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Solution Manual for Principles of


Accounting 1st Edition by Libby

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1. A sole proprietorship is a business owned by one individual. It is relatively
inexpensive to form a sole proprietorship, but the owner is personally liable for all
debts of the business.

A partnership is legally similar to a sole proprietorship, but has two or more owners
of the business.

Unlike proprietorships and partnerships, a corporation is a separate entity both


legally and from an accounting perspective. Although it is much more expensive to
form a corporation than a partnership or sole proprietorship, two major advantages
of a corporation are that (1) owners cannot be held responsible for debts that are
greater than their investment in the company and (2) shareholders can sell their
shares at any time if they wish to leave the business.

2. Accounting is an information system that collects and processes (analyzes,


measures, and records) information about an organization and communicates that
information to decision makers both inside and outside the organization.

3. Financial accounting involves preparation of the four basic financial statements and
related disclosures for external decision makers. Managerial accounting involves
the preparation of detailed plans and continually updated performance reports for
internal decision makers.

Accountants employed by a single business or nonprofit organization are in private


accounting. Accountants who charge fees for services to a variety of businesses
and nonprofit organizations are in public accounting.

4. Financial reports are used by both internal and external groups and individuals.
The internal groups are comprised of the various managers of the entity. The
external groups include the owners, investors, creditors, governmental agencies,
other interested parties, and the public at large.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-1
5. Assets = Liabilities + Owner’s Equity

Assets are the measurable economic resources owned by the business that are
likely to provide future benefits to the firm. Liabilities are the measurable and
probable obligations that require the business to pay goods or services to others in
the future. Owner’s Equity is the difference between the assets the business owns
and the liabilities that the business owes.

6. Revenues – Expenses = Net Income (or net loss)

Revenues are the amounts earned when goods or services are delivered to
customers. Expenses are the dollar amount of resources used by an entity to
generate revenues during the period. Net income and net loss are defined in the
next question.

7. Net income is the positive difference between revenues earned during a period and
the expenses that were incurred to generate the revenues during the period. Net
loss is the result when expenses exceed revenues during the period.

8. Beginning Owner’s Equity + Additional Investments – Withdrawals + Net Income (or


– net loss) = Ending Owner’s Equity

Beginning and Ending Owner’s Equity is the difference between the assets the
business owns and the liabilities the business owes at the beginning and ending of
the accounting period, respectively. Additional investments is the amount of
additional money that the owner invested in the business during the period, while
withdrawals represent money that the owner withdrew from the business. Net
income and net loss were defined in the previous question.

9. +/- Cash from Operating Activities


+/- Cash from Investing Activities
+/- Cash from Financing Activities
Change in cash during the period
+ Cash at beginning of period
Cash at end of period
Cash from operating activities is the cash received and used in running the
business to earn profit. Cash from investing activities is the cash received and
used in buying and selling productive resources with long lives. Cash from
financing activities is cash received and used in financing the business itself, such
as through bank loans or additional investments/withdrawals by owners.

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10. (a) The purpose of the balance sheet is to report the financial position of an entity
at a point in time – information about the assets, obligations, and owners’
equity of the entity as of a specific date.
(b) The purpose of the income statement is to present information about the
revenues, expenses, and net income (or loss) of the entity for a specified
period of time.
(c) The statement of owner’s equity reports the changes in owner’s equity during
the period from any additional amounts invested, earnings, and any amounts
withdrawn.
(d) The purpose of the statement of cash flows is to present information about the
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
and the net increase or decrease in cash during the period.

11. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure

12. The purpose of the notes to the financial statements is to provide information to
help those who study the statements to understand how the amounts were
measured and what additional relevant information may affect their decisions.

13. The Securities and Exchange Commission (SEC) is the U.S. government agency
that supervises the work of the Financial Accounting Standards Board (FASB) and
Public Company Accounting Oversight Board (PCAOB). The Financial Accounting
Standards Board (FASB) is the private sector body given the primary responsibility
for setting detailed rules of accounting which become generally accepted
accounting principles.

14. Ethical dilemmas in accounting arise when managers and owners decide between
reporting fraudulently or accurately in the face of personal greed and the desire to
appear successful. Ethical dilemmas harm many: employees, the business’
reputation, the corporation’s stock price, lenders, and the public in general.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-3
Authors' Recommended Solution Time
(Time in minutes)

Skill
Mini-exercises Exercises Problems Development
Cases
No. Time No. Time No. Time No. Time
1 3 1 12 PA1-1 45 1 20
2 3 2 12 PA1-2 45 2 20
3 5 3 12 PA1-3 45 3 *
4 3 4 20 PA1-4 45 4 30
5 3 5 25 PA1-5 45 5 20
6 3 6 20 PA1-6 45 6 60
7 5 7 15 PB1-1 45
8 5 8 25 PB1-2 45
9 5 9 25 PB1-3 45
10 3 10 30 PB1-4 45
11 6 11 15 PB1-5 45
12 3 12 20 PB1-6 45
13 10 13 12
14 30
15 30
16 15
17 20

* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time discussing research strategies. When we want the students
to focus on a real accounting issue, we offer suggestions about possible companies or
industries.

