Solution Manual for Introductory Financial Accounting for Business, 2nd Edition

IFAB 2e – Chapter 2 – Solutions Manual ANSWERS TO QUESTIONS – CHAPTER 2 1. Accrual accounting attempts to record the effects of accounting events in the period when such events occur, regardless of when cash is received or paid. The goal is to match expenses with the revenues that they produce. 2. Recognition is the act of recording an event in the financial statements. When accruals are used, events are recognized before the associated cash is paid or collected. 3. If cash is collected in advance for services, the revenue is recognized when the services are rendered. 4. The issue of common stock, which is capital acquired from owners, increases business assets (usually cash) and equity (common stock). 5. The recognition of revenue on account increases the corresponding revenue account on the income statement, but does not affect the statement of cash flows. The cash flow statement is affected when the account is collected. 6. Revenue is recognized under accrual accounting when a revenueproducing event occurs, i.e., when the revenue is earned, even if no cash is collected at the time of the transaction. 7. The recognition of expenses affects the accounting equation by either decreasing assets or increasing liabilities (payables) and by decreasing stockholders’ equity (retained earnings). 8. A claims exchange transaction is one where the claims of creditors (liabilities) increase and the claims of stockholders (retained earnings) decrease, or vice versa. The total amount of claims is unchanged. 9. Expenses are recognized under accrual accounting at the time the expense is incurred or resources are consumed, regardless of when cash payment is made. 2-1 IFAB 2e – Chapter 2 – Solutions Manual 10. Net cash flows from operations on the cash flow statement may be different from net income because of the application of accrual accounting. Revenues and expenses reported on the income statement may be recognized before or after the actual collection or payment of cash that is reported on the cash flow statement. 11. Net income increases stockholders’ claims on business assets by increasing retained earnings. 12. An expense is a decrease in assets or an increase in liabilities that occurs in the process of generating revenue. 13. The purpose of the statement of changes in stockholders’ equity is to display the effects of business operations and stock issued to owners and dividends paid to stockholders. It identifies the ways that an entity’s equity increased and decreased as a result of its operations and transactions with its stockholders. 14. The purpose of the balance sheet is to provide information about an entity’s assets, liabilities, and stockholders’ equity and their relationships to each other at a particular point in time. It provides a list of the economic resources that the enterprise has available for its operating activities and the claims to those resources. 15. The balance sheet is dated as of a specific date because it shows information about an entity’s assets, liabilities, and stockholders’ equity as of that date, not measured over a time period. The statement of changes in stockholders’ equity, the income statement, and the statement of cash flows reflect transactions that occur over a period of time. The statement of cash flows explains the change in cash from one accounting period to the next. It is prepared by analyzing the cash account and summarizing where cash came from and how it was used. 16. 17. Period costs are costs that are recognized in an accounting period. Examples of period costs include rent expense, utilities expense, and salaries expense. 2-2 IFAB 2e – Chapter 2 – Solutions Manual 18. Salary of the tax return preparer could be directly matched with the revenue that it produces. 2-3 IFAB 2e – Chapter 2 – Solutions Manual SOLUTIONS TO EXERCISES – SERIES A – CHAPTER 2 EXERCISE 2-1A a. The Ramires, Incorporated Horizontal Financial Statements Model for Year 1 Event 1 2 3 4 5 6 Balance Sheet Assets = Liab. + Stockholders’ Equity Notes Common Retained Cash + Land = Payable + Stock + Earnings + 56,000 + NA = NA 56,000 + NA = + + 52,000 52,000 + NA NA NA = + + (27,000) (27,000) + NA NA NA = + 15,000 + NA 15,000 + NA NA + + (40,000) + 40,000 = NA NA NA = + + (1,000) + NA NA NA (1,000) 55,000 + 40,000 = 15,000 + 56,000 + 24,000 2-4 Income Statement Revenue − Expense = Net Inc. NA 52,000 NA NA NA NA 52,000 − − − − − − − NA NA 27,000 NA NA NA 27,000 = NA = 52,000 = (27,000) = NA = NA = NA = 25,000 Statement of Cash Flows 56,000 FA 52,000 OA (27,000) OA 15,000 FA (40,000) IA (1,000) FA 55,000 NC IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-1A (cont.) b. The Ramires, Incorporated Income Statement For the Period Ended December 31, Year 1 Revenue Expenses Net Income $52,000 (27,000) $25,000 The Ramires, Incorporated Statement of Changes in Stockholders’ Equity For the Period Ended December 31, Year 1 Beginning Common Stock Plus: Common Stock Issued Ending Common Stock $ -056,000 Beginning Retained Earnings Plus: Net Income Less: Dividends Ending Retained Earnings $-025,000 (1,000) Total Stockholders’ Equity $56,000 24,000 $80,000 2-5 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-1A b. (cont.) The Ramires, Incorporated Balance Sheet As of December 31, Year 1 Assets Cash Land Total Assets $55,000 40,000 $95,000 Liabilities Notes Payable $15,000 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $56,000 24,000 $80,000 Total Liabilities and Stockholders’ Equity 2-6 $95,000 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-1A b. (cont.) The Ramires, Incorporated Statement of Cash Flows For the Year Ended December 31, Year 1 Cash Flows From Operating Activities: Cash Receipts from Customers Cash Payments for Expenses Net Cash Flow from Operating Activities $52,000 (27,000) Cash Flows From Investing Activities: Cash Payment for Land Net Cash Flow from Investing Activities $(40,000) Cash Flows From Financing Activities: Cash Receipts from Stock Issue Cash Receipts from Borrowed Funds Cash Dividends Net Cash Flow from Financing Activities $56,000 15,000 (1,000) Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance $25,000 $(40,000) $70,000 55,000 -0$55,000 2-7 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-2A The Candle Shop Horizontal Financial Statements Model for Year 1 Assets Event 1 2 3 4 5 6 7 Cash I D D I I D NA + + + + + + + + Land NA NA NA NA NA I NA Balance Sheet = Liab. + Stockholders’ Equity Notes Common Retained = Payable + Stock + Earnings + + = NA I NA = + + NA NA D = + + NA NA D = + + I NA NA = + + NA NA I = + + NA NA NA = + + NA NA NA 2-8 Income Statement Revenue − Expense = Net Inc. NA NA NA NA I NA NA − − − − − − − NA NA I NA NA NA NA = = = = = = = NA NA D NA I NA NA Statement of Cash Flows I D D I I D NA FA FA OA FA OA IA IFAB 2e – Chapter 2 – Solutions Manual EXERICSE 2-3A a. Missing items are determined as follow: (a) $200,000; Since the cash flow column shows that this event was financing activity, we can infer that the company either borrowed money or issued stock. Since the model shows that liabilities were not affected, we conclude that the common stock account increased by $200,000. (b) NA; Since issuing common stock (see answer to (a) above), does not affect the revenue account, the answer is not affected (NA). (c) NA; Since issuing common stock (see answer to (a) above), does not affect net income, the answer is not affected (NA). (d) NA; Since assets and liabilities increased, we infer that the company borrowed money. Borrowing money does not affect net income. (e) FA; Since assets and liabilities increased, we infer that the company borrowed money. Borrowing money is a financing activity (FA). (f) 500,000; Since cash decreased and no other balance sheet account other than the land account was affected, the company must have purchased land which would cause the land account to increase by 500,000. (g) IA; Purchasing land (see answer to (f) above) is an investing activity (IA). (h) 95,000; The income statement shows $95,000 of revenue. Recognizing revenue increases the cash and retained earning accounts on the balance sheet. (i) 95,000; The income statement shows $95,000 of revenue. Recognizing revenue increases the cash and retained earning accounts on the balance sheet. 2-9 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-3A a. (cont). (j) (65,000); The statement of cash flows shows that the $65,000 cash outflow was an operating activity. Therefore, we conclude that this is an expense item that will act to reduce the amount of retained earnings shown in the balance sheet. (k) 65,000; The statement of cash flows shows that the $65,000 cash outflow was an operating activity. Therefore, we conclude that this is an expense item that will act to increase the amount of expenses shown in the income statement. (l) FA; Since the event decreases cash and retained earnings on the balance sheet; and does not affect the income statement, we conclude that this was a dividend payment which is a financing activity (FA) (m) 68,000; This amount is determined by totaling the vertical column. (n) 95,000; This amount is determined by totaling the vertical column. 