Deck 2: Basic Financial Statements

Question 1

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
A set of financial statements:
a.s intended to assist users in evaluating the financial position, profitability, and future prospects of an entity.
b.s intended to substitute for filing income tax returns to the Internal Revenue Service in determining the amount of income taxes owed by a business organization.
c.ncludes notes disclosing information necessary for the proper interpretation of the statements.
d.s intended to assist investors and creditors in making decisions involving the allocation of economic resources.

Answer 1

Financial statements: The statement which indicates the real picture of the organization. The performance of the entity during the year is represented in the statement of income. The financial worth after working for a year is shown on the balance sheet. The cash inflows and outflows during the period are presented in the statement of cash flows.
Main Solution:
First, analyze the situation with the help of above explanation of related concept(s) and then reach to a conclusion in the following manner:
Analysis:
As per the above discussed features of financial statements, following can be deduced:
a. A set of financial statements facilitates perspicuous view of the present financial position of the entity and determines whether the entity achieved its financial objectives and if yes, then to what extent. It also provides accurate information about the profitability of the entity and premise of its future possible activities.
Hence, it can be said with full certainty that ' point a' given in question describes one of the features of a set of financial statements.
b. A set of financial statements facilitates a base for preparation of income tax return and computation of income tax payable but it can never be treated as replacement of income tax return filing in finalizing the income tax payable by the entity.
Hence, it can be said with firm conviction that ' point b' given in question does not describes one of the features of a set of financial statements.
c. A set of financial statements comprises of balance sheet, income statement, cash flows statement and information provided through notes to accounts and further supplementary presentations imparting essential details to accurately decipher the financial statements.
Hence, it can be said without any doubt that ' point c' given in question describes one of the features of a set of financial statements.
d. A set of financial statements serves one of its purposes by facilitating necessary details to its external users (such as investors, creditors, etc.) that helps them in measuring out their economic resources in different segments and timely making crucial economic decisions.
Hence, it can be said with full conviction that 'point d' given in question describes one of the features of a set of financial statements.
Conclusion:
On the basis of the above analysis, it can be concluded without a trace of doubt that indicates the correct answer and describe features of a set of financial statements appropriately.

Question 2

John Marshall is employed as a bank loan officer for First State Bank.e is comparing two companies that have applied for loans, and he wants your help in evaluating those companies.he two companies-Morris, Inc., and Walker Company-are approximately the same size and had approximately the same cash balance at the beginning of 2013.ecause the total cash flows for the three-year period are virtually the same, John is inclined to evaluate the two companies as equal in terms of their desirability as loan candidates.
Abbreviated information (in thousands of dollars) from Morris, Inc., and Walker Company is as follows:

Instructions
a.o you agree with John's preliminary assessment that the two companies are approximately equal in terms of their strength as loan candidates Why or why not
b.hat might account for the fact that Walker Company's cash flow from financing activities is zero in 2015
c.enerally, what would you advise John with regard to using statements of cash flows in evaluating loan candidates

Answer 2

Financial reporting means reporting financial facts and data of the company for a fixed point of time. It includes Balance sheet, income statements, cash flow statements, notes to accounts and press releases.
Statement of financial position is also called balance sheet, consisting asset, liabilities, and capital structure details.
Cash flow statement is a financial reporting statement, it is used to record changes in cash and cash equivalents due to changes in balance sheet accounts and various income and expenses. Cash flow statement is divided into three types of activities, operating activity, investing activity, and financing activity.
There are two methods of making a cash flow statement, direct method and indirect method. The major difference in both the methods is in the computation of operating activity, other than this the rest of the activities are calculated in similar way.
(a)John assessment is focused more on the overall results rather than the overall thorough evaluation. Morris Inc. is having more cash flows from the operating activities which mean that the company is focussing on increasing the efficiency of their processes in the shop floors and are focussing on getting the right product which will help them in long run.
(b)This may be due to the unavailability of the financing sources in 2015. Also, this means that the earlier investments were done by the owner itself.
There might also be a case that the cash inflow and cash outflows in 2015 are offset by each other.
(c)The recommendations will be as follows:
• Consideration should be given to every relevant detail of financial statements, not just the final figures or bottom line.
• Focus on the sources of the cash and how they are being used by the company.
• Negative values in the cash flow statement for the investment and the financing activities are not always bad for the company.

Question 3

The Accounting Equation
A number of business transactions carried out by Smalling Manufacturing Company are as follows:
a. Borrowed money from a bank.
b. Sold land for cash at a price equal to its cost.
c.Paid a liability.
d.Returned for credit some of the office equipment previously purchased on credit but not yet paid for.Treat this the opposite of a transaction in which you purchased office equipment on credit.)
e.Sold land for cash at a price in excess of cost.Hint: The difference between cost and sales price represents a gain that will be in the company's income statement.)
f.Purchased a computer on credit.
g.The owner invested cash in the business.
h. Purchased office equipment for cash.
i.Collected an account receivable.
Indicate the effects of each of these transactions on the total amounts of the company's assets, liabilities, and owners' equity.rganize your answer in tabular form, using the following column headings and the code letters I for increase, D for decrease, and NE for no effect.he answer for transaction a is provided as an example:

Answer 3

Transaction Analysis:
Transaction analysis is the process of the documents such as invoice or bill in order to determine the effect on the accounting equation and accounts involved.Accounting equation implies that each economic event has dual effect on the equation because resource always must equal claims. Indicate effect of each transaction on assets, liabilities and owners' equity: Transaction (a):
Money borrowed from bank increases cash and liability to pay. Increase in cash increases assets. Hence, this transaction results in increase of assets, liabilities and nil effect on owners' equity.
Transaction (b):
When land is sold for cash equal to its cost, cash increases and value of land decreases. Increase in cash increases assets and decrease in land decreases assets. Both increase and decrease of assets will offset and show nil effect.
Transaction (c):
Payment of liability decreases cash and decreases liability. Decrease in cash decreases assets. Hence, liability paid decreased assets and liabilities.
Transaction (d):
Return of office equipment previously purchased on credit decreases liability and decreases assets.
Transaction (e):
When land is sold for cash in excess of cost, cash increases more than value of land and value of land decreases. Increase in cash increases assets and decrease in land decreases assets. Increase in cash is more than decrease in land which results in net effect of increase in assets. Gain on sale of land increases net income resulting in increase of owners' equity.
Transaction (f):
Purchase of computer on credit increases assets and liability to pay resulting in increase of assets and liabilities.
Transaction (g):
Investing cash in business increases cash and capital resulting in increase of assets and owners' equity.
Transaction (h):
Purchase of office equipment for cash increases assets and decreases cash for payment made. Increase of assets and decrease of assets offset each other resulting in nil effect.
Transaction (i):
Cash collected from accounts receivable increases cash and decreases accounts receivable. Increase in cash increases assets and decrease in accounts receivable decreases assets. Hence, increase in assets and decrease in assets offset each other resulting in nil effect.

Question 4

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
Which of the following statements relating to the role of professional judgment in the financial reporting process is (are) true
a.ifferent accountants may evaluate similar situations differently.
b.he determination of which items should be disclosed in notes to financial statements requires professional judgment.
c.nce a complete list of generally accepted accounting principles is prepared, judgment by accountants will no longer enter into the financial reporting process.
d.he possibility exists that professional judgment later may prove to have been incorrect.

Question 5

An inexperienced accountant for Prestwick Company prepared the following income statement for the month of August 2015:

Prepare a revised income statement in accordance with generally accepted accounting principles.

Question 6

Foster, Inc., purchased a truck by paying $5,000 and borrowing the remaining $30,000 required to complete the transaction.riefly state how this transaction affects the company's basic accounting equation.

Question 7

Why is the statement of financial position, or balance sheet, a logical place to begin a discussion of financial statements

Question 8

The following list of balance sheet items are in random order for Alexander Farms, Inc., at September 30, 2015:

Instructions
a.repare a balance sheet by using these items and computing the amount for Retained Earnings.se a sequence of assets similar to that illustrated in Exhibit 2-10.After "Barns and Sheds," you may list the remaining assets in any order.) Include a proper heading for your balance sheet.
b.ssume that on September 30, immediately after this balance sheet was prepared, a tornado completely destroyed one of the barns.his barn had a cost of $14,000 and was not insured against this type of disaster.xplain what changes would be required in your September 30 balance sheet to reflect the loss of this barn.

Question 9

Alternative Forms of Equity
Repeat Brief Exercise 2.8, except assume that rather than being a sole proprietorship or a partner­ship, Solway Company is organized as a corporation with capital stock of $40,000.ow would the $50,000 of owners' equity be presented in the company's balance sheet

Question 10

What are the characteristics of a strong income statement

Question 11

Using Financial Statements
Obtain from the library the annual report of a well-known company (or a company specified by your instructor).

Instructions
From the balance sheet, income statement, statement of cash flows, and notes to the financial state­ments, answer the following:
a.What are the largest assets included in the company's balance sheet Why would a company of this type (size and industry) have a large investment in this particular type of asset
b.In a review of the company's statement of cash flows:
1.What are the primary sources and uses of cash from investing activities
2.Did investing activities cause the company's cash to increase or decrease
3.What are the primary sources and uses of cash from financing activities
4.Did financing activities cause the company's cash to increase or decrease
c. In a review of the company's income statement, did the company have a net income or a net loss for the most recent year What percentage of total revenues was that net income or net loss
d.Select three items in the notes accompanying the financial statements and explain briefly the importance of these items to people making decisions about investing in, or extending credit to, this company.
e.Assume that you are a lender and this company has asked to borrow an amount of cash equal to 10 percent of its total assets, to be repaid in 90 days.ould you consider this company to be a good credit risk Explain.

Question 12

The following cases relate to the valuation of assets.onsider each case independently.
a.orld-Wide Travel Agency has office supplies costing $1,400 on hand at the balance sheet date.hese supplies were purchased from a supplier that does not give cash refunds.orld-Wide's management believes that the company could sell these supplies for no more than $500 if it were to advertise them for sale.owever, the company expects to use these supplies and to purchase more when they are gone.n its balance sheet, the supplies were presented at $500.
b.erez Corporation purchased land in 1957 for $40,000.n 2015, it purchased a similar parcel of land for $300,000.n its 2015 balance sheet, the company presented these two parcels of land at a combined amount of $340,000.
c.t December 30, 2015, Felix, Inc., purchased a computer system from a mail-order supplier for $14,000.he retail value of the system-according to the mail-order supplier-was $20,000.n January 7, however, the system was stolen during a burglary.n its December 31, 2015, balance sheet, Felix showed this computer system at $14,000 and made no reference to its retail value or to the burglary.he December balance sheet was issued in February 2016.n each case, indicate the appropriate balance sheet amount of the asset under generally accepted accounting principles.f the amount assigned by the company is incorrect, briefly explain the accounting principles that have been violated.f the amount is correct, identify the accounting principles that justify this amount.