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1-4 Solutions Manual
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MINI-EXERCISES

M1–1

Firm type
B (1) Manufacturing business
C (2) Merchandising business
A (3) Service business

M1–2

B (1) Sole proprietorship


A (2) Partnership
C (3) Corporation

M1–3

1.) The primary internal users are a company’s managers and owner/managers
(sole proprietors and partners) who make business decisions affecting the
operating, investing, and financing activities of the organization.

2.) The primary external users are bankers, suppliers, governments, and owners
(stockholders in corporations) who are not directly involved in the business but
make decisions such as whether to lend the firm money, whether to extend credit
to the firm, how much to collect in taxes from the firm, and whether to invest
additional money in the firm as well as evaluate how current investments are
doing.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-5
M1–4

L (1) Accounts Payable


A (2) Accounts Receivable
A (3) Cash
E (4) Cost of Goods Sold
A (5) Buildings
E (6) Interest Expense
A (7) Inventories
E (8) Selling and Administrative Expenses
R (9) Sales Revenue
L (10) Notes Payable

M1–5

A (1) Inventories
L (2) Accounts payable
R (3) Sales revenue
A (4) Property and equipment
L (5) Notes payable
OE (6) Owner’s capital
A (7) Accounts receivable
A (8) Cash
E (9) Promotion expense
E (10) Cost of goods sold

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M1–6

Element Financial Statement


B (1) Expenses A. Balance sheet
D (2) Cash flows from investing activities B. Income statement
A (3) Assets C. Statement of owner’s equity
C* (4) Withdrawals D. Statement of cash flows
B (5) Revenues
D (6) Cash flows from operating activities
A (7) Liabilities
D (8) Cash flows from financing activities

*Withdrawals paid in cash are also subtracted in the Financing section of the Statement
of Cash Flows

M1–7

The Tea Room


Income Statement
For the year ended December 31, 2010

M1–8 The Tea Room


Statement of Owner’s Equity
For the year ended December 31, 2010

Gerry Stayman, Capital, January 1, 2010 $ 0


Add: Additional investments 100,000
Net income 70,000
Less: Gerry Stayman, Drawing (20,000)
Gerry Stayman, Capital, December 31, 2010 $ 150,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-7
M1–9
The Tea Room
Balance Sheet
December 31, 2010
Assets $180,000
Total assets $180,000

Liabilities $ 30,000
Owner’s Equity 150,000
Total liabilities and owner’s equity $180,000

M1–10

Assets = Liabilities + Owner’s Equity


Example: Borrowed Notes
$30,000 from a bank. Cash +30,000 Payable +30,000

a. Received $10,000 Cash +10,000 A. Simpson,


contribution from Capital +10,000
owner, Alecia
Simpson.

b. Purchased a Equipment +4,000 Accounts


$4,000 computer Payable +4,000
for use in the
business on
account.

c. Provided $22,000 Cash +22,000 Service


of service to Revenue +22,000
customers for
cash.

d. Paid employees Cash -15,000 Salaries


$15,000 cash. Expense -15,000

e. Withdrew $1,200 Cash -1,200 A. Simpson,


cash from the Drawing -1,200
profits of the
business.

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1-8 Solutions Manual
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M1–11

Abbreviation Full Designation


(1) CPA Certified Public Accountant.

(2) GAAP Generally Accepted Accounting Principles.

(3) FASB Financial Accounting Standards Board.

(4) SEC Securities and Exchange Commission.

M1–12

1.) This is an example of an ethical dilemma. The government will be harmed


because an insufficient amount of tax revenue will be collected from the client,
which will in turn harm the public as well.

2.) This is an example of an ethical dilemma. Both of you will be harmed if you are
caught, but you will be harmed regardless of whether you are caught because
without doing the homework for yourself you lose an opportunity to learn the
material.

3.) This is an example of an ethical dilemma. The owner(s) of the store will be
harmed because of lost revenue, and both you and your manager will likely lose
your jobs if you are caught.

M1–13

Private 1. Preparing financial statements for external users.


