SMChap 001

Chapter 1
Accounting in Business
QUESTIONS
1. The purpose of accounting is to provide decision maers !ith re"evant and re"ia#"e
information to he"p them mae #etter decisions. E$amp"es inc"ude information for
peop"e maing investments% "oans% and #usiness p"ans.
&. Techno"og' reduces the time% effort% and cost of recordeeping. There is sti"" a
demand for peop"e !ho can design accounting s'stems% supervise their operation%
ana"'(e comp"e$ transactions% and interpret reports. )emand a"so e$ists for peop"e
!ho can effective"' use computers to prepare and ana"'(e accounting reports.
Techno"og' !i"" never su#stitute for *ua"ified peop"e !ith a#i"ities to prepare% use%
ana"'(e% and interpret accounting information.
+. E$terna" users and their uses of accounting information inc"ude, -a. "enders% to
measure the ris and return of "oans/ -#. shareho"ders% to assess !hether to #u'%
se""% or ho"d their shares/ -c. directors% to oversee their interests in the organi(ation/
-d. emp"o'ees and "a#or unions% to 0udge the fairness of !ages and assess future
emp"o'ment opportunities/ and -e. regu"ators% to determine !hether the organi(ation
is comp"'ing !ith regu"ations. Other users are voters% "egis"ators% government
officia"s% contri#utors to nonprofits% supp"iers and customers.
1. Business o!ners and managers use accounting information to he"p ans!er
*uestions such as, 2hat resources does an organi(ation o!n3 2hat de#ts are
o!ed3 4o! much income is earned3 Are e$penses reasona#"e for the "eve" of sa"es3
Are customers5 accounts #eing prompt"' co""ected3
6. Service #usinesses inc"ude, Standard and 7oor5s% )un 8 Bradstreet% 9erri"" :'nch%
South!est Air"ines% CitiCorp% 4umana% Char"es Sch!a#% and 7rudentia". Businesses
offering products inc"ude Nie% ;ee#o% <ap% App"e Computer% =ord 9otor Co.% 7hi"ip
9orris% Coca>Co"a% Best Bu'% and Circuit Cit'.
?. The interna" ro"e of accounting is to serve the organi(ation5s interna" operating
functions. It does this #' providing usefu" information for interna" users in
comp"eting their tass more effective"' and efficient"'. B' providing this information%
accounting he"ps the organi(ation reach its overa"" goa"s.
@. Accounting professiona"s offer man' services inc"uding auditing% management
advice% ta$ p"anning% #usiness va"uation% and mone' management.
A. 9areting managers are "ie"' interested in information such as sa"es vo"ume%
advertising costs% promotion costs% sa"aries of sa"es personne"% and sa"es
commissions.
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Solutions Manual, Chapter 1
1
D. Accounting is descri#ed as a service activit' #ecause it serves decision maers #'
providing information to he"p them mae #etter #usiness decisions.
1C. Some accounting>re"ated professions inc"ude consu"tant% financia" ana"'st%
under!riter% financia" p"anner% appraiser% =BI investigator% maret researcher% and
s'stem designer.
11. Ethics ru"es re*uire that auditors avoid auditing c"ients in !hich the' have a direct
investment% or if the auditor5s fee is dependent on the figures in the c"ient5s reports.
This !i"" he"p prevent others from dou#ting the *ua"it' of the auditor5s report.
1&. In addition to preparing ta$ returns% ta$ accountants he"p companies and individua"s
p"an future transactions to minimi(e the amount of ta$ to #e paid. The' are a"so
active"' invo"ved in estate p"anning and in he"ping set up organi(ations. Some ta$
accountants !or for regu"ator' agencies such as the I;S or the various state
departments of revenue. These ta$ accountants he"p to enforce ta$ "a!s.
1+. The o#0ectivit' concept means that financia" statement information is supported #'
independent% un#iased evidence other than someone5s opinion or imagination. This
concept increases the re"ia#i"it' and verifia#i"it' of financia" statement information.
11. This treatment is 0ustified #' #oth the cost princip"e and the going>concern
assumption.
16. The revenue recognition princip"e provides guidance for managers and auditors so
the' no! !hen to recogni(e revenue. If revenue is recogni(ed too ear"'% the
#usiness "oos more profita#"e than it is. On the other hand% if revenue is
recogni(ed too "ate the #usiness "oos "ess profita#"e than it is. This princip"e
demands that revenue #e recogni(ed !hen it is #oth earned -!hen service or
product provided. and can #e measured re"ia#"'. The amount of revenue shou"d
e*ua" the va"ue of the assets received or e$pected to #e received from the
#usiness5s operating activities covering a specific time period.
1?. Business organi(ations can #e organi(ed in one of three #asic forms, so"e
proprietorship% partnership% or corporation. These forms have imp"ications for "ega"
"ia#i"it'% ta$ation% continuit'% num#er of o!ners% and "ega" status as fo""o!s,
Proprietorship Partnership Corporation
Business entit' 'es 'es 'es
:ega" entit' no no 'es
:imited "ia#i"it' noE noE 'es
Un"imited "ife no no 'es
Business ta$ed no no 'es
One o!ner a""o!ed 'es no 'es
E7roprietorships and partnerships that are set up as ::Cs provide "imited "ia#i"it'.
1@. -a. Assets are resources o!ned or contro""ed #' a compan' that are e$pected to
'ie"d future #enefits. -#. :ia#i"ities are creditors5 c"aims on assets that ref"ect
o#"igations to provide assets% products or services to others. -c. E*uit' is the
o!ner5s c"aim on assets and is e*ua" to assets minus "ia#i"ities. -d. Net assets refer
to e*uit'.
1A. E*uit' is increased #' investments from the o!ner and #' net income -!hich is the
e$cess of revenues over e$penses.. It is decreased #' !ithdra!a"s #' the o!ner
and #' a net "oss -!hich is the e$cess of e$penses over revenues..
Fundamental Accounting Principles, 21st Edition
2
1D. Accounting princip"es consist of -a. general and -#. specific princip"es. <enera"
princip"es are the #asic assumptions% concepts% and guide"ines for preparing
financia" statements. The' stem from "ong>used accounting practices. Specific
princip"es are detai"ed ru"es used in reporting on #usiness transactions and events.
The' usua""' arise from the ru"ings of authoritative and regu"ator' groups such as
the =inancia" Accounting Standards Board or the Securities and E$change
Commission.
&C. ;evenue -or sa"es. is the amount received from se""ing products and services.
&1. Net income -a"so ca""ed income% profit or earnings. e*ua"s revenues minus e$penses
-if revenues e$ceed e$penses.. Net income increases e*uit'. If e$penses e$ceed
revenues% the compan' has a net "oss. Net "oss decreases e*uit'.
&&. The four #asic financia" statements are, income statement% statement of o!ner5s
e*uit'% #a"ance sheet% and statement of cash f"o!s.
&+. An income statement reports a compan'5s revenues and e$penses a"ong !ith the
resu"ting net income or "oss over a period of time.
&1. ;ent e$pense% uti"ities e$pense% administrative e$penses% advertising and promotion
e$penses% maintenance e$pense% and sa"aries and !ages e$penses are some
e$amp"es of #usiness e$penses.
&6. The statement of o!ner5s e*uit' e$p"ains the changes in e*uit' from net income or
"oss% and from an' o!ner contri#utions and !ithdra!a"s over a period of time.
&?. The #a"ance sheet descri#es a compan'5s financia" position -t'pes and amounts of
assets% "ia#i"ities% and e*uit'. at a point in time.
&@. The statement of cash f"o!s reports on the cash inf"o!s and outf"o!s from a
compan'5s operating% investing% and financing activities.
&A. ;eturn on assets% a"so ca""ed return on investment% is a profita#i"it' measure that is
usefu" in eva"uating management% ana"'(ing and forecasting profits% and p"anning
activities. It is computed as net income divided #' the average tota" assets. =or
e$amp"e% if !e have an average annua" #a"ance of F1CC in a #an account and it
earns interest of F6 for the 'ear% then our return on assets is F6 G F1CC or 6H. The
return on assets is a popu"ar measure for ana"'sis #ecause it a""o!s us to compare
companies of different si(es and in different industries.
&D
A
.

;eturn refers to income% and ris is the uncertaint' a#out the return !e e$pect to
mae. The "o!er the ris of an investment% the "o!er the e$pected return. =or
e$amp"e% savings accounts pa' a "o! return #ecause of the "o! ris of a #an not
returning the principa" !ith interest. 4igher ris imp"ies higher% #ut risier% e$pected
returns.
+C
B
. Organi(ations carr' out three ma0or activities, financing% investing% and operating.
=inancing provides the means used to pa' for resources. Investing refers to the
ac*uisition and disposing of resources necessar' to carr' out the organi(ation5s
p"ans. Operating activities are the actua" carr'ing out of these p"ans. (Planning is the
glue that connects these activities, including the organizations ideas, goals and
strategies!"
#
+1
B
. An organi(ation5s financing activities -"ia#i"ities and e*uit'. pa' for investing
activities -assets.. An organi(ation cannot have more or "ess assets than its
"ia#i"ities and e*uit' com#ined and% simi"ar"'% it cannot have more or "ess "ia#i"ities
and e*uit' than its tota" assets. This means, assets I "ia#i"ities J e*uit'. This re"ation
is ca""ed the accounting e*uation -a"so ca""ed the $alance sheet e%uation.% and it
app"ies to organi(ations at a"" times.
+&. The do""ar amounts in 7o"aris5 financia" statements are rounded to the nearest
thousand -F1%CCC.. 7o"aris5 conso"idated statement of income -or income statement.
covers the 'ear ended )ecem#er +1% &C11. 7o"aris a"so reports comparative income
statements for the previous t!o 'ears.
++. At 9arch +1% &C11% Arctic Cat had -F in thousands. assets of F&@&%DC?% "ia#i"ities of
FAD%A@C% and e*uit' of F1A+%C+?.
+1. Confirmation of KT95s accounting e*uation fo""o!s -num#ers in EU; thousands.,
Assets I :ia#i"ities J E*uit'
1A6%@@6 I &??%CCC J &1D%@@6
+6. The independent auditor for 7o"aris% is Ernst 8 Loung% ::7. The auditor e$press"'
states that Mour responsi#i"it' is to e$press an opinion on these conso"idated
financia" statements and schedu"e #ased on our audits.N The auditor a"so states that
Mthese financia" statements and the schedu"e are the responsi#i"it' of the
Compan'5s management.N
&
QUICK STU)IES
Quic Stud' 1>1
-a. and -#.
<AA7, <enera""' Accepted Accounting 7rincip"es
Importance, <AA7 are the ru"es that specif' accepta#"e accounting
practices.