2-10 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-3A a. (cont.) Completed Horizontal Financial Statements Model The Frame Shop (TFS) Horizontal Statements Model for Year 1 Beg. 1 2 3 4 5 6 Balance Sheet Assets = Liab. + Stockholders’ Equity Notes Common Retained Cash + Land = Payable + Stock + Earnings + + 0 + 0 = 0 0 0 200,000 + NA = NA + 200,000 + NA 350,000 + NA = 350,000 + NA + NA (500,000) + 500,000 = NA + NA + NA 95,000 + NA = NA + NA + 95,000 (65,000) + NA = NA + NA + (65,000) (12,000) + NA = NA + NA + (12,000) 68,000 + 500,000 = 350,000 + 200,000 + 18,000 Income Statement Revenue − Expense = Net Inc. − NA − NA − NA − 95,000 − NA − NA − 95,000 − 0 0 = 0 NA = NA NA = NA NA = NA NA = 95,000 65,000 = (65,000) NA = NA 65,000 = 30,000 b. $568,000 Total Assets (Cash $68,000 + Land $500,000) c. $30,000 Net Income (Revenue $95,000 – Expenses $65,000) d. $538,000 Net Cash Flow from Financing Activities ($200,000 + $350,000 – $12,000) 2-11 Statement of Cash Flows NA 200,000 FA 350,000 FA (500,000) IA 95,000 OA (65,000) OA (12,000) FA 68,000 NC IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-4A Holloway Company Effect of Events on the Year 1 Financial Statements Event Earned Revenue Coll. Acct. Rec. Ending Balance Assets = Liabilities Accounts Cash + Rec. = NA + 18,000 = NA 14,000 + (14,000) = NA 14,000 + 4,000 = -0- + + + + + Stockholders’ Equity Common Retained Stock + Earnings NA + 18,000 NA + NA -0- + 18,000 a. Accounts Receivable: $18,000 – $14,000 = $4,000 b. $18,000 Net Income c. $14,000 cash collected from accounts receivable. d. $18,000 e. $18,000 of revenue was earned but only $14,000 of it was collected. 2-12 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-5A The Containers Inc. Horizontal Financial Statements Model for Year 1 Event 1 2 3 4 5 6 Balance Sheet Assets = Liab. + Stockholders’ Equity Accts. Notes Common Retained Cash + Rec = Payable + Stock + Earnings 42,000 + NA = NA + 42,000 + NA NA + 25,000 = NA + NA + 25,000 (18,000) + NA = NA + NA + (18,000) 10,000 + NA = 10,000 + NA + NA 22,000 + (22,000) = NA + NA + NA (1,000) + NA = NA + NA + (1,000) 55,000 + 3,000 = 10,000 + 42,000 + 6,000 Income Statement Revenue − Expense = Net Inc. NA − 25,000 − NA − NA − NA − NA − 25,000 − NA = NA NA = 25,000 18,000 = (18,000) NA = NA NA = NA NA = NA 18,000 = 7,000 Statement of Cash Flows 42,000 FA NA (18,000) OA 10,000 FA 22,000 OA (1,000) FA 55,000 NC a. Accounts receivable will appear as an “asset” on the December 31, Year 1 balance sheet. b. $3,000. Total from the accounts receivable column in the Horizontal Financial Statements Model. c. $7,000. Total from the net income column in the Horizontal Financial Statements Model. d. $4,000. Net cash flow from operating activities ($22,000 – $18,000). e. Cash flow from operating activities and net income are different in most cases, because there is a time gap between when revenue is earned and cash is collected. When a company earns revenue on account, this amount is reflected in net income but will not be reflected on the cash flow statement until the cash is collected. 2-13 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-6A Troy Company Horizontal Financial Statements Model for Year 1 Event 1 2 3 Balance Sheet Assets = Liab. + Stockholders’ Equity Accts. Accts. Common Retained Cash + Rec = Payable + Stock + Earnings 15,000 + NA = NA + NA + 15,000 NA + NA = 12,000 + NA + (12,000) (8,000) + NA = (8,000) + NA + NA 7,000 + 0 = 4,000 + 0 + 3,000 Income Statement Revenue − Expense = Net Inc. Statement of Cash Flows NA = 15,000 12,000 = (12,000) NA = NA 12,000 = 3,000 15,000 OA NA (8,000) OA 7,000 NC 15,000 − NA − NA − 15,000 − a. $4,000. Total from the accounts payable column in the Horizontal Financial Statements Model. b. $12,000. Total from the expenses column in the Horizontal Financial Statements Model. c. $7,000. Total cash flow from operating activities. d. $3,000. Total from the retained earnings column in the Horizontal Financial Statements Model. e. Cash flow from operating activities and expenses are different in most cases, because there is a time gap between when an expense is incurred and when cash is paid for that expense. This also occurs when revenue is earned at a different time than cash is collected. When a company incurs an revenue or expense transaction, this amount is reflected in revenues or expenses on the income statement but will not impact the cash flow statement until the cash is paid. 2-14 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-7A a. Chung Corporation Accounting Equation – Year 1 Event Assets = Liabilities + Stockholders’ Equity Salaries Common Retained Cash = Payable + Stock + Earnings Earned Rev. 8,000 NA NA 8,000 Accrued Sal. NA 5,000 NA (5,000) = Ending Bal. 8,000 5,000 + -0- + 3,000 Chung Corporation Balance Sheet As of December 31, Year 1 Assets Cash Total Assets $8,000 Liabilities Salaries Payable Total Liabilities $5,000 Stockholders’ Equity Retained Earnings Total Stockholders’ Equity $3,000 $8,000 $5,000 3,000 Total Liab. and Stockholders’ Equity $8,000 b. Computation of Net Income Revenue Less: Expenses Net Income $8,000 (5,000) $3,000 2-15 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-7A (cont.) c. Cash Flow from Operating Activities Cash from Revenue Net Cash Flow from Operating Act. d. $8,000 $8,000 The salary expense is deducted from revenue in computing net income, but it has not been paid. This creates a difference of $5,000 between net income and cash flow from operating activities. The revenue is the same because it has been earned and collected. 2-16 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-8A a. Milea Inc. Accounting Equation For the Year Ended December 31, Year 1 Assets Event 1. 2. 3. 4. 5. 6. Totals Cash 20,000 (2,500) 48,000 (2,000) 63,500 = Liabilities + Acct. Rec. Salaries = Pay. = 56,000 = = (48,000) = = 10,000 = 8,000 = 10,000 Stockholders’ Equity Common Retained + Stock Earn. + 20,000 + 56,000 + (2,500) + + (10,000) + (2,000) + 20,000 41,500 Acct. Title for RE Revenue Util. Exp. Sal. Exp. Dividends b. Milea Inc. Income Statement For the Year Ended December 31, Year 1 Revenue $56,000 Expenses Utility Expense Salaries Expense Total Expenses $ 2,500 10,000 (12,500) Net Income $43,500 2-17 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-8A b. (cont.) Milea Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, Year 1 Beginning Common Stock Plus: Common Stock Issued Ending Common Stock $ -020,000 Beginning Retained Earnings Plus: Net Income Less: Dividends Ending Retained Earnings -0$43,500 (2,000) $20,000 41,500 Total Stockholders’ Equity $61,500 Milea Inc. Balance Sheet As of December 31, Year 1 Assets Cash Accounts Receivable Total Assets $63,500 8,000 Liabilities Salaries Payable Total Liabilities $10,000 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $20,000 41,500 $71,500 $10,000 61,500 Total Liab. and Stockholders’ Equity 2-18 $71,500 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-8A b. (cont.) Milea Inc. Statement of Cash Flows For the Year Ended December 31, Year 1 Cash Flow From Operating Activities Cash Received from Customers Cash Paid for Expenses Net Cash Flow from Operating Act. $48,000 (2,500) $45,500 Cash Flow From Investing Activities Cash Flow From Financing Activities Issue of Stock Paid Dividends Net Cash Flow from Financing Act. Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance -0$20,000 (2,000) 18,000 63,500 -0$63,500 c. Net income is the difference between services performed and expenses incurred, regardless of the cash collected or paid. Cash flow from operating activities is the difference between cash collected and paid for operating activities. There was $56,000 of income earned, but only $48,000 collected and $12,500 of expenses incurred, but there was only $2,500 paid. 2-19 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-9A a. Lewis and Harper Horizontal Statements Model Year 1 Event 1. 2. 3. 4. 5. 6. 7. 8. Totals Balance Sheet Assets = Liabilities Accts. Acct. Sal. Cash + Rec. = Payable + Pay. NA + 70,000 = NA + NA 40,000 + NA = NA + NA NA + NA = 36,000 + NA (10,000) + NA = NA + NA 47,000 + (47,000) = NA + NA (16,000) + NA = (16,000) + NA (8,000) + NA = NA + NA NA + NA = NA + 2,000 53,000 + 23,000 = 20,000 + 2,000 + S. Equity Retained + Earn. + 70,000 + 40,000 + (36,000) + (10,000) + NA + NA + (8,000) + (2,000) + 54,000 Income Statement Rev. – Exp. = Net Inc. 70,000 40,000 NA NA NA NA NA NA 110,000 – NA – NA – 36,000 – 10,000 – NA – NA – NA – 2,000 – 48,000 = = = = = = = = = 70,000 40,000 (36,000) (10,000) NA NA NA (2,000) 62,000 b. Total assets: $76,000 ($53,000 + $23,000) c. $23,000 d. $20,000 e. Accounts Receivable (an asset) is an amount owed to Lewis and Harper: $23,000; Accounts Payable (a liability) is an amount that Lewis and Harper owe: $20,000 f. $62,000 g. $61,000 ($40,000 – $10,000 + $47,000 – $16,000) 2-20 Statement of Cash Flows NA 40,000 OA NA (10,000) OA 47,000 OA (16,000) OA (8,000) FA NA 53,000 NC IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-10A a. & c. Event 1. 2. 3. 4. 5. 6. 7. Revenue Expense NA $82,000 NA NA NA 19,000 NA NA NA NA NA $53,000 NA 3,500 Statement of Cash Flows $40,000 FA NA (6,000) FA 76,000 OA (53,000) OA 19,000 OA NA b. Computation of Net Income Revenue Less: Expenses Net Income $101,000 (56,500) $44,500 d. Cash Flow from Operating Activities Cash from Revenue Cash paid for expenses Net Cash Flow from Operating Act. e. $95,000 (53,000) $42,000 The balance of Retained Earnings on the Year 1 Balance Sheet will be the amount of Net Income, $44,500 minus $6,000 of dividends that were paid during the year = $38,500. There was no beginning balance in Retained Earnings. 