CHAPTER INTRODUCTION TO ACCOUNTING AND BUSINESS DISCUSSION QUESTIONS Some users of accounting information include managers, employees, investors, creditors, customers, and the government The role of accounting is to provide information for managers to use in operating the business In addition, accounting provides information to others to use in assessing the economic performance and condition of the business The corporate form allows the company to obtain large amounts of resources by issuing stock For this reason, most companies that require large investments in property, plant, and equipment are organized as corporations No The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business The payment of the interest of $4,500 is a personal transaction of Josh Reilly and should not be recorded by Dispatch Delivery Service The land should be recorded at its cost of $167,500 to Reliable Repair Service This is consistent with the cost concept a No The offer of $2,000,000 and the increase in the assessed value should not be recognized in the accounting records because land is recorded on the cost basis b Cash would increase by $2,125,000, land would decrease by $900,000, and owner’s equity would increase by $1,225,000 An account receivable is a claim against a customer for goods or services sold An account payable is an amount owed to a creditor for goods or services purchased Therefore, an account receivable in the records of the seller is an account payable in the records of the purchaser (b) The business realized net income of $91,000 ($679,000 – $588,000) (a) The business incurred a net loss of $75,000 ($640,000 – $715,000) 10 (a) Net income or net loss (b) Owner’s equity at the end of the period (c) Cash at the end of the period 1-1 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Introduction to Accounting and Business PRACTICE EXERCISES PE 1-1A $380,000 Under the cost concept, the land should be recorded at the cost to Clairemont Repair Service PE 1-1B $437,500 Under the cost concept, the land should be recorded at the cost to Higgins Repair Service PE 1-2A a b A = L + OE $675,000 = $215,000 + OE OE = $460,000 A +$112,300 OE OE on December 31, 2019 = = = = = L + OE +$32,000 + OE +$80,300 $460,000 + $80,300 $540,300 PE 1-2B a b A = L + OE $395,000 = $97,000 + OE OE = $298,000 A –$65,000 OE OE on December 31, 2019 = = = = = L + OE +$36,000 + OE –$101,000 $298,000 – $101,000 $197,000 PE 1-3A (2) Asset (Accounts Receivable) increases by $13,750; Revenue (Delivery Service Fees) increases by $13,750 (3) Liability (Accounts Payable) decreases by $2,500; Asset (Cash) decreases by $2,500 (4) Asset (Cash) increases by $9,000; Asset (Accounts Receivable) decreases by $9,000 (5) Asset (Cash) decreases by $1,000; Owner's Equity (Jerome Foley, Drawing) decreases by $1,000 1-2 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Introduction to Accounting and Business PE 1-3B (2) Expense (Advertising Expense) increases by $4,850; Asset (Cash) decreases by $4,850 (3) Asset (Supplies) increases by $2,100; Liability (Accounts Payable) increases by $2,100 (4) Asset (Accounts Receivable) increases by $14,700; Revenue (Delivery Service Fees) increases by $14,700 (5) Asset (Cash) increases by $8,200; Asset (Accounts Receivable) decreases by $8,200 PE 1-4A ADVENTURE TRAVEL SERVICE Income Statement For the Year Ended April 30, 2019 Fees earned Expenses: Wages expense Office expense Miscellaneous expense Total expenses Net income $2,180,000 $1,300,000 400,000 25,000 1,725,000 $ 455,000 PE 1-4B SENTINEL TRAVEL SERVICE Income Statement For the Year Ended August 31, 2019 Fees earned Expenses: Wages expense Office expense Miscellaneous expense Total expenses Net loss $750,000 $450,000 295,000 12,000 757,000 $ (7,000) 1-3 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Introduction to Accounting and Business PE 1-5A ADVENTURE TRAVEL SERVICE Statement of Owner’s Equity For the Year Ended April 30, 2019 Jerome Foley, capital, May 1, 2018 Additional investment by owner during year Net income for the year Withdrawals Increase in owner’s equity Jerome Foley, capital, April 30, 2019 $1,020,000 $ 60,000 455,000 (40,000) 475,000 $1,495,000 PE 1-5B SENTINEL TRAVEL SERVICE Statement of Owner’s Equity