Chapter F1introduction to ACCOUNTINGAND BUSINESS

CHAPTER F1 INTRODUCTION TO ACCOUNTING AND BUSINESS

CLASS DISCUSSION QUESTIONS

1. The objective of most businesses is to maxi- directly affecting the activities of the busi- mize profits. Profit is the difference between ness. The payment of the interest of $3,500 the amounts received from customers for is a personal transaction of Lynda Lyons goods or services provided and the amounts and should not be recorded by Fast Delivery paid for the inputs used to provide those Service. goods or services. 8. The land should be recorded at its cost of 2. The stakeholders of a business normally in- $97,500 to Neece Repair Service. This is clude owners, managers, employees, cus- consistent with the cost concept. tomers, creditors, and the government. 9. a. No. The offer of $400,000 and the in- 3. Simply put, the role of accounting is to pro- crease in the assessed value should not vide information for managers to use in op- be recognized in the accounting records. erating the business. In addition, accounting b. Cash would increase by $400,000, land provides information to other stakeholders to would decrease by $350,000, and own- use in assessing the economic performance er’s equity would increase by $50,000. and condition of the business. 10. The two principal rights to the properties of a 4. Three sound principles that form the founda- business are liabilities (the rights of credi- tion for ethical behavior are (1) avoid small tors) and owner's equity (the rights of the ethical lapses, (2) focus on your long-term owner). reputation, and (3) be willing to suffer ad- 11. The three elements of the accounting equa- verse personal consequences for holding to tion are assets, liabilities, and owner's equi- an ethical position. ty. 5. Accountants serving a business firm, gov- ernmental agency, not-for-profit organiza- 12. An account receivable is a claim against a tion, etc., as an employee are engaged in customer for goods or services sold. An ac- private accounting. Accountants who pro- count payable is an amount owed to a credi- vide accounting services to clients on a fee tor for goods or services purchased. There- basis are engaged in public accounting. fore, an account receivable in the records of 6. FASB stands for the Financial Accounting the seller is an account payable in the Standards Board. The FASB sets generally records of the purchaser. accepted accounting principles by first iden- 13. The business incurred a net loss of $15,000. tifying specific issues in financial accounting. 14. The business realized net income of As these issues arise, the FASB conducts $10,000. extensive research to identify the primary 15. The two types of transactions that increase concerns involved and possible solutions. the owner’s equity of a corporation are rev- Generally, after issuing discussion memo- enue and an investment by stockholders. randa and preliminary proposals and evalu- 16. The income statement presents a summary ating comments from interested parties, the of the revenues and expenses of a business Board issues Statements of Financial Ac- for a specific period of time. The retained counting Standards. These standards be- come part of generally accepted accounting earnings statement indicates the changes in principles. To explain, clarify, or elaborate retained earnings that have occurred over a on existing standards, the Board also issues specific period of time. The balance sheet Interpretations, which have the same author- presents a listing of the assets, liabilities, ity as the Standards. and owner's equity of a business as of a 7. No. The business entity concept limits the specific date. The statement of cash flows recording of economic data to transactions presents a summary of the cash receipts

1 and cash payments of a business entity for a 18. Net income or net loss specific period of time. Retained earnings at the end of the period 17. An income statement, a retained earnings 19. The statement of cash flows reports cash statement, and a statement of cash flows flows from operating activities, investing ac- are for a specific period of time. The balance tivities, and financing activities. sheet is for a specific date.

2 EXERCISES

Ex. 1–1

As in many ethics issues, there is no one right answer. The Naples Daily News re- ported on this issue in these terms: "The company covered up the first report, and the local newspaper uncovered the company's secret. The company was forced to not locate here (Collier County). It became patently clear that doing the least that is legally allowed is not enough."

Ex. 1–2

1. B 2. F 3. R 4. B 5. B 6. F 7. X 8. R 9. B 10. X

Ex. 1–3

Coca-Cola stockholders’ equity: $21,623 – $12,110 = $9,513 PepsiCo stockholders’ equity: $17,551 – $10,670 = $6,881

Ex. 1–4

a. $51,500 ($20,000 + $31,500) b. $52,750 ($62,750 – $10,000) c. $19,000 ($57,000 – $38,000)

3 Ex. 1–5

a. $183,000 ($325,000 – $142,000) b. $230,000 ($183,000 + $84,000 – $37,000) c. $158,000 ($183,000 – $8,000 – $17,000) d. $275,500 ($183,000 + $75,000 + $17,500) e. Net income: $137,000 ($425,000 – $105,000 – $183,000)

Ex. 1–6

a. owner's equity b. asset c. owner's equity d. asset e. liability f. asset

Ex. 1–7

a. Increases assets and increases owner’s equity. b. Increases assets and increases owner’s equity. c. Increases assets and decreases assets. d. Decreases assets and decreases owner’s equity. e. Increases assets and increases liabilities.

Ex. 1–8

a. (1) Total assets increased $50,000. (2) No change in liabilities. (3) Owner’s equity increased $50,000. b. (1) Total assets decreased $28,000. (2) Total liabilities decreased $28,000. (3) No change in owner’s equity.