Public 2. Consulting
Private 3. Cost accounting.
Public 4. Auditing by CPA.
Private 5. Internal auditing.
Both 6. Reviewing financial information for compliance with generally
accepted accounting principles.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-9
EXERCISES
E1–1

1. Partnership (P)

2. Sole proprietorship (S)

3. Corporation (C)

4. Sole proprietorship (S)

E1–2

Net
Total Total Income or Total Total Owner’s
Case Revenues - Expenses = = Liabilities +
(Loss) Assets Equity

A $100,000 - $82,000 = $18,000 $150,000 = $70,000 + $80,000

B 92,000 - 80,000 = 12,000 112,000 = 52,000 + 60,000

C 80,000 - 86,000 = (6,000) 104,000 = 26,000 + 78,000

D 50,000 - 37,000 = 13,000 99,000 = 22,000 + 77,000

E 75,000 - 81,000 = (6,000) 101,000 = 73,000 + 28,000

E1–3

SOE, B/S
1. 1. Total owners’ equity
I/S 2. Sales Revenue
B/S 3. 3. Total assets
SCF 4. 4. Cash flows from operating activities
B/S 5. 5. Total liabilities
I/S, SOE6. 6. Net income
SCF 7. 7. Cash flows from financing activities

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E1–4
A (1) Inventories L (6) Notes Payable
L (2) Accounts Payable OE (7) Owners’ Capital
E (3) Income Tax Expense E (8) Cost of Goods Sold
A (4) Equipment E (9) Selling and Administrative Expense
A (5) Accounts Receivable R (10) Sales Revenue

E1–5
L (1) Accounts Payable A (7) Cash
A (2) Accounts Receivable A (8) Machinery
L (3) Wages Payable E (9) Promotion and Advertising Expenses
OE (4) Owners’ Capital R (10) Sales Revenue
E (5) Income Tax Expense L (11) Notes Payable to Banks
A (6) Inventory E (12) Selling and Administrative Expenses

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-11
E1–6

Req. 1
Clay Company
Income Statement
For the Month Ended January 31, 2010
Revenue:
Service Revenue $130,000
Expenses:
Wages Expense 15,000
Other Expenses 80,000
Net income $ 35,000

Clay Company
Statement of Owner's Equity
For the Month Ended January 31, 2010
J. Clay, Capital, January 1, 2010 $ 0
Add: Additional investments by owner 26,000
Net income 35,000
Less: J. Clay, Drawing (0)
J. Clay, Capital, January 31, 2010 $ 61,000

Clay Company
Balance Sheet
At January 31, 2010

Assets
Cash $ 30,000
Accounts Receivable 15,000
Supplies 42,000
Total Assets $ 87,000

Liabilities
Accounts Payable $ 26,000
Total liabilities 26,000
Owner's Equity
J. Clay, Capital 61,000
Total liabilities and owner's equity $ 87,000

Req. 2

Clay Company should be able to pay its liabilities because its cash balance is $30,000
and its liabilities are only $26,000.

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1-12 Solutions Manual
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E1–7

a)
Lucas Rock Company
Income Statement
For the Year Ended December 31, 2011
(in thousands)

Revenue $ 10,500
Expenses 9,200
Net income $ 1,300

b)
Lucas Rock Company
Statement of Owner's Equity
For the Year Ended December 31, 2011
(in thousands)

L. Rock, Capital, January 1, 2011 $ 3,500


Add: Additional investments by
owner 150
Net income 1,300
Less: L. Rock, Drawings (500)
L. Rock, Capital, December 31, 2011 $ 4,450

c)
Lucas Rock Company
Balance Sheet
At December 31, 2011
(in thousands)

Assets $ 18,200
Total Assets $ 18,200

Liabilities and Owner’s Equity


Total liabilities $ 13,750
L. Rock, Capital 4,450
Total liabilities and owner's equity $ 18,200

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-13
E1–7 (continued)

d)
Lucas Rock Company
Statement of Cash Flows
For the Year Ended December 31, 2011
(in thousands)

Cash flows from operating activities $ 1,600


Cash flows from investing activities (1,000)
Cash flows from financing activities (900)
Change in cash (300)
Cash at January 1, 2011 1,000
Cash at December 31, 2011 $ 700

E1–8

Req. 1
FedEx
Income Statement
For the Year Ended May 31, 2007
(in millions)

Revenue:
Delivery Revenue $ 22,527
Expenses:
Salaries Expense 8,051
Fuel Expense 2,946
Rent Expense 1,598
Maintenance and Repairs Expense 1,440
Other Expenses 7,241
Total expenses 21,276
Net income $ 1,251

Req. 2

FedEx’s largest expense is Salaries Expense.

