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CHAPTER 1

INTRODUCTION TO ACCOUNTING AND BUSINESS

Chapter 1—Introduction to Accounting and Business


TRUE/FALSE

1. The main objective of a not-for-profit business is not to make a profit.

ANS: F DIF: 2 OBJ: 01

2. An example of a business stakeholder is the federal government.

ANS: T DIF: 2 OBJ: 01

3. A corporation is a business that is legally separate and distinct from its owners.


4. About 90% of the businesses in the United States are organized as corporations.


5. A value chain is the way a business adds value for its customers by processing inputs into a product or service.


6. Once a business has chosen a strategy, it must implement the strategy in its value chain.


7. A successful entrepreneur could be someone who is independent, self confident, and therefore does not need the ability to interact with others.

ANS: F DIF: 3 STO: 01

8. Primary users of accounting information are accountants.


9. Accounting is thought to be the "language of business" because business information is communicated to stakeholders.


10. Accounting is a service that provides many different users with financial information to make economic decisions.


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11. Proper ethical conduct implies that you only consider what's in your best interest.


12. Small ethical lapses are harmless in and of themselves.


13. CMA is an acronym that stands for Certified Manufacturing Accountant.


14. Individuals who wish to practice public accounting as a CPA must meet the requirements of the state in which they reside.


15. Managerial accounting is primarily concerned with the recording and reporting of economic data and activities of an entity for use by owners, creditors, governmental agencies, and the public.


16. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility for developing accounting principles.


17. The cost concept is the basis for entering the exchange price into the accounting records.


18. Without the cost concept, accounting reports would become unstable and unreliable.


19. The unit of measurement concept requires that economic data be recorded in a common unit of measurement.


20. If a building is appraised for $90,000, offered for sale at $95,000, and the buyer pays $85,000 cash for it, the buyer would record the building at $90,000.


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21. The accounting equation can be expressed as Assets - Liabilities = Owner's Equity.


22. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of owners.


23. The owner’s rights to the assets rank ahead of the creditors' rights to the assets.


24. If the liabilities owed by a business total $500,000, then the assets also total $500,000.


25. If the assets owned by a business total $500,000, and owner's equity totals $400,000, liabilities total $100,000.


26. If the assets owned by a business total $100,000 and liabilities total $50,000, owner's equity totals $150,000.


27. Business transactions are economic events that directly or indirectly change an entity's financial condition or results from operations.


28. If total assets decreased by $40,000 during a specific period and owner's equity decreased by $45,000 during the same period, the period's change in total liabilities was an $85,000 increase.


29. If total assets increased by $175,000 during a specific period and liabilities decreased by $10,000 during the same period, the period's change in total owner's equity was a $185,000 increase.


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30. If net income for a proprietorship was $25,000, the owner withdrew $10,000 in cash and the owner invested $5,000 in cash, the capital of the owner increased by $20,000.


31. If net income for a business was $175,000, withdrawals were $40,000 in cash, and the owner made no investment, the owner's equity increased $215,000.


32. An account receivable is a claim against a customer arising from a sale on account.


33. Paying an account payable increases liabilities and decreases assets.


34. Receiving payments on an account receivable increases both equity and assets.


35. Cash investments by owners increase both equity and assets.


36. Cash withdrawals by owners decrease assets and increase equity.


37. Purchasing supplies on account increases liabilities and decreases equity.


38. The owner is only allowed to withdraw cash from the business.


39. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid.


40. Revenue is earned only when money is received.


41. Expenses are expired costs of doing business.

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42. The excess of revenue over the expenses incurred in earning the revenue is called capital.


43. The excess of expenses over revenues is called net income.


44. The principal financial statements of a proprietorship are the income statement, statement of owner's equity, and the balance sheet.


