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Solution Manual for Introduction to Accounting An Integrated Approach 6th

edition by Ainsworth
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1. A business is an entity designed to exchange goods and/or services on an arm’s

length basis for the mutual benefit of parties involved.
2. Accounting is the information infrastructure of the economy. It provides the
information for people to make informed decisions regarding business.
3. The finance function is responsible for managing the financial resources of the
business. Human resources function is responsible for ensuring that employees
are given the opportunities to succeed in a safe environment. The marketing
function is responsible for determining the wants and needs of customers. The
production and operations function is responsible for planning, organizing,
directing, and controlling the operations of the business. The accounting and
information systems function is responsible for providing useful information to
the other functional areas and external parties.
4. JIT stands for just-in-time. It implies that goods arrive just when they are needed.
5. A sole proprietorship has only one owner and unlimited liability. A partnership
has two or more owners, unlimited liability, and mutual agency. A corporation
has one or more owners, limited liability, and unlimited life.
6. A service firm provides services such as legal or accounting advice to clients for a
fee. A merchandising firm buys merchandise from another business and then sells
this merchandise to consumers. A manufacturing firm makes products that it then
sells to other businesses.
7. In ancient times accounting was used primarily to record transactions in an
illiterate society.
8. In the 11th – 15th centuries accounting was used to maintain records for an on-
going business, often a partnership. The double-entry accounting system was
developed and the accounting equation was used to organize accounting records.
9. An asset is a right to use resources with expected future benefit. Examples of
assets include cash, buildings, amounts owed to the business by customers, land,
and inventory.
10. A liability is an obligation to transfer resources to suppliers of money, goods, and
services. Examples of liabilities include amounts owed by the business to the
bank for interest, amounts owed by the business to employees for wages, and
amounts owed to suppliers for inventory purchases.
11. Net assets are total assets minus total liabilities, also known as, owners’ equity.
12. Owners’ equity is the claim on the business to transfer the residual interest to the
13. A partnership agreement is important because it outlines the rights and obligations
of each partner as well as how profits and losses will be divided.
14. The business entity concept requires that an accounting system reflect only
information about economic events that pertain to the entity. It implies that the
business records are maintained separately from personal records.

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15. The going concern concept assumes that absent any information to the contrary,
the business entity will continue into the foreseeable future. It implies that
accounting records can continue from one period to the next.
16. The fundamental accounting equation is: assets = liabilities + owners’ equity.
17. Pacioli is known as the “father of accounting” because he wrote a book on the
“Method of Venice” that was one of the first printed works. He helped establish
the double-entry accounting system.
18. The financial statements convey information concerning revenues and expenses,
cash flows, and financial position to interested, informed external users.
19. The monetary unit concept requires that accounting events be recorded in
monetary terms.
20. The periodicity concept requires that the success or failure of the business be
determined at regular intervals.
21. Using cash basis accounting income is revenues received less expenses paid.
22. Limited liability means that the assets of the business are at risk if the business
fails, but the owners’ personal possessions are not at risk from the business’s
23. Accrual basis income is revenue earned less expenses incurred in an effort to
generate that revenue.
24. The stock market crash of 1929 led to the regulation of the securities market.
The SEC was established to oversee publicly held companies and how they report
to stockholders.
25. Generally accepted accounting principles (GAAP) are the set of reporting
standards applicable to all companies that issue financial reports to external user.
The Financial Accounting Standards Board (FASB) is responsible for determining
GAAP in the United States.
26. The FASB Concepts Statements are designed to provide broad overview of
accounting and to serve as a foundation for future accounting standards.
27. The International Financial Reporting Standards are the global standards for
international external reporting by public companies.
28. The product life cycle is the time span from the conception of the product until it
is no longer in demand by customers. For example, consider the Schwin 10-speed
bicycle. Initially someone developed the idea of a 10-speed bicycle for road use.
This bicycle had very thin tires, handlebars that wrapped under, and a skinny seat.
Eventually these bicycles became less popular as mountain bikes were developed.
Eventually the Schwin 10-speed ceased to exist.
29. These types of “hybrid” organizational structures were developed to combine the
various characteristics of sole proprietorships, partnerships, and corporations to
minimize the risks for the owners.
30. The income statement is designed to show the revenues, expenses, and resulting
net income for a period of time. The statement of cash flows is designed to show
the cash inflows and outflows from operating, investing, and financing activities
for a period of time. The statement of owners’ equity is designed to show the
changes in owners’ equity for a period of time. The balance sheet is designed to
show the balances of the company’s assets, liabilities, and owners’ equity at the
end of the period.

