Type:
Solution Manual
Resource:
Financial Accounting
Edition:
12th Edition
Author(s):
William Thomas Wendy M. Tietz Walter Harrison
Chapter 1 The Financial Statements Ethics Check (5-10 min.) EC 1-1 a.
Objectivity and independence
b.
Due care
c.
Integrity
d.
Integrity
.
Chapter 1
The Financial Statements 1-1
Short Exercises (10 min.) S 1-1 a. Corporation, limited partners of a Limited-liability partnership (LLP) and Limited-liability company (LLC). If any of these businesses fails and cannot pay its liabilities, creditors cannot force the owners to pay the business’s debts from the owners’ personal assets. Creditors can go after the general partner of a limited liability partnership. b. Proprietorship. There is a single owner of the business, so the owner is answerable to no other owner. c. Partnership. If the partnership fails and cannot pay its liabilities, creditors can force the partners to pay the business’s debts from their personal assets. A partnership affords more protection for creditors than a proprietorship because there are two or more owners to share this liability.
(5 min.) S 1-2 1. The entity assumption applies. 2. Application of the entity assumption will separate Osmond’s personal assets from the assets of Simple Treats, Inc. This will help Osmond, investors, and lenders know how much assets, liabilities and equity the business has, and this knowledge will help all parties evaluate the business realistically.
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(5-10 min.) S 1-3 a.
Stable-monetary-unit assumption
b.
Historical cost principle; $300 is the accounting value of the laptop
c.
Historical cost principle; the sale price is the amount actually received from the sale
d.
Entity assumption
(10 min.) S 1-4 Computed amounts in boxes Total Assets
=
Total Liabilities
+
Stockholders’ Equity
a.
$660,000
=
$300,000
+
$360,000
b.
85,000
=
50,000
+
35,000
c.
350,000
=
75,000
+
275,000
(5 min.) S 1-5 1. Liabilities = Assets − Owners’ Equity 2. Owners’ Equity = Assets − Liabilities This way of determining the amount of owners’ equity applies to any company or your household.
.
Chapter 1
The Financial Statements 1-3
(5-10 min.) S 1-6 a. Land A
g. Retained earnings S
b. Accrued expenses payable L
h. Prepaid expenses A
c. Supplies A
i. Accounts payable L
d. Equipment A
j. Accounts receivable A
e. Notes payable
L
f. Long-term debt L
k. Merchandise inventory A l. Common stock S
(5-10 min.) S 1-7
1. Assets are the economic resources of a business that are expected to produce a benefit in the future. Owners’ (stockholders’) equity represents the insider claims of a business, the owners’ interest in its assets. Assets and owners’ equity differ in that assets are resources and owners’ equity is a claim to assets. Assets must be at least as large as owners’ equity, so equity can be smaller than assets. 2. Both liabilities and owners’ (stockholders’) equity are claims to assets. Liabilities are the outsider claims to the assets of a business; they are obligations to pay creditors. Owners’ equity represents the insider claims to the assets of the business; they are the owners’ interest in its assets.
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(5 min.) S 1-8
1. Revenues and expenses
2. Net income (or net loss)
(10 min.) S 1-9 a.
Salary expense
b.
Dividends
c.
Accounts payable
d.
Net income
e.
Common stock
f.
Inventory
g.
Interest revenue
h.
Cash
i.
Retained earnings
j.
Long-term debt
k.
Increase or decrease in cash
l.
Net cash provided by operating activities
m.
Sales revenue
n.
Net cash used for financing activities
.
I
R, C B
I, R, C B
B I
B, C R, B B C C
I
Chapter 1
C
The Financial Statements 1-5
(15-20 min.) S 1-10 a. Paying large dividends will cause retained earnings to be low.
b. Heavy investing activity and paying off debts can result in a cash shortage even if net income has been high.
c. The single best source of cash for a business is operating activities. This source of cash is best because it results from the core operations of the business. Operating activities should be the main source of cash for a business.
a. Borrowing, issuing stock, and selling land, buildings, and equipment can bring in cash even when the company has experienced losses. Reducing accounts receivable and inventory can also increase cash flow.
(5 min.) S 1-11
a.
I
f.
I
b.
B
g.
R
c.
C
h.
C
d.
R
i.
B
e.
B
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(5 min.) S 1-12 MacKensie Services, Inc. Income Statement Year Ended December 31, 2018 (millions) Revenues........................................................
$394
Expenses ........................................................
171
Net income .....................................................
$223
(5 min.) S 1-13 Journey Corporation Statement of Retained Earnings Year Ended December 31, 2018 (millions)
.
Retained earnings, December 31, 2017 ........
$270
Add: Net income ($460 − $380) ....................
80
Less: Dividends declared .............................
(64)
Retained earnings, December 31, 2018 ........
$286
Chapter 1
The Financial Statements 1-7
(10-15 min.) S 1-14 Jackson Corporation Balance Sheet December 31, 2018 (in millions) ASSETS Current assets: Cash ............................................................................
$ 52
Accounts receivable ..................................................
23
Total current assets ...................................................
75
Long-term assets.............................................................
45
Total assets......................................................................
$120
LIABILITIES Current liabilities: Accounts payable ......................................................
$ 21
Total current liabilities ...............................................
21
Long-term liabilities: Long-term notes payable...........................................
31
Total liabilities .................................................................
52
STOCKHOLDERS’ EQUITY Common stock ................................................................
28
Retained earnings ...........................................................
40
Total stockholders’ equity ..............................................
68
Total liabilities and stockholders’ equity .......................
$120
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(10-15 min.) S 1-15 Sullivan Corporation Balance Sheet September 30, 2018 (in millions)
ASSETS Current assets: Cash ............................................................................