2-21 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-11A Lee Inc. Effect of Events on the Accounts under Accounting Equation Event 1. Sales on Account 2. Coll. Accts. Rec. 3. Incurred Expense 4. Pd. Acc. Pay. 5. Issue of Stock 6. Purchase Land Totals Cash Assets Accounts Receivable Land = Liabilities + Stockholders’ Equity Accounts Com. Retained = Payable + Stock + Earnings 62,000 51,000 62,000 (51,000) 39,000 (31,000) (39,000) (31,000) 40,000 (21,000) 39,000 40,000 11,000 21,000 21,000 = 8,000 + 40,000 + 23,000 a. Revenue recognized, $62,000. b. Cash flow from revenue, $51,000. c. Revenue, $62,000, less operating expenses, $39,000 = $23,000 net income. d. Accounts receivable collected, $51,000, less cash paid for expenses, $31,000 = $20,000 cash flow from operating activities. e. Income of $62,000 was earned, but only $51,000 was collected (a difference of $11,000); operating expenses incurred were $39,000 but only $31,000 was paid during the period (a difference of $8,000). Consequently, net income is $3,000 more than cash flow from operating activities. f. $21,000 cash outflow for the purchase of land. g. $40,000 cash inflow from the issue of common stock. h. Total assets Total liabilities Total equity = $71,000 ($39,000 + $11,000 + $21,000) = $8,000 = $63,000 ($40,000 + $23,000) 2-22 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-12A a. Examples of expenses that would be matched directly with revenue: Sales commissions Salaries expense b. An example of a period cost that is difficult to match with revenue: Advertising expense – A company cannot be certain when dollars spent for advertising will produce benefits. 2-23 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-13A a. $8,000 x 6% = $480; $480 x 5/12 = $200 b. $-0-, no interest was paid in Year 1; $480 of interest will be paid in Year 2. c. Bradley Company Statements Model for Year 1 Statement of Event Assets = No. 1. 2. 3. Cash I I NA Balance Sheet Liabilities + Stockholders’ Equity Notes Int. Common Ret. = Payable + Payable + Stock + Earn. = NA + NA + NA + I = I + NA + NA + NA = NA + I + NA + D 2-24 Income Statement Rev. – Exp. = Net Inc. I NA NA – NA – NA – I = = = I NA D Cash Flows I OA I FA NA IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-14A a. Interest expense recognized for Year 1: $80,000 x 8% = $6,400; $6,400 x 7/12 = $3,733 (rounded) b. Leach Company Accounting Equation for Year 1 Assets Event Note Cash 80,000 Adj. NA = = Liabilities Note Interest Payable + Payable 80,000 + NA NA 3,733 + + Equity Common Stock NA + NA Retained Earnings NA (3,733) See the adjusting entry in the accounting equation above (liabilities increase, equity decreases). c. $-0-. All interest will be paid at maturity, June 1, Year 2, for this note payable. d. $3,733 e. $6,400 ($80,000 x 8%). All interest will be paid when the note payable matures. f. $2,667 ($80,000 x 8% x 5/12) or ($6,400 − $3,733 = $2,667) g. $-0- 2-25 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-15A Solve for “X” in the following scenarios: a. X Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance $4,500 69,400 (68,200) $5,700 (X) b. X Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance $4,300 62,200 (63,100) $3,400 (X) c. X Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance 2-26 $9,700 99,700 (99,100) $10,300 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-15A a. (cont.) d. X Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance 2-27 $22,000 108,300 (109,000) $21,300 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-16A Solve for “X” in the following scenarios: a. X Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance $4,700 67,600 (68,900) $3,400 (X) b. X Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance $3,000 66,400 (64,100) $5,300 (X) c. X Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance 2-28 $4,100 67,600 (66,900) $4,800 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-16A a. (cont.) d. X Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance 2-29 $7,700 79,400 (77,300) $9,800 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-17A a. Solve for “X” Harbert, Inc. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance $12,000 70,500 (72,000) $10,500 (X) b. $7,500. Revenue ($70,500) minus expenses ($63,000). c. $9,000. Cash inflow from AR collections ($72,000) minus cash expenses ($63,000). d. Cash flow from operating activities and net income are different in most cases, because there is a time gap between when revenue is earned and cash is collected. When a company earns revenue on account, this amount is reflected in net income but will not be reflected on the cash flow statement until the cash is collected. 2-30 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-18A a. Solve for “X” Kincaid, Inc. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance $2,000 63,000 (40,000) $25,000 (X) b. $22,000. Revenue ($85,000) minus expenses ($63,000). c. $45,000. Cash inflow from sales ($85,000) minus cash outflow for expenses ($40,000). d. Cash flow from operating activities and expenses are different in most cases, because there is a time gap between when an expense is incurred and when cash is paid for that expense. When a company incurs an expense, this amount is reflected in expenses on the income statement but will not impact the cash flow statement until the cash is paid. 2-31 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-19A The six principles of the AICPA Code of Professional Conduct and a brief explanation is as follows: Responsibilities Principle In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. The Public Interest Principle Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. Integrity Principle To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. Objectivity and Independence Principle A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. Due Care Principle A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability. Scope and Nature of Services Principle A member in public practice should observe the principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. 2-32 IFAB 2e – Chapter 2 – Solutions Manual SOLUTIONS TO PROBLEMS – SERIES A – CHAPTER 2 PROBLEM 2-20A a. Maben Company Horizontal Financial Statements Model for Year 1 Assets Event 1 2 3 4 5. 6. 7. 8. 9. Total Cash 30,000 40,000 48,000 (25,000) (1,000) 20,000 (10,000) (53,000) NA 49,000 + + + + + + + + + + + Land NA NA NA NA NA NA NA 53,000 NA 53,000 Balance Sheet = Liab. + Stockholders’ Equity Notes Common Retained = Payable + Stock + Earnings = NA + 30,000 + NA = 40,000 + NA + NA = NA + NA + 48,000 = NA + NA + (25,000) = NA + NA + (1,000) = NA + 20,000 + NA = (10,000) + NA + NA = NA + NA + NA = NA + NA + NA = 30,000 + 50,000 + 22,000 Revenue NA NA 48,000 NA NA NA NA NA NA 48,000 Income Statement = − Expense − − − − − − − − − − b. Total Assets = $49,000 + $53,000 = $102,000 c. Sources of Assets 1. Issue of stock 2. Cash from loan 3. Cash from revenue 6. Issue of stock Total Sources of Assets 2-33 $ 30,000 40,000 48,000 20,000 $138,000 NA NA NA 25,000 NA NA NA NA NA 25,000 = = = = = = = = = = Net Inc. NA NA 48,000 (25,000) NA NA NA NA NA 23,000 Statement of Cash Flows 30,000 40,000 48,000 (25,000) (1,000) 20,000 (10,000) (53,000) 49,000 FA FA OA OA FA FA FA IA NA NC IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-20A (cont.) d. Net income amounts to $23,000 (see part a.) Dividends are not expenses and do not appear on the income statement. e. f. Operating Activities: Cash from revenue Cash paid for expenses Net Cash Flow from Operating Activities $48,000 (25,000) $23,000 Investing Activities: Cash paid to purchase land Net Cash Flow from Investing Activities $(53,000) $(53,000) Financing Activities: Cash from stock issue ($30,000 + $20,000) Cash from loan Paid cash dividend Cash paid on loan principal Net Cash Flow from Financing Activities $50,000 40,000 (1,000) (10,000) $79,000 Percentage of assets is provided as follows: Investors Creditors Earnings g. ($50,000 ÷ $102,000) 49.0% ($30,000 ÷ $102,000) 29.4% ($22,000 ÷ $102,000) 21.6% Zero. The revenue is recorded in a Revenue account not in the Retained Earnings account. The balance in the Revenue account is transferred to Retained Earnings at the end of the accounting period through the closing process. 2-34 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-21A Event No. 6 2 4 1 8 5 7 3 Description Incurred cash expenses. Earned revenue on account. Earned cash revenue. Issued common stock for cash. Paid a cash dividend. Collected cash from customer accounts receivable. Used cash to pay off accounts payable. Incurred expenses on account. 2-35 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-22A Wadell Company Statements Model for Year 2 Date Beg. 1/1 3/1 4/1 5/1 9/1 12/31 12/31 12/31 12/31 Totals Cash + 35,000 + 20,000 + (2,000) + (15,000) + (5,500) + 30,000 + NA + 46,000 + NA + NA + 108,500 + Assets Accts. Rec. + 9,000 + NA + NA + NA + NA + NA + 58,000 + (46,000) + NA + NA + 21,000 + Balance Sheet = Liab. + S. Equity Land = Accts. Common Retained Pay. + Stock Earn. 51,000 = 7,500 + 40,000 47,500 NA = NA + 20,000 NA NA = NA + NA (2,000) 15,000 = NA + NA NA NA = (5,500) + NA NA (30,000) = NA + NA NA NA = NA + NA 58,000 NA = NA + NA NA NA = 28,000 + NA (28,000) NA = NA + NA NA 36,000 = 30,000 + 60,000 75,500 Income Statement Rev. – Exp. = Net Inc. NA NA NA NA NA NA 58,000 NA NA NA 58,000 – – – – – – – – – – − NA = NA = NA = NA = NA = NA = NA = NA = 28,000 = NA = 28,000 = NA NA NA NA NA NA 58,000 NA (28,000) NA 30,000 Statement of Cash Flows NA 20,000 FA (2,000) FA (15,000) IA (5,500) OA 30,000 IA NA 46,000 OA NA NA 73,500 NC a. $36,000. Total of the land column in the Horizontal Financial Statements Model. b. $40,500. Cash inflows of $46,000 minus cash outflows of $5,500. c. $30,000. Total of the liabilities column in the Horizontal Financial Statements Model. d. $15,000. Cash inflow from the sale of land ($30,000) minus cash outflow from the purchase of land ($15,000). 