# CHAPTER

Financial Statements and Accounting Concepts/Principles

2
E2.1.

Cash……………………………………………
Accounts payable…………….………………..
Common stock…………………………………
Depreciation expense…………………………..
Net sales………………………………………..
Income tax expense…………………………….
Short-term investments………………………...
Gain on sale of land…………………………….
Retained earnings………………………………
Dividends payable……………………………..
Accounts receivable……………………………
Short-term debt…………………………………

Category
A
L
OE
E
R
E
A
G
OE
L
A
L

Financial
Statement(s)
BS
BS
BS
IS
IS
IS
BS
IS
BS
BS
BS
BS

E2.3.
Use the accounting equation to solve for the missing information
Firm A:
A =
L + PIC + ( Beg. RE + NI - DIV = End. RE)
\$420,000 = \$215,000 + \$75,000 + ( \$78,000 + ? - \$50,000 =
? )

In this case, the ending balance of retained earnings must be determined first:
\$420,000 = \$215,000 + \$75,000 + End. RE.
Retained earnings, 12/31/09 = \$130,000
Once the ending balance of retained earnings is known, net income can be determined:
\$78,000 + NI – \$50,000 = \$130,000
Net income for 2009 = \$102,000
Firm B:
A
=
L + PIC + ( Beg. RE +
NI
DIV = End. RE )
\$540,000 = \$145,000 + ? + (
?
+ \$83,000 - \$19,000 = \$310,000 )

\$540,000 = \$145,000 + PIC + \$310,000
Paid-in capital, 12/31/09 = \$85,000
Beg. RE + \$83,000 - \$19,000 = \$310,000
Retained earnings, 1/1/09 = \$246,000

© The McGraw-Hill Companies, Inc., 2009

2-1

000 = ? ) In this case.3.\$7. December 31.000 + \$113.200 liabilities + \$3. Inc.. Less: Dividends declared and paid in 2009….Chapter 2 Financial Statements and Accounting Concepts/Principles E2. By looking at the RE column. and ending retained earnings = net assets at the end of the year = \$6. the ending balance of retained earnings must be determined first: \$42.000 = End.000 + \$90.200 + ? = ? + OE .000 = L + \$40.800.000 = ? + \$40. 2009………………………………… \$ 311. Beginning: Changes: Ending: A = L + \$12.\$65. PIC + RE \$ 0 + \$5.400 .400.000 + \$113.000 Total liabilities. Thus. which is equal to the net decrease on the right-hand side of the balance sheet (-\$1. RE + NI . December 31. 2009………………….700) (18. it can be seen that ending liabilities are \$5. Since paid-in capital did not change during the year. RE ) \$325.800 (4. total assets decreased by \$600 during the year (\$12.000 .000 Solution approach: (Remember that net assets = Assets .400 dividends = \$600 net decrease in assets). liabilities can be determined: \$325. 12/31/09 = \$195.000 net income -\$2. © The McGraw-Hill Companies. 2009: Retained Earnings. Also by looking at the liabilities column.800).000 Once the ending balance of retained earnings is known.. Retained Earnings.DIV = End.000 + ( \$42.400 = \$7. Prepare the retained earnings portion of a statement of changes in owners' equity for the year ended December 31. 2009 2-2 . 12/31/09 = \$90.\$65. beginning retained earnings = \$12.400 -\$11. it can be seen that dividends must have been \$2.500) \$288.000 .400 0 + 3. and therefore ending assets must be \$11.000 = \$5.5.800.400. assume that the beginning and ending balances are \$0.000 E2.600 E2.000 + ? = -1.7. (continued) Firm C: A = L + PIC + ( Beg. 2008………………………………… Less: Net loss for the year ended December 31. Thus.Liabilities = Owners’ equity = PIC + RE ).000.000 (net income) ? (dividends) 0 + \$6.………………………….. RE Retained earnings.

