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CHAPTER 2
Business ActivitiesThe Source of Accounting Information
THINKING BEYOND THE QUESTION
How do we know how well our business is doing?
Revenues are earned when goods are transferred or services are provid-ed to customers. In most cases, these events are associated with com-pletion of certain critical events, such as delivery of goods. Expenses areincurred when resources are consumed in the process of providing
goods and services. Therefore, a system that identifies when goods aretransferred, services are provided, and resources are consumed is impor-tant for identifying revenues and expenses.
Some resources are consumed when goods or services are transferred tocustomers: the cost of goods, supplies, and labor associated with partic-ular jobs. In other cases, the amount of resources consumed is measuredeach fiscal period: salaries and wages, utilities, rent, and insurance. De-pending on the type of resource consumed, identification of the cost ofthe resource associated with specific sales or identification of the cost ofthe resource associated with a fiscal period is an important event for
identifying expenses during a fiscal period.
QUESTIONS
Q2-1 Chapter 2 illustrates two sources of money for companiesloans andowner contributions. Chapter 1 discussed the three forms of businessorganizationsproprietorships, partnerships, and corporations. Tomaintain control, Joan probably would want to organize her business asa proprietorship. If she has enough money or other resources, she canborrow the rest of the capital she needs from a bank. If she does not have
enough money or other resources and cannot borrow as much as sheneeds, she may have to find one or more partners to help finance thebusiness. Because this is a small business, she is unlikely to want orneed to incorporate at this time or to issue bonds.
Q2-2 Major sources of financing for corporations are stocks and debt. Bankloans also are possible. Managers should consider how much stock orhow much debt they can incur, what amount of money they will receive
23
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from the issuance, and whether they can repay debt as it becomes duefrom the profits they expect to earn.
Q2-3 From the corporations perspective, this event was a financing activity. Thecorporation raised capital (i.e., raised financing) by selling shares ofstock to Jerrilyn.
Q2-4 Assets = Liabilities + Equity. The question indicates that assets areaccurately reported. Therefore, if liabilities are understated, equity mustbe overstated. For example, assume assets, liabilities, and equity arecorrectly reported as $10,000, $3,000, and $7,000 respectively ($10,000 =$3,000 + $7,000). If liabilities are understated by $1,000, equity must beoverstated by $1,000 to make the accounting equation balance ($10,000 =$2,000 + $8,000).
Q2-5 Both liabilities and owners equity represent claims to a companysresources.
Q2-6 The accounting equation presents the relationship between resources andclaims to resources. Financial resources to acquire assets are obtainedfrom financing activities and from revenues earned by the company.When assets are consumed, expenses are created that reduce acompanys profits. The profits earned during a period increase ownersequity, as reported in retained earnings. The total amount of assets isequal to the total amount of liabilities and owners equity.
Q2-7 Purchasing merchandise inventory is an operating activity. The operatingactivities section of the cash flow statement reports cash from selling
goods and services and cash paid for expense-related activities.
Q2-8 Contributed capital represents claims to resources provided by theowners. Sales revenue represents owners claims to resources that wereearned and retained by the company.
Q2-9 No. Retained Earnings represents earnings kept in the business. Theseearnings are reinvested and may be included in various kinds of assets.Retained Earnings does not equal cash.
Q2-10 The possibilities will depend on the specific company selected andindustry in which it operates. Exhibit 12 in the text should give students agood start on this question.
Q2-11 The left side of a balance sheet reveals how an organizations managershave used investors capital. That is, what does the organization own?Or, what amount of capital has been committed to which assets? Theright side of a balance sheet reveals where the capital came from to
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Business ActivitiesThe Source of Accounting Information 25
acquire the assets listed on the left side. It reveals how much of theorganizations capital was provided by investors loaning money orextending credit (i.e., liabilities). It also reveals how much capital wasprovided by the owners contributions (invested capital) as well as howmuch capital has been provided by profitable operations of the company(retained earnings).
Q2-12 A balance sheet reports the assets, liabilities, and equity of anorganization. The income statement reports revenues and expenses. Thestatement of cash flows reports the net cash flows from operatingactivities, investing activities, and financing activities.
