Exercise: Users of Accounting Information and the Financial
Statements
Following are a number of users of accounting information and examples of questions they need answered before making decisions. Fill in each blank to indicate whether the user is most likely to find the answer by looking at the income statement (IS), the balance sheet (BS), the statement of retained earnings (RE), or the statement of cash flows (SCF).
User Question
Financial
Statement
Stockholder how did this year's sales compare to last year's? _____________
Banker How much debt does the company already have on its books? _____________
Supplier How much does the company currently owe to its suppliers? _____________
Stockholder how much did the company pay in dividends this past year? _____________
Advertising account manager
How much did the company spend this past year to generate?
sales? _____________
Banker what collateral or security can the company provide to ensure that any loan I make will be repaid? _____________
Exercise 1 Types of Business Activities
Braxton Corp. was organized on January 1 to operate a limousines service to and from the airport. For each of the following business activities, indicate whether it is a financing (F), investing (I), or operating (O) activity.
_______ 1. Issued shares of stock to each of the four owners.
_______ 2. Purchased two limousines.
_______ 3. Paid first month's rent for use of garage.
_______ 4. Obtained loan from local bank.
_______ 5. Received cash from customer for trip to the airport.
_______ 6. Paid driver first week's wages.
_______ 7. Purchased 500-gallon fuel tank.
Exercise 12 Accounting Principles and Assumptions
The following basic accounting principles and assumptions were discussed in the chapter:
Economic entity
Monetary unit
Cost principle
Going concern
Time period
Fill in each of the blanks with the accounting principle or assumption that is relevant to the situation described.
________________________________ 1. Genesis Corporation is now in its 30th year of business. The founder of the company is planning to retire at the end of the year and turn the business over to his daughter.
________________________________ 2. Nordic Company purchased a 20-acre parcel of property on which to build a new factory. The company recorded the property on the records at the amount of cash given to acquire it.
________________________________ 3. Jim Bailey enters into an agreement to operate a new law firm in partnership with a friend. Each partner will make an initial cash investment of $10,000. Jim opens a checking account in the name of the partnership and transfers $10,000 from his personal account into the new account.
________________________________ 4. Multinational Corp. has a division in Japan. Prior to preparing the financial statements for the company and all of its foreign divisions, Multinational translates the financial statements of its Japanese division from yen to U.S. dollars.
________________________________ 5. Camden Company has always prepared financial statements annually, with a year-end of June 30.
Because the company is going to sell its stock to the public for the first time, quarterly financial reports will also be required by the SEC.
Problem Income Statement, Statement of Retained Earnings, and
Balance Sheet
The following list, in alphabetical order, shows the various items that regularly appear on the financial statements of Sterns Audio Book Rental Corp. The amounts shown for balance sheet items are balances as of December 31, 2014 (with the exception of retained earnings, which is the balance on January 1, 2014), and the amounts shown for income statement items are balances for the year ended December 31, 2014.
Accounts payable $ 4,500 Notes payable $ 10,000
Accounts receivable 300 Rental revenue 125,900
Advertising expense 14,500 Rent expense 60,000
Capital stock 50,000 Retained earnings 35,390
Cash 2,490 Salaries and wages expense 17,900
Display fixtures 45,000 Supplies inventory 70,000
Dividends paid during the year 12,000 Water, gas, and electricity 3,600
Required
1. Prepare an income statement for the year ended December 31, 2014.
2. Prepare a statement of retained earnings for the year ended December 31, 2014.
3. Prepare a balance sheet at December 31, 2014.
4. You have $1,000 to invest. On the basis of the statements you prepared, would you use it to buy stock in this company? Explain. What other information would you want before deciding?
Decision Case Responsibility for Financial Statements and the
Role of the Auditor
Financial statements are the means by which accountants communicate to external users. Recent financial reporting scandals have focused attention on the accounting profession and its role in the preparation of these statements and the audits performed on the statements.
Required
1. Who is responsible for the preparation of the financial statements that are included in a company's annual report?
2. Who performs an audit of the financial statements referred to in part (1)?
3. Why is it important for those who are responsible for an audit of the financial