45. A balance sheet is a list of the assets, liabilities, and owner's equity of a business for a period of time.


46. An income statement is a summary of the revenues and expenses of a business as of a specific date.


47. A statement of owner's equity reports the changes in the owner's equity for a period of time.


48. The statement of cash flows consists of an operating section, an income section, and an equity section.


49. The financial statements of a proprietorship should include the owner's personal assets and liabilities.


50. The ratio of liabilities to owner's equity can be expressed as "total owner's equity divided by total liabilities."


51. A low ratio of liabilities to owner's equity indicates that a business is near bankruptcy.

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MULTIPLE CHOICE

1. Profit is the difference betweena. assets and liabilitiesb. the incoming cash and outgoing cashc. the assets purchased with cash contributed by the owner and the cash spent to

operate the businessd. the assets received for goods and services and the amounts used to provide the

goods and services

ANS: D DIF: 2 OBJ: 01

2. Most businesses in the United States area. sole proprietorshipsb. partnershipsc. corporationsd. separate entities

ANS: A DIF: 2 OBJ: 01

3. Which of the items below is not a business organization form?a. entrepreneurshipb. proprietorshipc. partnershipd. corporation


4. An entity that is organized according to state or federal statutes and in which ownership is divided into shares of stock is aa. proprietorshipb. corporationc. partnershipd. governmental unit

ANS: B DIF: 1 OBJ: 01

5. An example of a basic business strategy isa. low-cost strategy

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b. differentiation strategyc. combination strategyd. all of the above


6. Which of the following is not included in the value chain? a. business processesb. inputsc. business strategiesd. products or services

ANS: C DIF: 3 OBJ: 01

7. Financial reports are used bya. managementb. creditorsc. investorsd. all of the above


8. Which of the following best describes accounting?a. records economic data but does not communicate the data to users according to

any specific rulesb. is an information system that provides reports to stakeholdersc. is of no use by individuals outside of the businessd. is used only for filling out tax returns and for financial statements for various type

of governmental reporting requirements


9. Which of the following is not a step in providing accounting information to stakeholders?a. design the accounting information systemb. prepare accounting surveysc. identify stakeholdersd. record economic data


10. The two most common specialized fields of accounting in practice area. forensic accounting and financial accounting

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b. managerial accounting and financial accountingc. managerial accounting and environmental accountingd. financial accounting and tax accounting systems


11. Public accountants are normallya. Certified Public Accountantsb. Forensic accountantsc. Certified Internal Auditorsd. Certified Management Accountants


12. Which one of the following is a specialized field of accounting?a. social accountingb. tax accountingc. environmental accountingd. all of the above


13. The initials GAAP stand fora. General Accounting Proceduresb. Generally Accepted Plansc. Generally Accepted Accounting Principlesd. Generally Accepted Accounting Practices


14. Presently the dominant body in the development of accounting principles is thea. American Institute of Certified Public Accountants (AICPA)b. American Accounting Association (AAA)c. Financial Accounting Standards Board (FASB)d. Institute of Management Accountants (IMA)


15. The business entity concept means thata. the owner is part of the business entity

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b. an entity is organized according to state or federal statutesc. an entity is organized according to the rules set by the FASBd. the entity is an individual economic unit for which data are recorded, analyzed, and

reported


16. For accounting purposes, the business entity should be considered separate from its owners if the entity isa. a corporationb. a proprietorshipc. a partnershipd. all of the above


17. Smith Company purchased $105,000 of computer equipment from Brown Company. Smith Company paid for the equipment using cash that had been obtained from the initial investment by Connie Smith. The transaction involving the computer equipment should be recorded on the accounting records of which of the following entities?a. Smith Company and Connie Smith's personal recordsb. Brown Company and Connie Smith's personal recordsc. Brown Companyd. Smith Company and Brown Company


18. The objectivity principle requires thata. business transactions must be consistent with the objectives of the entityb. the Financial Accounting Standards Board must be fair and unbiased in its

deliberations over new accounting standardsc. accounting principles must meet the objectives of the Security and Exchange

Commissiond. amounts recorded in the financial statements must be based on independently

verifiable evidence


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19.The Reynolds Company estimated that the value of its land had increased from $10,000 to $16,000 and therefore wrote up the land account to $16,000. Which accounting concept(s) was (were) violated?a. cost conceptb. objectivity conceptc. all of the aboved. none of the above