2-36 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-22A (cont.) e. $28,000. Total of the expenses column in the Horizontal Financial Statements Model. f. $58,000. Total of the revenue column in the Horizontal Financial Statements Model. g. $18,000. Cash inflow from issuance of common stock ($20,000) minus cash outflow from dividend ($2,000). h. $30,000. Revenues ($58,000) minus expenses ($28,000). i. $75,500. Total of the retained earnings column in the Horizontal Financial Statements Model. 2-37 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23A a. Sentry, Inc. Accounting Equation for Year 1 Event Beg. 1. Issued stk. 2. Rev. on acct. 3. Loan 4. Exp. On acct. 5. AR collect. 6. AP payment 7. Interest exp.* Totals Assets = Accts. Cash + Rec. = Accts Pay. $0 + 20,000 + NA + 12,000 + NA + 5,000 + (2,900) + NA + 34,100 + $0 + NA + NA + NA + NA + NA + NA + 12,000 + 3,700 + NA + NA + NA + (2,900) + NA + NA + NA + 800 + 12,000 + $0 = NA = 62,000 = NA = NA = (5,000) = NA = NA = 57,000 = Liabilities Notes Int. + Pay. + Pay. *240 = (12,000 x .08) x 3/12 2-38 NA NA NA NA NA NA NA 240 240 + + Stockholders’ Equity Com. Retained Acct. Stock + Earnings Title/RE + + + + + + + + + $0 20,000 NA NA NA NA NA NA 20,000 + + + + + + + + + $0 NA 62,000 Rev. NA (3,700) Exp. NA NA (240) Int. exp. 58,060 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23A a. (cont.) Sentry, Inc. Accounting Equation for Year 2 Assets Event Beg. 1. AR collect. 2. AP payment 3. Int. exp.* 4. Int. pay.** 5. Note pay. Totals Cash + = Accts. Rec. = $34,100 + 57,000 = 57,000 + (57,000) = (800) + NA = NA + NA = (960) + NA = (12,000) + NA = 77,340 + 0= Accts Pay. Liabilities Notes Int. + Pay. + Pay. $800 + 12,000 + NA + NA + (800) + NA + NA + NA + NA + NA + NA + (12,000) + 0 + 0 + *720 = (12,000 *.08) x 9/12 **960 = 240 + 720 2-39 240 NA NA 720 (960) NA 0 + Stockholders’ Equity Com. Retained Acct. + Stock + Earnings Title/RE + 20,000 + + NA + + NA + + NA + + NA + + NA + + 20,000 + 58,060 NA NA (720) Int. exp. NA NA 57,340 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23A (cont.) b. Sentry, Inc. Income Statement For the Period Ended December 31, Year 1 & Year2 Year 1 Year 2 Revenue Expenses Net Income $62,000 (3,940) $58,060 $0 (720) $(720) Sentry, Inc. Statement of Changes in Stockholders’ Equity For the Period Ended December 31, Year 1 & Year2 Year 1 Year 2 Beginning Common Stock Plus: Common Stock Issued Ending Common Stock $ -020,000 $20,000 $20,000 0 $20,000 Beginning Retained Earnings Plus: Net Income Ending Retained Earnings $ -058,060 $58,060 $58,060 (720) $57,340 Total Stockholders’ Equity $78,060 $77,340 2-40 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23A b. (cont.) Sentry, Inc. Balance Sheet December 31, Year 1 & Year 2 Year 1 Year 2 Assets Cash Accounts Receivable Total Assets $34,100 $57,000 $91,100 $77,340 $0 $77,340 Liabilities Accounts Payable Interest Payable Notes Payable Total Liabilities $800 240 12,000 $13,040 $0 0 0 $0 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $20,000 $58,060 $78,060 $20,000 $57,340 $77,340 Total Liabilities and Stockholders’ Equity $91,100 $77,340 2-41 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23A b. (cont.) Sentry, Inc. Statement of Cash Flows For the Year Ended December 31, Year 1 & Year 2 Year 1 Year 2 Cash Flows From Operating Activities: Cash Receipts from Customers Cash Payments for Expenses Net Cash Flow from Operating Activities $5,000 (2,900) $2,100 $57,000 (1,760)* $55,240 Cash Flows From Investing Activities Net Cash Flow from Investing Activities $0 $0 Cash Flows From Financing Activities: Cash Transactions from Borrowed Funds Cash Receipts from Stock Issue Net Cash Flow from Financing Activities $12,000 ($12,000) 20,000 0 $32,000 ($12,000) Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance $34,100 -0$34,100 $43,240 $34,100 $77,340 *$1,760 = $800 + $960 c. Sentry Inc. has $77,340 worth of assets to distribute in the event of liquidation at the end of Year 2. During liquidation, creditors have first rights to the assets and any remaining assets are distributed to owners. As the company has no debts, creditors would receive $0 and total amount of assets of $77,340 would be distributed to owners. 2-42 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-24A a. Bennett Company Income Statement For the Year Ended December 31, Year 2 Revenue Service Revenue Total Revenue $42,000 Expenses Other Operating Expenses Salary Expense Interest Expense Total Expenses $20,000 10,000 4,000 $42,000 (34,000) Net Income $8,000 Bennett Company Statement of Changes in Stockholders’ Equity For the Year Ended December 31, Year 2 Beginning Common Stock Plus: Stock Issued Ending Common Stock $40,000 5,000 Beginning Retained Earnings Plus: Net Income Less: Dividends Ending Retained Earnings $ 15,000 8,000 (3,000) $45,000 Total Stockholders’ Equity 20,000 $65,000 2-43 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-24A a. (cont.) Bennett Company Balance Sheet As of December 31, Year 2 Assets Cash Accounts Receivable Land Total Assets $23,000 18,000 59,000 Liabilities Accounts Payable Interest Payable Accrued Salaries Payable Notes Payable Total Liabilities $17,000 3,000 5,000 10,000 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $45,000 20,000 $100,000 $ 35,000 $ 65,000 Total Liab. and Stockholders’ Equity 2-44 $100,000 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-24A a. (cont.) Bennett Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash Flow From Operating Activities $33,000 Cash Flow From Investing Activities (32,000) Cash Flow From Financing Activities 2,000 Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance 3,000 20,000 $23,000 b. Bennett Company Accounts Receivable Summary Beginning AR Balance Increase in AR from Service Revenue Reduction in AR from Collections Endings Accounts Receivable Balance $41,000 42,000 (65,000) $18,000 (X) $15,000 20,000 (18,000) $17,000 (X) c. Bennet Company Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance 2-45 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-25A a. Computation of Net Income Revenue recognized on account Less accrued salary expense Net Income $68,000 (46,000) $22,000 b. Computation of Cash Collected from Accounts Receivable Beginning balance of Accounts Receivable $ 4,000 Add revenue recognized on account 68,000 Less ending balance of Accounts Receivable (4,500) Cash collected from accounts receivable $67,500 Computation of Cash Paid for Salaries Expense Beginning balance of Salaries Payable Add accrued salary expense recognized Less ending balance of Salaries Payable Cash paid for Salary Expense $ 2,600 46,000 (1,500) $47,100 Cash Flow from Operating Activities Cash from Accounts Receivable Cash paid for Salary Expense Net Cash Flow from Operating Act. c. $67,500 (47,100) $20,400 Net income is the difference between services performed and expenses incurred, regardless of the cash collected or paid. Cash flow from operating activities is the difference between cash collected and paid for operating activities. The time gap between these two activities often causes a difference between the net income and cash flow from operating activities. 2-46 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-26A The three common features of ethical misconduct are: 1. The availability of an opportunity 2. The existence of some sort of pressure 3. The capacity for rationalization 1. Even though Pete has exceeded his authority, no one has complained because he is bringing in more revenue. Oversight by a partner would eliminate this type of problem. 2. Pete is in a financial bind and does not want to discuss his problem with others for fear of ruining his image. Therefore, he is willing to take risks to keep his secret. 