Q2-13 The accounting equation, Assets = Liabilities + Equity, illustrates thatassets are provided by creditors (liabilities) or by owners (equity). Thus,creditors and owners have claims on a companys assets.
Q2-14 The income statement provides information about how well a company has
performed during a period based on the operating activities for thatperiod. These activities may affect cash flows of prior or future periods.The income statement helps decision makers assess the long-runsuccess of a company.
The statement of cash flows describes the cash flows that resultedfrom current-period operating activities. It provides information about acompanys ability to pay current obligations. A company must generatesufficient cash to pay creditors, suppliers, employees, and other pro-viders of goods and services. Net income, as reported on the incomestatement, does not ensure short-run survival of a company.
Q2-15Most companies of size have hundreds or thousands of individualaccounts. A mere list of accounts and balances would overwhelm thereader with detail and be unlikely to convey any useful information.Accounts and balances are arranged into financial statements for thepurpose of conveying information quickly and conveniently. Similaraccounts are grouped, such as all revenues, all expenses, all assets, etc.Then, to provide further information, certain groups of accounts arearranged into financial statements. For example, revenues and expensesare matched on the income statement. Assets, liabilities, and equity aregrouped on the balance sheet. Account balances are summarized onfinancial statements because they yield more information in this form.
EXERCISES
E2-1 Definitions of all terms are listed in the glossary.
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E2-2 1. Operating activity2. Financing activity3. Investing activity4. Financing activity5. Investing activity
6. Operating activity7. Investing activity8. Financing activity9. Investing activity
10. Operating activity
E2-3 a. Ib. Oc. Fd. Oe. O
f. Ig. Fh. Oi. O
j. F
E2-4
ASSETS = LIABILITIES + OWNERS' EQUITY
Date Accounts CashOtherAssets
ContributedCapital
RetainedEarnings
Beginning Amounts 40,000 + 60,000 = 30,000 + 50,000 + 20,000
June 1 Merchandise Inventory 15,000Cash 15,000
June 15 Cash 60,000
Sales Revenue 60,000
Cost of Goods Sold 28,000
Merchandise Inventory 28,000
June 23 Cash 250,000
Bank Loan Payable 250,000
June 25 Supplies Expense 2,000
Cash 2,000
June 28 Wages Expense 5,000
Cash 5,000
June 30 Equipment 100,000
Cash 100,000
June 30 Utilities Expense 6,000
Cash 6,000
Ending Amounts 222,000 +147,000 = 280,000 + 50,000 + 39,000
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E2-5 June 1 OperatingJune 15 OperatingJune 23 FinancingJune 25 OperatingJune 28 OperatingJune 30 Investing
June 30 Operating
E2-6
ASSETS = LIABILITIES + OWNERS' EQUITY
Date Accounts CashOtherAssets
ContributedCapital
RetainedEarnings
Beginning Amounts 70,000 + 90,000 = 60,000 + 60,000 + 40,000
May 1 Cash 10,000
Contributed Capital 10,000
May 5 Cash 35,000
Sales 35,000Cost of Goods Sold 14,000
Merchandise Inventory 14,000
May 10 Merchandise Inventory 45,000
Cash 45,000
May 15 Notes Payable 2,000
Cash 2,000
May 22 Equipment 4,000
Cash 4,000
May 31 Utilities Expense 800
Cash 800
May 31 Wages Expense 7,500
Cash 7,500
Ending Amounts 55,700 + 125,000 = 58,000 + 70,000 + 52,700
E2-7 May 1 FinancingMay 5 OperatingMay 10 OperatingMay 15 FinancingMay 22 InvestingMay 31 OperatingMay 31 Operating
E2-8 a. Cash increased $18,000; Owners Investment increased $18,000.The owners invested $18,000 in the company.
b. Equipment increased $12,000; Cash decreased $12,000.The company purchased equipment using cash.
c. Cash decreased $8,500; Notes Payable decreased $8,500.The company paid down the balance of a note.
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d. Supplies inventory increased $13,500; Cash decreased $13,500.The company purchased supplies costing $13,500 using cash.
e. Merchandise Inventory decreased $10,000; Cost of Goods Sold in-creased $10,000.The company sold merchandise costing $10,000.
f. Cash increased $23,500; Sales Revenue increased $23,500.
