mgt45 fall 2013 hw

Chapter 01 - An Introduction to Accounting

CHAPTER 1 - An Introduction to Accounting

ANSWERS TO QUESTIONS

2. Accounting provides important information to the stakeholders of both profit oriented and nonprofit oriented organizations. Such information is useful in making decisions by all participants in the market for resource goods and services. Because of this communicative role of accounting, it is often called the language of business.

10. The U.S. rules of accounting information measurement are called generally accepted accounting principles (GAAP).

16. The term “liabilities” is used to describe creditors' claims on the assets of a business.

17. The accounting equation is: ASSETS – LIABILITIES = STOCKHOLDERS’

EQUITY or

ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY

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Assets are the economic resources used by a business for the production of revenue. Liabilities are obligations of a business that can be settled by relinquishing assets, providing goods or services, or accepting other obligations. Equity, also called “residual interest” or “net assets”, is the portion of the assets remaining after the creditors' claims have been satisfied (i.e., Assets – Liabilities).

18. The owners ultimately bear the risk and collect the rewards associated with operating a business.

SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 1

EXERCISE 1-5

Title or Account Financial Statement(s)a. Common Stock Balance Sheet; Statement of

Changes in Stockholders’ Equityb. Land Balance Sheetc. Ending Cash Balance Balance Sheet; Statement of Cash

Flowsd. Beginning Cash

BalanceStatement of Cash Flows

e. Notes Payable Balance Sheetf. Retained Earnings Balance Sheet; Statement of

Changes in Stockholders’ Equityg. Revenue Income Statementh. Dividends Statement of Changes in

Stockholders’ Equityi. Financing Activities Statement of Cash Flowsj. Salaries Expense Income Statement

EXERCISE 1-15

Event Classification1. Asset Source2. Asset Source3. Asset Exchange4. Asset Source5. Asset Source

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6. Asset Exchange7. Asset Use8. NA9. Asset Use10. Asset Use11. NA

EXERCISE 1-16

Event Statement of Cash Flow Classification

a. OAb. FAc. FAd. IAe. OAf. OAg. IAh. FAi. NAj. FA

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Chapter 02 - Understanding the Accounting Cycle

EXERCISE 1-22

City Consulting ServicesHorizontal Statements Model for 2012

Balance Sheet Income Statement Statement of

Assets = Liab. + Stockholders’ Equity

Revenue

Expense

= Net Inc.

Cash Flows

Event No.

Cash + Land =NotesPayabl

e+

Common Stock +

Retained

Earnings

1 I + NA = NA + I + NA NA NA = NA I FA2 I + NA = NA + NA + I I NA = I I OA3 I + NA = I + NA + NA NA NA = NA I FA4 D + I = NA + NA + NA NA NA = NA D IA5 D + NA = NA + NA + D NA I = D D OA6 D + NA = NA + NA + D NA NA = NA D FA7 NA + NA = NA + NA + NA NA NA = NA NA

EXERCISE 1-24a.

Solito, Inc.Horizontal Statements Model for 2012



Revenue

Expense

= Net Inc.

Cash Flows

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Event No.

Cash + Land =NotesPayabl

e+

Common

Stock+

Retained

Earnings

1 50,000 NA NA 50,000 NA NA NA NA 50,000 FA2 (12,00

0)12,000 NA NA NA NA NA NA (12,000)

IA3 50,000 NA NA NA 50,000 50,000 NA 50,000 50,000 OA4 (9,500) NA NA NA (9,500) NA 9,500 (9,50

0)(9,500) OA

5 5,000 NA NA 5,000 NA NA NA NA 5,000 FA6 10,000 NA 10,00

0NA NA NA NA NA 10,000 FA

7 (10,000)

10,000 NA NA NA NA NA NA (10,000)IA

8 (8,000) NA NA NA (8,000) NA 8,000 (8,000)

(8,000) OA

9 (2,800) NA NA NA (2,800) NA NA NA (2,800) FA10 NA NA NA NA NA NA NA NA NA

Total

72,700 + 22,000 = 10,000

+ 55,000 + 29,700 50,000 17,500 = 32,500 72,700 NC

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CHAPTER 2 - Understanding the Accounting Cycle


1. Accrual accounting attempts to record the effects of accounting events in the period when such events occur, regardless of when cash is received or paid. The goal is to match expenses with the revenues that they produce.

4. If cash is collected in advance for services, the revenue is recognized when the services are rendered.

6. The issue of common stock, which is capital acquired from owners, increases

business assets (usually cash) and equity (common stock).

