A) Comprehensive Review Questions:
1. How do accounts payable and notes payable differ? How are they similar?
2. Define revenues. How are revenues measured?
3. Define expenses. How are expenses measured?
4. What is a balance sheet? On what aspect of a business does the balance sheet provide information?
5. What information does the statement of retained earnings provide?
6. Identify the three types of activities shown in a statement of cash flows.
7. What is a transaction? What use does the accountant make of transactions? Why?
8. What is the accounting equation? Why must it always balance?
9. Give an example from your personal life that illustrates your use of accounting information in reaching a decision.
10. You have been elected to the governing board of your church. At the first meeting you attend, mention is made of building a new church.
What accounting information would the board need in deciding whether or not to go ahead?
11. A company purchased equipment for USD 2,000 cash. The vendor stated that the equipment was worth USD 2,400. At what amount
should the equipment be recorded?
12. What is meant by money measurement?
13. Of what significance is the exchange-price (or cost) concept? How is the cost to acquire an asset determined?
14. What effect does the going-concern (continuity) concept have on the amounts at which long-term assets are carried on the balance sheet?
15. Of what importance is the periodicity (time periods) concept to the preparation of financial statements?
16. Describe a transaction that would:
a) Increase both an asset and capital stock.
b) Increase both an asset and a liability.
c) Increase one asset and decrease another asset.
d) Decrease both a liability and an asset.
e) Increase both an asset and retained earnings.
f) Decrease both an asset and retained earnings.
g) Increase a liability and decrease retained earnings.
h) Identify the causes of increases and decreases in stockholders' equity.
B) Accounting Exercises:
Exercise 1. Applying Basic Accounting Equation
Royals Palm, Inc. reports the following assets and liabilities. Compute the totals that would appear in the corporation's basic accounting equation (Assets = Liabilities + Stockholders' Equity (Capital Stock)).
Cash $55,000
Accounts Payable 25,000
Office Supplies 1,500
Loan Payable 7,000
Accounts Receivable 10,000
Answer:
Assets = Liabilities + Stockholders' Equity
Exercise 2. Applying Basic Accounting Equation
Dan and Den, Inc. reports the following assets and liabilities. Compute the
totals that would appear in the corporation's basic accounting equation
(Assets = Liabilities + Stockholders' Equity (Capital Stock)).
Cash $37,000
Accounts Payable 15,000
Supplies 1,800
Loan Payable 9,000
Inventory 12,000
Answer:
Assets = Liabilities + Stockholders' Equity
Exercise 3. Applying Basic Accounting Equation
Mercury, Inc. reports the following assets and liabilities. Compute the totals
that would appear in the corporation's basic accounting equation (Assets =
Liabilities + Stockholders' Equity (Capital Stock)).
Cash $67,000
Accounts Payable 13,000
Supplies 2,800
Loan Payable 9,000
Inventory 12,000
Accounts Receivable 15,000
Equipment 25,000
Exercise 4.
On 2014 December 31, Perez Company, the accounting records showed the
following information:
Assets $150,000
Liabilities $50,000
Capital Stock $100,000
Earned revenues $45,000
Incurred expenses $33,750
Dividends declared and paid amounted to $3,000
1. Prepare the Statement of Stockholders' Equity on 2014 December 31.
Statement of Stockholders' Equity
Perez Company
Month Ended on December 31, 2014
Perez Company, Capital Stock , January 1, 2014
(beginning balance) $100,000
Net income for the year
Less: Dividends
Perez Company, Capital Stock, December, 2014
(ending balance)
Exercise 5.
On 2014 December 31, Bryniuk's Company, the accounting records showed
the following information:
Assets $750,000
Liabilities $250,000
Capital Stock $500,000
Earned revenues $175,000
Incurred expenses $87,750
Dividends declared and paid amounted to $15,000
1. Prepare the Statement of Stockholders' Equity on 2014 December 31.
Statement of Stockholders' Equity
Bryniuk's Company
Month Ended on December 31, 2014
Bryniuk's Company, Capital Stock , January 1, 2014
(beginning balance) $.........
Net income for the year
Less: Dividends
Bryniuk's Company, Capital Stock , December, 2014
(ending balance)
Exercise 6.
On 2014 December 31, Carlsen Company, the accounting records showed
the Stockholders' equity totaled $85,000 at the beginning of the year.
During the year, net income was $18,000, dividends of $8,000 were
declared and paid. In addition, in 2914, $7,000 of common stock was issued
at par value.
1. Carlsen Stockholders' Equity on 2014 December 31.
2. Beginning balance...................... $85,000
3. Changes during the year:
• - Common stock issued.....................
• - Net income for the year................18,000
• - Less: Dividends..........................(8000)
1. Ending balance.................. $............
Exercise 7.
On 2014 December 31, Mitchell Company, the accounting records showed
the Stockholders' equity totaled $95,000 at the beginning of the year.
During the year, net income was $15,000, dividends of $15,000 were
declared and paid. In addition, in 2914, $5,000 of common stock was issued
at par value.
1. Compute the company's Stockholders' Equity on 2014 December 31.
Exercise 8.
On 2014 December 31, RodCast Company, the accounting records showed:
Net sales $807,000
Gross profit $177,000
Net income $35,000
Income tax expense $15,000
Selling, general, and administrative expenses $87,000
Compute Company's cost of goods sold, income from operations, income
before taxes, and interest expense.