The company sold goods for $23,500 cash.g. Supplies Expense increased $3,000; Supplies inventory decreased
$3,000.The company removed supplies costing $3,000 from inventory andused them.
E2-9
ASSETS = LIABILITIES + OWNERS' EQUITY
Date Accounts CashOther
AssetsContributed
CapitalRetainedEarnings
Beginning Amounts 5,000 = 1,500 + 3,000 + 500Feb. 2 Cash 1,800
Revenues 1,800
Feb. 3 Rent Expense 1,200
Cash 1,200
Feb. 4 Cash 300
Loan Payable 300
Feb. 4 Miscellaneous Expense 35
Cash 35
Feb. 5 Cash 4,250
Revenues 4,250
Feb. 5 Equipment 3,200
Cash 3,200
Feb. 6 Wages Expense 525
Cash 525
Feb. 6 Office Supplies Expense 128
Cash 128
Ending Amounts 5,662 + 3,200 = 1,200 + 3,000 + 4,662
Amelios Law Firm
Income StatementFor the First Week of February
Revenues $ 6,050Rent (1,200)Miscellaneous (35)Wages (525)
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Office supplies (128 )Net income $ 4,162
E2-10 Feb. 2OperatingFeb. 3 OperatingFeb. 4 Financing
Feb. 4 OperatingFeb. 5 OperatingFeb. 5 InvestingFeb. 6 OperatingFeb. 6 Operating
E2-11 Assets = Liabilities + Owners Equity
Cash $ 1,500Flowers and Plants 26,000Supplies Inventory 4,350
Buildings 79,500Equipment 12,750
Notes Payable $57,500
Proprietors Capital $66,600
Total $124,100 = $57,500 + $66,600
E2-12
ASSETS = LIABILITIES + OWNERS' EQUITY
Date Accounts Cash
Other
Assets
Contributed
Capital
Retained
EarningsCash 220,000
Contributed Capital 80,000
Bank Loan 140,000
a. Equipment 45,150
Cash 45,150
b. Merchandise Inventory 129,600
Cash 129,600
c. Cash 85,000
Sales 85,000
Cost of Goods Sold 43,200*
Merchandise Inventory 43,200
d. Wages Expense 12,300
Rent Expense 15,500
Utilities Expense 4,800
Postage Expense 650
Insurance Expense 1,290
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Cash 34,540
* $129,600 3 = $43,200
E2-13 Changs Pottery WorksSchedule of Retained Earnings
For the Month Ended November 30
Retained earnings, November 1 $ 95,000Net income for November 15,000Less: Payment to owners in November (4,000 )Retained earnings, November 30 $106,000
E2-14 Christmas Cookie CompanyIncome Statement
For the Month Ended December 31
Sales revenue $234,000Cost of goods sold (60,000)Wages expense (97,500)Utilities expense (24,000 )Net income $ 52,500
E2-15 a. Cash flows from financing activities:
Proceeds from owners $ 30,957Proceeds from issuance of note payable 13,057Payments of debt (80,323 )
Net cash used for financing activities $(36,309)
b. Cash flows from investing activities:
Proceeds from sales of plant and equipment $ 1,986Additions to plant and equipment (5,379 )
Net cash provided by investing activities $ (3,393 )
E2-16 Cash collected from customers $270,000Cash paid for merchandise inventory (83,500)Cash paid for utilities (25,000)Cash paid for insurance (23,000)Cash paid to employees (58,000)
Cash paid for postage (7,500 )Net cash from operating activities $ 73,000
E2-17 Wages expense Income statementCost of goods sold Income statementSales revenue Income statementMerchandise inventory Balance sheet
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Business ActivitiesThe Source of Accounting Information 31
Net income Income statementRetained earnings Balance sheetContributed capital Balance sheetRent expense Income statementCash Balance sheet, Statement of cash flowsNotes payable Balance sheet
E2-18 Brothers Lawn ServiceIncome Statement
For the Six Months Ended June 30, 2007
Service revenue $12,300Supplies expense (4,000)Wages expense (6,000)Utilities expense (500)Rent expense (1,000 )Net income $ 800
E2-19 Brothers Lawn ServiceBalance Sheet
At June 30, 2007
AssetsCash $3,000Supplies inventory 500Equipment 5,000
Total assets $8,500
Liabilities and Owners EquityNotes payable $1,000
Contributed capital 6,700Retained earnings 800
Total liabilities and owners equity $8,500