9. Revenue is recognized under accrual accounting when a revenue-producing transaction occurs, i.e., when the revenue is earned, even if no cash is collected at the time of the transaction.

17. Net cash flows from operations on the cash flow statement may be different from net income because of the application of accrual accounting. Revenues and expenses reported on the income statement may be recognized before or after the actual collection or payment of cash that is reported on the cash flow statement.

27. The balance sheet is dated as of a specific date because it gives information about an entity's assets, liabilities, and stockholders’ equity as of that date, not measured over a time period. Whereas, the statement of changes in stockholders’ equity, the income statement, and the cash flow statement reflect transactions that occur over a period of time. Hence, they are dated with the phrase for the period ended.

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SOLUTIONS TO EXERCISES - CHAPTER 2

EXERCISE 2-4a.

Green Copy ServiceEffect of Events on Financial Statements for 2012


Income Statement

Event

No.Cash Supplie

s=

Accts.Pay. +

Com.Stock

Retained

EarningsRev. Exp. =

Net Incom

e

Cash Flows

Beg. Bal. 16,000 -0- -0- 10,000 6,000 -0- -0- -0- -0-1. NA 9,600 9,600 NA NA NA NA NA NA2. 39,000 NA NA NA 39,000 39,00

0NA 39,00

039,000

OA3. (7,000) NA (7,000) NA NA NA NA NA (7,000)

OA4. NA (7,400) NA NA (7,400) NA 7,400 (7,40

0)NA

Totals

48,000 2,200 = 2,600 + 10,000 37,600 39,000

7,400 = 31,600

32,000 NC

b. The difference in net income and cash flow from operating activities of $400 ($31,600 - $32,000) is attributed to recognizing supplies expense of $7,400 in the income statement, whereas the cash payment on accounts payable (for supplies) was $7,000.

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EXERCISE 2-14

Horizontal Statement Model

Stk. Equity Income StatementType of Com. Ret. Net Cash

Event Event Assets = Liab. + Stock + Earn. Rev. Exp. = Inc. Flowsa. AS I NA I NA NA NA NA I FAb. AE I/D NA NA NA NA NA NA D IAc. AE I/D NA NA NA NA NA NA D OAd. AE I/D NA NA NA NA NA NA I OAe. AS I NA NA I I NA I I OAf. AE/AS I I NA NA NA NA NA D IAg. AU D NA NA D NA I D D OAh. AE I/D NA NA NA NA NA NA D OAi. AU D NA NA D NA NA NA D FAj. CE NA I NA D NA I D NAk. AU D D NA NA NA NA NA D OAl. AS I I NA NA NA NA NA I OAm. CE NA I NA D NA I D NAn. AS I NA NA I I NA I NAo. AU D NA NA D NA I D NAp. AU D D NA NA NA NA NA D OA

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EXERCISE 2-17Cherry Design

Effect of Events on the General Ledger Accounts

Assets = Liabilities + Stockholders’ Equity

Event CashAccounts

Receivable Land =AccountsPayable +

Com. Stock +

RetainedEarnings

1. Svc. on Account 58,000 58,0002. Coll. on Account 46,000 (46,000)3. Incurred Expense 41,000 (41,000)4. Pd. Acc. Pay. (30,000) (30,000)5. Issue of Stock 40,000 40,0006. Purchase Land (20,000) 20,000Totals 36,000 12,000 20,000 = 11,000 + 40,000 + 17,000

a. Revenue recognized, $58,000.

b. Cash flow from revenue, $46,000.

c. Revenue, $58,000, less operating expenses, $41,000 = $17,000 net income.

d. Accounts receivable collected, $46,000, less cash paid for expenses, $30,000 = $16,000 cash flow from operating activities.

e. Income of $58,000 was earned, but only $46,000 was collected (a difference of $12,000); operating expenses incurred were $41,000 but only $30,000 was paid during the period (a difference of $11,000). Consequently, net income is $1,000 more than cash flow from operating activities.

f. $20,000 cash outflow for the purchase of land.

g. $40,000 cash inflow from the issue of common stock.

h. Total assets = $68,000 ($36,000 + $12,000 + $20,000)

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Total liabilities = $11,000Total equity = $57,000 ($40,000 + $17,000)

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EXERCISE 2-25

Item Statement Item Statementa. BS i. BSb. IS j. BSc. IS k. SEd. BS l. CFe. CF m. BS,SEf. IS n. ISg. NA o. BS/CFh. BS

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SOLUTIONS TO PROBLEMS - CHAPTER 2

PROBLEM 2-27

King CompanyEffect of Events on the Financial Statements

Balance Sheet Income Statement Stmt. ofAssets = Liabilities + Stock. Equity Rev. Exp. = Net

Inc.Cash Flows

EventCash +

Accts Rec. + Supp. =

Accts. Pay. +

Unearn Rev. +

Com. Stock +

Ret. Earn.

