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CHAPTER 1

1-1 Accounting is a process of identifying, recording, summarizing
and reporting economic information to decision makers.

1-2 No. Accounting is about real information about real companies.
In learning accounting it is helpful to see accounting reports from
various companies. This helps put the rules and techniques of
accounting into an understandable framework and provides
familiarity with the diversity of practice.

1-3 Examples of decisions that are likely to be influenced by financial
statements include choosing where to expand or reduce
operations, lending money, investing ownership capital, and
rewarding mangers.

1-4 Users of financial statements include managers, lenders,
suppliers, owners, income tax authorities, and government
regulators.

1-5 The major distinction between financial accounting and
management accounting is their use by two classes of decision
makers. Management accounting is concerned mainly with how
accounting can serve internal decision makers such as the chief
executive officer and other executives. Financial accounting is
concerned with supplying information to external users.

1-6 The balance sheet equation is Assets = Liabilities + Owners’
equity. It is the fundamental framework of accounting. The left
side lists the resources of the organization, and the right side lists
the claims against those resources.

Chapter 1 Accounting: The Language of Business 1

1-7 No. Every transaction should leave the balance sheet equation in balance. 2 . Accounting is often called “double-entry” because accountants must enter at least two numbers for each transaction to keep the equation in balance.

one asset is traded for another. 1-11 Limited liability means that corporate owners are not personally liable for the debts of the corporation. again keeping the balance sheet equation in balance. thus.1-8 This is true. and the owners of sole proprietorships or partnerships are usually also managers in the company while most corporations hire professional managers. refer to a “society anonymous” meaning that multiple unidentified owners stand behind the company. both inventory and accounts payable increase. but the evidence for an account payable does not. When a company buys inventory on credit.A. When a company buys inventory for cash. 1-14 Almost all states forbid the issuance of stock at below par. Creditors' claims can be satisfied only by the assets of the particular corporation. 1-12 The corporation is the most prominent type of entity and corporations do by far the largest volume of business. Thus. essentially the same as a corporation. In the United Kingdom corporations frequently use the word limited (Ltd. both total assets and total liabilities increase by the same amount. the initials S. par values are customarily set at very low amounts and have no Chapter 1 Accounting: The Language of Business 3 . the balance sheet equation stays in balance. 1-10 Ownership shares in most large corporations are easily traded in the stock markets. 1-9 The evidence for a note payable includes a promissory note. 1-13 Yes. Thus. In many countries whose laws trace back to Spain. corporate owners have limited liability.) in their name. and neither total assets nor total liabilities change.

not-for-profit) and profit-seeking organizations. One becomes a CPA by a combination of education. 1-16 Audits have value because they add credibility to a company’s financial statements. It is the board’s duty to ensure that managers act in the interests of shareholders. The SEC has formal authority for accounting standards as delegated by Congress. 1-17 CPA is a Certified Public Accountant. qualifying experience.S. Each country determines its own GAAP. there are many more ethical standards that pertain to accountants. 1-18 In the U. and the passing of a two-day national examination. The fundamental accounting principles apply equally to nonprofit (that is. the investing public can put more faith in statements that are audited. 1-15 The board of directors is the elected link between stockholders and the actual managers. In addition. 4 . although increasingly countries are accepting GAAP as set by the International Accounting Standards Board. but accountants are working to regain the high ethical regard they have traditionally maintained. but it usually accepts the standards promulgated by the FASB. This reputation has been sullied recently. 1-19 Public accountants must obey standards of independence and integrity. Provided that auditors have the expertise to assess the accuracy of financial statements and the integrity to report any problems they discover. GAAP is generally set by the Financial Accounting Standards Board. real importance in affecting economic behavior of the issuing entity. Some folks call accounting the moral guardian of companies. 1-20 No.