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E1–9
Req. 1
Dave & Buster's Inc.
Balance Sheet
At February 4, 2007
(in millions)

Assets
Cash $ 10
Supplies 13
Property and Equipment 317
Other Assets 167
Total Assets $ 507

Liabilities
Accounts Payable $ 19
Notes Payable 254
Wages Payable 46
Other Liabilities 91
Total liabilities 410
Owners’ Equity
Owners’ Capital 97
Total liabilities and owner's equity $ 507

Req. 2
Dave & Buster’s largest asset is its property and equipment.

Req. 3
Most of the financing for assets come from creditors ($410 million in liabilities vs. $97
million in owners’ equity)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-15
E1–10

Req. 1
READ MORE STORE
Balance Sheet
At December 31, 2010

ASSETS LIABILITIES
Cash $48,900 Accounts Payable $ 8,000
Accounts Receivable 26,000 Notes Payable 2,120
Equipment 48,000 Total liabilities $10,120

OWNER’S EQUITY
T. Lopez, Capital 112,780
Total liabilities and
Total assets $122,900 owner’s equity $122,900

Req. 2

T. Lopez, Capital, January 1, 2010 $ 0


+ Additional owner contributions 100,000
+ Net income ?
- Owner withdrawals (0)
T. Lopez, Capital, December 31, 2010 $112,780

$100,000 + Net income = 112,780


Net Income = $12,780

Req. 3

Most of the financing comes from the owner, Terry Lopez.

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E1–11

COLLEGIATE LAUNDRY SERVICE


Income Statement
For the Month of October 2010

Revenue:
Laundry services for cash $ 12,000
Laundry services on credit 1,000
Total service revenue 13,000
Expenses:
Wages expense 3,500
Supplies expense 800
Advertising expense 600
Other expenses 500
Total expenses 5,400
Net Income $ 7,600

E1–12

TNT Cleaning Service


Income Statement
For the Year Ended December 31, 2009

Cleaning Service Revenue $ 166,000


Expenses:
Wages Expense 102,775
Supplies Expense 18,500
Advertising Expense 9,025
Fuel Expense 525
Total expenses 130,825
Net income $ 35,175

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-17
E1–13

O, I or F + or –
O – A. Cash paid to suppliers and employees
O + B. Cash collected from customers
F + C. Cash received from borrowing long-term debt
F + D. Cash received from owners as additional investments
I – E. Cash paid to purchase equipment

E1–14

O, I, or F + or -
I - A. Cash paid for purchases of buildings and equipment.
F - B. Cash paid to owners as distributions of profits.
I + C. Cash received on sales of buildings and equipment.
O - D. Cash paid to suppliers and employees.
F + E. Cash received from owners as additional investments.
F + F. Cash received from borrowing long-term debt.
O + G. Cash received from customers.
F - H. Cash paid on long-term debt.

E1–15

Req. A
General Mills will report $6,375 million on its cash flow statement.

Req. B
Microsoft will report $25.4 billion on its cash flow statement.

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E1–16

Assets = Liabilities + Owner’s Equity


Ex. Cash +100,000 C. Reyes,
Capital +100,000
1. Cash - 30,000 Note Payable +10,000
Building
+40,000

2. Supplies Accounts
+1,000 Payable +1,000

3. Accounts Service
Receivable Revenue +31,000
+31,000

4. Cash -19,000 Wages


Expense -19,000

5. Accounts Utilities
Payable +600 Expense -600

6. Cash +6,200 Service


Revenue +6,200

7. Cash -3,000
Equipment +3,000

8. Cash -5,000 C.Reyes,


Drawing -5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-19
E1–17

I 1. SEC
F 2. Investing activities
D 3. Private company
E 4. Corporation
A 5. Accounting
C 6. Partnership
J 7. FASB
G 8. Financing activities
B 9. Monetary unit
L 10. GAAP
K 11. Public company
H 12. Operating activities

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PROBLEMS – SET A
PA1–1
Req. 1
NUCLEAR COMPANY
Income Statement
For the Year Ended December 31, 2010
Revenue:
Service Revenue $140,000
Expenses:
Wages Expense 60,000
Advertising Expense 1,100
Other Expenses 38,000
Total expenses 99,100
Net Income $ 40,900

Req. 2
NUCLEAR COMPANY
Statement of Owner’s Equity
For the Year Ended December 31, 2010
C. Reed, Capital, January 1, 2010 $ 0
Add: Additional investments by owner 87,000
Net income (from req. 1) 40,900
Less: C. Reed, Drawing (15,270)
C. Reed, Capital, December 31, 2010 $ 112,630

