Problem Set B

Problem 1-1B:
Identify how each of the following separate transactions affects financial statements.
For the balance sheet, identify how each transaction affects total assets, total
liabilities, and total equity. For the income statement, identify how each transaction
affects net income. For the statement of cash flows, identify how each transaction
affects cash flows from operating activities, cash flows from financing activities, and
cash flows from investing activities. For increases, place a “1” in the column or
columns. For decreases, place a “2” in the column or columns. If both an increase and
a decrease occur, place “1y2” in the column or columns. The first transaction is
completed as an example.

Solution:
Transacti Balanc Balance Balanc Income Cash Cash Cash
on e Sheet – e Stateme Flows – Flows – Flows –
Sheet Total Sheet nt – Net Operati Financi Investin
– Total Liabiliti – Total Income ng ng g
Assets es Equity Activitie Activitie Activiti
s s es

1. Owner + 0 + 0 0 + 0
invests
cash in
business

2. Buys + + 0 0 0 0 –
building
by signing
note
payable

3. Pays – 0 – – – 0 0
cash for
salaries
incurred

4. + 0 + + + 0 0
Provides
services
for cash

5. Pays – 0 – – – 0 0
cash for
rent
incurred

6. Incurs 0 + – – 0 0 0
utilities
costs on
credit

7. Buys +/– 0 0 0 0 0 –
store
equipme
nt for
cash

8. Owner – 0 – 0 0 – 0
withdraw
s cash

9. + 0 + + 0 0 0
Provides
services
on credit
 10. +/– 0 0 0 + 0 0
Collects
cash on
receivabl
e from (9)

Quick Explanation:
(1) The business receives cash from the owner, which increases assets(cash) and also
increases owner equity(capital).

(2) Building increases assets, but liability also increases (note payable).

(3) Paying salaries reduces cash (asset) and equity (expense).

(4) Cash ↑ from customer, revenue ↑ equity, and NI ↑.

(5) Rent paid → cash ↓, expense ↑ → equity ↓.

(6) Utilities on credit → liability ↑, expense ↑ → equity ↓.

(7) Exchange cash for equipment → one asset ↑, cash ↓ (no effect on total assets, but
shown as +/–).

(8) Withdrawals → cash ↓ and owner’s equity ↓.

(9) Services on credit → accounts receivable ↑, revenue ↑ → equity ↑.

(10) Collecting receivable → cash ↑, accounts receivable ↓ (no net change in total
assets).
Ex 1-2B:

Solution:
Useful formulas

• Asset = Liabilities + Equity

• Ending equity = Beginning equity + Owner investments + Net income –

Withdrawals/Drawings

• Rearranged when needed:

o Net income = Ending equity − Beginning equity − Investments +

Withdrawals/drawings

o Owner investments = Ending equity − Beginning equity − Net income +

Withdrawals/drawings

o Beginning equity = Ending equity − Investments − Net income +

Withdrawals/drawings

Given (from the table)

Dec 31, 2010

 • Assets: Company V $45,000 ; Company W $70,000; Company X $121,500;
Company Y $82,500; Company Z $124,000

• Liabilities: V $30,000; W $50,000; X $58,500; Y $61,500; Z = ?

Dec 31, 2011

• Assets: V $49,000; W $90,000; X $136,500; Y = ?; Z $160,000

• Liabilities: V $26,000; W = ?; X $55,500; Y $72,000; Z $52,000

During 2011

• Owner investments: V $6,000; W $10,000; X = ?; Y $38,100; Z $40,000

• Net income: V = ?; W $30,000; X $16,500; Y $24,000; Z $32,000

• Withdrawals: V $4,500; W $2,000 ; X $0 ; Y $18,000; Z $6,000

1. Company V

(a) Beginning equity (Dec 31, 2010):

Equity₀ = Assets₀ − Liab₀ = 45,000 − 30,000 = 15,000

(b) Ending equity (Dec 31, 2011):

Equity₁ = Assets₁ − Liab₁ = 49,000 − 26,000 = 23,000

(c) Net income for 2011:

Net Income = Equity₁ − Equity₀ − Investments + Withdrawals
= 23,000 − 15,000 − 6,000 + 4,500 = 6,500