E2-20June 1 Merchandise Inventory 15,000
Cash 15,000June 15 Cash 60,000
Sales 60,000Cost of Goods Sold 28,000
Merchandise Inventory 28,000June 23 Cash 250,000
Bank Loan Payable 250,000June 25 Supplies Expense 2,000Cash 2,000
June 28 Wages Expense 5,000Cash 5,000
June 30 Equipment 100,000Cash 100,000
June 30 Utilities Expense 6,000Cash 6,000
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E2-21May 1 Cash 10,000
Contributed Capital 10,000May 5 Cash 35,000
Sales 35,000Cost of Goods Sold 14,000
Merchandise Inventory 14,000
May 10 Merchandise Inventory 45,000Cash 45,000
May 15 Notes Payable 2,000Cash 2,000
May 22 Equipment 4,000Cash 4,000
May 31 Utilities Expense 800Cash 800
May 31 Wages Expense 7,500Cash 7,500
E2-22Feb 2 Cash 1,800
Revenues 1,800Feb 3 Rent Expense 1,200
Cash 1,200Feb 4 Loan Payable 300
Cash 300Feb 4 Miscellaneous Expense 35
Cash 35Feb 5 Cash 4,250
Revenues 4,250Feb 5 Equipment 3,200
Cash 3,200Feb 6 Wages Expense 525
Cash 525Feb 6 Office Supplies Expense 128Cash 128
E2-23Cash 220,000
Contributed Capital 80,000Bank Loan 140,000
a. Equipment 45,150Cash 45,150
b. Merchandise Inventory 129,600
Cash 129,600c. Cash 85,000
Sales 85,000Cost of Goods Sold * 43,200
Merchandise Inventory 43,200d. Wages Expense 12,300
Rent Expense 15,500Utilities Expense 4,800
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Postage Expense 650Insurance Expense 1,290
Cash 34,540
* $129,600 3 = $43,200
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PROBLEMS
P2-1 A. ASSETS = LIABILITIES + OWNERS' EQUITY
Date Accounts CashOtherAssets
ContributedCapital
RetainedEarnings
1 Cash 5,800
Utilities Expense 5,8002 Cash 89,460
Sales 89,460
Cost of Goods Sold 60,000
Merchandise Inventory 60,000
3 Equipment 28,600
Cash 28,600
4 Notes Payable 4,900
Cash 4,900
5 Cash 65,000
Notes Payable 65,000
6 Salaries Expense 59,430
Cash 59,430
7 Maintenance Expense 11,900
Cash 11,900
8 Cash 48,600
Contributed Capital 48,600
9 Supplies Expense 3,750
Cash 3,750
B. Financing decisions: When, how much, and where to borrow.
Investing decisions: What property and equipment to purchase and
when to purchase it. What future earnings is the investment likely tobring?
P2-2 1. Operating2. Operating3. Investing4. Financing5. Financing6. Operating7. Operating8. Financing
9. Operating
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P2-3 Assets = Liabilities + Equity
Cash $10,000Merchandise Inventory 30,000Equipment 45,000
Notes Payable $20,000Contributed Capital $35,000Retained Earnings 30,000Total $85,000 = $ 20,000 + $6 5,000
P2-4 A. ASSETS = LIABILITIES + OWNERS' EQUITY
Date Accounts CashOtherAssets
ContributedCapital
RetainedEarnings
June 1 Cash 7,000Contributed Capital 7,000
June 2 Rent Expense 525Cash 525
June 7 Merchandise Inventory 5,000Cash 5,000
June 12 Advertising Expenses 800
Cash 800
June 26 Cash 7,500Sales Revenue 7,500
Cost of Goods Sold 4,500
Merchandise Inventory 4,500
June 30 Wages Expense 850
Utilities Expense 228Cash 1,078
Ending Amounts 7,097 + 500 = 7,000 + 597
B. Davidson EnterprisesIncome Statement
For the Month Ended June 30, 2007
Sales $7,500
Cost of goods sold (4,500)Rent expense (525)Advertising (800)Wages (850)Utilities (228 )Net income $ 597
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C. Davidson EnterprisesBalance Sheet
At June 30, 2007
AssetsCash $7,097
Merchandise inventory 500Total assets $7,597
Liabilities and Owners EquityContributed capital $7,000Retained earnings 597
Total liabilities and owners equity $7,597
P2-5 June 1 FinancingJune 2 OperatingJune 7 Operating
June 12 OperatingJune 26 OperatingJune 30 Operating
P2-8 A. 1. Jill contributed $5,000 to the business.2. The company acquired $300 of supplies inventory by paying
cash.3. The company earned $4,200 for providing services.