Req. 3
NUCLEAR COMPANY
Balance Sheet
At December 31, 2010
Assets:
Cash $25,000
Accounts Receivable 12,000
Supplies 90,000
Equipment 45,000
Total Assets $172,000

Liabilities:
Accounts Payable $ 57,370
Notes Payable 2,000
Total Liabilities 59,370
Owner’s Equity:
C. Reed, Capital 112,630
Total liabilities and owner’s equity $172,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-21
PA1–2
Req. 1
FAMILY MEDICINE
Income Statement
For the Year Ended June 30, 2009
Revenue:
Medical Service Revenue $ 90,000
Expenses:
Wages Expense 46,000
Utilities Expense 6,500
Other Expenses 2,000
Total expenses 54,500
Net Income $ 35,500

Req. 2
FAMILY MEDICINE
Statement of Owner’s Equity
For the Year Ended June 30, 2009
A. Jones, Capital, July 1, 2008 $ 0
Add: Additional investments by owner 62,000
Net income (from req. 1) 35,500
Less: A. Jones, Drawing (6,000)
A. Jones, Capital, June 30, 2009 $ 91,500

Req. 3
FAMILY MEDICINE
Balance Sheet
At June 30, 2009
Assets:
Cash $13,500
Accounts Receivable 9,500
Supplies 17,000
Equipment 76,000
Total Assets $116,000

Liabilities and Owner’s Equity:


Liabilities:
Accounts Payable $ 3,500
Notes Payable 21,000
Total liabilities 24,500
Owner’s Equity:
A. Jones, Capital 91,500
Total liabilities and owner’s equity $116,000

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PA1–3

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Principles of Accounting 1-23
PA1-3 (continued)

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PA1–4

Req. 1
Average monthly revenue, $216,000 ¸ 12 = $18,000.

Req. 2
Average monthly wages expense, $84,000 ÷ 12 = $7,000

Req. 3
“Supplies Expense" is an expense because it represents the cost of the supplies that
the company used during the period.

Req. 4
“Advertising Expense” is an expense because it represents the amount of advertising
completed during the period to generate revenues.

Req. 5
No, the cash balance at December 31, 2011 cannot be determined from the information
provided. The amount of cash the company had on December 31, 2011, is not the
same as net income because net income represents the profit or loss of the company
during the preceding year, regardless of whether purchases or sales were made with
cash or credit.

PA1-5
a.)
Hannah Company
Income Statement
For the Quarter Ended September 30, 2010

Revenue $ 32,100
18,95
Expenses 0
Net income $ 13,150

b.)
Hannah Company
Statement of Owner's Equity
For the Quarter Ended September 30, 2010

D. Hannah, Capital , June 30, 2010 $ 51,000


Add: Additional investments by owner 1,750
Net income 13,150
Less: D. Hannah, Drawings (4,900)
D. Hannah, Capital, September 30, 2010 $ 61,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-25
PA1-5 (continued)

c)
Hannah Company
Balance Sheet
At September 30, 2010

Assets: $ 79,500
Total Assets $ 79,500

Liabilities and Owner’s Equity:


Total liabilities $ 18,500
Owner’s Equity
D. Hannah, Capital 61,000
Total liabilities and owner's equity $ 79,500

d)
Hannah Company
Statement of Cash Flows
For the Quarter Ended September 30, 2010

Cash flows from operating activities $ 15,700


Cash flows from investing activities (7,200)
Cash flows from financing activities (5,300)
Change in cash 3,200
Cash at the beginning of the period 3,200
Cash at the end of the period $ 6,400

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PA1-6
a)
OSI Restaurant Partners, Inc.
Income Statement
For the Year Ended December 31, 2006
(in millions)
Revenues:
Restaurant Sales Revenue $ 3,920
Other Revenues 21
Total revenues 3,941
Expenses:
Food and Supplies Expenses 1,415
General and Administrative Expenses 235
Wages Expenses 1,087
Utilities and Other Expenses 1,104
Total expenses 3,841
Net income $ 100

b)
OSI Restaurant Partners, Inc.
Statement of Owners’ Equity
For the Year Ended December 31, 2006
(in millions)

Owners’ Capital, January 1, 2006 $ 1,144


Add: Additional investments by owners 16
Net income 100
Less: Owners’ Drawings (distributions) (39)
Owners’ Capital, December 31, 2006 $ 1,221

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-27
PA1-6 (continued)

c)
OSI Restaurant Partners, Inc.
Balance Sheet
At December 31, 2006
(in millions)