4 Ex. 1–9

1. increase 2. increase 3. decrease 4. decrease

Ex. 1–10

1. c 6. a 2. d 7. e 3. c 8. a 4. e 9. e 5. c 10. e

Ex. 1–11

a. (1) Sale of catering services for cash, $15,000. (2) Purchase of land for cash, $2,000. (3) Payment of expenses, $11,250. (4) Purchase of supplies on account, $500. (5) Payment of cash dividends, $1,500. (6) Payment of cash to creditors, $5,300. (7) Recognition of cost of supplies used, $800. b. ($5,050) ($950 – $6,000) c. $1,450 ($30,700 – $29,250) d. $2,950 ($15,000 – $11,250 – $800) e. $1,450 ($2,950 – $1,500)

Ex. 1–12

It would be incorrect to say that the business had incurred a net loss of $7,250. The excess of the dividends over the net income for the period is a decrease in the amount of retained earnings in the business.

5 Ex. 1–13

Company W Owner's equity at end of year ($600,000 – $325,000). . $275,000 Owner's equity at beginning of year ($375,000 – $150,000)...... 225,000 Net income (increase in owner's equity)...... $ 50,000

Company X Increase in owner's equity (as determined for W)...... $ 50,000 Add dividends...... 30,000 Net income...... $ 80,000

Company Y Increase in owner's equity (as determined for W)...... $ 50,000 Deduct additional issuance of capital stock...... 75,000 Net loss...... $ (25,000)

Company Z Increase in owner's equity (as determined for W)...... $ 50,000 Deduct additional issuance of capital stock...... 75,000 $ (25,000) Add dividends...... 30,000 Net income...... $ 5,000

Ex. 1–14

Balance sheet items: 3, 5, 6, 8, 9, 10

Ex. 1–15

Income statement items: 1, 2, 4, 7

6 Ex. 1–16

DOUMA COMPANY Retained Earnings Statement For the Month Ended June 30, 2003 Retained earnings, June 1, 2003...... $317,500 Net income for the month...... $91,250 Less dividends...... 15,000 Increase in retained earnings...... 76,250 Retained earnings, June 30, 2003...... $393,750

Ex. 1–17

SURGERY SERVICES Income Statement For the Month Ended April 30, 2003 Fees earned...... $165,800 Operating expenses: Wages expense...... $71,500 Rent expense...... 25,000 Supplies expense...... 3,250 Miscellaneous expense...... 2,250 Total operating expenses...... 102,000 Net income...... $ 63,800

7 Ex. 1–18

In each case, solve for a single unknown, using the following equation: Owner’s equity (beginning) + Additional issue of capital stock – Dividends + Rev- enues – Expenses = Owner’s equity (ending)

I. Owner's equity at end of year ($745,000 – $325,000)...... $420,000 Owner's equity at beginning of year ($600,000 – $360,000). . 240,000 Increase in owner's equity...... $180,000 Deduct increase due to net income ($197,750 – $108,000).... 89,750 $ 90,250 Add dividends...... 40,000 Additional issue of capital stock...... (a) $130,250

II. Owner's equity at end of year ($175,000 – $55,000)...... $120,000 Owner's equity at beginning of year ($125,000 – $65,000).... 60,000 Increase in owner's equity...... $ 60,000 Add dividends...... 8,000 $ 68,000 Deduct additional issue of capital stock...... 25,000 Increase due to net income...... $ 43,000 Add expenses...... 32,000 Revenue...... (b) $ 75,000

III. Owner's equity at end of year ($90,000 – $80,000)...... $ 10,000 Owner's equity at beginning of year ($100,000 – $76,000).... 24,000 Decrease in owner's equity...... $ (14,000) Deduct decrease due to net loss ($115,000 – $122,500)...... (7,500) $ (6,500) Deduct additional issue of capital stock...... 10,000 Dividends from the business...... (c) $ (16,500)

IV. Owner's equity at end of year ($310,000 – $170,000)...... $140,000 Add decrease due to net loss ($140,000 – $160,000)...... 20,000 $160,000 Add dividends...... 75,000 $235,000 Deduct additional issue of capital stock...... 50,000 $185,000 Add liabilities at beginning of year...... 150,000 Assets at beginning of year...... (d) $335,000

8 Ex. 1–19 a. REVIVAL INTERIORS Balance Sheet August 31, 20— Assets Liabilities Cash...... $15,000 Accounts payable...... $ 3,850 Accounts receivable...... 8,500 Supplies...... 750 Stockholders’ Equity Capital stock...... $ 10,000 Retained earnings...... 10,400* 20,400 Total liabilities and Total assets...... $24,250 stockholders’ equity...... $24,250 *$10,400 = – $3,850 + $8,500 + $15,000 + $750 – $10,000

