Chapter 01 - Accounting in Business

Chapter 1
Accounting in Business
EXERCISES
Exercise 1-1 (10 minutes)

C 1. Analyzing and interpreting reports

C 2. Presenting financial information
R 3. Keeping a log of service costs
R 4. Measuring the costs of a product
C 5. Preparing financial statements
I 6. Seeing revenues generated from a service
I 7. Observing employee tasks behind a product
R 8. Registering cash sales of products sold

Exercise 1-2 (20 minutes)

Part A.
1. I 5. I
2. E 6. E
3. I 7. I
4. E

Part B.
1. I 5. I
2. I 6. E
3. E 7. I
4. E 8. I

Exercise 1-3 (10 minutes)

1. B 5. C
2. A 6. C
3. B 7. A
4. B 8. A
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Chapter 01 - Accounting in Business

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Chapter 01 - Accounting in Business

Exercise 1-4 (10 minutes)

1. A 4. F
2. G 5. C
3. D

Exercise 1-6 (10 minutes)

a. (C) Corporation e. (C) Corporation

b. (P) Partnership f. (SP) Sole proprietorship
c. (SP) Sole proprietorship g. (C) Corporation
d. (SP) Sole proprietorship

Exercise 1-7 (10 minutes)

Code Description Principle/Assumption

H. 1. A company reports details behind financial Full disclosure
statements that would impact users' decisions. principle
G 2. Financial statements reflect the assumption that Going-concern
the business continues operating. assumption
F 3. A company records the expenses incurred to Matching (expense
generate the revenues reported. recognition) principle
A 4. Derived from long-used and generally accepted General accounting
accounting practices. principle
C 5. Every business is accounted for separately from Business entity
its owner or owners. assumption
D 6. Revenue is recorded only when the earnings Revenue recognition
process is complete. principle
E 7. Usually created by a pronouncement from an Specific accounting
authoritative body. principle
B 8. Information is based on actual costs incurred in Cost principle
transactions.

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Chapter 01 - Accounting in Business

Exercise 1-8 (10 minutes)

Assets = Liabilities + Equity

(a) $ 65,000 = $ 20,000 + $45,000

$100,000 = $ 34,000 + (b) $66,000

$154,000 = (c) $114,000 + $40,000

Exercise 1-9 (20 minutes)

a. Using the accounting equation at the beginning of the year:

Assets = Liabilities + Equity
$300,000 = ? + $100,000
Thus, beginning liabilities = $200,000

Using the accounting equation at the end of the year:

Assets = Liabilities + Equity
$300,000 + $80,000 = $200,000+ $50,000 + ?
$380,000 = $250,000 + ?
Thus, ending equity = $130,000

Alternative approach to solving part (b):

Assets($80,000) = Liabilities($50,000) + Equity(?)
where “” refers to “change in.”
Thus: Ending Equity = $100,000 + $30,000 = $130,000

b. Using the accounting equation:

Assets = Liabilities + Equity
$123,000 = $47,000 + ?
Thus, equity = $76,000

c. Using the accounting equation at the end of the year:

Assets = Liabilities + Equity
$190,000 = $70,000 - $5,000 + ?
$190,000 = $65,000 + $125,000
Using the accounting equation at the beginning of the year:
Assets = Liabilities + Equity
$190,000 - $60,000 = $70,000 + ?
$130,000 = $70,000 + ?

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Chapter 01 - Accounting in Business

Thus: Beginning Equity = $60,000

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Chapter 01 - Accounting in Business

Exercise 1-10 (20 minutes)

a. Started the business with the owner investing $40,000 cash in the
business.
b. Purchased office supplies for $3,000 by paying $2,000 cash and putting
the remaining $1,000 balance on credit.
c. Purchased office furniture by paying $8,000 cash.
d. Billed a customer $6,000 for services earned.
e. Provided services for $1,000 cash.

Exercise 1-11 (20 minutes)

a. Purchased land for $4,000 cash.

b. Purchased $1,000 of office supplies on credit.
c. Billed a client $1,900 for services provided.
d. Paid the $1,000 account payable created by the credit purchase of
office supplies in transaction b.
e. Collected $1,900 cash for the billing in transaction c.

