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Problem 1-27A  Accounting’s role in not-for-profit organizations

Charles Robertson is struggling to pass his introductory accounting course. Charles is intelligent but he likes to party. Studying is a low priority for Charles. When one of his friends tells him he is going to have trouble in business if he doesn’t learn accounting, Charles responds that he doesn’t plan to go into business. He says that he is arts oriented and plans someday to be a director of a museum. He is in the school of business to develop his social skills, not his quantitative skills. Charles says he won’t have to worry about accounting since museums are not intended to make a profit.

Required

1. Write a brief memo explaining whether you agree or disagree with Charles’s position regarding accounting and not-for-profit organizations.
2. Distinguish between financial accounting and managerial accounting.
3. Identify some of the stakeholders of not-for-profit institutions that would expect to receive financial accounting reports.
4. Identify some of the stakeholders of not-for-profit institutions that would expect to receive managerial accounting reports.

Problem 1-28A  Accounting entities

The following business scenarios are independent of one another.

1. Tilly Jensen starts a business by transferring $5,000 from her personal checking account into a checking account for the business.
2. A business that Bart Angle owns earns $2,300 of cash revenue.
3. Phil Culver borrows $20,000 from the National Bank and uses the money to purchase a car from Henderson Ford.
4. Lipka Company pays its five employees $2,000 each to cover their salaries.
5. Kevin Dow loans his son Brian $5,000 cash.
6. Asthana Inc. paid $150,000 cash to purchase land from Waterbury Inc.
7. Moshe Liu and Chao Porat form a partnership by contributing $30,000 each from their personal bank accounts to a partnership bank account.
8. Ken Stanga pays cash to purchase $2,000 of common stock that is issued by Krishnan Inc.
9. Omni Company pays a $42,000 cash dividend to each of its seven shareholders.
10. McCann Inc. borrowed $5,000,000 from the National Bank.

Required

1. For each scenario create a list of all of the entities that are mentioned in the description.
2. Describe what happens to the cash account of each entity that you identified in Requirement a.

L.O. 2

CHECK FIGURE
Entities mentioned:
Tilly Jensen
Jensen Business

Problem 1-29A  Relating titles and accounts to financial statements

Required

Identify the financial statements on which each of the following items (titles, date descriptions, and accounts) appears by placing a check mark in the appropriate column. If an item appears on more than one statement, place a check mark in every applicable column.

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Problem 1-30A  Preparing financial statements for two complete accounting cycles

Keller Consulting experienced the following transactions for 2006, its first year of operations, and 2007. Assume that all transactions involve the receipt or payment of cash.

Transactions for 2006

1. Acquired $20,000 by issuing common stock.
2. Received $65,000 cash for providing services to customers.
3. Borrowed $25,000 cash from creditors.
4. Paid expenses amounting to $42,000.
5. Purchased land for $30,000 cash.

Transactions for 2007

Beginning account balances for 2007 are:

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1. Acquired an additional $24,000 from the issue of common stock.
2. Received $95,000 for providing services.
3. Paid $10,000 to creditors to reduce loan.
4. Paid expenses amounting to $71,500.
5. Paid a $6,000 dividend to the stockholders.
6. Determined the market value of the land to be $47,000.

Required

1. Write an accounting equation, and record the effects of each accounting event under the appropriate headings for each year. Record the amounts of revenue, expense, and dividends in the Retained Earnings column. Provide appropriate titles for these accounts in the last column of the table.
2. Prepare an income statement, statement of changes in stockholders’ equity, year-end balance sheet, and statement of cash flows for each year.
3. Determine the amount of cash that is in the retained earnings account at the end of 2006 and 2007.
4. Compare the information provided by the income statement with the information provided by the statement of cash flows. Point out similarities and differences.

L.O. 3,4,5a, 5b, 6,8

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CHECK FIGURES

1. Net Income 2006: $23,000
2. Retained Earnings 2007: $40,500

Problem 1-31A  Interrelationships among financial statements

O’Shea Enterprises started the 2006 accounting period with $30,000 of assets (all cash), $18,000 of liabilities, and $4,000 of common stock. During the year, O’Shea earned cash revenues of $48,000, paid cash expenses of $32,000, and paid a cash dividend to stockholders of $2,000. O’Shea also acquired $10,000 of additional cash from the sale of common stock and paid $6,000 cash to reduce the liability owed to a bank.