4. The company paid $450 for utilities consumed.5. The company paid $500 for transportation expenses.6. The company paid $700 for insurance.7. Jill took $1,300 cash from the company for her personal use.
B. The company earned $2,550 ($4,200 $450 $500 $700).
P2-9 A. Mar. 1 Jacqueline contributed $10,000 cash to the business.3 The company borrowed $7,000 by issuing a note payable.5 The company purchased $8,100 of inventory and paid
cash.18 The company sold goods costing $7,500 for $15,250 in
cash.18 The company paid wages of $650.23 The company paid $2,500 on the note.31 Jacqueline took $2,000 cash from the company for her
personal use.
B. 1. The company earned $7,100 ($15,250 $7,500 $650).
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2. Owners Equity is $15,100 ($10,000 + $5,100).
P2-10 1. Owners contributed $15,000 to the business.2. A bank loan of $6,285 was obtained.3. Equipment costing $11,000 was purchased. A loan was obtained to
purchase the equipment.
4. Services totaling $2,250 were performed.5. Rent of $400 was paid.6. Wages of $250 were paid.7. Internet service costs of $35 were paid.
P2-11 A. ASSETS = LIABILITIES + OWNERS' EQUITY
Date Accounts CashOther
AssetsContributed
CapitalRetainedEarnings
1 Cash 10,000
Contributed Capital 10,000
2 Cash 30,000Bank Loan Payable 30,000
3 Equipment 25,000
Cash 25,000
4 Merchandise Inventory 12,000
Cash 12,000
5 Cash 27,000
Sales Revenue 27,000
6 Cost of Goods Sold 10,000
Merchandise Inventory 10,000
7 Bank Loan Payable 300
Cash 300
8 Retained Earnings 800Cash 800
Ending Amounts 28,900 + 27,000 = 29,700 + 10,000 + 16,200
B. Sand Dune Trading CompanyIncome Statement
For the Month Ended May 31, 2007
Sales revenue $27,000Cost of goods sold 10,000Net income $17,000
C. Sand Dune Trading Company
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Balance Sheet
At May 31, 2007
AssetsCash $28,900
Merchandise inventory 2,000Equipment 25,000Total assets $55,900
Liabilities and Owners EquityBank loan $29,700Contributed capital 10,000Retained earnings 16,200
Total liabilities and owners equity $55,900
P2-12 1. I2. B3. B4. B5. C6. I7. C8. I, C9. B
10. C
P2-13 Moonbeam EnterprisesIncome Statement
For the Month Ended April 30, 2007
Sales revenue $26,000Cost of goods sold (15,050)Supplies expense (1,300)Interest expense (900)Wage expense (1,500)Insurance expense (550)Income tax expense (1,060 )
Net income $ 5,640
Moonbeam EnterprisesBalance Sheet
At April 30, 2007
AssetsCash $ 10,360
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Business ActivitiesThe Source of Accounting Information 39
Merchandise inventory 12,480Buildings 50,000Land 45,000
Total assets $ 117,840
Liabilities and Owners Equity
Notes payable $ 33,000Contributed capital 38,770Retained earnings 46,070
Total liabilities and owners equity $117,840
P2-15 June 3 OperatingJune 4 FinancingJune 5 Operating
June 5 Operating
June 6 OperatingJune 6 InvestingJune 7 Operating
P2-16 A. Crimson FloristStatement of Cash Flows
For the Month Ended July 31
Operating ActivitiesCash received from sales to customers $15,000
Cash paid for wages (4,500)Cash paid for supplies (3,000)Cash paid for utilities (2,700 )Net cash flow from operating activities $ 4,800
Investing ActivitiesCash paid for equipment (7,000)
Financing ActivitiesCash received from owners $13,000Cash received from creditors 9,000
Net cash flow from financing activities 22,000
Net cash flow for July $19,800Cash balance, July 1 3,300Cash balance, July 31 $ 23,100
B. The purpose of the statement of cash flows is to allow users to de-termine the sources and uses of cash during a fiscal period. The
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cash flow statement does not report profitability, but the amountsand sources (or uses) of cash.