Exercise 1-12 (15 minutes)

Examples of transactions that fit each case include:

a. Cash withdrawals (or some other asset) paid to the owner of the
business; OR, the business incurs an expense paid in cash.
b. Business purchases equipment (or some other asset) on credit.
c. Business signs a note payable to extend the due date on an account
payable; OR, the business renegotiates a liability (perhaps to obtain a
lower interest rate.)
d. Business pays an account payable (or some other liability) with cash
(or some other asset).
e. Business purchases office supplies (or some other asset) for cash (or
some other asset).
f. Business incurs an expense that is not yet paid (for example, when
employees earn wages that are not yet paid).
g. Owner invests cash (or some other asset) in the business; OR, the
business earns revenue and accepts cash (or another asset).
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 Chapter 01 - Accounting in Business

Exercise 1-13 (30 minutes)

Assets = Liabilities + Equity

[Link],
Accounts Equip- Accounts [Link],
Cash + Receivable + = + – With- + Revenues – Expenses
ment Payable Capital
drawals
a. +$60,000 + $15,000 = + $75,000
b. – 1,500 ______ ______ – $1,500
Bal. 58,500 + + 15,000 = + 75,000 – 1,500
c. _______ + 10,000 +$10,000 ______ _____
Bal. 58,500 + + 25,000 = 10,000 + 75,000 – 1,500
d. + 2,500 ______ _______ ______ + $2,500 _____
Bal. 61,000 + + 25,000 = 10,000 + 75,000 + 2,500 – 1,500
e. _______ + $8,000 ______ _______ ______ + 8,000 _____
Bal. 61,000 + 8,000 + 25,000 = 10,000 + 75,000 + 10,500 – 1,500
f. – 6,000 ______ + 6,000 _______ ______ _____ _____
Bal. 55,000 + 8,000 + 31,000 = 10,000 + 75,000 + 10,500 – 1,500
g. – 3,000 ______ ______ _______ ______ _____ – 3,000
Bal. 52,000 + 8,000 + 31,000 = 10,000 + 75,000 + 10,500 – 4,500
h. + 5,000 - 5,000 ______ _______ ______ _____ _____
Bal. 57,000 + 3,000 + 31,000 = 10,000 + 75,000 + 10,500 – 4,500
i. – 10,000 ______ ______ – 10,000 ______ _____ _____
Bal. 47,000 + 3,000 + 31,000 = 0 + 75,000 + 10,500 – 4,500
j. – 1,000 ______ ______ _______ ______ – $1,000 _____ _____
Bal. $46,000 + $3,000 + $31,000 = $ 0 + $75,000 – $1,000 + $10,500 – $4,500

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Chapter 01 - Accounting in Business

Exercise 1-14 (10 minutes)

Return on assets = Net income / Average total assets

= $40,000 / [($200,000 + $300,000)/2]

= 16%

Interpretation: Swiss Group’s return on assets of 16% is markedly above

the 10% return of its competitors. Accordingly, its performance is
assessed as superior to its competitors.

Exercise 1-15 (15 minutes)

ERNST CONSULTING
Income Statement
For Month Ended October 31
Revenues
Consulting fees earned...................... $14,000
Expenses
Salaries expense................................. $7,000
Rent expense....................................... 3,550
Telephone expense............................ 760
Miscellaneous expenses.................... 580
Total expenses.................................... 11,890
Net income.................................................. $ 2,110

Exercise 1-16 (15 minutes)

ERNST CONSULTING
Statement of Owner’s Equity
For Month Ended October 31
E. Ernst, Capital, October 1............................. $ 0
Add: Owner’s investment.......................... 84,000
Net income (from Exercise 1-15)........ 2,110
86,110
Less: Withdrawals by owner....................... 2,000
E. Ernst, Capital, October 31........................... $84,110

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Chapter 01 - Accounting in Business

Exercise 1-17 (15 minutes)

ERNST CONSULTING
Balance Sheet
October 31
Assets Liabilities
Cash............................... $11,360 Accounts payable................. $ 8,500
Accounts receivable.... 14,000
Office supplies.............. 3,250 Equity
Office equipment.......... 18,000 E. Ernst, Capital*................... 84,110
Land............................... 46,000 _______
Total assets................... $92,610 Total liabilities and equity.... $92,610

* For the computation of this amount see Exercise 1-16.

Exercise 1-18 (15 minutes)

ERNST CONSULTING
Statement of Cash Flows
For Month Ended October 31
Cash flows from operating activities
Cash received from customers............................................ $ 0
Cash paid to employees1...................................................... (1,750)
Cash paid for rent.................................................................. (3,550)
Cash paid for telephone expenses...................................... (760)
Cash paid for miscellaneous expenses............................... (580)
Net cash used by operating activities................................. ( 6,640)

Cash flows from investing activities

Purchase of office equipment.............................................. (18,000)
Net cash used by investing activities................................ (18,000)

Cash flows from financing activities

Investments by owner........................................................... 38,000
Withdrawals by owner........................................................... (2,000)
Net cash provided by financing activities........................... 36,000

Net increase in cash.............................................................. $11,360

Cash balance, October 1....................................................... 0
Cash balance, October 31..................................................... $11,360
1
$7,000 Salaries Expense - $5,250 still owed = $1,750 paid to employees.
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Chapter 01 - Accounting in Business