3. He rationalizes that his actions do not hurt anyone because the client is getting the service and the firm is getting a reasonable fee. 2-47 IFAB 2e – Chapter 2 – Solutions Manual SOLUTIONS TO EXERCISES – SERIES B – CHAPTER 2 EXERCISE 2-1B a. The Bruce Spruce Co. Horizontal Financial Statements Model for Year 1 Event 1 2 3 4 5 6 Balance Sheet Assets = Liab. + Stockholders’ Equity Notes Common Retained Cash + Land = Payable + Stock + Earnings + 75,000 + NA = NA 75,000 + NA = + + 48,000 + NA NA NA 48,000 = + + (34,000) (34,000) + NA NA NA = + 20,000 + NA 20,000 + NA NA + + (38,000) + 38,000 = NA NA NA = + + (2,000) + NA NA NA (2,000) 69,000 + 38,000 = 20,000 + 75,000 + 12,000 2-58 Income Statement Revenue − Expense = Net Inc. NA 48,000 NA NA NA NA 48,000 − − − − − − − = NA NA = 48,000 NA 34,000 = (34,000) = NA NA = NA NA = NA NA 34,000 = 14,000 Statement of Cash Flows 75,000 FA 48,000 OA (34,000) OA 20,000 FA (38,000) IA (2,000) FA 69,000 NC IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-1B (cont.) b. The Bruce Spruce Co. Income Statement For the Period Ended December 31, Year 1 Revenue Expenses Net Income $48,000 (34,000) $14,000 The Bruce Spruce Co. Statement of Changes in Stockholders’ Equity For the Period Ended December 31, Year 1 Beginning Common Stock Plus: Common Stock Issued Ending Common Stock $ -075,000 Beginning Retained Earnings Plus: Net Income Less: Dividends Ending Retained Earnings $-014,000 (2,000) Total Stockholders’ Equity $75,000 12,000 $87,000 2-59 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-1B b. (cont.) The Bruce Spruce Co. Balance Sheet As of December 31, Year 1 Assets Cash Land Total Assets $69,000 38,000 $107,000 Liabilities Notes Payable $20,000 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $75,000 12,000 $87,000 Total Liabilities and Stockholders’ Equity 2-60 $107,000 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-1B b. (cont.) The Bruce Spruce Co. Statement of Cash Flows For the Year Ended December 31, Year 1 Cash Flows From Operating Activities: Cash Receipts from Customers Cash Payments for Expenses Net Cash Flow from Operating Activities $48,000 (34,000) Cash Flows From Investing Activities: Cash Payment for Land Net Cash Flow from Investing Activities $(38,000) Cash Flows From Financing Activities: Cash Receipts from Stock Issue Cash Receipts from Borrowed Funds Cash Dividends Net Cash Flow from Financing Activities $75,000 20,000 (2,000) Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance 2-61 $14,000 $(38,000) $93,000 69,000 -0$69,000 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-2B a. 1. 2. 3. 4. 5. 6. 7. Asset source Asset source NA Asset exchange Asset use Asset use NA b. Pet Partners Horizontal Financial Statements Model for Year 1 Assets Event 1 2 3 4 5 6 7 Cash I I NA D D D NA + + + + + + + + Land NA NA NA I NA NA NA Balance Sheet = Liab. + Stockholders’ Equity Notes Common Retained = Payable + Stock + Earnings + + = NA I NA = + + I NA NA = + + NA NA NA = + + NA NA NA = + + NA NA D = + + NA NA D = + + NA NA NA 2-62 Income Statement Revenue − Expense = Net Inc. NA NA NA NA NA NA NA − − − − − − − NA NA NA NA I NA NA = = = = = = = NA NA NA NA D NA NA Statement of Cash Flows I I NA D D D NA FA FA IA OA FA IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-3B a. Missing items are determined as follow: (a) $500,000; Since the cash flow column shows that this event was financing activity, we can infer that the company either borrowed money or issued stock. Since the model shows that liabilities were not affected, we conclude that the common stock account increased by $500,000. (b) NA; Since issuing common stock (see answer to (a) above), does not affect the revenue account, the answer is not affected (NA). (c) NA; Since issuing common stock (see answer to (a) above), does not affect net income, the answer is not affected (NA). (d) NA; Since assets and liabilities increased, we infer that the company borrowed money. Borrowing money does not affect net income. (e) FA; Since assets and liabilities increased, we infer that the company borrowed money. Borrowing money is a financing activity (FA). (f) 475,000; Since cash decreased and no other balance sheet account other than the land account was affected, the company must have purchased land which would cause the land account to increase by 475,000. (g) IA; Purchasing land (see answer to (f) above) is an investing activity (IA). (h) 105,000; The income statement shows $105,000 of revenue. Recognizing revenue increases the cash and retained earning accounts on the balance sheet. (i) 105,000; The income statement shows $105,000 of revenue. Recognizing revenue increases the cash and retained earning accounts on the balance sheet. 2-63 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-3B a. (cont). (j) (80,000); The statement of cash flows shows that the $80,000 cash outflow was an operating activity. Therefore, we conclude that this is an expense item that will act to reduce the amount of retained earnings shown in the balance sheet. (k) 80,000; The statement of cash flows shows that the $80,000 cash outflow was an operating activity. Therefore, we conclude that this is an expense item that will act to increase amount of expenses shown in the income statement. (l) FA; Since the event decreases cash and retained earnings on the balance sheet; and does not affect the income statement, we conclude that this was a dividend payment which is a financing activity (FA). (m) 435,000; This amount is determined by totaling the vertical column. (n) 105,000; This amount is determined by totaling the vertical column. 2-64 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-3B a. (cont.) Completed Horizontal Financial Statements Model Surf’s Up Industries Horizontal Financial Statements Model for Year 1 Beg. 1 2 3 4 5 6 Balance Sheet Assets = Liab. + Stockholders’ Equity Notes Common Retained Cash + Land = Payable + Stock + Earnings + + 0 + 0 = 0 0 0 = + 500,000 + 500,000 + NA NA NA = 400,000 + + 400,000 + NA NA NA + + (475,000) + 475,000 = NA NA NA = + + 105,000 105,000 + NA NA NA = + + (80,000) (80,000) + NA NA NA = + + (15,000) (15,000) + NA NA NA 435,000 + 475,000 = 400,000 + 500,000 + 10,000 Income Statement Revenue − Expense = Net Inc. 0 NA NA NA 105,000 NA NA 105,000 b. $910,000 Total Assets (Cash $435,000 + Land $475,000) c. $25,000 Net Income (Revenue $105,000 – Expenses $80,000) d. $(475,000) Net Cash Flow from Investing Activities 2-65 0 − NA − NA − NA − NA − − 80,000 NA − − 80,000 = = = = = = = = 0 NA NA NA 105,000 (80,000) NA 25,000 Statement of Cash Flows NA 500,000 FA 400,000 FA (475,000) IA 105,000 OA (80,000) OA (15,000) FA 435,000 NC IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-4B Smith Company Effect of Events on the Year 1 Financial Statements Event Earned Revenue Coll. Acct. Rec. Ending Balance Assets = Liabilities Accounts Cash + Rec. = NA + 12,000 = NA 9,800 + (9,800) = NA 9,800 + 2,200 = -0- + + + + + Stockholders’ Equity Common Retained Stock + Earnings NA + 12,000 NA + NA -0- + 12,000 a. Accounts Receivable: $12,000 – $9,800 = $2,200 b. $12,000 c. $9,800 cash collected from accounts receivable. d. $12,000 e. $12,000 of revenue was earned but only $9,800 of it was collected. 2-66 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-5B The Woodstock Shop Horizontal Financial Statements Model for Year 1 Event 1 2 3 4 5 6 Balance Sheet Assets = Liab. + Stockholders’ Equity Accts. Notes Common Retained Cash + Rec = Payable + Stock + Earnings 38,000 + NA = NA + 38,000 + NA NA + 30,000 = NA + NA + 30,000 (25,000) + NA = NA + NA + (25,000) 15,000 + NA = 15,000 + NA + NA 25,000 + (25,000) = NA + NA + NA (2,000) + NA = NA + NA + (2,000) 51,000 + 5,000 = 15,000 + 38,000 + 3,000 Income Statement Revenue − Expense = Net Inc. Statement of Cash Flows NA = NA NA = 30,000 25,000 = (25,000) NA = NA NA = NA NA = NA 25,000 = 5,000 38,000 FA NA (25,000) OA 15,000 FA 25,000 OA (2,000) FA 51,000 NC NA − 30,000 − NA − NA − NA − NA − 30,000 − b. Accounts receivable will appear as an “asset” on the December 31, Year 1 balance sheet. c. $5,000. Total from the accounts receivable column in the Horizontal Financial Statements Model. d. $5,000. Total from the net income column in the Horizontal Financial Statements Model. e. $0. Net cash flow from operating activities ($25,000 – $25,000). f. Cash flow from operating activities and net income are different in most cases, because there is a time gap between when revenue is earned and cash is collected. When a company earns revenue on account, this amount is reflected in net income but not cash flow from operating activities until the cash is collected. 2-67 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-6B Kendall Company Horizontal Financial Statements Model for Year 1 Event 1 2 3 Balance Sheet Assets = Liab. + Stockholders’ Equity Accts. Accts. Common Retained Cash + Rec = Payable + Stock + Earnings + + 20,000 20,000 + NA = NA NA + = 10,000 + + (10,000) NA NA NA = (5,000) + + (5,000) + NA NA NA = 5,000 + + 10,000 15,000 + 0 0 Income Statement Revenue − Expense = Net Inc. 20,000 NA NA 20,000 NA − − (10,000) NA − − (10,000) = 20,000 = (10,000) = NA = 10,000 Statement of Cash Flows 20,000 OA NA (5,000) OA 15,000 NC a. $5,000. Total from the accounts payable column in the Horizontal Financial Statements Model. b. $10,000. Total from the expenses column in the Horizontal Financial Statements Model. c. $15,000. Total cash flow from operating activities. d. $10,000. Total from the retained earnings column in the Horizontal Financial Statements Model. e. Cash flow from operating activities and expenses are different in most cases, because there is a time gap between when an expense is incurred and when cash is paid for that expense. When a company incurs an expense, this amount is reflected in expenses on the income statement but will not impact the cash flow statement until the cash is paid. 2-68 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-7B a. Star Corporation Accounting Equation – Year 1 Event Assets = Liabilities + Stockholders’ Equity Earned Rev. Accrued Sal. Ending Bal. Cash 5,000 NA 5,000 = = Salaries Payable NA 3,000 3,000 + + Common Stock NA NA -0- + + Retained Earnings 5,000 (3,000) 2,000 Star Corporation Balance Sheet As of December 31, Year 1 Assets Cash Total Assets $5,000 Liabilities Salaries Payable Total Liabilities $3,000 Stockholders’ Equity Retained Earnings Total Stockholders’ Equity $2,000 $5,000 $3,000 2,000 Total Liab. and Stockholders’ Equity $5,000 b. Computation of Net Income Revenue Less: Expenses Net Income $5,000 (3,000) $2,000 2-69 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-7B (cont.) c. Cash Flow from Operating Activities Cash from Revenue Net Cash Flow from Operating Act. e. $5,000 $5,000 The salary expense is deducted from revenue in computing net income, but it has not been paid. This creates a difference of $3,000. The revenue is the same because it has been earned and collected. 