an error has been made. If the balance sheet equation does not balance. cash. Money must be raised and spent. investors often worry about expectations and predictions. Chapter 1 Accounting: The Language of Business 5 . Managers and accountants in hospitals. Thus. The double-entry concept is important because it emphasizes that there are assets and claims on assets. Nonprofit organizations need to use their limited resources wisely. The negative side of this is that many important things that affect the value of a firm are based on what will happen in the future. budgets must be prepared. 1-22 Historians are primarily concerned with events that have already occurred. borrowing money provides an asset. Maintaining a balanced relationship provides an indicator of errors. and creates a liability. You might liken the importance of historical financial statements to the importance of navigation instruments. and financial performance must be judged. Of course. government agencies. 1-21 Double-entry refers to the concept that every transaction involves two or more accounts with the effect being to retain the balance in the balance sheet equation. there is no way to agree on the accuracy of expectations and predictions. The positive side of historical financial statements is that they present a no- nonsense perspective on what actually happened. In addition to this conceptual benefit there is a clerical benefit. In that sense. and financial statements are essential for judging their use of resources. where the company was at a point in time. In the balance sheet. the financial statements do report on transactions that are complete. for example. or what it accomplished over a period of time. universities. and other nonprofit organizations use financial statements. It is easier to predict the future when you know where you are.

as indicated above. 6 . although. a historical focus ensures that the data are measurable and verifiable. If you do not know where you are and where you are headed. it is very hard to get to where you want to go. Most people who refer to accountants as historians intend it as a criticism.

because only CPAs can perform public audits and sign audit opinions. The notion behind the importance of the corporation is that for any substantial growth to occur there must be a system for organizing resources and using them over long periods of time. and it has perpetual life so its activity is not disrupted by the death of any shareholder.accounting. some adventurous student will suggest that the question leaves out another really important innovation . it protects the personal assets of shareholders and. Every state has strict procedures for licensing CPAs.1-23 Such arguments are fun but can never be truly resolved. The fact that you personally do not recognize the name of the audit firm should not be a problem. Hopefully. Nevertheless. so such people are qualified. it allows us to separate ownership from management. 1-24 The auditor increases the value of financial statements by reassuring the reader of the statements that an “independent” and a “qualified” third party has reviewed management’s disclosures and believes they fairly present the company’s performance. Corporations operate under a set of established rules of behavior for entering into contracts and being sure that other parties can be relied upon to uphold their side of an agreement. Chapter 1 Accounting: The Language of Business 7 . more risky undertakings can be financed. and ones with a positive public image may give some financial statement users more confidence in the financial statements they audit. The corporate form of ownership helps companies raise large amounts of capital via stock issuance as well as borrowing. audit firms develop reputations. because their maximum losses can be limited.

7 Mann’s Furniture Company purchased $6. 6 Mann’s Furniture Company sold store fixtures for $3. Assets = Liabilities + Owners’ Equity $5 = $3 + $2 2.000 cash.) Amounts are in millions. 8 . 3 Owners invested an additional $4.000. Owners’ equity would be unaffected.000 into the company by contributing additional store fixtures valued at $4.000 on accounts payable. 4 Mann’s Furniture Company purchased additional furniture inventory for $3. Assets and liabilities would increase by $1 million.000 later. 1.000 cash now and agreeing to pay $1. paying $5.000 of store fixtures.000 additional cash in Mann’s Furniture Company.000.000 cash.1-25 (10 min. 9 Mann’s Furniture Company returned $400 of merchandise (furniture inventory) for credit against accounts payable. 1-26 (15-20 min. 5 Mann’s Furniture Company purchased furniture inventory on account for $5. 8 Mann’s Furniture Company paid $2.) June 2 Owners invested $6.

Chapter 1 Accounting: The Language of Business 9 . 10 Owners withdrew $3.000 cash from Mann’s Furniture Company.

3 Owner or owners withdrew $3. 10 .000 of store fixtures. 8 LaPaz paid $500 on accounts payable.500 of store fixtures on account.000 were invested in the company by owners.1-27 (10-20 min. 5 Computers (inventory) valued at $7.500 later. 4 LaPaz returned $5. 10 LaPaz returned $300 of store fixtures for credit against accounts payable.) Sept. paying $500 now and agreeing to pay $2.000 credit against its accounts payable. 2 LaPaz purchased $2.000 of computers for $5. 9 LaPaz purchased $3.000 cash.

