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CHAPTER 1

INTRODUCTION TO ACCOUNTING
AND BUSINESS
CLASS DISCUSSION QUESTIONS
1. The objective of most businesses is to
maximize profits. Profit is the difference
between the amounts received from
customers for goods or services provided
and the amounts paid for the inputs used to
provide those goods or services.
2. The stakeholders of a business normally
include owners, managers, employees,
customers, creditors, and the government.
3. Simply put, the role of accounting is to
provide information for managers to use in
operating the business. In addition,
accounting provides information to other
stakeholders to use in assessing the
economic performance and condition of the
business.
4. Three sound principles that form the
foundation for ethical behavior are (1) avoid
small ethical lapses, (2) focus on your longterm reputation, and (3) be willing to suffer
adverse personal consequences for holding
to an ethical position.
5. Accountants serving a business firm,
governmental
agency,
not-for-profit
organization, etc., as an employee are
engaged in private accounting. Accountants
who provide accounting services to clients
on a fee basis are engaged in public
accounting.
6. FASB stands for the Financial Accounting
Standards Board. The FASB sets generally
accepted accounting principles by first
identifying specific issues in financial
accounting. As these issues arise, the FASB
conducts extensive research to identify the
primary concerns involved and possible
solutions. Generally, after issuing discussion
memoranda and preliminary proposals and
evaluating comments from interested
parties, the Board issues Statements of
Financial Accounting Standards. These
standards become part of generally
accepted accounting principles. To explain,
clarify, or elaborate on existing standards,
the Board also issues Interpretations, which
have the same authority as the Standards.

7. No. The business entity concept limits the


recording of economic data to transactions
directly affecting the activities of the
business. The payment of the interest of
$3,500 is a personal transaction of Lynda
Lyons and should not be recorded by Fast
Delivery Service.
8. The land should be recorded at its cost of
$97,500 to Neece Repair Service. This is
consistent with the cost concept.
9. a. No. The offer of $400,000 and the
increase in the assessed value should
not be recognized in the accounting
records.
b. Cash would increase by $400,000, land
would decrease by $350,000, and
owners equity would increase by
$50,000.
10. The two principal rights to the properties of
a business are liabilities (the rights of
creditors) and owner's equity (the rights of
the owner).
11. The three elements of the accounting
equation are assets, liabilities, and owner's
equity.
12. An account receivable is a claim against a
customer for goods or services sold. An
account payable is an amount owed to a
creditor for goods or services purchased.
Therefore, an account receivable in the
records of the seller is an account payable
in the records of the purchaser.
13. The business incurred a net loss of $15,000.
14. The business realized net income of
$10,000.
15. The two types of transactions that increase
the owners equity of a proprietorship are
revenue and an investment by the owner.
16. The income statement presents a summary
of the revenues and expenses of a business
for a specific period of time. The statement
of owners equity indicates the changes in
owners equity that have occurred over a
specific period of time. The balance sheet
presents a listing of the assets, liabilities,

17.

and owner's equity of a business as of a


specific date. The statement of cash flows
presents a summary of the cash receipts
and cash payments of a business entity for
a specific period of time.
An income statement, a statement of
owners equity, and a statement of cash

flows are for a specific period of time. The


balance sheet is for a specific date.
18. Net income or net loss
Owners equity at the end of the period
19. The statement of cash flows reports cash
flows from operating activities, investing
activities, and financing activities.

EXERCISES
Ex. 11
As in many ethics issues, there is no one right answer. The Naples Daily News
reported on this issue in these terms: "The company covered up the first report,
and the local newspaper uncovered the company's secret. The company was
forced to not locate here (Collier County). It became patently clear that doing the
least that is legally allowed is not enough."

Ex. 12
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

B
F
R
B
B
F
X
R
B
X

Ex. 13
Coca-Cola owners equity: $21,623 $12,110 = $9,513
PepsiCo owners equity: $17,551 $10,670 = $6,881

Ex. 14
a. $51,500 ($20,000 + $31,500)
b. $52,750 ($62,750 $10,000)
c. $19,000 ($57,000 $38,000)

Ex. 15
a.
b.
c.
d.
e.

$183,000 ($325,000 $142,000)


$230,000 ($183,000 + $84,000 $37,000)
$158,000 ($183,000 $8,000 $17,000)
$275,500 ($183,000 + $75,000 + $17,500)
Net income: $137,000 ($425,000 $105,000 $183,000)

Ex. 16
a.
b.
c.
d.
e.
f.

owner's equity
asset
owner's equity
asset
liability
asset

Ex. 17
a.
b.
c.
d.
e.

Increases assets and increases owners equity.


Increases assets and increases owners equity.
Increases assets and decreases assets.
Decreases assets and decreases owners equity.
Increases assets and increases liabilities.

Ex. 18
a. (1)
(2)
(3)

Total assets increased $50,000.


No change in liabilities.
Owners equity increased $50,000.

b. (1)
(2)
(3)

Total assets decreased $28,000.


