Finance: The role of accounting in society

Subject: Business / Finance
Question
Multiple-choice questions

EXERCISES

LO 1 Exercise 1-1The role of accounting in society

Free economies use open markets to allocate resources.

Required

Identify the three participants in a free business market. Write a brief memo explaining how these participants interact to ensure that goods and services are distributed in a manner that satisfies consumers. Your memo should include answers to the following questions: If you work as a public accountant, what role would you play in the allocation of resources? Which professional certification would be most appropriate to your career?

Lo 1 Exercise 1-2Distributions in a business liquidation

Assume that Kennedy Company acquires $1,600 cash from creditors and $1,800 cash from investors.

Required

1. a.Explain the primary differences between investors and creditors.

2. b.If Kennedy has a net loss of $1,600 cash and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive?

3. c.If Kennedy has net income of $1,600 and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive?

LO 1 Exercise 1-3Careers in accounting

Accounting is commonly divided into two sectors. One sector is called public accounting. The other sector is called private accounting.

Required

1. a.Identify three areas of service provided by public accountants.

2. b.Describe the common duties performed by private accountants.

LO 1 Exercise 1-4Identifying the reporting entities

Kenneth Chang recently started a business. During the first few days of operation, Mr. Chang transferred $30,000 from his personal account into a business account for a company he named Chang Enterprises. Chang Enterprises borrowed $40,000 from First Bank. Mr. Chang’s father-in-law, Jim Harwood, invested $64,000 into the business for which he received a 25 percent ownership interest. Chang Enterprises purchased a building from Morton Realty Company. The building cost $120,000 cash. Chang Enterprises earned $28,000 in revenue from the company’s customers and paid its employees $25,000 for salaries expense.

Required

Identify the entities that were mentioned in the scenario and explain what happened to the cash accounts of each entity that you identify.

LO 2 Exercise 1-5Titles and accounts appearing on financial statements

Annual reports normally include an income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows.

Required

Identify the financial statements on which each of the following titles or accounts would appear. If a title or an account appears on more than one statement, list all statements that would includeit.

1. a.Common Stock

2. b.Land

3. c.Ending Cash Balance

4. d.Beginning Cash Balance

5. e.Notes Payable

6. f.Retained Earnings

7. g.Revenue

8. h.Cash Dividends

9. i.Financing Activities

10. j.Salaries Expense

LO 2 Exercise 1-6Components of the accounting equation

Required

The following three requirements are independent of each other.

1. a.Craig’s Cars has assets of $4,550 and stockholders’ equity of $3,200. What is the amount of liabilities? What is the amount of claims?

2. b.Heavenly Bakery has liabilities of $4,800 and stockholders’ equity of $5,400. What is the amount of assets?

3. c.Bell’s Candy Co. has assets of $49,200 and liabilities of $28,200. What is the amount of stockholders’ equity?

LO 2 Exercise 1-7Missing information in the accounting equation

Required

Calculate the missing amounts in the following table.

.gif”> alt=”Stockholders’ Equity Common Retained Company Assets = Liabilities + Stock + Earnings A $? $25,000 $48,000 $50,000 B 40,000? 7,000 30,000 C 75,000 15,000? 42,000 D 125,000 45,000 60,000?”

LO 2 Exercise 1-8Missing information in the accounting equation

As of December 31, 2012, Eber Company had total assets of $156,000, total liabilities of $85,600, and common stock of $52,400. During 2013 Eber earned $36,000 of cash revenue, paid $20,000 for cash expenses, and paid a $2,000 cash dividend to the stockholders.

Required

1. a.Determine the amount of retained earnings as of December 31, 2012, after closing.

2. b.Determine the amount of net income earned in 2013.

3. c.Determine the amount of retained earnings as of December 31, 2013, after closing.

4. d.Determine the amount of cash that is in the retained earnings account as of December 31,2013.

LO 2 Exercise 1-9Missing information for determining net income

The December 31, 2012, balance sheet for Classic Company showed total stockholders’ equity of $82,500. Total stockholders’ equity increased by $53,400 between December 31, 2012, and December 31, 2013. During 2013 Classic Company acquired $13,000 cash from the issue of common stock. Classic Company paid an $8,000 cash dividend to the stockholders during 2013.