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Chapter 01 - Accounting in Business

Exercise 1-19 (10 minutes)

I 1. Cash purchase of equipment O 5. Cash paid on an account payable

F 2. Cash withdrawal by owner O 6. Cash received from clients
O 3. Cash paid for advertising F 7. Cash investment by owner
O 4. Cash paid for wages O 8. Cash paid for rent

Exercise 1-20 (20 minutes)

BMW GROUP
Income Statement
For Year Ended December 31, 2013
(Euros in millions)

Revenues ...................................................................... € 68,821

Expenses
Cost of sales............................................................ €54,276
Sales and administrative costs.............................. 6,177
Other expenses........................................................ 3,487
Total expenses......................................................... 63,940
Net income.................................................................... € 4,881

Exercise 1-21B (10 minutes)

a. Financing*
b. Financing
c. Operating
d. Investing
e. Investing
* Would also be listed as “investing” if resources contributed by owner were in the
form of nonfinancial resources.

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Chapter 01 - Accounting in Business

PROBLEM SET A
Problem 1-1A (25 minutes)

Income Statement of
Balance Sheet Statement Cash Flows
Total Total Total Net Operating Financing Investing
Transaction Assets Liab. Equity Income Activities Activities Activities
1 Owner invests
cash in business + + +
2 Receives cash
for services + + + +
provided
3 Pays cash for
employee wages – – – –
4 Incurs legal
costs on credit + – –
5 Borrows cash
by signing L-T + + +
note payable
6 Buys office
equipment +/– –
for cash
7 Buys land by
signing note + +
payable
8 Provides ser-
vices on credit + + +
9 Owner
withdraws cash – – –
10 Collects cash
on receivable +/– +
from (8)

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Chapter 01 - Accounting in Business

Problem 1-2A (40 minutes)

Part 1
Company A

(a) Equity on December 31, 2014:

Assets.......................................................... $55,000
Liabilities..................................................... (24,500)
Equity.......................................................... $30,500

(b) Equity on December 31, 2015:

Equity, December 31, 2014........................ $30,500

Plus investment by owner......................... 6,000
Plus net income.......................................... 8,500
Less withdrawals by owner....................... (3,500)
Equity, December 31, 2015....................... $41,500

(c) Liabilities on December 31, 2015:

Assets.......................................................... $58,000
Equity.......................................................... (41,500)
Liabilities..................................................... $16,500

Part 2
Company B

(a) and (b)

Equity: 12/31/2014 12/31/2015

Assets................................... $34,000 $40,000
Liabilities.............................. (21,500) (26,500)
Equity................................... $12,500 $13,500

(c) Net income for 2015:

Equity, December 31, 2014..................... $12,500
Plus investment by owner...................... 1,400
Plus net income....................................... ?
Less withdrawals by owner.................... (2,000)
Equity, December 31, 2015..................... $13,500

Therefore, net income must have been $ 1,600

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Chapter 01 - Accounting in Business

Problem 1-2A (Continued)

Part 3
Company C

First, calculate the beginning balance of equity:

Dec. 31, 2014
Assets.......................................................... $24,000
Liabilities..................................................... ( 9,000)
Equity.......................................................... $15,000

Next, find the ending balance of equity by completing this table:

Equity, December 31, 2014........................ $15,000

Plus investment by owner......................... 9,750
Plus net income.......................................... 8,000
Less withdrawals by owner....................... (5,875)
Equity, December 31, 2015........................ $26,875

Finally, find the ending amount of assets by adding the ending balance of
equity to the ending balance of liabilities:
Dec. 31, 2015
Liabilities..................................................... $29,000
Equity.......................................................... 26,875
Assets.......................................................... $55,875

Part 4
Company D

First, calculate the beginning and ending equity balances:

12/31/2014 12/31/2015
Assets...................................... $60,000 $85,000
Liabilities................................. (40,000) (24,000)
Equity...................................... $20,000 $61,000

Then, find the amount of investment by owner during 2015:

Equity, December 31, 2014.......................... $20,000

Plus investment by owner........................... ?
Plus net income............................................ 14,000
Less withdrawals by owner......................... 0
Equity, December 31, 2015.......................... $61,000
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Chapter 01 - Accounting in Business

Thus, investment by owner must have been $27,000

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Chapter 01 - Accounting in Business

Problem 1-2A (Concluded)

Part 5
Company E

First, compute the balance of equity as of December 31, 2015:

Assets.......................................................... $113,000
Liabilities.................................................... (70,000)
Equity.......................................................... $ 43,000

Next, find the beginning balance of equity as follows:

Equity, December 31, 2014........................ $ ?