Total liabilities decreased $28,000.
No change in owners equity.

Ex. 19
1.
2.
3.
4.

increase
increase
decrease
decrease

Ex. 110
1.
2.
3.
4.
5.

c
d
c
e
c

6.
7.
8.
9.
10.

a
e
a
e
e

Ex. 111
a. (1)
(2)
(3)
(4)
(5)
(6)
(7)

Sale of catering services for cash, $15,000.


Purchase of land for cash, $2,000.
Payment of expenses, $11,250.
Purchase of supplies on account, $500.
Withdrawal of cash by owner, $1,500.
Payment of cash to creditors, $5,300.
Recognition of cost of supplies used, $800.

b. ($5,050) ($950 $6,000)


c. $1,450 ($30,700 $29,250)
d. $2,950 ($15,000 $11,250 $800)
e. $1,450 ($2,950 $1,500)

Ex. 112
It would be incorrect to say that the business had incurred a net loss of $7,250.
The excess of the withdrawals over the net income for the period is a decrease in
the amount of owners equity in the business.

Ex. 113
Company W
Owner's equity at end of year ($600,000 $325,000)..
Owner's equity at beginning of year
($375,000 $150,000)..................................................
Net income (increase in owner's equity)..............

$275,000
225,000
$ 50,000

Company X
Increase in owner's equity (as determined for W).......
Add withdrawals..............................................................
Net income...................................................................

$ 50,000
30,000
$ 80,000

Company Y
Increase in owner's equity (as determined for W).......
Deduct additional investment........................................
Net loss.........................................................................

$ 50,000
75,000
$ (25,000)

Company Z
Increase in owner's equity (as determined for W).......
Deduct additional investment........................................
Add withdrawals..............................................................
Net income...................................................................

Ex. 114
Balance sheet items: 3, 5, 6, 8, 9, 10

Ex. 115
Income statement items: 1, 2, 4, 7

$ 50,000
75,000
$ (25,000)
30,000
$ 5,000

Ex. 116
DOUMA COMPANY
Statement of Owners Equity
For the Month Ended June 30, 2003
Meg Douma, capital, June 1, 2003..............................
Net income for the month............................................
Less withdrawals..........................................................
Increase in owners equity..........................................
Meg Douma, capital, June 30, 2003............................

$317,500
$91,250
15,000
76,250
$393,750

Ex. 117
SURGERY SERVICES
Income Statement
For the Month Ended April 30, 2003
Fees earned..................................................................
Operating expenses:
Wages expense.........................................................
Rent expense............................................................
Supplies expense.....................................................
Miscellaneous expense............................................
Total operating expenses....................................
Net income....................................................................

$165,800
$71,500
25,000
3,250
2,250
102,000
$ 63,800

Ex. 118
In each case, solve for a single unknown, using the following equation:
Owners equity (beginning) + Investments Withdrawals + Revenues
Expenses = Owners equity (ending)
I.

Owner's equity at end of year ($745,000 $325,000).............


Owner's equity at beginning of year ($600,000 $360,000). .
Increase in owner's equity.........................................................
Deduct increase due to net income ($197,750 $108,000). . .

$420,000
240,000
$180,000
89,750
$ 90,250
Add withdrawals.........................................................................
40,000
Additional investment in the business................................ (a) $130,250

II.

Owner's equity at end of year ($175,000 $55,000)...............


Owner's equity at beginning of year ($125,000 $65,000)....
Increase in owner's equity.........................................................
Add withdrawals.........................................................................
Deduct additional investment...................................................
Increase due to net income.......................................................
Add expenses.............................................................................
Revenue...................................................................................

III.

$120,000
60,000
$ 60,000
8,000
$ 68,000
25,000
$ 43,000
32,000
(b) $ 75,000

Owner's equity at end of year ($90,000 $80,000).................


Owner's equity at beginning of year ($100,000 $76,000)....
Decrease in owner's equity.......................................................
Deduct decrease due to net loss ($115,000 $122,500)........

$ 10,000
24,000
$ (14,000)
(7,500)
$ (6,500)
Deduct additional investment...................................................
10,000
Withdrawals from the business............................................ (c) $ (16,500)

IV. Owner's equity at end of year ($310,000 $170,000).............


Add decrease due to net loss ($140,000 $160,000).............
Add withdrawals.........................................................................
Deduct additional investment...................................................
Add liabilities at beginning of year..........................................
Assets at beginning of year..................................................

$140,000
20,000
$160,000
75,000
$235,000
50,000
$185,000
150,000
(d) $335,000

Ex. 119
a.
REVIVAL INTERIORS
Balance Sheet
August 31, 20
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$15,000
8,500
750
$24,250

Accounts payable...........

$ 3,850

Owners Equity

Laura Fedro, capital.......


Total liabilities and
owners equity............

