Solution Manual For Survey of Accounting, 9th Edition

CHAPTER 2 BASIC ACCOUNTING SYSTEMS: CASH BASIS CLASS DISCUSSION QUESTIONS 1. The basic elements of a financial accounting system include the following: (1) a set of rules for determining what, when, and how much should be recorded; (2) a framework for preparing financial statements; and (3) one or more controls to determine whether errors may have occurred in the recording process. These elements apply to all businesses, from a local restaurant to Alphabet (Google), Inc. All businesses require a financial reporting system so financial statements can be provided to stakeholders. 2. a. Purchase of land for cash affects only assets. b. Payment of a liability affects assets and liabilities; receipt of cash for fees earned affects assets and stockholders’ equity. c. Incurring an expense partially paid in cash decreases assets increases liabilities and decreases stockholders’ equity (retained earnings). For example, assume a business hires a lawyer for $10,000 to draft and file the necessary documents to start and incorporate the business. The business pays the lawyer $4,000 and agrees to pay the remaining $6,000 over the next several months. This transaction would decrease assets ($4,000), increase liabilities ($6,000), and decrease stockholders’ equity (retained earnings) ($10,000). The expense is an organizational expense. Likewise, a new business might hire a new chief operating officer by agreeing to pay a nonrefundable, noncancellable signing bonus of $50,000, with $30,000 due at signing and the remainder due in four installments. This transaction would decrease assets ($30,000), increase liabilities ($20,000), and decrease stockholders’ equity (retained earnings) ($50,000). The expense is salary expense or bonus expense. 3. Out of balance. Assets are correct, but retained earnings (utilities expense) should have been decreased by $1,200 rather than $2,100. Thus, retained earnings is understated by $900, and total liabilities plus stockholders’ equity would be less than total assets by $900. 4. a. Out of balance. Assets are overstated by $27,000 ($85,000 – $58,000), and thus, total assets would exceed total liabilities plus stockholders’ equity by $27,000. b. In balance. Even though liabilities and stockholders’ equity are incorrect, the accounting equation balances. For this error, liabilities are overstated by $7,000, and retained earnings (fees earned) are understated by $7,000; thus, the over- and understatements offset each other, and the accounting equation balances. 5. A primary control for determining the accuracy of record keeping is the equality of the accounting equation. The accounting equation must balance. 6. Total assets are increased by $175,000: an increase in cash of $375,000 and a decrease in land of $200,000. Stockholders’ equity (retained earnings) is increased by $175,000, the gain on the sale of the land. 7. a. The payment of $15,000 of dividends decreases total assets (decrease in cash) and decreases stockholders’ equity (decrease in retained earnings). Liabilities are not affected. b. Net income is not affected by the payment of dividends. Dividends are a distribution of income to stockholders and are not an expense. 8. a. The equality of the accounting equation would not be affected. That is, the accounting equation would still balance. b. On the income statement, total operating expenses (salary expense) would be overstated by $30,000, and net income would be understated by $30,000. On the statement of stockholders’ equity, the beginning and ending retained earnings would be correct. However, net income and dividends would be understated by $30,000. These understatements offset one another, and thus, ending retained earnings is correct. The balance sheet is not affected by the error. On the statement of cash flows, net cash flows from 33 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. operating activities is understated since cash paid for salary expense is overstated. In addition, net cash flows from financing activities is overstated since cash paid for dividends is understated. The understatement of net cash flows from operating activities is offset by the overstatement of net cash flows from financing activities, and thus, the net increase or decrease in cash for the period is correct as is the ending cash balance. 9. a. The equality of the accounting equation would not be affected. That is, the accounting equation would still balance. b. On the income statement, revenues (fees earned) would be overstated by $75,000, and net income would be overstated by $75,000. On the statement of stockholders’ equity, the beginning retained earnings would be correct. However, net income and ending retained earnings would be overstated by $75,000. The total assets reported on the balance sheet is correct. However, liabilities (notes payable) are understated by $75,000, and stockholders’ equity (retained earnings) is overstated by $75,000. The understatement of liabilities is offset by the overstatement of stockholders’ equity, and thus, total liabilities and stockholders’ equity are correct. On the statement of cash flows, net cash flows from operating activities is overstated since cash received from fees earned is overstated. In addition, net cash flows from financing activities is understated, since cash received from borrowing (notes payable) is understated. The overstatement of net cash flows from operating activities is offset by the understatement of net cash flows from financing activities, and thus, the net increase or decrease in cash for the period is correct, as is the ending cash balance. 