REVIVAL INTERIORS Balance Sheet September 30, 20— Assets Liabilities Cash...... $25,500 Accounts payable...... $ 4,150 Accounts receivable...... 9,780 Supplies...... 600 Stockholders’ Equity Capital stock...... $ 10,000 Retained earnings...... 21,730** 31,730 Total liabilities and Total assets...... $35,880 stockholders’ equity...... $ 35,880 **$21,730 = – $4,150 + $9,780 + $25,500 + $600 – $10,000 b. Retained earnings, September 30...... $21,730 Retained earnings, August 31...... 10,400 Net income...... $11,330 c. Retained earnings, September 30...... $21,730 Retained earnings, August 31...... 10,400 Increase in stockholder's equity...... $11,330 Add dividends...... 7,500 Net income...... $18,830

9 Ex. 1–20

Balance sheet: b, c, e, f, h, i, j, l, m, n, o Income statement: a, d, g, k

Ex. 1–21

1. c–financing activity 2. b–investing activity 3. a–operating activity 4. a–operating activity

Ex. 1–22

1. All financial statements should contain the name of the business in their heading. The retained earnings statement is incorrectly headed as “Lynn Soby” rather than Aspen Realty. The heading of the balance sheet needs the name of the business. 2. The income statement and retained earnings statement cover a period of time and should be labeled “For the Month Ended March 31, 2003.” 3. The year in the heading for the retained earnings statement should be 2003 rather than 2002. 4. The balance sheet should be labeled as of “March 31, 2003,” rather than “For the Month Ended March 31, 2003.” 5. In the income statement, the miscellaneous expense amount should be listed as the last operating expense. 6. In the income statement, the total operating expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $3,625.00. This also affects the retained earnings statement and the amount of retained earnings that appears on the balance sheet. 7. In the retained earnings statement the net income should be presented, fol- lowed by the amount of dividends, which is subtracted from the net income to yield a net increase in retained earnings. 8. Accounts payable should be listed as a liability on the balance sheet. 9. Accounts receivable and supplies should be listed as assets on the balance sheet. 10. The balance sheet assets should equal the sum of the liabilities and stockholders’ equity.

10 Ex. 1–22 Concluded

Corrected financial statements appear as follows: ASPEN REALTY Income Statement For the Month Ended March 31, 2003 Sales commissions...... $37,100 Operating expenses: Office salaries expense...... $23,150 Rent expense...... 7,800 Automobile expense...... 1,750 Supplies expense...... 225 Miscellaneous expense...... 550 Total operating expenses...... 33,475 Net income...... $ 3,625

ASPEN REALTY Retained Earnings Statement For the Month Ended March 31, 2003 Retained earnings, March 1, 2003...... $2,450 Net income for March...... $3,625 Less dividends during March...... 1,000 Increase in retained earnings...... 2,625 Retained earnings, March 31, 2003...... $5,075

ASPEN REALTY Balance Sheet March 31, 2003 Assets Liabilities Cash...... $ 2,350 Accounts payable...... $ 2,300 Accounts receivable...... 10,200 Supplies...... 1,325 Stockholders’ Equity Capital stock...... $ 6,500 Retained earnings...... 5,075 11,575 Total liabilities and Total assets...... $13,875 stockholders’ equity...... $ 13,875

11 Ex. 1–23 a. 2000: 0.20 ($5,196,000,000 ÷ $26,497,000,000) 1999: 0.26 ($3,038,000,000 ÷ $11,811,000,000) b. The margin of protection to the creditors increased in 2000. A comparison with the ratio for similar businesses and with earlier periods for Cisco Sys- tems might be useful in assessing these ratios further.

12 PROBLEMS

Prob. 1–1A

1. Assets = Liabilities + Owner’s Equity

Accounts Accounts Capital Retained Cash + Receivable + Supplies = Payable + Stock + Earnings a. + 10,000 + 10,000 Investment b. + 1,150 + 1,150 Bal. 10,000 1,150 1,150 10,000 c. + 4,500 + 4,500 Fees earned Bal. 14,500 1,150 1,150 10,000 4,500 d. – 2,500 – 2,500 Rent expense Bal. 12,000 1,150 1,150 10,000 2,000 e. – 675 – 675 Bal. 11,325 1,150 475 10,000 2,000 f. + 3,250 + 3,250 Fees earned Bal. 11,325 3,250 1,150 475 10,000 5,250 g. – 1,755 – 980 Auto expense – 775 Misc. expense Bal. 9,570 3,250 1,150 475 10,000 3,495 h. – 1,500 – 1,500 Salaries exp. Bal. 8,070 3,250 1,150 475 10,000 1,995 i. – 935 – 935 Supplies exp. Bal. 8,070 3,250 215 475 10,000 1,060 j. – 1,000 – 1,000 Dividends Bal. 7,070 3,250 215 475 10,000 60

2. Owner's equity is the right of owners to the assets of the business. These rights are increased by stockholders’ investments and revenues and decreased by dividends and expenses.