Assets
Cash $ 94
Food and Supply Inventories 87
Property, Fixtures, and Equipment 1,549
Other Assets 529
Total Assets $ 2,259

Liabilities and Owners’ Equity


Liabilities
Accounts Payable $ 166
Notes Payable 235
Wages and Taxes Payable 120
Unearned Revenue 187
Other Liabilities 330
Total liabilities 1,038
Owners’ Equity
Owners’ Capital 1,221
Total Liabilities and Owners’ Equity $ 2,259

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PA1-6 (continued)

d)
OSI Restaurant Partners, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2006
(in millions)

Cash flows from operating activities


Cash received from customers $ 2,946
Cash paid to suppliers and employees (2,578)
36
Cash provided by operating activities 8

Cash flows from investing activities


Cash paid to purchase equipment (384)
Cash received from sale of fixtures & equipment 32
Other cash outflows from investing activities (2)

Cash used in investing activities (354)

Cash flows from financing activities


37
Cash received from bank borrowings 5
Additional investments by owners 16
Repayments of bank borrowings (294)
Withdrawals (distributions to owners) (39)
Other cash outflows from financing activities (62)

Cash used in financing activities (4)

Change in cash 10
Cash at January 1, 2006 84
Cash at December 31, 2006 $ 94

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Principles of Accounting 1-29
PROBLEMS – SET B
PB1-1

Req. 1
WRITE-r-WRONG COMPANY
Income Statement
For the Year Ended April 30, 2011
Revenue:
Service Revenue $270,000
Expenses:
Wages Expense 138,500
Supplies Expense 22,000
Other Expenses 10,000
Total expenses 170,500
Net Income $ 99,500

Req. 2
WRITE-r-WRONG COMPANY
Statement of Owner’s Equity
For the Year Ended April 30, 2011
M. Waxman, Capital, May 1, 2010 $ 0
Add: Additional investments by owner 186,000
Net income (from req. 1) 99,500
Less: M. Waxman, Drawing (27,150)
M. Waxman, Capital, April 30, 2011 $ 258,350

Req. 3
WRITE-r-WRONG COMPANY
Balance Sheet
At April 30, 2011
Assets:
Cash $ 39,150
Accounts Receivable 27,500
Supplies 35,000
Equipment 208,000
Total Assets $309,650

Liabilities and Owner’s Equity:


Liabilities:
Accounts Payable $ 47,800
Notes Payable 3,500
Total liabilities 51,300
Owner’s Equity:
M. Waxman, Capital 258,350
Total liabilities and owner’s equity $309,650

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1-30 Solutions Manual
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PB1–2

Req. 1
SWEATERS ‘n THINGS COMPANY
Income Statement
For the Year Ended December 31, 2012

Revenue:
Sales Revenue $ 945,000
Expenses:
Cost of Goods Sold 746,000
Utilities Expense 42,500
Other Expenses 2,000
Total expenses 790,500
Net Income $ 154,500

Req. 2
SWEATERS ‘n THINGS COMPANY
Statement of Owner’s Equity
For the Year Ended December 31, 2012

E. Rosati, Capital, January 1, 2012 $ 0


Add: Additional investments by owner 200,000
Net income (from req. 1) 154,500
Less: E. Rosati, Drawing (58,500)
E. Rosati, Capital, December 31, 2012 $ 296,000

Req. 3
SWEATERS ‘n THINGS COMPANY
Balance Sheet
At December 31, 2012
Assets:
Cash $ 31,500
Accounts Receivable 79,000
Inventories 152,000
Fixtures and Equipment 140,000
Total Assets $402,500

Liabilities and Owner’s Equity:


Liabilities:
Accounts Payable $ 71,500
Notes Payable 35,000
Total Liabilities 106,500
Owner’s Equity:
E. Rosati, Capital 296,000
Total liabilities and owner’s equity $402,500

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Principles of Accounting 1-31
PB1-3

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PB1-3 (continued)

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Principles of Accounting 1-33
PB1-4
Req. 1
Average monthly revenue, $468,000 ¸ 12 = $39,000.

Req. 2
Average monthly expenses, $420,000 ÷ 12 = $35,000.

Req. 3
“Cost of Goods Sold" is an expense because it represents the cost of the inventory that
the company sold (used) during the period.

Req. 4
“Utilities Expense” is an expense because it represents the amount of utilities used
during the period to generate revenues.

Req. 5
No, cash at the end of the year cannot be determined from the information provided.
The amount of cash the company had on December 31, 2010, is not the same as net
income because net income represents the profit or loss of the company during the
preceding year, regardless of whether purchases or sales were made with cash or
credit.