20,400
$24,250

REVIVAL INTERIORS
Balance Sheet
September 30, 20
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$25,500
9,780
600
$35,880

Accounts payable...........

$ 4,150

Owners Equity

Laura Fedro, capital.......


Total liabilities and
owners equity............

31,730
$ 35,880

b.

Owner's equity, September 30.......................................


Owner's equity, August 31.............................................
Net income................................................................

$31,730
20,400
$11,330

c.

Owner's equity, September 30.......................................


Owner's equity, August 31.............................................
Increase in owner's equity.......................................
Add withdrawal................................................................
Net income................................................................

$31,730
20,400
$11,330
7,500
$18,830

Ex. 120
Balance sheet: b, c, e, f, h, i, j, l, m, n, o
Income statement: a, d, g, k

Ex. 121
1.
2.
3.
4.

cfinancing activity
binvesting activity
aoperating activity
aoperating activity

Ex. 122
1. All financial statements should contain the name of the business in their
heading. The statement of owners equity is incorrectly headed as Lynn
Soby rather than Aspen Realty. The heading of the balance sheet needs the
name of the business.
2. The income statement and statement of owners equity cover a period of time
and should be labeled For the Month Ended March 31, 2003.
3. The year in the heading for the statement of owners equity should be 2003
rather than 2002.
4. The balance sheet should be labeled as of March 31, 2003, rather than For
the Month Ended March 31, 2003.
5. In the income statement, the miscellaneous expense amount should be listed
as the last operating expense.
6. In the income statement, the total operating expenses are incorrectly
subtracted from the sales commissions, resulting in an incorrect net income
amount. The correct net income should be $3,625.00. This also affects the
statement of owners equity and the amount of Lynn Soby, capital, that
appears on the balance sheet.
7. In the statement of owners equity, the additional investment should be added
first to Lynn Soby, capital, as of March 1, 2003. The net income should be
presented next, followed by the amount of withdrawals, which is subtracted
from the net income to yield a net increase in owners equity.
8. Accounts payable should be listed as a liability on the balance sheet.
9. Accounts receivable and supplies should be listed as assets on the balance
sheet.
10. The balance sheet assets should equal the sum of the liabilities and owners
equity.

Ex. 122 Concluded


Corrected financial statements appear as follows:
ASPEN REALTY
Income Statement
For the Month Ended March 31, 2003
Sales commissions.............................................................
Operating expenses:
Office salaries expense...............................................
Rent expense................................................................
Automobile expense....................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$37,100
$23,150
7,800
1,750
225
550
33,475
$ 3,625

ASPEN REALTY
Statement of Owners Equity
For the Month Ended March 31, 2003
Lynn Soby, capital, March 1, 2003.....................................
Additional investment during March.................................
Net income for March..........................................................
Less withdrawals during March.........................................
Increase in owners equity..................................................
Lynn Soby, capital, March 31, 2003...................................

$ 7,450
$ 1,500
3,625
$ 5,125
1,000
4,125
$11,575

ASPEN REALTY
Balance Sheet
March 31, 2003
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$ 2,350
10,200
1,325
$13,875

Accounts payable...........

$ 2,300

Owners Equity

Lynn Soby, capital..........


Total liabilities and
owners equity............

11,575
$13,875

Ex. 123
a. 2000: 0.20 ($5,196,000,000 $26,497,000,000)
1999: 0.26 ($3,038,000,000 $11,811,000,000)
b. The margin of protection to the creditors increased in 2000. A comparison
with the ratio for similar businesses and with earlier periods for Cisco
Systems might be useful in assessing these ratios further.

PROBLEMS
Prob. 11A
1.
Assets

a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.

Owners
= Liabilities + Equity

Accounts
Accounts Linda Neece,
Cash + Receivable + Supplies = Payable + Capital
+10,000
+10,000
Investment
+ 1,150
+ 1,150
10,000
1,150
1,150
10,000
+ 4,500
+ 4,500
Fees earned
14,500
1,150
1,150
14,500
2,500
2,500
Rent expense
12,000
1,150
1,150
12,000
675
675
11,325
1,150
475
12,000
+ 3,250
+ 3,250
Fees earned
11,325
3,250
1,150
475
15,250
1,755
980
Auto expense
775
Misc. expense
9,570
3,250
1,150
475
13,495
1,500
1,500
Salaries exp.
8,070
3,250
1,150
475
11,995
935
935
Supplies exp.
8,070
3,250
215
475
11,060
1,000
1,000
Withdrawal
7,070
3,250
215
475
10,060

2. Owner's equity is the right of owners to the assets of the business. These
rights are increased by owners investments and revenues and decreased by
owner's withdrawals and expenses.