2-70 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-8B a. Talley, Inc. Accounting Equation for the Year Ended December 31, Year 1 Assets Event 1. 2. 3. 4. 5. 6. Totals Cash 20,000 Accts. Rec. = Liabilities = Salaries Pay. + Stockholders’ Equity Common + Stock 20,000 Retained Earnings Acct. Title for RE 38,000 (2,500) Revenue Util. Exp. (15,000) (2,000) 18,500 Sal. Exp. Dividends 38,000 (2,500) 21,000 (21,000) 15,000 (2,000) 36,500 17,000 = 15,000 + 20,000 b. Talley, Inc. Income Statement For the Year Ended December 31, Year 1 Revenue $38,000 Expenses Utilities Expense Salaries Expense Total Expenses $ 2,500 15,000 (17,500) Net Income $20,500 2-71 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-8B b. (cont.) Talley, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, Year 1 Beginning Common Stock Plus: Common Stock Issued Ending Common Stock $ Beginning Retained Earnings Plus: Net Income Less: Dividends Ending Retained Earnings $ -020,000 $20,000 -020,500 (2,000) 18,500 Total Stockholders’ Equity $38,500 Talley, Inc. Balance Sheet As of December 31, Year 1 Assets Cash Accounts Receivable Total Assets $36,500 17,000 Liabilities Salaries Payable Total Liabilities $15,000 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $20,000 18,500 $53,500 $15,000 38,500 Total Liab. and Stockholders’ Equity 2-72 $53,500 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-8B b. (cont.) Talley, Inc. Statement of Cash Flows For the Year Ended December 31, Year 1 Cash Flow From Operating Activities Cash Receipts from Customers Cash Paid for Expenses Net Cash Flow from Operating Act. $21,000 (2,500) $18,500 Cash Flow From Investing Activities Cash Flow From Financing Activities Issue of Stock Paid Dividends Net Cash Flow from Financing Act. Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance -0$20,000 (2,000) 18,000 36,500 -0$36,500 c. Net income is based on income earned of $38,000 and expenses incurred of $17,500 for a net income of $20,500. Net cash flow from operating activities is based on cash collected from revenue, $21,000 and expenses paid, $2,500, for a net cash flow from operating activities of $18,500. The difference of $2,000 is reflected in the Accounts Receivable account ($17,000), revenues accrued but not yet collected, and the Salaries Payable account ($15,000), expenses incurred but not paid. 2-73 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-9B a. Parker and Moates Statements Model Year 1 Event 1. 2. 3. 4. 5. 6. 7. 8. Totals b. c. d. e. f. g. Balance Sheet = Assets Liabilities + Stk. Equity Accts. Acct. Sal. Retained = Cash + Rec. Payable + Pay. + Earnings NA + 96,000 = NA + NA + 96,000 65,000 + NA = NA + NA + 65,000 NA + NA = 45,000 + NA + (45,000) (26,000) + NA = NA + NA + (26,000) 70,000 + (70,000) = NA + NA + NA (38,000) + NA = (38,000) + NA + NA (10,000) + NA = NA + NA + (10,000) NA + NA = NA + 3,000 + (3,000) = 61,000 + 26,000 7,000 + 3,000 + 77,000 Income Statement Rev. – Exp. = Net Inc. Statement of 96,000 – NA = 65,000 – NA = NA – 45,000 = NA – 26,000 = NA – NA = NA – NA = NA – NA = NA – 3,000 = 161,000 – 74,000 = NA 65,000 OA NA (26,000) OA 70,000 OA (38,000) OA (10,000) FA NA 61,000 NC 96,000 65,000 (45,000) (26,000) NA NA NA (3,000) 87,000 Total assets: $87,000 ($61,000 + $26,000) $26,000 $7,000 Accounts Receivable (an asset) is an amount owed to Parker and Moates: $26,000; Accounts Payable (a liability) is an amount that Parker and Moates owes: $7,000. $87,000 $71,000 ($65,000 – $26,000 + $70,000 – $38,000) 2-74 Cash Flows IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-10B a. & c. Event 1. 2. 3. 4. 5. 6. 7. Revenue Expense NA $67,000 NA NA NA 10,000 NA NA NA NA NA $49,000 NA 2,000 Statement of Cash Flows $50,000 FA NA (5,000) FA 45,000 OA (49,000) OA 10,000 OA NA b. Computation of Net Income Revenue Less: Expenses Net Income $77,000 (51,000) $26,000 d. Cash Flow from Operating Activities Cash from Revenue Cash paid for expenses Net Cash Flow from Operating Act. e. $55,000 (49,000) $ 6,000 The balance of Retained Earnings on the Year 1 Balance Sheet will be the amount of Net Income: $26,000, less $5,000 of dividends paid since there is no beginning balance in Retained Earnings. 2-75 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-11B Hall, Inc. Effect of Events on the Accounting Equation Event 1. Sales on Account Cash Assets Accounts Receivable Land = Liabilities + Stockholders’ Equity Accounts Com. Retained = Payable + Stock + Earnings 62,000 62,000 2. Coll. Accts. Rec. 51,000 (51,000) 3. Incurred Expense 39,000 (39,000) 4. Pd. Acc. Pay. (31,000) (31,000) 5. Issue of Stock 40,000 40,000 6. Purchase Land Totals (21,000) 39,000 11,000 21,000 21,000 = 8,000 + 40,000 + 23,000 a. Revenue recognized, $62,000. b. Cash flow from revenue, $51,000. c. Revenue, $62,000, less operating expenses, $39,000 = $23,000 net income. d. Accounts receivable collected, $51,000, less cash paid for expenses, $31,000 = $20,000 cash flow from operating activities. e. Income of $62,000 was earned, but only $51,000 was collected (a difference of $11,000); operating expenses incurred were $39,000 but only $31,000 was paid during the period (a difference of $8,000). Consequently, net income is $3,000 more than cash flow from operating activities. f. $21,000 cash outflow for the purchase of land. g. $40,000 cash inflow from the issue of common stock. h. Total assets Total liabilities Total equity = $71,000 ($39,000 + $11,000 + $21,000) = $8,000 = $63,000 ($40,000 + $23,000) 2-76 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-12B a. Directly matched b. Period expense c. Period expense d. Directly matched 2-77 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-13B a. $10,000 x 9% = $900; $900 x 4/12 = $300 b. $300 c. $-0-, No interest was paid in Year 1; $900 of interest will be paid in Year 2 when the note matures. d. Connelly Company Statements Model for Year 1 Statement of Event No. 1. 2. 3. Balance Sheet Assets = Liabilities + Stockholders’ Equity Notes Int. Common Ret. Earn. Cash = Payable + Payable + Stock + I NA NA NA I I I NA NA NA NA NA I NA D 2-78 Income Statement Rev. – Exp. = Net Inc. Cash Flows I NA NA I I NA NA I I NA D OA FA NA IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-14B a. Interest expense recognized for Year 1: $120,000 x 7% = $8,400; $8,400 x 5/12 = $3,500 b. California Company Accounting Equation for Year 1 Assets = Event Note Adj. Cash = 120,000 = NA = Liabilities Note Interest Payable + Payable 120,000 + NA NA + 3,500 + + + + Stockholders’ Equity Common Retained Stock + Earnings NA + NA NA + (3,500) See the adjusting entry in the accounting equation above (liabilities increase, equity decreases). c. $-0-. All interest will be paid at maturity, August 1, Year 2, for this note payable. d. $3,500 e. $8,400 ($120,000 x 7%). All interest will be paid when the note payable matures. f. $4,900 ($120,000 x 7% x 7/12) g. $-0- 2-79 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-15B Solve for “X” in the following scenarios: a. W Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance $5,000 72,500 (70,000) $7,500 (X) b. W Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance $3,800 60,600 (61,200) $3,200 (X) c. W Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance 2-80 $11,300 102,400 (97,900) $15,800 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-15B a. (cont.) d. W Co. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance 2-81 $18,000 135,500 (125,000) $28,500 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-16B Solve for “X” in the following scenarios: a. W Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance $5,500 45,200 (43,100) $7,600 (X) b. W Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance $4,700 55,200 (54,600) $5,300 (X) c. W Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance 2-82 $3,000 73,000 (67,500) $8,500 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-16B a. (cont.) d. W Co. Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance 2-83 $6,750 86,050 (82,000) $10,800 (X) IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-17B a. Solve for “X” London Falls Inc. Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance $15,000 58,500 (65,000) $8,500 (X) b. $5,500. Revenue ($58,500) minus expenses ($53,000). c. $12,000. Cash inflow from AR collections ($65,000) minus cash expenses ($53,000). d. Cash flow from operating activities and net income are different in most cases, because there is a time gap between when revenue is earned and cash is collected. When a company earns revenue on account, this amount is reflected in net income but will not be reflected on the cash flow statement until the cash is collected. 