13 Prob. 1–2A

1. FLY AWAY TRAVEL AGENCY Income Statement For the Year Ended December 31, 2003 Fees earned...... $117,480 Operating expenses: Wages expense...... $35,500 Rent expense...... 27,000 Utilities expense...... 10,240 Supplies expense...... 2,125 Miscellaneous expense...... 1,750 Total operating expenses...... 76,615 Net income...... $ 40,865

2. FLY AWAY TRAVEL AGENCY Retained Earnings Statement For the Year Ended December 31, 2003 Retained earnings, January 1, 2003...... $ 4,500 Net income for the year...... $40,865 Less dividends...... 30,000 Increase in retained earnings...... 10,865 Retained earnings, December 31, 2003...... $15,365

3. FLY AWAY TRAVEL AGENCY Balance Sheet December 31, 2003 Assets Liabilities Cash...... $ 7,200 Accounts payable...... $ 3,200 Accounts receivable...... 19,500 Supplies...... 1,865 Stockholders’ Equity Capital stock...... $10,000 Retained earnings...... 15,365 25,365 Total liabilities and Total assets...... $28,565 stockholders’ equity...... $ 28,565

14 Prob. 1–3A

1. EAGLE FINANCIAL SERVICES Income Statement For the Month Ended January 31, 2003 Fees earned...... $13,100 Operating expenses: Rent expense...... $2,500 Salaries expense...... 2,000 Auto expense...... 1,250 Supplies expense...... 1,050 Miscellaneous expense...... 350 Total operating expenses...... 7,150 Net income...... $ 5,950

2. EAGLE FINANCIAL SERVICES Retained Earnings Statement For the Month Ended January 31, 2003 Net income for January...... $5,950 Less dividends...... 3,000 Retained earnings, January 31, 2003...... $2,950

3. EAGLE FINANCIAL SERVICES Balance Sheet January 31, 2003 Assets Liabilities Cash...... $11,250 Accounts payable...... $ 425 Accounts receivable...... 4,350 Supplies...... 275 Stockholders’ Equity Capital stock...... $12,500 Retained earnings...... 2,950 15,450 Total liabilities and Total assets...... $15,875 stockholders’ equity...... $ 15,875

15 Prob. 1–4A

Accounts Capital Retained Cash + Supplies = Payable+ Stock + Earnings a. + 5,000 + 5,000 Investment b. + 1,250 + 1,250 Bal. 5,000 1,250 1,250 5,000 c. – 850 – 850 Bal. 4,150 1,250 400 5,000 d. + 16,200 + 16,200 Sales commissions Bal. 20,350 1,250 400 5,000 16,200 e. – 2,000 – 2,000 Rent expense Bal. 18,350 1,250 400 5,000 14,200 f. – 4,500 – 4,500 Dividends Bal. 13,850 1,250 400 5,000 9,700 g. – 2,250 – 1,900 Auto expense – 350 Misc. expense Bal. 11,600 1,250 400 5,000 7,450 h. – 4,250 – 4,250 Salaries expense Bal. 7,350 1,250 400 5,000 3,200 i. – 650 – 650 Supplies expense Bal. 7,350 600 400 5,000 2,550

2. DEAL REALTY Income Statement For the Month Ended March 31, 20— Sales commissions...... $16,200 Operating expenses: Office salaries expense...... $4,250 Rent expense...... 2,000 Automobile expense...... 1,900 Supplies expense...... 650 Miscellaneous expense...... 350 Total operating expenses...... 9,150 Net income...... $ 7,050

16 Prob. 1–4A Concluded

DEAL REALTY Retained Earnings Statement For the Month Ended March 31, 20— Net income for March...... $ 7,050 Less dividends...... 4,500 Retained earnings, capital, March 31, 20—...... $ 2,550

DEAL REALTY Balance Sheet March 31, 20— Assets Liabilities Cash...... $7,350 Accounts payable...... $ 400 Supplies...... 600 Stockholders’ Equity Capital stock...... $5,000 Retained earnings...... 2,550 7,550 Total liabilities and Total assets...... $7,950 stockholders’ equity...... $ 7,950

17 Prob. 1–5A

Accounts Accounts Capital Retained Cash + Receivable + Supplies + Land = Payable + Stock + Earnings 6,250 + 18,100 + 2,200 + 40,000 = 7,800 + 10,000 + Retained Earnings 66,550 = 17,800 + Retained Earnings 48,750 = Retained Earnings