10. a. $350,000 ($500,000 – $150,000) b. Stockholders’ equity as of December 31, 20Y8 …….. $400,000 Less stockholders’ equity as of January 1, 20Y8 ………….. 350,000 Net income ……………………… $ 50,000 11. Change in stockholders’ equity (see Question 10) ……………. $50,000 Plus dividends ………………………. 18,000 Net income …………………………… $68,000 34 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. EXERCISES E2–1 a. $950,000 ($357,500 + $592,500) b. $45,000 ($300,000 – $255,000) c. $44,325 ($56,200 – $11,875) E2–2 Amounts in millions: a. $47,323 ($92,033 – $44,710) b. $6,075 increase ($3,756 + $2,319) c. Total assets = $95,789 ($92,033 + $3,756) Total liabilities = $50,785 ($44,710 + $6,075) Total stockholders’ equity = $45,004 ($47,323 – $2,319) d. Yes. [$95,789 (total assets) = $50,785 (total liabilities) + $45,004 (total stockholders’ equity)] E2–3 Amounts in millions: a. $1,533 ($7,837 – $6,304) b. $112 increase ($223 – $111) c. Total assets = $7,726 ($7,837 – $111) Total liabilities = $6,081 ($6,304 – $223) Total stockholders’ equity = $1,645 ($1,533 + $112) d. Yes. [$7,726 (total assets) = $6,081 (total liabilities) + $1,645 (total stockholders’ equity)] 35 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–4 (a) $193,437 ($241,272 – $47,835) (b) $128,249 ($321,686 – $193,437) (c) $375,319 ($321,686 + $53,633) (d) $134,047 [($375,319 – $241,272) or ($128,249 + $5,798)] (e) $244,180 [($221,656 + $22,524) or ($257,143 – $12,963)] (f) $221,656 [($214,047 + $7,609) or ($244,180 – $22,524)] (g) $12,963 [($257,143 – $244,180) or ($20,572 – $7,609)] (h) $20,572 ($43,096 – $22,524) (i) $214,047 ($257,143 – $43,096) E2–5 a. $825,000 ($1,200,000 – $375,000) b. $895,000 ($825,000 + $150,000 – $80,000) c. $525,000 ($825,000 – $200,000 – $100,000) d. $1,300,000 ($825,000 + $400,000 + $75,000) e. $160,000 net income ($1,275,000 – $290,000 – $825,000) 36 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–6 a. b. c. d. e. (3) No effect (3) No effect (1) Increase (3) No effect (2) Decrease f. g. h. i. j. (2) Decrease (2) Decrease (1) Increase (1) Increase (2) Decrease E2–7 a. Increases assets and increases stockholders’ equity. b. Decreases assets and decreases stockholders’ equity. c. Increases assets and increases liabilities. d. Increases assets and increases stockholders’ equity. e. Increases assets and decreases assets. E2–8 1. 2. 3. Total assets decreased $140,000. Total liabilities decreased $300,000. Stockholders’ equity increased $160,000. E2–9 1. 2. 3. (a) increase (a) increase (b) decrease 4. 5. (b) decrease (b) decrease 37 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–10 1. 2. 3. 4. 5. (c) (e) (e) (c) (b) 6. 7. 8. 9. (a) (e) (e) (e) E2–11 a. (1) Provided catering services for cash, $28,000. (2) Purchased land for cash, $20,000. (3) Paid expenses, $18,000. (4) Paid cash as dividends, $1,000. b. $11,000 ($40,000 – $29,000) c. $9,000 ($109,000 – $100,000) d. $10,000 ($28,000 – $18,000) e. $9,000 ($10,000 – $1,000) f. $10,000 ($28,000 – $18,000) g. $20,000 used for purchase of land h. $1,000 used for payment of dividends E2–12 It would be incorrect to say the business incurred a net loss of $8,000. The excess of the dividends over the net income for the period is a decrease in the amount of retained earnings in the corporation. 38 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–13 Company Sierra Stockholders’ equity at end of year ($770,000 – $294,000) ……………….. Deduct stockholders’ equity at beginning of year ($490,000 – $175,000) ………………………………………………………………… Net income (increase in stockholders’ equity) ……………………………. $ 476,000 (315,000) $ 161,000 Company Tango Increase in stockholders’ equity (as determined for Sierra) ……………… Add dividends ……………………………………………………………………………….. Net income ……………………………………………………………………………….. $ 161,000 55,000 $ 216,000 Company Yankee Increase in stockholders’ equity (as determined for Sierra) ……………… Deduct issuance of additional common stock …………………………………. Net income ……………………………………………………………………………….. $ 161,000 (75,000) $ 86,000 Company Zulu Increase in stockholders’ equity (as determined for Sierra) ……………… Deduct issuance of additional common stock …………………………………. Add dividends ……………………………………………………………………………….. Net income ……………………………………………………………………………….. $ 161,000 (75,000) $ 86,000 55,000 $ 141,000 39 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–14 In each case, solve for a single unknown, using the following equation: Stockholders’ Equity (beginning) + Issuance of Common Stock – Dividends + Revenues – Expenses = Stockholders’ Equity (ending) Carbon: Stockholders’ equity at end of year ($495,000 – $160,000) … Deduct stockholders’ equity at beginning of year ($333,000 – $118,000) …………………………………………………………….. Increase in stockholders’ equity ……………………………………… Deduct increase due to net income ($90,000 – $39,000) ……. $ 335,000 Krypton: Stockholders’ equity at end of year ($350,000 – $110,000) … Deduct stockholders’ equity at beginning of year ($250,000 – $130,000) ……………………………………………………………. Increase in stockholders’ equity ……………………………………… Add