PB1-5
a.)
Darryl Company
Income Statement
For the Year Ended December 31, 2009
Revenue $ 135,600
Expenses 128,100
Net income $ 7,500

b.)
Darryl Company
Statement of Owner's Equity
For the Year Ended December 31, 2009

J. Darryl, Capital, January 1, 2009 $ 7,400


Add: Additional investments by owner 6,000
Net income 7,500
Less: J. Darryl, Drawing (4,900)
J. Darryl, Capital, December 31, 2009 $ 16,000

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PB1-5 (continued)

c)
Darryl Company
Balance Sheet
At December 31, 2009

Assets: $ 97,500
Total Assets $ 97,500

Liabilities and Owner’s Equity:


Total liabilities $ 81,500
J. Darryl, Capital 16,000
Total Labilities and Owner's Equity $ 97,500

d)
Darryl Company
Statement of Cash Flows
For the Year Ended December 31, 2009

Cash flows from operating activities $ 20,200


Cash flows from investing activities (47,000)
Cash flows from financing activities 40,100
Change in cash 13,300
Cash at the beginning of the period 8,200
Cash at the end of the period $ 21,500

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-35
PB1-6

a)
The Cheesecake Factory
Income Statement
For the Year Ended January 2, 2007
(in thousands)

Revenues:
Restaurant Sales Revenues $1,315,325
Other Revenues 8,171
Total revenues 1,323,496
Expenses:
Food and Supplies Expense 333,528
Wages Expenses 420,957
Utilities and other Expenses 414,978
General and Administrative Expenses 72,751
Total expenses 1,242,214
Net income $ 81,282

b)
The Cheesecake Factory
Statement of Owners’ Equity
For the Year Ended January 2, 2007
(in thousands)

Owners’ Capital, January 3, 2006 $ 646,699


Add: Additional investments by owner 33,555
Net income 81,282
Less: Owners’ Drawings (distributions) (49,994)
Owners’ Capital, January 2, 2007 $ 711,542

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PB1-6 (continued)

c)
The Cheesecake Factory
Balance Sheet
At January 2, 2007
(in thousands)

Assets:
Cash $ 44,790
Accounts Receivable 11,639
Food and Supply Inventories 20,775
Prepaid Rent 43,870
Property and Equipment 732,204
Other Assets 186,453
Total Assets $1,039,731

Liabilities and Owners’ Equity:


Liabilities:
Accounts Payable $ 45,570
Notes Payable 39,381
Wages and Other Expenses Payable 117,226
Other Liabilities 126,012
Total liabilities 328,189
Owners’ Equity:
Owners’ Capital 711,542
Total liabilities and owners’ equity $1,039,731

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2010


Principles of Accounting 1-37
PB1-6 (continued)

d)
The Cheesecake Factory
Statement of Cash Flows
For the Year Ended January 2, 2007
(in thousands)

Cash flows from operating activities


Cash received from customers $1,276,008
(1,123,353
Cash paid to suppliers and employees )
Cash provided by operating activities 152,655

Cash flows from investing activities


Cash paid to purchase equipment (243,211)
Cash received from sale of long-term assets 115,975
Cash used in investing activities (127,236)

Cash flows from financing activities


Additional investments by owners 33,555
Borrowings 175,000
Repayments of borrowings (170,242)
Withdrawals (distributions to owners) (49,994)
Cash used in financing activities (11,681)

Change in cash 13,738


Cash at January 3, 2006 31,052
Cash at January 2, 2007 $ 44,790

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CASES AND PROJECTS


CP1-1

Req. 1

Home Depot is organized as a corporation. Only a corporation issues shares of stock


to its owners in exchange for their investment.

Req. 2
The income statement reports net income of $4,395. Note that the amounts on the
financial statements are rounded to the nearest million, so this is actually
$4,395,000,000.

Req. 3

The income statement shows that sales revenue of $77,349,000,000 was earned in the
most recent year.

Req. 4

The balance sheet shows that inventory costing $11,731,000,000 was on hand at
February 3, 2008.

Req. 5

The balance sheet and statement of cash flows show cash of $445,000,000 on hand at
February 3, 2008.

Req. 6

Because Home Depot’s stock is traded on the New York Stock Exchange, Home Depot
must be a public company.

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Principles of Accounting 1-39
CP1-2

Req. 1

Lowe’s net income for the year ended February 1, 2008 was $2,809,000,000. This is
lower than the $4,395,000,000 earned by Home Depot for the year ended February 3,
2008.

Req. 2

Lowe’s reported revenue of $48,283,000,000 for the year ended February 1, 2008. This
is lower than the $77,349,000,000 reported by Home Depot for the year ended
February 3, 2008.