Question 13

Shown below in random order is a list of balance sheet items for Maple Valley Farms at September 30, 2015:

Instructions
a.repare a balance sheet by using these items and computing the amount for Retained Earnings.se a sequence of assets similar to that illustrated in Chapter 2 of the text.nclude a proper heading for your balance sheet.
b.ssume that on September 30, immediately after this balance sheet was prepared, a tornado completely destroyed one of the barns.his barn had a cost of $4,500 and was not insured against this type of disaster.xplain what changes would be required in your September 30 balance sheet to reflect the loss of this barn.

Question 14

What is meant by the terms positive cash flows and negative cash flows How do they relate to revenues and expenses

Question 15

On the basis of the information for Prestwick Company in Exercise 2.13, prepare a statement of cash flows in a form consistent with generally accepted accounting principles.ou may assume all transactions were in cash and that the beginning cash balance was $7,200.

Question 16

Why is a knowledge of accounting terms and concepts use­ful to persons other than professional accountants

Question 17

The items making up the balance sheet of Phillips Truck Rental at December 31 are listed below in tabular form similar to the illustration of the accounting equation in Exhibit 2-11.

During a short period after December 31, Phillips Truck Rental had the following transactions:
1.ought office equipment at a cost of $2,700.aid cash.
2.ollected $4,000 of accounts receivable.
3.aid $3,200 of accounts payable.
4.orrowed $10,000 from a bank.igned a note payable for that amount.
5.urchased two trucks for $30,500.aid $15,000 cash and signed a note payable for the balance.
6.old additional stock to investors for $85,000.
Instructions
a.ist the December 31 balances of assets, liabilities, and owners' equity in tabular form as shown above.
b.ecord the effects of each of the six transactions in the preceding tabular arrangement.how the totals for all columns after each transaction.

Question 18

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
Which of the following would you expect to find in a correctly prepared income statement
a.ash balance at the end of the period.
b.evenues earned during the period.
c.ontributions by the owner during the period.
d.xpenses incurred during the period to earn revenues.

Question 19

Factors Contributing to Solvency
Explain whether each of the following balance sheet items increases, reduces, or has no direct effect on a company's ability to pay its obligations as they come due.xplain your reasoning.
a.Cash.
b.Accounts Payable.
c.Accounts Receivable.
d.Capital Stock.

Question 20

What are the characteristics of a strong statement of cash flows

Question 21

The night manager of Willis Transportation Service, who had no accounting background, prepared the following balance sheet for the company at February 28, 2015.he dollar amounts were taken directly from the company's accounting records and are correct.owever, the balance sheet contains a number of errors in its headings, format, and the classification of assets, liabilities, and owners' equity.

Prepare a corrected balance sheet.nclude a proper heading.

Question 22

The items making up the balance sheet of Maxx Trucking at December 31 are listed below in tabular form similar to the illustration of the accounting equation in Chapter 2 of the text.

During a short period after December 31, Maxx Trucking had the following transactions:
1.ought office equipment at a cost of $2,600.aid cash.
2.ollected $2,500 of accounts receivable.
3.aid $2,000 of accounts payable.
4.orrowed $5,000 from a bank.igned a note payable for that amount.
5.urchased three trucks for $60,000.aid $5,000 cash and signed a note payable for the balance.
6.old additional stock to investors for $25,000.
Instructions
a.ist the December 31 balances of assets, liabilities, and owners' equity in tabular form as shown above.
b.ecord the effects of each of the six transactions in the tabular arrangement illustrated above.how the totals for all columns after each transaction.

Question 23

Wilkes Company had the following transactions during the current year:
• Earned revenues of $100,000 and incurred expenses of $56,000, all in cash.
• Purchased a truck for $25,000.
• Sold land for $10,000.
• Borrowed $15,000 from a local bank.
What was the total change in cash during the year

Question 24

Anita Spencer is the founder and manager of Spencer Playhouse.he business needs to obtain a bank loan to finance the production of its next play.s part of the loan application, Anita Spencer was asked to prepare a balance sheet for the business.he prepared the following balance sheet, which is arranged correctly but which contains several errors with respect to such concepts as the business entity and the valuation of assets, liabilities, and owner's equity.

