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 “+/–” in the column or columns. The first transaction is completed as an example.
Problem 1-2B
Identifying effects of transactions on financial statements
Holly Nikolas launched a new business, Holly’s Maintenance Co., that began operations on June 1. The following transactions were completed by the company during that first month:
June
1
H. Nikolas invested $130,000 cash in the business in exchange for common stock.
2
Rented a furnished office and paid $6,000 cash for June’s rent.
4
Purchased $2,400 of equipment on credit.
6
Paid $1,150 cash for the next week’s advertising of the opening of the business.
8
Completed maintenance services for a customer and immediately collected $850 cash.
14
Completed $7,500 of maintenance services for City Center on credit.
16
Paid $800 cash for an assistant’s salary for the first half of the month.
20
Received $7,500 cash payment for services completed for City Center on June 14.
21
Completed $7,900 of maintenance services for Paula’s Beauty Shop on credit.
24
Completed $675 of maintenance services for Build-It Coop on credit.
25
Received $7,900 cash payment from Paula’s Beauty Shop for the work completed on June 21.
26
Made payment of $2,400 cash for the equipment purchased on June 4.
28
Paid $800 cash for an assistant’s salary for the second half of this month.
29
Paid $4,000 cash for dividends.
30
Paid $150 cash for this month’s telephone bill.
30
Paid $890 cash for this month’s utilities.
Required
Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash; Accounts Receivable; Equipment; Accounts Payable; Common Stock; Dividends; Revenues; and Expenses.
Show the 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 a June income statement, a June statement of retained earnings, a June 30 balance sheet, and a June statement of cash flows.
Problem 1-7B
Analyzing transactions and preparing financial statements
Check (2) Ending balances: Cash, $130,060; Expenses, $9,790
(3) Net income, $7,135; Total assets, $133,135
Truro Excavating Co., owned by Raul Truro, began operations in July and completed these transactions during that first month:
July
1
R. Truro invested $80,000 cash in the business in exchange for common stock.
2
Rented office space and paid $700 cash for the July rent.
3
Purchased excavating equipment for $5,000 by paying $1,000 cash and agreeing to pay the $4,000 balance in 30 days.
6
Purchased office supplies for $600 cash.
8
Completed work for a customer and immediately collected $7,600 cash for the work.
10
Purchased $2,300 of office equipment on credit.
15
Completed work for a customer on credit in the amount of $8,200.
17
Purchased $3,100 of office supplies on credit.
23
Paid $2,300 cash for the office equipment purchased on July 10.
25
Billed a customer $5,000 for work completed; the balance is due in 30 days.
28
Received $8,200 cash for the work completed on July 15.
30
Paid an assistant’s salary of $1,560 cash for this month.
31
Paid $295 cash for this month’s utility bill.
31
Paid $1,800 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; Excavating 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 $5,000 purchase of excavating equipment on July 3 was financed from an owner investment of another $5,000 cash in the business in exchange for more common stock (instead of the purchase conditions described in the transaction). Explain the effect of this change on total assets, total liabilities, and total equity.
Problem 1-8B
Analyzing transactions and preparing financial statements
Check (2) Ending balances: Cash, $87,545; Accounts Payable, $7,100
(3) Net income, $18,245; Total assets, $103,545
Nico Mitchell started a new business, Nico’s Solutions, that completed the following transactions during its first year of operations:
N. Mitchell 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. The company 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 $1,800 cash 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.
AT&T and Verizon produce and market telecommunications products and are competitors. Key financial figures (in $ millions) for these businesses over the past year follow:
Compute return on assets for (a) AT&T and (b) Verizon.
Which company is more successful in the 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 1-10B
Computing and interpreting return on assets
Carbondale Company manufactures, markets, and sells snowmobile equipment. The average total assets for Carbondale Company is $3,000,000. In its most recent year, Carbondale reported net income of $200,000 on revenues of $1,400,000.
Required
What is Carbondale Company’s return on assets?
Does return on assets seem satisfactory for Carbondale given that its competitors average a 9.5% return on assets?
What are the total expenses for Carbondale Company in its most recent year?
What is the average total amount of liabilities plus equity for Carbondale Company?
Problem 1-11B
Determining expenses, liabilities, equity, and return on assets
A startup company often engages in the following activities during its first year of operations. Classify each of the following activities into one of the three major activities of an organization:
F. Financing
I. Investing
O. Operating
______ 1. Providing client services.
______ 2. Obtaining a bank loan.
______ 3. Purchasing machinery.
______ 4. Research for its products.
______ 5. Supervising workers.
______ 6. Owner investing money in business.
______ 7. Renting office space.
______ 8. Paying utilities expenses.
Problem 1-13BB
Describing organizational activities
Identify in outline format the three major business activities of an organization. For each of these activities, identify at least two specific transactions or events normally undertaken by the business’s owners or its managers.
Problem 1-14BB
Describing organizational activities