18 Prob. 1–5A Continued 2. Assets = Liabilities + Owner’s Equity

Accounts Accounts Capital Retained Cash + Receivable + Supplies + Land = Payable + Stock + Earnings Bal. 6,250 18,100 2,200 40,000 7,800 10,000 48,750 a. + 15,750 + 15,750 Dry cleaning sales Bal. 22,000 18,100 2,200 40,000 7,800 10,000 64,500 b. – 2,500 – 2,500 Rent expense Bal. 19,500 18,100 2,200 40,000 7,800 10,000 62,000 c. + 1,650 + 1,650 Bal. 19,500 18,100 3,850 40,000 9,450 10,000 62,000 d. – 5,100 – 5,100 Bal. 14,400 18,100 3,850 40,000 4,350 10,000 62,000 e. + 8,920 + 8,920 Dry cleaning sales Bal. 14,400 27,020 3,850 40,000 4,350 10,000 70,920 f. + 6,000 – 6,000 Dry cleaning expense Bal. 14,400 27,020 3,850 40,000 10,350 10,000 64,920 g. – 5,570 – 2,400 Wages expense – 1,580 Truck expense – 960 Utilities expense – 630 Miscellaneous expense Bal. 8,830 27,020 3,850 40,000 10,350 10,000 59,350 h. + 12,100 – 12,100 Bal. 20,930 14,920 3,850 40,000 10,350 10,000 59,350 i. – 1,350 – 1,350 Supplies expense Bal. 20,930 14,920 2,500 40,000 10,350 10,000 58,000 j. – 7,500 – 7,500 Dividends Bal. 13,430 14,920 2,500 40,000 10,350 10,000 50,500

19 Prob. 1–5A Concluded

3. a. PERSNICKETY DRY CLEANERS Income Statement For the Month Ended July 31, 20— Dry cleaning sales...... $24,670 Operating expenses: Dry cleaning expense...... $6,000 Rent expense...... 2,500 Wages expense...... 2,400 Truck expense...... 1,580 Supplies expense...... 1,350 Utilities expense...... 960 Miscellaneous expense...... 630 Total operating expenses...... 15,420 Net income...... $ 9,250 b. PERSNICKETY DRY CLEANERS Retained Earnings Statement For the Month Ended July 31, 20— Retained earnings, July 1, 20—...... $48,750 Net income for July...... $9,250 Less dividends...... 7,500 Increase in retained earnings...... 1,750 Retained earnings, capital, July 31, 20—...... $50,500 c. PERSNICKETY DRY CLEANERS Balance Sheet July 31, 20— Assets Liabilities Cash...... $13,430 Accounts payable...... $ 10,350 Accounts receivable...... 14,920 Supplies...... 2,500 Stockholders’ Equity Land...... 40,000 Capital stock...... $ 10,000 Retained earnings...... 50,500 60,500 Total liabilities and Total assets...... $70,850 stockholders' equity...... $ 70,850

20 Prob. 1–6A a. Fees earned, $15,000 b. Supplies expense, $1,500 c. Net income for April, $6,200 d. Retained earnings, April 30, 2003, $3,200 e. Total assets, $24,000 f. Retained earnings, $3,200 g. Total stockholders’ equity, $23,200 h. Total liabilities and stockholders’ equity, $24,000 i. Cash received from customers, $15,000 j. Net cash flow from operating activities, $5,900 k. Cash payments for acquisition of land, $(20,000) l. Cash received from issuing capital stock, $20,000 m. Dividends, $3,000 n. Net cash flow from financing activities, $17,000 o. Net cash flow and April 30, 2003 cash balance, $2,900

21 Prob. 1–1B

Accounts Accounts Capital Retained Cash + Receivable + Supplies = Payable + Stock + Earnings a. + 15,000 15,000 Investment b. + 750 + 750 Bal. 15,000 750 750 15,000 c. – 625 – 625 Bal. 14,375 750 125 15,000 d. + 5,250 + 5,250 Fees earned Bal. 19,625 750 125 15,000 5,250 e. – 1,000 – 1,000 Rent expense Bal. 18,625 750 125 15,000 4,250 f. – 1,230 – 880 Auto expense – 350 Misc. expense Bal. 17,395 750 125 15,000 3,020 g. – 1,200 – 1,200 Salaries exp. Bal. 16,195 750 125 15,000 1,820 h. – 575 – 575 Supplies exp. Bal. 16,195 175 125 15,000 1,245 i. + 7,350 + 7,350 Fees earned Bal. 16,195 7,350 175 125 15,000 8,595 j. – 1,500 – 1,500 Dividends Bal. 14,695 7,350 175 125 15,000 7,095

2. Owner's equity is the right of owners to the assets of the business. These rights are increased by stockholders’ investments and revenues and decreased by dividends and expenses.

22 Prob. 1–2B

1. HIAWATHA TRAVEL SERVICE Income Statement For the Year Ended April 30, 2003 Fees earned...... $131,600 Operating expenses: Wages expense...... $65,850 Rent expense...... 18,900 Utilities expense...... 11,250 Supplies expense...... 3,550 Taxes expense...... 2,800 Miscellaneous expense...... 1,475 Total operating expenses...... 103,825 Net income...... $ 27,775

2. HIAWATHA TRAVEL SERVICE Retained Earnings Statement For the Year Ended April 30, 2003 Retained earnings, May 1, 2002...... $13,000 Net income for the year...... $27,775 Less dividends...... 15,000 Increase in retained earnings...... 12,775 Retained earnings, April 30, 2003...... $25,775

