Problem Set Blocated at the end ofProblem Set Ais provided for eachproblem to reinforce the learning process.Problem Set C(with solutions for instructors) is provided on this book’s Website.
Identify how each of the following separate transactions affects financial statements. For the balance sheet, identify how each transaction affects total assets, total liabilities, and total equity. For the income statement, identify how each transaction affects net income. For the statement of cash flows, identify how each transaction affects cash flows from operating activities, cash flows from financing activities, and cash flows from investing activities. For increases, place a “+” in the column or columns. For decreases, place a “–” in the column or columns. If both an increase and a decrease occur, place a “+/–” in the column or columns. The first transaction is completed as an example.
Problem 1-2A
Identifying effects of transactions on financial statements
The following is selected financial information for Elko Energy Company for the year ended December 31, 2007: revenues, $55,000; expenses, $40,000; net income, $15,000.
Required
Prepare the 2007 calendar-year income statement for Elko Energy Company.
Holden Graham started The Graham Co., a new business that began operations on May 1. Graham Co. completed the following transactions during that first month:
May
1
H. Graham invested $40,000 cash in the business in exchange for common stock.
1
Rented a furnished office and paid $2,200 cash for May’s rent.
3
Purchased $1,890 of office equipment on credit.
5
Paid $750 cash for this month’s cleaning services.
8
Provided consulting services for a client and immediately collected $5,400 cash.
12
Provided $2,500 of consulting services for a client on credit.
15
Paid $750 cash for an assistant’s salary for the first half of this month.
20
Received $2,500 cash payment for the services provided on May 12.
22
Provided $3,200 of consulting services on credit.
25
Received $3,200 cash payment for the services provided on May 22.
26
Paid $1,890 cash for the office equipment purchased on May 3.
27
Purchased $80 of advertising in this month’s (May) local paper on credit; cash payment is due June 1.
28
Paid $750 cash for an assistant’s salary for the second half of this month.
30
Paid $300 cash for this month’s telephone bill.
30
Paid $280 cash for this month’s utilities.
31
Paid $1,400 cash for dividends.
Required
Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash; Accounts Receivable; Office Equipment; Accounts Payable; Common Stock; Dividends; Revenues; and Expenses.
Show effects of the transactions on the accounts of the accounting equation by recording increases and decreases in the appropriate columns. Do not determine new account balances after each transaction. Determine the final total for each account and verify that the equation is in balance.
Prepare an income statement for May, a statement of retained earnings for May, a May 31 balance sheet, and a statement of cash flows for May.
Problem 1-7A
Analyzing transactions and preparing financial statements
Check (2) Ending balances: Cash, $42,780; Expenses, $5,110
(3) Net income, $5,990; Total assets, $44,670
Helga Anderson started a new business and completed these transactions during December:
Dec.
1
Helga Anderson transferred $65,000 cash from a personal savings account to a checking account in the name of Anderson Electric in exchange for common stock.
2
Rented office space and paid $1,000 cash for the December rent.
3
Purchased $13,000 of electrical equipment by paying $4,800 cash and agreeing to pay the $8,200 balance in 30 days.
5
Purchased office supplies by paying $800 cash.
6
Completed electrical work and immediately collected $1,200 cash for the work.
8
Purchased $2,530 of office equipment on credit.
15
Completed electrical work on credit in the amount of $5,000.
18
Purchased $350 of office supplies on credit.
20
Paid $2,530 cash for the office equipment purchased on December 8.
24
Billed a client $900 for electrical work completed; the balance is due in 30 days.
28
Received $5,000 cash for the work completed on December 15.
29
Paid the assistant’s salary of $1,400 cash for this month.
30
Paid $540 cash for this month’s utility bill.
31
Paid $950 cash for dividends.
Required
Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash; Accounts Receivable; Office Supplies; Office Equipment; Electrical Equipment; Accounts Payable; Common Stock; Dividends; Revenues; and Expenses.
Use additions and subtractions to show the effects of each transaction on the accounts in the accounting equation. Show new balances after each transaction.
Use the increases and decreases in the columns of the table from part 2 to prepare an income statement, a statement of retained earnings, and a statement of cash flows for the month. Also prepare a balance sheet as of the end of the month.
Analysis Component
Assume that the owner investment transaction on December 1 was $49,000 cash instead of $65,000 and that Anderson Electric obtained the $16,000 difference by borrowing it from a bank. Explain the effect of this change on total assets, total liabilities, and total equity.
Problem 1-8A
Analyzing transactions and preparing financial statements
Check (2) Ending balances: Cash, $59,180, Accounts Payable, $8,550
(3) Net income, $4,160; Total assets, $76,760
Isabel Lopez started Biz Consulting, a new business, and completed the following transactions during its first year of operations:
I. Lopez invests $70,000 cash and office equipment valued at $10,000 in exchange for common stock.
Purchased a $150,000 building to use as an office. Biz paid $20,000 in cash and signed a note payable promising to pay the $130,000 balance over the next ten years.
Purchased office equipment for $15,000 cash.
Purchased $1,200 of office supplies and $1,700 of office equipment on credit.
Paid a local newspaper $500 cash for printing an announcement of the office’s opening.
Completed a financial plan for a client and billed that client $2,800 for the service.
Designed a financial plan for another client and immediately collected a $4,000 cash fee.
Paid $3,275 cash for dividends.
Received a $1,800 cash payment from the client described in transaction f.
Made a $700 cash payment on the equipment purchased in transaction d.
Paid $1,800 cash for the office secretary’s wages.
Required
Create a table like the one in Exhibit 1.9, using the following headings for the columns: Cash; Accounts Receivable; Office Supplies; Office Equipment; Building; Accounts Payable; Notes Payable; Common Stock; Dividends; Revenues; and Expenses.
Use additions and subtractions to show the effects of these transactions on individual items of the accounting equation. Show new balances after each transaction.
Once you have completed the table, determine the company’s net income.
Coca-Cola and PepsiCo both produce and market beverages that are direct competitors. Key financial figures (in $ millions) for these businesses over the past year follow:
Compute return on assets for (a) Coca-Cola and (b) PepsiCo.
Which company is more successful in its total amount of sales to consumers?
Which company is more successful in returning net income from its assets invested?
Analysis Component
Write a one-paragraph memorandum explaining which company you would invest your money in and why. (Limit your explanation to the information provided.)
Problem 1-10A
Computing and interpreting return on assets
Kyzera manufactures, markets, and sells cellular telephones. The average total assets for Kyzera is $250,000. In its most recent year, Kyzera reported net income of $65,000 on revenues of $475,000.
Required
What is Kyzera’s return on assets?
Does return on assets seem satisfactory for Kyzera given that its competitors average a 12% return on assets?
What are total expenses for Kyzera in its most recent year?
What is the average total amount of liabilities plus equity for Kyzera?
Problem 1-11A
Determining expenses, liabilities, equity, and return on assets
A startup company often engages in the following transactions in its first year of operations. Classify these transactions in one of the three major categories of an organization’s business activities.
F. Financing
I. Investing
O. Operating
_______ 1. Owner investing land in business.
_______ 2. Purchasing a building.
_______ 3. Purchasing land.
_______ 4. Borrowing cash from a bank.
_______ 5. Purchasing equipment.
_______ 6. Selling and distributing products.
_______ 7. Paying for advertising.
_______ 8. Paying employee wages.
Problem 1-13AB
Describing organizational activities
An organization undertakes various activities in pursuit of business success. Identify an organization’s three major business activities, and describe each activity.
Problem 1-14AB
Describing organizational activities
