Solution manual for accounting concepts and applications 10th edition by albrecht

This information is provided in the primary financial statements consisting of a balance sheet, an income statement, and a statement of cash flows.. A balance sheet shows a company's

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https://getbooksolutions.com/download/accounting-concepts-and-CHAPTER 2 DISCUSSION QUESTIONS

1 Investors, creditors, and other external users

need to know a company's financial status

For example, what assets does the company

own? Are the assets still productive? How

hard would it be to sell the assets, if

needed? Also, what debts must be paid? Are

the owners' interests in the business

increasing or decreasing and why? External

users also need information on the

profitability of the company Is the company

making or losing money? In addition,

external users need to know what the total

inflows and outflows of cash are—those

from operations as well as those from

investing and financing activities This

information is provided in the primary

financial statements consisting of a balance

sheet, an income statement, and a

statement of cash flows

2 a A balance sheet shows a company's

financial status (the relationships among

assets, liabilities, and owners' equity) at

a particular date

b An income statement shows the results

of an entity's operations during a period

of time

c A statement of cash flows shows the

major inflows and outflows of cash

during a period of time

3 The answer might seem obvious to you, but

you would be surprised at how often people

get so caught up in dreaming of the

―guaranteed‖ return that they forget to

research the company's financial situation

before investing

Would you buy a home on your friends'

advice without seeing the home yourself?

No, you would view the home and most likely

hire an inspector to check it for problems

before deciding if it would be a good

investment Just as you would inspect a

home before investing, so should you

inspect the company by, among other things, reviewing the financial statements

By researching the past and current financial statements of the company, you can determine (1) if past and present stock performances are indicative of the projected 150% return; (2) if the company has a history of positive or negative cash flows; (3)

if sales have been steadily increasing or decreasing over time; and (4) if the company historically has had net earnings or losses These are but a few of the many reasons why it is important to do the research yourself before immediately jumping into an investment just on your friends' advice

4 Readers of annual reports need to compare

the financial status and results of operations

of a company with other companies and with the same company's results for previous periods In this way, users can judge the relative progress of a company toward its goals Statements covering more than one accounting period and those statements that classify and highlight key relationships assist

in this comparative analysis

5 There are three ways that economic

resources can be brought into a business: borrowing from others, owner contributions, and earnings The first is a liability, whereas the latter two are included in the owners' equity section Together these two balance sheet sections (liabilities and owners' equity) inform readers of the ―sources'' of assets

6 Owners' equity is a residual value showing

the amount of net assets (assets minus liabilities) that are claimed by the owners of the business If a business were to sell all its assets, then pay all its creditors, the remaining amount would go to the owners The amount of owners' equity reported on a balance sheet generally will not be equal to

the current worth of a business since the

assets generally are reported at their

historical costs, not at their current values

The amount of owners' equity is represented

by all assets (after deducting liabilities), not

just cash

7 The balance sheet has two main limitations

First, assets are initially recorded at their

purchase cost and subsequent changes in

value may or may not be recorded on the

books The second limitation is that some

important economic assets, called intangible

assets, are not reported at all, although they

may be the most valuable assets to the

company

It is important to be aware of these

limitations when evaluating a company's

growth potential because the company may

be worth much more (or less) than its book

value shows

8 Some people feel that the income statement

is more important than the balance sheet

because it shows the profitability of a

company In turn, profitability relates to

future cash-generating ability, which is of

prime interest to most users of financial

reports Others feel that the balance sheet is

more important than the income statement

because cash flow is eventually translated

into the asset and equity balances reported

on the balance sheet Properly informed

people realize that all three primary financial

statements are equally important and

complementary

9 By looking only at the net income or EPS

number, an investor might not see the

important relationships of various categories

on an income statement For example,

revenues less operating expenses equals

operating income If an unusual gain or loss

on some nonoperating item is added to or

subtracted from operating income, net

income and the EPS number may be

distorted and would not reflect the results of

normal operations for the period

10 Cash flows should be classified according to

operating, investing, and financing activities

in order to help investors and others see the

sources and uses of cash by major activity

For example, if a company is not providing a

net cash inflow from operations and instead

has to borrow cash to keep the business

running, it may not stay in business long

Thus, the amount of net cash provided from

operations is a key figure that should be highlighted

11 When financial statements are prepared in

accordance with generally accepted accounting principles (GAAP), certain guidelines or rules have been followed in measuring and reporting the yearly financial activities In expressing an opinion, an auditor attests and affirms that the guidelines followed are commonly accepted

by the accounting profession Thus, the auditor's opinion gives assurance that the results of operations have not been distorted because a firm uses different or incorrect accounting principles and procedures The auditor's opinion also gives some assurance that management's financial statements fairly represent what actually occurred during the year Without such assurances, misleading or ill-prepared financial statements could cause substantial losses to unwary investors

12 Auditors cannot assure that the financial

statements are accurate, because their examination is not based on a test of every item and every transaction Time and fee constraints require that an audit be based on

a sample of items Auditors review a sufficient sample of evidential material to form a professional opinion, but accuracy is still the responsibility of the preparer of the statements—management The auditor's function is to express an opinion about the financial statements

13 The four types of financial statement notes

typically included in an annual report are (1) summary of significant accounting policies, (2) additional information about summary totals, (3) disclosure of information not recognized, and (4) supplementary information