1. 25,000 NA NA NA NA 25,000

NA NA NA NA 25,000 FA

2. 5,000 NA NA NA NA NA 5,000 5,000 NA 5,000 5,000 OA3. NA 18,000 NA NA NA NA 18,000 18,00

0NA 18,000 NA

4. 11,000 (11,000)

NA NA NA NA NA NA NA NA 11,000 OA

5. (1,400) NA 1,400 NA NA NA NA NA NA NA (1,400) OA6.* NA NA (1,100) NA NA NA (1,100) NA 1,10

0(1,100) NA

7. 3,600 NA NA NA 3,600 NA NA NA NA NA 3,600 OA8.** NA NA NA NA (1,800) NA 1,800 1,800 NA 1,800 NA9. (6,000) NA NA NA NA NA (6,000) NA 6,00

0(6,000) (6,000) OA

10. NA NA NA 2,400 NA NA (2,400) NA 2,400

(2,400) NA

11. (2,000) NA NA (2,000) NA NA NA NA NA NA (2,000) OA12. (2,000) NA NA NA NA NA (2,000) NA NA NA (2,000) FABal. 33,200 + 7,000 + 300 = 400 + 1,800 + 25,00

0+ 13,300 24,80

0 9,50

0= 15,300 33,200 NC

*$1,400 purchase – $300 ending balance = $1,100 used**$3,600 x ½ = $1,800

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CHAPTER 3 - Accounting for Merchandising Businesses


2. Product costs are costs associated with goods for resale, usually inventory costs. Selling and administrative expenses, called period costs, are costs that are not directly traceable to products, for example, operating expenses.

4. The cost of the items that have not been sold are allocated to merchandise inventory (asset) and are shown on the balance sheet. The cost of the items that have been sold are allocated to cost of goods sold (expense) and are shown on the income statement.

9. Assets would both increase and decrease (cash increases by $20,000 and

inventory decreases by $12,000) and stockholders’ equity both increases and decreases (revenue is increased by $20,000 and cost of goods sold is increased by $12,000). All four financial statements are affected.

14. 2/10 n/30 means that a 2% discount may be taken off of the selling price if payment is made within ten days of the invoice date. If the discount is not taken, the amount of the invoice is due in 30 days.

20. Gross margin is net sales less cost of goods sold and relates the sales of primary products. Gain from the sale of an asset is computed by subtracting the cost of the asset from its sales price, but a gain refers to profit from an incidental transaction not likely to regularly recur.

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SOLUTIONS TO EXERCISES - CHAPTER 3

EXERCISE 3-1a.

Eady CPAsIncome Statement

For the Year Ended December 31, 2012

RevenueConsulting Revenue $30,00

0

ExpensesSalaries Expense (20,00

0)

Net Income $10,000

Eady CPAs Balance Sheet

As of December 31, 2012

AssetsCash* $50,000

Total Assets $50,00

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0

LiabilitiesNotes Payable $40,000

Total Liabilities $40,000

Stockholders’ EquityRetained Earnings $10,000

Total Stockholders’ Equity 10,000

Total Liab. and Stockholders’ Equity

$50,000

*$40,000 + $30,000 $20,000 = $50,000EXERCISE 3-1 a. (cont.)

Eady CPAsStatement of Cash Flows

For Year Ended December 31, 2012

Cash Flows From Operating Activities:

Inflow from Revenue $30,000Outflow for Salaries (20,000)

Net Cash Flow from Operating Activ.

$10,000

Cash Flows From Investing Activities

-0-

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Cash Flows From Financing Activities:

Inflow from Loan $40,000

Net Cash Flow from Financing Activ.

40,000

Net Increase in Cash 50,000Plus: Beginning Cash Balance -0-Ending Cash Balance $50,000

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EXERCISE 3-1 a. (cont.)

Campus ClothingIncome Statement


Net Sales Revenue $30,000

Cost of Goods Sold (16,400)

Gross Margin 13,600

ExpensesOperating Expenses (3,600)

Net Income $10,000

Campus ClothingBalance Sheet

As of December 31, 2012

AssetsCash* $41,400Merchandise Inventory** 8,600

Total Assets $50,000

LiabilitiesNotes Payable $40,000

Total Liabilities $40,000

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Stockholders’ EquityRetained Earnings $10,000

Total Stockholders’ Equity 10,000

Total Liab. and Stockholders’ Equity

$50,000

*$40,000 $25,000 + $30,000 $3,600 = $41,400**$25,000 – $16,400 = $8,600

EXERCISE 3-1a. (cont.)