Prob. 12A
1.
FLY AWAY TRAVEL AGENCY
Income Statement
For the Year Ended December 31, 2003
Fees earned..........................................................................
Operating expenses:
Wages expense............................................................
Rent expense................................................................
Utilities expense...........................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$ 117,480
$35,500
27,000
10,240
2,125
1,750
76,615
$ 40,865

2.
FLY AWAY TRAVEL AGENCY
Statement of Owners Equity
For the Year Ended December 31, 2003
Ryan Stecker, capital, January 1, 2003..............................
Net income for the year.......................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Ryan Stecker, capital, December 31, 2003........................

$14,500
$40,865
30,000
10,865
$25,365

3.
FLY AWAY TRAVEL AGENCY
Balance Sheet
December 31, 2003
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$ 7,200
19,500
1,865
$ 28,565

Accounts payable...........

$ 3,200

Owners Equity

Ryan Stecker, capital.....


Total liabilities and
owners equity............

25,365
$ 28,565

Prob. 13A
1.
EAGLE FINANCIAL SERVICES
Income Statement
For the Month Ended January 31, 2003
Fees earned..........................................................................
Operating expenses:
Rent expense................................................................
Salaries expense..........................................................
Auto expense................................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$13,100
$2,500
2,000
1,250
1,050
350
7,150
$ 5,950

2.
EAGLE FINANCIAL SERVICES
Statement of Owners Equity
For the Month Ended January 31, 2003
Loren Thurlow, capital, January 1, 2003...........................
Investment on January 1, 2003..........................................
Net income for January.......................................................

$12,500
5,950
$18,450
3,000

Less withdrawals.................................................................
Increase in owners equity..................................................
Loren Thurlow, capital, January 31, 2003.........................

15,450
$15,450

3.
EAGLE FINANCIAL SERVICES
Balance Sheet
January 31, 2003
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$11,250
4,350
275
$15,875

Accounts payable...........

425

Owners Equity

Loren Thurlow, capital...


Total liabilities and
owners equity............

15,450
$15,875

Prob. 14A
1.
Assets

a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.

Cash
+ 5,000

5,000
850
4,150
16,200
20,350
2,000
18,350
4,500
13,850
2,250
11,600
4,250
7,350
7,350

= Liabilities +

+ Supplies
+1,250
1,250
1,250
1,250
1,250
1,250
1,250
1,250
650
600

Owners
Equity

Accounts Dori French,


= Payable + Capital
+ 5,000
+1,250
1,250
5,000
850
400
5,000
+ 16,200
400
21,200
2,000
400
19,200
4,500
400
14,700
1,900

350
400
12,450
4,250
400
8,200

650
400
7,550

Investment

Sales commissions
Rent expense
Withdrawal
Auto expense
Misc. expense
Salaries expense
Supplies expense

2.
DEAL REALTY
Income Statement
For the Month Ended March 31, 20
Sales commissions.............................................................
Operating expenses:
Office salaries expense...............................................
Rent expense................................................................
Automobile expense....................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$16,200
$4,250
2,000
1,900
650
350
9,150
$ 7,050

Prob. 14A Concluded


DEAL REALTY
Statement of Owners Equity
For the Month Ended March 31, 20
Dori French, capital, March 1, 20...................................
Investment on March 1, 20..............................................
Net income for March..........................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Dori French, capital, March 31, 20.................................

$ 5,000
7,050
$12,050
4,500
7,550
$7,550

DEAL REALTY
Balance Sheet
March 31, 20
Assets

Cash..................................
Supplies............................

Liabilities

$ 7,350
600

Accounts payable...........

400

Owners Equity

Total assets......................

$ 7,950

Dori French, capital........


Total liabilities and
owners equity............

7,550
$ 7,950

Prob. 15A
1.
Assets

Liabilities

Accounts
Cash + Receivable + Supplies + Land =
6,250 + 18,100
+ 2,200 + 40,000 =

Accounts
Payable
7,800

+ Bea Cheever, Capital


+ Bea Cheever, Capital

7,800

+ Bea Cheever, Capital

66,550

58,750

Owner's Equity

Bea Cheever, Capital

Prob. 15A Continued


2.
Assets
Accounts
Cash + Receivable + Supplies +
Bal.
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.

6,250
+ 15,750
22,000
2,500
19,500

18,100

19,500
5,100
14,400

18,100

14,400
5,570

27,020

Bal.
h.
Bal.
i.
Bal.
j.
Bal.

8,830
+ 12,100
20,930

27,020
12,100
14,920

20,930
7,500
13,430

14,400

18,100
18,100

18,100
+ 8,920
27,020

2,200
2,200

Land
40,000
40,000

2,200
+ 1,650
3,850

40,000

3,850

40,000

3,850
3,850

40,000

40,000
40,000

Liabilities +

Accounts
Payable
7,800
7,800
7,800
+ 1,650
9,450
5,100
4,350
4,350
+ 6,000
10,350