dividends ………………………………………………………………… $ 240,000 (215,000) $ 120,000 (51,000) $ 69,000 Add dividends ………………………………………………………………… 7,500 Additional issuance of common stock …………………………. (a) $ 76,500 Deduct additional issuance of common stock ………………….. Increase due to net income ……………………………………………… Add expenses ………………………………………………………………… Revenue ……………………………………………………………………… (120,000) $ 120,000 16,000 $ 136,000 (50,000) $ 86,000 64,000 (b) $ 150,000 Fluorine: Stockholders’ equity at end of year ($90,000 – $80,000) ……. Deduct stockholders’ equity at beginning of year ($100,000 – $76,000) ……………………………………………………………… Decrease in stockholders’ equity …………………………………….. Add decrease due to net loss ($115,000 – $122,500) …………. $ 10,000 Radium: Stockholders’ equity at end of year ($248,000 – $136,000) … Add decrease due to net loss ($112,000 – $128,000) …………. $ 112,000 16,000 $ 128,000 60,000 $ 188,000 (40,000) $ 148,000 120,000 (d) $ 268,000 (24,000) $ (14,000) 7,500 $ (6,500) Deduct additional issuance of common stock ………………….. (10,000) Dividends ……………………………………………………………………. (c) $ (16,500) Add dividends ………………………………………………………………… Deduct additional issuance of common stock ………………….. Stockholders’ equity at beginning of year ………………………… Add liabilities at beginning of year…………………………………… Assets at beginning of year …………………………………………. 40 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–15 Amounts in millions: a. $(9,186) = $18,412 – $27,598 b. $(5,568) = –$164 – $15,386 + $9,982 E2–16 a. ABBY’S INTERIORS Balance Sheet October 31, 20Y6 Assets Cash ………………………………………………………………………. Land ………………………………………………………………………. Total assets ……………………………………………………………. $ 50,000 500,000 $550,000 Liabilities Notes payable ………………………………………………………… $200,000 Stockholders’ Equity Common stock……………………………………………………….. Retained earnings ………………………………………………….. Total stockholders’ equity ………………………………………. Total liabilities and stockholders’ equity………………….. $ 75,000 275,000* 350,000 $550,000 *$550,000 – $200,000 – $75,000 = $275,000 41 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–16, Concluded ABBY’S INTERIORS Balance Sheet November 30, 20Y6 Assets Cash ……………………………………………………………………… Land………………………………………………………………………. Total assets …………………………………………………………… $ 175,000 575,000 $ 750,000 Liabilities Notes payable ………………………………………………………… $ 250,000 Stockholders’ Equity Common stock ………………………………………………………. Retained earnings ………………………………………………….. Total stockholders’ equity ………………………………………. $ 90,000 410,000* Total liabilities and stockholders’ equity …………………. 500,000 $ 750,000 *$750,000 – $250,000 – $90,000 = $410,000 b. Retained earnings, November 30, 20Y6 ……………………………………… Less retained earnings, October 31, 20Y6 ………………………………….. Increase in retained earnings …………………………………………………….. Add dividends ………………………………………………………………………….. Net income ……………………………………………………………………………….. $ 410,000 (275,000) $ 135,000 12,000 $ 147,000 c. Net cash flows from operating activities = $147,000 (The same as net income using the cash basis.) d. $(75,000) used for the increase in the land (Cash flows from investing activities equal the change in the land account.) e. $53,000 (Cash flows from financing activities equal the increase in common stock of $15,000 plus the increase in notes payable of $50,000 minus the dividends paid of $12,000.) f. $125,000 [($175,000 – $50,000) or ($147,000 – $75,000 + $53,000)] 42 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–17 WEST COAST DREAMS REALTY INC. Income Statement For the Month Ended June 30, 20Y9 Revenues: Sales commissions ………………………………………………… Expenses: Salaries expense ……………………………………………………. Utilities expense …………………………………………………….. Rent expense …………………………………………………………. Interest expense …………………………………………………….. Miscellaneous expense …………………………………………… Total expenses ………………………………………………….. Net income …………………………………………………………………. $180,000 $100,000 20,000 16,000 600 3,400 (140,000) $ 40,000 E2–18 WEST COAST DREAMS REALTY INC. Statement of Stockholders’ Equity For the Month Ended June 30, 20Y9 Common Stock Balances, June 1, 20Y9 ……………… Issued common stock ……………….. Net income ……………………………….. Dividends ………………………………….. Balances, June 30, 20Y9 ……………. $ 0 150,000 $150,000 Retained Earnings $ 0 40,000 (4,000) $36,000 Total $ 0 150,000 40,000 (4,000) $186,000 43 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–19 WEST COAST DREAMS REALTY INC. Balance Sheet June 30, 20Y9 Assets Cash …………………………………………………………………………… Land …………………………………………………………………………… Total assets ………………………………………………………………… $ 86,000 200,000 $286,000 Liabilities Notes payable …………………………………………………………….. $100,000 Stockholders’ Equity Common stock ……………………………………………………………. Retained earnings ………………………………………………………. Total stockholders’ equity …………………………………………… $150,000 36,000 186,000 Total liabilities and stockholders’ equity………………………. $286,000 E2–20 WEST COAST DREAMS REALTY INC. Statement of Cash Flows For the Month Ended June 30, 20Y9 Cash flows from (used for) operating activities: Cash received from operating activities ………………….. Cash paid for operating activities ……………………………. Net cash flows from operating activities………………….. $180,000 (140,000) $ 40,000 Cash flows from (used for) investing activities: Cash paid for land ………………………………………………….. Cash flows from (used for) financing activities: Cash received from issuing common stock …………….. Cash received from issuing notes payable ………………. Cash