In discussions with Anita Spencer and by reviewing the accounting records of Spencer Playhouse, you determine the following facts:
1.he amount of cash, $21,900, includes $15,000 in the company's bank account, $1,900 on hand in the company's safe, and $5,000 in Anita Spencer's personal savings account.
2.he accounts receivable, listed as $132,200, include $7,200 owed to the business by Artistic Tours.he remaining $125,000 is Anita Spencer's estimate of future ticket sales from September 30 through the end of the year (December 31).
3.nita Spencer explains to you that the props and costumes were purchased several days ago for $18,000.he business paid $3,000 of this amount in cash and issued a note payable to Actors' Supply Co.or the remainder of the purchase price ($15,000).s this note is not due until January of next year, it was not included among the company's liabilities.
4.pencer Playhouse rents the theater building from Kievits International at a rate of $3,000 a month.he $27,000 shown in the balance sheet represents the rent paid through September 30 of the current year.ievits International acquired the building seven years ago at a cost of $135,000.
5.he lighting equipment was purchased on September 26 at a cost of $9,400, but the stage manager says that it isn't worth a dime.
6.he automobile is Anita Spencer's classic 1978 Jaguar, which she purchased two years ago for $9,000.he recently saw a similar car advertised for sale at $15,000.he does not use the car in the business, but it has a personalized license plate that reads "PLAHOUS."
7.he accounts payable include business debts of $3,900 and the $2,100 balance of Anita Spencer's personal Visa card.
8.alaries payable include $25,000 offered to Mario Dane to play the lead role in a new play opening next December and $4,200 still owed to stagehands for work done through September 30.
9.hen Anita Spencer founded Spencer Playhouse several years ago, she invested $20,000 in the business.owever, Live Theatre, Inc., recently offered to buy her business for $173,300.herefore, she listed this amount as her equity in the above balance sheet.
Instructions
a.repare a corrected balance sheet for Spencer Playhouse at September 30, 2015.
b.or each of the nine numbered items above, explain your reasoning in deciding whether or not to include the items in the balance sheet and in determining the proper dollar valuation.

Question 25

Window Dressing Financial Statements
Prepare a two-column analysis that illustrates steps management might take to improve the appear­ance of its company's financial statements.n the left column, briefly identify three steps that might be taken.n the right column, briefly describe for each step the impact on the balance sheet, income statement, and statement of cash flows.f there is no impact on one or more of these finan­cial statements, indicate that.

Question 26

The following six transactions of Memphis Moving Company, a corporation, are summarized in equation form, with each of the six transactions identified by a letter.or each of the transactions (a) through (f) write a separate statement explaining the nature of the transaction.or example, the explanation of transaction (a) could be as follows: Purchased equipment for cash at a cost of $3,200.

Question 27

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
A transaction caused a $15,000 decrease in both total assets and total liabilities.his transaction could have been:
a.urchase of a delivery truck for $15,000 cash.
b.n asset with a cost of $15,000 destroyed by fire.
c.epayment of a $15,000 bank loan.
d.ollection of a $15,000 account receivable.

Question 28

Gathering Financial Information

This assignment introduces you to EDGAR, the Securities and Exchange Commission's database of financial information about publicly owned companies;.he SEC maintains EDGAR to increase the efficiency of financial reporting in the American economy and also to give the public free and.asy access to information about publicly owned companies.
Instructions
Access EDGAR at the following Internet address: www.sec.gov.o to "Filings Forms."
Click "Search for Company Filings" and then "Companies and Other Filers." Then type Cisco Systems into the search box and click on "Find Companies." Locate the most recent10Q (quarterly) report.
a.What is the business address of Cisco Systems
b.Locate the balance sheet in Form 10Q and determine whether the amount of the company's cash (and cash equivalents) increased or decreased in the most recent quarter.
c.Locate the income statement (called the "statement of operations").hat was the company's net income for the most recent quarter Is that amount higher or lower than in the previous quarter
d.Analyze the statement of cash flows.ow much cash was provided by operations to date for the current year
e.While you ere in EDGAR, pick another company that interests you and learn more about it by studying that company's information.e prepared to tell the class which company you selected and explain what you learned.
Internet sites are time and date sensitive.t is the purpose of these exercises to have you explore the Internet.ou may need to use the Yahoo! search engine http://www.vahoo.com (or another favorite search engine) to find a company's current Web address.

Question 29

Howard Jaffe is the founder and manager of Old Town Playhouse.he business wishes to obtain a bank loan to finance the production of its next play.s part of the loan application, Jaffe was asked to prepare a balance sheet for the business.e prepared the following balance sheet, which is arranged correctly but which contains several errors with respect to such concepts as the business entity and the valuation of assets, liabilities, and owner's equity.

In discussions with Jaffe and by reviewing the accounting records of Old Town Playhouse, you discover the following facts:
1.he amount of cash, $19,400, includes $16,000 in the company's bank account, $2,400 on hand in the company's safe, and $1,000 in Jaffe's personal savings account.
2.he accounts receivable, listed as $150,200, include $10,000 owed to the business by Dell, Inc.he remaining $140,200 is Jaffe's estimate of future ticket sales from September 30 through the end of the year (December 31).
3.affe explains to you that the props and costumes were purchased several days ago for $18,000.he business paid $3,000 of this amount in cash and issued a note payable to Ham's Supply Co.or the remainder of the purchase price ($15,000).s this note is not due until January of next year, it was not included among the company's liabilities.
4.ld Town Playhouse rents the theater building from Time International.he $26,000 shown in the balance sheet represents the rent paid through September 30 of the current year.ime International acquired the building seven years ago at a cost of $180,000.
5.he lighting equipment was purchased on September 26 at a cost of $10,000, but the stage manager says that it isn't worth a dime.
6.he automobile is Jaffe's classic 1935 Ford, which he purchased two years ago for $12,000.e recently saw a similar car advertised for sale at $15,000.e does not use the car in the business, but it has a personalized license plate that reads "OTPLAY."
7.he accounts payable include business debts of $6,000 and the $1,000 balance of Jaffe's personal Visa card.
8.alaries payable include $30,000 offered to Robin Needelman to play the lead role in a new play opening next December and $2,000 still owed to stagehands for work done through September 30.
9.hen Jaffe founded Old Town Playhouse several years ago, he invested $20,000 in the business.owever, New Theatre, Inc., recently offered to buy his business for $184,600.herefore, he listed this amount as his equity in the above balance sheet.
Instructions
a.repare a corrected balance sheet for Old Town Playhouse at September 30, 2015.
b.or each of the nine numbered items above, explain your reasoning for deciding whether or not to include the items in the balance sheet and in determining the proper dollar valuation.