3,850

40,000

10,350

40,000

10,350

14,920

3,850
1,350
2,500

40,000

10,350

14,920

2,500

40,000

10,350

Owners
Equity

Bea Cheever,
Capital
58,750
+ 15,750
74,500
2,500
72,000

Dry cleaning sales


Rent expense

72,000
72,000
+ 8,920
80,920
6,000
74,920
2,400
1,580

960

630
69,350
69,350
1,350
68,000
7,500
60,500

Dry cleaning sales


Dry cleaning expense
Wages expense
Truck expense
Utilities expense
Miscellaneous expense

Supplies expense
Withdrawals

Prob. 15A Concluded


3. a.
PERSNICKETY DRY CLEANERS
Income Statement
For the Month Ended July 31, 20
Dry cleaning sales...............................................................
Operating expenses:
Dry cleaning expense..................................................
Rent expense................................................................
Wages expense............................................................
Truck expense..............................................................
Supplies expense.........................................................
Utilities expense...........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$24,670
$6,000
2,500
2,400
1,580
1,350
960
630
15,420
$ 9,250

b.
PERSNICKETY DRY CLEANERS
Statement of Owners Equity
For the Month Ended July 31, 20
Bea Cheever, capital, July 1, 20......................................
Net income for July.............................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Bea Cheever, capital, July 31, 20....................................

$58,750
$9,250
7,500
1,750
$60,500

c.
PERSNICKETY DRY CLEANERS
Balance Sheet
July 31, 20
Assets

Liabilities

Cash..................................
Accounts receivable........
Supplies............................
Land..................................

$13,430
14,920
2,500
40,000

Total assets......................

$70,850

Accounts payable...........

$10,350

Owners Equity

Bea Cheever, capital......


Total liabilities and
owners equity............

60,500
$70,850

Prob. 16A
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Fees earned, $15,000


Supplies expense, $1,500
Ray Conway, capital, April 1, 2003, $0
Net income for April, $6,200
$26,200
Increase in owners equity, $23,200
Ray Conway, capital, April 30, 2003, $23,200
Total assets, $24,000
Ray Conway, capital, $23,200
Total liabilities and owners equity, $24,000

k.
i.
m.
n.
o.
p.
q.

Cash received from customers, $15,000


Net cash flow from operating activities, $5,900
Cash payments for acquisition of land, $(20,000)
Cash received as owners investment, $20,000
Cash withdrawal by owner, $(3,000)
Net cash flow from financing activities, $17,000
Net cash flow and April 30, 2003 cash balance, $2,900

Prob. 11B
1.
Assets

a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.

= Liabilities +

Owners
Equity

Accounts
Accounts
Fran Cowles,
Cash + Receivable + Supplies = Payable +
Capital
+15,000
+15,000 Investment
+ 750
+ 750
15,000
750
750
15,000
625
625
14,375
750
125
15,000
+ 5,250
+ 5,250 Fees earned
19,625
750
125
20,250
1,000
1,000 Rent expense
18,625
750
125
19,250
1,230
880 Auto expense
350 Misc. expense
17,395
750
125
18,020
1,200
1,200 Salaries exp.
16,195
750
125
16,820
575
575 Supplies exp.
16,195
175
125
16,245
+ 7,350
+ 7,350 Fees earned
16,195
7,350
175
125
23,595
1,500
1,500 Withdrawal
14,695
7,350
175
125
22,095

2. Owner's equity is the right of owners to the assets of the business. These rights
are increased by owners investments and revenues and decreased by owner's
withdrawals and expenses.

Prob. 12B
1.
HIAWATHA TRAVEL SERVICE
Income Statement
For the Year Ended April 30, 2003
Fees earned..........................................................................
Operating expenses:
Wages expense............................................................
Rent expense................................................................
Utilities expense...........................................................
Supplies expense.........................................................
Taxes expense..............................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$131,600
$65,850
18,900
11,250
3,550
2,800
1,475
103,825
$ 27,775

2.
HIAWATHA TRAVEL SERVICE
Statement of Owners Equity
For the Year Ended April 30, 2003
Rob Graybill, capital, May 1, 2002.....................................
Net income for the year.......................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Rob Graybill, capital, April 30, 2003..................................

$25,000
$27,775
15,000
12,775
$37,775

3.
HIAWATHA TRAVEL SERVICE
Balance Sheet
April 30, 2003
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$ 26,525
15,675
1,675
$ 43,875

Accounts payable...........

$ 6,100

Owner's Equity

Rob Graybill, capital......


Total liabilities and
owners equity............

37,775
$43,875

Prob. 13B
1.
INFINET COMPUTER SERVICES
Income Statement
For the Month Ended October 31, 2003
Fees earned..........................................................................
Operating expenses:
Salaries expense..........................................................
Rent expense................................................................
Auto expense................................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$8,250
$2,000
1,800
780
325
375
5,280
$2,970

2.
INFINET COMPUTER SERVICES
Statement of Owners Equity
For the Month Ended October 31, 2003
Chester Hoche, capital, October 1, 2003..........................
Investment on October 1, 2003..........................................
Net income for October......................................................

