(Solution Manual) Introduction to Financial Accounting

Sundem, Philbrick, 11

Business

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11th Edition

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Solution Manual for Introduction to Financial Accounting, The downloadable file consists of 534 pages, and the total size of the file is 4.49 MB. Purchase now only for highly discounted price.

Author(s): Sundem, Philbrick

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XXI Copyright  ©2014 Pearson Education,  Inc. KEY AMOUNTS FROM SUGGESTED SOLUTIONS TO SELECTED PROBLEMS Chapter 1 1-29 May 2, $6,000 investment 1-40 Total assets, $15,146 million 1-30 Nov. 8, $500 paid 1-41 Total assets, $210,000 1-31 Total assets, $140,000 1-42 1. Cash & deposits increase, $1,000 1-32 Total assets, £363,000 1-43 1. Cash, €2,879 million 1-33 1. $14,269,000,000 1-44 Total assets, $61,948 million 1-34 Add. paid-in cap., $58,000 1-45 Total assets, $22,263 million 1-35 Total assets, $121,000 1-46 1. Total assets, $350,000 1-36 Total assets, $438,000 1-47 1. Par value up $5,000,000 1-37 Total assets, €96,900 1-48 Common stock, $1,832 million 1-38 Total assets, $64,000 1-49 1. Par value, ¥47.5 1-39 Total assets, $27,593 million 1-55 1. Cash, $1,148.1 million Chapter 2 2-32 1. $10,000 2-50 Total assets, $12,236 million 2-35 1/1/X1, SE $60,000 2-51 Net cash outflow, $9 million 2-36 Cash, June 30, $53,000 2-52 1. Net loss, CHF(70) million 2-38 1. $1,452 million 2-53 1. Net income, $3,000 2-39 1. E = $35,000; 2. K = $230,000 2-54 1. Total assets, $1,849,000 2-40 A = $19,199 million 2-55 B = $6,272 million 2-42 1. EPS = ₤1.07 2-57 1. Net income, $5,503.1 million 2-43 1. 1,986,336,780 average shares 2-58 1. Net income, $1,798.3 million 2-45 Total assets, $189,000 2-59 1. UPS Div. = $2.10 2-47 Total assets, $513,000 2-60 1. Shell P-E = 7.32 2-48 Total assets, $245,000 2-66 1. Net earnings, $1,245.7 million 2-49 Net cash outflow, $82,000 Chapter 3 3-18 1. Cr., 2. Dr. 3-38 Net income, $17,000 3-19 1. Cr., 2. Dr. 3-39 Total debits, $336,000 3-20 1. Dr., 2. Cr. 3-40 4. Net income, $10,000 3-21 1. T, 2. F 3-41 3. Total debits, $1,234 3-23 f. Dr. 3; Cr. 7 3-42 4. Total debits, $67,000 3-29 Trial balance Totals, $150,000 3-43 3. Total debits, $74,865 million 3-31 Total assets, £263,000 3-44 3. Total debits, $1,845.3 million 3-32 1. U 3-45 2. Total assets, $75,378 million 3-33 2. 20X0, o; 20X1, n 3-46 1. 7.2 years 3-34 Total debits, $155,700 3-47 1. 2010 income overstated ¥30 million 3-35 4. Total debits, $1,386,000 3-51 4. 65.2% through life 3-36 Total debits, $912,000 3-55 2. Net, $2,355.0 million 3-37 3. Total debits, $355,000 XXII Copyright  ©2014 Pearson Education,  Inc. Chapter 4 4-24 1. Cash decreases, $138,000 4-40 1. Net earnings, $1,204 million 4-25 1. Dr. Wage expense, $54 4-41 3. $550,000 4-26 Net income, Sunriver, $92,500 4-42 1. Collections €140,000 4-27 Interest is $5.00 per month 4-43 1. Net income $58,626 4-29 1. (c) 2. (f) 4-44 b. Dr. Accounting expense, $20,000 4-30 1. 20X0 u; 20X1 o 4-45 1. Dr. Unearned rent revenue, $728,000 4-31 c. Dr. Prepaid insurance $2,250,000 4-46 b. Cr. Rent revenue, $3 million 4-32 Current ratio, 3.94 4-47 1a. Dr. Prepaid expense, $366 million 4-33 Gross profit percentage, 47.2% 4-48 1a. Cr. Deferred revenue, $205,173,000 4-34 a. Current, N; Return on sales, N 4- 49 a. Dr. Accrued unbilled rev., $61,925,000 4-35 a. supplies used, $1,700 4-50 1. Total assets, $25,278 million 4-36 Net income, $180,000 4-51 Net income, $12,942 million 4-37 1a. 6 months’ rent, $12,000 4-52 1. Net income, $599,114 thousand 4-38 1a. Dr. rent expense, $728,000 4-53 1. Net income, $6,272 million 4-39 1a. Dr. Prepaid rent expense, $9 million 4-54 1. Net income, $11,797 million Chapter 5 5-33 Cash provided, $143,000 5-56 Net cash increase, $80,000 5-34 Cash used, £(21,000) 5-57 Cash from operations, $392 million 5-35 Cash used, $(220,000) 5-58 Ending cash balance, R37 million 5-37 Cash received, $870 ,000 5-59 Net increase in cash, A$103 million 5-38 Cash paid, $632,000 5-60 Cash from operations, $227,000 5-39 Ending balance payable, $53,000 5-61 Cash from operations, $168 million 5-40 Cash from operations, $215,000 5-62 Cash from operations, ¥202 billion 5-41 Cash from operations, $215,000 5-63 Cash from operations ¥224 million 5-42 a. Operating f. Financing 5-64 Net increase, $80,000 5-43 1. Cash used by operations, $(110,000) 5-65 Net decrease, $(16 million) 5-45 Cash from operations, $390,000 5-66 1. Net decrease, $(18 million) 5-46 Bal,, Cash & cash equivalents, £310 million 5-67 Cash from operations, $83 million 5-47 Free CF before dividends, £4,582 million 5-68 Net increase in cash $29 million 5-49 Cash used for fin., $(1,432.0 million) 5-70 Cash from operations $1,378,000 5-50 Cash used, $(4,612 million) 5-71 Cash from operations, $1,177 million 5-53 Net decrease, $(38 million) 5-72 2011, $397 million 5-54 Net decrease $(124,000) 5-73 3. A. Decrease $(51 million) 5-55 Cash from operations, ¥224 million Chapter 6 6-39 2. 