Exercises

Exercise 1-1

Identifying accounting users and uses

Much of accounting is directed at servicing the information needs of those users that are external to an organization. (a) Identify at least three external users of accounting information and indicate two questions they might seek to answer through their use of accounting information. (b) Identify at least three internal users of accounting information and describe how each might use accounting information in their jobs.

Exercise 1-2

Describing accounting responsibilities

C2 C3

Many accounting professionals work in one of the following three areas:

Financial accounting
Managerial accounting
Tax accounting

Identify the area of accounting that is most involved in each of the following responsibilities:

_____ 1. Investigating violations of tax laws.

_____ 2. Planning transactions to minimize taxes.

_____ 3. Preparing external financial statements.

_____ 4. Reviewing reports for SEC compliance.

_____ 5. Internal auditing.

_____ 6. External auditing.

_____ 7. Cost accounting.

_____ 8. Budgeting.

Exercise 1-3

Identifying ethical concerns

Assume the following role and describe a situation in which ethical considerations play an important part in guiding your decisions and actions:

You are an accounting professional with audit clients that are competitors in business.
You are an accounting professional preparing tax returns for clients.
You are a manager with responsibility for several employees.
You are a student in an introductory accounting course.

Exercise 1-4

Identifying accounting principles and assumptions

Match each of the numbered descriptions with the principle or assumption it best reflects. Enter the letter for the appropriate principle or assumption in the blank space next to each description.

General accounting principle
Cost principle
Business entity assumption
Revenue recognition principle
Specific accounting principle
Full disclosure principle
Going-concern assumption
Matching principle

_____ 1. Usually created by a pronouncement from an authoritative body.

_____ 2. Financial statements reflect the assumption that the business continues operating.

_____ 3. Derived from long-used and generally accepted accounting practices.

_____ 4. Every business is accounted for separately from its owner or owners.

_____ 5. Revenue is recorded only when the earnings process is complete.

_____ 6. Information is based on actual costs incurred in transactions.

_____ 7. A company reports details behind financial statements that would impact users' decisions.

_____ 8. A company records the expenses incurred to generate the revenues reported.

Exercise 1-5

Distinguishing business organizations

The following describe several different business organizations. Determine whether the description refers to a sole proprietorship, partnership, or corporation.

Wallingford is owned by Gary Malone, who is personally liable for the company's debts.
Ava Fong and Elijah Logan own Financial Services, a financial services provider. Neither Fong nor Logan has personal responsibility for the debts of Financial Services.
IBC Services does not have separate legal existence apart from the one person who owns it.
Computing Services pays its own income taxes and has two owners.
Ownership of Zander Company is divided into 1,000 shares of stock.
Emma Bailey and Dylan Kay own Speedy Packages, a courier service. Both are personally liable for the debts of the business.
Physio Products does not pay income taxes and has one owner.

Exercise 1-6

Using the accounting equation

Determine the missing amount from each of the separate situations a, b, and c below.

Exercise 1-7

Learning the language of business

C1 – C4

Match each of the numbered descriptions with the term or phrase it best reflects. Indicate your answer by writing the letter for the term or phrase in the blank provided.

Audit
GAAP
Ethics
Tax accounting
SEC
Public accountants
Net income
IASB

_____ 1. An accounting area that includes planning future transactions to minimize taxes paid.

_____ 2. Amount a business earns after paying all expenses and costs associated with its sales and revenues.

_____ 3. Principles that determine whether an action is right or wrong.

_____ 4. Accounting professionals who provide services to many clients.

_____ 5. An examination of an organization's accounting system and records that adds credibility to financial statements.

Exercise 1-8

Using the accountingequation

A1 A2

Check (c) Beg. equity, $73,000

Answer the following questions. (Hint: Use the accounting equation.)

Office Supplies has assets equal to $137,000 and liabilities equal to $110,000 at year-end. What is the total equity for Office Supplies at year-end?
At the beginning of the year, Addison Company's assets are $259,000 and its equity is $194,250. During the year, assets increase $80,000 and liabilities increase $52,643. What is the equity at the end of the year?
At the beginning of the year, Quasar Company's liabilities equal $57,000. During the year, assets increase by $60,000, and at year-end assets equal $190,000. Liabilities decrease $16,000 during the year. What are the beginning and ending amounts of equity?

Exercise 1-9

Identifying effects oftransactions on the accounting equation

A1 A2

Provide an example of a transaction that creates the described effects for the separate cases a through g.

Increases an asset and increases a liability.
Decreases a liability and increases a liability.
Decreases an asset and decreases a liability.
Increases an asset and decreases an asset.
Increases a liability and decreases equity.
Increases an asset and increases equity.
Decreases an asset and decreases equity.