3. HIAWATHA TRAVEL SERVICE Balance Sheet April 30, 2003 Assets Liabilities Cash...... $26,525 Accounts payable...... $ 6,100 Accounts receivable...... 15,675 Supplies...... 1,675 Stockholders’ Equity Capital stock...... $ 12,000 Retained earnings...... 25,775 37,775 Total liabilities and Total assets...... $43,875 stockholders’ equity...... $ 43,875

23 Prob. 1–3B

1. INFINET COMPUTER SERVICES Income Statement For the Month Ended October 31, 2003 Fees earned...... $8,250 Operating expenses: Salaries expense...... $2,000 Rent expense...... 1,800 Auto expense...... 780 Supplies expense...... 325 Miscellaneous expense...... 375 Total operating expenses...... 5,280 Net income...... $2,970

2. INFINET COMPUTER SERVICES Retained Earnings Statement For the Month Ended October 31, 2003 Net income for October...... $ 2,970 Less dividends...... 1,000 Retained earnings, October 31, 2003...... $ 1,970

3. INFINET COMPUTER SERVICES Balance Sheet October 31, 2003 Assets Liabilities Cash...... $3,295 Accounts payable...... $ 470 Accounts receivable...... 3,750 Supplies...... 395 Stockholders’ Equity Capital stock...... $ 5,000 Retained earnings...... 1,970 6,970 Total liabilities and Total assets...... $7,440 stockholders’ equity...... $ 7,440

24 Prob. 1–4B

Accounts Capital Retained Cash + Supplies = Payable+ Stock + Earnings a. +10,000 +10,000 Investment b. – 3,600 – 3,600 Rent expense Bal. 6,400 10,000 – 3,600 c. – 1,450 – 900 Auto expense – 550 Misc. expense Bal. 4,950 10,000 – 5,050 d. + 1,325 + 1,325 Bal. 4,950 1,325 1,325 10,000 – 5,050 e. + 18,750 + 18,750 Sales commissions Bal. 23,700 1,325 1,325 10,000 13,700 f. – 690 – 690 Bal. 23,010 1,325 635 10,000 13,700 g. – 4,000 – 4,000 Salaries expense Bal. 19,010 1,325 635 10,000 9,700 h. – 3,000 – 3,000 Dividends Bal. 16,010 1,325 635 10,000 6,700 i. – 725 – 725 Supplies expense Bal. 16,010 600 635 10,000 5,975

2. VOGUE REALTY Income Statement For the Month Ended August 31, 2003 Sales commissions...... $18,750 Operating expenses: Office salaries expense...... $4,000 Rent expense...... 3,600 Automobile expense...... 900 Supplies expense...... 725 Miscellaneous expense...... 550 Total operating expenses...... 9,775 Net income...... $ 8,975

25 Prob. 1–4B Concluded

VOGUE REALTY Retained Earnings Statement For the Month Ended August 31, 2003 Net income for August...... $ 8,975 Less dividends...... 3,000 Retained earnings, August 31, 2003...... $ 5,975

VOGUE REALTY Balance Sheet August 31, 2003 Assets Liabilities Cash...... $16,010 Accounts payable...... $ 635 Supplies...... 600 Stockholders’ Equity Capital stock...... $ 10,000 Retained earnings...... 5,975 15,975 Total liabilities and Total assets...... $16,610 stockholders’ equity...... $ 16,610

26 Prob. 1–5B

Accounts Accounts Capital Retained Cash + Receivable + Supplies + Land = Payable + Stock + Earnings 7,400 + 13,750 + 1,560 + 25,000 = 3,880 + 25,000 + Retained Earnings 47,710 = 28,880 + Retained Earnings 18,830 = Retained Earnings

27 Prob. 1–5B Continued

Accounts Accounts Capital Retained Cash + Receivable + Supplies + Land = Payable + Stock + Earnings Bal. 7,400 13,750 1,560 25,000 3,880 +25,000 18,830 a. – 3,000 – 3,000 Rent expense Bal. 4,400 13,750 1,560 25,000 3,880 25,000 15,830 b. + 6,150 + 6,150 Dry cleaning sales Bal. 4,400 19,900 1,560 25,000 3,880 25,000 21,980 c. – 1,680 – 1,680 Bal. 2,720 19,900 1,560 25,000 2,200 25,000 21,980 d. + 840 + 840 Bal. 2,720 19,900 2,400 25,000 3,040 25,000 21,980 e. + 14,600 + 14,600 Dry cleaning sales Bal. 17,320 19,900 2,400 25,000 3,040 25,000 36,580 f. + 11,750 – 11,750 Bal. 29,070 8,150 2,400 25,000 3,040 25,000 36,580 g. + 5,400 – 5,400 Dry cleaning expense Bal. 29,070 8,150 2,400 25,000 8,440 25,000 31,180 h. – 3,225 – 1,800 Wages expense – 725 Truck expense – 510 Utilities expense – 190 Miscellaneous expense Bal. 25,845 8,150 2,400 25,000 8,440 25,000 27,955 i. – 1,050 – 1,050 Supplies expense Bal. 25,845 8,150 1,350 25,000 8,440 25,000 26,905 j. – 5,000 – 5,000 Dividends Bal. 20,845 8,150 1,350 25,000 8,440 25,000 21,905