paid as dividends ………………………………………….. Net cash flows from financing activities ………………….. Net increase in cash during June ………………………………… Cash as of June 1, 20Y9 ………………………………………………. Cash as of June 30, 20Y9 …………………………………………….. (200,000) $150,000 100,000 (4,000) 246,000 $ 86,000 0 $ 86,000 44 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E2–21 a. Decrease in assets and decrease in stockholders’ equity. b. Increase in assets and decrease in assets. c. Increase in assets and increase in stockholders’ equity. d. Increase in assets and increase in liabilities. e. Increase in assets and increase in stockholders’ equity. f. Decrease in assets and decrease in stockholders’ equity. g. Decrease in assets and decrease in stockholders’ equity. h. Increase in assets, decrease in assets, and increase in stockholders’ equity. i. Decrease in assets and decrease in stockholders’ equity. j. Decrease in assets and decrease in stockholders’ equity. k. Decrease in assets and decrease in liabilities. l. Decrease in assets and decrease in stockholders’ equity. E2–22 a. b. c. d. e. f. operating section investing section financing section financing section operating section operating section g. h. i. j. k. l. operating section investing section operating section operating section financing section financing section 45 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROBLEMS P2–1 1. Assets Transaction Cash a. Issued common stock b. Issued note payable Balances c. Fees earned Balances d. Rent expense Balances e. Paid expenses Balances f. Paid salary expense Balances g. Paid interest expense Balances h. Purchased land Balances i. Paid dividends Balances, July 31 30,000 50,000 80,000 15,000 95,000 (2,500) 92,500 (1,750) 90,750 (3,250) 87,500 (250) 87,250 (60,000) 27,250 (1,500) 25,750 + Land 30,000 50,000 50,000 2. 30,000 50,000 30,000 50,000 30,000 50,000 30,000 50,000 30,000 50,000 30,000 60,000 60,000 50,000 30,000 60,000 50,000 30,000 Statement of Cash Flows a. Financing b. Financing c. Operating d. Operating e. Operating f. Operating g. Operating h. Investing i. Financing Increase in cash Balance Sheet = Liabilities + Stockholders’ Equity Notes Common Retained = Payable + Stock + Earnings 15,000 15,000 (2,500) 12,500 (1,750) 10,750 (3,250) 7,500 (250) 7,250 c. d. e. f. g. 7,250 (1,500) 5,750 Income Statement 30,000 50,000 15,000 (2,500) (1,750) (3,250) (250) (60,000) (1,500) 25,750 c. Fees earned d. Rent expense e. Auto expense e. Misc. expense f. Salary expense g. Interest expense Net income 15,000 (2,500) (1,250) (500) (3,250) (250) 7,250 Stockholders’ equity is the right of stockholders to the assets of the business. These rights are increased by stockholders’ investments and revenues and decreased by dividends and expenses. 46 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–1, Continued 3. SMITH INSURANCE INC. Income Statement For the Month Ended July 31, 20Y5 Revenues: Fees earned ………………………………………………………. Expenses: Salary expense ………………………………………………….. Rent expense …………………………………………………….. Auto expense…………………………………………………….. Interest expense ………………………………………………… Miscellaneous expense ……………………………………… Total expenses ……………………………………………… Net income …………………………………………………………….. $15,000 $3,250 2,500 1,250 250 500 (7,750) $ 7,250 SMITH INSURANCE INC. Statement of Stockholders’ Equity For the Month Ended July 31, 20Y5 Common Stock Balances, July 1, 20Y5 ………….. Issued common stock …………… Net income …………………………… Dividends …………………………….. Balances, July 31, 20Y5 ………… 4. Retained Earnings $ 0 30,000 $30,000 $ 0 7,250 (1,500) $ 5,750 Total $ 0 30,000 7,250 (1,500) $35,750 SMITH INSURANCE INC. Balance Sheet July 31, 20Y5 Assets Cash ………………………………………………………………………. Land ………………………………………………………………………. Total assets ……………………………………………………………. $25,750 60,000 $85,750 Liabilities Notes payable ………………………………………………………… $50,000 Stockholders’ Equity Common stock……………………………………………………….. Retained earnings ………………………………………………….. Total stockholders’ equity ………………………………………. Total liabilities and stockholders’ equity………………….. $30,000 5,750 35,750 $85,750 47 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–1, Concluded 5. SMITH INSURANCE INC. Statement of Cash Flows For the Month Ended July 31, 20Y5 Cash flows from (used for) operating activities: Cash received from operating activities ……………… Cash paid for operating activities ………………………. Net cash flows from operating activities …………….. $15,000 (7,750) $ 7,250 Cash flows from (used for) investing activities: Cash paid for land……………………………………………… Cash flows from (used for) financing activities: Cash received from issuing common stock ………… Cash received from issuing note payable …………… Cash paid as dividends ……………………………………… Net cash flows from financing activities ……………… Net increase in cash during July …………………………….. Cash as of July 1, 20Y5…………………………………………… Cash as of July 31, 20Y5…………………………………………. (60,000) $30,000 50,000 (1,500) 78,500 $ 25,750 0 $ 25,750 48 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–2 1. RESTART TECHNOLOGY SERVICES Income Statement For the Month Ended August 31, 20Y4 Fees earned……………………………………………………………. Operating expenses: Salaries expense ……………………………………………….. Rent expense …………………………………………………….. Automobile expense ………………………………………….. Miscellaneous expense ……………………………………… Total operating expenses………………………………. Net income …………………………………………………………….. 