20. John Williams owns and operates Indoor Advertising Company. Recently, John withdrew $18,000 from Indoor Advertising, and he contributed $10,000, in his name, to the Red Cross. The contribution of the $10,000 should be recorded on the accounting records of which of the following entities?a. Indoor Advertising and the Red Crossb. John William's personal records and the Red Crossc. John William's personal records and Indoor Advertisingd. John William's personal records, Indoor Advertising, and the Red Cross


21. Equipment with an estimated market value of $45,000 is offered for sale at $65,000. The equipment is acquired for $10,000 in cash and a note payable of $40,000 due in 30 days. The amount used in the buyer's accounting records to record this acquisition isa. $50,000b. $65,000c. $10,000d. $45,000


22. Owned resources of a business are referred to asa. assetsb. liabilitiesc. equitiesd. revenues


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23. Assets area. always greater than liabilities.b. either cash or accounts receivablesc. the same as expenses because they are acquired with cashd. financed by the owner and/or creditors


24. Debts owed by a business are referred to asa. accounts receivablesb. equitiesc. owner’s equityd. liabilities


25. The accounting equation may be expressed asa. Assets = Equities - Liabilitiesb. Assets + Liabilities = Owner's Equityc. Assets = Revenues less Liabilitiesd. Assets - Liabilities = Owner's Equity


26. Which of the following is not a business transaction?a. make a sales offerb. sell goods for cashc. receive cash for services to be rendered laterd. pay for supplies


27. If total liabilities decreased by $25,000 during a period of time and owner's equity increased by $30,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets isa. $65,000 increaseb. $5,000 decreasec. $5,000 increased. $65,000 decrease


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28. A business paid $9,000 to a creditor in payment of an amount owed. The effect of the transaction on the accounting equation was toa. increase one asset, decrease another assetb. increase an asset, increase a liabilityc. decrease an asset, decrease a liabilityd. increase an asset, increase owner's equity


29. Earning revenuea. increases assets, increases owner’s equity.b. increases assets, decreases owner's equityc. increases one asset, decreases another assetd. decreases assets, increases liabilities


30. The monetary value charged to customers for the performance of services sold is called a(n)a. assetb. net incomec. capitald. revenue


31. Revenues are reported whena. a contract is signedb. cash is received from the customerc. work is begun on the jobd. work is completed on the job


32. Expenses are recorded whena. cash is paid for services renderedb. a bill is received in advance of services renderedc. services are renderedd. none of the above


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33. Goods purchased on account for future use in the business, such as supplies, are calleda. prepaid liabilitiesb. revenuesc. prepaid expensesd. liabilities


34. The asset created by a business when it makes a sale on account is termeda. accounts payableb. prepaid expensec. unearned revenued. accounts receivable


35. The debt created by a business when it makes a purchase on account is referred to as ana. account payableb. account receivablec. assetd. expense payable


36. If total assets decreased by $47,000 during a period of time and owner's equity increased by $24,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities isa. $23,000 increaseb. $47,000 decreasec. $71,000 decreased. $71,000 increase


37. Owner's withdrawalsa. increase expensesb. decrease expensesc. increase cashd. decrease owner's equity


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38. Owner's equity is increased bya. cashb. revenuec. accounts receivabled. all of the above


39. How does the purchase of supplies on account affect the accounting equation?a. assets increase; owner's equity decreasesb. assets increase; liabilities increasec. assets increase; liabilities decreased. liabilities increase; owner's equity decreases


40. How does the rendering of services on account affect the accounting equation?a. assets increase; owner’s equity increasesb. assets decrease; owner's equity decreasec. assets increase; owner's equity decreasesd. liabilities increase; owner's equity decreases


41. How does paying a liability in cash affect the accounting equation?a. assets increase; liabilities decreaseb. assets increase; liabilities increasec. assets decrease; liabilities decreased. liabilities decrease; owner's equity increases