For the Year Ended August 31, 2019 Barb Schroeder, capital, September 1, 2018 Additional investment by owner during year Net loss for the year Withdrawals Increase in owner’s equity Barb Schroeder, capital, August 31, 2019 $380,000 $ 36,000 (7,000) (18,000) 11,000 $391,000 PE 1-6A ADVENTURE TRAVEL SERVICE Balance Sheet April 30, 2019 Assets Cash Accounts receivable Supplies Land Total assets $ 197,000 485,000 18,000 900,000 $1,600,000 Liabilities Accounts payable $ 105,000 Owner’s Equity Jerome Foley, capital Total liabilities and owner’s equity 1,495,000 $1,600,000 1-4 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Introduction to Accounting and Business PE 1-6B SENTINEL TRAVEL SERVICE Balance Sheet August 31, 2019 Assets Cash Accounts receivable Supplies Land Total assets $ 45,400 75,500 4,700 310,000 $435,600 Liabilities Accounts payable $ 44,600 Owner’s Equity Barb Schroeder, capital Total liabilities and owner’s equity 391,000 $435,600 PE 1-7A ADVENTURE TRAVEL SERVICE Statement of Cash Flows For the Year Ended April 30, 2019 Cash flows from operating activities: Cash receipts from customers $ 2,080,000 Cash payments for operating expenses (1,706,000) Net cash flow from operating activities Cash flows used for investing activities: Cash payment for purchase of land Cash flows from financing activities: Cash receipt from owner as investment $ 60,000 Cash withdrawals by owner (40,000) Net cash flow from financing activities Net decrease in cash during year Cash as of May 1, 2018 Cash as of April 30, 2019 $ 374,000 (400,000) 20,000 $ (6,000) 203,000 $ 197,000 1-5 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Introduction to Accounting and Business PE 1-7B SENTINEL TRAVEL SERVICE Statement of Cash Flows For the Year Ended August 31, 2019 Cash flows from operating activities: Cash receipt from customers $ 734,000 Cash payments for operating expenses (745,600) Net cash flow used for operating activities Cash flows used for investing activities: Cash payment for purchase of land Cash flows from financing activities: $ 36,000 Cash receipt from owner as investment (20,000) Cash withdrawals by owner Net cash flow from financing activities Net decrease in cash during year Cash as of September 1, 2018 Cash as of August 31, 2019 $(11,600) (50,000) 16,000 $(45,600) 89,000 $ 43,400 PE 1-8A a Dec 31, 2019 Total liabilities……………………………………………… Total owner’s equity………………………………………… Ratio of liabilities to owner’s equity……………………… Dec 31, 2018 $547,800 $415,000 1.32 * $518,000 $370,000 1.40** Dec 31, 2019 Total liabilities……………………………………………… $4,085,000 Total owner’s equity………………………………………… $4,300,000 0.95 * Ratio of liabilities to owner’s equity……………………… Dec 31, 2018 $2,880,000 $3,600,000 0.80** * $547,800 ÷ $415,000 ** $518,000 ÷ $370,000 b Decreased PE 1-8B a * $4,085,000 ÷ $4,300,000 ** $2,880,000 ÷ $3,600,000 b Increased 1-6 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Introduction to Accounting and Business EXERCISES Ex 1-1 a b manufacturing manufacturing manufacturing service merchandise 10 service service service manufacturing merchandise 11 12 13 14 15 service service manufacturing service merchandise The accounting equation is relevant to all of the companies It serves as the basis of the accounting information system Ex 1-2 As in many ethics issues, there is no one right answer Oftentimes, disclosing only what is legally required may not be enough In this case, it would be best for the company’s chief executive officer to disclose both reports to the county representatives In doing so, the chief executive officer could point out any flaws or deficiencies in the fired researcher’s report Ex 1-3 a b K G B K B B X G 10 X B A business transaction is an economic event or condition that directly changes an entity’s financial condition or results of operations Ex 1-4 Keurig Green Mountain’s owners’ equity: $4,002 – $1,288 = $2,714 Starbucks’ owners’ equity: $12,446 – $6,628 = $5,818 Ex 1-5 Dollar Tree’s owners’ equity: $3,567 – $1,782 = $1,785 Target’s owners’ equity: $41,404 – $27,407 = $13,997 1-7 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Introduction to Accounting and Business Ex 1-6 a b c $3,930,000 ($556,000 + $3,374,000) $386,200 ($6,111,200 – $5,725,000) $1,337,500 ($2,150,000 – $812,500) Ex 1-7 a b c d e $540,000 ($720,000 – $180,000) $606,500 ($540,000 + $96,500 – $30,000) $357,000 ($540,000 – $168,000 – $15,000) $733,000 ($540,000 + $175,000 + $18,000) Net income: $120,000 ($880,000 – $220,000 – $540,000) Ex 1-8 a b c d e f g (1) (2) (1) (3) (1) (3) (1) asset liability asset owner’s equity (revenue) asset owner’s equity (expense) asset Ex 1-9 a b c d e Increases assets and increases owner’s equity Decreases assets and decreases owner’s equity Increases assets and decreases assets Increases assets and increases liabilities Increases assets and increases owner’s equity Ex 1-10 a (1) Total assets increased $183,000 ($298,000 – $115,000) (2) No change in liabilities (3) Owner’s equity increased $183,000 b (1) Total assets decreased $80,000 (2) Total liabilities decreased $80,000 (3) No change in owner’s equity c No It is false that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation Some transactions affect only one element of the accounting equation For example, purchasing supplies for cash only affects assets 1-8 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business Ex 1-11 (b) (a) (b) (a) decrease increase decrease increase Ex 1-12 c a e e c 10 c d a e e Ex 1-13 a (1) (2) (3) (4) (5) (6) (7) Provided catering services for cash, $71,800 Purchase of land for cash, $15,000 Payment of cash for expenses, $47,500 Purchase of supplies on account, $1,100 Withdrawal of cash by owner, $5,000 Payment of cash to creditors, $4,000 Recognition of cost of supplies used, $1,500 b c d e $300 ($40,300 – $40,000) $17,800 (–$5,000 + $71,800 – $49,000) $22,800 ($71,800 – $49,000) $17,800 ($22,800 – $5,000) Ex 1-14 No It would be incorrect to say that the business had incurred a net loss of $8,000 The excess of the withdrawals over the net income for the period is a decrease in the amount of owner’s equity in the business 1-9 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren Full file at https://TestbankDirect.eu/Solution-Manual-for-Accounting-27th-Edition-by-Warren CHAPTER Introduction to Accounting and Business Ex 1-15 Jupiter Owner's equity at end of year ($844,000 – $320,000)…………………………… Deduct owner's equity at beginning of year ($550,000 – $215,000)………… Net income (increase in owner’s equity)……………………………………… $524,000 335,000 $189,000 Mars Increase in owner’s equity (as determined for Jupiter)……………………… Add withdrawals……………………………………………………………………… Net income………………………………………………………………………… $189,000 36,000 $225,000 Saturn Increase in owner’s equity (as determined for Jupiter)……………………… Deduct additional investment……………………………………………………… Net income………………………………………………………………………… $189,000 60,000 $129,000 Venus Increase in owner’s equity (as determined for Jupiter)……………………… Deduct additional investment……………………………………………………… Add withdrawals……………………………………………………………………… Net income………………………………………………………………………… $189,000 60,000 $129,000 36,000 $165,000 Ex 1-16 Balance sheet items: 1, 2, 3, 4, 6, 8, 10 Ex 1-17 Income statement items: 5, 7, 1-10 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business Prob 1-5B (Continued) Owner’s Equity (Continued) Dry Dry Cleaning Cleaning + Revenue – Exp – Wages Exp Supplies Exp – – Rent Exp Truck Exp – – Utilities Misc Exp – Exp Bal (a) Bal (b) Bal (c) – 4,000 Bal (d) – 4,000 + Bal 72,000 72,000 – 4,000 72,000 – 4,000 72,000 – 4,000 (e) Bal (f) Bal (g) Bal + 38,000 110,000 – 4,000 110,000 – 4,000 (h) Bal – 29,450 (i) Bal 110,000 – 29,450 (j) Bal 110,000 – 29,450 – 4,000 – 24,000 – 24,000 – 2,100 – 1,800 – 1,300 – 4,000 – 2,100 – 1,800 – 1,300 – 7,200 Bal 110,000 – 29,450 – 24,000 – 7,200 – 4,000 – 2,100 – 1,800 – 1,300 (l) Bal 110,000 – 29,450 – 24,000 – 7,200 – 4,000 – 2,100 – 1,800 – 1,300 (k) 1-38 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business Prob 1-5B (Continued) BEV'S DRY CLEANERS Income Statement For the Month Ended November 30, 2019 Dry cleaning revenue Expenses: Dry cleaning expense $29,450 Wages expense 24,000 Supplies expense 7,200 Rent expense 4,000 Truck expense 2,100 Utilities expense 1,800 Miscellaneous expense 1,300 Total expenses Net income BEV'S DRY CLEANERS Statement of Owner’s Equity For the Month Ended November 30, 2019 Beverly Zahn, capital, November 1, 2019 Additional