2. Company W

(a) Beginning equity (Dec 31, 2010):

Equity₀ = 70,000 − 50,000 = 20,000

(b) Ending equity (Dec 31, 2011):

Equity₁ = Equity₀ + Investments + Net Income − Withdrawals
= 20,000 + 10,000 + 30,000 − 2,000 = 58,000

(c) Liabilities at Dec 31, 2011:

Liab₁ = Assets₁ − Equity₁ = 90,000 − 58,000 = 32,000

3. Company X — Owner investments during 2011

(a) Beginning equity:
Equity₀ = 121,500 − 58,500 = 63,000

(b) Ending equity:

Equity₁ = 136,500 − 55,500 = 81,000

(c) Owner investments during 2011:

Investments = Equity₁ − Equity₀ − Net Income + Withdrawals
= 81,000 − 63,000 − 16,500 + 0 = 1,500

4. Company Y — Assets on Dec 31, 2011

(a) Beginning equity:

Equity₀ = 82,500 − 61,500 = 21,000

(b) Ending equity:

Equity₁ = 21,000 + 38,100 + 24,000 − 18,000 = 65,100

(c) Assets at Dec 31, 2011:

Assets₁ = Liab₁ + Equity₁ = 72,000 + 65,100 = 137,100

5. Company Z — Liabilities on Dec 31, 2010

a) Ending equity (Dec 31, 2011):

Equity₁ = Assets₁ − Liab₁ = 160,000 − 52,000 = 108,000

(b) Beginning equity:

Equity₀ = Equity₁ − Investments − Net Income + Withdrawals
= 108,000 − 40,000 − 32,000 + 6,000 = 42,000

(c) Liabilities at Dec 31, 2010:

Liab₀ = Assets₀ − Equity₀ = 124,000 − 42,000 = 82,000

Ex 1-3B:

Solution:
RWB Company
Balance Sheet
As of December 31, 2011

Assets

• Total Assets: $114,000

Liabilities and Equity

• Liabilities: $74,000

• Equity: $40,000

• Total Liabilities and Equity: $114,000

Ex 1-4B:

Solution:
Online Company

Income Statement
For the Year Ended December 31, 2011

Revenues

• Revenues: $58,000

Expenses

• Expenses: $30,000

Net Income

• Net Income: $28,000

Check:
Revenues – Expenses = Net Income
$58,000 – $30,000 = $28,000
Ex1-5B:
Following is selected financial information of ComEx for the year ended December 31,
2011.

Required Prepare the 2011 statement of owner’s equity for ComEx

C. Tex, Capital, Dec. 31, 2011 . . . . . . . . . . . $47,000

C. Tex, Withdrawals . . . . . . . . . . . . . . . . . . $ 8,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . 6,000

C. Tex, Capital, Dec. 31, 2010 . . . . . . . . . . . 49,000

Solution:
Statement of Owner’s Equity
For the Year Ended December 31, 2011

C. Tex, Capital, Dec. 31, 2010 (Beginning Capital) ............. $49,000

Add: Net Income .................................................................................. + 6,000
Subtotal ................................................................................................... 55,000
Less: Withdrawals ................................................................................ – 8,000
C. Tex, Capital, Dec. 31, 2011 (Ending Capital) .................. $47,000

Check: $49,000 + $6,000 – $8,000 = $47,000

matches given ending capital.

Ex1-6B:
Selected financial information of BuyRight Co. for the year ended December 31, 2011,
follows.

Required
Prepare the 2011 statement of cash flows for BuyRight Company.

Cash from investing activities . . . . . . . . . . . $2,600

Net increase in cash . . . . . . . . . . . . . . . . . . 1,400

Cash from financing activities . . . . . . . . . . . . 2,800

Cash used by operating activities . . . . . . . . (4,000)

Cash, December 31, 2010 . . . . . . . . . . . . . . 1,300

Solution:
CASH FLOWS AMOUNT ($)

OPERATING ACTIVITIES

NET CASH USED BY OPERATING ACTIVITIES (4,000)

INVESTING ACTIVITIES

NET CASH PROVIDED BY INVESTING 2,600

FINANCING ACTIVITIES

NET CASH PROVIDED BY FINANCING 2,800

NET INCREASE IN CASH 1,400

CASH, DECEMBER 31, 2010 1,300

CASH, DECEMBER 31, 2011 2,700

Check:
Operating (−4,000) + Investing (+2,600) + Financing (+2,800) = +1,400 (matches reported
net increase).
Beginning cash 1,300 + Net increase 1,400 = Ending cash 2,700.