SEC, Securities and E$change Commission
Importance, The SEC is charged #' Congress to set reporting ru"es for
organi(ations that se"" o!nership shares to the pu#"ic. The
SEC de"egates part of this responsi#i"it' to the =ASB.
=ASB, =inancia" Accounting Standards Board
Importance, =ASB is an independent group of fu"">time mem#ers !ho are
responsi#"e for setting accounting ru"es.
IASB, Internationa" Accounting Standards Board.
Importance, Its purpose is to issue standards that identif' preferred
practices in the desire of harmoni(ing accounting practices
across different countries. The vast ma0orit' of countries and
financia" e$changes support its activities and o#0ectives.
I=;S, Internationa" =inancia" ;eporting Standards.
Importance, A g"o#a" set of accounting standards issued #' the IASB.
9an' countries re*uire or permit companies to comp"' !ith
I=;S in preparing their financia" statements. The =ASB is
undergoing a process !ith the IASB to converge <AA7 and
I=;S and to create a sing"e set of accounting standards for
g"o#a" use.
Quic Stud' 1>&
a. E g. E
#. E h. E
c. E i. I
d. E 0. E
e. I . E
f. E ". I
'
Quic Stud' 1>+
Interna" contro"s serve severa" purposes,
The' invo"ve monitoring an organi(ation5s activities to promote
efficienc' and to prevent !rongfu" use of its resources.
The' he"p ensure the va"idit' and credi#i"it' of accounting reports.
The' are often crucia" to effective operations and re"ia#"e reporting.
9ore genera""'% the a#sence of interna" contro"s can adverse"' affect the
effectiveness of domestic and g"o#a" financia" marets.
E$amp"es of interna" contro"s inc"ude cash registers !ith interna" tapes or
drives% scanners at door!a's to identif' tagged products% overhead video
cameras% securit' guards% and man' others.
Quic Stud' 1>1
Accounting professiona"s practice in at "east four main areas. These four
areas% a"ong !ith a "isting of some !or opportunities in each% are,
1. =inancia" accounting
7reparation
Ana"'sis
Auditing -e$terna".
Consu"ting
Investigation
&. 9anageria" accounting
Cost accounting
Budgeting
Auditing -interna".
Consu"ting
+. Ta$ accounting
7reparation
7"anning
;egu"ator'
Consu"ting
Investigation
1. Accounting>re"ated
:ending
Consu"ting
Ana"'st
(
Investigator
Appraiser
)
Quic Stud' 1>6
The choice of an accounting method !hen more than one a"ternative
method is accepta#"e often has ethica" imp"ications. This is #ecause
accounting information can have ma0or impacts on individua"s5 -and firms5.
!e"">#eing.
To i""ustrate% man' companies #ase compensation of managers on the
amount of reported income. 2hen the choice of an accounting method
affects the amount of reported income% the amount of compensation is a"so
affected. Simi"ar"'% if !orers in a division receive #onuses #ased on the
division5s income% its computation has direct financia" imp"ications for
these individua"s.
Quic Stud' 1>?
a. ;evenue recognition princip"e
#. Cost princip"e -a"so ca""ed historica" cost.
c. Business entit' assumption
Quic Stud' 1>@
F@CC%CCC -a. F&AC%CCC F1&C%CCC
F6CC%CCC -#. F&6C%CCC -#. F&6C%CCC
Quic Stud' 1>A
F@6%CCC -a. F+6%CCC F1C%CCC
-#. FD6%CCC F&6%CCC F@C%CCC
FA6%CCC F&C%CCC -c. F?6%CCC
*
Quic Stud' 1>D
-a. E$amp"es of #usiness transactions that are measura#"e inc"ude,
Se""ing products and services.
Co""ecting funds from dues% ta$es% contri#utions% or investments.
Borro!ing mone'.
7urchasing products and services.
-#. E$amp"es of #usiness events that are measura#"e inc"ude,
)ecreases in the va"ue of securities -assets..
Banruptc' of a customer o!ing mone'.
Techno"ogica" advances rendering patents -or other assets.
!orth"ess.
An Mact of <odN -casua"t'. that destro's assets.
Quic Stud' 1>1C
a. =or )ecem#er +1% &C11% the account and its do""ar amount -in
thousands. for 7o"aris are,
-1. Assets I F1%&&A%C&1
-&. :ia#i"ities I F @&@%D?A
-+. E*uit' I F 6CC%C6?
#. Using 7o"aris5 amounts from -a. !e verif' that -in mi""ions.,
F1%&&A%C&1 I F @&@%D?A J F 6CC%C6?
Quic Stud' 1>11
OCode+ ,ncome statement (,", -alance sheet (-", Statement of o.ners e%uit/ (E", or
Statement of cash flo.s (CF"!P
a. B d. B g. C=
#. C= e. I h. I
c. EE f. B i. B
EThe more advanced student might no! that this item cou"d a"so appear on the C=.
0
Quic Stud' 1>1&
;eturn on assets I I I A.&H
Interpretation, Its return of A.&H is s"ight"' a#ove the AH of its competitors.
4ome )epot5s performance can #e rated as a#ove average.
Quic Stud' 1>1+ -1C minutes.
a. Internationa" =inancia" ;eporting Standards -I=;S.
#. Convergence desires to achieve a sing"e set of accounting standards
for g"o#a" use.
c. The =ASB is to deve"op a transition p"an to effect these changes over
the ne$t five 'ears or so. =or updates on this roadmap% !e can chec
!ith the AIC7A -I=;S.com.% =ASB -=ASB.org.% and IASB -IASB.org.u..
11
F+%++A
F1C%6C1
Net income
Average tota" assets
EQE;CISES
E$ercise 1>1 -1C minutes.
1. A 6. C
&. B ?. C
+. A @. B
1. A A. B
E$ercise 1>& -1C minutes.
C 1. Ana"'(ing and interpreting reports
C &. 7resenting financia" information
; +. 9aintaining a "og of service costs
; 1. 9easuring the costs of a product
C 6. 7reparing financia" statements
I ?. Esta#"ishing revenues generated from a product
I @. )etermining emp"o'ee tass #ehind a service
E$ercise 1>+ -&C minutes.
7art A.
1. I 6. I
&. I ?. E
+. E @. I
1. E A. I
7art B.
1. I 6. I
&. E ?. E
+. I @. I
1. E
11
E$ercise 1>1 -&C minutes.
a. Situations invo"ving ethica" decision maing in course!or inc"ude
performing independent !or on e$aminations and individua""'
comp"eting assignmentsGpro0ects. It can a"so e$tend to prompt"'
returning reference materia"s so others can en0o' them% and to
proper"' preparing for c"ass to efficient"' use the time and *uestion
period to not detract from others5 instructiona" #enefits.
#. 9anagers face severa" situations demanding ethica" decision maing
in their dea"ings !ith emp"o'ees. E$amp"es inc"ude fairness in
performance eva"uations% sa"ar' ad0ustments% and promotion
recommendations. The' can a"so inc"ude avoiding an' perceived or
rea" harassment of emp"o'ees #' the manager or an' other emp"o'ees.
It can a"so inc"ude issues of confidentia"it' regarding persona"
information no!n to managers.
c. Accounting professiona"s !ho prepare ta$ returns can face situations
!here c"ients !ish to c"aim deductions the' cannot su#stantiate. A"so%
c"ients sometimes e$ert pressure to use methods not a""o!ed or
*uestiona#"e under the "a!. Issues of confidentia"it' a"so arise !hen
these professiona"s have access to c"ients5 persona" records.
d. Auditing professiona"s !ith competing audit c"ients are "ie"' to "earn
va"ua#"e information a#out each c"ient that the other c"ients !ou"d
#enefit from no!ing. In this situation the auditor must tae care to
maintain the confidentia" nature of information a#out each c"ient.
12
E$ercise 1>6 -1C minutes.
Code )escription 7rincip"eGAssumption
E 1. Usua""' created #' a pronouncement from an
authoritative #od'.
Specific accounting
princip"e
< &. =inancia" statements ref"ect the assumption that
the #usiness continues operating.
<oing>concern
assumption
A +. )erived from "ong>used and genera""' accepted
accounting practices.
<enera" accounting
princip"e
C 1. Ever' #usiness is accounted for separate"' from
its o!ner or o!ners.
Business entit'
assumption
) 6. ;evenue is recorded on"' !hen the earnings
process is comp"ete.
;evenue recognition
princip"e
B ?. Information is #ased on actua" costs incurred in
transactions.
Cost princip"e
= @. A compan' records the e$penses incurred to
generate the revenues reported.
9atching -e$pense
recognition. princip"e
4. A. A compan' reports detai"s #ehind financia"
statements that !ou"d impact usersR decisions.
=u"" disc"osure
princip"e
E$ercise 1>? -1C minutes.
1. C 1. A
&. = 6. <
+. )
E$ercise 1>@ -1C minutes.
a. Corporation e. So"e proprietorship
#. So"e proprietorship f. So"e proprietorship
c. Corporation g. Corporation
d. 7artnership
1#
E$ercise 1>A -&C minutes.
a. Using the accounting e*uation,
F1&+%CCC I F1@%CCC J 3
Thus% e*uit' I F@?%CCC
#. Using the accounting e*uation at the $eginning of the 'ear,
F+CC%CCC I 3 J F1CC%CCC
Thus% $eginning "ia#i"ities I F&CC%CCC
Using the accounting e*uation at the end of the 'ear,
F+CC%CCC J FAC%CCC I F&CC%CCCJ F6C%CCC J 3
F+AC%CCC I F&6C%CCC J 3
Thus% ending e*uit' I F1+C%CCC
Alternative approach to solving part ($"+
Assets-FAC%CCC. I :ia#i"ities-F6C%CCC. J E*uit'-3.
!here MN refers to Mchange in.N
2hus+ Ending E*uit' I F1CC%CCC J F+C%CCC I F1+C%CCC
c. Using the accounting e*uation at the end of the 'ear,
F1DC%CCC I F@C%CCC > F6%CCC J 3
F1DC%CCC I F?6%CCC J F1&6%CCC
Using the accounting e*uation at the $eginning of the 'ear,
F1DC%CCC > F?C%CCC I F@C%CCC J 3
F1+C%CCC I F@C%CCC J 3
Thus, -eginning E*uit' I F?C%CCC
1&
E$ercise 1>D -1C minutes.
-a. F ?6%CCC I F &C%CCC J F16%CCC
F1CC%CCC I F +1%CCC J -#. F??%CCC
F161%CCC I -c. F111%CCC J F1C%CCC
E$ercise 1>1C -16 minutes.
E3amples of transactions that fit each case include+
a. Cash !ithdra!a"s -or some other asset. paid to the o!ner of the
#usiness/ O;% the #usiness incurs an e$pense paid in cash.