42. How does the owner withdrawing cash from the business affect the accounting equation?a. assets decrease; owner's equity decreasesb. assets decrease; owner's equity increasesc. assets increase; liabilities decreased. no effect on the assets, liabilities, or owner's equity


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43.How does receiving a bill to be paid next month for services rendered affect the accounting equation?a. assets decrease; owner's equity decreases b. assets increase; liabilities increasec. liabilities increase; owner's equity increasesd. liabilities increase; owner's equity decreases


44. How does the collection of cash from a customer who was previously put on account affect the accounting equation? a. assets decrease; owner's equity decreasesb. assets increase; owner's equity increasesc. assets increase; assets decreased. assets increase; liabilities increase


45. How does the purchase of equipment by signing a note affect the accounting equation?a. assets increase; assets decreaseb. assets increase; liabilities decreasec. assets increase; liabilities increased. assets increase; owner's equity increases


46. Land, originally purchased for $20,000, is sold for $75,000 in cash. What is the effect of the sale on the accounting equation?a. assets increase $75,000; owner's equity increases $75,000b. assets increase $55,000; owner's equity increases $55,000c. assets increase $75,000; liabilities decrease $20,000; owner's equity increases

$55,000d. assets increase $20,000; no change for liabilities; owner's equity increases $75,000


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47. The Melville Company sold land for $60,000 in cash. The land was originally purchased for $40,000, and at the time of the sale, $15,000 was still owed to First National Bank on that purchase. After the sale, The Melville Company paid off the loan to First National Bank. What is the effect of the sale and the payoff of the loan on the accounting equation?a. assets increase $20,000; liabilities decrease $15,000; owner's equity increases

$5,000b. assets increase $5,000; liabilities decrease $15,000; owner's equity increases

$20,000c. assets increase $60,000; liabilities decrease $15,000; owner's equity increases

$20,000d. assets increase $20,000; liabilities decrease $15,000; owner's equity increases

$35,000


48. On November 1 of the current year, the assets and liabilities of Jim Chu, M.D., are as follows: Cash, $10,000; Accounts Receivable, $8,200; Supplies, $1,050; Land, $25,000; Accounts Payable, $6,530. What is the amount of owner's equity (Jim Chu's capital) as of November 1 of the current year?a. $37,720b. $44,430c. $21,500d. $50,780


49. Al Shea is the sole owner and operator of SawTooth Company. As of the end of its accounting period, December 31, 2005, SawTooth Company has assets of $925,000 and liabilities of $285,000. During 2006, Al Shea invested an additional $50,000 and withdrew $30,000 from the business. What is the amount of net income during 2006, assuming that as of December 31, 2006, assets were $980,000, and liabilities were $255,000?a. $ 95,000b. $ 65,000c. $165,000d. $725,000


50. The total assets and the total liabilities of a business at the beginning and at the end of the year appear below. During the year, the owner had withdrawn $50,000 for personal use and had made an additional investment of $35,000 in the business.

Assets LiabilitiesBeginning of year $295,000 $190,000End of year 355,000 220,000

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The amount of net income for the year wasa. $85,000b. $40,000c. $135,000d. $45,000


51. If beginning capital was $65,000, ending capital is $43,000, and the owner's withdrawals were $16,000, the amount of net income or net loss wasa. net income of $37,000b. net income of $8,000c. net loss of $22,000d. net loss of $6,000


52. Transactions affecting owner's equity includea. owner's investments and payment of liabilitiesb. owner's investments and owner's withdrawals, revenues, and expensesc. owner's investments, revenues, expenses, and collection of accounts receivabled. owner's withdrawals, revenues, expenses, and purchase of supplies on account


53. The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or year, is called a(n)a. prior period statementb. statement of owner's equityc. income statementd. balance sheet


54. All of the following are financial statement(s) of a proprietorship except thea. statement of retained earningsb. statement of owner's equityc. income statementd. statement of cash flows