Ex1-7B:
Tiana Moore started a new business, Tiana’s Solutions, and completed the following
transactions during

its first year of operations.

a. T. Moore invests $95,000 cash and office equipment valued at $20,000 in the
company.

b. The company purchased a $120,000 building to use as an office. It paid $20,000 in

cash and signed

a note payable promising to pay the $100,000 balance over the next ten years.

c. The company purchased office equipment for $20,000 cash.

d. The company purchased $1,400 of office supplies and $3,000 of office equipment on
credit.
e. The company paid a local newspaper $400 cash for printing an announcement of the
office’s opening.

f. The company completed a financial plan for a client and billed that client $1,800 for
the service.

g. The company designed a financial plan for another client and immediately collected
a $2,000 cash fee.

h. T. Moore withdrew $5,000 cash from the company for personal use.

i. The company received $1,800 cash from the client described in transaction f.

j. The company made a payment of $2,000 cash on the equipment purchased in

transaction d.

k. The company paid $2,000 cash for the office secretary’s wages.

Required

1. Create a table like the one in Exhibit 1.9, using the following headings for the
columns: Cash; Accounts Receivable; Office Supplies; Office Equipment; Building;
Accounts Payable; Notes Payable;

T. Moore, Capital; T. Moore, Withdrawals; Revenues; and Expenses.

2. Use additions and subtractions within the table created in part 1 to show the dollar
effects of each transaction on individual items of the accounting equation. Show new
balances after each transaction.

3. Once you have completed the table, determine the company’s net income.

Solution:
Trans Cas A/ Sup Equ Buil A/P N/P Capi Withdr Reve Expe
h R plie ip. ding tal awals nues nses
s

a. +95, +20, +115

Invest 000 000 ,000
cash
+
equip.
b. Buy - +120 +100
buildi 20,0 ,000 ,000
ng: 00
cash
+ N/P

c. Buy - +20,
office 20,0 000
equip 00
ment

d. +1,4 +3,0 +4,

Suppl 00 00 400
ies +
equip
ment
on
credit

e. - +400
News 400
paper
ad
(expe
nse)

f. +1, +1,80
Servic 800 0
e
billed
(A/R &
Rev)

g. +2,0 +2,00
Servic 00 0
e
collec
ted
cash

h. - +5,000
Owne 5,00
r 0
 withdr
awal

i. +1,8 -
Recei 00 1,8
ve 00
paym
ent
from
client
(f)

j. Paid - -
on 2,00 2,0
equip 0 00
ment
liabilit
y

k. - +2,0
Wage 2,00 00
s 0
expen
se

Final Balance:

Cash = 95,000 – 20,000 – 20,000 – 400 + 2,000 – 5,000 + 1,800 – 2,000 – 2,000 = 49,400

Accounts Receivable = +1,800 – 1,800 = 0

Office Supplies = 1,400

Office Equipment = 20,000 + 20,000 + 3,000 = 43,000

Building = 120,000

Accounts Payable = 4,400 – 2,000 = 2,400

Notes Payable = 100,000

Capital = 115,000

Withdrawals = 5,000

Revenues = 1,800 + 2,000 = 3,800

Expenses = 400 + 2,000 = 2,400

Net income:

Net Income=Revenues–Expenses=3,800–2,400=1,400

Ex 1-8B:
Ken Stone launched a new business, Ken’s Maintenance Co., that began operations on
June 1. The following transactions were completed by the company during that first
month.

June 1 K. Stone invested $120,000 cash in the company.

2 The company rented a furnished office and paid $4,500 cash for June’s rent.

4 The company purchased $2,400 of equipment on credit.

6 The company paid $1,125 cash for this month’s advertising of the opening of the
business.

8 The company completed maintenance services for a customer and immediately

collected $750

cash.