#. Business purchases e*uipment -or some other asset. on credit.
c. Business signs a note pa'a#"e to e$tend the due date on an account
pa'a#"e/ O;% the #usiness renegotiates a "ia#i"it' -perhaps to o#tain a
"o!er interest rate..
d. Business pa's an account pa'a#"e -or some other "ia#i"it'. !ith cash
-or some other asset..
e. Business purchases office supp"ies -or some other asset. for cash -or
some other asset..
f. Business incurs an e$pense that is not 'et paid -for e$amp"e% !hen
emp"o'ees earn !ages that are not 'et paid..
g. O!ner invests cash -or some other asset. in the #usiness/ O;% the
#usiness earns revenue and accepts cash -or another asset..
1'
E$ercise 1>11 -+C minutes.
Assets
I
:ia#i"ities
J
E*uit'
Cash
J
Accounts
;eceiva#"e
J
E*uip>
ment
I
Accounts
7a'a#"e
J
4o"den%
Capita"
S
4o"den%
2ith>
dra!a"s
J
;evenues
S
E$penses
a. JF?C%CCC J F16%CCC I J F@6%CCC
#. S 1%6CC TTTTTT TTTTTT S F1%6CC
Ba".
6A%6CC J J 16%CCC I J @6%CCC S 1%6CC
c. TTTTTTT J 1C%CCC JF1C%CCC TTTTTT TTTTT
Ba".
6A%6CC J J &6%CCC I 1C%CCC J @6%CCC S 1%6CC
d. J &%6CC TTTTTT TTTTTTT TTTTTT J F&%6CC TTTTT
Ba".
?1%CCC J J &6%CCC I 1C%CCC J @6%CCC J &%6CC S 1%6CC
e. TTTTTTT J FA%CCC TTTTTT TTTTTTT TTTTTT J A%CCC TTTTT
Ba".
?1%CCC J A%CCC J &6%CCC I 1C%CCC J @6%CCC J 1C%6CC S 1%6CC
f. S ?%CCC TTTTTT J ?%CCC TTTTTTT TTTTTT TTTTT TTTTT
Ba".
66%CCC J A%CCC J +1%CCC I 1C%CCC J @6%CCC J 1C%6CC S 1%6CC
g. S +%CCC TTTTTT TTTTTT TTTTTTT TTTTTT TTTTT S +%CCC
Ba".
6&%CCC J A%CCC J +1%CCC I 1C%CCC J @6%CCC J 1C%6CC S 1%6CC
h. J 6%CCC > 6%CCC TTTTTT TTTTTTT TTTTTT TTTTT TTTTT
Ba".
6@%CCC J +%CCC J +1%CCC I 1C%CCC J @6%CCC J 1C%6CC S 1%6CC
i. S 1C%CCC TTTTTT TTTTTT S 1C%CCC TTTTTT TTTTT TTTTT
Ba".
1@%CCC J +%CCC J +1%CCC I C J @6%CCC J 1C%6CC S 1%6CC
0. S 1%CCC TTTTTT TTTTTT TTTTTTT TTTTTT S F1%CCC TTTTT TTTTT
Ba".
F1?%CCC J F+%CCC J F+1%CCC I F C J F@6%CCC S F1%CCC J F1C%6CC S F1%6CC
E$ercise 1>1& -&C minutes.
a. Started the #usiness !ith the o!ner investing F1C%CCC cash in the
#usiness.
#. 7urchased office supp"ies for F+%CCC #' pa'ing F&%CCC cash and putting
the remaining F1%CCC #a"ance on credit.
c. 7urchased office furniture #' pa'ing FA%CCC cash.
d. Bi""ed a customer F?%CCC for services earned.
e. 7rovided services for F1%CCC cash.
1(
E$ercise 1>1+ -&C minutes.
a. 7urchased "and for F1%CCC cash.
#. 7urchased F1%CCC of office supp"ies on credit.
c. Bi""ed a c"ient F1%DCC for services provided.
d. 7aid the F1%CCC account pa'a#"e created #' the credit purchase of
office supp"ies in transaction $.
e. Co""ected F1%DCC cash for the #i""ing in transaction c.
E$ercise 1>11 -16 minutes.
;EA: ANS2E;S
Income Statement
=or 9onth Ended Octo#er +1
;evenues
Consu"ting fees earned...................... F11%CCC
E$penses
Sa"aries e$pense................................. F@%CCC
;ent e$pense....................................... +%66C
Te"ephone e$pense............................. @?C
9isce""aneous e$penses.................... 6AC
Tota" e$penses.................................... 11%ADC
Net income.................................................. F &%11C
E$ercise 1>16 -16 minutes.
;EA: ANS2E;S
Statement of O!ner5s E*uit'
King% Capita"% Octo#er 1................................... F C
Add, O!ner5s investment.......................... A1%CCC
Net income -from E$ercise 1>11......... &%11C
A?%11C
:ess, 2ithdra!a"s #' o!ner....................... &%CCC
King% Capita"% Octo#er +1................................. FA1%11C
1)
E$ercise 1>1? -16 minutes.
;EA: ANS2E;S
Ba"ance Sheet
Octo#er +1
Assets 4ia$ilities
Cash............................... F11%+?C Accounts pa'a#"e................. F A%6CC
Accounts receiva#"e.... 11%CCC
Office supp"ies.............. +%&6C E%uit/
Office e*uipment.......... 1A%CCC King% Capita"E......................... A1%11C
:and............................... 1?%CCC TTTTTTT
Tota" assets................... FD&%?1C Tota" "ia#i"ities and e*uit'.... FD&%?1C
E =or the computation of this amount see E$ercise 1>16.
E$ercise 1>1@ -16 minutes.
;EA: ANS2E;S
Statement of Cash ="o!s
Cash f"o!s from operating activities
Cash received from customers............................................ F C
Cash paid to emp"o'ees
1
...................................................... -1%@6C.
Cash paid for rent.................................................................. -+%66C.
Cash paid for te"ephone e$penses...................................... -@?C.
Cash paid for misce""aneous e$penses............................... -6AC.
Net cash used #' operating activities................................. - ?%?1C.
Cash f"o!s from investing activities
7urchase of office e*uipment.............................................. -1A%CCC.
Net cash used #' investing activities................................ -1A%CCC.
Cash f"o!s from financing activities
Investments #' o!ner........................................................... +A%CCC
2ithdra!a"s #' o!ner........................................................... -&%CCC.
Net cash provided #' financing activities........................... +?%CCC
Net increase in cash.............................................................. F11%+?C
Cash #a"ance% Octo#er 1....................................................... C
Cash #a"ance% Octo#er +1..................................................... F11%+?C
1
F@%CCC Sa"aries E$pense > F6%&6C sti"" o!ed I F1%@6C paid to emp"o'ees.
1*
E$ercise 1>1A -1C minutes.
;eturn on assets I Net income G Average tota" assets
I F1C%CCC G O-F&CC%CCC J F+CC%CCC.G&P
I 1?H
Interpretation, S!iss <roup5s return on assets of 1?H is mared"' a#ove
the 1CH return of its competitors. According"'% its performance is
assessed as superior to its competitors.
E$ercise 1>1D -1C minutes.
O 1. Cash paid for advertising O 6. Cash paid for rent
O &. Cash paid for !ages O ?. Cash paid on an account pa'a#"e
= +. Cash !ithdra!a" #' o!ner = @. Cash investment #' o!ner
I 1. Cash purchase of e*uipment O A. Cash received from c"ients
E$ercise 1>&C
B
-1C minutes.
a. =inancingE
#. Investing
c. Investing
d. Operating
e. =inancing
E 2ou"d a"so #e "isted as MinvestingN if resources contri#uted #' o!ner !ere in the
form of nonfinancia" resources.
10
E$ercise 1>&1 -&C minutes.
NINTEN)O
Income Statement
=or Lear Ended 9arch +1% &C11
-Uapanese Len in mi""ions.
Net sa"es ...................................................................... V 1%C11%+16
E$penses
Cost of sa"es............................................................ V?&?%+@D
Se""ing% genera" and administrative e$penses...... &1?%AAD
Other e$penses........................................................ D+%16?
Tota" e$penses......................................................... D+?%@&1
Net income.................................................................... V @@%?&1
21
7;OB:E9 SET A
7ro#"em 1>1A -1C minutes.
Part 1
Compan' A
-a. E*uit' on )ecem#er +1% &C1&,
Assets.......................................................... F66%CCC
:ia#i"ities..................................................... -&1%6CC.
E*uit'.......................................................... F+C%6CC
-#. E*uit' on )ecem#er +1% &C1+,
E*uit'% )ecem#er +1% &C1&........................ F+C%6CC
7"us investment #' o!ner......................... ?%CCC
7"us net income.......................................... A%6CC
:ess !ithdra!a"s #' o!ner....................... -+%6CC.
E*uit'% )ecem#er +1% &C1+....................... F11%6CC
-c. :ia#i"ities on )ecem#er +1% &C1+,
Assets.......................................................... F6A%CCC
E*uit'.......................................................... -11%6CC.
:ia#i"ities..................................................... F1?%6CC
Part 2
Compan' B
-a. and -#.
E*uit', 125#152112 125#15211#
Assets................................... F+1%CCC F1C%CCC
:ia#i"ities.............................. -&1%6CC. -&?%6CC.
E*uit'................................... F1&%6CC F1+%6CC
-c. Net income for &C1+,
E*uit'% )ecem#er +1% &C1&..................... F1&%6CC
7"us investment #' o!ner...................... 1%1CC
7"us net income....................................... 3
:ess !ithdra!a"s #' o!ner.................... -&%CCC.
E*uit'% )ecem#er +1% &C1+..................... F1+%6CC
21
Therefore% net income must have #een F 1%?CC
22
7ro#"em 1>1A (Continued"
Part #
Compan' C
=irst% ca"cu"ate the #eginning #a"ance of e*uit',
6ec! #1, 2112
Assets.......................................................... F&1%CCC
:ia#i"ities..................................................... - D%CCC.
E*uit'.......................................................... F16%CCC
Ne$t% find the ending #a"ance of e*uit' #' comp"eting this ta#"e,
E*uit'% )ecem#er +1% &C1&........................ F16%CCC
7"us investment #' o!ner......................... D%@6C
7"us net income.......................................... A%CCC
:ess !ithdra!a"s #' o!ner....................... -6%A@6.
E*uit'% )ecem#er +1% &C1+........................ F&?%A@6
=ina""'% find the ending amount of assets #' adding the ending #a"ance of
e*uit' to the ending #a"ance of "ia#i"ities,
6ec! #1, 211#
:ia#i"ities..................................................... F&D%CCC
E*uit'.......................................................... &?%A@6
Assets.......................................................... F66%A@6
Part &
Compan' )
=irst% ca"cu"ate the #eginning and ending e*uit' #a"ances,
125#152112 125#15211#
Assets...................................... F?C%CCC FA6%CCC
:ia#i"ities................................. -1C%CCC. -&1%CCC.