Question 30

Locate the balance sheet, income statement, and statement of cash flows of Home Depot, Inc. in Appendix A of your text.eview those statements and then respond to the following for the year ended February 3, 2013 (fiscal year 2012).
a.id the company have a net income or net loss for the year How much
b.hat were the cash balances at the beginning and end of the year What were the most important causes of the cash decrease during the year (Treat "cash equivalents" as if they were cash.)
c.hat are the two largest assets and two largest liabilities included in the company's balance sheet at the end of the year

Question 31

Six transactions of Prosperity Company, a corporation, are summarized below in equation form, with each of the six transactions identified by a letter.or each of the transactions (a) through (f) write a separate statement explaining the nature of the transaction.or example, the explanation of transaction (a) could be as follows: Purchased furniture for cash at a cost of $800.

Question 32

Wiley Company had total revenues of $300,000 for a recent month.uring the month the company incurred operating expenses of $205,000 and purchased land for $55,000.ompute the amount of Wiley's net income for the month.

Question 33

Can a business transaction cause one asset to increase with­out affecting any other asset, liability; or owners' equity

Question 34

Ben Washington, sole owner of Washington Mattress Company, has an ownership interest in the company of $50,000 at January 1, 2015.uring that year, he invests an additional $20,000 in the company and the company reports a net income of $25,000.etermine the balance of owner's equity that will appear in the statement of financial position at the end of the year, and explain how the amount of net income articulates with that figure in the balance sheet.

Question 35

McKesson Corporation 's annual report for the year ended March 31, 2012, includes income statements for three years: ending on March 31, 2010, 2011, and 2012.et income for these three years is as follows (all in millions): $1,263 (2010), $1,202 (2011), and $1,403 (2012).urther analysis of the same income statements reveals that revenues were the following amounts for these same years (all in millions): $108,702 (2010), $112,084 (2011), and $122,734 (2012).tate each year's net income as a percentage of revenues and comment briefly on the trend you see over the three-year period.

Question 36

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
Which of the following statements is (are) not consistent with generally accepted accounting principles relating to asset valuation
a.ost assets are originally recorded in accounting records at their cost to the business entity.
b.ubtracting total liabilities from total assets indicates what the owners' equity in the business is worth under current market conditions.
c.ccountants assume that assets such as office supplies, land, and buildings will be used in business operations rather than sold at current market prices.
d.ccountants prefer to base the valuation of assets on objective, verifiable evidence rather than upon appraisals or personal opinions.

Question 37

The date is November 18, 2015.ou are the chief executive officer of Omega Software-a publicly owned company that is currently in financial difficulty.mega needs new large bank loans if it is to survive.
You have been negotiating with several banks, but each has asked to see your 2015 financial statements, which will be dated December 31.hese statements will, of course, be audited.ou are now meeting with other corporate officers to discuss the situation, and the following suggestions have been made:
1.We are planning to buy WordMaster Software Co.or $8 million cash in December.he owners of WordMaster are in no hurry; if we delay this acquisition until January, we'll have $8 million more cash at year-end.hat should make us look a lot more solvent."
2.At year-end, we'll owe accounts payable of about $18 million.f we were to show this liability in our balance sheet at half that amount-say, $9 million-no one would know the difference.e could report the other $9 million as stockholders' equity and our financial position would appear much stronger."
3.We owe Delta Programming $5 million, due in 90 days. know some people at Delta.f we were to sign a note and pay them 10 percent interest, they'd let us postpone this debt for a year or more."
4.We own land that cost us $2 million but today is worth at least $6 million.et's show it at $6 million in our balance sheet, and that will increase our total assets and our stockholders' equity by $4 million."
Instructions
Separately evaluate each of these four proposals to improve Omega Software's financial statements.our evaluations should consider ethical and legal issues as well as accounting issues.

Question 38

Effects of Business Transactions
For each of the following categories, state concisely a transaction that will have the required effect on the elements of the accounting equation.
a.Increase an asset and increase a liability.
b.Decrease an asset and decrease a liability.
c.Increase one asset and decrease another asset.
d.Increase an asset and increase owners' equity.
e.Increase one asset, decrease another asset, and increase a liability.

Question 39

What are the three categories commonly found in a state­ment of cash flows, and what is included in each category

Question 40

Bosh Company's assets total $155,000 and its liabilities total $85,000.hat is the amount of Bosh's retained earnings if its capital stock amounts to $50,000

Question 41

What is the basic accounting equation Briefly define the three primary elements in the equation.

Question 42

The balance sheet items for Franklin Bakery (arranged in alphabetical order) were as follows at August 1, 2015.You are to compute the missing figure for Retained Earnings.)

During the next two days, the following transactions occurred:

Instructions
a.repare a balance sheet at August 1, 2015.
b.repare a balance sheet at August 3, 2015, and a statement of cash flows for August 1-3.lassify the payment of accounts payable and the purchase of supplies as operating activities.
c.ssume the notes payable do not come due for several years.s Franklin Bakery in a stronger financial position on August 1 or on August 3 Explain briefly.

Question 43

Professional Judgment
Professional judgment plays a major role in the practice of accounting.
a.In general terms, explain why judgment enters into the accounting process.
b.Identify at least three situations in which accountants must rely on their professional judg­ment, rather than on official rules.