Required

1. Prepare an income statement, statement of changes in stockholders’ equity, period-end balance sheet, and statement of cash flows for the 2006 accounting period. (Hint: Determine the amount of beginning retained earnings before considering the effects of the current period events. Record all events under an accounting equation before preparing the statements.)
2. Determine the percentage of total assets that was provided by creditors, investors, and earnings.

L.O. 3, 5a, 5b, 8

CHECK FIGURES
a. Net Income: $16,000
b. Total Assets: $48,000

Problem 1-32A  Classifying events as asset source, use, or exchange

The following unrelated events are typical of those experienced by business entities.

1. Acquire cash by issuing common stock.
2. Purchase land with cash.
3. Purchase equipment with cash.
4. Pay monthly rent on an office building.
5. Hire a new office manager.
6. Borrow cash from a bank.
7. Pay a cash dividend to stockholders.
8. Pay cash for operating expenses.
9. Pay an office manager’s salary with cash.
10. Receive cash for services that have been performed.
11. Provide services for cash.
12. Acquire land by accepting a liability (financing the purchase).
13. Pay cash to purchase a new office building.
14. Discuss plans for a new office building with an architect.
15. Repay part of a bank loan.

Required

Identify each of the events as an asset source, use, or exchange transaction. If an event would not be recorded under generally accepted accounting principles, identify it as not applicable (NA). Also indicate for each event whether total assets would increase, decrease, or remain unchanged. Organize your answer according to the following table. The first event is shown in the table as an example.

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L.O. 4, 7

CHECK FIGURES
Event 2 Asset Exchange

Problem 1-33A  Recording the effect of events in a horizontal statements model

Lighthouse Services experienced the following transactions during 2006.

1. Acquired cash by issuing common stock.
2. Received cash for performing services.
3. Paid cash expenses.
4. Borrowed cash from the local bank.
5. Purchased land for cash.
6. Paid cash to reduce the principal balance of the bank loan.
7. Paid a cash dividend to the stockholders.
8. Determined the market value of the land to be higher than its historical cost.

Required

Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction is shown as an example.

Problem 1-34A  Recording events in a horizontal statements model

Flick Company was started on January 1, 2007, and experienced the following events during its first year of operation.

1. Acquired $30,000 cash from the issue of common stock.
2. Borrowed $20,000 cash from State Bank.
3. Earned cash revenues of $48,000 for performing services.
4. Paid cash expenses of $35,000.
5. Paid a $4,000 cash dividend to the stockholders.
6. Acquired an additional $20,000 cash from the issue of common stock.
7. Paid $5,000 cash to reduce the principal balance of the bank note.
8. Paid $53,000 cash to purchase land.
9. Determined the market value of the land to be $60,000.

Required

1. Record the preceding transactions in the horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first event is shown as an example.

L.O. 4, 6, 9

CHECK FIGURES
a. Net Income: $13,000
e. Net Cash Flow from Operating Activities: $13,000

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2. Determine the amount of total assets that Flick would report on the December 31, 2007, balance sheet.
3. Identify the sources of the assets that Flick would report on the December 31, 2007, balance sheet. Determine the amount of each of these sources.
4. Determine the net income that Flick would report on the 2007 income statement. Explain why dividends do not appear on the income statement.
5. Determine the net cash flows from operating activities, financing activities, and investing activities that Flick would report on the 2007 statement of cash flows.
6. Determine the percentage of assets that was provided by investors, creditors, and earnings.

Problem 1-35A  Factors associated with white collar crime

Clair Cubelic, a private accountant employed by a large corporation, holds the CMA professional designation. She is a trusted employee who is eager to help others whenever necessary. For example, Clair frequently orders merchandise when purchasing department personnel are overburdened. Clair’s only problem is that she feels she is underpaid. Several men in her office make more money than she does and they are not even professionally certified accountants. Clair has significant debt that she acquired while she was a student and has trouble paying her monthly bills. A close friend of Clair’s sells supplies to the company. When Clair complained to him about her pay situation, he joked that he could help her get even by sending the company less merchandise than was shown on the purchase orders. He laughed and suggested they could split the rewards of the rip-off between them. To his surprise she responded with a serious plan that would enable them to embezzle several thousand dollars per month from her company. She assured him that she could gain control of all phases of the purchasing system from ordering to payment. Unfortunately for Clair, what started as a joke ultimately ended with a jail sentence.

Required

Name the three factors that Donald Cressey found to be associated with white collar criminals. Identify these factors as they apply to Clair Cubelic’s case.