P2-17 The College Shop
Statement of Cash FlowsFor the Month Ended January 31
Operating Activities
Cash received from sales to customers $13,000Cash paid for wages (1,200)Cash paid for insurance (2,500)Rent (5,300)Cash paid for merchandise (4,000)Cash paid for utilities (200 )Net cash flow from operating activities $ (200)
Investing Activities
Cash paid for equipment (7,000)
Financing Activities
Cash received from owners $ 9,000Cash received from creditors 10,500Net cash flow from financing activities 19,500
Net cash flow for January $12,300
Cash balance, January 1 4,000Cash balance, January 31 $ 16,300
P2-18 A. ROA = Net Income Total Assets = $4,000 $30,600 = 13%
B. ROA measures the amount a company earned for each dollar of totalinvestment.
C. Managers can make changes to produce more income by increasingsales or by reducing expenses. By improving inefficient operations,managers can improve profitability and ROA.
Managers also can reduce assets by selling nonproductive equip-ment and returning the cash to owners in the form of a dividend.
Thus, if earnings remain the same, and total assets declines, ROAwill improve.
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P2-191 Utilities Expense 5,800
Cash 5,8002 Cash 89,460
Sales 89,460Cost of Goods Sold 60,000
Merchandise Inventory 60,000
3 Equipment 28,600Cash 28,600
4 Notes Payable 4,900Cash 4,900
5 Cash 65,000Notes Payable 65,000
6 Salaries Expense 59,430Cash 59,430
7 Maintenance Expense 11,900Cash 11,900
8 Cash 48,600Contributed Capital 48,600
9 Supplies Expense 3,750Cash 3,750
P2-201 Cash 3,000
Contributed Capital 3,000
2 Cash 4,000
Notes Payable 4,000
3 Merchandise Inventory 3,500
Cash 3,500
4 Cash 2,500Sales Revenue 2,500
Cost of Goods Sold 825
Merchandise Inventory 825
4 Commissions Expense 500
Cash 500
5 Notes Payable 1,500
Cash 1,500
6 Retained Earnings 750
Cash 750
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P2-21June 1 Cash 750
Note PayableDad 450Contributed Capital 300
June 2 Equipment Rental Expense 85Cash 85
June 3 Equipment Rental Expense 135Cash 135
June 16 Cash 650Service Revenue 650
June 16 Gas and Oil Expense 67Cash 67
June 18 Advertising Expense 70Cash 70
June 30 Cash 507Service Revenue 507
June 30 Gas and Oil Expense 105Cash 105
June 30 Interest Expense 5
Note PayableDad 225Cash 230
P2-221 Cash 10,000
Contributed Capital 10,0002 Cash 30,000
Bank Loan Payable 30,0003 Equipment 25,000
Cash 25,0004 Merchandise Inventory 12,000
Cash 12,0005 Cash 27,000Sales Revenue 27,000
6 Cost of Goods Sold 10,000Merchandise Inventory 10,000
7 Bank Loan Payable 300Cash 300
8 Retained Earnings 800Cash 800
P2-23 See Excel spreadsheet on page 49.
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P2-24 1. b 2. a 3. b 4. d 5. d6. c 7. a 8. b 9. a
10. a11. b
CASES
C2-1 It is unlikely that Frank gets much information from his current accountingsystem. Since his personal finances are commingled with his business
activities, he cant tell (for sure) whether his business is profitable or not.About all he knows is his checking account balance. Once a month, hegets a statement from the bank, which he could use to verify his checkingaccount. The receipts he keeps could provide information about some ofhis expenses and revenues, but Frank probably is not making use of thisinformation.