Question 44

Moon Corporation and Star Corporation are in the same line of business and both were recently organized, so it may be assumed that the recorded costs for assets are close to current market values.he balance sheets for the two companies are as follows at July 31, 2015:


Instructions
a.ssume that you are a banker and that each company has applied to you for a 90-day loan of $12,000.hich would you consider to be the more favorable prospect Explain your answer fully.
b.ssume that you are an investor considering purchasing all the capital stock of one or both of the companies.or which business would you be willing to pay the higher price Do you see any indication of a financial crisis that you might face shortly after buying either company Explain your answer fully.For either decision, additional information would be useful, but you are to reach your decision on the basis of the information available.)

Question 45

Compute the missing amounts in the following table:

Question 46

The balance sheet items for Collier Butcher Shop (arranged in alphabetical order) were as follows at July 1, 2015.You are to compute the missing figure for Retained Earnings.)

During the next few days, the following transactions occurred:

Instructions
a.repare a balance sheet at July 1, 2015.
b.repare a balance sheet at July 5, 2015, and a statement of cash flows for July 1-5.lassify the payment of accounts payable and the purchase of supplies as operating activities.
c.ssume the notes payable do not come due for several years.s Collier Butcher Shop in a stronger financial position on July 1 or on July 5 Explain briefly.

Question 47

Big Screen Scripts is a service-type enterprise in the entertainment field, and its manager, William Pippin, has only a limited knowledge of accounting.ippin prepared the following balance sheet, which, although arranged satisfactorily, contains certain errors with respect to such concepts as the business entity and asset valuation.ippin owns all of the corporation's outstanding stock.

In discussion with Pippin and by inspection of the accounting records, you discover the following facts:
1.he amount of cash, $5,150, includes $3,400 in the company's bank account, $540 on hand in the company's safe, and $1,210 in Pippin's personal savings account.
2.ne of the notes receivable in the amount of $500 is an IOU that Pippin received in a poker game several years ago.he IOU is signed by "B.K.," whom Pippin met at the game but has not heard from since.
3.ffice furniture includes $2,900 for a Persian rug for the office purchased on November 20.he total cost of the rug was $9,400.he business paid $2,900 in cash and issued a note payable to Zoltan Carpet for the balance due ($6,500).s no payment on the note is due until January, this debt is not included in the liabilities above.
4.lso included in the amount for office furniture is a computer that cost $2,525 but is not on hand because Pippin donated it to a local charity.
5.he "Other Assets" of $22,400 represent the total amount of income taxes Pippin has paid the federal government over a period of years.ippin believes the income tax law to be unconstitutional, and a friend who attends law school has promised to help Pippin recover the taxes paid as soon as he passes the bar exam.
6.he asset "Land" was acquired at a cost of $39,000 but was increased to a valuation of $70,000 when one of Pippin's friends offered to pay that much for it if Pippin would move the building off the lot.
7.he accounts payable include business debts of $32,700 and the $3,105 balance owed on Pippin's personal MasterCard.
Instructions
a.repare a corrected balance sheet at November 30, 2015.
b.or each of the seven numbered items above, use a separate numbered paragraph to explain whether the treatment followed by Pippin is in accordance with generally accepted accounting principles.

Question 48

Walters Company purchased a piece of machinery on credit for $20,000.riefly state the way this transaction affects the company's basic accounting equation.

Question 49

In general terms, what are revenues and expenses How are they related in the determination of an enterprise's net income or net loss

Question 50

HERE COME THE CLOWNS! is the name of a traveling circus.he ledger accounts of the business at June 30, 2015, are listed here in alphabetical order:

Instructions
a.repare a balance sheet by using these items and computing the amount of Cash at June 30, 2015.rganize your balance sheet similar to the one illustrated in Exhibit 2-10.nclude a proper balance sheet heading.
b.ssume that late in the evening of June 30, after your balance sheet had been prepared, a fire destroyed one of the tents, which had cost $14,300.he tent was not insured.xplain what changes would be required in your June 30 balance sheet to reflect the loss of this asset.

Question 51

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
What information would you find in a statement of cash flows that you would not be able to get from the other two primary financial statements
a.ash provided by or used in financing activities.
b.ash balance at the end of the period.
c.otal liabilities due to creditors at the end of the period.
d.et income.

Question 52

Star Scripts is a service-type enterprise in the entertainment field, and its manager, Joe Smartt, has only a limited knowledge of accounting.oe prepared the following balance sheet, which, although arranged satisfactorily, contains certain errors with respect to such concepts as the business entity and asset valuation.oe owns all of the corporation's outstanding stock.