2-84 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-18B a. Solve for “X” Shelby Enterprises Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance $25,000 78,000 (85,000) $18,000 (X) b. $37,000. Revenue ($115,000) minus expenses ($78,000). c. $30,000. Cash inflow from sales ($115,000) minus cash outflow for expenses ($85,000). d. Cash flow from operating activities and expenses are different in most cases, because there is a time gap between when an expense is incurred and when cash is paid for that expense. When a company incurs an expense, this amount is reflected in expenses on the income statement but will not impact the cash flow statement until the cash is paid. 2-85 IFAB 2e – Chapter 2 – Solutions Manual EXERCISE 2-19B One provision of the Sarbanes-Oxley Act of 2002 clarifies the legal responsibility of company management, including the CFO and controller. This provision states that the company chief executive officer (CEO) and the chief financial officer (CFO) must certify in writing that they have reviewed the financial reports being issued, and that the reports present fairly the company’s financial status. This provision would apply to the CEO and CFO of Hewlett-Packard Company. CEOs and CFOs who make intentional misrepresentations are subject to a fine of up to $5 million and imprisonment of up to 20 years. 2-86 IFAB 2e – Chapter 2 – Solutions Manual SOLUTIONS TO PROBLEMS – SERIES B – CHAPTER 2 PROBLEM 2-20B a. Daley Company Horizontal Financial Statements Model for Year 1 Assets Event No. 1 2 3 4 5 6 7 8 9 Total b. Cash 52,000 20,000 42,000 (23,000) (6,000) 10,000 (10,000) (45,000) NA 40,000 + + + + + + + + + + + Balance Sheet Liab. + Notes = Payable + = NA + = 20,000 + = NA + = NA + = NA + = NA + = (10,000) + = NA + = NA + = 10,000 + = Land NA NA NA NA NA NA NA 45,000 NA 45,000 Stockholders’ Equity Common Retained Stock + Earnings 52,000 + NA NA + NA NA + 42,000 NA + (23,000) NA + (6,000) 10,000 + NA NA + NA NA + NA NA + NA 62,000 + 13,000 Total Assets = $40,000 + $45,000 = $85,000 c. Sources of Assets Event 1. Issue of stock 2. Cash from loan 3. Cash from revenue 6. Issue of stock Total Sources of Assets $ 52,000 20,000 42,000 10,000 $124,000 2-87 Revenue NA NA 42,000 NA NA NA NA NA NA 42,000 Income Statement − Expense = − − − − − − − − − − NA NA NA 23,000 NA NA NA NA NA 23,000 = = = = = = = = = = Net Inc. Statement of Cash Flows NA NA 42,000 (23,000) NA NA NA NA NA 19,000 52,000 FA 20,000 FA 42,000 OA (23,000) OA (6,000) FA 10,000 FA (10,000) FA (45,000) IA NA 40,000 NC IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-20B (cont.) d. Net income is $19,000 (see part a.) Dividends are not expenses so they do not appear on the income statement. e. Operating Activities: Cash from customers Cash paid for expenses Net Cash Flow from Operating Activities $42,000 (23,000) $19,000 Investing Activities: Cash paid to purchase land Net Cash Flow from Investing Activities $(45,000) $(45,000) Financing Activities: Cash from stock issues ($52,000 + $10,000) Cash from loan Paid cash dividend Cash paid on loan principal Net Cash Flow from Financing Activities $62,000 20,000 (6,000) (10,000) $66,000 f. Percentage of assets provided by: Creditors $10,000 ÷ $85,000 = 11.76% Investors $62,000 ÷ $85,000 = 72.94% Earnings $13,000 ÷ $85,000 = 15.29% g. Zero. The revenue is recorded in a Revenue account not in the Retained Earnings account. The balance in the Revenue account is transferred to Retained Earnings at the end of the accounting period through the closing process. 2-88 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-21B Event No. 4 3 6 7 5 8 1 2 Description Earned cash revenue. Incurred expenses on account. Incurred cash expenses. Used cash to pay off accounts payable. Collected cash from customer accounts receivable. Paid a cash dividend. Issued common stock for cash. Earned revenue on account. 2-89 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-22B Waddell Company Statements Model for Year 2 Date Cash + 52,000 + 35,000 + (4,000) + (20,000) + (7,000) + 25,000 + NA + 55,000 + NA + NA + 136,000 + Beg. 1/1 3/1 4/1 5/1 9/1 12/31 12/31 12/31 12/31 Totals Assets Accts. Rec. + 23,000 + NA + NA + NA + NA + NA + 65,000 + (55,000) + NA + NA + 33,000 + Balance Sheet = Liab. + S. Equity Land = Accts. Common Retained Pay. + Stock Earn. 45,000 = 12,500 + 35,000 72,500 NA = NA + 35,000 NA NA = NA + NA (4,000) 20,000 = NA + NA NA NA = (7,000) + NA NA (25,000) = NA + NA NA NA = NA + NA 65,000 NA = NA + NA NA NA = 34,000 + NA (34,000) NA = NA + NA NA 40,000 = 39,500 + 70,000 99,500 Income Statement = Net Inc. Rev. – Exp. Statement of NA NA NA NA NA NA 65,000 NA NA NA 65,000 NA 35,000 FA (4,000) FA (20,000) IA (7,000) OA 25,000 IA NA 55,000 OA NA NA 84,000 NC – NA = – NA = – NA = – NA = – NA = – NA = – NA = – NA = – 34,000 = – NA = − 34,000 = NA NA NA NA NA NA 65,000 NA (34,000) NA 31,000 Cash Flows a. $40,000. Total of the land column in the Horizontal Financial Statements Model. b. $48,000. Cash inflows of $55,000 minus cash outflows of $7,000. c. $39,500. Total of the liabilities column in the Horizontal Financial Statements Model. d. $5,000. Cash inflow from the sale of land ($25,000) minus cash outflow from the purchase of land ($20,000). 2-90 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-22B (cont.) e. $34,000. Total of the expenses column in the Horizontal Financial Statements Model. f. $65,000. Total of the revenue column in the Horizontal Financial Statements Model. g. $31,000. Cash inflow from issuance of common stock ($35,000) minus cash outflow from dividend ($4,000). h. $31,000. Revenues ($65,000) minus expenses ($34,000). i. $99,500. Total of the retained earnings column in the Horizontal Financial Statements Model. 2-91 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23B a. Matchstix Accounting Equation for Year 1 Event Beg. 1. Issued stk. 2. Rev. on acct. 3. Loan 4. Exp. On acct. 5. AR collect. 6. AP payment 7. Interest exp.* Totals Assets = Accts. Cash + Rec. = Accts Pay. $0 + 50,000 + NA + 22,000 + NA + 7,000 + (3,500) + NA + 75,500 + $0 + NA + NA + NA + NA + NA + NA + 22,000 + 10,500 + NA + NA + NA + (3,500) + NA + NA + NA + 7,000 + 22,000 + $0 = NA = 24,000 = NA = NA = (7,000) = NA = NA = 17,000 = Liabilities Notes Int. + Pay. + Pay. *330 = (22,000 x .06) x 3/12 2-92 NA NA NA NA NA NA NA 330 330 + + Stockholders’ Equity Com. Retained Acct. Stock + Earnings Title/RE + + + + + + + + + $0 50,000 NA NA NA NA NA NA 50,000 + + + + + + + + + $0 NA 24,000 Rev. NA (10,500) Exp. NA NA (330) Int. exp. 13,170 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23B a. (cont.) Matchstix Accounting Equation for Year 2 Assets Event Beg. 1. AR collect. 2. AP payment 3. Int. exp.* 4. Int. pay.** 5. Note pay. Totals Cash + = Accts. Rec. = $75,500 + 17,000 = 17,000 + (17,000) = (7,000) + NA = NA + NA = (1,320) + NA = (22,000) + NA = 62,180 + 0 = Accts Pay. Liabilities Notes Int. + Pay. + Pay. + Stockholders’ Equity Com. Retained Acct. + Stock + Earnings Title/RE 7,000 + 22,000 + 330 + 50,000 + NA + NA + NA + NA + (7,000) + NA + NA + NA + NA + NA + 990 + NA + NA + NA + (1,320) + NA + NA + (22,000) + NA + NA + 0 + 0 + 0 + 50,000 + *990 = (22,000 *.06) x 9/12 **1,320 = 330 + 990 2-93 13,170 NA NA (990) Int. exp. NA NA 12,180 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23B (cont.) b. Matchstix Income Statement For the Period Ended December 31, Year 1 & Year2 Year 1 Year 2 Revenue Expenses Net Income $24,000 (10,830) $13,170 $0 (990) $(990) Matchstix Statement of Changes in Stockholders’ Equity For the Period Ended December 31, Year 1 & Year2 Year 1 Year 2 Beginning Common Stock Plus: Common Stock Issued Ending Common Stock $ -050,000 $50,000 $50,000 0 $50,000 Beginning Retained Earnings Plus: Net Income Ending Retained Earnings $ -013,170 $13,170 $13,170 (990) $12,180 Total Stockholders’ Equity $63,170 $62,180 2-94 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23B b. (cont.) Matchstix Balance Sheet December 31, Year 1 & Year 2 Year 1 Year 2 Assets Cash Accounts Receivable Total Assets $75,500 $17,000 $92,500 $62,180 $0 $62,180 Liabilities Accounts Payable Interest Payable Notes Payable Total Liabilities $7,000 330 22,000 $29,330 $0 0 0 $0 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $50,000 $13,170 $63,170 $50,000 $12,180 $62,180 Total Liabilities and Stockholders’ Equity $92,500 $62,180 2-95 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-23B b. (cont.) Matchstix Statement of Cash Flows For the Year Ended December 31, Year 1 & Year 2 Year 1 Year 2 Cash Flows From Operating Activities: Cash Receipts from Customers Cash Payments for Expenses Net Cash Flow from Operating Activities $7,000 (3,500) $3,500 $17,000 (8,320)* $8,680 Cash Flows From Investing Activities Net Cash Flow from Investing Activities $0 $0 Cash Flows From Financing Activities: Cash Transactions from Borrowed Funds Cash Receipts from Stock Issue Net Cash Flow from Financing Activities $22,000 50,000 $72,000 $(22,000) 0 $(22,000) Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance $75,500 $(13,320) -075,500 $75,500 $62,180 *$8,320 = $7,000 + $1,320 c. Matchstix has $62,180 worth of assets to distribute in the event of liquidation at the end of Year 2. During liquidation, creditors have first rights to the assets and any remaining assets are distributed to owners. As the company has no debts, creditors would receive $0 and total amount of assets of $62,180 would be distributed to owners. 