14 The company completed $6,300 of maintenance services for City Center on credit.

16 The company paid $900 cash for an assistant’s salary for the first half of the month.

20 The company received $6,300 cash payment for services completed for City Center
on June 14.

21 The company completed $3,500 of maintenance services for Skyway Co. on credit.

24 The company completed $825 of maintenance services for Comfort Motel on credit.

25 The company received $3,500 cash payment from Skyway Co. for the work
completed on June 21.

26 The company made payment of $2,400 cash for equipment purchased on June 4.

28 The company paid $900 cash for an assistant’s salary for the second half of this
month.

29 K. Stone withdrew $2,000 cash from the company for personal use.

30 The company paid $120 cash for this month’s telephone bill.

30 The company paid $525 cash for this month’s utilities.

Required

1. Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash;
Accounts Receivable; Equipment; Accounts Payable; K. Stone, Capital; K. Stone,
Withdrawals; Revenues; and Expenses.

2. Show the effects of the transactions on the accounts of the accounting equation by
recording increases and decreases in the appropriate columns. Do not determine new
account balances after each transaction. Determine the final total for each account
and verify that the equation is in balance.

3. Prepare a June income statement, a June statement of owner’s equity, a June 30

balance sheet, and a June statement of cash flows.

Solution:
Da Transa Cas Accou Equip Acco K. Withdra Reven Expen
te ction h nts ment unts Ston wals ues ses
Receiv Payab e,
able le Capi
tal

1 Investe 120, – – – 120, – – –

d cash 000 000

2 Paid 115, – – – 120, – – 4,500

June 500 000
rent

4 Bought 115, – 2,400 2,400 120, – – –

equipm 500 000
ent on
credit

6 Paid 114, – 2,400 2,400 120, – – 1,125

advertis 375 000
ing

8 Service 115, – 2,400 2,400 120, – 750 –

s for 125 000
cash

14 Service 115, 6,300 2,400 2,400 120, – 6,300 –

s on 125 000
credit
 16 Paid 114, 6,300 2,400 2,400 120, – – 900
wages 225 000

20 Receive 120, – 2,400 2,400 120, – – –

d cash 525 000
from
City
Center

21 Service 120, 3,500 2,400 2,400 120, – 3,500 –

s on 525 000
credit

24 Service 120, 4,325 2,400 2,400 120, – 825 –

s on 525 000
credit

25 Collect 124, 825 2,400 2,400 120, – – –

ed cash 025 000
from
Skyway

26 Paid 121, 825 2,400 – 120, – – –

equipm 625 000
ent
(A/P)

28 Paid 120, 825 2,400 – 120, – – 900

wages 725 000

29 Owner 118, 825 2,400 – 120, 2,000 – –

withdra 725 000
wal

30 Paid 118, 825 2,400 – 120, 2,000 – 120

telepho 605 000
ne bill

30 Paid 118, 825 2,400 – 120, 2,000 – 525

utilities 080 000

Final Totals:

Final Balances
 • Cash = 118,080

• Accounts Receivable = 825

• Equipment = 2,400

• Accounts Payable = 0

• Capital = 120,000

• Withdrawals = 2,000

• Revenues = 11,375

• Expenses = 8,070

Income Statement:

REVENUES AMOUNT

SERVICE REVENUES 11,375

TOTAL REVENUES 11,375

RENT EXPENSE 4500

ADVERTISING EXPENSE 1125
WAGES EXPENSE 1800

TELEPHONE EXPENSE 120

UTILITIES EXPENSE 525
TOTAL EXPENSES
8070

Net Income = 11,375 – 8,070 = 3,305

Balance Sheet:

ASSETS AMOUNT

CASH 118,080

ACCOUNTS RECEIVABLE 825

EQUIPMENT 2,400

TOTAL ASSETS 121,305

LIABILITIES & EQUITY

ACCOUNTS PAYABLE 0

OWNER’S CAPITAL 121,305

TOTAL LIABILITIES & 121,305
EQUITY

Statement of owner Equity:

PARTICULARS AMOUNT

BEGINNING CAPITAL 120,000

ADD: NET INCOME 3,305

LESS: WITHDRAWALS (2,000)