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55. Which of the following financial statements reports information as of a specific date?a. income statementb. statement of owner's equityc. statement of cash flowsd. balance sheet


56. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The statement of owner's equity (OE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared?a. I,OE, Bb. B, I, OEc. OE, I, Bd. B,OE, I


57. Liabilities are reported on thea. income statementb. statement of owner's equityc. statement of cash flowsd. balance sheet


58. Cash investments made by the owner to the business are reported on the statement of cash flows in thea. financing activities sectionb. investing activities sectionc. operating activities sectiond. supplemental statement


59. The year-end balance of the owner's capital account appears ina. both the statement of owner's equity and the income statementb. only the statement of owner's equityc. both the statement of owner's equity and the balance sheetd. both the statement of owner's equity and the statement of cash flows


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60. A debt-to-equity ratio of 1 indicatesa. the business cannot pay its debtsb. the business is in danger of being closedc. the assets equal the equitiesd. the liabilities equal the equities


61. All other things being equal, a bank would most likely prefer to lend to a company with a debt to equity ratio ofa. .30b. 1.00c. .15d. 2.00


PROBLEM

1. Give the major disadvantage of disregarding the cost concept and constantly revaluing assets based on appraisals and opinions.

ANS:Accounting reports would become unstable and unreliable.

DIF: 1 OBJ: 05

2. Determine the missing amount for each of the following:

Assets Liabilities Owner's Equity(a) $18,000 $ 11,000

$50,000 (b) $ 28,000$35,000 $ 7,000 (c)

ANS:

(a) $29,000(b) $22,000(c) $28,000

DIF: 1 OBJ: 06

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3. Indicate whether each of the following represents an asset, liability, or owner's equity:

(a) accounts payable(b) wages expense(c) capital(d) accounts receivable(e) withdrawal(f) land

ANS:(a) liability(b) owner’s equity(c) owner’s equity(d) asset(e) owner’s equity(f) asset

DIF: 1 OBJ: 07

4. Selected transactions completed by a proprietorship are described below. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "-" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column.

A L OE(a) Received cash from owner as an additional

investment_____ _____ _____

(b) Purchased supplies on account _____ _____ _____(c) Paid rent for the current month _____ _____ _____(d) Received cash for services sold to customers _____ _____ _____(e) Returned some defective supplies purchased in

(b)_____ _____ _____

(f) Paid insurance premiums in advance _____ _____ _____(g) Paid cash to creditor for purchases in (b) _____ _____ _____(h) Charged customers for services sold on account _____ _____ _____(i) Paid cash to a customer as a refund for an

overcharge_____ _____ _____

(j) Received cash on account from customers _____ _____ _____(k) Owner withdrew cash for personal use _____ _____ _____(l) Recorded the cost of supplies used during the

year_____ _____ _____

(m) Received invoice for electricity used _____ _____ _____(n) Paid wages _____ _____ _____(o) Purchased a truck for cash _____ _____ _____

ANS:

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A L OE(a) + +(b) + +(c) - -(d) + +(e) - -(f) +,-(g) - -(h) + +(i) - -(j) +,-(k) - -(l) - -(m) + -(n) - -(o) +,-

DIF: 4 OBJ: 07

5. Identify each of the following as an (1) increase in owner's equity, or a (2) decrease in owner's equity

(a) Fees Earned(b) Wages Expense(c) Withdrawal(d) Lawn Care Revenue(e) Investment(f) Supplies Expense

ANS:

(a) 1(b) 2(c) 2(d) 1(e) 1(f) 2

DIF: 1 OBJ: 07

6. From the following list of accounts taken from Benson's accounting records, identify those that would appear on the Income Statement.