$5,000
2,970
$7,970
1,000

Less withdrawals.................................................................
Increase in owners equity..................................................
Chester Hoche, capital, October 31, 2003........................

6,970
$6,970

3.
INFINET COMPUTER SERVICES
Balance Sheet
October 31, 2003
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$3,295
3,750
395
$7,440

Accounts payable...........

470

Owners Equity

Chester Hoche, capital. .


Total liabilities and
owners equity............

6,970
$ 7,440

Prob. 14B
1.

Assets

Cash
a.
b.
Bal.
c.

+ 10,000
3,600
6,400
1,450

Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.

4,950
4,950
+ 18,750
23,700

690
23,010
4,000
19,010
3,000
16,010
16,010

= Liabilities +

+ Supplies =

Owners
Equity

Accounts Angie Tate,


Payable + Capital
+ 10,000
3,600
6,400

900

550
4,950

+1,325
1,325

+1,325
1,325

1,325
1,325

1,325
690
635

1,325

635

1,325
725
600

635
635

4,950
+ 18,750
23,700
23,700
4,000
19,700
3,000
16,700

725
15,975

Investment
Rent expense
Auto expense
Misc. expense

Sales commissions

Salaries expense
Withdrawal
Supplies expense

2.
VOGUE REALTY
Income Statement
For the Month Ended August 31, 2003
Sales commissions.............................................................
Operating expenses:
Office salaries expense...............................................
Rent expense................................................................
Automobile expense....................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$18,750
$4,000
3,600
900
725
550
9,775
$ 8,975

Prob. 14B Concluded


VOGUE REALTY
Statement of Owners Equity
For the Month Ended August 31, 2003
Angie Tate, capital, August 1, 2003...................................
Investment on August 1, 2003............................................
Net income for August........................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Angie Tate, capital, August 31, 2003.................................

$10,000
8,975
$18,975
3,000
15,975
$15,975

VOGUE REALTY
Balance Sheet
August 31, 2003
Assets

Cash..................................
Supplies............................

Liabilities

$16,010
600

Accounts payable...........

635

Owners Equity

Total assets......................

$16,610

Angie Tate, capital..........


Total liabilities and
owners equity............

15,975
$16,610

Prob. 15B
1.
Assets

= Liabilities +

Accounts
Cash + Receivable + Supplies + Land =
7,400 + 13,750
+ 1,560
+ 25,000 =
47,710

43,830

Owner's Equity

Accounts
Payable + Merritt Paisley, Capital
3,880
+ Merritt Paisley, Capital
3,880

+ Merritt Paisley, Capital


Merritt Paisley, Capital

Prob. 15B Continued


2.
Assets

Bal.
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.

Bal.
i.
Bal.
j.
Bal.

Cash
7,400
3,000
4,400

= Liabilities +

Accounts
+ Receivable + Supplies + Land
13,750
1,560
25,000

Accounts
Payable +
3,880

13,750
+ 6,150
19,900

1,560

25,000

3,880

1,560

25,000

19,900

1,560
+ 840
2,400

25,000
25,000

3,880
1,680
2,200
+ 840
3,040

19,900
11,750
8,150

2,400

25,000

3,040

2,400

25,000

29,070
3,225

8,150

2,400

25,000

3,040
+ 5,400
8,440

25,845

8,150

4,400
1,680
2,720
2,720
+ 14,600
17,320
+ 11,750
29,070

25,845
5,000
20,845

19,900

8,150
8,150

2,400
1,050
1,350
1,350

25,000
25,000
25,000

8,440
8,440
8,440

Owners
Equity
Merritt
Paisley,
Capital
43,830
3,000
40,830
+ 6,150
46,980

Rent expense
Dry cleaning sales

46,980
46,980
+ 14,600
61,580
61,580
5,400
56,180
1,800

725

510

190
52,955
1,050
51,905
5,000
46,905

Dry cleaning sales

Dry cleaning expense


Wages expense
Truck expense
Utilities expense
Miscellaneous expense
Supplies expense
Withdrawal

Prob. 15B Concluded


3. a.
SWAN DRY CLEANERS
Income Statement
For the Month Ended November 30, 20
Dry cleaning sales...............................................................
Operating expenses:
Dry cleaning expense..................................................
Rent expense................................................................
Wages expense............................................................
Supplies expense.........................................................
Truck expense..............................................................
Utilities expense...........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$20,750
$5,400
3,000
1,800
1,050
725
510
190
12,675
$ 8,075

b.
SWAN DRY CLEANERS
Statement of Owners Equity
For the Month Ended November 30, 20
Merritt Paisley, capital, November 1, 20........................
Net income for November...................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Merritt Paisley, capital, November 30, 20......................

$43,830
$8,075
5,000
3,075
$46,905

c.
SWAN DRY CLEANERS
Balance Sheet
November 30, 20
Assets

Liabilities

Cash..................................
Accounts receivable........
Supplies............................
Land..................................

$20,845
8,150
1,350
25,000

Total assets......................