28 Prob. 1–5B Concluded

3. a. SWAN DRY CLEANERS Income Statement For the Month Ended November 30, 20— Dry cleaning sales...... $20,750 Operating expenses: Dry cleaning expense...... $5,400 Rent expense...... 3,000 Wages expense...... 1,800 Supplies expense...... 1,050 Truck expense...... 725 Utilities expense...... 510 Miscellaneous expense...... 190 Total operating expenses...... 12,675 Net income...... $ 8,075 b. SWAN DRY CLEANERS Retained Earnings Statement For the Month Ended November 30, 20— Retained earnings, November 1, 20—...... $18,830 Net income for November...... $8,075 Less dividends...... 5,000 Increase in retained earnings...... 3,075 Retained earnings, November 30, 20—...... $21,905 c. SWAN DRY CLEANERS Balance Sheet November 30, 20— Assets Liabilities Cash...... $20,845 Accounts payable...... $ 8,440 Accounts receivable...... 8,150 Supplies...... 1,350 Stockholders’ Equity Land...... 25,000 Capital stock...... $ 25,000 Retained earnings...... 21,905 46,905 Total liabilities and Total assets...... $55,345 stockholders’ equity...... $ 55,345

29 Prob. 1–6B a. Wages expense, $5,375 b. Net income, $11,550 c. Net income for June, $11,550 d. Dividends, $6,000 e. Retained earnings, June 30, 2003, $5,550 f. Land, $36,000 g. Total assets, $51,750 h. Capital stock, $45,000 i. Retained earnings, $5,550 j. Total stockholders’ equity, $50,550 k. Total liabilities and stockholders’ equity, $51,750 l. Cash received from customers, $23,500 m. Net cash flow from operating activities, $11,750 n. Net cash flow from financing activities, $39,000 o. Net cash flow and June 30, 2003 cash balance, $14,750

30 CONTINUING PROBLEM

Accounts Accounts Capital Retained Cash + Receivable +Supplies = Payable + Stock + Earnings Nov. 1 + 3,500 3,500 Investment 2 + 1,000 + 1,000 Fees earned Bal. 4,500 3,500 1,000 Nov. 2 – 500 – 500 Office rent exp. Bal. 4,000 3,500 500 Nov. 4 + 175 + 175 Bal. 4,000 175 175 3,500 500 Nov. 6 – 300 – 300 Adv. exp. Bal. 3,700 175 175 3,500 200 Nov. 8 – 325 – 325 Equip. rent exp. Bal. 3,375 175 175 3,500 – 125 Nov. 12 – 100 – 100 Music exp. Bal. 3,275 175 175 3,500 – 225 Nov. 13 – 50 – 50 Bal. 3,225 175 125 3,500 – 225 Nov. 16 + 75 + 75 Fees earned Bal. 3,300 175 125 3,500 – 150 Nov. 22 + 600 + 600 Fees earned Bal. 3,300 600 175 125 3,500 450 Nov. 25 + 250 + 250 Fees earned Bal. 3,550 600 175 125 3,500 700 Nov. 29 – 120 – 120 Music exp. Bal. 3,430 600 175 125 3,500 580 Nov. 30 + 450 + 450 Fees earned Bal. 3,880 600 175 125 3,500 1,030 Nov. 30 – 200 – 200 Wages exp. Bal. 3,680 600 175 125 3,500 830 Nov. 30 – 150 – 150 Utilities exp. Bal. 3,530 600 175 125 3,500 680 Nov. 30 – 90 – 90 Supplies exp. Bal. 3,530 600 85 125 3,500 590 Nov. 30 – 75 – 75 Misc. exp. Bal. 3,455 600 85 125 3,500 515 Nov. 30 – 250 – 250 Music exp. Bal. 3,205 600 85 125 3,500 265 Nov. 30 – 125 – 125 Dividends Bal. 3,080 600 85 125 3,500 140

31 Continuing Problem Concluded

2. DANCIN MUSIC Income Statement For the Month Ended November 30, 2002 Fees earned...... $2,375 Operating expenses: Office rent expense...... $ 500 Music expense...... 470 Equipment rent expense...... 325 Advertising expense...... 300 Wages expense...... 200 Utilities expense...... 150 Supplies expense...... 90 Miscellaneous expense...... 75 Total operating expenses...... 2,110 Net income...... $ 265

3. DANCIN MUSIC Retained Earnings Statement For the Month Ended November 30, 2002 Net income for November...... $ 265 Less dividends...... 125 Retained earnings, November 30, 2002...... $ 140

4. DANCIN MUSIC Balance Sheet November 30, 2002 Assets Liabilities Cash...... $3,080 Accounts payable...... $ 125 Accounts receivable...... 600 Supplies...... 85 Stockholders’ Equity Capital stock...... $ 3,500 Retained earnings...... 140 3,640 Total liabilities and Total assets...... $3,765 stockholders’ equity...... $ 3,765