Req. 3

Lowe’s inventory as of February 1, 2008 was $7,611,000,000. This is lower than the
$11,731,000,000 reported by Home Depot as of February 3, 2008.

Req. 4

Lowe’s cash as of February 1, 2008 was $281,000,000. This is lower than the
$445,000,000 reported by Home Depot as of February 3, 2008.

Req. 5

Like Home Depot, Lowe’s is a public company. It trades on the New York Stock
Exchange under the symbol LOW.

Req. 6

Two measures of financial success are the company’s net income and revenues. As
noted for requirements 1 and 2, Home Depot reported greater amounts for both of
these measures, suggesting that the company was more successful during fiscal year
2007. It is important to note, though, that Home Depot is a bigger company than
Lowe’s, with more locations, more inventory (see requirement 3), and more total assets.
Given these differences, it is reasonable to expect that Home Depot would produce
more revenue and net income than Lowe’s. To truly determine whether Home Depot is
run more successfully than Lowe’s, a complete analysis is required. Such an analysis
would take into account size differences between the two companies. (You’ll learn
about this kind of analysis later chapters).

CP1-3
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1-40 Solutions Manual
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The solutions to this case will depend on the company and/or accounting period
selected for analysis.

CP1-4

Req. 1

The accounting concept that the Rigas family is accused of violating is the separate
entity concept.

Req. 2

Based on the limited information available, it is difficult to categorize particular dealings


as appropriate or inappropriate. Dealings would clearly be inappropriate if they
involved Adelphia paying for items for the owners’ personal use or to unfairly transfer
some of the resources of Adelphia (and its stockholders) to the Rigas family. However,
we cannot determine the propriety of the payments from the limited information
available.

Req. 3

Investors should take at least two actions to ensure this kind of behavior does not occur
or does not occur without their knowledge.
(1) First, they should ensure that the managers of the business are accountable for
their actions. The most common way of doing this is to appoint a board of
directors who are independent of top management. These directors should
review and challenge the actions taken by management and require that the
financial statements disclose significant transactions with related parties.
(2) Second, investors should read the financial statements, including any notes
describing related party transactions. Any questionable dealings should be
raised with top management at the company’s annual meeting. If investors don’t
receive satisfactory answers to their concerns, they should sell their investment
in the company’s stock.

Req. 4

Other parties that might be harmed by the actions committed by the Rigas family are
creditors (such as suppliers and banks), the company’s auditors, governmental
agencies (such as the IRS and SEC), and the public at large.

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Principles of Accounting 1-41
CP1-5

Req. 1

You should take the position that an independent annual audit of the financial
statements is an absolute must. This is the best way to ensure that the financial
statements are complete, are free from bias, and conform with GAAP. You should be
prepared to reject the partner’s uncle as the auditor because there is no evidence
about his competence as an accountant or auditor. Also, he does not appear
independent because he is related to the partner who prepares the financial
statements, resulting in a potential conflict of interest. Hire an independent CPA.

Req. 2

You should strongly recommend the selection of an independent CPA in public practice
because the financial statements should be audited by a competent and independent
professional who must follow prescribed accounting and auditing standards on a strictly
independent basis. An audit by an uncle would not meet these requirements.

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CP1–6

Req 1. September
Jack Jill
Own:
PlayStation $ 350
Cash 6,000 $1,000
'75 Mustang 800
Trading cards 250
Total owned 6,350 2,050
Owe:
Car loan 250
Student loan 4,800
Tuition bill 800
Total owed 5,600 250

Excess $ 750 $1,800


Although Jack owns more
than Jill, he also owes more as well. Jill has $1,050 more net assets (assets –
liabilities) than Jack.

Req 2. October
Jack Jill
Own:
September position $ 6,350 $ 2,050
Monthly salary 500
Lottery winnings 950
Total owned 7,300 2,550
Owe:
September position 5,600 250
Rent expense paid 450 120
Other living expenses 300 300
Total owed 6,350 670

Excess $ 950 $1,880

Jack acquired more than Jill ($950 in October as compared to Jill’s $500). He also
incurred higher expenses ($750 in October as compared to Jill’s $420), but they were
significantly lower than Jill’s as a percentage of earnings. Thus, Jack had net profits in
October of $200, while Jill had $80 in net profits. However, when these effects are
added to the net assets from September, Jill clearly has done better than Jack overall.
In addition, Jill has more sustainable earnings than Jack – Jack cannot depend on
lottery winnings every period; he needs to get a job.

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Principles of Accounting 1-43