E*uit'...................................... F&C%CCC F?1%CCC
Then% find the amount of investment #' o!ner during &C1+,
E*uit'% )ecem#er +1% &C1&........................... F&C%CCC
7"us investment #' o!ner........................... 3
7"us net income............................................ 11%CCC
:ess !ithdra!a"s #' o!ner......................... C
E*uit'% )ecem#er +1% &C1+........................... F?1%CCC
2#
Thus% investment #' o!ner must have #een F&@%CCC
2&
7ro#"em 1>1A -Concluded.
Part '
Compan' E
=irst% compute the #a"ance of e*uit' as of )ecem#er +1% &C1+,
Assets.......................................................... F11+%CCC
:ia#i"ities.................................................... -@C%CCC.
E*uit'.......................................................... F 1+%CCC
Ne$t% find the #eginning #a"ance of e*uit' as fo""o!s,
E*uit'% )ecem#er +1% &C1&........................ F 3
7"us investment #' o!ner......................... ?%6CC
7"us net income.......................................... &C%CCC
:ess !ithdra!a"s #' o!ner....................... -11%CCC.
E*uit'% )ecem#er +1% &C1+....................... F1+%CCC
Thus% the #eginning #a"ance of e*uit' is, F&@%6CC
=ina""'% find the #eginning amount of "ia#i"ities #' su#tracting the #eginning
#a"ance of e*uit' from the #eginning #a"ance of assets,
6ec! #1, 2112
Assets.......................................................... F11D%CCC
E*uit'.......................................................... -&@%6CC.
:ia#i"ities.................................................... F D1%6CC
2'
7ro#"em 1>&A -&6 minutes.
Ba"ance Sheet
Income
Statement
Statement of
Cash ="o!s
Transaction
Tota"
Assets
Tota"
:ia#.
Tota"
E*uit'
Net
Income
Operating
Activities
=inancing
Activities
Investing
Activities
1 O!ner invests
cash in #usiness J J J
& ;eceives cash
for services
provided
J J J J
+ 7a's cash for
emp"o'ee !ages S S S S
1 Incurs "ega"
costs on credit J S S
6 Borro!s cash
#' signing :>T
note pa'a#"e
J J J
? O!ner
!ithdra!s cash S S S
@ Bu's "and #'
signing note
pa'a#"e
J J
A 7rovides ser>
vices on credit J J J
D Bu's office
e*uipment
for cash
JGS S
1C Co""ects cash
on receiva#"e
from -A.
JGS J
2(
7ro#"em 1>+A -16 minutes.
E"o Energ' Compan'
Income Statement
=or Lear Ended )ecem#er +1% &C1+
;evenues ................................................... F66%CCC
E$penses.................................................. 1C%CCC
Net income.................................................... F16%CCC
7ro#"em 1>1A -16 minutes.
Amit' Compan'
Ba"ance Sheet
)ecem#er +1% &C1+
Assets ......... FDC%CCC:ia#i"ities ......................................F11%CCC
E*uit'.......................................... 1?%CCC
Tota" assets..................... FDC%CCC Tota" "ia#i"ities and e*uit'....... FDC%CCC
AB9 Compan'
Cash from operating activities ........................ F ?%CCC
Cash used #' investing activities.................... -&%CCC.
Cash used #' financing activities.................... -&%ACC.
Net increase in cash.......................................... F 1%&CC
Cash% )ecem#er +1% &C1&................................. &%+CC
Cash% )ecem#er +1% &C1+................................. F +%6CC
2)
7ro#"em 1>?A -16 minutes.
Kasio Compan'
K. Kasio% Capita"% )ec. +1% &C1& ...................... F @%CCC
Add, Net income.................................................... A%CCC
16%CCC
:ess, 2ithdra!a"s #' o!ner............................ -1%CCC.
K. Casio% Capita"% )ec. +1% &C1+....................... F11%CCC
2*
7ro#"em 1>@A -?C minutes. Parts 1 and 2
)ate Cash J Accounts
;eceiva#"e
J Office
E*uipment
I Accounts
7a'a#"e
J 4. <raham%
Capita"
>
4. <raham%
2ith>
dra!a"s
J ;evenues
>
E$penses
9a' 1 JF1C%CCC I J F1C%CCC
1 > &%&CC I > F&%&CC
+ J F1%ADC I J F1%ADC
6 > @6C W I > @6C
A J 6%1CC I J F6%1CC
1& J F&%6CC I J &%6CC
16 > @6C I > @6C
&C J &%6CC > &%6CC I
&& J +%&CC I J +%&CC
&6 J +%&CC > +%&CC I
&? > 1%ADC I > 1%ADC
&@ I J AC > AC
&A > @6C I > @6C
+C > +CC I > +CC
+C > &AC I > &AC
+1 > 1%1CC I > F1%1CC
F1&%@AC J F C J F1%ADC I F AC J F1C%CCC > F1%1CC J F11%1CC > F6%11C
B&C1+ #' 9c<ra!>4i"" Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
20
#1
7ro#"em 1>@A (Continued"
Part #
The <raham Co.
Income Statement
=or 9onth Ended 9a' +1
;evenues
Consu"ting services revenue ............ F11%1CC
E$penses
;ent e$pense....................................... F&%&CC
Sa"aries e$pense................................. 1%6CC
C"eaning e$pense............................... @6C
Te"ephone e$pense............................. +CC
Uti"ities e$pense.................................. &AC
Advertising e$pense........................... AC
Tota" e$penses.................................... 6%11C
Net income.................................................. F 6%DDC
The <raham Co.
4. <raham% Capita"% 9a' 1........................................ F C
Add, Investment #' o!ner..................................... 1C%CCC
Net income...................................................... 6%DDC
16%DDC
:ess, 2ithdra!a"s #' o!ner................................... 1%1CC
4. <raham% Capita"% 9a' +1...................................... F11%6DC
The <raham Co.
Ba"ance Sheet
9a' +1
Assets 4ia$ilities
Cash...............................F1&%@AC Accounts pa'a#"e........................ F AC
Office e*uipment.......... 1%ADC E%uit/
4. <raham% Capita"...................... 11%6DC
TTTTTTT
Tota" assets...................F11%?@C Tota" "ia#i"ities and e*uit'........... F11%?@C
B&C1+ #' 9c<ra!>4i"" Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
#1
7ro#"em 1>@A -Concluded"
7art +Xcontinued
The <raham Co.
Cash received from customers................................. F11%1CC
Cash paid for rent...................................................... -&%&CC.
Cash paid for c"eaning............................................... -@6C.
Cash paid for te"ephone............................................ -+CC.
Cash paid for uti"ities................................................. -&AC.
Cash paid to emp"o'ees............................................ -1%6CC.
Net cash provided #' operating activities............... F ?%C@C
7urchase of e*uipment............................................. -1%ADC.
Net cash used #' investing activities...................... -1%ADC.
Investment #' o!ner................................................. 1C%CCC
2ithdra!a" #' o!ner................................................. -1%1CC.
Net cash provided #' financing activities............... +A%?CC
Net increase in cash.................................................. F1&%@AC
Cash #a"ance% 9a' 1.................................................. C
Cash #a"ance% 9a' +1................................................ F1&%@AC
B&C1+ #' 9c<ra!>4i"" Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamental Accounting Principles, 21st Edition #2
7ro#"em 1>AA -?C minutes. 7arts 1 and &
)ate Cash J
Accounts
;eceiva#"e
J
Office
Supp"ies
J
Office
E*uipment
J
E"ectrica"
E*uipment
I
Accounts
7a'a#"e
J
4. Ander%
Capita"
>
4. Ander%
2ith>
dra!a"s
J ;evenues > E$penses
)ec. 1 JF?6%CCC I J F?6%CCC
&
> 1%CCC >
F1%CCC
Ba". ?1%CCC I ?6%CCC
>
1%CCC
+
> 1%ACC
J F1+%CCC J FA%&CC
Ba". 6D%&CC J 1+%CCC I A%&CC J ?6%CCC
>
1%CCC
6
> ACC
J F ACC
Ba". 6A%1CC J ACC J 1+%CCC I A%&CC J ?6%CCC
>
1%CCC
? J 1%&CC J F1%&CC
Ba". 6D%?CC J ACC J 1+%CCC I A%&CC J ?6%CCC J 1%&CC
>
1%CCC
A J F&%6+C J &%6+C
Ba". 6D%?CC J ACC J &%6+C J 1+%CCC I 1C%@+C J ?6%CCC J 1%&CC
>
1%CCC
16 J F6%CCC J 6%CCC
Ba". 6D%?CC J 6%CCC J ACC J &%6+C J 1+%CCC I 1C%@+C J ?6%CCC J ?%&CC
>
1%CCC
1A J +6C J +6C
Ba". 6D%?CC J 6%CCC J 1%16C J &%6+C J 1+%CCC I 11%CAC J ?6%CCC J ?%&CC
>
1%CCC
&C
> &%6+C > &%6+C
Ba". 6@%C@C J 6%CCC J 1%16C J &%6+C J 1+%CCC I A%66C J ?6%CCC J ?%&CC
>
1%CCC
&1 J DCC J DCC
Ba". 6@%C@C J 6%DCC J 1%16C J &%6+C J 1+%CCC I A%66C J ?6%CCC J @%1CC
>
1%CCC
&A J 6%CCC
>
6%CCC
Ba". ?&%C@C J DCC J 1%16C J &%6+C J 1+%CCC I A%66C J ?6%CCC J @%1CC
>
1%CCC
&D
> 1%1CC

>
1%1CC
Ba". ?C%?@C J DCC J 1%16C J &%6+C J 1+%CCC I A%66C J ?6%CCC J @%1CC
>
&%1CC
+C
> 61C >
61C
Ba". ?C%1+C J DCC J 1%16C J &%6+C J 1+%CCC I A%66C J ?6%CCC J @%1CC
>
&%D1C
+1
> D6C >
FD6C
Ba". F6D%1AC J F DCC J F1%16C J F&%6+C J F1+%CCC I FA%66C J F?6%CCC
>
FD6C J F@%1CC
>
F&%D1C
##
7ro#"em 1>AA (Continued.