000 (d) Long-term debt 32.000 (f) Furniture and fixtures 2.000 + 12.000 = 27.000 = 6.1-28 (15-25 min.000 Paid-in capital 92.000 + 1.000 = 32.000 (e) Total liabilities 54.000 (h) Paid-in capital: 80.000 + 20.000 + 4.000 = 12.000 (b) Merchandise inventory: 40.000 (a) Cash: 10.000 + 4.000 (c) Furniture and fixtures: 3.000 Building 28.000 = 2.000 (b) Accounts payable $ 12.000 – 1.) ATLANTA CORPORATION Balance Sheet March 31.000 (d) Machinery and equipment: 15.000 (e) Land: 14.000 Machinery and equipment 27.000 = 44.000 + 12.000 (g) Long-term debt: 12.000 Stockholders' equity: Total $146.000 + 25. 20X4 Liabilities and Assets Stockholders' Equity Cash $ 6.000 – 5. Chapter 1 Accounting: The Language of Business 11 .000 (a) Liabilities: Merchandise inventory 44.000 (f) Accounts payable: 8.000 (c) Notes payable 10.000 = 39.000 (h) Total $146.000 (g) Land 39.000 = 92.000 Note: Event 5 requires no change in the balance sheet.

000 (c) Land: 41.000 = 101.) SOHO CORPORATION Balance Sheet November 30.000 + 23.000 – 6.000 (g) Paid-in capital: 189.1-29 (25-35 min.000 (f) Land 35.000 Building 230. 12 .000) = 31.000 Stockholders’ equity: Total $354.000 + (13.000 = 19.000 (d) Furniture and fixtures 8.000 – 6.000 (f) Long-term debt: 124.000 (b) Long-term debt 101.000 Paid-in Capital 212.000 + 6.000 = 35.000 – 3.000 (d) Accounts payable: 16.000 + 13. 33.000 = 10. 20X1 Liabilities and Assets Stockholders’ Equity Cash $ 19.000 (a) Cash: 22.000 (e) Notes payable: 21.000 (g) Total $354.000 Accounts payable $ 10.000 (e) Machinery and equip.000 = 212.000 Notes payable 31.000 – 3.000 Note: Event 4 requires no change in the balance sheet.000 – 23.000 – 6.000 (c) Total liabilities 142.000 (a) Liabilities: Merchandise inventory 29.000 = 33.000 (b) Machinery and equipment: 20.

000. XYZ CORPORATION January 31.000. Total liabilities = Total assets − stockholders’ equity = $575.000. par value $669 1-31 (20-30 min.969.887.000.979.000. Common stock.000 − $64.) 1.894. Like other items on General Electric’s balance sheet. 1-32 (20-35 min.) See Exhibit 1-31. Equipment and furniture could be in two separate accounts rather than combined. $1 par. the amount would be rounded off to millions: Common stock. 20X4 Analysis of Transactions (In Thousands of Dollars) Liabilities and Assets Stockholders' Equity Liabilities: Cash $144 Note payable $ 30 Accounts payable 104 Merchandise inventory 254 Total liabilities $134 Stockholders' equity: Equipment 36 Capital stock. 2. See Exhibit 1-32 .000. 30.000 = $668.1-30 (5-10 min. par value = $.000 2.) 1.0671 x 9.000 shares issued and outstanding $ 30 Chapter 1 Accounting: The Language of Business 13 .000 = $511. common.

Additional paid-in capital in excess of par value 270 300 Total $434 Total $434 14 .

Issuance of stock +20 = +20 3. Acquisition for cash –30 +30 = 5.000 Account payable 6. Acquisition on account +10 = +10 6.000 Total $101. Sale of equipment +8 –8 = 8. No entry = +49 +52 = +35 +6 + 60 +101 +101 CORNER CLEANERS Balance Sheet April 30. Issuance of stock +40 = +40 2.EXHIBIT 1–31 CORNER CLEANERS Analysis of April 20X1 Transactions (In Thousands of Dollars) Assets Liabilities and Owners' Equity Equipment Note Accounts Stockholders' Description of Transactions Cash + and Furniture = Payable + Payable + Equity 1. Payments to creditors –4 = –4 7.000 Total $101.000 Cash $ 49. Borrowing +35 = +35 4. 20X1 Assets Liabilities and Owners' Equity Note payable $ 35.000 Equipment and furniture 52.00 Chapter 1 Accounting: The Language of Business 15 .000 Stockholders' equity 60.

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