Net Sales $807,000
Cost of Goods Sold
Gross Profit $177,000
Selling, general, and administrative expenses $87,000
Income From Operations
Interest Expense
Income Before Taxes
Income Taxes $15,000
Net Income $35,000
Exercise 9.
On 2014 December 31, Lidowski Company, the accounting records showed:
Net sales $105,000
Gross profit $57,000
Net income $21,000
Income tax expense $9,000
Selling, general, and administrative expenses $6,500
Compute Company's cost of goods sold, income from operations, income
before taxes, and interest expense.
Net Sales $105,00
Cost of Goods Sold
Gross Profit
Selling, general, and administrative expenses
Income From Operations
Interest Expense
Income Before Taxes
Income Taxes
Net Income
Required:
Calculate cost of goods sold, income from operations, income before
taxes, and interest expense.
Exercise 10.
Give examples of transactions that would have the following effects on the
items in a firm's financial statements:
1. Increase cash; decrease some other asset.
2. Decrease cash; increase some other asset.
3. Increase an asset; increase a liability.
4. Decrease retained earnings; decrease an asset.
5. Increase an asset other than cash; increase retained earnings.
6. Decrease an asset; decrease a liability.
Exercise 11.
Which of the following transactions results in a decrease in retained earnings? Why?
1. Employees were paid USD 20,000 for services received during the month.
2. USD 175,000 was paid to acquire land.
3. Paid an USD 18,000 note payable. No interest was involved.
4. Paid a USD 200 account payable.
Exercise 12.
Assume that the following items were included in the Retained Earnings column in the summary of transactions for Cinck Company for July 2014:
Salaries expense $120,000
Service revenue 300,000
Gas and oil expense 27,000
Rent expense 48,000
Dividends paid 40,000
Prepare an income statement for July 2010.
Comprehensive Problems Example:
Larson's Accounting Company has the following assets and liabilities: Cash, $5,000; Accounts Receivable, $2,000; Prepaid Rent, Supplies, $850, $1,500; Equipment, $6,000; Trucks, $15,000; Accounts Payable, $2,500. Business transactions during December are presented as follows:
1. Company received cash from clients for services, $4,500
2. Larson paid to creditors $500,
3. Paid office rent for the month of December, $750,
4. Company billed client for accounting services on account, $5,200
5. Supplies were purchased on account, $650,
6. Company received cash from clients billed previously, $5,200
7. Larson received an invoice for services from Office Extra for December (the invoice will be paid next month), $850,
8. Larson paid monthly salaries, $2,700,
9. Utilities expense were paid, $280,
10. Miscellaneous expense were paid, $350,
11. Dividends were paid, $550.
Record all business transactions.
Larson Company
Income Statement
Month Ended December 31, 2014
Fees earned $9,700
Expenses:
Rent Expense $750
Service Expense 850
Wages Expense 2700
Utilities Expense 280
Miscellaneous expense 350
Total Expenses $4,930
Net Income ($9,700 - $4,930)= $4,770
Larson Company
Statement of Stockholders' Equity
Month Ended December 31, 2014
Larson Inc., Capital Stock , December 31,
2014 $27,850
Net income for the month $4,770
Less Dividends - 550
Increase in Stockholders' Equity + 4,220
Larson Inc., Capital Stock , December 31,
2014 $32,070
Larson Company
Balance Sheet
Month Ended
December 31, 2014
Assets Liabilities
Cash $10,320 Accounts Payable $3,500
Accounts
Receivable 2,000
Prepaid Rent 750 Stockholders' Equity
Supplies 1,500 Capital Stock 32,070
Equipment 6,000
Trucks 15,000
Total Assets $35,570 Total Liabilities and
Stockholders' Equity $35,570
Larson Company
Statement of Cash Flow
Month Ended December 31, 2014
Cash flows from operating activities
Cash received from customers $9,700*
Minus cash payments for operating expenses - 3,830**
Net cash from operating activities +$5,870
Cash flows from investing activities -
Cash flows from financing activities:
Cash received from owner as investment -
Minus paid dividends -$550
Net cash flows from financing activities $550
Net increase in cash during the year +5,320
Cash as of December 1, 2014 $5,000
Cash as of December 31, 2014 $10,320
$9,700*= $4,500+$5,200
$3,830**= $500+ $2,700+ $280 +$350
Comprehensive Problem 1.
Cast 77 Service Company has the following assets and liabilities: Cash, $6,000; Accounts Receivable, $7,000; Prepaid Rent, 1,900; Prepaid
Insurance, $1,200 Supplies, $950, $1,500; Equipment, $7,000; Trucks, $10,000; Accounts Payable, $2,700. Business transactions during December are presented as follows:
1. Company received cash from clients for services, $7,500
2. Cast 77 paid to creditors $600,
3. Paid office rent for the month of December, $950,
4. Company billed client for accounting services on account, $8,200
5. Supplies were purchased on account, $450,
6. Company received cash from clients billed previously, $4,200
7. Cast 77 received an invoice for services from Copy Plus for December (the invoice will be paid next month), $550,
8. Cast 77 paid monthly salaries, $4,700,
9. Utilities expense were paid, $380,
10. Miscellaneous expense were paid, $250,
11. Paid for monthly insurance, $200
12. Dividends were paid, $750.
Required:
• Apply basic accounting equation (create a spreadsheet).
• Prepare income statement at the end of December 31, 2014.
• Formulate statement of stockholders' equity at the end of December 31, 2014.
• Prepare balance sheet and statement of cash flows at the end of December 31, 2014.