Part #
Ander E"ectric
Income Statement
=or 9onth Ended )ecem#er +1
;evenues
E"ectrica" fees earned...................... F@%1CC
E$penses
;ent e$pense.................................... F1%CCC
Sa"aries e$pense.............................. 1%1CC
Uti"ities e$pense .............................. 61C
Tota" e$penses.................................. &%D1C
Net income.................................................. F1%1?C
Ander E"ectric
4. Ander% Capita"% )ecem#er 1.................. F C
Add, Investment #' o!ner..................... ?6%CCC
Net income...................................... 1%1?C
?D%1?C
:ess, 2ithdra!a"s #' o!ner................... D6C
4. Ander% Capita"% )ecem#er +1................ F?A%&1C
Ander E"ectric
Ba"ance Sheet
)ecem#er +1
Assets 4ia$ilities
Cash................................. F6D%1AC Accounts pa'a#"e.................... F A%66C
Accounts receiva#"e....... DCC
Office supp"ies................ 1%16C E%uit/
Office e*uipment............. &%6+C Ander% Capita".......................... ?A%&1C
E"ectrica" e*uipment....... 1+%CCC TTTTTTT
Tota" assets..................... F@?%@?C Tota" "ia#i"ities and e*uit'....... F@?%@?C
Fundamental Accounting Principles, 21st Edition #&
7ro#"em 1>AA (Concluded"
Part #7continued
Ander E"ectric
Cash received from customers
1
.................................. F ?%&CC
Cash paid for rent......................................................... -1%CCC.
Cash paid for supp"ies................................................. -ACC.
Cash paid for uti"ities................................................... -61C.
Cash paid to emp"o'ees.............................................. -1%1CC.
Net cash provided #' operating activities................. F &%1?C
7urchase of office e*uipment..................................... -&%6+C.
7urchase of e"ectrica" e*uipment............................... -1%ACC.
Net cash used #' investing activities........................ -@%++C.
Investments #' o!ner.................................................. ?6%CCC
2ithdra!a"s #' o!ner................................................. -D6C.
Net cash provided #' financing activities................. ?1%C6C
Net increase in cash..................................................... F6D%1AC
Cash #a"ance% )ec. 1.................................................... C
Cash #a"ance% )ec. +1.................................................. F6D%1AC
1
F1%&CC J F6%CCC I F?%&CC
Part &
If the )ecem#er 1 investment had #een F1D%CCC cash instead of F?6%CCC and
the F1?%CCC difference !as #orro!ed #' the compan' from a #an% then,
-a. tota" o!ner investments during this period% as !e"" as the ending e*uit'%
!ou"d #e F1?%CCC "o!er%
-#. tota" "ia#i"ities !ou"d #e F1?%CCC greater% and
-c. tota" assets !ou"d remain the same.
#'
7ro#"em 1>DA -?C minutes. 7arts 1 and &
Cash J
Accounts
;eceiva#"e
J
Office
Supp"ies
J
Office
E*uipment
J Bui"ding I
Accounts
7a'a#"e
J
Notes
7a'a#"e
J
I. :ope(%
Capita"
>
I. :ope(%
2ith>
dra!a"s
J
;eve>
nues
>
E$pen>
ses
a. JF@C%CCC J F1C%CCC J FAC%CCC
#.
> &C%CCC
J F16C%CCC J F1+C%CCC
Ba". 6C%CCC J 1C%CCC J 16C%CCC I J 1+C%CCC J AC%CCC
c.
> 16%CCC
J 16%CCC
Ba". +6%CCC J &6%CCC J 16C%CCC I J 1+C%CCC J AC%CCC
d. J F1%&CC J 1%@CC J F&%DCC
Ba". +6%CCC J 1%&CC J &?%@CC J 16C%CCC I &%DCC J 1+C%CCC J AC%CCC
e.
> 6CC >
F 6CC
Ba". +1%6CC J 1%&CC J &?%@CC J 16C%CCC I &%DCC J 1+C%CCC J AC%CCC
>
6CC
f. J F&%ACC J F&%ACC
Ba". +1%6CC J &%ACC J 1%&CC J &?%@CC J 16C%CCC I &%DCC J 1+C%CCC J AC%CCC J &%ACC
>
6CC
g. J 1%CCC J 1%CCC
Ba". +A%6CC J &%ACC J 1%&CC J &?%@CC J 16C%CCC I &%DCC J 1+C%CCC J AC%CCC J ?%ACC
>
6CC
h.
> +%&@6 >
F+%&@6
Ba". +6%&&6 J &%ACC J 1%&CC J &?%@CC J 16C%CCC I &%DCC J 1+C%CCC J AC%CCC
>
+%&@6 J ?%ACC
>
6CC
i. J 1%ACC
>
1%ACC
Ba". +@%C&6 J 1%CCC J 1%&CC J &?%@CC J 16C%CCC I &%DCC J 1+C%CCC J AC%CCC
>
+%&@6 J ?%ACC
>
6CC
0.
> @CC > @CC
Ba". +?%+&6 J 1%CCC J 1%&CC J &?%@CC J 16C%CCC I &%&CC J 1+C%CCC J AC%CCC
>
+%&@6 J ?%ACC
>
6CC
.
> 1%ACC

>
1%ACC
Ba". F+1%6&6 J F1%CCC J F1%&CC J F&?%@CC J F16C%CCC I F&%&CC J F1+C%CCC J FAC%CCC
>
F+%&@6 J F?%ACC
>
F&%+CC
Fundamental Accounting Principles, 21st Edition #(
#)
7ro#"em 1>DA (Concluded"
Part #
Bi( Consu"ting5s net income I F?%ACC > F&%+CC I F1%6CC
7ro#"em 1>1CA -&C minutes.
1. ;eturn on assets e*ua"s net income divided #' average tota" assets.
a. Coca>Co"a return, FA%?+1 G F@?%11A I C.11+ or 11.+H.
#. 7epsiCo return, F?%1?& G F@C%61A I C.CD& or D.&H.
&. Strict"' on the amount of sa"es to consumers% Coca>Co"a5s sa"es of
F1?%61& are "ess than 7epsiCo5s F??%6C1.
+. Success in returning net income from the average amount invested is
revea"ed #' the return on assets. 7art 1 sho!ed that Coca>Co"a5s 11.+H
return is #etter than 7epsiCoYs D.&H return.
1. Current performance figures suggest that Coca>Co"a 'ie"ds a margina""'
higher return on assets than 7epsiCo. Based on this information a"one%
!e !ou"d #e #etter advised to invest in Coca>Co"a than 7epsiCo.
Neverthe"ess% and #ecause the returns are not dramatica""' different% !e
!ou"d "oo for additiona" information in financia" statements and other
sources for further guidance. =or e$amp"e% if Coca>Co"a cou"d dispose
of some assets !ithout curtai"ing its sa"es "eve"% it !ou"d "oo even more
attractive/ or% 7epsiCo cou"d do "ie!ise% and c"ose the gap. 2e !ou"d
a"so "oo for consumer trends% maret e$pansion% competition% product
deve"opment% and promotion p"ans.
Fundamental Accounting Principles, 21st Edition #*
1. ;eturn on assets is net income divided #' the average tota" assets.
K'(era5s return, F?6%CCC G F&6C%CCC I C.&? or &?H.
&. ;eturn on assets seems satisfactor' for the ris invo"ved in the
manufacturing% mareting% and se""ing of ce""u"ar te"ephones. 9oreover%
K'(era5s &?H return is more than t!ice as high as that of its
competitors5 1&H return.
+. 2e no! that revenues "ess e$penses e*ua" net income. Taing the
revenues and net income num#ers for K'(era !e o#tain,
F1@6%CCC > E$penses I F?6%CCC E$penses must e*ua" F11C%CCC.
1. 2e no! from the accounting e*uation that tota" financing -"ia#i"ities
p"us e*uit'. must e*ua" the tota" for assets -investing.. Since average
tota" assets are F&6C%CCC% !e no! the average tota" of "ia#i"ities p"us
e*uit' -financing. must e*ua" F&6C%CCC.
7ro#"em 1>1&A
A
-&C minutes.
Case 1 8eturn, 6H interest or F1CCG'ear.
8is9, Zer' "o!/ it is the ris of the financia" institution not
pa'ing interest and principa".
Case & 8eturn, E$pected !innings from 'our #et.
8is9, )epends on the pro#a#i"it' of 'our team covering
the Mspread.N
Case + 8eturn, E$pected return on 'our stoc investment -#oth
dividends and stoc price changes..
8is9, )epends on the current and future performance of
Lahoo5s stoc price -and dividends..
Case 1 8eturn, E$pected increase in career earnings and other
re!ards from an accounting degree -"ess a"" costs..
8is9, )epends on 'our a#i"it' to successfu""' "earn and
app"' accounting no!"edge.
#0
7ro#"em 1>1+A
B
-16 minutes.
1. = 6. I
&. I ?. O
+. I @. O
1. = A. O
7ro#"em 1>11A
B
-16 minutes.
An organi(ation pursues three ma0or #usiness activities, financing%
investing% and operating.
-1. Financing is the means used to pa' for resources.
-&. ,nvesting refers to the #u'ing and se""ing of resources -assets.
necessar' to carr' out the organi(ation5s p"ans.
-+. :perating activities are the carr'ing out of an organi(ation5s p"ans.
If financia" statements are to #e informative a#out an organi(ation5s
activities% then the' !i"" need to report on these three ma0or activities. A"so
note that p"anning is the g"ue that "ins and coordinates these three ma0or
activitiesXit inc"udes the ideas% goa"s% and strategies of an organi(ation.
Fundamental Accounting Principles, 21st Edition &1
7;OB:E9 SET B
7ro#"em 1>1B -1C minutes.
Part 1
Compan' Z
-a. and -#.
Ca"cu"ation of e*uit', 125#152112 125#15211#
Assets.............................. F61%CCC F6D%CCC
:ia#i"ities......................... -&6%CCC. -+?%CCC.
E*uit'.............................. F&D%CCC F&+%CCC
-c. Ca"cu"ation of net income for &C1+,
E*uit'% )ecem#er +1% &C1&........................ F&D%CCC
7"us investments #' o!ner....................... 6%CCC
7"us net income.......................................... 3
:ess !ithdra!a"s #' o!ner....................... -6%6CC.
E*uit'% )ecem#er +1% &C1+....................... F&+%CCC
Therefore% the net "oss must have #een F-6%6CC..
Part 2
Compan' 2
-a. Ca"cu"ation of e*uit' at )ecem#er +1% &C1&,
Assets.......................................................... FAC%CCC
:ia#i"ities..................................................... -?C%CCC.
E*uit'.......................................................... F&C%CCC
-#. Ca"cu"ation of e*uit' at )ecem#er +1% &C1+,
E*uit'% )ecem#er +1% &C1&........................ F&C%CCC
7"us investments #' o!ner....................... &C%CCC
7"us net income.......................................... 1C%CCC
:ess !ithdra!a"s #' o!ner....................... -&%CCC.
E*uit'% )ecem#er +1% &C1+........................ F@A%CCC
-c. Ca"cu"ation of the amount of "ia#i"ities at )ecem#er +1% &C1+,
Assets..........................................................F1CC%CCC
E*uit'.......................................................... -@A%CCC.