000 = 305.810 *The effects of these transactions on owners’ equity represent losses from the sale (or collection) of the non-cash assets.600 0 0 \$ 64. the unadjusted owners’ equity can be calculated by subtracting liabilities from the total of the assets given.200 +49. © The McGraw-Hill Companies.810 0 OE Plant & Owners’ Inventory + Equipment = Liabilities + Equity -114.710 -61.800 + 114. Since total assets must equal total liabilities and owners’ equity.400 + 265. 2009 2-3 .600 Balance L + + 61.800 -5.000 Payment of liabilities -305.200 Collection of accounts receivable +108.9.000 -305.000 \$ 64.Solutions to Odd-Numbered Problems P2.280 -265.400 -12..600 + 157. Inc.120 Sale of plant & equipment = 0 0 -75. Set up the accounting equation and show the effects of the transactions described. A Cash Accounts + Receivable Data given \$ 22.490 Inventory liquidation +190.

. Retained earnings......000 b......................... © The McGraw-Hill Companies.. Income tax expense.......... \$ 23......... Cash ........................... the beginning retained earnings balance must have been \$47..000.. Earnings from operations (operating income)................................... Retained earnings.000........................... Total current assets...11................................................000 earnings before taxes = 30% average tax rate f........000) (14.................................................................000 (16................000) \$ 50....... 2009 2-4 ................000 6.......................................000 (12................................... Common stock........ 2009.....000 10..... \$ 44....000 40..Chapter 2 Financial Statements and Accounting Concepts/Principles P2.......... Retained earnings.................. Gross profit........................ \$140..................................................................... .......... Supplies ............. a... Net income.............................................000 Solving the model... Earnings before taxes...............................................000 20.... Inc..................... Earnings from operations (operating income)................000 income tax expense / \$40.......................................................................................000 (12..000 d...........000 c... Depreciation expense. Total liabilities and owners’ equity …………………………………. Net income for the year................................. because the account balance increased by \$12...............000) \$ 59................................... Interest expense.......................................................................................................................................................................................000) \$ 44...................000) \$ 28..............000 9....... Sales revenue.................... Dividends declared and paid during the year................................................000) \$ 40..................................... 2009 ..... \$ 33.... Cost of goods sold.................................................................. Long-term debt........................................000 \$ 79.... December 31.............................................000 59...................................................... Merchandise inventory...................................................... Accounts payable .............................. Accounts receivable......................000 (4..........000 e............000 31...... .............. ? \$ 28................................. January 1. \$12.............000 during the year to an ending balance of \$59........................... ..........000 \$132............................................................ Service revenue....................................................................................................................000 (90.......................... Supplies expense......

........... general..................................................... \$ 65...................... Income Statement For the Year Ended December 31.................000 (34.....................000 Total liabilities and owners’ equity..................Solutions to Odd-Numbered Problems P2................ and administrative expenses ..... (52..........000 © The McGraw-Hill Companies..........000) \$ 32...............000 (12......... a.....000) \$ 72............. INC...................................... INC... 2009 2-5 ................... Less: Dividends declared and paid during the year.................. BREANNA................................000 Liabilities: Accounts payable.......................... \$ 55........... 2009 Paid-in capital: Common stock ............000) \$ 24...................................... ...................................000 Merchandise inventory.....000 Owners’ Equity: Common stock ............ \$200................................................000 Accounts receivable...............................................................................000 \$125.................................... Cost of goods sold............................................... \$112............................................. Gross profit.............................................................................................13............... 2009 Sales............................................................ \$ 90......... Earnings from operations (operating income)........................000 (6........000 24.... 35...... Net income....... INC...........000 Equipment............... Balance Sheet December 31....... Inc........... \$ 90..... Selling...........................................000 Total liabilities.................................................................................... Interest expense..................................................000 Total current assets...000 \$ 23..........000) 68........ Total owners’ equity...000 BREANNA.......................................000 (128............................................ Earnings before taxes............... 2009 Assets: Cash ...000 BREANNA...000 Long-term debt................000 Total assets.. Retained earnings: Beginning balance....................................................................................... ................................ \$180......000 Less: Accumulated depreciation.........000) 35.........................................................000) \$ 38.............................................................. 10........................... 40...... \$125........... 120...................... Ending balance ....... Net income for the year .................................................000 Retained earnings ...................................................... Income tax expense........................... 37.......................................................................... \$180. \$ 15.................................................................000 Total owners’ equity................................. Statement of Changes in Owners’ Equity For the Year Ended December 31...000 (8..