In discussion with Joe and by inspection of the accounting records, you discover the following facts:
1.he amount of cash, $5,000, includes $2,000 in the company's bank account, $1,200 on hand in the company's safe, and $1,800 in Joe's personal savings account.
2.ne of the notes receivable in the amount of $600 is an IOU that Joe received in a poker game five years ago.he IOU is signed by "G.W.," whom Joe met at the game but has not heard from since.
3.ffice furniture includes $2,500 for an Indian rug for the office purchased on November 15.he total cost of the rug was $10,000.he business paid $2,500 in cash and issued a note payable to Jana Interiors for the balance due ($7,500).s no payment on the note is due until January, this debt is not included in the liabilities above.
4.lso included in the amount for office furniture is a computer that cost $800 but is not on hand because Joe donated it to a local charity.
5.he "Other Assets" of $25,000 represent the total amount of income taxes Joe has paid the federal government over a period of years.oe believes the income tax law to be unconstitutional, and a friend who attends law school has promised to help Joe recover the taxes paid as soon as he passes the bar exam.
6.he asset "Land" was acquired at a cost of $15,000 but was increased to a valuation of $60,000 when one of Joe's friends offered to pay that much for it if Joe would move the building off the lot.
7.he accounts payable include business debts of $30,000 and the $2,000 balance owed on Joe's personal MasterCard.
Instructions
a.repare a corrected balance sheet at November 30, 2015.
b.or each of the seven numbered items above, use a separate numbered paragraph to explain whether the treatment followed by Joe is in accordance with generally accepted accounting principles.

Question 53

Content of a Balance Sheet
You are to prepare a balance sheet for a hypothetical business entity of your choosing (or specified by your instructor).nclude in your balance sheet the types of assets and liabilities that you think the entity might have, and show these items at what you believe would be realistic dollar amounts.ake reasonable assumptions with regard to the company's capital stock and retained earnings.
Note : The purpose of this assignment is to help you consider the types of assets and liabilities required for the operations of a specific type of business.ou should complete this assignment without referring to an actual balance sheet for this type of business.

Question 54

The balance sheet items of Kiner Company as of December 31, 2011, follow in random order.ou are to prepare a balance sheet for the company, using a similar sequence for assets as illustrated in Exhibit 2-9.ou must compute the amount for Retained Earnings.

Question 55

Circus World is the name of a traveling circus.he ledger accounts of the business at June 30, 2015, are listed here in alphabetical order:

Instructions
a.repare a balance sheet by using these items and computing the amount of Cash at June 30, 2015.nclude a proper balance sheet heading.
b.ssume that late in the evening of June 30, after your balance sheet had been prepared, a fire destroyed one of the tents, which had cost $10,000.he tent was not insured.xplain what changes would be required in your June 30 balance sheet to reflect the loss of this asset.

Question 56

Alternative Forms of Equity
Solway Company is a sole proprietorship whose owner, Joe Solway, has an equity interest of $50,000.ad Solway been a partnership rather than a sole proprietorship, and the two equal part­ners were Joe and his brother Tom, how would the $50,000 owners' equity be presented in the company's balance sheet

Question 57

What is meant by the statement that the financial statements articulate

Question 58

In broad general terms, what is the purpose of accounting

Question 59

Maxwell Communications was organized on December 1 of the current year and had the following account balances at December 31, listed in tabular form:

Early in January, the following transactions were carried out by Maxwell Communications:
1.old capital stock to owners for $35,000.
2.urchased land and a small office building for a total price of $90,000, of which $35,000 was the value of the land and $55,000 was the value of the building.aid $22,500 in cash and signed a note payable for the remaining $67,500.
3.ought several computer systems on credit for $9,500 (30-day open account).
4.btained a loan from Capital Bank in the amount of $20,000.igned a note payable.
5.aid the $22,250 account payable due as of December 31.
Instructions
a.ist the December 31 balances of assets, liabilities, and owners' equity in tabular form as shown.
b.ecord the effects of each of the five transactions in the format illustrated in Exhibit 2-11.how the totals for all columns after each transaction.

Question 60

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
Which of the following is (are) correct about a company's balance sheet
a.isplays sources and uses of cash for the period.
b.s an expansion of the basic accounting equation: Assets 5 Liabilities 1 Owners' Equity.
c.s sometimes referred to as a statement of financial position.
d.t is unnecessary if both an income statement and statement of cash flows are available.

Question 61

Give an example of business transactions that would:
a.Cause one asset to increase and another asset to decrease, with no effect on either liabilities or owners' equity.
b. Cause both total assets and liabilities to increase with no effect on owners' equity.

Question 62

During the month of October 2015, Weller Company had the following transactions:
1.evenues of $12,000 were earned and received in cash.
2.ank loans of $3,000 were paid off.
3.quipment of $2,500 was purchased for cash.
4.xpenses of $7,600 were paid.
5.dditional shares of capital stock were sold for $7,500 cash.
Assuming that the cash balance at the beginning of the month was $7,450, prepare a statement of cash flows that displays operating, investing, and financing activities and that reconciles the beginning and ending cash balances.

Question 63

Assets and liabilities are important elements of a company's financial position.
a.efine assets.ive three examples of assets other than cash that might appear in the balance sheet of (1) American Airlines and (2) a professional sports team, such as the Boston Red Sox.
b.efine liabilities.ive three examples of liabilities that might appear in the balance sheet of (1) American Airlines and (2) a professional sports team, such as the Boston Red Sox.

Question 64

Delta Corporation was organized on December 1 of the current year and had the following account balances at December 31, listed in tabular form:

Early in January, the following transactions were carried out by Delta Corporation:
1.old capital stock to owners for $40,000.
2.urchased land and a small office building for a total price of $80,000, of which $30,000 was the value of the land and $50,000 was the value of the building.aid $10,000 in cash and signed a note payable for the remaining $70,000.
3.ought several computer systems on credit for $8,000 (30-day open account).
4.btained a loan from 2nd Bank in the amount of $12,000.igned a note payable.
5.aid $6,000 of account payable due as of December 31.
Instructions
a.ist the December 31 balances of assets, liabilities, and owners' equity in tabular form as shown above.
b.ecord the effects of each of the five transactions in the format illustrated in Chapter 2 of the text.how the totals for all columns after each transaction.