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(a) Rent Expense(b) Land(c) Capital(d) Fees Earned(e) Withdrawal(f) Wages Expense(g) Investment

ANS:(a), (d), (f)

DIF: 1 OBJ: 08

7. Identify which of the following accounts appear on a balance sheet.

(a) Cash(b) Fees Earned(c) Joe Brown, Capital(d) Wages Payable(e) Rent Expense(f) Prepaid Advertising(g) Land

ANS:(a), (c), (d), (f), (g)

DIF: 1 OBJ: 08

8. Indicate whether each of the following activities would be reported on the Statement of Cash Flows as an Operating Activity, an Investing Activity, a Financing Activity, or does not appear on the Cash Flow Statement.

(a) Cash paid for building(b) Cash paid to suppliers(c) Cash paid for owner's withdrawal(d) Cash received from customers(e) Cash received from the owner's investment(f) Cash received from the sale of a building(g) Borrowed cash from a bank

ANS:

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(a) Investing(b) Operating(c) Financing(d) Operating(e) Financing(f) Investing(g) Financing

DIF: 5 OBJ: 08

9. For each of the following, determine the amount of net income or net loss for the year.

(a) Revenues for the year totaled $90,500 and expenses totaled $44,500. The owner made an additional investment of $15,000 during the year.

(b) Revenues for the year totaled $75,500 and expenses totaled $110,500. The owner withdrew $20,000 during the year.

(c) Revenues for the year totaled $198,000 and expenses totaled $85,000. The owner invested an additional $20,000 and withdrew $15,000 during the year.

(d) Revenues for Smith Co. totaled $273,500 and expenses totaled $263,800. Cash withdrawals of $30,000 were paid during the year.

ANS:

(a) $46,000 net income ($90,500 - $44,500)(b) $35,000 net loss ($75,500 - $110,500)(c) $113,000 net income ($198,000 - $85,000)(d) $9,700 net income ($273,500 - $263,800)

DIF: 3 OBJ: 08

10. The total assets and total liabilities of Missy's Draperies, a proprietorship, at the beginning and at the end of the current fiscal year are as follows:

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January 1 December 31Total assets $250,000 $430,000Total liabilities 200,000 140,000

(a) Determine the amount of net income earned during the year. The owner did not invest any additional assets in the business during the year and made no withdrawals.

(b) Determine the amount of net income during the year. The assets and liabilities at the beginning and at the end of the year are unchanged from the amounts presented above. However, the owner withdrew $32,000 in cash during the year (no additional investments).

(c) Determine the amount of net income earned during the year. The assets and liabilities at the beginning and at the end of the year are unchanged from the amounts presented above. However, the owner invested an additional $40,000 in cash in the business in June of the current fiscal year (no withdrawals).

(d) Determine the amount of net income earned during the year. The assets and liabilities at the beginning and at the end of the year are unchanged from the amounts presented above. However, the owner invested an additional $10,000 in cash in August of the current fiscal year and made twelve monthly cash withdrawals of $3,000 each during the year.

ANS:

(a) Owner's equity at end of year $290,000Owner's equity at beginning of year 50,000 Net income $240,000

========(b) Increase in owner's equity as in (a) $240,000

Add withdrawals 32,000 Net income $272,000

===== ==(c) Increase in owner's equity as in (a) $240,000

Deduct additional investment 40,000 Net income $200,000

== =====(d) Increase in owner's equity as in (a) $240,000

Add withdrawals 36,000 $276,000

Deduct additional investment 10,000 Net income $266,000

=======

DIF: 4 OBJ: 08

11. Selected transaction data of a business for June are summarized below. Determine the following amounts for June: (a) total revenue, (b) total expense, (c) net income.

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Service sales charged to customers on account during June $35,000Cash received from cash customers for services performed in June 30,000Cash received from customers on account during June: Services performed and charged to customers prior to June

15,000

Services performed and charged to customers during June 20,000Expenses incurred prior to June and paid during June 8,250Expenses incurred and paid in June 38,500Expenses incurred in June but not paid in June 7,000Expenses for supplies used and insurance (not included above) applicable to June

1,000

ANS:

(a) $65,000 ($35,000 + $30,000)(b) $46,500 ($38,500 + $7,000 + $1,000)(c) $18,500 ($65,000 - $46,500)

