Problem 1-27B  Applying GAAP to financial reporting

Kim Verhaeghe is a business consultant. She analyzed the business processes of one of her clients, Rector Companies, in November 2005. She prepared a report containing her recommendation for changes in some of the company’s business practices. She presented Rector with the report in December 2005. Kim guarantees that her clients will save money by following her advice. She does not collect for the services she provides until the client is satisfied with the results of her work. In this case she received cash payment from Rector in February 2006.

Required

1. Define the acronym GAAP.
2. Assume that Kim’s accountant tells her that GAAP permits Kim to recognize the revenue from Rector in either 2005 or 2006. What GAAP rule would justify reporting the same event in two different ways? Write a brief memo explaining the logic behind this rule.
3. If Kim were keeping records for managerial reporting purposes, would she be bound by GAAP rules? Write a brief memo to explain how GAAP applies to financial versus managerial reporting.

Problem 1-28B  Accounting entities

The following business scenarios are independent of one another.

1. Mary Poort purchased an automobile from Hayney Bros. Auto Sales for $9,000.
2. John Rodman loaned $15,000 to the business in which he is a stockholder.
3. First State Bank paid interest to Caleb Co. for a savings account that Caleb Co. has at First State Bank.
4. Parkside Restaurant paid the current utility bill of $128 to Gulf Utilities.
5. Gatemore Inc. borrowed $50,000 from City National Bank and used the funds to purchase land from Morgan Realty.
6. Steven Wong purchased $10,000 of common stock of International Sales Corporation from the corporation.
7. Dan Dow loaned $4,000 cash to his daughter.
8. Mega Service Co. earned $5,000 in cash revenue.
9. McCloud Co. paid $1,500 for salaries to each of its four employees.
10. Shim Inc. paid a cash dividend of $3,000 to its sole shareholder, Marcus Shim.

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.

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

A random list of various financial statements components follows: (1) Retained Earnings account ending balance, (2) revenues, (3) Common Stock account beginning balance, (4) Common Stock account ending balance, (5) assets, (6) expenses, (7) operating activities, (8) dividends, (9) Retained Earnings beginning balance, (10) investing activities, (11) common stock issued during the period for cash, (12) liabilities, and (13) financing activities.

Required

Set up a table with the following headings. Identify the financial statements on which each of the preceding components appears by placing a check mark for the component in the appropriate column. If an item appears on more than one statement, place the check mark in every applicable column. The first component is shown as an example.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0072846003/0072846003_001_0039.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

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

Jim’s Janitorial Services experienced the following transactions for 2007, the first year of operations, and 2008. Assume that all transactions involve the receipt or payment of cash.

Transactions for 2007

1. Acquired $60,000 by issuing common stock.
2. Received $100,000 for providing services to customers.
3. Borrowed $25,000 cash from creditors.
4. Paid expenses amounting to $70,000.
5. Purchased land for $40,000 cash.

Transactions for 2008

Beginning account balances for 2008 are:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0072846003/0072846003_001_0040.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

1. Acquired an additional $20,000 from the issue of common stock.
2. Received $120,000 for providing services in 2008.
3. Paid $10,000 to reduce notes payable.
4. Paid expenses amounting to $80,000.
5. Paid a $15,000 dividend to the stockholders.
6. Determined the market value of the land to be $45,000.

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 2007 and 2008.
4. Compare the information provided by the income statement with the information provided by the statement of cash flows. Point out similarities and differences.

Problem 1-31B  Interrelationships among financial statements

Best Electronics started the accounting period with $10,000 of assets, $2,200 of liabilities, and $4,550 of retained earnings. During the period, the Retained Earnings account increased by $3,565. The bookkeeper reported that Best paid cash expenses of $5,010 and paid a $625 cash dividend to stockholders, but she could not find a record of the amount of cash that Best received for performing services. Best also paid $1,000 cash to reduce the liability owed to a bank, and the business acquired $2,000 of additional cash from the issue of common stock.

Required

1. Prepare an income statement, statement of changes in stockholders’ equity, year-end balance sheet, and statement of cash flows for the accounting period. (Hint: Determine the beginning balance in the Common Stock account 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.

Problem 1-32B  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. Borrow cash from the local bank.
3. Pay office supplies expense.
4. Make plans to purchase office equipment.
5. Trade a used car for a computer with the same value.
6. Pay other operating expenses.
7. Agree to represent a client in an IRS audit and to receive payment when the audit is complete.
8. Receive cash from customers for services rendered.
9. Pay employee salaries with cash.
10. Pay back a bank loan with cash.
11. Pay rent to a bank with cash.
12. Transfer cash from a checking account to a money market account.
13. Sell land for cash at its original cost.
14. Pay a cash dividend to stockholders.

Required

Identify each of the events as an asset source, asset use, or asset 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.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0072846003/0072846003_001_0041.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

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

Belzio Company experienced the following transactions during 2006.

1. Paid a cash dividend to the stockholders.
2. Acquired cash by issuing additional common stock.
3. Signed a contract to perform services in the future.
4. Performed services for cash.
5. Paid cash expenses.
6. Sold land for cash at an amount equal to its cost.
7. Borrowed cash from a bank.
8. Determined the year-end 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 1-34B  Recording events in a horizontal statements model

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

1. Acquired $32,000 cash from the issue of common stock.
2. Borrowed $20,000 cash from National Bank.
3. Earned cash revenues of $42,000 for performing services.
4. Paid cash expenses of $28,000.
5. Paid a $6,000 cash dividend to the stockholders.
6. Acquired $10,000 cash from the issue of additional common stock.
7. Paid $15,000 cash to reduce the principal balance of the bank note.
8. Paid $45,000 cash to purchase land.
9. Determined that the year-end market value of the land is $50,000.

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.

2. Determine the amount of total assets that Foreman would report on the December 31, 2007, balance sheet.
3. Identify the asset source transactions and related amounts for 2007.
4. Determine the net income that Foreman 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, investing activities, and financing activities that Foreman would report on the 2007 statement of cash flows.
6. Determine the percentage of assets that was provided by investors, creditors, and earnings.

Problem 1-35B  Code of Professional Conduct

Pablo Gonzalez is a CPA. His sister, Maria, started a business two years ago. She has been successful enough that she wants to expand operations. She has contacted a local bank to inquire about obtaining a loan to finance the expansion. The bank loan officer was encouraging but insisted that she provide the bank with a set of financial statements that have been audited by a CPA. Maria has asked Pablo if he would agree to audit her financial statements in order to save her the expense of having to hire another accountant.

Required

Write a brief memo explaining how Pablo should respond to Maria’s request. Your memo should contain relevant references to the AICPA’s Code of Professional Conduct.