investment during November $21,000 Net income for November 40,150 Withdrawals (5,000) Increase in owner’s equity Beverly Zahn, capital, November 30, 2019 $110,000 69,850 $ 40,150 $148,500 56,150 $204,650 BEV'S DRY CLEANERS Balance Sheet November 30, 2019 Assets Cash Accounts receivable Supplies Land Total assets $ 81,800 75,000 11,800 85,000 $253,600 Liabilities Accounts payable $ 48,950 Owner’s Equity Beverly Zahn, capital Total liabilities and owner’s equity 204,650 $253,600 1-39 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business Prob 1-5B (Concluded) (Optional) BEV'S DRY CLEANERS Statement of Cash Flows For the Month Ended Novemer 30, 2019 Cash flows from operating activities: Cash receipts from customers* $115,000 Cash payments for expenses and payments to (53,200) creditors** Net cash flow from operating activities Cash flows used for investing activities: Cash payment for purchase of land Cash flows from financing activities: Cash receipt of owner’s investment $ 21,000 Cash withdrawal by owner (5,000) Net cash flow from financing activities Net increase in cash during November Cash balance, November 1, 2019 Cash balance, November 30, 2019 $ 61,800 (35,000) 16,000 $ 42,800 39,000 $ 81,800 * $38,000 + $77,000; these amounts are taken from the cash column of the spreadsheet in Part ** $4,000 + $20,000 + $29,200; these amounts are taken from the cash column of the spreadsheet in Part 1-40 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business Prob 1-6B a Wages expense, $203,200 ($288,000 – $48,000 – $17,600 – $14,400 – $4,800) b Net income, $112,000 ($400,000 – $288,000) c LuAnn Martin, capital, May 1, 2019, $0; Atlas Realty was organized on May 1, 2019 d Investment on May 1, 2019, $160,000; from statement of cash flows e Net income for May, $112,000; from (b) f Withdrawals, $64,000; from statement of cash flows g Increase in owner’s equity, $208,000 ($160,000 + $112,000 – $64,000) h LuAnn Martin, capital, May 31, 2019, $208,000 i Land, $120,000; from statement of cash flows j Total assets, $256,000 ($123,200 + $12,800 + $120,000) k LuAnn Martin, capital, $208,000 l Total liabilities and owner’s equity, $256,000 ($48,000 + $208,000) m Cash received from customers, $400,000; this is the same as fees earned since there are no accounts receivable n Net cash flow from operating activities, $147,200 ($400,000 – $252,800) o Net cash flow from financing activities, $96,000 ($160,000 – $64,000) p Net increase in cash and May 31, 2019, cash balance, $123,200 ($147,200 – $120,000 + $96,000); also, the cash balance on the balance sheet 1-41 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business CONTINUING PROBLEM Cash June + 4,000 June + 3,500 Bal June – – – June 12 Bal June 13 Bal June 16 + 5,375 Bal June 29 – June 30 Bal June 30 Bal June 30 – 5,835 Bal June 30 – June 30 3,500 350 350 4,000 3,500 350 4,000 3,500 3,500 100 350 250 4,000 350 250 4,000 + 1,000 350 250 300 3,800 4,000 1,000 4,800 + 500 1,000 350 250 4,000 5,300 1,000 350 250 4,000 5,300 + 900 1,000 350 250 4,000 6,200 1,000 350 250 4,000 6,200 1,000 350 250 4,000 6,200 180 1,000 170 250 4,000 6,200 1,000 170 250 4,000 6,200 1,000 170 250 4,000 6,200 1,000 170 250 4,000 1,000 4,420 – 4,000 415 5,420 Bal 350 1,000 – – 350 + June 30 June 30 3,500 300 5,835 Bal 4,000 400 6,135 Bal 350 900 6,535 – 350 240 5,635 + 3,500 500 5,875 Bal 4,000 350 – + + 3,500 300 June 22 June 25 + 350 5,375 Bal 350 100 5,075 Bal 4,000 350 5,175 – 3,500 675 5,525 – 4,000 500 6,200 Fees Earned + 800 6,700 + Peyton Smith, – Drawing + + Bal Bal + Supplies = Owner’s Equity Peyton Smith, Capital + Bal June + Accts Payable 6,700 Bal June Accts Rec 7,500 Bal June = Liabilities + Assets 500 3,920 – 500 – 500 6,200 1-42 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business Continuing Problem (Continued) Owner’s Equity (Continued) Music Exp – June June Office Rent Exp – – Equip Rent Exp – Advertising Exp – Wages Exp – Utilities Supplies Exp Exp – – Misc Exp Bal June Bal June 12 Bal June 29 Bal June Bal – 500 – 350 – 350 – 800 – 675 – 500 – 350 – 800 – 675 – 500 – 350 – 800 – 675 – 500 – 350 – 800 – 675 – 500 – 350 – 800 – 675 – 500 – 240 – 590 – 800 – 675 – 500 – 590 – 800 – 675 – 500 – 400 – 590 – 800 – 675 – 500 – 400 – 590 – 800 – 675 – 500 – 400 – 30 Bal June 675 – 300 – 300 590 – 800 – 675 – 500 – 400 – 300 – 180 – 180 30 Bal June – 30 Bal June 675 800 30 Bal June – – 30 Bal June 500 800 30 Bal June – – 25 Bal June 500 22 Bal June – 16 Bal June 800 13 Bal June – Bal June 800 Bal June 800 – Bal June – – 590 – 1,000 – – – 415 – 800 – 675 – 500 – 400 – 300 – 180 – 415 1,590 – 800 – 675 – 500 – 400 – 300 – 180 – 415 1,590 – 800 – 675 – 500 – 400 – 300 – 180 – 415 30 1-43 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business Continuing Problem (Concluded) PS MUSIC Income Statement For the Month Ended June 30, 2019 Fees earned: Expenses: Music expense Office rent expense Equipment rent expense Advertising expense Wages expense Utilities expense Supplies expense Miscellaneous expense Total expenses Net income $6,200 $1,590 800 675 500 400 300 180 415 4,860 $1,340 PS MUSIC Statement of Owner’s Equity For the Month Ended June 30, 2019 Peyton Smith, capital, June 1, 2019 Investment on June 1, 2019 Net income for June Withdrawals Increase in owner’s equity Peyton Smith, capital, June 30, 2019 $ $4,000 1,340 (500) 4,840 $4,840 PS MUSIC Balance Sheet June 30, 2019 Assets Cash Accounts receivable Supplies Total assets $3,920 1,000 170 $5,090 Liabilities Accounts payable $ 250 Owner’s Equity Peyton Smith, capital Total liabilities and owner’s equity 4,840 $5,090 1-44 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business CASES & PROJECTS CP 1-1 The car repair is a personal expense and is Marco's personal responsibility By using partnership funds to pay for the repair, Marco is behaving unethically because he is violating the business entity assumption The business entity assumption treats the business as a separate entity from its owners By taking money from the partnership for a personal expense, Marco is effectively stealing from his partners The partnership's net income will be reduced by the $2,000 Marco has taken This will reduce the amount of net income available to Marco's partners Marco could ask his partners for a loan from the partnership The loan could be repaid out of his salary or from his share of the partnership income CP 1-2 Acceptable professional conduct requires that Colleen Fernandez supply First Federal Bank with all the relevant financial statements necessary for the bank to make an informed decision Therefore, Colleen should provide the complete set of financial statements These can be supplemented with a discussion of the net loss in the past year or other data explaining why granting the loan is a good investment for the bank a Owners are generally willing to provide bankers with information about the operating and financial condition of the business, such as the following: ● Operating Information: ● Description of business operations ● Results of past operations ● Preliminary results of current operations ● Plans for future operations ● Financial Condition: ● List of assets and liabilities (balance sheet) ● Estimated current values of assets ● Owner’s personal investment in the business ● Owner’s commitment to invest additional funds in the business Owners are normally reluctant to provide the following types of information to bankers: Proprietary Operating Information Such information, which might hurt ● the business if it becomes known by competitors, might include special processes used by the business or future plans to expand operations into areas that are not currently served by a competitor 1-45 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business CP 1-2 (Concluded) ● Personal Financial Information Owners may have little choice here because banks often require owners of small businesses to pledge their personal assets as security for a business loan Personal financial information requested by bankers often includes the owner’s net worth, salary, and other income In addition, bankers usually request information about factors that might affect the personal financial condition of the owner For example, a pending divorce by the owner might significantly affect the owner’s personal wealth b Bankers typically want as much information as possible about the ability of the business and the owner to repay the loan with interest Examples of such information are