Question 65

Wexler, Inc.'s income statement showed total expenses for the year to be $50,000.f the company's revenues for the year were $135,000 and its year-end cash balance was $35,000, what was Wexler's net income for the year

Question 66

Spencer Software Company has assets of $850,000 and liabilities of $460,000.
a.repare the owners' equity section of the company's balance sheet under each of the following independent assumptions:
1.he business is organized as a sole proprietorship, owned by Johanna Spencer.
2.he business is organized as a partnership, owned by Johanna Spencer and Mikki Yato.pencer's equity amounts to $240,000.
3.he business is a corporation with 27 stockholders, each of whom originally invested $10,000 in exchange for shares of the company's capital stock.he remainder of the stockholders' equity has resulted from profitable operation of the business.
b.ssume that you are a loan officer at Security Bank.pencer Software Company has applied to your bank for a large loan to finance the development of new products.oes it matter to you whether Spencer is organized as a sole proprietorship, a partnership, or a corporation Explain.

Question 67

What is meant by the term adequate disclosure , and how do accountants fulfill this requirement in the preparation of financial statements

Question 68

Listed below in random order are the items to be included in the balance sheet of Rocky Mountain Lodge at December 31, 2015:

Instructions
a.repare a balance sheet at December 31, 2015.nclude a proper heading and organize your balance sheet similar to Exhibit 2-9.ou will need to compute the amount to be shown for Retained Earnings.
b.ssume that no payment is due on the notes payable until 2017.oes this balance sheet indicate that the company is in a strong financial position as of December 31, 2015 Explain briefly.

Question 69

The answers to these questions appear on page 85.Note: In order to review as many chapter concepts as possible, some self-test questions include more than one correct answer.n these cases, you should indicate all of the correct answers.
Waterworld Boat Shop purchased a truck for $12,000, making a down payment of $5,000 cash and signing a $7,000 note payable due in 60 days.s a result of this transaction:
a.otal assets increased by $12,000.
b.otal liabilities increased by $7,000.
c.rom the viewpoint of a short-term creditor, this transaction makes the business more liquid.
d.his transaction had no immediate effect on the owners' equity in the business.

Question 70

Public Company Accounting Oversight Board

The Public Company Accounting Oversight Board (PCAOB) is a direct outcome of the Sarbanes-Oxley Act of 2002.his is considered one of the most significant pieces of legislation to have been enacted in terms of financial reporting in several decades.o respond to the instructions in this case, use the methodology of your choice to locate the Web site of the PCAOB.
Instructions
a.State the mission of the PCAOB.
b.Access the category "About Us" and list the names of the members of the PCAOB.
c.Access the category "Enforcement" and describe the authority the PCAOB has been granted by the Sarbanes-Oxley Act of 2002.
d.Access the category "Standards" and describe the responsibility of the PCAOB to establish standards that impact corporate financial reporting

Question 71

The balance sheet items of The Soda Shop (arranged in alphabetical order) were as follows at the close of business on September 30, 2015:

The transactions occurring during the first week of October were:

Instructions
a.repare a balance sheet at September 30, 2015.You will need to compute the missing figure for Notes Payable.)
b.repare a balance sheet at October 6, 2015.lso prepare an income statement and a statement of cash flows for the period October 1-6, 2015.n your statement of cash flows, treat the purchase of supplies and the payment of accounts payable as operating activities.
c.ssume the notes payable do not come due for several years.s The Soda Shop in a stronger financial position on September 30 or on October 6 Explain briefly.

Question 72

Jiminez, Inc., had the following transactions during the month of March 2015.repare an income statement based on this information, being careful to include only those items that should appear in that financial statement.
1.ash received from bank loans was $10,000.
2.evenues earned and received in cash were $9,850.
3.ividends of $4,000 were paid to stockholders.
4.xpenses incurred and paid were $5,465.

Question 73

Listed below in random order are the items to be included in the balance sheet of Tri-State Lodge at December 31, 2015:

Instructions
a.repare a balance sheet at December 31, 2015.nclude a proper heading and organize your balance sheet similar to the illustrations shown in Chapter 2.ou will need to compute the amount to be shown for Capital Stock.
b.ssume that no payment is due on the notes payable until 2017.oes this balance sheet indicate that the company is in a strong financial position as of December 31, 2015 Explain briefly.

Question 74

Computing Total Liabilities
White Company's assets total $780,000 and its owners' equity consists of capital stock of $500,000 and retained earnings of $150,000.oes White Company have any outstanding liabilities and, if so, what is the total amount of its liabilities

Question 75

Why is the going-concern assumption an important consid­eration in understanding financial statements

Question 76

The balance sheet items of The Sweet Shop (arranged in alphabetical order) were as follows at the close of the business on September 30, 2015:

The transactions occurring during the first week of October were:

Instructions
a.repare a balance sheet at September 30, 2015.You will need to compute the missing figure for Notes Payable.)
b.repare a balance sheet at October 6, 2015.lso prepare an income statement and a statement of cash flows for the period October 1-6, 2015.n your statement of cash flows, treat the purchase of supplies and the payment of accounts payable as operating activities.
c.ssume the notes payable do not come due for several years.s The Sweet Shop in a stronger financial position on September 30 or on October 6 Explain briefly.

Question 77

What is meant by the term window dressing when referring to financial statements