$55,345

Accounts payable...........

$ 8,440

Owners Equity

Merritt Paisley, capital....


Total liabilities and
owners equity............

46,905
$55,345

Prob. 16B
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Wages expense, $5,375


Net income, $11,550
R. J. Cain, capital, June 1, 2003, $0
Investment on June 1, 2003, $45,000
Net income for June, $11,550
$56,550
Withdrawals, $6,000
Increase in owners equity, $50,550
R. J. Cain, capital, June 30, 2003, $50,550
Land, $36,000

k.
l.
m.
n.
o.
p.
q.

Total assets, $51,750


R. J. Cain, capital, $50,550
Total liabilities and owners equity, $51,750
Cash received from customers, $23,500
Net cash flow from operating activities, $11,750
Net cash flow from financing activities, $39,000
Net cash flow and June 30, 2003 cash balance, $14,750

CONTINUING PROBLEM
1.

Owners
= Liabilities + Equity

Assets

Lynn
Accounts
Accounts
Kwan,
Cash + Receivable + Supplies = Payable + Capital
Nov. 1
2
Bal.
Nov. 2
Bal.
Nov. 4
Bal.
Nov. 6
Bal.
Nov. 8
Bal.
Nov. 12
Bal.
Nov. 13
Bal.
Nov. 16
Bal.
Nov. 22
Bal.
Nov. 25
Bal.
Nov. 29
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.
Nov. 30
Bal.

+ 3,500
+ 1,000
4,500

500
4,000

+ 3,500 Investment
+ 1,000 Fees earned
4,500

500 Office rent exp.


4,000
+ 175
175

4,000
300
3,700
325
3,375
100
3,275
50
3,225
75
3,300
3,300
250
3,550
120
3,430
450
3,880
200
3,680
150
3,530

4,000
300 Advertising exp.
3,700

325 Equip. rent exp.


3,375

100 Music expense


3,275

175

175

175

175

175

175

175
50
125

+
175
+ 600
600

125
+

175

125
+

600

175

125

600

175

125
+

600

175

125

600

175

125

600

3,530
75
3,455

250
3,205

125
3,080

+ 175
175

600

175
90
85

125

125

600

85

125

600

85

125

600

85

125

3,275
75
3,350
600
3,950
250
4,200
120
4,080
450
4,530
200
4,330
150
4,180
90
4,090
75
4,015
250
3,765
125
3,640

Fees earned
Fees earned
Fees earned
Music expense
Fees earned
Wages expense
Utilities exp.
Supplies exp.
Misc. expense
Music expense
Withdrawal

Continuing Problem

Concluded

2.
DANCIN MUSIC
Income Statement
For the Month Ended November 30, 2002
Fees earned..........................................................................
Operating expenses:
Office rent expense......................................................
Music expense..............................................................
Equipment rent expense..............................................
Advertising expense....................................................
Wages expense............................................................
Utilities expense...........................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$2,375
$

500
470
325
300
200
150
90
75
2,110
265

3.
DANCIN MUSIC
Statement of Owners Equity
For the Month Ended November 30, 2002
Lynn Kwan, capital, November 1, 2002.............................
Investment on November 1, 2002......................................
Net income for November...................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Lynn Kwan, capital, November 30, 2002...........................

$3,500
265
$3,765
125
3,640
$3,640

4.
DANCIN MUSIC
Balance Sheet
November 30, 2002
Assets

Cash..................................
Accounts receivable........
Supplies............................
Total assets......................

Liabilities

$3,080
600
85
$3,765

Accounts payable...........

$ 125

Owners Equity

Lynn Kwan, capital.........


Total liabilities and
owners equity............

3,640
$3,765

SPECIAL ACTIVITIES
Activity 11
1. Acceptable professional conduct requires that Joel Phinney supply Bridger
National Bank with all the relevant financial statements necessary for the
bank to make an informed decision. Therefore, Joel should provide the
complete set of financial statements. These can be supplemented with a
discussion of the net loss in the past year or other data explaining why
granting the loan is a good investment by the bank.
2. a. Owners are generally willing to provide bankers with information about the
operating and financial condition of the business, such as the following:
Operating Information:

description of business operations

results of past operations

preliminary results of current operations

plans for future operations

Financial Condition:

list of assets and liabilities (balance sheet)

estimated current values of assets

owners personal investment in the business

owners commitment to invest additional funds in the business


Owners are normally reluctant to provide the following types of
information to bankers:
Proprietary Operating Information. Such information, which might hurt
the business if it becomes known by competitors, might include special
processes used by the business or future plans to expand operations
into areas that are not currently served by a competitor.
Personal Financial Information. Owners may have little choice here
because banks often require owners of small businesses to pledge their
personal assets as security for a business loan. Personal financial
information requested by bankers often includes the owner's net worth,
salary, and other income. In addition, bankers usually request
information about factors that might affect the personal financial
condition of the owner. For example, a pending divorce by the owner
might significantly affect the owner's personal wealth.

