certified they must meet educational and/or experience requirements and pass an exam. Certified Management Accountants (CMAs) specialize in accounting and financial management knowledge. They work for a single company. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual 5. What is the role of the Financial Accounting Standards Board (FASB)? Chapter 1: Accouting and the Business Environment Page 2 of 84 The FASB oversees the creation and governance of accounting standards. They work with governmental regulatory agencies, congressionally created groups, and private groups. 6. Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the organization currently responsible for the creation and governance of these standards. The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule book and is currently created and governed by the FASB. Investors and lenders must have information that is relevant and has faithful representation in order to make decisions and the GAAP provides the framework for this financial reporting. 7. Describe the similarities and differences among the four different types of business entities discussed in the chapter. A sole proprietorship has a single owner, terminates upon the owner’s death or choice, the owner has personal liability for the business’s debts, and it is not a separate tax entity. A partnership has two or more owners, terminates at partner’s choice or death, the partners have personal liability, and it is not a separate tax entity. A corporation is a separate legal entity, has one or more owners, has indefinite life, the stockholders are not personally liable for the business’s debts, and it is a separate tax entity. A limited -liability company has one or more members and each is only liable for his or her own actions, has an indefinite life, and is not a separate tax entity. 8. A business purchases an acre of land for $5,000. The current market value is $5,550 and the land was assessed for property tax purposes at $5,250. What value should the land be recorded at, and which accounting principle supports your answer? The land should be recorded at $5,000. The cost principle states that assets should be recorded at their historical cost. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 3 of 84 9. What does the going concern assumption mean for a business? The going concern assumption assumes that the entity will remain in business for the foreseeable future and long enough to use existing resources for their intended purpose. 10. Which concept states that accounting information should be complete, neutral, and free from material error? The faithful representation concept states that accounting information should be complete, neutral, and free from material error. 11. Financial statements in the United States are reported in U.S. dollars. What assumption supports this statement? The monetary unit assumption states that items on the financial statements should be measured in terms of a monetary unit. 12. Explain the role of the International Accounting Standards Board (IASB) in relation to International Financial Reporting Standards (IFRS). The IASB is the organization that develops and creates IFRS which are a set of global accounting standards that would be used around the world. 13. What is the accounting equation? Briefly explain each of the three parts. Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the business in the future. They are things of value that a business owns or has control of. Liabilities are debts that are owed to creditors. They are one source of claims against assets. Equity is the other source of claims against assets. Equity is the stockholders’ claims against assets and is the amount of assets that is left over after the company has paid its liabilities. It represents the net worth of the corporation. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 4 of 84 14. How do retained earnings increase? What are the two ways that retained earnings decreases? Retained earnings increases with revenues. Retained earnings decreases with expenses and dividends. 15. How is net income calculated? Define revenues and expenses. Revenues – Expenses = Net Income. Revenues are earnings resulting from delivering goods or services to customers. Expenses are the cost of selling goods or service. 16. What are the steps used when analyzing a business transaction? Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases or decreases. Step 3: Determine if the accounting equation is in balance. 