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31. The PCAOB is responsible for developing auditing and attestation standards as
well as standard for ethics and to regulate the accounting firms that audit publicly
traded companies.
32. The current ratio shows the relationship between current assets and current
liabilities and measures liquidity. The debt to equity ratio shows the relationship
between total debt and owners’ equity and measures solvency. The return on sales
ratio shows the relationship between net income and sales and measures

E1.1 a. service b. service
c. service d. all
e. service f. manufacturing, service
g. merchandising h. merchandising
E1.2 a. service b. all
c. all d. service
e. manufacturing f. all
g. merchandising h. merchandising
E1.3 Answers vary.
E1.4 Answers vary.
E1.5 Owners’ equity = $3,000,000 - $1,200,000 = $1,800,000.
E1.6 Assets = $800,000 + $100,000 = $900,000.
E1.7 Debt to equity ratio = $800,000/$100,000 = 8
E1.8 Net assets = $5,000,000 - $3,200,000 = $1,800,000.
E1.9 Debt to equity ratio = $3,200,000/$1,800.000 = 1.78
E1.10 Periodicity and monetary unit
E1.11 Business entity
E1.12 Accrual basis income = $350,000 - $210,000 = $140,000.
E1.13 Cash basis income = $350,000 - $400,000 = ($50,000).
E1.14 a. liability b. asset
c. asset d. liability
e. asset f. liability
g. asset
E1.15 The current assets total $140,000 ($40,000 accounts receivable + $100,000 cash).
The current liabilities total $55,000 ($50,000 accounts payable + $5,000
obligation to employees). Therefore the current ratio is $140,000/$55,000 = 2.55.
E1.16 a. owners’ equity b. liability
c. asset d. asset
e. liability f. asset
g. liability
E1.17 The current assets total $51,500 ($50,000 inventory + $1,500 supplies). The
current liabilities total $3,250 ($2,000 obligation to the IRS + $1,250 obligation to
the utility company). Therefore the current ratio is $51,500/$3,250 = 15.85.
E1.18 a. revenue b. revenue
c. expense d. expense
e. expense f. revenue

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E1.19 The net income is total revenues ($14,000) less total expenses ($4,450) equals
$9,550. Therefore the return on sales ratio is $9,550/$14,000 = 68.21%.
E1.20 Answers vary.
E1.21 Answers vary.
E1.22 Answers vary, but the students should probably consider a partnership.


P1.1 a. liability and expense b. asset and revenue

c. asset and expense
P1.2 Total revenue is $20,000 and total expenses are $8,500. Therefore the net income
is $20,000 - $8,500 = $11,500.
P1.3 a. asset and liability b. assets (2)
c. asset and owners’ equity d. asset and owners’ equity
P1.4 Total assets are $210,000 ($200,000 cash + $125,000 building - $125,000 cash +
$15,000 computer - $5,000 cash). Total liabilities are $200,000 (loan). Total
owners’ equity is $10,000 ($15,000 contribution - $5,000 distribution). Net assets
equal $210,000 - $200,000 = $10,000.
P1.5 a. $625,000 ($75,000 accounts receivable + $500,000 building + $40,000
cash + $10,000 raw materials)
b. $53,000 ($3,000 obligation to employees + $50,000 obligation to
c. Owners equity = total assets ($625,000) – total liabilities ($53,000) =
P1.6 a. income statement—revenue
b. balance sheet—reduction of an asset
c. income statement--expense
d. balance sheet—asset; statement of cash flows
e. balance sheet—asset
f. balance sheet—liability
g. balance sheet—asset
h. statement of cash flows—cash inflow from operating
i. income statement—expense
j. balance sheet—asset
k. statement of cash flows—cash outflow from investing
l. balance sheet—owners’ equity
P1.7 b. long-term asset
d. current asset
e. current asset
f. current liability
g. current asset
j. long-term asset
l. owners’ equity
P1.8 a. statement of cash flows—cash outflow from operations
b. income statement--expense
c. income statement—revenue earned

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d. statement of cash flows—cash outflow from operations

e. balance sheet—asset
f. income statement—revenues less expenses
g. statement of cash flows—cash inflow from investing
h. balance sheet—owners’ equity
i. income statement—expense
j. balance sheet—liability
k. balance sheet—asset
l. balance sheet—owners’ equity (earnings belong to owners)
P1.9 e. long-term asset
h. owners’ equity
j. long-term liability
k. long-term asset
l. owners’ equity
P1.10 Revenues = $40,000 (cash sales) + $58,000 (sales on account) + $100 (interest
earned) = $98,100.
Expenses = $30,000 (salary) + $1,500 (utilities) + $10,000 (property taxes) +
$102,000 (cost of goods sold) + $12,000 (rent) = $155,500.
Net income (loss) = $98,100 (revenue) - $155,500 (expense) = ($57,400).
P1.11 a. monetary unit
b. going concern; business entity
c. going concern; business entity
d. periodicity
e. business entity


C1.1 Answers vary. This case will be built on in future chapters.

C1.2 Answers vary.


CT1.1 Answers vary. Students should consider the role of business versus the role of
CT1.2 The primary risk with JIT is running out of inventory. If this happens it could
cause production slow downs and unhappy customers.
CT1.3 Answers vary. Students must understand that an asset is a right to use and the
business has no “right” to its employees.
CT1.4 Answers vary. Students must understand the percentage drop in the markets
during both events as well as the unemployment rates at the time.


EC1.1 Answers vary. Students should consider the impact on stockholders, employees,
customers, and suppliers.

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EC1.2 Answers vary. Students should consider the right of people to control their own
destiny as well as the rights of companies.


CA1.1 Answers vary.

CA1.2 Answers vary.
CA1.3 Answers vary.
CA1.4 Answers vary.