2. $9,200 5,000 2,400 1,400 (18,000) $36,000 RESTART TECHNOLOGY SERVICES Statement of Stockholders’ Equity For the Month Ended August 31, 20Y4 Common Stock Balances, Aug. 1, 20Y4 …………. Issued common stock …………… Net income …………………………… Dividends …………………………….. Balances, Aug. 31, 20Y4 ……….. 3. $54,000 Retained Earnings $ 0 50,000 $50,000 $ 0 36,000 (6,000) $30,000 Total $ 0 50,000 36,000 (6,000) $80,000 RESTART TECHNOLOGY SERVICES Balance Sheet August 31, 20Y4 Assets Cash ………………………………………………………………………. Land ………………………………………………………………………. Total assets ……………………………………………………………. $ 20,000 80,000 $ 100,000 Liabilities Notes payable ………………………………………………………… $ 20,000 Stockholders’ Equity Common stock……………………………………………………….. Retained earnings ………………………………………………….. Total stockholders’ equity ………………………………………. Total liabilities and stockholders’ equity………………….. $50,000 30,000 80,000 $100,000 49 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–2, Concluded 4. RESTART TECHNOLOGY SERVICES Statement of Cash Flows For the Month Ended August 31, 20Y4 Cash flows from (used for) operating activities: Cash received from operating activities ……………… Cash paid for operating activities ………………………. Net cash flows from operating activities …………….. $54,000 (18,000) $ 36,000 Cash flows from (used for) investing activities: Cash paid for land……………………………………………… Cash flows from (used for) financing activities: Cash received from issuing common stock ………… Cash received from issuing notes payable …………. Cash paid as dividends ……………………………………… Net cash flows from financing activities ……………… Net increase in cash during August ………………………… Cash as of August 1, 20Y4 ……………………………………… Cash as of August 31, 20Y4 ……………………………………. (80,000) $50,000 20,000 (6,000) 64,000 $ 20,000 0 $ 20,000 50 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–3 1. DUST, SWEEP, REPEAT SERVICES, INC. Income Statement For the Year Ended December 31, 20Y7 Revenues: Fees earned ………………………………………………………. Expenses: Salaries expense ……………………………………………….. Utilities expense ………………………………………………… Rent expense …………………………………………………….. Taxes expense…………………………………………………… Interest expense ………………………………………………… Miscellaneous expense ……………………………………… Total expenses ……………………………………………… Net income …………………………………………………………….. 2. $124,000 $54,400 17,000 14,000 8,600 960 2,040 (97,000) $ 27,000 DUST, SWEEP, REPEAT SERVICES, INC. Statement of Stockholders’ Equity For the Year Ended December 31, 20Y7 Common Stock Balances, Jan. 1, 20Y7 ………….. Issued common stock …………… Net income …………………………… Dividends …………………………….. Balances, Dec. 31, 20Y7 ………… $ 0 15,000 $15,000 Retained Earnings $ 0 27,000 (3,000) $24,000 Total $ 0 15,000 27,000 (3,000) $39,000 51 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–3, Concluded 3. DUST, SWEEP, REPEAT SERVICES, INC. Balance Sheet December 31, 20Y7 Assets Cash ……………………………………………………………………… Land………………………………………………………………………. Total assets …………………………………………………………… $12,000 43,000 $55,000 Liabilities Notes payable ………………………………………………………… $16,000 Stockholders’ Equity Common stock ………………………………………………………. Retained earnings ………………………………………………….. Total stockholders’ equity ………………………………………. $15,000 24,000 39,000 Total liabilities and stockholders’ equity …………………. 4. $55,000 DUST, SWEEP, REPEAT SERVICES, INC. Statement of Cash Flows For the Year Ended December 31, 20Y7 Cash flows from (used for) operating activities: Cash received from operating activities ……………… Cash paid for operating activities ………………………. Net cash flows from operating activities …………….. $124,000 (97,000) $ 27,000 Cash flows from (used for) investing activities: Cash paid for land……………………………………………… Cash flows from (used for) financing activities: Cash received from issuing common stock ………… Cash received from issuing notes payable …………. Cash paid as dividends ……………………………………… Net cash flows from financing activities ……………… Net increase in cash during the year ……………………….. Cash as of January 1, 20Y7 …………………………………….. Cash as of December 31, 20Y7 ……………………………….. (43,000) $ 15,000 16,000 (3,000) 28,000 $ 12,000 0 $ 12,000 52 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–4 1. DUST, SWEEP, REPEAT SERVICES, INC. Income Statement For the Year Ended December 31, 20Y8 Revenues: Fees earned ………………………………………………………. Expenses: Salaries expense ……………………………………………….. Utilities expense ………………………………………………… Rent expense …………………………………………………….. Taxes expense…………………………………………………… Interest expense ………………………………………………… Miscellaneous expense ……………………………………… Total expenses ……………………………………………… Net income …………………………………………………………….. 2. $ 443,000 $190,000 60,000 50,000 32,500 3,600 6,900 (343,000) $ 100,000 DUST, SWEEP, REPEAT SERVICES, INC. Statement of Stockholders’ Equity For the Year Ended December 31, 20Y8 Balances, Jan. 1, 20Y8 ………….. Issued common stock …………… Net income …………………………… Dividends …………………………….. Balances, Dec. 31, 20Y8 ………… Common Stock Retained Earnings Total $15,000 40,000* $ 24,000 $ 39,000 40,000 100,000 (25,000) $154,000 $55,000 100,000 (25,000) $ 99,000 *$55,000 – $15,000 = $40,000 53 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–4, Concluded 3. DUST, SWEEP, REPEAT SERVICES, INC. Balance Sheet December 31, 20Y8 Assets Cash ……………………………………………………………………… Land………………………………………………………………………. Total assets …………………………………………………………… $ 44,000* 170,000 $214,000 Liabilities Notes payable ………………………………………………………… $ 