14 The importance of the basic accounting

concepts or assumptions is as follows:

a The separate entity concept identifies

the particular organizational unit for which accounting data are compiled The entity is the focal point for accumulating, measuring, and communicating accounting data

b Arm's-length transactions are those in

which the buyer and seller are rational and free to act independently Accounting for and analyzing economic

transactions enable the accountant to

measure the successes and failures of a

reporting entity If transactions between

entities involve any favoritism or

irregularity, the data measured by the

accountant will lose validity; that is, the

data will not accurately measure the

success of the reporting entity

c The cost principle requires transactions

to be recorded at historical costs, the

amounts originally paid in an

arm's-length transaction This ensures that

accounting data are objective, since the

exchange price (historical cost) at the

date of the transaction is presumed to

reflect the fair market value of an item at

that date

d Monetary measurement provides a

quantitive means of measuring

transactions and comparing the results

of operations for various reporting

entities

e The going concern assumption states

that, unless there is evidence to the contrary, the entity will continue in operation for the foreseeable future If the opposite assumption were made— that the entity was about to go out of business—accountants would record liquidation values on the books of the entity

PRACTICE EXERCISES

Computation of total assets:

Computation of total liabilities:

Computation of total owners’ equity:

Refer to the solutions for PE 2–1, 2–2, and 2–3 To confirm the accuracy of the solutions, we can verify assets are equal to liabilities plus owners’ equity:

Note that in this case, total owners’ equity is negative because liabilities are greater than assets

PE 2–5 (LO1) Balance Sheet

Computation of total current assets:

Computation of total current liabilities:

For simplicity, the entire $10,000 amount of the mortgage payable is assumed to

be a long-term liability However, if monthly payments are to be made on the mortgage during the next year, some part of the liability is current This portion might be labeled as ―current portion of mortgage payable.‖

PE 2–8 (LO1) Book Value and Market Value of Equity

of publicly-traded U.S companies have negative equity book values

Computation of total revenues:

Computation of total expenses:

PE 2–11 (LO2) Computation of Net Income

Computation of net income (or net loss):

Computation of ending retained earnings:

Note that in this case, retained earnings is negative indicating that either the company has reported a cumulative loss over its history or cumulative dividends have exceeded cumulative income

PE 2–15 (LO3) Computing Cash from Operating Activities

Computation of cash flow from operating activities:

Computation of cash flow from investing activities:

Computation of cash flow from financing activities:

PE 2–18 (LO3) Preparing a Statement of Cash Flows

Statement of Cash Flows OPERATING ACTIVITIES:

INVESTING ACTIVITIES:

FINANCING ACTIVITIES:

E 2–23 (LO1, LO2) Computing Elements of Owners' Equity

Therefore:

X = $16,500 = Net Income Net Income = Revenues – Expenses

X = $91,500 = Revenues

E 2–24 (LO1, LO2) Balance Sheet Relationships

Canfield Corporation Balance Sheet December 31, 2009 Assets

Owners' Equity

Retained earnings 145,000 Total liabilities and owners'

equity $560,000

Note: Sales revenue, rent expense, and utilities expense are not part of the

balance sheet, but instead are components of the income statement

E 2–25 (LO1, LO2) Balance Sheet Preparation

Taylorsville Construction Company

Balance Sheet December 31, 2009 Assets

*Computations of Owners' Equity:

$423,750

E 2–26 (LO2) Income Statement Computations

Income Statement For the Year Ended December 31, 2009

Pickard and Associates earned $21.15 during 2009 This helps investors see how profitable their individual investments in Pickard and Associates are

E 2–28 (LO2) Income and Retained Earnings Relationships

Retained earnings, December 31, 2008 = $60,000

Retained earnings, December 31, 2009 = $75,000

E 2–30 (LO2) Preparation of Income Statement and Retained Earnings

Statement

Big Sky Corporation Income Statement For the Year Ended June 30, 2009

Big Sky Corporation Statement of Retained Earnings For the Year Ended June 30, 2009

$90,400

Income Statement

(increased $48,000) If owners' equity increased by $48,000 and dividends of

$12,100 were paid, net income must have been $48,000 + $12,100, or $60,100

(increased $48,000) If owners' equity increased $48,000 and $18,000 of this was the result of additional issuance of stock, net income must have been

$48,000 – $18,000, or $30,000

issued for $72,000 and dividends of $12,400 were paid, then the net loss must have been $48,000 – $72,000 + $12,400, or ($11,600)

E 2–32 (LO3) Cash Flow Computations

Cash payments for:

E 2–34 (LO4) Notes to Financial Statements

The notes to financial statements are very important because they explain how a company has prepared its financial statements and also clarify specific items that need more detail The first section of its notes to financial statements is entitled

―Summary of Significant Accounting Policies.‖ The second section gives additional information regarding long-term debt, financial instruments, income taxes, and other items This section explains how Wal-Mart came up with the totals given earlier in its financial statements The third section examines Wal- Mart's stock and employee stock and savings plans The last section of the notes

to financial statements details segment information for Wal-Mart, as well as unaudited quarterly information

The property purchased by Save-More Construction Company on January 1,

2009, should be recorded at $150,000, the amount of cash paid for the property This assumes that the land was purchased in an arm's-length transaction The amount reported at year-end, after the rezoning decision, would still be

$150,000—the historical cost, or exchange price, at the date of the transaction The historical cost provides an objective measure of value in accounting measurements The increased value of the land would be recognized later, when the land is sold in another arm's-length transaction

Accounting records report only those transactions and events that can be measured in dollars Some items are not measurable in monetary terms and therefore are not reported on financial statements There can be little doubt that good employees add great value to a business enterprise However, measuring that value is very difficult, and it is the main reason why that information is not reported on a balance sheet

If the auto repair business is regarded as a going concern, the values assigned to the assets will be equal to the original exchange prices of the transactions If the business is not regarded as a going concern, the values assigned to the assets will likely be much lower (reflecting the lower liquidation values that the entity would obtain if it were forced to sell the assets immediately)