20X2, $6.0 million 6-65 1. $95,011 6-40 Revenues, $220,000 6-67 3. $2,407,000 6-41 Net revenue, $35,000 6-68 Ending balance, $12,078 6-44 1. Net sales, $660,000 6-69 Addition to allowance, $9,900 6-47 2. Yes, 6-70 1. Bad debt expense, $17,640 6-48 2. No 6-71 1. Net A/R, $404,200 6-49 Discount, $4,800 6-72 2. Allowance, $9,266 6-51 1. $42,296,000 6-73 1. 3.0% 6-54 2. Net A/R, 20X1, $138,000 6-74 2. $101 million 6-56 2. Net A/R, $60,000 6-75 1. $113 million 6-57 Turnover, 9.16 6-76 Bal., $(3,000) 6-58 Ave. collection period, 2011, 68.6 6-77 20X3, 46.9 days 6-59 2. 9.1% 6-87 5. $17,900 6-63 1. Revenue, $2 million 6-91 3. 10.75 daysXXIII Copyright  ©2014 Pearson Education,  Inc. Chapter 7 7-31 Gross profit, $356,000 7-61 1. LIFO gross profit, ₤134,000 7-32 Jan. 1, Inventory, $39,964 7-62 1. LIFO gross profit, $1,640 7-33 Cost of Goods Sold, Perpetual $17 million 7-63 FIFO 20X2 cost of goods sold, $2,000 7-34 FIFO ending Inventory, ₤9,200 7-64 1.a. Pretax income, $32,000 7-36 1. Cost of steel acquired, $192,280 7-65 1.a. Ending LIFO reserve, $32 7-41 Cost of goods sold, $61,431 million 7-66 2. 20X1, Retained earnings over by $6 million 7-42 May 3, Inventory, $51,200 7-67 2.a. Lower under LIFO, $10,000 7-43 March 9, Inventory, $85,000 7-68 Gross Margin with Purchases $114,000 7-44 $40,000 7-69 LIFO net income, $156 7-45 20X5, Taxable income, $12,000 too low 7-70 LIFO Pretax income $70 lower with purchase 7-46 1. Turnover, 1.18 7-72 1. EPS, $4.80 lower with purchase 7-47 1. July 31, LIFO inventory, $11,000 7-73 1. Net Income $89,400 7-48 December 31, 20X2, Inventory $180 ,000 7-74 1. Write down $4 million 7-49 Purchases $78,739 million 7-75 1. FIFO Pretax Income $846 million 7-50 Gross profit percentage, 2012, 35.73% 7-76 1. Increasing 7-51 1. Gross profit, $200,000 7-77 1. 2011 Net income, U by $12 million 7-52 Net income, $6,000 7-79 1. Savings of $2,720,000 7-53 Cost of goods sold, $1,505 7-80 2011 inventory turnover, JCP=3.60, Kmart= 3.57 7-54 2. Inventory turnover 3.6 times 7-81 If 15,000 more units purchased, inventory= $1,055,000 7-55 Pretax income, ($1,751) million 7-82 1. $155,000 Ending inventory 7-56 1. FIFO gross profit, $11,000 7-83 1. Taxes evaded, $200,000 7-57 LIFO gross profit down $1,400 7-84 1. Cost of goods sold, $5,880 7-58 1. $1,240 7-85 2. LIFO Cost of goods sold, $561 million 7-59 1. 20X1 gross profit Overstated, $20,000 7-60 3. LIFO, lower cash outflow by $8,000 Chapter 8 8-28 Land, $3,950,000 8-51 1. $1,500,000 8-29 $473,400 8-52 1. $150,000 8-30 Allocated Land cost, $345,000 8-54 1. Impairment loss, $3.5 million 8-31 2. Loss, $8,000 8-55 1. 20X1 depletion, $1,728,000 8-32 2. Gain $10,000 8-56 Year 2, DDB, $4,500 thousand 8-33 2. Loss, $5,500 8-57 2. $148.4 million 8-34 Truck, year 1, $12,000 8-58 1. Other, ¥118,718 million 8-35 1. $.45 per mile 8-59 1. Amortization, $1,774 million 8-36 Year 2, DDB, $350 thousand 8-60 1. 19.7 years 8-37 Year 2, Units, $180,000 8-61 2. S/L net income, $174 thousand 8-38 Year 2, DDB, $8,160 8-62 2. S/L net income, $15,325 million 8-39 Year 2, DDB, $67.5 thousand 8-63 2. S/L net income, €734 million 8-40 1. Cost, $613,748 thousand 8-64 1. Dep. Exp., $4.5 million 8-41 2016 Revised SL, $15,000 8-68 1. Gain, $13.2 million 8-43 2. Tax purposes, $1,733,333 8-69 1. Acc. Dep., $46.5 million 8-45 1, a, b, c 8-70 1. Gain, $5,358,000 8-46 1. E; 5. C 8-71 1. Gain, $120.4 million 8-48 1. Gain, $5,000 8-72 1. 20X8 R&D expense, $400,000 8-49 1. Gain, $2,000 XXIV Copyright  ©2014 Pearson Education,  Inc. Chapter 9 9-34 2. $18,000 9-60 1. Proceeds, $16,911,020 9-36 1. Warranty. Exp., $24,000 9-61 2. Interest expense $490,476 9-37 2. Unearned revenue, 4/30, $345.4 million 9-62 2a. Cash NKR 15,762,000 9-38 Total liabilities $85,822 million 9-63 1. Proceeds $6,486,870 9/39 1. Warranty expense, $150,000 9-64 2a. Cash $11,359,000 9-40 1. To Accounts payable, $2,400,000 9-66 1. Net liability $17,987,728 9-41 @12%, $10,000 9-67 1. Gain CHF 1,000,000 9-42 a. Operating 9-68 1. Proceeds, $76,000 9-43 Pension exp., $800,000 9-69 1. Cash $19,275,000 9-44 Income tax expense $3,392 9-70 3. Cash $5,219 9-45 1. Debt-to-equity 1.91 9-71 1. $74,607 9-46 1a. FV, $13,605 9-72 1a. Total expense, operating lease, $32,330 9-47 1a. PV, $20,490 9-73 1. Rental $38,803 per year 9-48 1. Equipment, $788,000 9-74 1. Quarterly payment $55.25 9-49 2a. PV, $21,648 9-75 1. $9,452,000,000 9-50 1a. Withdraw, $150,274.25 9-76 2. Asset $558.6 million, Liability $420 million 9-51 1. Future amount, $121,820 9-78 1. Pension obligation, $3,215 million 9-52 $234,260 9-79 1. Earnings from cont ops $3,883 million 9-53 2. Accrued wages payable, Cr. $64,900 9-80 3. Zero 9-54 Total liabilities $64,804 million 9-81 1. income tax expense $255 million 9-55 1. Interest expense $3,000 9-82 1. GE 2011 Debt-to-Equity = 5.07 9-56 1. € 34,375,000, 9-83 1. Accum. Depreciation on disposals $600 million 9-57 1. Proceeds, $20 milllion 9-85 1. Total Present value = $193,204,400 9-58 1. Proceeds, $50 million 9-89 1a. Debt-to-equity, 2011 = 0.68 9-59 3. March 1, 2009, $91,420 Chapter 10 10-31 Issued and outstanding, 1,625,000 10-53 1. Comp. expense, Dr. $50,000 10-32 Issued and outstanding, 1,163.2 million 10-55 2. Tot. Stk. equity, $74,985,000 10-33 Com. stk. receives, $53 0,000 of $1,400,000 10-56 2. Tot. Stk. equity, $307,000 10-34 1. Common stock, ¥103,580 million 10-57 1. Cash Dr., $4,000,000 10-35 1. 