DIF: 5 OBJ: 08

12. On May 1, 2005, the amount of Beth Moore's capital in Moore Services Company was $101,000. During May, she withdrew $15,100 from the business. The amounts of the various assets, liabilities, revenues, and expenses are as follows:

Accounts payable $8,900Accounts receivable 25,950Cash 11,390Fees earned 70,800Insurance expense 1,475Land 74,400Miscellaneous expense 1,510Prepaid insurance 2,000Rent expense 8,000Salary expense 35,300Supplies 950Supplies expense 825Utilities expense 3,800

Present in good form (a) an income statement for May, (b) a statement of owner's equity for May, and (c) a balance sheet as of May 31.

ANS:(a)

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Moore Services CompanyIncome Statement

For the Month Ended May 31, 2005Fees earned $70,800Operating expenses: Salary expense $35,300 Rent expense 8,000 Utilities expense 3,800 Supplies expense 825 Insurance expense 1,475 Miscellaneous expense 1,510 Total operating expenses 50,910 Net income $19,890

=======

(b)

Moore Services CompanyStatement of Owner's Equity

For the Month Ended May 31, 2005

Beth Moore, capital, May 1, 2005 $101,000Net income for the month $19,890Less withdrawals 15,100 Increase in owner's equity 4,790 Beth Moore, capital, May 31, 2005 $105,790

========

(c)

Moore Services CompanyBalance SheetMay 31, 2005

Assets LiabilitiesCash $ 11,390 Accounts payable $ 8,900Accounts receivable 25,950Prepaid insurance 2,000 Owner's EquitySupplies 950 Beth Moore, capital 105,790 Land 74,400 Total liabilities andTotal assets $114,690 owner's equity $114,690

======== ========

DIF: 5 OBJ: 08

13. Ross Consultants began operations on December 1, 2005. The financial statements for Ross Consultants are shown below for the month ended December 31, 2005 (the first month of operations). Determine the missing amounts for letters (a) through (o).

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Ross ConsultantsIncome Statement

For the Month Ended December 31, 2062Fees earned $20,000Operating expenses: Wages expense $6,250 Rent expense (a) Supplies expense 1,600 Utilities expense 900 Miscellaneous expense 1,550 Total operating expenses (b) Net income $ (c)

=======

Ross ConsultantsStatement of Owner's Equity

For the Month Ended December 31, 2005Joe Ross, capital, December 1, 2005 0Investment on December 1, 2005 $30,000Net income for December (d)

$ (e)Less withdrawals 4,000 Increase in owner's equity (f) Joe Ross, capital, December 31, 2005 $32,100

=======

Ross ConsultantsBalance Sheet

December 31, 2005Assets Liabilities

Cash $ (g) Accounts payable $ (i)Supplies 1,100 Owner's EquityLand (h) Joe Ross, capital (j) Total assets $45,900 Total liabilities and

======= owner's equity $ (k)======

Ross ConsultantsStatement of Cash Flows

For the Month Ended December 31, 2005

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Cash flows from operating activities: Cash received from customers $20,000 Deduct cash payments for expenses and payments to creditors

1,200

Net cash flow from operating activities $ 18,800Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner's investment $ (l) Deduct cash withdrawal by owner (m) Net cash flow from financing activities (n) Net cash flow and Dec. 31, 2005 cash balance $ (o)

========

Place your answers in the space provided below. Hint: Use the interrelationships among the financial statements to solve this problem.

(a) ___________(b) ___________(c) ___________(d) ___________(e) ___________(f) ___________(g) ___________(h) ___________(i) ___________(j) ___________(k) ___________(l) ___________(m) ___________(n) ___________(o) ___________

ANS:

a. $ 3,600b. $13,900

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c. $ 6,100d. $ 6,100e. $36,100f. $32,100g. $24,800h. $20,000i. $13,800j. $32,100k. $45,900l. $30,000m. $ 4,000n. $26,000o. $24,800

DIF: 5 OBJ: 08

14 . Jay Pyle, CPA, was organized on January 1, 2005, as a proprietorship. List the errors that you find in the following financial statements and prepare the corrected statements for the three months ended March 31, 2005.