Required

Determine the amount of net income or loss Classic reported on its 2013 income statement. (Hint:Remember that stock issues, net income, and dividends all change total stockholders’ equity.)

LO 2,3 Exercise 1-10Effect of events on the accounting equation

Olive Enterprises experienced the following events during 2012.

1. 1.Acquired cash from the issue of common stock.

2. 2.Paid cash to reduce the principal on a bank note.

3. 3.Sold land for cash at an amount equal to its cost.

4. 4.Provided services to clients for cash.

5. 5.Paid utilities expenses with cash.

6. 6.Paid a cash dividend to the stockholders.

Required

Explain how each of the events would affect the accounting equation by writing the letter I for increase, the letter D for decrease, and NA for does not affect under each of the components of the accounting equation. The first event is shown as an example.

.gif”> alt=”Stockholders’ Equity Event Common Retained Number Assets = Liabilities + Stock + Earnings 1 I NA I NA”

LO 2,3 Exercise 1-11Effects of issuing stock

Shiloh Company was started in 2012 when it acquired $15,000 cash by issuing common stock. The cash acquisition was the only event that affected the business in 2012.

Required

Write an accounting equation, and record the effects of the stock issue under the appropriate general ledger account headings.

LO 2,3 Exercise 1-12Effects of borrowing

Marcum Company was started in 2012 when it issued a note to borrow $6,200 cash.

Required

Write an accounting equation, and record the effects of the borrowing transaction under the appropriate general ledger account headings.

LO 2,3 Exercise 1-13Effects of revenue, expense, dividend, and the closing process

Rhodes Company was started on January 1, 2011. During 2012, the company experienced the following three accounting events: (1) earned cash revenues of $13,500, (2) paid cash expenses of $9,200, and (3) paid a $500 cash dividend to its stockholders. These were the only events that affected the company during 2012.

Required

1. a.Write an accounting equation, and record the effects of each accounting event under the appropriate general ledger account headings.

2. b.Prepare an income statement for the 2012 accounting period and a balance sheet at the end of 2012 for Rhodes Company.

3. c.What is the balance in the Retained Earnings account immediately after the cash revenue is recognized?

4. d.What is the balance in the Retained Earnings account after the closing process is complete?

LO 2,3 Exercise 1-14Effect of transactions on general ledger accounts

At the beginning of 2012, J & J Corp.’s accounting records had the following general ledger accounts and balances.

.gif”> alt=” J & J CORP. Accounting Equation Acct. Titles Event Assets = Liabilities + Stockholders’ Equity for RE Notes Common Retained Cash Land Payable Stock Earnings Balance 1/1/2012 10,000 20,000 12,000 7,000 11,000″

J & J Corp. completed the following transactions during 2012.

1. 1.Purchased land for $5,000 cash.

2. 2.Acquired $25,000 cash from the issue of common stock.

3. 3.Received $75,000 cash for providing services to customers.

4. 4.Paid cash operating expenses of $42,000.

5. 5.Borrowed $10,000 cash from the bank.

6. 6.Paid a $5,000 cash dividend to the stockholders.

7. 7.Determined that the market value of the land is $35,000.

Required

1. a.Record the transactions in the appropriate general ledger accounts. Record the amounts of revenue, expense, and dividends in the Retained Earnings column. Provide the appropriate titles for these accounts in the last column of the table.

2. b.Determine the net cash flow from financing activities.

3. c.What is the balance in the Retained Earnings account as of January 1, 2013?

LO 4 Exercise 1-15Classifying events as asset source, use, or exchange

BJ’s Business Services experienced the following events during its first year of operations.

1. 1.Acquired $10,000 cash from the issue of common stock.

2. 2.Borrowed $8,000 cash from First Bank.

3. 3.Paid $4,000 cash to purchase land.

4. 4.Received $5,000 cash for providing boarding services.

5. 5.Acquired an additional $2,000 cash from the issue of common stock.

6. 6.Purchased additional land for $3,500 cash.

7. 7.Paid $2,500 cash for salary expense.

8. 8.Signed a contract to provide additional services in the future.

9. 9.Paid $1,000 cash for rent expense.

10. 10.Paid a $1,000 cash dividend to the stockholders.

11. 11.Determined the market value of the land to be $8,000 at the end of the accounting period.