ENDING CAPITAL (JUNE 30) 121,305

Cash Flow Statement:

CASH FLOWS AMOUNT

OPERATING ACTIVITIES

CASH RECEIVED FROM CUSTOMERS 750 + 6,300 + 3,500 =

10,550

CASH PAID FOR EXPENSES (RENT, ADVERTISING, (8,070)

WAGES, PHONE, UTILITIES)

NET CASH FROM OPERATING 2,480

INVESTING ACTIVITIES

EQUIPMENT PURCHASE (2,400)

NET CASH FROM INVESTING (2,400)

FINANCING ACTIVITIES

OWNER INVESTMENT 120,000

OWNER WITHDRAWAL (2,000)

NET CASH FROM FINANCING 118,000

NET INCREASE IN CASH 2,480 - 2,400 + 118,000 =

118,080

ENDING CASH BALANCE 118,080

Ex 1-9B
Swender Excavating Co., owned by Patrick Swender, began operations in July and
completed these transactions during that first month of operations.

July 1 P. Swender invested $60,000 cash in the company.

2 The company rented office space and paid $500 cash for the July rent.

3 The company purchased excavating equipment for $4,000 by paying $800 cash and
agreeing to

pay the $3,200 balance in 30 days.

6 The company purchased office supplies for $500 cash.

8 The company completed work for a customer and immediately collected $2,200 cash
for the work.

10 The company purchased $3,800 of office equipment on credit.

15 The company completed work for a customer on credit in the amount of $2,400.

17 The company purchased $1,920 of office supplies on credit.

23 The company paid $3,800 cash for the office equipment purchased on July 10.

25 The company billed a customer $5,000 for work completed; the balance is due in 30
days.

28 The company received $2,400 cash for the work completed on July 15.

30 The company paid an assistant’s salary of $1,260 cash for this month.

31 The company paid $260 cash for this month’s utility bill.

31 P. Swender withdrew $1,200 cash from the company for personal use.

Required

1. Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash;
Accounts Receivable; Office Supplies; Office Equipment; Excavating Equipment;
Accounts Payable; P. Swender,

Capital; P. Swender, Withdrawals; Revenues; and Expenses.

2. Use additions and subtractions to show the effects of each transaction on the
accounts in the accounting equation. Show new balances after each transaction.
3. Use the increases and decreases in the columns of the table from part 2 to prepare
an income statement, a statement of owner’s equity, and a statement of cash flows—
each of these for the current

month. Also prepare a balance sheet as of the end of the month.

Analysis Component

4. Assume that the $4,000 purchase of excavating equipment on July 3 was financed
from an owner investment of another $4,000 cash in the business (instead of the
purchase conditions described in the transaction). Explain the effect of this change on
total assets, total liabilities, and total equity.

Solution:
Da Transa Ca A/ Supp Offi Excav A/ Cap Withdr Reve Expe
te ction sh R lies ce ating P ital awals nues nses
Eq Equip.
uip
.

1 Owner 60, – – – – – 60,0 – – –

invests 000 00

2 Paid 59, – – – – – 60,0 – – 500

July 500 00
rent

3 Bought 58, – – – 4,000 3,2 60,0 – – –

excava 700 00 00
ting
equip.
(800
cash +
3,200
payabl
e)

6 Bought 58, – 500 – 4,000 3,2 60,0 – – –

suppli 200 00 00
es for
cash

8 Compl 60, – 500 – 4,000 3,2 60,0 – 2,200 –

eted 400 00 00
work
 for
cash

10 Bought 60, – 500 3,8 4,000 7,0 60,0 – – –

office 400 00 00 00
equip.
on
credit

15 Compl 60, 2,4 500 3,8 4,000 7,0 60,0 – 2,400 –

eted 400 00 00 00 00
work
on
credit

17 Bought 60, 2,4 2,42 3,8 4,000 8,9 60,0 – – –

suppli 400 00 0 00 20 00
es on
credit

23 Paid 56, 2,4 2,42 3,8 4,000 5,1 60,0 – – –

office 600 00 0 00 20 00
equip.
payabl
e

25 Billed 56, 7,4 2,42 3,8 4,000 5,1 60,0 – 5,000 –

custo 600 00 0 00 20 00
mer for
service
s

28 Collect 59, 5,0 2,42 3,8 4,000 5,1 60,0 – – –

ed A/R 000 00 0 00 20 00
(July
15)