Frank should be able to obtain information about his companys assets,liabilities, owners equity, revenues, and expenses from a new accountingsystem. In addition, he will need revenue information for each locationseparately because the monthly fee paid to each retailer is partially de-pendent on this amount. For management control purposes, Frank will
probably want to have all categories of financial information broken downby individual location. This information would allow him to evaluatewhether a particular location (or operator) is performing satisfactorily. Amonthly income statement by location would be useful for evaluating theperformance of each stand and employee. An analysis of the companyschecking account would help Frank understand how much cash the com-pany is producing, its cash needs, and how the cash is being used.
The accounting system could be improved by (a) establishing a separatechecking account for the business; (b) establishing a ledger to keep ac-counts for each of the firms assets, liabilities, owners equities, rev-
enues, and expenses; and (c) providing periodic (monthly) income state-ments and balance sheets. At a minimum, separate revenue accountsshould be maintained for each location. At a maximum, each accounttype could be divided into separate accounts for each location.
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The following accounts would be useful:
Account Name Account Type
Cash
Hot Dogs
Canned Soda
CondimentsSupplies
Carts
Notes Payable
Investment by Owner
Retained Earnings
Sales Revenue (Location 1, 2, etc.)
Cost of Goods Sold (Location 1, 2, etc.)
Wages Expense (Location 1, 2, etc.)
Location Fee Expense (Location 1, 2, etc.)
Equipment Usage Expense* (Location 1, 2, etc.)Repair Expense (Location 1, 2, etc.)
asset
asset
asset
assetasset
asset
liability
owners equity
owners equity
revenue
expense
expense
expense
expenseexpense
*As you will learn in Chapter 3, this usually is referred to asDepreciation Expense.
Separate accounts by location would be useful for Carts, SalesRevenue, Cost of Goods Sold, Wages Expense, Location Fee Ex-pense, Depreciation Expense, and Repair Expense. This would al-low Frank to determine net income for each location and compareprofitability among the locations.
C2-2 The following questions are examples of key decisions needing to be madeat each stage of the transformation process.
Financing decisions: How much money is needed for investment and operations? How and when should money be obtained?
Investing decisions: What building and equipment resources are needed? Do any new long-lived resources need to be added? From where and when should new long-lived resources be obtained?
Operating decisions: How can resources be used most effectively and efficiently? What materials need to be acquired?
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Business ActivitiesThe Source of Accounting Information 45
What employees need to be hired, how should they be trained, andwhat specific tasks should they be assigned to do?
What will be the cost of adding new employees? How should the products be designed to ensure they can be con-
structed with the time and resources available to meet customerneeds?
What schedules are needed for the construction, transportation, andassembly phases in order to minimize waste of labor and materials?
What marketing strategy should be followed in order to maximizesales?
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P2-2
3
Cost
of
Investment
Retained
Goods
Date
Cash
Inventory
Supplies
Equipment
Notes
Payable
by
Owners
Earnings
Sales
Sold
9/30/2007
$4,2
38.7
2
$23
5,8
92.3
5
$2,3
43.2
8
$43,
297.0
0
$123,4
52.8
8
$100,00
0.0
0
$62,3
18.4
7
$
$
10/31/2007
38,2
46.5
0
38,2
46.5
0
10/31/2007
2
7,3
18.9
3
27,3
18.9
3
10/31/2007
10,9
27.5
7
38,2
46.5
0
27,3
18.9
3
10/31/2007
$42,4
85.2
2
$20
8,5
73.4
2
$2,3
43.2
8
$43,
297.0
0
$123,4
52.8
8
$100,00
0.0
0
$73,2
46.0
4
$
0.0
0
$
0.0
0
Ba
lance
Shee
t
Income
Statemen
t
Asse
ts
Liabilities
&Equ
ity
Revenues
Cash
$42,4
85.2
2
NotesPayable
$123,4
52.88
Sales
$38,2
46.5
0
Inventory
208,5
73.4
2
InvestmentbyOwners
100,0
00.00
Expenses
Supplies
2,3
43.2
8
RetainedEarnings
73,2
46.04
CostofGoodSold
27,3
18.9
3
Equipment
43,2
97.0
0
Total
$296,6
98.9
2
Total
$296,6
98.92
NetIncome
$10,9
27.5
7
7/29/2019 Chapter 2 HW Solutions
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Business ActivitiesThe Source of Accounting Information 47