17. List the four financial statements. Briefly describe each statement. Income Statement – Shows the difference between an entity’s revenues and expenses and reports the net income or net loss for a specific period. Statement of Retained Earnings – Shows the changes in retained earnings for a specific period including net income (loss) and dividends. Balance Sheet – Shows the assets, liabilities, and stockholders’ equity of the business as of a specific date. Statement of Cash Flows – Shows a business’s cash receipts and cash payments for a specific period. 18. What is the calculation for return on assets (ROA)? Explain what ROA measures. Return on Assets = Net income / Average total assets. ROA measures how profitably a company uses its assets. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 5 of 84 S1-1 For each user of accounting information, identify if the user would use financial accounting (FA) or managerial accounting (MA). Solution: a. FA b. FA c. FA d. MA e. MA f. FA g. MA h. FA FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 6 of 84 S1-2 Name the organization that governs the majority of the guidelines that the CPA will use to prepare financial statements for Wholly Shirts. What are those guidelines called? Solution: The Financial Accounting Standards Board governs the majority of guidelines, called Generally Accepted Accounting Principles (GAAP), that the CPA will use to prepare financial statements for Wholly Shirts. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 7 of 84 S1-3 Which type of business organization will meet Chloe’s needs best? Solution: Chloe’s needs will best be met by organizing a corporation since a corporation has an unlimited life and is a separate tax entity. In addition, the owners (stockholders) have limited liability. Chloe could also consider a limited liability company (LLC) as an option. A LLC meets two of the three criteria. It has an unlimited life and limited liability for the owner. However, a LLC is not a separate tax entity. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 8 of 84 S1-4 Identify the advantages and disadvantages of owning a sole proprietorship. Solution: Advantages: 1. Easy to organize. 2. Unification of ownership and management. 3. Less government regulation. 4. Owner has more control over business. Disadvantages: 1. The owner pays taxes since it is not a separate tax entity. 2. No continuous life or transferability of ownership. 3. Unlimited liability of owner. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 9 of 84 S1-5 Consider the accounting principles and assumptions discussed in the chapter and identify the principle or assumption that best matches the situation: Solution: a. The economic entity assumption b. The cost principle. c. The monetary unit assumption. d. The going concern assumption. FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 10 of 84 S1-6 Requirements 1. Use the accounting equation to solve for equity. 2. If next year assets increased by $3,500 and equity decreased by $2,580, what Solution: Requirement 1 Kenmore Handyman Services has equity of $7,720. Assets = Liabilities + Equity $ 16,400 = $ 8,680 + ? $ 16,400 = $ 8,680 + $ 7,720 Requirement 2 Kenmore Handyman Services has liabilities of $14,760. Assets = Liabilities + Equity $16,400 + $3,500 = ? + $7,720 – $2,580 $ 19,900 = $ 14,760 + $ 5,140 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 11 of 84 S1-7 Requirements 1. Use the accounting equation to solve for the missing information. 2. Did Josh’s Overhead Doors report net income or net loss? Solution: Requirement 1 Assets = Liabilities + Equity Contributed Retained Capital Earnings + Common Dividends + Revenues − Expenses Stock $ 42,600 = $ 17,220 + $ 26,240 − $ 8,500 + $ 12,080 − ? $ 42,600 = $ 17,220 + $ 26,240 − $ 8,500 + $ 12,080 − $ 4,440 Requirement 2 Josh’s Overhead Doors reported net income of $7,640. Net Income = Revenues ($12,080) – Expenses ($4,440) FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 12 of 84 S1-8 Identify each account as Asset (A), Liability (L), or Equity (E). Solution: a. L b. A c. E d. A e. E f. E g. A h. E i. A j. E FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 13 of 84 S1-9 Indicate the effects of the business transactions on the accounting equation for Tiny Town Kennel. Solution: a. Increase asset (Cash); Increase equity (Service Revenue) b. Decrease asset (Cash); Decrease equity (Salaries Expense) c. Increase asset (Cash); Increase Equity (Common Stock) d. Increase asset (Accounts Receivable); Increase equity (Service Revenue) e. Increase liability (Accounts Payable); Decrease equity (Utility Expense) f. Decrease asset (Cash); Decrease