Campus ClothingStatement of Cash Flows


Cash Flows From Operating Activities:

Inflow from Revenue 30,000Outflow for Inventory (25,000)Outflow for Expenses (3,600)

Net Cash Flow from Operating Activities

$1,400

Cash Flows From Investing Activities

-0-

Cash Flows From Financing Activities:

Inflow from Loan $40,000

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Net Cash Flow from Financing Activities

40,000

Net Increase in Cash 41,400Plus: Beginning Cash Balance -0-Ending Cash Balance $41,400

b. Campus Clothing is a merchandising business and has inventory and cost of goods sold -- product costs. Eady is a service company and does not have product costs.

c. Eady is a service company and sells a service not a product. Consequently, it does not have cost of goods sold or gross margin. It only has selling and administrative expense (period expense).

d. The asset in common is cash. The only asset that Eady has is Cash. Campus Clothing has cash but also has inventory. Eady does not sell a product and does not have any inventory. Campus Clothing sells products and must carry inventory available for sale to customers.

EXERCISE 3-3a.

Knight Merchandising Company Effect of Events on the Financial Statements


Assets = Liab. + Stkholders’ Equity

Rev. Exp. =Net Inc. Cash Flows

Events Cash + A. Rec. + Inv. = A. Pay. + C. Stk.

+Ret. Ear.

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Beg. Bal. 14,000 + NA + NA = NA + 14,000

+ NA NA NA = NA NA

1. Pur. Inv.

NA + NA + 15,000 = 15,000 + NA + NA NA NA = NA NA

2a. Sold Inv.

NA + 17,500 + NA = NA + NA +17,500 17,500

NA =17,500 NA

2b. Inv. Cost

NA + NA + (12,500)

= NA + NA + (12,500)

NA 12,500

=(12,500)

NA

3. Pd. AP (10,000)

+ NA + NA = (10,000)

+ NA + NA NA NA = NA (10,000)OA

4. Coll. AR 11,000 + (11,000)

+ NA = NA + NA + NA NA NA = NA 11,000 OA

5. Pd. Exp.

(3,500)+ NA + NA = NA + NA + (3,500) NA 3,500 =(3,500) (3,500) OA

End. Bal. 11,500 + 6,500 + 2,500 = 5,000 + 14,000

+ 1,500 17,500

16,000

= 1,500 (2,500) NC

b. $6,500 (see above)

c. $5,000 (see above)

d. Sales $17,500Cost of Goods Sold (12,500 ) Gross Margin 5,000Operating Exp. (3,500)Net Income $ 1,500

e. Cash Flows From Operating Activities:Inflow from Customers $11,000Outflow for Inventory (10,000)Outflow for Expenses (3,500)

Net Cash Flow from Operating Activities$ (2,500 )

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EXERCISE 3-3 (cont.)

f. Ending retained earnings and net income are the same in this problem because this is the first year of operations and no dividends were paid. Ending Retained Earnings is calculated as follows: Beginning Retained Earnings + Net Income Dividends = Ending Retained Earnings. Generally, retained earnigs and net income are not the same. Any beginning balance in retained earnings or any payment of dividends will make these two items different.

EXERCISE 3-8

a.Transaction

Period Costs

Product Costs

Not Applicable

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

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EXERCISE 3-8 (cont.)b.

The Toy Store Horizontal Statements Model for 2012


Assets = Liab. + Stkholders’ Equity

Rev. Exp. = Net Inc.

Cash Flows

Cash + A. Rec. + Inv. = A. Pay. + C. Stk.

+ Ret. Ear.

1. Stock 20,000 + NA + NA = NA +20,000

+ NA NA NA = NA 20,000 FA

2. Pur Inv. NA + NA + 56,000 56,000 + NA + NA NA NA = NA NA 3. Freight (600)+ NA + 600 = NA + NA + NA NA NA = NA (600)

OA 4a. Sold Inv.

NA + 57,400 + NA = NA + NA + 57,400 57,400

NA =57,400 NA

4b. Cost NA + NA +(35,000)

= NA + NA +(35,000)

NA 35,000 =(35,000)

NA

5. Pd. Frt. (420)+ NA + NA = NA + NA + (420) NA 420 = (420) (420)OA

6a. Ret. Sale

NA + (4,000)+ NA = NA + NA + (4,000) (4,000)

NA = (4,000) NA

6b. Ret. Inv.