20X4 Pref. Div., $9,000,000 10-58 3. Ret. earnings after div., $4,800 million 10-36 Pref. Div., $540,000 10-59 2. Ret. Earnings, Dr. $300,000 10-37 Div. Declared, ¥92,172.3 mil 10-60 1. Treasury stock, Dr., $2,701 million 10-38 Compensation expense, $16,000 10-61 1. Ending Treasury stock, $31,769 million 10-40 Common stock balance, $1,760 10-62 2. Book value, $33.96 10-41 1. New C/S issued, 2,353,000 shares 10-63 Ending Stk. equity, $55,600,000 10-42 2. Common stock, Cr., $97,035 10-64 1. Treasury stock, Cr., $60,000 10-43 1. Treasury stock, $58,005 10-65 1. Stk. equity, after $8 mil. dividends, $44 mil. 10-44 1. $52.50 10-66 1. Treasury stock, Dr., R6,000,000 10-45 ROE, 15.8% 10-67 Convertion: Freewater Cr. Com. Stk., $10,000 10-46 Tot. S.E., $27,250,000 10-68 1a. Issue 272,000 shares 10-47 3. +$600,000 10-70 4. $7,695 Profit 10-48 2. $2,784,581 10-71 1. ROE, Adobe, 14.4% 10-49 1. Ret. earnings, Dr., $2,604,000,000 10-72 2. $893 million 10-51 1. Common stock, Cr., $2,000,000 10-76 1. Div. Declared $419.5 million 10-52 1. Common stock, Cr., $700,000 XXV Copyright  ©2014 Pearson Education,  Inc. Chapter 11 11-28 Unrealized loss, $(5) million, period 1 11-44 2. Consolidated net income, $160 million 11-29 B/S shows $135million, period 2 11-45 3. Consolidated Stk. equity, $606 million 11-30 1. Discount amortization, $3,118 11-46 1. Goodwill, $30 million 11-31 1. Premium amortization, $13,511 11-47 1. Plant assets, $105 million 11-32 2. Equity method 11-48 1. Total assets, $1,000 million 11-33 Year-end investment, $97 million 11-49 Net consolidated income, $115 million 11-34 3. $295,000 11-51 1. Deduct R49 million 11-35 P’s noncontrolling interest, $30,000 11-52 Other increases, $183 million 11-36 1. $220,000 11-53 2. Net income, $1,640,000 11-37 Equity in earnings, $54,000 11-54 1. Total earnings, $372.5 million 11-39 1. Balance sheet value, Feb., $940,000 11-55 1. Goodwill 46.2% of assets in 2010; 40.4% in 2011 11-40 1. $1,990,000 11-57 Net cash provided by operating activities $741,000 11-41 1. Gain, $282,825 11-61 2. Loss, $1.6 million 11-42 Net income, $123,000 11-43 Consolidated net income, $19 million Chapter 12 12-31 Lowe’s gross profit 34.6% 12-46 f. 27.6% g. 14.7% 12-32 1. 2.04 10. 7.7% 12-48 Net income up $10; 33.3% 12-33 1. Stockholders’ equity $228,000,000 12-49 1b. Gross profit, 20X3, 45.6% 12-34 1a. ¥200 million 12-50 1. ROA, 9.9% 12-35 1. 2012, 9.5% 12-51 2011 net income, 10.3% 12-36 Year 1 Bayol ROE, 10% 12-52 1c. Inventory turnover 6.0 times 12-37 Net income w/debt, $6,600,000 12-53 1a. Total-debt-to-total-assets = 42.8% 12-38 Net income w/debt, $2,116 million 12-54 1a. ROE, 71.8% 12-39 1. $4.50 12-55 1a. Price-earnings, 21.7 12-40 1. $5.44, EPS 12-56 1. EBIT 2011, $11,891 million 12-43 Price-Break net income, 6.44% 12-57 1b. Gross profit rate, 29.31% 12-44 1.m. Price-Break 12.85, Low Cost 9.54 12-58 1. ROA, 22.4% 12-45 Sales up $2,949 million, 11.1% 12-67 2011, 30.9% CHAPTER 1 COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVES QUESTIONS EXERCISES PROBLEMS OTHER LO1: Explain how accounting information assists in making decisions. 1,2,3,4,5,25 LO2: Describe the components of the balance sheet. 6,7 28, 33 42, 43 54,55,56 LO3: Analyze business transactions and relate them to changes in the balance sheet. 8,9,10, 24 29,30 35,36,37,38, 39,40 53 LO4: Prepare a balance sheet from transactions data. 31,32 35, 36, 37, 38, 39, 40, 41, 44,45 53 LO5: Compare the features of sole proprietorships, partnerships, and corporations. 11,12,13,14, 26 LO6: Identify how the owners’ equity section in a corporate balance sheet differs from that in a sole proprietorship or a partnership. 15,16 33, 34 46,47,48,49 LO7: Explain the regulation of financial reporting, including differences between U.S. GAAP and IFRS. 17,18 50 LO8: Describe auditing and how it enhances the value of financial information. 18,19,27 50,51 56 LO9: Evaluate the role of ethics in the accounting process. 20,21 52 LO10: Recognize career opportunities in accounting, and understand that accounting is important to both for-profit and nonprofit organizations. 22, 23 1 Copyright  ©2014  Pearson Education,  Inc. CHAPTER 1 1-1 Accounting is a process of identifying, recording, summarizing, and reporting economic information to decision makers. 1-2 No. Accounting is real information about real companies. In learning accounting it is helpful to see accounting reports from various companies. This helps put the rules and techniques of accounting into an understandabl e framework and provides familiarity with the diversity of practice. 1-3 Examples of decisions that are likely to be influenced by financial statements include choosing where to expand or reduce opera tions, lending money, investing ownership capital, and rewarding mangers. 