000 interest expense / \$40. e. \$6. i. b. Assets are reported at original cost.000 income tax expense / \$32. \$8. c. Assets are reported at original cost. not at an assessed or appraised value. therefore the accounts receivable are stated at the amount expected to be collected from customers. 2009 2-6 . c. Inc. Total assets can be determined based on items (a).000 common stock / 9. not current "worth. d.000 shares = \$10 per share par value.Chapter 2 Financial Statements and Accounting Concepts/Principles P2. This assumes that the year-end balance of long-term debt is representative of the average long-term debt account balance throughout the year. g. An asset should have a "probable future economic benefit".000 earnings before taxes = 25% average tax rate. \$90.15." Depreciation in accounting reflects the spreading of the cost of an asset over its estimated useful life. d. Assets = Liabilities + Owners’ Equity Borrowed cash on a bank loan + + NE Paid an account payable NE Sold common stock + NE + Purchased merchandise inventory on account + + NE Declared and paid dividends NE Collected an account receivable NE NE NE Sold inventory on account at a profit + NE + Paid operating expenses in cash NE Repaid principal and interest on a bank loan - P2. Retained earnings represents the difference between cumulative net income and cumulative dividends.000 long-term debt = 15% interest rate. This assumes that the board of directors has a policy to pay dividends in proportion to earnings. and (c).13. P2. f. © The McGraw-Hill Companies.000 net income = 50%. (continued) b. d. \$12.17.. (b). b. and the note payable is the difference between total liabilities and the accounts payable. e. total owners' equity is known after considering item (e). a.000 dividends declared and paid/ \$24. A = L + OE. The amount of the note payable is calculated using the accounting equation. e. Amounts shown in the balance sheet below reflect the following use of the data given: a. c. h.

.497 Income before taxes……………... (6...562 Gross profit……………………......……...... 21............… 3... \$27........198... b.. Thus....... when a deficit exists............. net income was used in 2005 and 2006 to reduce the deficit).. 268...................156 Total stockholders' deficit.726 Operating income ………............….......848 1.........947 Cost of goods sold..........003 Less: Cash dividends declared…………………………...091) Accumulated deficit......222.198.....003 Dividends declared and paid…………………………… \$ 0 As at November 26 and 27..601 126..100 Liabilities and Owners’ Equity: Note payable.......065 Total liabilities.............588 589.. \$18................. 106...................... 2..... dividends are inappropriate.... \$ 2.... despite the net income figures reported in 2005 and 2006........162 Income tax expense...400 Total liabilities.. 613.......……… \$ 239... (992........500 Total owners’ equity......... 3..... Land.. © The McGraw-Hill Companies.....000) Total assets…………………………… P2...........................................398...……………….................804......Solutions to Odd-Numbered Problems P2.. (959...................478) 2005 \$ 4........000 12...219 (1.. November 26................ \$ 700 3.. *.. and other operating expenses......................... would follow a “zero dividends” policy....... net...............216..............……… 345............... Automobile. a......... 8.............947 \$ 0 \$ 2..976......385 Selling... (continued) Assets: Cash ... common stock and additional paid-in capital)....804.......... \$ 5..000 \$27............478) It makes economic sense that Levi Strauss & Co........ respectively: Total assets……...........810 2...……………….481) * Accumulated deficit..19. 13................. Inc..............654 \$ 155........ 2009 2-7 ...........400 11.....................000 Retained earnings........................481) Add: Net income for the year…………………………… 239..............962 1......192. 1........200 Accounts payable..987... 2005……………… \$(1....................100 2006 For the years ended November 26 and 27....…….....159 Net income…………………........................500 Total liabilities and owners’ equity…………............e....... because their accumulated deficit is so large (i...................659 282.......e.... 2006……………… \$ (959...........659 Interest expense and other expenses...........362.......600 Common stock ............... \$ 2...... The difference between total shareowners’ equity and accumulated deficit relates primarily to paid-in capital accounts (i...134 4.........224................. 1.....236.........026....... November 27...... It also makes accounting sense! Recall that there must be a sufficient positive balance in retained earnings (to absorb the dividend without creating a deficit) for the board of directors to legally declare a dividend...............085) (1...........17......................... Accounts receivable.........260 306....000 Less: Accumulated depreciation............... \$ 4.……………………………..... (0) Accumulated deficit.......796.............. respectively: Net revenues………………….... general and administrative..........