32 SPECIAL ACTIVITIES

Activity 1–1

1. Acceptable professional conduct requires that Joel Phinney supply Bridger National Bank with all the relevant financial statements necessary for the bank to make an informed decision. Therefore, Joel should provide the com- plete set of financial statements. These can be supplemented with a discussion of the net loss in the past year or other data explaining why granting the loan is a good investment by the bank. 2. a. Managers are generally willing to provide bankers with information about the operating and financial condition of the business, such as the following:  Operating Information:  description of business operations  results of past operations  preliminary results of current operations  plans for future operations  Financial Condition:  list of assets and liabilities (balance sheet)  estimated current values of assets  stockholders’ investment in the business  stockholders’ commitment to invest additional funds in the business Managers are normally reluctant to provide proprietary operating information to bankers. Such information, which might hurt the business if it be- comes known by competitors, might include special processes used by the business or future plans to expand operations into areas that are not currently served by a competitor.

33 Activity 1–1 Concluded

b. Bankers typically want as much information as possible about the ability of the business to repay the loan with interest. Examples of such information are described in the preceding answer. c. Both bankers and business managers share the common interest of the business doing well and being successful. If the business is successful, the bankers will receive their loan payments on time with interest, and the managers (and stockholders) will be rewarded.

Activity 1–2

The difference in the two bank balances, $150,000 ($180,000 – $30,000), may not be pure profit from an accounting perspective. To determine the accounting profit for the seven-month period, the revenues for the period would need to be matched with the related expenses. The revenues minus the expenses would indi- cate whether the business generated net income (profit) or a net loss for the period. Using only the difference between the two bank account balances ignores such factors as amounts due from customers (receivables), liabilities (accounts payable) that need to be paid for wages or other operating expenses, additional investments that the stockholder may have made in the business during the period, or dividends paid during the period. Some businesses that have few, if any, receivables or payables may use a “cash” basis of accounting. The cash basis of accounting ignores receivables and payables because they are assumed to be insignificant in amount. However, even with the cash basis of accounting, additional investments during the period and any dividends during the period have to be considered in determining the net income (profit) or net loss for the period.

34 Activity 1–3

1. Owner’s Assets = Liabilities + Equity

Yvonne Accounts Tobin, Cash + Supplies = Payable + Capital a. + 500 + 500 Investment b. – 160 + 160 Bal. 340 160 500 c. – 80 – 80 Rent expense Bal. 260 160 420 d. – 70 + 30 – 100 Rent expense Bal. 190 160 30 320 e. + 800 + 800 Service revenue Bal. 990 160 30 1,120 f. + 150 + 150 Service revenue Bal. 1,140 160 30 1,270 g. – 300 – 300 Salary expense Bal. 840 160 30 970 h. – 75 – 75 Misc. expense Bal. 765 160 30 895 i. + 300 + 300 Service revenue Bal. 1,065 160 30 1,195 j. – 85 – 85 Supplies expense Bal. 1,065 75 30 1,110 k. – 400 – 400 Withdrawal Bal. 665 75 30 710

35 Activity 1–3 Continued

2. FORTY–LOVE Income Statement For the Month Ended September 30, 20— Service revenue...... $1,250 Operating expenses: Salary expense...... $300 Rent expense...... 180 Supplies expense...... 85 Miscellaneous expense...... 75 Total operating expenses...... 640 Net income...... $ 610

3. a. Forty-Love would provide Yvonne with $50 more income per month than working as a waitress. This amount is computed as follows:

Net income of Forty-Love, per month...... $610 Earnings as waitress, per month: 20 hours per week × $7 per hour × 4 weeks...... 560 Difference...... $ 50

36 Activity 1–3 Concluded b. Other factors that Yvonne should consider before discussing a long-term ar- rangement with the Racquet Club include the following: Yvonne should consider whether the results of operations for September are indicative of what to expect each month. For example, Yvonne should consider whether club members will continue to request lessons or use the ball ma- chine during the winter months when interest in tennis may slacken. Yvonne should evaluate whether the additional income of $50 per month from Forty– Love is worth the risk being taken and the effort being expended. Yvonne should also consider how much her investment in Forty–Love could have earned if invested elsewhere. For example, if the initial investment of $500 had been deposited in a money market or savings account at 3% interest, it would have earned $1.25 interest in September, or $15 for the year. Note to Instructors: Numerous other considerations could be mentioned by students, such as the ability of Yvonne to withdraw cash from Forty–Love for personal use. Unlike a money market account or savings account, some of her investment in Forty–Love will be in the form of supplies (tennis balls, etc.) which may not be readily convertible to cash. The objective of this case is not to mention all possible considerations but rather to encourage students to begin thinking about the use of accounting information in making business decisions.

Activity 1–4

Note to Instructors: The purpose of this activity is to familiarize students with the certification requirements and their online availability.

Activity 1–5

1998 1997 1996 Net cash flows from operating activities positive positive negative Net cash flows from investing activities negative negative negative Net cash flows from financing activities positive positive 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—activities from raising capital.