1-4 Users of financial statements include inve stors, managers, lenders, suppliers, owners, income tax authorities, and government regulators. 1-5 The major distinction between financial accounting and management accounting is their use by two classes of decision makers. Ma nagement accounting is concerned mainly with how accounting can serve internal deci sion makers such as the chief executive officer and other executives. Financia l accounting is concerned with supplying information to external users. 1-6 The balance sheet equation is Assets = Liabilities + Owners’ equity. It is the fundamental framework of accounting. The left side lists the resources of the organization, and the right side lists the claims against those resources. 1-7 No. Every transaction should leave the balan ce sheet equation in balance. Accounting is often called “double-entry” because accountants must enter at least two numbers for each transaction to keep the equation in balance. 1-8 This is true. When a company buys inventory for cash, one asset is traded for another, and neither total assets nor total liabilities change. Thus, the balance sheet equation stays in balance. When a company buys inventory on credit, both inventory and accounts payable increase. Thus, both total assets and total liabilities increase by the same amount, again keeping the balance sheet equation in balance. 1-9 The evidence for a note payable includes a promissory note, but the evidence for an account payable does not. A note payable is generally to a lender while an account payable is generally to a supplier. 1-10 Balance sheets for companies in the same i ndustry will not necessarily look similar. For example, companies in the same industry may have quite different strategies. One might be capital intensive, with large amounts of pr operty, plant, and equipment. Another may rely less on fixed assets, but it may have la rge accounts receivable because of a lenient credit policy. In addition, one may have la rge bank loans while another has greater owner investment and thus larger owners’ equity or stockholders’ equity. 2 Copyright  ©2014  Pearson Education,  Inc. 1-11 Ownership shares in most large corporations are easily traded in the stock markets, corporate owners have limited liability, and the owners of sole proprietorships or partnerships are usually also managers in the company while most corporations hire professional managers. 1-12 Limited liability means that corporate owners are not personally liable for the debts of the corporation. Creditors’ claims can be satis fied only by the assets of the particular corporation. 1-13 The corporation is the most prominent t ype of entity, and corporations do by far the largest volume of business. 1-14 Yes. In the United Kingdom corporations frequently use the word limited (Ltd.) in their name. In many countries whose laws trace back to Spain, the initials S.A. refer to a “society anonymous,” meaning that multiple unidentified owners stand behind the company, which is essentially the same structure as a corporation. 1-15 Almost all states forbid the issuance of stock at below par; thus, par values are customarily set at very low amounts and have no real importance in affecting economic behavior of the issuing entity. 1-16 The board of directors is the elected link between stockholders and the actual managers. It is the board’s duty to ensure that managers act in the best interests of shareholders. 1-17 In the U.S. GAAP is generally set by the Financial Accounting Standards Board. The SEC has formal authority for specifying accounting standards for companies with publicly held stock, as delegated by Congr ess, but it usually accepts the standards promulgated by the FASB. Internationally, a majority of countries accept IFRS as set by the International Accounting Standards Board as their GAAP. 1-18 Until recently this was true. However, now the SEC allows companies headquartered outside the U. S. to report using IFRS. 1-19 Audits have value because they add credib ility to a company’s financial statements. Provided that auditors have the expertise to assess the accuracy of financial statements and the integrity to report any problems they discover, the investing public can put more faith in statements that are audited. 1-20 A CPA is a certified public accountant. One becomes a CPA by a combination of education, qualifying experience, and the passi ng of a two-day national examination. A CA (chartered accountant) is the equivale nt of a CPA in many parts of the world, including most former British Commonwealth countries. 3 Copyright  ©2014  Pearson Education,  Inc. 1-21 Public accountants must obey standards of i ndependence and integrity. In addition, there are many more ethical standards that pertai n to accountants. Some folks call accounting the moral guardian of companies. This reputation has been sullied recently by corporate scandals that went undetected (or, at l east, unreported by accountants), but accountants are working to regain the high ethical regard they have traditionally maintained. 