30 Paid 57, 5,0 2,42 3,8 4,000 5,1 60,0 – – 1,260

assista 740 00 0 00 20 00
nt’s
salary
 31 Paid 57, 5,0 2,42 3,8 4,000 5,1 60,0 – – 260
utilitie 480 00 0 00 20 00
s

31 Owner 56, 5,0 2,42 3,8 4,000 5,1 60,0 1,200 – –

withdr 280 00 0 00 20 00
ew
cash

Final Balances

• Cash = 56,280

• Accounts Receivable = 5,000

• Office Supplies = 2,420

• Office Equipment = 3,800

• Excavating Equipment = 4,000

• Accounts Payable = 5,120

• Capital = 60,000

• Withdrawals = 1,200

• Revenues = 9,600 (2,200 + 2,400 + 5,000)

• Expenses = 2,020 (Rent 500 + Salary 1,260 + Utilities 260)

Income statement:

REVENUES AMOUNT

SERVICE REVENUES 9,600

TOTAL REVENUES 9,600

EXPENSES
RENT 500
SALARY 1,260
UTILITIES 260
TOTAL EXPENSES 2,020

Net Income = 9,600 – 2,020 = 7,580

Statement of Owner Equity:

PARTICULARS AMOUNT

BEGINNING CAPITAL 60,000

ADD: NET INCOME 7,580

LESS: WITHDRAWALS (1,200)

ENDING CAPITAL (JULY 31) 66,380

Balance Sheat:

ASSETS AMOUNT

CASH 56,280

ACCOUNTS RECEIVABLE 5,000

OFFICE SUPPLIES 2,420

OFFICE EQUIPMENT 3,800

EXCAVATING EQUIPMENT 4,000

TOTAL ASSETS 71,500

LIABILITIES & EQUITY

ACCOUNTS PAYABLE 5,120
OWNER’S CAPITAL 66,380
TOTAL LIABILITIES & EQUITY 71,500

Statements of Cash flow

CASH FLOWS AMOUNT

OPERATING ACTIVITIES

CASH RECEIVED FROM CUSTOMERS 2,200 + 2,400 = 4,600

CASH PAID FOR RENT, SUPPLIES, SALARY, (500 + 500 + 1,260 + 260) =
UTILITIES (2,520)

NET CASH FROM OPERATING 2,080

INVESTING ACTIVITIES

EXCAVATING EQUIPMENT PURCHASE (800)

OFFICE EQUIPMENT PURCHASE (PAID JULY 23) (3,800)

 NET CASH FROM INVESTING (4,600)

FINANCING ACTIVITIES

OWNER INVESTMENT 60,000

OWNER WITHDRAWAL (1,200)

NET CASH FROM FINANCING 58,800

NET INCREASE IN CASH 2,080 – 4,600 + 58,800 = 56,280

ENDING CASH 56,280

Ex1-10B
Aspen Company manufactures, markets, and sells ATV and snowmobile equipment and
accessories. The

average total assets for Aspen is $2,000,000. In its most recent year, Aspen reported net
income of

$100,000 on revenues of $1,200,000.

Required

1. What is Aspen Company’s return on assets?

2. Does return on assets seem satisfactory for Aspen given that its competitors average
a 9.5% return on

assets?

3. What are the total expenses for Aspen Company in its most recent year?

4. What is the average total amount of liabilities plus equity for Aspen Company?

Solution:
Given Data:

• Average total assets = $2,000,000

• Net income = $100,000

• Revenues = $1,200,000

• Competitors’ average ROA = 9.5%

Return on Assets:

ROA= (Net Income / Average Total Assets )×100

ROA = (100000 / 200000) * 100

= 5%

Comparison with competitors

• Aspen’s ROA = 5%

• Competitors’ average ROA = 9.5%

Since Aspen’s ROA (5%) is lower than the industry average (9.5%), Aspen’s performance
is below average and may not be considered satisfactory.