Plus investment by owner......................... 6,500
Plus net income.......................................... 20,000
Less withdrawals by owner....................... (11,000)
Equity, December 31, 2015....................... $43,000

Thus, the beginning balance of equity is: $27,500

Finally, find the beginning amount of liabilities by subtracting the

beginning balance of equity from the beginning balance of assets:
Dec. 31, 2014
Assets.......................................................... $119,000
Equity.......................................................... (27,500)
Liabilities.................................................... $ 91,500

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Chapter 01 - Accounting in Business

Problem 1-3A (15 minutes)

Armani Company
Balance Sheet
December 31, 2015
Assets.............................. $90,000 Liabilities.................................. $44,000
Equity.......................................... 46,000
Total assets..................... $90,000 Total liabilities and equity....... $90,000

Problem 1-4A (15 minutes)

Edison Energy Company

Income Statement
For Year Ended December 31, 2015
Revenues ................................................. $55,000
Expenses.................................................. 40,000
Net income................................................ $15,000

Problem 1-5A (15 minutes)

Kojo Company
Statement of Owner’s Equity
For Year Ended December 31, 2015
K. Kojo, Capital, Dec. 31, 2014 ........................ $ 7,000
Add: Net income............................................... 8,000
15,000
Less: Withdrawals by owner............................ (1,000)
K. Kojo, Capital, Dec. 31, 2015......................... $14,000

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Chapter 01 - Accounting in Business

Problem 1-6A (15 minutes)

Kia Company
Statement of Cash Flows
For Year Ended December 31, 2015
Cash from operating activities ........................ $ 6,000
Cash used by investing activities.................... (2,000)
Cash used by financing activities.................... (2,800)
Net increase in cash.......................................... $ 1,200
Cash, December 31, 2014................................. 2,300
Cash, December 31, 2015................................. $ 3,500

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Chapter 01 - Accounting in Business

Problem 1-7A (60 minutes) Parts 1 and 2

Assets = Liabilities + Equity

Date Cash + Accounts + Office = Accounts + G. Gram, - G. Gram, + Revenues - Expenses
Receivable Equipment Payable Capital With-
drawals

May 1 +$40,000 = + $40,000

1 - 2,200 = - $2,200

3 + $1,890 = + $1,890
5 - 750 ` = - 750

8 + 5,400 = + $5,400
12 + $2,500 = + 2,500
15 - 750 = - 750

20 + 2,500 - 2,500 =

22 + 3,200 = + 3,200
25 + 3,200 - 3,200 =

26 - 1,890 = - 1,890
27 = + 80 - 80

28 - 750 = - 750

30 - 300 = - 300

30 - 280 = - 280

31 - 1,400 = - $1,400

$42,780 + $ 0 + $1,890 = $ 80 + $40,000 - $1,400 + $11,100 - $5,110

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Chapter 01 - Accounting in Business

Problem 1-7A (Continued)

Part 3
The Gram Co.
Income Statement
For Month Ended May 31
Revenues
Consulting services revenue ............ $11,100
Expenses
Rent expense....................................... $2,200
Salaries expense................................. 1,500
Cleaning expense............................... 750
Telephone expense............................ 300
Utilities expense.................................. 280
Advertising expense........................... 80

Total expenses.................................... 5,110

Net income.................................................. $ 5,990

The Gram Co.

Statement of Owner’s Equity
For Month Ended May 31

G. Gram, Capital, May 1............................................ $ 0

Add: Investment by owner..................................... 40,000
Net income...................................................... 5,990
45,990
Less: Withdrawals by owner................................... 1,400
G. Gram, Capital, May 31.......................................... $44,590

The Gram Co.

Balance Sheet
May 31
Assets Liabilities
Cash...............................$42,780 Accounts payable........................ $ 80
Office equipment.......... 1,890 Equity
G. Gram, Capital.......................... 44,590
_______
Total assets...................$44,670 Total liabilities and equity.......... $44,670

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Chapter 01 - Accounting in Business

Problem 1-7A (Concluded)

Part 3—continued

The Gram Co.

Statement of Cash Flows
For Month Ended May 31

Cash flows from operating activities

Cash received from customers $11,100
Cash paid for rent (2,200)
Cash paid for cleaning (750)
Cash paid for telephone (300)
Cash paid for utilities (280)
Cash paid to employees (1,500)
Net cash provided by operating activities $ 6,070

Cash flows from investing activities

Purchase of equipment (1,890)
Net cash used by investing activities (1,890)

Cash flows from financing activities

Investment by owner 40,000
Withdrawal by owner (1,400)
Net cash provided by financing activities 38,600
Net increase in cash $42,780
Cash balance, May 1 0
Cash balance, May 31 $42,780

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Chapter 01 - Accounting in Business

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