1-22 All managers find accounting useful for maki ng decisions, and often their superiors use accounting numbers in evaluating them. In addition, experience in accounting is valuable to anyone in an organization. Many operating ex ecutives got their start in accounting. It provided them a broad knowledge of the comp any and brought them into contact with managers throughout the organization. 1-23 No. The fundamental accounting principles apply equally to nonprofit (also called not- for-profit) and profit-seeking organizations. Managers and accountants in hospitals, universities, government agencies, and ot her nonprofit organizations use financial statements. They need to raise and spend money, prepare budgets, and judge financial performance. Nonprofit organizations need to use their limited resources wisely, and financial statements are essential for judging their use of resources. 1-24 Double-entry refers to the concept that every transaction involves two or more accounts with the effect being to retain the balance in the balance sheet equation. The double-entry concept is important because it emphasizes that there are assets and claims on assets. In the balance sheet, for example, borrowing money provides an asset, cash, and creates a liability. In addition to this concep tual benefit there is a clerical benefit. Maintaining a balanced relationship provides an indicator of errors. If the balance sheet equation does not balance, an error has been made. 1-25 Historians are primarily concerned with events that have already occurred. In that sense, a company’s financial statements do report on history—transactions that are complete. The negative side of this is that many important things that affect the value of a firm are based on what will happen in the future. Thus , investors often worry about expectations and predictions. Of course, there is no way to agree on the accuracy of expectations and predictions. The positive side of historical fina ncial statements is that they present a no-nonsense perspective on what actually happe ned, where the company was at a point in time, or what it accomplished over a period of time. It is easier to predict the future when you know where you are and how you got there. You might liken the importance of historical financial statements to the importa nce of navigation instruments. If you do not know where you are and where you are headed, it is very hard to get to where you want to go. Most people who refer to accountants as hi storians intend it as a criticism, although, as indicated above, a historical focus ensures that the data are measurable and verifiable. 4 Copyright  ©2014  Pearson Education,  Inc. 1-26 Such arguments are fun but can never be truly resolved. The notion behind the importance of the corporation is that for any substantial growth to occur there must be a system for organizing resources and using them over long periods of time. The corporate form of ownership helps companies raise la rge amounts of capital via stock issuance as well as borrowing. It allows us to separate ownership from management. It protects the personal assets of shareholders, and because their maximum losses can be limited, more risky undertakings can be financed. Finally, it has perpetual life so its activity is not disrupted by the death of any shareholder. Corporations operate under a set of established rules of behavior for entering into contracts and being sure that other parties can be relied upon to uphold their side of an agreement. Accounting helped corporations emerge as the dominant economic organization in the world. Without accounting it would be difficu lt to coordinate the activities of large corporations. It would be especially difficu lt to separate management from ownership if accounting did not provide information about the performance of managements. 1-27 The auditor increases the value of financial statements by reassuring the reader of the statements that an “independent” and a “qualified” third party has reviewed management’s disclosures and believes they fairly present the company’s performance. The fact that you personally do not recognize th e name of the audit firm should not be a problem, because only CPAs can perform public audits and sign audit opinions. Every state has strict procedures for licensi ng CPAs, so such people are qualified. Nevertheless, audit firms develop reputations, and ones with a positive public image may give some financial statement users more c onfidence in the financial statements they audit. 1-28 (10 min.) Amounts are in millions. 1. Assets = Liabilities + Owners’ Equity $7 = $4 + $3 2. Assets and liabilities would increase by $2 million. Owners’ equity would be unaffected. 5 Copyright  ©2014  Pearson Education,  Inc. 1-29 (15-20 min.) May 2 Owners invested $6,000 additional cash in Radloff’s Furniture Company. 