Exercise 1-10

Analysis using theaccounting equation

A1 A2

Zen began a new consulting firm on January 5. The accounting equation showed the following balances after each of the company's first five transactions. Analyze the accounting equation for each transaction and describe each of the five transactions with their amounts.

Exercise 1-11

Identifying effects oftransactions on accounting equation

A1 A2

The following table shows the effects of five transactions (a through e) on the assets, liabilities, and equity of Trista's Boutique. Write short descriptions of the probable nature of each transaction.

Exercise 1-12

Identifying effects of transactions using the accounting equation

A1 A2

Check Net income, $7,000

Leora Diamond began a professional practice on June 1 and plans to prepare financial statements at the end of each month. During June, Diamond (the owner) completed these transactions:

Owner invested $70,000 cash along with equipment that had a $20,000 market value in exchange for common stock.
Paid $2,000 cash for rent of office space for the month.
Purchased $25,000 of additional equipment on credit (payment due within 30 days).
Completed work for a client and immediately collected the $3,000 cash earned.
Completed work for a client and sent a bill for $9,500 to be received within 30 days.
Purchased additional equipment for $5,000 cash.
Paid an assistant $3,500 cash as wages for the month.
Collected $6,500 cash as a partial payment for the amount owed by the client in transaction e.
Paid $25,000 cash to settle the liability created in transaction c.
Paid $1,500 cash dividends to the owner.

Required

Create a table like the one in Exhibit 1.9, using the following headings for columns: Cash; Accounts Receivable; Equipment; Accounts Payable; Common Stock; Dividends; Revenues; and Expenses. Then use additions and subtractions to show the effects of the transactions on individual items of the accounting equation. Show new balances after each transaction.

Exercise 1-13

Preparing an income statement

Check Net income, $4,540

On October 1, Keisha King organized Real Answers, a new consulting firm. On October 31, the company's records show the following items and amounts. Use this information to prepare an October income statement for the business.

Exercise 1-14

Preparing a statement of retained earnings

Use the information in Exercise 1-13 to prepare an October statement of retained earnings for Real Answers.

Exercise 1-15

Preparing a balance sheet

Use the information in Exercise 1-13 (if completed, you can also use your solution to Exercise 1-14) to prepare an October 31 balance sheet for Real Answers.

Exercise 1-16

Preparing a statement of cash flows

Check Net increase in cash, $11,500

Use the information in Exercise 1-13 to prepare an October 31 statement of cash flows for Real Answers. Also assume the following:

The owner's initial investment consists of $38,360 cash and $46,000 in land in exchange for common stock.
The $18,000 equipment purchase is paid in cash.
The accounts payable balance of $25,037 consists of the $24,437 office supplies purchase and $600 in employee salaries yet to be paid.
The rent, telephone, and miscellaneous expenses are paid in cash.
$2,000 has been collected on the $14,000 consulting fees earned.

Exercise 1-17

Identifying sections of the statement of cash flows

Indicate the section where each of the following would appear on the statement of cash flows.

Cash flows from operating activity
Cash flows from investing activity
Cash flows from financing activity

_____ 1. Cash paid for rent

_____ 2. Cash paid on an account payable

_____ 3. Cash received from stock issued

_____ 4. Cash received from clients

_____ 5. Cash paid for advertising

_____ 6. Cash paid for wages

_____ 7. Cash paid for dividends

_____ 8. Cash purchase of equipment

Exercise 1-18

Analysis of return on assets

Iowa Group reports net income of $36,000 for 2009. At the beginning of 2009, Iowa Group had $135,000 in assets. By the end of 2009, assets had grown to $185,000. What is Iowa Group's 2009 return on assets? How would you assess its performance if competitors average a 10% return on assets?

Exercise 1-19^B

Identifying business activities

Match each transaction or event to one of the following activities of an organization: financing activities (F), investing activities (I), or operating activities (O).

_____An organization purchases equipment.
_____An organization advertises a new product.
_____The organization borrows money from a bank.
_____An owner contributes resources to the business in exchange for stock.
_____An organization sells some of its land.

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		Chapter Opener Demonstration Problem Financial Statements Transaction Analysis a... Importance of Accounting Fundamentals of Accoun... Appendix 1A Return and... Appendix 1B Business A... Summary Guidance Answers to De... Guidance Answers to Qu... Key Terms Multiple Choice Quiz Discussion Questions Quick Study Exercises Problem Set A Problem Set B Serial Problem Beyond The Numbers Answers to Multiple Ch...