NA + NA + 2,400 = NA + NA + 2,400 NA (2,400)

= 2,400 NA

7. Coll. AR 47,000 + (47,000)

+ NA = NA + NA + NA NA NA = NA 47,000 OA

8. Pd. AP (44,000)

+ NA + NA =(44,000)

+ NA + NA NA NA = NA (44,000)OA

9. Pd. Exp.

(1,100)+ NA + NA = NA + NA + (1,100) NA 1,100 = (1,100) (1,100)OA

10. Pd. Exp.

(1,000)+ NA + NA = NA + NA + (1,000) NA 1,000 = (1,000) (1,000)OA

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End. Bal. 19,880 + 6,400 + 24,000 =12,000 +20,000

+ 18,280 53,400

35,120 =18,280 19,880 NC

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EXERCISE 3-15Single-Step Income Statement:

Healthy Foods MarketIncome Statement


Net Sales $2,400Gain on Sale of Land 75Total Revenue 2,475

ExpensesCost of Goods Sold $900Advertising Expense 200Interest Expense 140Salaries Expense 260Supplies Expense 210

Total Expenses (1,710)

Net Income (Loss) $ 765

Multistep Income Statement:

Healthy Foods MarketIncome Statement


Net Sales $2,400

Cost of Goods Sold (900)

Gross Margin 1,500

Operating ExpensesAdvertising Expense $200

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Salaries Expense 260Supplies Expense 210

Total Operating Expenses (670)Operating Income (Loss) 830

Non-operating ItemsInterest Expense (140)Gain on Sale of Land 75

Net Income (Loss) $ 765

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CHAPTER 4 - Internal Controls, Accounting for Cash, and Ethics


1. The accounting scandals of WorldCom and Enron are partially responsible for the passage of the Sarbanes-Oxley Act. SOX requires public companies to evaluate their internal control system.

2. Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations.

7. Separation of duties is the procedure whereby different individuals separately perform the authorization, recording, and custody functions for a business. An example would be to have one individual write the checks and attach appropriate documentation and have another individual sign the checks and approve the payment.

13. The use of prenumbered documents (i.e., checks, receipts, and invoices) is a control to help ensure that all transactions are properly accounted for and recorded, and that no transactions are unrecorded or missing.

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EXERCISE 4-2

1. Separation of Duties: Whenever possible, the functions of authorization, recording, and custody should be handled by different individuals. If these duties are separated, the likelihood of theft or fraud by employees is greatly reduced, because collusion among employees is necessary to accomplish the crime.

2. Quality of Employees: Employees should be competent and adequately trained to perform the required task.

3. Bonded Employees: Employers should hire employees with high personal integrity. Employees in positions of trust should be covered with a fidelity bond (insurance against loss from employee dishonesty).

4. Periods of Absence: Employees should be required to take extended vacations and/or be rotated among duties in order to discover patterns of dishonesty or theft.

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5. Procedures Manual: A procedures manual should be established, kept up-to-date, and enforced to assure that company procedures for processing transactions are being followed.

6. Authority and Responsibility: A clear chain of command should be established and documented. A manual should detail this chain of command and provide guidance for specific and general authority.

7. Prenumbered Documents: The use of prenumbered documents (checks, receipts, etc.) requires all such documents to be accounted for and reduces the likelihood of unauthorized transactions.

8. Physical Control: All assets should be properly documented, and periodically accounted for, with access limited to authorized personnel.

9. Performance Evaluations : A periodic and independent evaluation of employees' performance alerts management to inefficiencies of employees.

EXERCISE 4-4

a. Cash requires additional control procedures because of its appeal. Usually possession of cash is presumed ownership. It usually cannot be traced and one dollar cannot be distinguished from another. Relatively small quantity of high-denomination currency can represent significant amounts of value. Consequently, extra controls are necessary to safeguard cash.

b. Cash includes currency and other items that are payable on demand such as checks, money orders, bank drafts, and certain savings accounts. Some companies combine marketable securities with cash for balance sheet presentation.

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EXERCISE 4-10

Bank Reconciliation

Unadjusted Bank Balance 6/30/2012 $13,879.85

Add: Deposit in Transit 1,476.30Less: Outstanding Check (1,843.74)True Cash Balance 6/30/2012 $13,51

2.41

Unadjusted Book Balance 6/30/2012 $13,483.75

Add: Credit Memo for Interest Earned 35.00Less: Debit Memo for Service Charge (6.34)True Cash Balance 6/30/2012 $13,51

2.41

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