3 Owners invested an additional $4,000 into the company by contributing additional store fixtures valued at $4,000. 4 Radloff’s Furniture Company purchased additional furniture inventory for $3,000 cash. 5 Radloff’s Furniture Company pur chased furniture inventory on account for $6,000. 6 Radloff’s Furniture Company sold store fixtures for $3,000 cash. 7 Radloff’s Furniture Company pur chased $6,000 of store fixtures, paying $5,000 cash now and agreeing to pay $1,000 later. 8 Radloff’s Furniture Company paid $2,000 on accounts payable. 9 Radloff’s Furniture Company retu rned $400 of merchandise (furniture inventory) for credit against accounts payable. 10 Owners withdrew $3,000 cash from Radloff’s Furniture Company. 1-30 (10-20 min.) Nov. 2 Melbourne purchased $2,500 of store fixtures on account. 3 Owner or owners withdrew $2,000 cash. 4 Melbourne returned $5,000 of its inventory of computers for $5,000 credit against its accounts payable. 5 Computers (inventory) valued at $7,000 were invested in the company by owners. 8 Melbourne paid $500 on accounts payable. 9 Melbourne purchased $3,500 of store fixtures, paying $1,000 now and agreeing to pay $2,500 later. 10 Melbourne returned $500 of store fixtures for credit against accounts payable. 6 Copyright  ©2014  Pearson Education,  Inc. 1-31 (15-25 min.) JACKSONVILLE CORPORATION Balance Sheet March 31, 20X1 Liabilities and Assets Stockholders’ Equity Cash $ 5,000 (a) Liabilities: Merchandise inventory 43,000 (b) Accounts payable $ 11,000 (f) Furniture and fixtures 2,000 (c) Notes payable 10,000 Machinery and equipment 27,000 (d) Long-term debt 27,000 (g) Land 39,000 (e) Total liabilities 48,000 Building 24,000 Stockholders’ equity: Total assets $140,000 Paid-in capital 92,000 (h) Total liab. & stk. equity $140,000 (a) Cash: $14,000 + $1,000 – $10,000 = $5,000 (b) Merchandise inventory: $40,000 + $3,000 = $43,000 (c) Furniture and fixtures: $3,000 – $1,000 = $2,000 (d) Machinery and equipment: $15,000 + $12,000 = $27,000 (e) Land: $14,000 + $25,000 = $39,000 (f) Accounts payable: $8,000 + $3,000 = $11,000 (g) Long-term debt: $12,000 + $15,000 = $27,000 (h) Paid-in capital: $80,000 + $12,000 = $92,000 Note: Event 5 requires no change in the balance sheet. 7 Copyright  ©2014  Pearson Education,  Inc. 1-32 (25-35 min.) SOUTHAMPTON COMPANY Balance Sheet November 30, 20X1 Liabilities and Assets Stockholders’ Equity Cash £ 17,000 (a) Liabilities: Merchandise inventory 29,000 Accounts payable £ 9,000 (d) Furniture and fixtures 8,000 Notes payable 30,000 (e) Machinery and equip. 33,000 (b) Long-term debt payable 111,000 (f) Land 35,000 (c) Total liabilities 150,000 Building 241,000 Stockholders’ equity: Total assets £363,000 Paid-in Capital 213,000 (g) Total liab. & stk. equity £363,000 (a) Cash: £22,000 – £4,000 – £7,000 + £6,000 = £17,000 (b) Machinery and equipment: £20,000 + £13,000 = £33,000 (c) Land: £41,000 – £6,000 = £35,000 (d) Accounts payable: £16,000 – £7,000 = £9,000 (e) Notes payable: £21,000 + (£13,000 – £4,000) = £30,000 (f) Long-term debt payable: £134,000 – £23,000 = £111,000 (g) Paid-in capital: £190,000 + £23,000 = £213,000 Note: Event 4 requires no change in the balance sheet. 1-33 (5-10 min.) 1. Total liabilities = Total assets − stockholders’ equity = $26,271,000,000 − $12,002,000,000 = $14,269,000,000 2. Common stock, par value = $.005 × 434,266,000 = $2,171,330. Like other items on Costco’s balance sheet, the amount would be rounded off to millions: Common stock, par value $2 8 Copyright  ©2014  Pearson Education,  Inc. 9 Copyright  ©2014  Pearson Education,  Inc. 1-34 (5 – 10 min.) The Mammal Center Balance Sheet July 1, 20X1 Assets Liabilities and Stockholder’s Equity Cash $45,000 Accounts payable $14,000 Account receivable 13,000 Bank loan payable 9,000 Property, plant, and equipment 25,000 Capital stock at par 2,000 Total assets $83,000 Additional paid-in capital $58,000 Total liab. and stockholder’s equity $83,000 1-35 (20-30 min.) See Exhibit 1-35. Equipment and furniture could be in two separate accounts rather than combined. 1-36 (20-35 min.) 1. See Exhibit 1-36. 2. JBW CORPORATION Balance Sheet January 31, 20X1 (In Thousands of Dollars) Liabilities and Assets Stockholders’ Equity Liabilities: Cash $153 Accounts payable $108 Note payable 30 Merchandise inventory 249 Total liabilities $138 Stockholders’ equity: Equipment 36 Capital stock, $1 par, 30,000 shares issued and outstanding $ 30 Additional paid-in capital in excess of par value 270 300 Total assets $438 Total liabilities & stockholders’ equity $438 EXHIBIT 1–35 MARYMOUNT SERVICES, INC. Analysis of April 20X1 Transactions (In Thousands of Dollars) Assets Liabilities and Stockholders’ Equity Equipment Note Accounts Paid-in Description of Transactions Cash + and Furniture = Payable + Payable + Capital 1. Issuance of stock +60 = +60 2. Issuance of stock +20 = +20 3. Borrowing +35 = +35 4. Acquisition for cash –33 +33 = 5. Acquisition on account +10 = +10 6. Payments to creditors – 4 = – 4 7. Sale of equipment + 8 – 8 = 8. No entry = +66 +55 = +35 + 6 + 80 121 121 MARYMOUNT SERVICES, INC. Balance Sheet April 30, 20X1 Assets Liabilities and Stockholders’ Equity Accounts payable $ 6,000 Cash $ 66,000 Note payable 35,000 Equipment and furniture 55,000 Paid-in Capital 80,000 Total assets $121,000 Total liab. & stk. equity $121,000 10 Copyright  ©2014  Pearson Education,  Inc.         