Jay Pyle, CPAIncome Statement

For the Three Months Ended March 31, 2005

Fees earned $40,000Operating expenses: Salary expense $7,735 Rent expense 3,200 Wages expense 1,950 Utilities expense 1,225 Miscellaneous expense 2,000 Answering service expense 550 Supplies expense 2,000 Total operating expenses 29,000 Net income $11,000

=======

Jay Pyle CPAStatement of Owner's Equity

March 31, 2005Jay Pyle, capital, January, 1, 2005 $ 0Investment on January 1, 2005 $20,000

29


Net income for the 3 months 11,000 31,000

Less withdrawals 5,000 Increase in owner's equity 36,000 Jay Pyle, capital, March 31, 2005.

$36,000=======

Balance SheetFor the Three Months Ended March 31, 2005

Assets Owner's EquityLand $10,000 Jay Pyle, capital $36,000Cash 15,860 LiabilitiesAccounts payable 2,670 Accounts receivable 12,225 Supplies 925 Total liabilities andTotal assets $48,125 owner's equity 48,125

======= =======ANS:Errors in the Jay Pyle, CPA, financial statements include the following:

(1) Miscellaneous expense is incorrectly listed after utilities expense in the income statement. Miscellaneous expense should be listed as the last expense, regardless of the amount.

(2) The operating expenses are incorrectly added. Instead of $29,000, the total should be $18,660.

(3) Because operating expenses are incorrectly added, the net income is incorrect. It should be listed as $21,340.

(4) The statement of owner's equity should be for a period of time instead of a specific date. That is, the statement of owner's equity should be reported "For the Three Months Ended March 31, 2005."

(5) The amount of the owners' equity is incorrect. It should be $36,340.(6) The name of the company is missing from the balance sheet heading.(7) The balance sheet should be as of "March 31, 2005," not "For the Three

Months Ended March 31, 2005."(8) Cash, not Land, should be the first asset listed in the balance sheet.(9) Accounts Payable is incorrectly listed as an asset in the balance sheet.

Accounts Payable should be listed as a liability.(10) Liabilities should be listed in the balance sheet ahead of owner's equity.(11) Accounts Receivable is incorrectly listed as a liability in the balance sheet.

Accounts Receivable should be listed as an asset.(12) The total assets and the total liabilities do not foot.

Correctly prepared financial statements for Jay Pyle, CPA, are shown below.

Jay Pyle, CPAIncome Statement


30


Fees earned $40,000Operating expenses: Salary expense $7,735 Rent expense 3,200 Wages expense 1,950 Utilities expense 1,225 Answering service expense 550 Supplies expense 2,000 Miscellaneous expense 2,000 Total operating expenses 18,660 Net income $21,340

=======

Jay Pyle, CPAStatement of Owner's Equity


Jay Pyle, capital, January, 1, 2005 $ 0Investment on January 1, 2005 $20,000Net income for three months 21,340

$41,340Less withdrawals 5,000 Increase in owner's equity 36,340 Jay Pyle, capital, March 31, 2005 $36,340

=======

Jay Pyle, CPABalance Sheet

March 31, 2005

Assets LiabilitiesCash $15,860 Accounts payable $ 2,670Accounts receivable 12,225 Owner's EquitySupplies 925 Jay Pyle, capital 36,340 Land 10,000 Total liabilities andTotal assets $39,010 owner's equity $39,010

======= =======

DIF: 5 OBJ: 08

15. Based on the Bell Company account balances, calculate the liabilities to equity ratio. Please show all calculations.

Account AmountCash $200 Accounts receivable 300Supplies 100

31


Accounts payable 100Wages payable 200Bell, capital 300

ANS:(Accounts Payable + Wages Payable) ÷ Bell, Capital

( 100 + 200 ) ÷ 300 = 1

DIF: 4 OBJ: 09

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