&1
:ia#i"ities..................................................... F &&%CCC
Fundamental Accounting Principles, 21st Edition &2
7ro#"em 1>1B (Continued"
Part #
Compan' Q
=irst% ca"cu"ate the #eginning and ending e*uit' #a"ances,
125#152112 125#15211#
Assets.............................. F111%6CC F1A?%6CC
:ia#i"ities......................... -?A%6CC. -?6%ACC.
E*uit'.............................. F @+%CCC F1&C%@CC
Then% find the amount of investments #' o!ner during &C1+ as fo""o!s,
E*uit'% )ecem#er +1% &C1&................................ F @+%CCC
7"us investments #' o!ner.............................. 3
7"us net income................................................. 1A%6CC
:ess !ithdra!a"s #' o!ner.......................... C
E*uit'% )ecem#er +1% &C1+................................ F1&C%@CC
Thus% the o!ner5s investments must have #een F &D%&CC
Part &
Compan' L
=irst% ca"cu"ate the #eginning #a"ance of e*uit',
6ec! #1, 2112
Assets.......................................................... FD&%6CC
:ia#i"ities..................................................... 61%6CC
E*uit'.......................................................... F11%CCC
Ne$t% find the ending #a"ance of e*uit' as fo""o!s,
E*uit'% )ecem#er +1% &C1&........................ F11%CCC
7"us investments #' o!ner....................... 1A%1CC
7"us net income.......................................... &1%CCC
:ess !ithdra!a"s #' o!ner....................... -&C%CCC.
E*uit'% )ecem#er +1% &C1+........................ FD+%1CC
=ina""'% find the ending amount of assets #' adding the ending #a"ance of
e*uit' to the ending #a"ance of "ia#i"ities,
6ec! #1, 211#
:ia#i"ities..................................................... F 1&%CCC
E*uit'.......................................................... D+%1CC
&#
Assets.......................................................... F1+6%1CC
Fundamental Accounting Principles, 21st Edition &&
7ro#"em 1>1B (Concluded"
Part '
Compan' [
=irst% ca"cu"ate the #a"ance of e*uit' as of )ecem#er +1% &C1+,
Assets.......................................................... F1@C%CCC
:ia#i"ities..................................................... -1&%CCC.
E*uit'.......................................................... F1&A%CCC
Ne$t% find the #eginning #a"ance of e*uit' as fo""o!s,
E*uit'% )ecem#er +1% &C1&........................ F 3
7"us investments #' o!ner....................... ?C%CCC
7"us net income.......................................... +&%CCC
:ess !ithdra!a"s #' o!ner...................... -A%CCC.
E*uit'% )ecem#er +1% &C1+........................F1&A%CCC
Thus% the #eginning #a"ance of e*uit' is F11%CCC.
=ina""'% find the #eginning amount of "ia#i"ities #' su#tracting the #eginning
#a"ance of e*uit' from the #eginning #a"ance of assets,
6ec! #1, 2112
Assets.......................................................... F111%CCC
E*uit'.......................................................... -11%CCC.
:ia#i"ities..................................................... F1CC%CCC
&'
7ro#"em 1>&B -&6 minutes.
Ba"ance Sheet
Income
Statement
Statement of
Cash ="o!s
Transaction
Tota"
Assets
Tota"
:ia#.
Tota"
E*uit'
Net
Income
Operating
Activities
=inancing
Activities
Investing
Activities
1 O!ner invests
cash in #usiness J J J
& Bu's #ui"ding #'
signing note
pa'a#"e
J J
+ 7a's cash for
sa"aries incurred S S S S
1 7rovides ser>
vices for cash J J J J
6 7a's cash for
rent incurred S S S S
? Incurs uti"ities
costs on credit J S S
@ Bu's store e*uip>
ment for cash JGS S
A O!ner !ithdra!s
cash S S S
D 7rovides ser>
vices on credit J J J
1C Co""ects cash on
receiva#"e from -D. JGS J
7ro#"em 1>+B -16 minutes.
Offshore Co.
Income Statement
;evenues ................................................... F?A%CCC
E$penses.................................................. 1C%CCC
Net income.................................................... F&A%CCC
Fundamental Accounting Principles, 21st Edition &(
7ro#"em 1>1B -16 minutes.
T:C Compan'
Ba"ance Sheet
)ecem#er +1% &C1+
Assets ...... F111%CCC :ia#i"ities .................................F ?1%CCC
E*uit'..................................... 6C%CCC
Tota" assets................... F111%CCC Tota" "ia#i"ities and e*uit'.... F111%CCC
4a"f:ife Co.
Cash used #' operating activities ...................... F-+%CCC.
Cash from investing activities.............................. 1%?CC
Cash from financing activities............................. 1%ACC
Net increase in cash.............................................. F 1CC
Cash% )ecem#er +1% &C1&..................................... 1%+CC
Cash% )ecem#er +1% &C1+..................................... F 1%@CC
7ro#"em 1>?B -16 minutes.
ATZ Compan'
A.T. Zee% Capita"% )ec. +1% &C1& .................... F1D%CCC
Add, Net income........................................ 6%CCC
61%CCC
:ess, 2ithdra!a"s #' o!ner..................... -@%CCC.
A.T. Zee% Capita"% )ec. +1% &C1+..................... F1@%CCC
&)
7ro#"em 1>@B -?C minutes. Parts 1 and 2
)ate Cash J
Accounts
;eceiva#"e
J E*uipment I
Accounts
7a'a#"e
J
4. Nio"as%
Capita"
>
4. Nio"as%
2ithdra!a"s
J ;evenues > E$penses
Uune 1 JF1+C%CCC I J F1+C%CCC
& > ?%CCC I > F?%CCC
1 J F&%1CC I J F&%1CC
? > 1%16C I > 1%16C
A J A6C I J F A6C
11 J F@%6CC I J @%6CC
1? > ACC I > ACC
&C J @%6CC > @%6CC I
&1 J @%DCC I J @%DCC
&1 J ?@6 I J ?@6
&6 J @%DCC > @%DCC I
&? > &%1CC I > &%1CC
&A > ACC I > ACC
&D > 1%CCC I > F1%CCC
+C > 16C I > 16C
+C > ADC I > ADC
F1+C%C?C J F ?@6 J F&%1CC I F C J F1+C%CCC > F1%CCC J F1?%D&6 > FD%@DC
Fundamental Accounting Principles, 21st Edition &*
7ro#"em 1>@B (Continued"
Part #

4o""'5s 9aintenance Co.
Income Statement
=or 9onth Ended Uune +C
;evenues
9aintenance services revenue.......... F1?%D&6
E$penses
;ent e$pense....................................... F?%CCC
Sa"aries e$pense................................. 1%?CC
Advertising e$pense........................... 1%16C
Uti"ities e$pense.................................. ADC
Te"ephone e$pense............................. 16C
Tota" e$penses.................................... D%@DC
Net income............................................... F @%1+6
4. Nio"as% Capita"% Uune 1................................ F C
Add, Investment #' o!ner............................. 1+C%CCC
Net income............................................. @%1+6
1+@%1+6
:ess, 2ithdra!a"s #' o!ner........................... 1%CCC
4. Nio"as% Capita"% Uune +C.............................. F1++%1+6
Ba"ance Sheet
Uune +C
Assets 4ia$ilities
Cash F1+C%C?C Accounts pa'a#"e.......................... F C
Accounts receiva#"e........ ?@6 E%uit/
E*uipment........................ &%1CC 4. Nio"as% Capita"......................... 1++%1+6
TTTTTTT TTTTTTTT
Tota" assets......................F1++%1+6 Tota" "ia#i"ities and e*uit'................. F1++%1+6
&0
7ro#"em 1>@B (Concluded"
Part #7continued
1
.................................. F 1?%&6C
Cash paid for rent......................................................... -?%CCC.
Cash paid for advertising............................................ -1%16C.
Cash paid for te"ephone.............................................. -16C.
Cash paid for uti"ities................................................... -ADC.
Cash paid to emp"o'ees.............................................. -1%?CC.
Net cash provided #' operating activities................. F ?%1?C
7urchase of e*uipment................................................ -&%1CC.
Net cash used #' investing activities........................ -&%1CC.
Investments #' o!ner.................................................. 1+C%CCC
2ithdra!a"s #' o!ner................................................. -1%CCC.
Net cash provided #' financing activities................. 1&?%CCC
Net increase in cash..................................................... F1+C%C?C
Cash #a"ance% Uune 1................................................... C
Cash #a"ance% Uune +C................................................. F1+C%C?C
1
FA6C J F@%6CC J F@%DCC I F1?%&6C
Fundamental Accounting Principles, 21st Edition '1
7ro#"em 1>AB -?C minutes. 7arts 1 and &
)ate Cash J
Accounts
;eceiva#"e
J
Office
Supp"ies
J
Office
E*uipment
J
E$cavating
E*uipment
I
Accounts
7a'a#"e
J
;. Truro%
Capita"
>
;. Truro%
2ith>
dra!a"s
J
;eve>
nues
>
E$pen>
ses
Uu"' 1 J FAC%CCC I J FAC%CCC
&
> @CC >
F@CC
Ba". @D%+CC I AC%CCC
>
@CC
+
> 1%CCC
J F6%CCC J F1%CCC
Ba". @A%+CC J 6%CCC I 1%CCC J AC%CCC
>
@CC
?
> ?CC
J F ?CC
Ba". @@%@CC J ?CC J 6%CCC I 1%CCC J AC%CCC
>
@CC
A J @%?CC J F@%?CC
Ba". A6%+CC J ?CC J 6%CCC I 1%CCC J AC%CCC J @%?CC
>
@CC
1C J F&%+CC J &%+CC
Ba". A6%+CC J ?CC J &%+CC J 6%CCC I ?%+CC J AC%CCC J @%?CC
>
@CC
16 J FA%&CC J A%&CC
Ba". A6%+CC J A%&CC J ?CC J &%+CC J 6%CCC I ?%+CC J AC%CCC J 16%ACC
>
@CC
1@ J +%1CC J +%1CC
Ba". A6%+CC J A%&CC J +%@CC J &%+CC J 6%CCC I D%1CC J AC%CCC J 16%ACC
>
@CC
&+
> &%+CC > &%+CC
Ba". A+%CCC J A%&CC J +%@CC J &%+CC J 6%CCC I @%1CC J AC%CCC J 16%ACC
>
@CC
&6 J 6%CCC J 6%CCC
Ba". A+%CCC J 1+%&CC J +%@CC J &%+CC J 6%CCC I @%1CC J AC%CCC J &C%ACC
>
@CC
&A J A%&CC
>
A%&CC
Ba". D1%&CC J 6%CCC J +%@CC J &%+CC J 6%CCC I @%1CC J AC%CCC J &C%ACC
>
@CC
+C
> 1%6?C

>
1%6?C
Ba". AD%?1C J 6%CCC J +%@CC J &%+CC J 6%CCC I @%1CC J AC%CCC J &C%ACC
>
&%&?C
+1
> &D6 >
&D6
Ba". AD%+16 J 6%CCC J +%@CC J &%+CC J 6%CCC I @%1CC J AC%CCC J &C%ACC
>
&%666
+1
> 1%ACC >
F1%ACC
Ba". FA@%616 J F 6%CCC J F+%@CC J F&%+CC J F6%CCC I F@%1CC J FAC%CCC
>
F1%ACC J F&C%ACC
>
F&%666
'1
Fundamental Accounting Principles, 21st Edition '2
7ro#"em 1>AB (Continued.