EXHIBIT 1–36 JBW CORPORATION January 20X1 Analysis of Transactions (In Thousands of Dollars) Assets Liabilities + Stockholders’ Equity Merch- Capital Additional andise Equip- Notes Accounts Stock Paid-in Description of Transactions Cash + Inventory + ment = Payable + Payable + (at par) + Capital 1. Original incorporation +300 = + 30 + 270 2. Inventory purchased –75 +75 = 3. Inventory purchased +85 = + 85 4. Return of inventory to supplier –11 = – 11 5. Purchase of equipment –10 +40 = +30 6. Sale of equipment + 4 – 4 = 7. Payment to creditor –16 = – 16 8. Inventory purchased –50 +100 = + 50 9. No entry except on detailed underlying records = Balance, January 31, 20X1 +153 +249 +36 = +30 +108 + 30 + 270 438 43812 Copyright  ©2014  Pearson Education,  Inc. 1-37 (20-35 min.) 1. See Exhibit 1-37. 2. AUTOPARTES LISBON Balance Sheet March 31, 20X1 Assets Liabilities and Owner’s Equity Cash €62,800 Liabilities: Inventory 16,600 Accounts payable € 4,500 Equipment 17,500 Note payable 8,000 Total liabilities 12,500 You, capital 84,400 Total assets €96,900 Total liabilities and owner’s equity €96,900 1-38 (25-40 min.) Note that transaction 9 is not c overed directly in the text. However, it should be possible to figure out the accounting for it from similar items that are covered. However, some instructors may want to omit transaction 9. 1. See Exhibit 1-38. 2. LEIDA CRUZ, ATTORNEY-AT-LAW Balance Sheet December 31, 20X0 Liabilities and Assets Owner’s Equity Liabilities: Cash in bank $50,000 Accounts payable $ 1,000 Note receivable 3,000 Note payable 3,000 Rental damage deposit 1,000 Total liabilities $ 4,000 Legal supplies on hand 1,000 Owner’s equity: Computer 5,000 Leida Cruz, capital 60,000 Office furniture 4,000 Total liabilities and Total assets $64,000 owner’s equity $64,000 1-39 (15-25 min.) See Exhibit 1-39. EXHIBIT 1–37 AUTOPARTES LISBON Analysis of Transactions (in Euros) For the Month Ended March 31, 20X1 Assets Liabilities + Owner’s Equity Equip- Accounts Note You, Description of Transactions Cash + Invent ory + ment = Payable + Payable + Capital 1. Initial investment +80,000 = +80,000 2. Inventory acquired for cash −10,000 +10,000 = 3. Inventory acquired on credit + 8,000 = + 8,000 4. Equipment acquired – 5,000 +15,000 = +10,000 5. No entry = 6. Tires for family – 600 = - 600 7. Parts returned to supplier for cash + 300 – 300 = 8. No effect on total inventory* = 9. Parts returned to supplier for credit – 500 = – 500 10. Payment on note – 2,000 = –2,000 11. Equipment acquired + 5,000 = +5,000 12. Payment to creditors – 3,000 = –3,000 13. No entry 14. No entry 15. Exchange of equipment + 2,500 – 4,000 = + 1,500 + 62,800 +16,600 +17,500 = +4,500 + 8,000 +84,400 96,900 96,900 *Entries could have reduced both inventory and accounts paya ble by €800 and then increased the same two accounts by €800. The net effect is no change in either account. 13 Copyright  ©2014  Pearson Education,  Inc. EXHIBIT 1–38 LEIDA CRUZ ATTORNEY Analysis of Business Transactions (In Thousands of Dollars) Assets = Liabilities and Owner’s Equity Owner’s Cash Note Rental Legal Office Liabilities Equity Description in Receiv- Damage Supplies Furni- Note Account L. Cruz of Transactions Bank able Deposit on Hand Computer ture Payable Payable Capital 2. Opening investment +60 = +60 4. Rental deposit – 1 +1 = 5. Purchased computer – 2 +5 = +3 6. Purchased supplies +1 = +1 7. Purchased furniture – 4 +4 = 9. Note receivable from Whitman – 3 +3 = Balance, December 31, 20X0 +50 +3 +1 +1 +5 +4 = +3 +1 +60 64 64 General Comments : • Transactions 1 and 3 are personal rather than business transactions. • In transaction 4, no obligation (liability) is set up for the rent because it is not payable until January 2 and no rental se rvices will occur until January. • Transaction 8 requires no entry because no services have been performed during December. 14 Copyright  ©2014  Pearson Education,  Inc.         EXHIBIT 1–39 WALGREEN COMPANY Analysis of Transactions (In Millions of Dollars) Assets Liabilities and Stockholders’ Equity Property Stock- Inven- and Other Notes Accounts Other holders’ Description of Transactions Cash + tories + Assets = Payable + Payable + Liabilities + Equity Balance August 31 1,556 8,044 17,854 = 4,810 7,797 14,847 1. Issuance of stock for cash +30 = + 30 2. Issuance of stock for equipment +42 = + 42 3. Borrowing +13 = +13 4. Acquisition of equipment for cash –18 +18 = 5. Acquisition of inventory on account +89 = +89 6. Payments to creditors –35 = –35 7. Sale of equipment +2 - 2 = Balance September 2 1,548 8,133 17,912 = 13 4,864 7,797 14,919 27,593 27,593 WALGREEN COMPANY Balance Sheet September 2, 2011 (In Millions of Dollars) Assets Liabilities and Stockholders’ Equity Cash $ 1,548 Notes payable $ 13 Inventories 8,133 Accounts payable 4,864 Property and other assets 17,912 Other liabilities 7,797 Stockholders’ equity 14,919 Total assets $27,593 Total liab. and stockholders’ equity $27,593 16 Copyright  ©2014  Pearson Education,  Inc. 1-40 (20-35 min.) 1. See Exhibit 1-40. 