60,000 Stockholders’ Equity Common stock ………………………………………………………. Retained earnings ………………………………………………….. Total stockholders’ equity ………………………………………. $55,000 99,000 154,000 Total liabilities and stockholders’ equity …………………. $214,000 *$214,000 – $170,000 = $44,000 4. DUST, SWEEP, REPEAT SERVICES, INC. Statement of Cash Flows For the Year Ended December 31, 20Y8 Cash flows from (used for) operating activities: Cash received from operating activities ……………… Cash paid for operating activities ………………………. Net cash flows from operating activities …………….. $ 443,000 (343,000) $ 100,000 Cash flows from (used for) investing activities: Cash paid for land……………………………………………… Cash flows from (used for) financing activities: Cash received from issuing common stock ………… Cash received from issuing notes payable …………. Cash paid for dividends …………………………………….. Net cash flows from financing activities ……………… Net increase in cash during the year ……………………….. Cash as of Jan. 1, 20Y8…………………………………………… Cash as of Dec. 31, 20Y8 ………………………………………… (127,000)* $ 40,000 44,000** (25,000) 59,000 $ 32,000 12,000 $ 44,000 *$170,000 – $43,000 = $127,000 **$60,000 – $16,000 = $44,000 54 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–5 a. $125,000 (Net income for December of $57,500 plus total operating expenses of $67,500; also, the amount of cash received from customers on the statement of cash flows.) b. $10,620 ($67,500 – $33,120 – $18,000 – $1,800 – $3,960) c. $57,500 ($125,000 – $67,500); also, see the net income for December on the statement of stockholders’ equity. d. $0 (There is no beginning retained earnings since December was the first month of operations.) e. $12,000 (See the cash dividends on the statement of cash flows.) f. $45,500 ($57,500 – $12,000) g. $120,500 ($75,000 + $45,500) or ($0 + $75,000 + $57,500 – $12,000) h. $50,500 ($225,500 – $175,000) i. $75,000 (See the cash received from common stock on the statement of cash flows.) j. $45,500 (the same as f) k. $120,500 ($75,000 + $45,500) or (i + j) or the same as g l. $225,500 ($105,000 + $120,500); also the same as total assets. m. $57,500 ($125,000 – $67,500) or the same as c n. $105,000 (See notes payable on the balance sheet.) o. $168,000 ($180,000 – $12,000) p. $50,500 ($57,500 – $175,000 + $168,000) q. $0 (December was the first month of operations.) r. $50,500 ($50,500 + $0) or the same as h 55 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–6 1. a. All financial statements should contain the name of the business in their heading. The statement of stockholders’ equity is incorrectly headed as “Angela Griffin” rather than Alpine Realty, Inc. The heading of the balance sheet needs the name of the business. b. The income statement, statement of stockholders’ equity, and statement of cash flows cover a period of time and should be labeled “For the Month Ended July 31, 20Y8.” c. The year in the heading for the statement of stockholders’ equity should be 20Y8 rather than 20Y7. d. The balance sheet should be labeled as of “July 31, 20Y8,” rather than “For the Month Ended July 31, 20Y7.” e. On the income statement, the dividends should not be listed as an operating expense but should be included in the statement of stockholders’ equity. f. On the income statement, the total operating expenses include dividends of $2,000, resulting in an incorrect net income amount. This also affects the statement of stockholders’ equity and the amount of retained earnings that appears on the balance sheet. g. On the statement of stockholders’ equity, a column for common stock should be included along with a total column. In addition, dividends should be subtracted from net income to arrive at retained earnings as of July 31, 20Y8. h. Notes payable should be listed as a liability on the balance sheet. i. Land should be listed as an asset on the balance sheet. j. The balance sheet assets should equal the sum of the liabilities and stockholders’ equity. k. The cash payments for operating expenses have been omitted from the operating activities section of the statement of cash flows. l. The cash flows from financing activities should not include retained earnings. In addition, the financing activities section should include cash received from issuing common stock and notes payable. Also, the cash paid as dividends should be included as a deduction to arrive at net cash flows from financing activities. 56 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–6, Continued m. Since this is Alpine Realty’s first month of operations, the net increase in cash for July on the statement of cash flows should equal $32,000, the cash balance as of July 31, 20Y8. 