Part #
Truro E$cavating Co.
Income Statement
=or 9onth Ended Uu"' +1
;evenues
E$cavating fees earned ............................ F&C%ACC
E$penses
;ent e$pense.............................................. F @CC
Sa"aries e$pense........................................ 1%6?C
Uti"ities e$pense ........................................ &D6
Tota" e$penses............................................ &%666
Net income........................................................... F1A%&16
;. Truro% Capita"% Uu"' 1............................. F C
Add, Investment #' o!ner...................... AC%CCC
Net income....................................... 1A%&16
DA%&16
:ess, 2ithdra!a"s #' o!ner.................... 1%ACC
;. Truro% Capita"% Uu"' +1........................... FD?%116
Ba"ance Sheet
Uu"' +1
Assets 4ia$ilities
Cash .........F A@%616Accounts pa'a#"e..................................... F @%1CC
Accounts receiva#"e......... 6%CCC
Office supp"ies................... +%@CC E%uit/
Office e*uipment............... &%+CC ;. Truro%Capita"................... D?%116
E$cavating e*uipment...... 6%CCC TTTTTTTT
Tota" assets........................ F1C+%616 Tota" "ia#i"ities 8 e*uit'...... F1C+%616
'#
7ro#"em 1>AB (Concluded"
Part #7continued
1
.................................. F16%ACC
Cash paid for rent......................................................... -@CC.
Cash paid for supp"ies................................................. -?CC.
Cash paid for uti"ities................................................... -&D6.
Cash paid to emp"o'ees.............................................. -1%6?C.
Net cash provided #' operating activities................. F1&%?16
7urchase of e$cavating e*uipment............................ -1%CCC.
7urchase of office e*uipment..................................... -&%+CC.
Net cash used #' investing activities........................ -+%+CC.
Investments #' o!ner.................................................. AC%CCC
2ithdra!a"s #' o!ner................................................. -1%ACC.
Net cash provided #' financing activities................. @A%&CC
Net increase in cash..................................................... FA@%616
Cash #a"ance% Uu"' 1.................................................... C
Cash #a"ance% Uu"' +1.................................................. FA@%616
1
F@%?CC J FA%&CC I F16%ACC
Part &
If the F6%CCC purchase on Uu"' + had #een ac*uired through an additiona"
o!ner investment of cash% then,
-a. tota" assets !ou"d #e "arger #' F1%CCC%
-#. tota" "ia#i"ities !ou"d #e F1%CCC sma""er% and
-c. tota" e*uit' !ou"d #e F6%CCC "arger.
Fundamental Accounting Principles, 21st Edition '&
7ro#"em 1>DB -?C minutes. 7arts 1 and &
Assets
I
:ia#i"ities
J
E*uit'
Cash J
Accounts
;eceiva#"e
J
Office
Supp"ies
J
Office
E*uipment
J Bui"ding I
Accounts
7a'a#"e
J
Notes
7a'a#"e
J
N. 9itche""%
Capita"
>
N. 9itche""%
2ith>
dra!a"s
J
;eve>
nues
>
E$pen>
ses
a. J FDC%CCC J F&C%CCC J F11C%CCC
#.
> 1C%CCC
J F16C%CCC J F11C%CCC
Ba". 6C%CCC J &C%CCC J 16C%CCC I 11C%CCC J 11C%CCC
c.
> &6%CCC
J &6%CCC
Ba". &6%CCC J 16%CCC J 16C%CCC I 11C%CCC J 11C%CCC
d. J F1%&CC J 1%@CC J F&%DCC
Ba". &6%CCC 1%&CC J 1?%@CC J 16C%CCC I &%DCC J 11C%CCC J 11C%CCC
e.
> @6C >
F @6C
Ba". &1%&6C J 1%&CC J 1?%@CC J 16C%CCC I &%DCC J 11C%CCC J 11C%CCC
>
@6C
f. J F&%ACC J F&%ACC
Ba". &1%&6C J &%ACC J 1%&CC J 1?%@CC J 16C%CCC I &%DCC J 11C%CCC J 11C%CCC J &%ACC
>
@6C
g. J 1%CCC J 1%CCC
Ba". &A%&6C J &%ACC J 1%&CC J 1?%@CC J 16C%CCC I &%DCC J 11C%CCC J 11C%CCC J ?%ACC
>
@6C
h.
> 11%6CC >
F11%6CC
Ba". 1?%@6C J &%ACC J 1%&CC J 1?%@CC J 16C%CCC I &%DCC J 11C%CCC J 11C%CCC
>
11%6CC J ?%ACC
>
@6C
i. J 1%ACC
>
1%ACC
Ba". 1A%66C J 1%CCC J 1%&CC J 1?%@CC J 16C%CCC I &%DCC J 11C%CCC J 11C%CCC
>
11%6CC J ?%ACC
>
@6C
0.
> @CC > @CC
Ba". 1@%A6C J 1%CCC J 1%&CC J 1?%@CC J 16C%CCC I &%&CC J 11C%CCC J 11C%CCC
>
11%6CC J ?%ACC
>
@6C
.
> &%6CC

>
&%6CC
Ba". F16%+6C J F1%CCC J F1%&CC J F1?%@CC J F16C%CCC I F&%&CC J F11C%CCC J F11C%CCC
>
F11%6CC J F?%ACC
>
F+%&6C
''
Fundamental Accounting Principles, 21st Edition '(
7ro#"em 1>DB (Concluded"
Part #
Nico5s So"utions5 net income I F?%ACC > F+%&6C I F+%66C
7ro#"em 1>1CB -16 minutes.
1. ;eturn on assets e*ua"s net income divided #' average tota" assets.
a. AT8T return, F1%1A1G F&?D%A?A I C.C1? or 1.?H
#. Zeri(on return, F1C%1DAG F&&6%&++ I C.C16 or 1.6H
&. On strict"' the amount of sa"es to consumers% AT8T5s sa"es of F1&?%@&+
are greater than Zeri(on5s sa"es of F11C%A@6.
+. Success in returning net income from the amount invested is revea"ed
#' the return on assets ratio. 7art 1 sho!ed that AT8T has a much
"o!er return on assets of 1.?H versus Zeri(on !ith a 1.6H return on
assets.
1. Current performance figures suggest Zeri(on is more successfu" in
generating income #ased on assets. Based on this information a"one%
!e !ou"d #e #etter advised to invest in Zeri(on than AT8T.
Neverthe"ess% !e !ou"d "oo for additiona" information in financia"
statements and other sources for further guidance. =or e$amp"e% if
AT8T cou"d reduce its e$penses% or reduce its assets !ithout reducing
income% it cou"d potentia""' #e a more appea"ing investment given its
greater maret share/ or% Zeri(on cou"d do the same and mae it
appear more appea"ing as an investment. 2e !ou"d a"so "oo for
consumer trends% maret e$pansion% competition% and product
deve"opment and promotion p"ans.
')
1. ;eturn on assets is net income divided #' average tota" assets -the
average amount invested.. =or Car#onda"e Compan' this return is
computed as,
F&C1%CCC G F+%CCC%CCC I C.C?@ or ?.@H.
&. ;eturn on assets does not seem satisfactor' for the ris invo"ved in
the manufacturing% mareting% and se""ing of sno!mo#i"e e*uipment.
Car#onda"e Compan'5s ?.@H return is "ess than the D.6H return earned
#' its competitors.
+. 2e no! that revenues "ess e$penses e*ua" net income. Taing the
revenues and net income num#ers for Car#onda"e Compan' !e
o#tain,
F1%1CC%CCC > E$penses I F&C1%CCC E$penses must e*ua" F1%1DD%CCC.
1. 2e no! from the accounting e*uation that the tota" of "ia#i"ities p"us
e*uit' -financing. must e*ua" the tota" for assets -investing.. Since
average tota" assets are F+%CCC%CCC% !e no! the average tota" of
"ia#i"ities p"us e*uit' -financing. must e*ua" F+%CCC%CCC.
7ro#"em 1>1&B
A
-&C minutes.
Case 1. 8eturn, No return is generated.
8is9, 9oderate ;is. B' hiding mone' at home a person
riss "oss #' theft or fire. A"so such a strateg'
might resu"t in a "oss of purchasing po!er in the
event of inf"ation.
Case &. 8eturn, E$pected !innings from 'our #et.
8is9, )epends on the pro#a#i"it' of 'our horse finishing
the race in a position consistent !ith the odds
assigned the horse for the race.
Case +. 8eturn, E$pected return on 'our stoc investment -#oth
dividends and stoc price changes..
8is9, )epends on the current and future performance of
Nie5s stoc price -and dividends..
Case 1. 8eturn, E$pected return on the #ond is a function of the
interest rate paid on the #ond.
8is9, Zer' "o! #ecause the fu"" faith and credit of the U.S.
government #ac savings #onds.
'*
7ro#"em 1>1+B
B
-16 minutes.
1. O 6. O
&. = ?. =
+. I @. O
1. O A. O
7ro#"em 1>11B
B
-16 minutes.
I. =inancing Activities
A. O!ner financingXo!ner invests in the compan'
B. Non>o!ner -creditor. financingX#orro!ing mone' from a #an
II. Investing Activities
A. Bu'ing resources -assets.
B. Se""ing resources -assets.
III. Operating Activities
A. Use of assets to carr' out p"ans
B. 9anagement of interna" functionsX;8)% mareting% and so forth
ONote, 7"anning activities are the ideas% goa"s% and tactics for imp"ementing
financing% investing% and operating activities.P
'0
Serial Pro$lem 7 SP 1 Success S/stems
Assets
I
:ia#i"ities J E*uit'
)ate Cash
J
Accounts
;eceiva#"e
J
Computer
Supp"ies
J
Computer
S'stem
J
Office
E*uipment
I
Accounts
7a'a#"e
J
A. :ope(%
Capita"
>
A. :ope(%
2ithdra!a"s
J
;evenues
>
E$pense
s
Oct.
1
JF66%CCC F&C%CCC J FA%CCC J FA+%CCC
+
J F1%1&C J F1%1&C
Ba". 66%CCC J 1%1&C J &C%CCC J A%CCC I 1%1&C J A+%CCC
?