equity (Dividends) FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 14 of 84 S1-10 Indicate the effects of the business transactions on the accounting equation for Elaine's Inflatables. Solution: a. Increase asset (Cash); Increase equity (Common Stock) b. Increase asset (Equipment); Increase liability (Accounts Payable) c. Increase asset (Office Supplies); Decrease asset (Cash) d. Increase asset (Cash); Increase equity (Service Revenue) e. Decrease asset (Cash); Decrease equity (Wages Expense) f. Decrease asset (Cash); Decrease equity (Dividends) g. Increase asset (Accounts Receivable); Increase equity (Service Revenue) h. Decrease asset (Cash); Decrease equity (Rent Expense) i. Increase liability (Accounts Payable); Decrease equity (Utilities Expense) FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 15 of 84 S1-11 Identify the financial statement (or statements) that each account would appear on. Use I for Income Statement, RE for Statement of Retained Earnings, and B for Balance Sheet. Solution: a. B b. B c. B d. B e. I f. I g. B h. RE i. B j. I FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 16 of 84 S1-12 Prepare the income statement of Decorating Arrangements for the year ended December 31, 2016. Solution: DECORATING ARRANGEMENTS Income Statement Year Ended December 31, 2016 Revenue: Service Revenue $ 80,000 Expenses: Salaries Expense $ 37,000 Rent Expense 11,000 Insurance Expense 2,000 Utilities Expense 500 Total Expenses 50,500 Net Income $ 29,500 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 17 of 84 S1-13 Prepare the statement of retained earnings of Decorating Arrangements for the year ending December 31, 2016 Solution: DECORATING ARRANGEMENTS Statement of Retained Earnings Year Ended December 31, 2016 Retained Earnings, January 1, 2016 $4,800 Net income for the year 29,500 34,300 Dividends (4,500) Retained Earnings, December 31, 2016 $ 29,800 Chapter 1: Accouting and the Business Environment Page 18 of 84 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual S1-14 Prepare the balance sheet of Decorating Arrangements as of December 31, 2016. Solution: DECORATING ARRANGEMENTS Balance Sheet December 31, 2016 Assets Liabilities Cash $ 7,000 Accounts Payable $ 4,300 Accounts Receivable 7,500 Office Supplies 1,500 Stockholders’ Equity Equipment 26,600 Common Stock 8,500 Retained Earnings 29,800 Total Stockholders’ Equity 38,300 Total Assets $ 42,600 Total Liabilities and Stockholders’ Equity $ 42,600 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 19 of 84 S1-15 Prepare the statement of cash flows for Pushing Daisies Homes for the month ended July 31, 2016. Solution: PUSHING DAISIES HOMES Statement of Cash Flows Month Ended July 31, 2016 Cash flows from operating activities: Receipts: Collections from customers $ 24,000 Payments: For rent $ (3,000) For salaries (1,600) For utilities (900) (5,500) Net cash provided by operating activities 18,500 Cash flows from investing activities: Purchase of equipment (18,000) Net cash used by investing activities (18,000) Cash flows from financing activities: Issued common stock 12,000 Payment of cash dividend (3,500) Net cash provided by financing activities 8,500 Net increase in cash 9,000 Cash balance, July 1, 2014 11,000 Cash balance, July 31, 2014 $ 20,000 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 20 of 84 S1-16 Calculate Refined Water Services’ return on assets (ROA) for the month of October. Solution: Return on assets= Net income ∕ Average total assets = $74,000 ∕ (($350,000 + $390,000) ∕ 2) = $74,000 ∕ $370,000 = 20% FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 21 of 84 E1-17 For each of the users of accounting information, identify whether the user is an external decision maker (E) or an internal decision maker (I): Solution: a. E b. I c. E d. E e. E f. I g. I h. E FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 22 of 84 E1-18 Match the accounting terms to the definition: Solution: 1. d 2. e 3. g 4. a 5. i 6. f 7. b 8. c 9. j 10. h FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 23 of 84 E1-19 Match the accounting terms to the definition: Solution: 1. e 2. a 3. i 4. f 5. j 6. b 7. d 8. c 9. g 10. h 11. k FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual Chapter 1: Accouting and the Business Environment Page 24 of 84 E1-20 Compute the missing amount in the accounting equation for each entity from the financial information presented: Solution: Assets Liabilities Equity Newton Gas $ 144,000 $ 64,000 $ 80,000 Megas Video Rentals 65,000 40,000 25,000 Cline's Grocery $ 200,000 $ 43,000 $ 157,000