Total Expense:

Expenses = Revenues − Net Income

Expenses = 𝟏, 𝟐𝟎𝟎, 𝟎𝟎𝟎 − 𝟏𝟎𝟎, 𝟎𝟎𝟎 = 𝟏, 𝟏𝟎𝟎, 𝟎𝟎𝟎

Total Expenses = $1,100,000

Average Total Liabilities + Equity

By definition:

Assets = Liabilities + Equity

Average total assets = $2,000,000

So,

Average total liabilities + equity = $2,000,000

Ex 1-11B:

Solution:
• AT&T
12,535
𝑅𝑂𝐴 = × 100 ≈ 4.69%
266,999

• Verizon
10,358
𝑅𝑂𝐴 = × 100 ≈ 4.82%
214,937
Company sales:

• AT&T Sales = $123,018 million

• Verizon Sales = $107,808 million

AT&T is more successful in total sales.

Compare ROA

• AT&T ROA = 4.69%

• Verizon ROA = 4.82%

Verizon is slightly better at generating net income from assets.

Memorandum:
To: Investment Committee
From: [Analyst]
Subject: Investment Recommendation – AT&T vs Verizon

Based on the financial data provided, AT&T generates higher total sales ($123,018
million vs. $107,808 million), indicating stronger market reach and revenue generation.
However, Verizon has a slightly higher return on assets (4.82% vs. 4.69%), suggesting it
is more efficient at converting its assets into net income. If the priority is market
dominance and revenue scale, AT&T appears stronger. However, if the focus is on
efficiency and profitability relative to assets, Verizon is the better choice. Given the
small difference in ROA but AT&T’s significantly higher sales volume, I would
recommend investing in AT&T for its larger consumer base and stronger revenue
generation potential.

Ex 1-12B
All business decisions involve aspects of risk and return.

Required

Identify both the risk and the return in each of the following activities:

1. Stashing $1,000 cash under your mattress.

2. Placing a $500 bet on a horse running in the Kentucky Derby.

3. Investing $10,000 in Nike stock.

4. Investing $10,000 in U.S. Savings Bonds.

Solution:
ACTIVITY RISK RETURN

1. STASHING Risk of theft, fire, or losing No financial return (zero

$1,000 UNDER value due to inflation interest/earnings).
YOUR MATTRESS (purchasing power
decreases).

2. PLACING A $500 Very high risk – chance of Potential for very high return in
BET ON A HORSE losing entire $500 quickly; a short time if the bet wins.
outcome uncertain.
 3. INVESTING Market risk (price may fall), Potential for dividends and
$10,000 IN NIKE company performance risk, stock price appreciation,
STOCK economic factors can reduce possibly high long-term return.
value.

4. INVESTING Very low risk – backed by U.S. Low but guaranteed return
$10,000 IN U.S. government, nearly risk-free. (fixed interest).
SAVINGS BONDS

This shows the classic risk–return trade-off:

• High risk (horse bet) → high possible reward but high chance of loss.

• Low risk (savings bonds) → low guaranteed return.

• Stocks balance risk & return.

• Cash under mattress = no return, risk from inflation.

Ex 1-13B
Identify in outline format the three major business activities of an organization. For each
of these activities, identify at least two specific transactions or events normally
undertaken by the business’s owners or its managers.

Solution
Major Business Activities of an Organization

I. Operating Activities

• Day-to-day activities that generate revenues and expenses.

• Examples:

1. Selling products or providing services to customers.

2. Paying employee wages, utilities, and other operating expenses.

II. Investing Activities

• Acquiring and disposing of long-term assets used in operations.

• Examples:

1. Purchasing equipment, machinery, or buildings.

2. Selling unused property or long-term investments.

III. Financing Activities

• Obtaining and repaying funds to finance business operations and growth.

• Examples:

1. Issuing shares of stock or borrowing money through loans.

2. Paying dividends to owners or repaying borrowed funds.

Ex 1-14B:

Solution:
1. Providing client services → C (Operating)

2. Obtaining a bank loan → A (Financing)

3. Purchasing machinery → B (Investing)

4. Research for its products → C (Operating)

5. Supervising workers → C (Operating)

6. Owner investing money in business → A (Financing)

7. Renting office space → C (Operating)

8. Paying utilities expenses → C (Operating)