Activity 11

Concluded

b. Bankers typically want as much information as possible about the ability


of the business and the owner to repay the loan with interest. Examples of
such information are described above.
c. Both bankers and business owners share the common interest of the
business doing well and being successful. If the business is successful,
the bankers will receive their loan payments on time with interest, and the
owners will increase their personal wealth.

Activity 12
The difference in the two bank balances, $150,000 ($180,000 $30,000), may not
be pure profit from an accounting perspective. To determine the accounting profit
for the seven-month period, the revenues for the period would need to be
matched with the related expenses. The revenues minus the expenses would
indicate whether the business generated net income (profit) or a net loss for the
period. Using only the difference between the two bank account balances ignores
such factors as amounts due from customers (receivables), liabilities (accounts
payable) that need to be paid for wages or other operating expenses, additional
investments that Dr. North may have made in the business during the period, or
withdrawals during the period that Dr. North might have taken for personal
reasons unrelated to the business.
Some businesses that have few, if any, receivables or payables may use a cash
basis of accounting. The cash basis of accounting ignores receivables and
payables because they are assumed to be insignificant in amount. However, even
with the cash basis of accounting, additional investments during the period and
any withdrawals during the period have to be considered in determining the net
income (profit) or net loss for the period.

Activity 13
1.
Owners
= Liabilities + Equity

Assets

a.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.
i.
Bal.
j.
Bal.
k.
Bal.

+
+

Cash
500
160
340
80
260
70
190
800
990
150
1,140
300
840
75
765
300
1,065

Supplies
+ 160
160

160
+
160

1,065
400
665

30
30

160

30
+

160

30

160

30

160

30
+

Yvonne
Accounts
Tobin,
=
Payable + Capital
+ 500

160
85
75

30

30

75

30

500
80
420
100
320
800
1,120
150
1,270
300
970
75
895
300
1,195
85
1,110
400
710

Investment
Rent expense
Rent expense
Service revenue
Service revenue
Salary expense
Misc. expense
Service revenue
Supplies expense
Withdrawal

2.
FORTYLOVE
Income Statement
For the Month Ended September 30, 20
Service revenue...................................................................
Operating expenses:
Salary expense.............................................................
Rent expense................................................................
Supplies expense.........................................................
Miscellaneous expense...............................................
Total operating expenses........................................
Net income...........................................................................

$1,250
$300
180
85
75
$

640
610

Activity 13Continued
3.
FORTYLOVE
Statement of Owners Equity
For the Month Ended September 30, 20
Yvonne Tobin, capital, September 1, 20........................
Investment on September 1, 20......................................
Net income for September..................................................
Less withdrawals.................................................................
Increase in owners equity..................................................
Yvonne Tobin, capital, September 30, 20......................

$ 500
610
$1,110
400
710
$710

4.
FORTYLOVE
Balance Sheet
September 30, 20
Assets

Cash..................................
Supplies............................

Liabilities

$665
75

Accounts payable...........

$ 30

Owners Equity

Total assets......................
5.

$740

Yvonne Tobin, capital.....


Total liabilities and
owners equity............

710
$740

a. Forty-Love would provide Yvonne with $50 more income per month than
working as a waitress. This amount is computed as follows:
Net income of Forty-Love, per month......................................
Earnings as waitress, per month:
20 hours per week $7 per hour 4 weeks........................
Difference....................................................................................

$610
560
$ 50

Activity 13Concluded
b. Other factors that Yvonne should consider before discussing a long-term
arrangement with the Racquet Club include the following:
Yvonne should consider whether the results of operations for September are
indicative of what to expect each month. For example, Yvonne should
consider whether club members will continue to request lessons or use the
ball machine during the winter months when interest in tennis may slacken.
Yvonne should evaluate whether the additional income of $50 per month from
FortyLove is worth the risk being taken and the effort being expended.
Yvonne should also consider how much her investment in FortyLove could
have earned if invested elsewhere. For example, if the initial investment of
$500 had been deposited in a money market or savings account at 3%
interest, it would have earned $1.25 interest in September, or $15 for the year.
Note to Instructors: Numerous other considerations could be mentioned by
students, such as the ability of Yvonne to withdraw cash from FortyLove for
personal use. Unlike a money market account or savings account, some of
her investment in FortyLove will be in the form of supplies (tennis balls, etc.)
which may not be readily convertible to cash. The objective of this case is not
to mention all possible considerations, but rather to encourage students to
begin thinking about the use of accounting information in making business
decisions.

Activity 14
Note to Instructors: The purpose of this activity is to familiarize students with the
certification requirements and their on-line availability.

Activity 15
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities

1998
positive
negative
positive

1997
positive
negative
positive

1996
negative
negative
positive

Start-up companies normally experience negative cash flows from operating and
investing activities. Also, start-up companies normally have positive cash flows
from financing activitiesactivities from raising capital.