2. Corrected financial statements appear as follows: ALPINE REALTY, INC. Income Statement For the Month Ended July 31, 20Y8 Sales commissions ………………………………………………… Operating expenses: Office salaries expense ……………………………………… Rent expense …………………………………………………….. Automobile expense ………………………………………….. Miscellaneous expense ……………………………………… Total operating expenses………………………………. Net income …………………………………………………………….. $60,000 $20,000 6,000 3,500 1,500 (31,000) $29,000 ALPINE REALTY, INC. Statement of Stockholders’ Equity For the Month Ended July 31, 20Y8 Common Stock Balances, July 1, 20Y8 ………….. Issued common stock …………… Net income …………………………… Dividends …………………………….. Balances, July 31, 20Y8 ………… $ 0 15,000 $15,000 Retained Earnings $ 0 29,000 (2,000) $27,000 Total $ 0 15,000 29,000 (2,000) $42,000 57 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P2–6, Concluded ALPINE REALTY, INC. Balance Sheet July 31, 20Y8 Assets Cash ……………………………………………………………………… Land………………………………………………………………………. Total assets …………………………………………………………… $32,000 30,000 $62,000 Liabilities Notes payable ………………………………………………………… $20,000 Stockholders’ Equity Common stock ………………………………………………………. Retained earnings ………………………………………………….. Total stockholders’ equity ………………………………………. $15,000 27,000 42,000 Total liabilities and stockholders’ equity …………………. $62,000 ALPINE REALTY, INC. Statement of Cash Flows For the Month Ended July 31, 20Y8 Cash flows from (used for) operating activities: Cash received from sales commissions ……………… Cash paid for operating expenses ……………………… Net cash flows from operating activities …………….. $ 60,000 (31,000) $ 29,000 Cash flows from (used for) investing activities: Cash paid for land …………………………………………….. Cash flows from (used for) financing activities: Cash received from issuing common stock ………… Cash received from issuing notes payable …………. Cash paid as dividends ……………………………………… Net cash flows from financing activities ……………… Net increase in cash during July …………………………….. Cash as of July 1, 20Y8…………………………………………… Cash as of July 31, 20Y8…………………………………………. (30,000) $ 15,000 20,000 (2,000) 33,000 $ 32,000 0 $ 32,000 58 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. METRIC-BASED ANALYSIS MBA 2–1 a. b. c. d. e. f. g. h. i. Transaction Issued stock Issued note pay. Earned fees Paid rent expense Paid expenses Paid salaries Paid interest Purchased land Paid dividends Total Transaction Metric Effects Liquidity Profitability Cash Net Income – Cash Basis $ 30,000 No Effect — 50,000 No Effect — 15,000 Increase $15,000 (2,500) Decrease (2,500) (1,750) Decrease (1,750) (3,250) Decrease (3,250) (250) Decrease (250) (60,000) No Effect — — (1,500) No Effect $ 25,750 $ 7,250 MBA 2–2 a. b. c. d. e. f. g. h. Transaction Issued stock Earned fees Paid rent expense Issued note pay. Purchased land Paid expenses Paid salaries Paid dividends Total Transaction Metric Effects Profitability Liquidity Cash Net Income – Cash Basis $50,000 No Effect — 54,000 Increase $54,000 (5,000) Decrease (5,000) 20,000 No Effect — (80,000) No Effect — (3,800) Decrease (3,800) (9,200) Decrease (9,200) — (6,000) No Effect $20,000 $36,000 59 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MBA 2–3 1. Revenue …………………………………………….. Operating expenses: Fuel ………………………………………………. Aircraft related ………………………………. Selling and general ………………………… Other expenses……………………………… Total operating expenses ………….. Operating income ………………………………. 2. Year 1 100.0% Year 2 100.0% Increase (Decrease) n/a (12.9)% (24.8) (39.8) (5.0) (82.5)% 17.5% (13.9)% (25.7) (40.1) (5.5) (85.2)% 14.8% 1.0% 0.9 0.3 0.5 2.7% (2.7)% Delta’s operating income as a percent of revenue decreased 2.7% from 17.5% in Year 1 to 14.8% in Year 2. Fuel expenses increased 1.0% from 12.9% in Year 1 to 13.9% in Year 2. Aircraft related expenses such as landing fees, maintenance, and depreciation increased 0.9% from 24.8% in Year 1 to 25.7% in Year 2. Selling and general expenses increased 0.3% and other expenses increased 0.5%. Overall, it appears that increasing fuel and aircraft related costs were the primary cause of the decrease in operating income. 60 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MBA 2–4 1. Revenue ……………………………………………. Operating expenses: Fuel ……………………………………………… Aircraft related ……………………………… Selling and general ……………………….. Other expenses …………………………….. Total operating expenses …………. Operating income ………………………………. 2. Year 1 100.0% Year 2 100.0% Increase (Decrease) n/a (17.9)% (18.1) (33.3) (12.3) (81.6)% 18.4% (18.6)% (17.5) (34.6) (12.7) (83.4)% 16.6% 0.7% (0.6) 1.3 0.4 1.8% (1.8)% Southwest’s operating income decreased 1.8% as a percent of revenue from 18.4% in Year 1 to 16.6% in Year 2. The decrease was caused primarily by an increase of 1.3% in selling and general expenses and an increase in fuel expenses of 0.7%. These increases were offset by a decrease in aircraft related expenses, such as landing fees and maintenance costs, of 0.6%. MBA 2–5 Southwest’s operating income as a percent of revenue decreased by 1.8% compared to Delta’s decrease of 2.7%. The difference in operating results does not appear to be attributable to one item in particular. Southwest’s increase in selling and general expenses of 1.3% was the major contributing factor to its percentage decrease in operating income. Delta’s increase in fuel and aircraft-related expenses of 2.0% was the major contributing factor to its decrease in operating income. 61 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MBA 2–6 1. Sales …………………………………………………. Cost of goods sold …………………………….. Gross profit ……………………………………….. Selling and administrative expenses …… Operating income ………………………………. 2. Year 1 100.0% (63.5) 36.5% (25.8) 10.7% Year 2 100.0% (61.1) 38.9% (23.8) 15.1% Increase (Decrease) n/a (2.4)% 2.4% (2.0) 4.4% Kellogg’s operating income as a percent of sales increased by 4.4% from 10.7% to 15.1%. This increase was caused by the decrease in cost of goods sold of 2.4% and the decrease in selling and administrative expenses of 2.0% as a percentage of sales. MBA 2–7 1. Sales …………………………………………………. Cost of goods sold …………………………….. Gross profit ……………………………………….. Selling and administrative expenses …… Operating income ………………………………. 