Much of accounting is directed at servicing the information needs of those users that are external to an organization. Identify at least three external users of accounting information and indicate two questions they might seek to answer through their use of accounting information.
Exercise 1-2
Identifying accounting users and uses
The following describe several different business organizations. Determine whether the description refers to a sole proprietorship, partnership, or corporation.
Ownership of Zander Company is divided into 1,000 shares of stock.
Wallingford is owned by Trent Malone, who is personally liable for the company’s debts.
Elijah Fong and Ava Logan own Financial Services, a financial services provider. Neither Fong nor Logan has personal responsibility for the debts of Financial Services.
Dylan Bailey and Emma Kayley own Speedy Packages, a courier service. Both are personally liable for the debts of the business.
IBC Services does not have separate legal existence apart from the one person who owns it.
Physio Products does not pay income taxes and has one owner.
Aaliyah Services pays its own income taxes and has two owners.
Exercise 1-4
Distinguishing business organizations
Match each of the numbered descriptions with the principle it best reflects. Indicate your answer by writing the letter for the appropriate principle in the blank space next to each description.
General accounting principle
Cost principle
Business entity principle
Revenue recognition principle
Specific accounting principle
Objectivity principle
Going-concern 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. Financial statement data are supported by evidence other than someone’s opinion or belief.
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.
A. Audit
C. Ethics
E. SEC
G. Net income
B. GAAP
D. Tax accounting
F. Public accountants
H. IASB
_______
1.
Principles that determine whether an action is right or wrong.
_______
2.
Accounting professionals who provide services to many clients.
_______
3.
An accounting area that includes planning future transactions to minimize taxes paid.
_______
4.
An examination of an organization’s accounting system and records that adds credibility to financial statements.
_______
5.
Amount a business earns after paying all expenses and costs associated with its sales and revenues.
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.
Answer the following questions. (Hint: Use the accounting equation.)
Cadence Office Supplies has assets equal to $123,000 and liabilities equal to $47,000 at year-end. What is the total equity for Cadence at year-end?
At the beginning of the year, Addison Company’s assets are $300,000 and its equity is $100,000. During the year, assets increase $80,000 and liabilities increase $50,000. What is the equity at the end of the year?
At the beginning of the year, Quasar Company’s liabilities equal $70,000. During the year, assets increase by $60,000, and at year-end assets equal $190,000. Liabilities decrease $5,000 during the year. What are the beginning and ending amounts of equity?
Leora Holden began a professional practice on June 1 and plans to prepare financial statements at the end of each month. During June, Holden (the owner) completed these transactions:
Owner invested $60,000 cash along with equipment that had a $15,000 market value in exchange for common stock.
Paid $1,500 cash for rent of office space for the month.
Purchased $10,000 of additional equipment on credit (payment due within 30 days).
Completed work for a client and immediately collected the $2,500 cash earned.
Completed work for a client and sent a bill for $8,000 to be received within 30 days.
Purchased additional equipment for $6,000 cash.
Paid an assistant $3,000 cash as wages for the month.
Collected $5,000 cash on the amount owed by the client described in transaction e.
Paid $10,000 cash to settle the liability created in transaction c.
Paid $1,000 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 1-11
Identifying effects of transactions using the accounting equation
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.
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.
Use the information in Exercise 1-13 to prepare an October statement of retained earnings for Real Answers.
Exercise 1-14
Preparing a statement of retained earnings P1
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.
Swiss Group reports net income of $40,000 for 2007. At the beginning of 2007, Swiss Group had $200,000 in assets. By the end of 2007, assets had grown to $300,000. What is Swiss Group’s 2007 return on assets? How would you assess its performance if competitors average a 10% return on assets?
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 owner contributes resources to the business in exchange for stock.
______ An organization sells some of its land.
______ An organization purchases equipment.
______ An organization advertises a new product.
______ The organization borrows money from a bank.