$ 78
Accounts receivable ..................................................
27
Total current assets ...................................................
105
Property and equipment .................................................
27
Other long-term assets ...................................................
21
Total assets......................................................................
$153
LIABILITIES Current liabilities: Accounts payable ......................................................
$ 34
Total current liabilities ...............................................
34
Long-term liabilities: Long-term notes payable...........................................
17
Total liabilities .................................................................
51
STOCKHOLDERS’ EQUITY Common stock ................................................................
31
Retained earnings ...........................................................
71*
Total stockholders’ equity ..............................................
102
Total liabilities and stockholders’ equity .......................
$153
_____ *Computation of retained earnings: Total assets ($153) − total liabilities ($51) − common stock ($31) = $71 Or, total stockholders’ equity ($102) – common stock ($31) = $71
.
Chapter 1
The Financial Statements 1-9
(10-15 min.) S 1-16 Python Legal Services, Inc. Statement of Cash Flows Year Ended December 31, 2018 Cash flows from operating activities: Net income ................................................................
$115,000
Adjustments to reconcile net income to net cash provided by operating activities ........................
(9,000)
Net cash provided by operating activities
106,000
Cash flows from investing activities: Purchases of equipment
$(20,000)
Net cash used for investing activities
(20,000)
Cash flows from financing activities: Payment of dividends
$(15,000)
Net cash used for financing activities ...........
(15,000)
Net increase in cash .....................................................
71,000
Cash balance, December 31, 2017 ...............................
16,000
Cash balance, December 31, 2018 ...............................
$ 87,000
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(10-15 min.) S 1-17 Solve in this order: a.
$82
b.
$82
c.
$149
f.
$149
g.
$182
h.
$230
e.
$230
d.
$112
(5 min.) S 1-18
Ethics is a factor that should be included in every business and accounting decision, beyond the potential economic and legal consequences. Ideally, for each decision, honesty and truthfulness should prevail, considering the rights of others.
The decision
guidelines at the end of the chapter spell out the considerations we should take when making decisions. Simply, we might ask ourselves three questions: (1) Is the action legal? (2) Who will be affected by the decision? (3) How will the decision make me feel afterward?
.
Chapter 1
The Financial Statements 1-11
(10-15 min.) S 1-19 Asset (m)
Economic resources that are expected to produce a benefit in the future
Balance sheet (l)
Also called the statement of financial Position
Bookkeeping (k)
Mechanical part of accounting
Corporation (f)
Owned by stockholders whose liability is limited to the amount they have invested in the business
Equity (r)
Insider claims of a business
Ethical duties (d)
Responsibilities of the members of society to each other
Expenses (h)
Costs of doing business
Financial accounting (b)
Provides information for decision makers outside of the organization
Historical cost principle (j)
States that assets should be recorded at their actual cost on the date of purchase
Income statement (o)
Answers the question “How well did the company perform during the period?”
Investors and creditors (n)
Entities that provide money to finance a company’s operations
Liability (g)
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A debt payable to an outsider
..
(continued) S 1-19
Managerial accounting (c)
Provides information for managers of the organization
Net income (a)
Total revenues minus total expenses
Partnership (q)
A business organization form with two or more owners who are each personally liable for all of the business’s debts
Proprietorship (i)
A business organization form with a single owner who is personally liable for all of the business’s debts
Revenues (e)
Inflows of resources resulting from delivering goods or services to customers
Statement of cash flows (p) Reports cash flows from operating, investing, and financing activities
.
Chapter 1
The Financial Statements 1-13
Exercises (10-15 min.) E 1-20A Amounts in billions; (computed amounts in boxes)
Smythe Real Estate Odessa Florals Hometown Bank
Assets $73 26 29
=
Liabilities $41 11 14
+
Stockholders’ Equity $32 15 15
Odessa Florals appears to have the strongest financial position because its liabilities make up the smallest percentage of company assets ($11/$26 = .42). Stated differently, Odessa Florals’ equity is the highest percentage of company assets ($15/$26 = .58). Liabilities as a percent of total assets: Smythe Real Estate: $41/$73 = 0.56 Odessa Florals: $11/$26 = 0.42 Hometown Bank: $14/$29 = 0.48
(10-15 min.) E 1-21A Req. 1 (Amounts in millions)
Total Req. 2
Assets $220 320 130 $670
=
Liabilities $160 380
+
Stockholders’ Equity
=
$540
+
$130
Resources Req. 3 Amount to work with owed to creditors
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Req. 4 Actually owned by company stockholders
(10-20 min.) E 1-22A 1
Situation 2 (Millions)
3
January 31, 2018 ($47 − $19) ....................
$28
$28
$28
Add: Issuances of stock ...............................
11
-0-
15
Net income ................................................
13*
44*
84*
Less: Dividends declared .............................
-0-
(20)
(75)
Net loss ......................................................
-0-
-0-
-0-
$52
$52
$52
Total stockholders’ equity,
Total stockholders’ equity, January 31, 2019 ($77 − $25) .................... _____ *Must solve for these amounts.
.
Chapter 1
The Financial Statements 1-15
(10-15 min.) E 1-23A a.
Income statement
b.
Balance sheet
c.
Balance sheet
d.
Balance sheet
e.
Statement of retained earnings, Statement of cash flows
f.
Balance sheet, Statement of cash flows
g.
Statement of cash flows
h.
Statement of cash flows
i.
Income statement
j.
Balance sheet, Statement of retained earnings
k.
Income statement
l.
Balance sheet
m.
Income statement, Statement of retained earnings, Statement of cash flows
n.
Balance sheet
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