Required

Classify each event as an asset source, use, or exchange transaction or as not applicable (NA).

LO 5 Exercise 1-16Classifying items for the statement of cash flows

Required

Indicate how each of the following would be classified on the statement of cash flows as operating activities (OA), investing activities (IA), financing activities (FA), or not applicable (NA).

1. a.Paid $4,000 cash for salary expense.

2. b.Borrowed $8,000 cash from State Bank.

3. c.Received $30,000 cash from the issue of common stock.

4. d.Purchased land for $8,000 cash.

5. e.Performed services for $14,000 cash.

6. f.Paid $4,200 cash for utilities expense.

7. g.Sold land for $7,000 cash.

8. h.Paid a cash dividend of $1,000 to the stockholders.

9. i.Hired an accountant to keep the books.

10. j.Paid $3,000 cash on the loan from State Bank.

LO 2,3,5 Exercise 1-17Preparing financial statements

Montana Company experienced the following events during 2012.

1. 1.Acquired $30,000 cash from the issue of common stock.

2. 2.Paid $12,000 cash to purchase land.

3. 3.Borrowed $10,000 cash.

4. 4.Provided services for $20,000 cash.

5. 5.Paid $1,000 cash for rent expense.

6. 6.Paid $15,000 cash for other operating expenses.

7. 7.Paid a $2,000 cash dividend to the stockholders.

8. 8.Determined that the market value of the land purchased in Event 2 is now $12,700.

Required

1. a.The January 1, 2012, general ledger account balances are shown in the following accounting equation. Record the eight events in the appropriate general ledger accounts. Record the amounts of revenue, expense, and dividends in the Retained Earnings column. Provide the appropriate titles for these accounts in the last column of the table. The first event is shown as an example.

.gif”> alt=” MONTANA COMPANY Accounting Equation Acct. Titles Event Assets = Liabilities + Stockholders’ Equity for RE Notes Common Retained Cash Land Payable Stock Earnings Balance 1/1/2012 2,000 12,000 0 6,000 8,000 1. 30,000 30,000 LO 5 LO 5 LO 5″

2. b.Prepare an income statement, statement of changes in equity, year-end balance sheet, and statement of cash flows for the 2012 accounting period.

3. c.Determine the percentage of assets that were provided by retained earnings. How much cash is in the retained earnings account?

LO 5 Exercise 1-18Retained earnings and the closing process

Davis Company was started on January 1, 2012. During the month of January, Davis earned $4,600 of revenue and incurred $3,000 of expense. Davis closes its books on December 31 of each year.

Required

1. a.Determine the balance in the Retained Earnings account as of January 31, 2012.

2. b.Comment on whether retained earnings is an element of financial statements or an account.

3. c.What happens to the Retained Earnings account at the time expenses are recognized?

LO 5 Exercise 1-19Relationship between assets and retained earnings

Washington Company was organized when it acquired $2,000 cash from the issue of common stock. During its first accounting period the company earned $800 of cash revenue and incurred $500 of cash expenses. Also, during the accounting period the company paid its owners a $200 cash dividend.

Required

1. a.Determine the balance in the Retained Earnings account before and after the temporary accounts are closed.

2. b.As of the end of the accounting period, determine what percentage of total assets were provided by retained earnings.

LO 5 Exercise 1-20Historical cost versus market value

Hilltop, Inc., purchased land in January 2009 at a cost of $270,000. The estimated market value of the land is $350,000 as of December 31, 2012.

Required

1. a.Name the December 31, 2012, financial statement(s) on which the land will be shown.

2. b.At what dollar amount will the land be shown in the financial statement(s)?

3. c.Name the key concept that will be used in determining the dollar amount that will be reported for land that is shown in the financial statement(s).

LO 1,4,5 Exercise 1-21Relating accounting events to entities

Wright Company was started in 2012 when it acquired $25,000 cash by issuing common stock to Cal Wright.

Required

1. a.Was this event an asset source, use, or exchange transaction for Wright Company?

2. b.Was this event an asset source, use, or exchange transaction for Cal Wright?

3. c.Was the cash flow an operating, investing, or a financing activity on Wright Company’s 2012 statement of cash flows?

4. d.Was the cash flow an operating, investing, or a financing activity on Cal Wright’s 2012 statement of cash flows?