2. Year 1 100.0% (64.4) 35.6% (17.9) 17.7% Year 2 100.0% (65.5) 34.5% (17.5) 17.0% Increase (Decrease) n/a 1.1% (1.1)% (0.4) (0.7)% General Mills’ operating income as a percent of sales decreased by 0.7% from 17.7% to 17.0%. This decrease was caused by the increase in cost of goods sold of 1.1%, which was only partially offset by the decrease in selling and administrative expenses of 0.4%. 62 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MBA 2–8 In Year 1, Kellogg’s operating income as a percent of sales was 10.7% compared to General Mills’ 17.7%. In Year 2, Kellogg’s operating income as a percentage of sales increased by 4.4%; however, General Mills’ income as a percentage of sales decreased by 0.7%. This difference was caused by Kellogg’s decrease of 2.4% in cost of goods sold compared to General Mills’ increase of 1.1% in cost of goods sold. In Year 2, Kellogg’s selling and administrative expenses decreased by 2.0% compared to General Mills’ decrease of 0.4%. Thus, Kellogg’s Year 2 operating performance has improved relative to General Mills’ operating performance. 63 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. MBA 2–9 1. Current assets: Cash …………………………………………………….. Marketable securities ……………………………. Accounts receivable ……………………………… Inventory ……………………………………………… Other ……………………………………………………. Total current assets ……………………………… Long-term assets: Long-term marketable securities …………… Property, plant, and equipment ……………… Other long-term assets …………………………. Total long-term assets ………………………….. Total assets ………………………………………………. Current liabilities: Accounts payable and similar liabilities …. Current portion of long-term debt ………….. Other ……………………………………………………. Total current liabilities ………………………….. Long-term liabilities …………………………………… Total liabilities………………………………………. Stockholders’ equity: Common stock……………………………………… Retained earnings ………………………………… Other items…………………………………………… Total stockholders’ equity …………………….. Total liabilities and stockholders’ equity …….. 2. Year 1 Increase Year 2 (Decrease) 6.4% 14.5 4.9 0.6 6.8 33.2% 5.4% 14.4 4.8 1.3 8.4 34.3% (1.0)% (0.1) (0.1) 0.7 1.7 1.1% 53.0% 8.4 5.4 66.8% 100.0% 51.9% 9.0 4.8 65.7% 100.0% (1.1)% 0.6 (0.6) (1.1)% 11.6% 1.1 11.9 24.6% 35.6 60.2% 13.1% 1.7 12.1 26.9% 37.4 64.3% 1.5% 0.6 0.2 2.3% 1.8 4.1% 9.7% 29.9 0.2 39.8% 100.0% 9.5% 26.2 0.0 35.7% 100.0% (0.2)% (3.7) (0.2) (4.1)% Apple’s current assets as a percent of total assets increased slightly by 1.1% from 33.2% to 34.3% with other current assets increasing the most by 1.7%. At the same time, long-term assets declined by 1.1%. Apple’s total liabilities increased by 4.1% from 60.2% to 64.3% with long-term liabilities increasing the most by 1.8%. This is explained by Apple issuing over $21 billion in longterm notes during Year 2. 64 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASES Case 2–1 1. From our discussions in Chapter 1, the two possible business emphases that could be used are low-cost emphasis and premium-price emphasis. 2. Real-world examples of each emphasis are as follows: Low-cost emphasis: SteinMart, Walmart, Kmart, Costco Premium-price emphasis: GAP, The Limited, Talbots 3. The answers will vary among the student groups. Normally, venture capital firms demand a large percentage of ownership, which may be the majority (over 50%) ownership. Case 2–2 Dr. Turner’s comment is not correct. The difference in the cash balance of $55,000 ($100,000 – $45,000) represents the net result of operating, investing, and financing cash activities. To determine the profit, the effects of Dr. Turner’s investing and financing activities would also need to be considered. For example, Dr. Turner might have invested in buildings, land, computer equipment, or software programs that would be classified as investing activities. Also, Dr. Turner may have borrowed cash from a bank or withdrawn cash from SickCo as dividends. 65 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Case 2–3 Year 1 negative negative positive Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Year 2 positive negative positive Year 3 positive negative positive Start-up companies normally experience negative cash flows from operating and investing activities. Also, start-up companies normally have positive cash flows from financing activities from raising capital. Case 2–4 Note to Instructors: Answers will vary based upon the date students do their research. The objective of this case is to familiarize students with financial reporting resources available on the Internet. The following solution is based upon the Apple Inc. data as of May 26, 2019, from Yahoo.com’s finance Web site. 1. $178.97 (See opening page for AAPL) 2. $142.00 to $182.13 (See opening page for AAPL) 3. $233.47 (See Statistics) 4. 178,930 net shares were purchased in the last 6 months ending May 26, 2019. (See Insider Transactions under Holders) 5. Timothy D. Cook; he is 58 years old. (See Profile) 6. $15,680,000 (See Profile) 7. $2.92 (See Statistics) 8. Strong Buy Buy Hold Sell Strong Sell = 11 = 21 = 6 = 0 = 0 Average broker recommendation is 2.2 (See Analysis) 9. $77,434 million (See Financials: Cash Flows) 10. 25.34% (See Statistics) 66 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.