2. NIKE, INC. Balance Sheet June 3, 2011 (In Millions) Liabilities and Assets Stockholders’ Equity Cash $ 2,086 Total liabilities $ 5,213 Inventories 2,758 Stockholders’ equity 9,933 Property, plant, and equipment 2,089 Other assets 8,213 Total $15,146 Total liabilities & stk. equity $15,146 1-41 (15-20 min.) JENNIFER GRANT, REALTOR Balance Sheet November 30, 20X1 Liabilities and Assets Owners’ Equity Cash $ 6,000 Liabilities: Undeveloped land 170,000 Accounts payable $ 6,000 Office furniture 16,000 (a) Mortgage payable 85,000 Franchise 18,000 (b) Total liabilities 91,000 Owner’s equity: Jennifer Grant, capital 119,000 (c) Total assets $210,000 Total liabilities and owner’s equity $210,000 (a) $17,000 – $1,000 = $16,000 (b) A franchise is an economic resource that has been purchased to benefit future operations. (c) $210,000 – $91,000 = $119,000 Note that Rubenstein’s death may have considerable negative influence on future operations, but accounting does not formally measure its monetary impact. Moreover, transactions 3 and 4 are personal rather than business transactions.         EXHIBIT 1–40 NIKE, INC. Analysis of Transactions (In Millions of Dollars) Assets Liabilities and Stockholders’ Equity Description of Transactions Cash + Inven- tories +Property, Plant, and Equip. + Other Assets = Total Liabil- ities +Stock- holders’ Equity Balance May 31 1,955 2,715 2,115 8,213 5,155 9,843 1. Inventory purchased −28 +28 = 2. Inventory purchased +19 = +19 3. Return of inventory to supplier −4 = = −4 4. Purchase of equipment −5 +14 = +9 5. Sale of equipment +40 −40 6. No entry = 7. Payment to creditor −16 = −16 8. Borrowed from bank +50 = +50 9. Issued common stock +90 = +90 10. No entry except on detailed underlying records = Balance, June 3 2,086 2,758 2,089 8,213 = 5,213 9,933 15,146 15,146 1-42 (10 min.) 1. Cash would increase by $1,000 and the liab ility, Deposits, would increase by the same amount. 2. Deposits are liabilities because Wells Fargo owes these amounts to depositors. They are depositors’ claims on the assets of the bank. 3. Loans Receivable would increase and Cash would decrease by $75,000. 4. Both Deposits and Cash would decrease by $5,000. 1-43 (10 min.) Amounts are in millions. 1. a. Cash = Total assets − Noncash assets = €27,739 − €24,860 = €2,879 b. Stockholders’ equity = Total assets − Total liabilities = €27,739 − €21,512 = €6,227 2. Total liabilities and stockholders’ equity = total assets = €27,739. 18 Copyright  ©2014  Pearson Education,  Inc. 1-44 (20-30 min.) UNITED TECHNOLOGIES CORPORATION Balance Sheet September 30, 2011 (In Millions of Dollars) Liabilities and Assets Stockholders’ Equity Cash $ 5,966 (1) Accounts payable $ 5,597 Inventories 8,617 Other liabilities 22,935 Fixed assets 6,137 Long term debt 9,501 Other assets 41,228 Total liabilities 38,033 Common stock $13,330 Other stockholders’ equity 10,585 (3) Total stockholders’ equity 23,915 (2) Total liabilities and Total assets $61,948 stockholders’ equity $61,948 Notations (1), (2), and (3) designate the answers to the requirements. (1) The $5,966 cash was computed by taking total assets minus all a ssets except cash. To calculate (2) and (3), note that total assets must equal total liabilities plus stockholders’ equity, $61,948. Furthermore, total liabilities equal ($5,597 + $22,935 + $9,501) = $38,033. Therefore, total stockholders’ equity is ($61,948 – $38,033) = $23,915, denoted by (2) above. Other stockholders’ equity is ($23,915 – $13,330) = $10,585, denoted by (3) above. 19 Copyright  ©2014  Pearson Education,  Inc. 1-45 (20 min.) MACY’S, INC. Balance Sheet October 29, 2011 (In Millions of Dollars) Liabilities and Assets Shareholders’ Equity Cash $ 1,097 (1) Merchandise accounts Inventories 7,158 payable $ 3,576 Property, plant, Long-term debt 6,151 and equipment 8,423 Other liabilities 6,684 Total liabilities $16,411 (2) Other assets 5,585 Shareholders’ equity 5,852 (3) Total liabilities and Total assets $22,263 shareholders’ equity $22,263 Notations (1), (2), and (3) designate the answers to the requirements. Cash is calculated by subtracting the values given for the other assets from total assets: ($22,263 − $7,158− $8,423 − $5,585) = $1,097. Cash is the smallest individual a sset. Companies try to keep cash balances small because they do not earn large returns on cash accounts. To calculate (2), simply add the components ($3,576 + $6,151 + $6,684). For (3), note that total liabilities and shareholders’ equity equals total assets, $22,263, so shareholders’ equity is $22,263 less total liabilities of $16,411, which equals $5,852. 20 Copyright  ©2014  Pearson Education,  Inc.