described above c Both bankers and business owners share the common interest of the business doing well and being successful If the business is successful, the bankers will receive their loan payments on time with interest and the owners will increase their personal wealth CP 1-3 A sample solution based on Nike Inc.'s Form 10-K for the fiscal year ended May 31, 2015, is as follows: Nike, Inc Beaverton, Oregon Mark G Parker Manufacturing Our principal business activity is the design, development, and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories, and services Income statement, statement of comprehensive income, balance sheet, statement of stockholders' equity, statement of cash flows 1-46 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business CP 1-4 Example Memo To: From: Date: Re: My Teacher Ima Student January 1, 20XX Causes of Accounting Fraud Business and accounting fraud typically result from either a failure of individual character or a culture of greed within an organization Managers and accountants often face pressure to meet or exceed a company's financial goals At times, supervisors can place pressure on individuals to violate accounting standards to improve a company's reported financial results Individuals who give in to these pressures exhibit a failure of individual character In other situations, the organization may expect employees to violate accounting rules as part of their job This occurs in organizations that no value ethical decision making or fair financial reporting and exhibit a culture of ethical indifference CP 1-5 The difference in the two bank balances, $55,000 ($80,000 – $25,000), may not be pure profit from an accounting perspective To determine the accounting profit for the six-month period, the revenues for the period would need to be matched with the related expenses The revenues minus the expenses would indicate whether the business generated net income (profit) or a net loss for the period Using only the difference between the two bank account balances ignores such factors as amounts due from customers (receivables), liabilities (accounts payable) that need to be paid for wages or other operating expenses, additional investments that Dr Cousins may have made in the business during the period, or withdrawals during the period that Dr Cousins might have taken for personal reasons unrelated to the business Some businesses that have few, if any, receivables or payables may use a “cash” basis of accounting The cash basis of accounting ignores receivables and payables because they are assumed to be insignificant in amount However, even with the cash basis of accounting, additional investments during the period and any withdrawals during the period must be considered in determining the net income (profit) or net loss for the period 1-47 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part (a) (b) Bal (c) Bal (d) Bal (e) Bal (f) Bal (g) Bal (h) Bal (i) Bal (j) Bal (k) Bal CP 1-6 – + – – + + – – + – – + 180 300 120 180 300 300 300 300 300 300 300 300 + Supplies = + 150 150 150 150 150 150 150 150 150 Accts Payable + = Liabilities + + 950 950 950 950 950 950 950 950 950 950 950 Lisa Duncan, Capital – – – 1-48 400 400 Lisa Duncan, Drawing + + + + 3,650 3,650 2,350 1,300 3,650 2,350 1,750 1,750 600 2,350 Fees Earned Rent Supplies – – – – – – 800 800 800 800 800 800 – – – – – – – – – – – 525 525 525 525 525 525 525 275 275 250 525 – – – 120 120 120 – Expense – Expense – Expense – Salaries Owner’s Equity Introduction to Accounting and Business © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 2,835 400 2,435 950 300 650 275 375 100 275 1,750 2,025 600 2,625 800 1,825 290 1,535 1,300 2,835 Cash Assets CHAPTER – – – – – 290 290 290 290 290 Misc Exp Solution Manual for Accounting 27th Edition by Warren Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business CP 1-6 (Continued) SERVE-N-VOLLEY Income Statement For the Month Ended September 30, 2019 Fees earned: Expenses: Salaries expense Rent expense Supplies expense Miscellaneous expense Total expenses Net income $3,650 $800 525 120 290 1,735 $1,915 SERVE-N-VOLLEY Statement of Owner’s Equity For the Month Ended September 30, 2019 Lisa Duncan, capital, September 1, 2019 Investment