ASSIGNMENT 1 WITH SOLUTION PAGE 1/2

EXERCISE 1

Identify each of the following business activities into the appropriate category (operating,
financing or investing).

1. Paid utilities expenses. ____

2. Withdrawal of funds by owners. ____
3. Purchase of land. ____
4. Sale of used equipment. ____
5. Borrowed money from a bank on a long-term note. ____
6. Paid employee wages. ____
7. Purchase raw materials. ____
8. Investment made by the owner. ____
9. Purchase of equipment for production. ____
10. Received cash in advance for delivering service in future. ____
11. Paying 6 months office rent in advance. ____
12. Repayment of a bank loan. ____

Solution:

1. Operating 2. Financing 3. Investing

4. Investing 5. Financing 6. Operating

7. Operating 8. Financing 9. Investing

10. Operating 11. Operating 12. Financing

 ASSIGNMENT 1 WITH SOLUTION PAGE 2/2

EXERCISE 2

The following situations involve accounting principles and assumptions.

1. Rex Company owns buildings that are worth substantially more than they originally cost. In an
effort to provide more relevant information, Rex reports the buildings at fair value in its
accounting reports.
2. Levi Company includes in its accounting records only transaction data that can be expressed in
terms of money.
3. Josh Borke, owner of Josh’s Photography, records his personal living costs as expenses of the
business.

Instructions
For each of the three situations, say if the accounting method used is correct or incorrect. If
correct, identify which principle or assumption supports the method used. If incorrect, identify
which principle or assumption has been violated.

Solution:
1. Violation of Historical cost—cost principle. According to Historical cost principle, assets
should be reported at its cost rather than fair value, unless there exist a very strong secondary
market because of verifiability and reliability of cost data.

2. Monetary unit assumption. Monetary unit assumption state that transaction that can be
expressed in monetary value should be recorded.

3. Violation of economic entity concept. The concept requires that activities of the entity be
kept separate and distinct from the activities of its owner and all other economic entities for the
sake of getting true performance of each entity.