J F1%ACC J F 1%ACC
Ba". 66%CCC J 1%ACC J 1%1&C J &C%CCC J A%CCC I 1%1&C J A+%CCC J 1%ACC
A
> 1%1&C > 1%1&C
Ba". 6+%6AC J 1%ACC J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J 1%ACC
1&
J 1%1CC J 1%1CC
Ba". 6+%6AC J ?%&CC J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J ?%&CC
16
J 1%ACC > 1%ACC
Ba". 6A%+AC J 1%1CC J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J ?%&CC
1@
> AC6 > F AC6
Ba". 6@%6@6 J 1%1CC J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J ?%&CC > AC6
&C
> 1%D1C > 1%D1C
Ba". 66%?+6 J 1%1CC J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J ?%&CC > &%@16
&&
J 1%1CC > 1%1CC
Ba". 6@%C+6 J C J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J ?%&CC > &%@16
&A
J 6%&CA J 6%&CA
Ba". 6@%C+6 J 6%&CA J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J 11%1CA > &%@16
+1
> A@6 > A@6
Ba". 6?%1?C J 6%&CA J 1%1&C J &C%CCC J A%CCC I C J A+%CCC J 11%1CA > +%?&C
+1
> +%?CC > F+%?CC
Ba". F6&%6?C J F6%&CA J F1%1&C J F&C%CCC J FA%CCC I F C J FA+%CCC > F+%?CC J F11%1CA > F+%?&C
Fundamental Accounting Principles, 21st Edition (1
;eporting in Action X BTN 1>1
1. An organi(ation5s tota" assets are e*ua" to its tota" "ia#i"ities p"us tota"
e*uit'. Because 7o"aris5s "ia#i"ities and e*uit' tota" F1%&&A%C&1 -in CCCs.%
this imp"ies its amount of assets invested is the same F1%&&A%C&1 -in
CCCs..
&. ;eturn on assets is net income divided #' the average tota" assets
invested. =or 7o"aris this return is -F CCCs.,
F&&@%6@6 G O-F1%C?1%?1@ J F1%&&A%C&1.G&P I C.1DD or 1D.DH.
+. 2e no! that net income e*ua"s tota" revenues "ess tota" e$penses. =or
7o"aris% !e are to"d net income is F&&@%6@6 and revenues are F&%?6?%D1D.
Thus% 7o"aris5s tota" e$penses are computed as, F&%?6?%D1D > E$penses I
F&&@%6@6. Tota" e$penses must e*ua" F&%1&D%+@1. -a"" F in CCCs.
1. 7o"aris5s return on assets of 1D.DH is good given that it s"ight"' e$ceeds
its competitors5 return on assets of appro$imate"' 1AH for this period.
6. Ans!er depends on the current annua" report information o#tained.
Comparative Ana"'sis X BTN 1>&
(; thousands"
7o"aris Arctic Cat
1. Tota" assets I
:ia#i"ities J E*uit'
F1%&&A%C&1 F&@&%DC?
&. ;eturn on assets F&&@%6@6 F1+%CC@
O-F1%C?1%?1@ J F1%&&A%C&1.G&P O-F&1?%CA1 J F&@&%DC?.G&P
1D.DH 6.CH
+. ;evenues>E$penses
I Net income
F&%?6?%D1D>
E$penses IF&&@%6@6
F1?1%?61 >
E$penses IF1+%CC@
E$penses I E$penses I F &%1&D%+@1 E$penses I F161%?11
1. Ana"'sis of return on assets, 7o"aris5s 1D.DH return is good given the
moderate ris 7o"aris confronts and vis>\>vis the 1AH return of its
competitors. Arctic Cat5s 6.CH return is much !orse than competitors and
is not near"' as strong as 7o"aris5s.
6. Ana"'sis conc"usions, Arctic Cat5s return is undesira#"e -poor !hen
compared to the industr' norm./ 7o"aris5s return is argua#"' ver' good.
Both companies5 e$penses are a "arge percentage of their revenues.
Solutions Manual, Chapter 1 (1
Ethics Cha""enge X BTN 1>+
1. There are severa" parties affected. The' inc"ude the users of financia"
statements such as shareho"ders% "enders% investors% ana"'sts% supp"iers%
directors% unions% regu"ators and others. The' a"so inc"ude the accounting
firm% !hich can #e sued if deemed a part' to mis"eading statements.
&. A ma0or factor in the va"ue of an auditorRs report is the auditorRs
independence. If an auditor accepted a fee that increases !hen the c"ient5s
reported profit increases% the auditor is -or at "east is perceived to #e.
interested in higher profits for the c"ient. This compromises the auditorRs
independence.
+. Thorne shou"d not accept this fee arrangement. To avoid compromising
the auditorRs independence% Thorne shou"d re0ect it. -=urther% the AIC7A
Code of 7rofessiona" Conduct for#ids auditors from accepting contingent
fees that depend on amounts reported in a c"ientRs financia" statements.
This AIC7A Code has #een codified into "a! in most states and% therefore%
this action !ou"d a"so #e an i""ega" act for a C7A..
1. Ethica" considerations guiding this decision inc"ude the potentia" harm to
affected parties #' a""o!ing such a fee arrangement to e$ist. The
unaccepta#"e nature of such a fee arrangement guards the profession
against unethica" actions that cou"d undermine its rea" and perceived va"ue
to societ'.
Communicating in 7ractice X BTN 1>1
1. )eciding !hether T!itter is a good "oan ris can #e difficu"t #ecause the
p"anned e$pansion is ris' if customer demand does not meet
e$pectations. As a "oan officer in this situation 'ou !ou"d !ant information
on the compan'5s -1. pro0ections of e$pected cash receipts and cash
pa'ments -#est provided on a month"' #asis./ -&. assessment of the
maret% the compan'5s p"ans% and a strateg' to achieve success/ -+. cash
contri#utions that the o!ners !i"" mae to the #usiness/ and -1. a "isting of
tangi#"e assets -inc"uding their price and usefu" "ife. necessar' to carr' out
the compan'5s p"ans.
&. 4o! the compan' is organi(ed is important to a "oan officer. If it is a pro>
proprietorship -and not ::C.% the persona" assets of the o!ners are
avai"a#"e to repa' the "oan. In this case% a "oan officer !i"" !ant information
a#out the o!ners5 financia" condition. If it is a corporation% the amounts
invested in the #usiness #' each shareho"der are especia""' important. The
"oan officer can a"so re*uire o!ners or shareho"ders to persona""'
guarantee the "oan for additiona" protection for the #an. Carefu" e$ecution
of these steps shou"d minimi(e the #an5s ris of taing on a #ad "oan.
Fundamental Accounting Principles, 21st Edition (2
Taing It to the Net X BTN 1>6
-in thousands.
&C11 &C1C &CCD &CCA &CC@
;evenues............ F+1%1&A F&A%1+@ F&A%6+D F+1%A@A F+1%6@+
Net income.......... +%D11 +%6AC +%@1D 1%D?1 1%@16
1. ;oc' 9ountain Choco"ate =actor'5s -;9C=. revenues gre! s"ight"'
from &CC@ through &CCA% dec"ined in the recessionar' period of &CCA
through &C1C% and #egan to increase from &C1C to &C11. 9anagement
must !or to continue a trend of increasing revenues.
&. Net income performance for ;9C= improved from &CC@ to &CCA and from
&C1C to &C11. Its net income gre! near"' 6H and D.6H% respective"'.
4o!ever% &CCD and &C1C net income dec"ined &6H and 1H% respective"'..
A"though &CCD and &C1C !ere recessionar' times% management must
continue to !or to sustain and increase profita#i"it' "eve"s.
Team!or in Action X BTN 1>?
Suggestions for forming supportG"earning teams are in the Instructor5s
;esource 9anua" -I;9.. The I;9 provides the master of a Student )ata
=orm that can #e dup"icated and used to gather information as a #asis for
forming these teams. The I;9 a"so inc"udes other administrative materia"s
he"pfu" in creating an active "earning environment for stud'ing accounting.
O<ote+ ,nstructors often have students use the cop/ function in e=mail to 9eep
them advised of meeting times and other important team activities! 2his also
encourages students to use and e3plore additional features of e=mail!P
Solutions Manual, Chapter 1 (#
Entrepreneuria" )ecision X BTN 1>@
1. -a. AccounT!it5s tota" amount of "ia#i"ities and e*uit' consists of the
#an "oan and the o!ner investments. Specifica""',
Tota" assets I Ban :oan J O!ner investment
I :ia#i"ities J E*uit'
F@6C%CCC I F6CC%CCC J F&6C%CCC
-#. AccounT!it5s tota" amount of assets e*ua"s its tota" amount of
"ia#i"ities p"us e*uit'% !hich is F@6C%CCC.
&. ;eturn on assets I FAC%&6C G F@6C%CCC I C.1C@ I 1C.@H
AccounT!it5s 1C.@H return s"ight"' e$ceeds its competitors5 average return
of 1CH. Assuming AccounT!it can continue to earn 1C.@H or more% the
o!ners shou"d consider further investment in the ne! compan'.
4itting the ;oad 7 BTN 1>A
Chec each student5s report for the fo""o!ing content,
1. -a. Identification of the form of #usiness organi(ation for the #usiness
intervie!ed.
-#. Identification of the main #usiness activities for the #usiness
intervie!ed.
&. Identification of the reasons !h' the o!ner-s. chose this particu"ar
form of #usiness organi(ation.
+. Identification of advantages or disadvantages of the form of #usiness
organi(ation chosen.
ONote, 9an' instructors have students comp"ete this assignment in teams.P
Fundamental Accounting Principles, 21st Edition (&
<"o#a" )ecision 7 BTN 1>D
1. KT95s net income and revenues figures are computed using Euros%
!hich is the currenc' of Europe. In contrast% 7o"aris and Arctic Cat
compute their financia" figures in U.S. do""ars. According"'% one must
convert these figures into compara#"e monetar' units for #usiness
decisions that depend on direct comparisons of these num#ers.
9oreover% KT95s figures are computed according to Internationa"
=inancia" ;eporting Standards -I=;S. fo""o!ing pronouncements of the
IASB% !hi"e 7o"aris and Arctic Cat use U.S. <AA7 per the =ASB. One
shou"d ad0ust these figures for an' significant differences in accounting
measurements to 'ie"d an Yapp"es>to>app"es5 comparison.
&. KT95s return on assets ratio e"iminates differences in monetar' units
-#et!een Euros and do""ars.. Conse*uent"'% !e need not focus on
differences in Euros and do""ars for ratio comparisons provided !e are
comforta#"e !ith measurement techni*ues under"'ing the financia"
figures.
4o!ever% an' comparisons using the return on assets ratio are sti""
impacted #' potentia" differences in I=;S <AA7 as app"ied #' KT9
compared to U.S. <AA7 app"ied #' 7o"aris and Arctic Cat.
Solutions Manual, Chapter 1 ('

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