on September 1, 2019 $ 950 Net income for September 1,915 Withdrawals (400) Increase in owner’s equity Lisa Duncan, capital, September 30, 2019 $ 2,465 $2,465 SERVE-N-VOLLEY Balance Sheet September 30, 2019 Assets Cash Supplies Total assets $2,435 180 $2,615 Liabilities Accounts payable $ 150 Owner’s Equity Lisa Duncan, capital Total liabilities and owner’s equity 2,465 $2,615 1-49 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business CP 1-6 (Concluded) a Serve-N-Volley would provide Lisa with $715 more income per month than working as a waitress This amount is computed as follows: Net income of Serve-N-Volley, per month………………………………… Earnings as waitress, per month: 30 hours per week × $10 per hour × weeks………………………… Difference………………………………………………………………………… $1,915 1,200 $ 715 b Other factors that Lisa should consider before discussing a long-term arrangement with the Phoenix Tennis Club include the following: LIsa should consider whether the results of operations for September are indicative of what to expect each month For example, Lisa should consider whether club members will continue to request lessons or use the ball machine during the fall months when interest in tennis may slacken Lisa should evaluate whether the additional income of $715 per month from Serve-N-Volley is worth the risk being taken and the effort being expended Lisa should also consider how much her investment in Serve-N-Volley could have earned if invested elsewhere For example, if the initial investment of $950 had been invested to earn a rate of return of 6% per year, it would have earned $4.75 in September, or $57 for the year Note to Instructors: Numerous other considerations could be mentioned by students, such as the ability of Lisa to withdraw cash from Serve-N-Volley for personal use For example, some of her investment in Serve-N-Volley will be in the form of supplies (tennis balls, for example), which are readily convertible to cash The objective of this case is not to mention all possible considerations but, rather, to encourage students to begin thinking about the use of accounting information in making business decisions 1-50 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren CHAPTER Introduction to Accounting and Business CP 1-7 Note to Instructors: The purpose of this activity is to familiarize students with the certification requirements and their online availability You might use this as an opportunity to discuss the advantages and disadvantages of careers in public accounting (CPA), management accounting (CMA), and internal auditing (CIA) The following websites provide students with useful information (such as starting salaries) on careers in accounting: American Institute of Certified Public Accountants (AICPA) www.aicpa.org/becomeacpa/faqs/pages/faqs.aspx Institute of Certified Management Accountants (IMA) http://www.imanet.org/cma-certification/cma-certification-overview Institute of Internal Auditors (IIA) https://na.theiia.org/about-us/Pages/About-The-Institute-of-Internal-Auditors.aspx CP 1-8 Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities First Year Second Year Third Year negative negative positive positive negative positive positive negative positive Start-up companies normally experience negative net cash flows from operating activities; however, Amazon.com was able to generate positive net cash flows from operations by its second year Start-up companies normally have negative net cash flows from investing activities as they build up their infrastructure through purchases of property, plant, and equipment This was the case with Amazon.com for each of its first three years Likewise, start-up companies normally have positive net cash flows from financing activities from raising capital This is also the case for Amazon.com Also, start-up companies normally have positive cash flows from financing activities—activities from raising capital 1-51 © 2018 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Solution Manual for Accounting 27th Edition by Warren ... part Solution Manual for Accounting 27th Edition by Warren Full file at https://TestbankDirect.eu /Solution-Manual-for-Accounting-27th-Edition-by-Warren CHAPTER Introduction to Accounting and Business