LO 6 Exercise 1-22Effect of events on a horizontal financial statements model

City Consulting Services experienced the following events during 2012.

1. 1.Acquired cash by issuing common stock.

2. 2.Collected cash for providing tutoring services to clients.

3. 3.Borrowed cash from a local government small business foundation.

4. 4.Purchased land for cash.

5. 5.Paid cash for operating expenses.

6. 6.Paid a cash dividend to the stockholders.

7. 7.Determined that the market value of the land is higher than its historical cost.

Required

Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction is shown as an example.

.gif”> alt=”Balance Sheet Income Statement Event Statement of No. Cash Exercise + Land Exercise = N. Pay Exercise + C. Stock. Exercise + Ret. Ear. Rev. Exercise ? Exp. Exercise = Net Inc. Cash Flows Exercise 1. I + NA = NA + I + NA NA ? NA = NA I FA”

LO 6 Exercise 1-23Record events in the horizontal statements model

Expo Co. was started in 2012. During 2012, the company (1) acquired $11,000 cash from the issue of common stock, (2) earned cash revenue of $18,000, (3) paid cash expenses of $10,500, and (4) paid a $1,000 cash dividend to the stockholders.

Required

1. a.Record these four events in a horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first event is shown as an example.

2. b.What does the income statement tell you about the assets of this business?

.gif” alt=”Balance sheet income statement event statement of no. cashn. payexercise + c. stock. exercise + ret. ear. rev. exercise ? exp. exercise =”>

LO 6 Exercise 1-24Effect of events on a horizontal statements model

Solito, Inc., was started on January 1, 2012. The company experienced the following events during its first year of operation.

1. 1.Acquired $50,000 cash from the issue of common stock.

2. 2.Paid $12,000 cash to purchase land.

3. 3.Received $50,000 cash for providing tax services to customers.

4. 4.Paid $9,500 cash for salary expense.

5. 5.Acquired $5,000 cash from the issue of additional common stock.

6. 6.Borrowed $10,000 cash from the bank.

7. 7.Purchased additional land for $10,000 cash.

8. 8.Paid $8,000 cash for other operating expenses.

9. 9.Paid a $2,800 cash dividend to the stockholders.

10. 10.Determined that the market value of the land is $25,000.

Required

1. a.Record these events in a horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first event is shown as an example.

.gif” alt=”Balance sheet income statement event statement of no. cash + land =”>

2. b.What is the net income earned in 2012?

3. c.What is the amount of total assets at the end of 2012?

4. d.What is the net cash flow from operating activities for 2012?

5. e.What is the net cash flow from investing activities for 2012?

6. f.What is the net cash flow from financing activities for 2012?

7. g.What is the cash balance at the end of 2012?

8. h.As of the end of the year 2012, what percentage of total assets were provided by creditors, investors, and retained earnings?

9. i.What is the balance in the Retained Earnings account immediately after Event 4 is recorded?

LO 4,6 Exercise 1-25Types of transactions and the horizontal statements model

Partner’s Pet Store experienced the following events during its first year of operations, 2012.

1. 1.Acquired cash by issuing common stock.

2. 2.Purchased land with cash.

3. 3.Borrowed cash from a bank.

4. 4.Signed a contract to provide services in the future.

5. 5.Paid a cash dividend to the stockholders.

6. 6.Paid cash for operating expenses.

7. 7.Determined that the market value of the land is higher than the historical cost.

Required

1. a.Indicate whether each event is an asset source, use, or exchange transaction.

2. b.Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction is shown as an example.

.gif” alt=”Balance sheet income statement event statement of no. cash + land =”>

IFRS Exercise 1-26International Financial Reporting Standards

Seacrest Company is a U.S.–based company that develops its financial statements under GAAP. The total amount of the company’s assets shown on its December 31, 2012, balance sheet was approximately $225 million. The president of Seacrest is considering the possibility of relocating the company to a country that practices accounting under IFRS. The president has hired an international accounting firm to determine what the company’s statements would look like if they were prepared under IFRS. One striking difference is that under IFRS the assets shown on the balance sheet would be valued at approximately $275 million.

Required

1. a.Would Seacrest’s assets really be worth $50 million more if it moves its headquarters?

2. b.Discuss the underlying conceptual differences between U.S. GAAP and IFRS that cause the difference in the reported asset values.

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