2-96 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-24B a. Tristan Company Income Statement For the Year Ended December 31, Year 2 Revenue Service Revenue Total Revenue $65,000 Expenses Other Operating Expenses Salary Expense Interest Expense Total Expenses $18,000 12,000 5,000 $65,000 (35,000) Net Income $30,000 Tristan Company Statement of Changes in Stockholders’ Equity For the Year Ended December 31, Year 2 Beginning Common Stock Plus: Stock Issued Ending Common Stock $55,000 10,000 Beginning Retained Earnings Plus: Net Income Less: Dividends Ending Retained Earnings $ 10,000 30,000 (2,000) $65,000 Total Stockholders’ Equity 38,000 $103,000 2-97 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-24B a. (cont.) Tristan Company Balance Sheet As of December 31, Year 2 Assets Cash Accounts Receivable Land Total Assets $ 35,000 32,000 75,000 Liabilities Accounts Payable Interest Payable Accrued Salaries Payable Notes Payable Total Liabilities $12,000 5,000 9,000 13,000 Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity $65,000 38,000 $142,000 $39,000 $103,000 Total Liab. and Stockholders’ Equity 2-98 $142,000 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-24B a. (cont.) Tristan Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash Flow From Operating Activities $45,000 Cash Flow From Investing Activities (36,000) Cash Flow From Financing Activities 8,000 Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance 17,000 18,000 $35,000 b. Tristan Company Accounts Receivable Summary Beginning AR Balance Increase in AR from Sales Reduction in AR from Collections Endings Accounts Receivable Balance $13,000 65,000 (46,000) $32,000 (X) $17,000 18,000 (23,000) $12,000 (X) c. Tristan Company Accounts Payable Summary Beginning accounts payable balance Plus: Expenses incurred on account Minus: Payment of accounts payable Ending accounts payable balance 2-99 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-25B a. Computation of Net Income Revenue recognized on account Less accrued salary expense Net Income $40,000 (35,000) $ 5,000 b. Computation of Cash Collected from Accounts Receivable Beginning balance of Accounts Receivable $ 2,000 Add revenue recognized on account 40,000 Less ending balance of Accounts Receivable (2,400) Cash collected from accounts receivable $39,600 Computation of Cash Paid for Salaries Expense Beginning balance of Salaries Payable Add accrued salary expense recognized Less ending balance of Salaries Payable Cash paid for salary expense $ 1,300 35,000 (900) $35,400 Cash Flow from Operating Activities Cash from accounts receivable Cash paid for salary expense Net Cash Flow from Operating Act. c. $39,600 (35,400) $ 4,200 Net income is the difference between services performed and expenses incurred, regardless of the cash collected or paid. Cash flow from operating activities is the difference between cash collected and paid for operating activities. The time gap between these two activities often causes a difference between the net income and cash flow from operating activities. 2-100 IFAB 2e – Chapter 2 – Solutions Manual PROBLEM 2-26B a. Several of the principles should be mentioned in the memo. Responsibilities Principle As a professional, Kato should exercise professional and moral judgment in his position. Integrity Principle Kato should perform his duties with the highest sense of integrity. Due Care Principle Members are required be competent in their areas of responsibility and to perform professional duties to the best of his/her ability. b. Pleading ignorance would not relieve Kato of responsibility. The due care principle requires that members of the profession be competent and provide quality services 2-101 IFAB 2e – Chapter 2 – Solutions Manual SOLUTIONS TO ANALYZE, THINK, COMMUNICATE – CHAPTER 2 ATC 2-1 a. (All dollar amounts are in millions.) Target’s accrual accounts are: Accounts payable, Accrued and other current liabilities. The “Other current assets” accounts includes two accrual accounts: “Vendor income receivables” and “Income tax and other receivables.” See Note 10. As Note 14 shows, all of the individual accounts included in “Accrued and other current liabilities” are accrual accounts. The “Deferred income taxes” account shown under Liabilities is probably best classified as an accrual account, but students will probably think it is a deferral account. b. Net income for 2018 was Cash provided by operating activities for 2018 was $2,937 $5,973 Thus, cash flow from operating activities exceeded net income by $3,036. c. Net income increased by $23 from 2017 to 2018 ($2,937 – $2,914). Cash provided by operating activities decreased by $962 from 2017 to 2018 ($5,973- $6,935). Therefore, the change in cash flow from operations was the greatest. 2-102 IFAB 2e – Chapter 2 – Solutions Manual ATC 2-2 Income Statments Revenue Expense Net Income Year 1 Year 2 $50,000 (30,000) $(20,000) $40,000 (25,000) $(15,000) Accounts Receivable Beginning accounts receivable balance Plus: Increases due to sales on account Minus: Decreases due to receivables collections Yields: Ending accounts receivable balance Year 1 $0 Year 2 $10,000 50,000 40,000 (40,000) (50,000) $10,000 $0 Operating Activities Section of Statement of Cash Flows Cash collections from customers Cash payments for expense Net cash flow from operating activities Year 1 Year 2 $40,000 (25,000) $15,000 $50,000 (30,000) $20,000 Accounts Payable Beginning accounts payable balance Plus: Increases due to expenses incurred on account Minus: Decreases due to payments to reduce accounts payable Yields: Ending accounts payable balance Class Discussion Year 1 $0 30,000 Year 2 $5,000 25,000 (25,000) (30,000) $5,000 $0 The discussion should focus on how accrual accounting facilitates the matching of revenues with expenses. 2-103 IFAB 2e – Chapter 2 – Solutions Manual ATC 2-3 Dollar amounts are in thousands. a. b. Revenues – Expenses Net income 2017 $2,926,289 2,724,390 $ 201,899 2018 $3,030,445 2,782,825 $ 247,620 Beg. retained earnings + Net income – Dividends End. Retained earnings $ 488,481 201,899 197,544 $ 492,836 $ 492,836 247,620 207,649 $ 532,807 Revenue increased by 3.6% ($3,030,445 – $2,926,289)  $2,926,289 = 3.6% Net income increased by 22.6% ($247,620 – $201,899)  $201,899 = 22.6% c. 2017: $201,899  $2,926,289 = 6.9% 2018: $247,620  $3,030,445 = 8.2% d. Both revenues and net income increased in 2018, and net income as a percentage of revenues was also higher in 2018, thus, 2018 appears to have been a better year than 2017. 2-104 IFAB 2e – Chapter 2 – Solutions Manual ATC 2-4 Dollar amounts in millions. a. and b. Cash from operating activities Cash from investing activities Cash from financing activities Net change in cash + Beg. cash balance = End. Cash balance c. 2016 $1,030 1,472 (1,734) 768 831 $1,599 2017 $1,248 (4) (778) 466 365 $ 831 Negative cash flow from financing activities could result from the company either paying off long-term debt, paying significant amounts of dividends, repurchasing its stock, or some combination of these. None of these are negative events. Of course students will probably not think of repurchasing stock as a reason. The real reason for Yum! was paying off debt and repurchasing stock. 2-105 IFAB 2e – Chapter 2 – Solutions Manual ATC 2-5 The memo provided by students should convey knowledge of the following relationships. The amount of revenue recognized on account was greater than the amount of cash collected from customers. Accordingly, the amount of revenue recognized will be higher than the amount of cash collected thereby making net income higher than net cash flow from operating activities. At the end of the period, there will be a $9,000 balance in the accounts receivable account. This balance represents the amount of cash Corola expects to collect from customers in the next accounting period. 2-106 IFAB 2e – Chapter 2 – Solutions Manual ATC 2-6 a. Income Statement Balance Sheet Service Revenue $120,000 Assets: Operating Exp. Net Income Liabilities: (40,000) $ 80,000 Stockholders’ Equity: Common Stock Retained Earnings Total Stk Eqty. Total Liab. and Stk. Equity $167,000 $ 5,000 82,000 80,000 162,000 $167,000 Computations for Income Statement Items: Revenue: $38,000 + $82,000 = $120,000 Operating Expense: $70,000 − $30,000 = $40,000 Computations for Balance Sheet Items: Assets: $85,000 + $82,000 = $167,000 Liabilities: $35,000 − $30,000 = $5,000 Retained Earnings: $(32,000) + $82,000 + $30,000 = $80,000 b. Willful deception is an act of fraud and punishable under the law. Good intentions are not sufficient justification for breaking the law. Students should learn to avoid operating under an ends justifies the means philosophy. Suppose the unexpected happens in this case. Glenn fails to obtain the contract and is forced to declare bankruptcy after having manipulated the statements. He would not only stand to lose the friend that he deceived, but also may be convicted of a felony on charges of fraudulent reporting. 2-107 IFAB 2e – Chapter 2 – Solutions Manual ACT 2-6 (cont.) c. The auditing profession has identified three elements that are typically present when fraud occurs. They are: (1) the availability of an opportunity, (2) the existence of some form of pressure leading to an incentive, and (3) the capacity for rationalization. Glenn had the opportunity to record the questionable adjustments because he was the owner and could make whatever adjustments he deemed appropriate. Glenn’s existence of pressure is the fact that he needs the financial statements to look good in order to obtain the loan. Because Glenn was confident that the contracts would be approved, he was able to rationalize making the adjustments. All three of the factors of ethical misconduct are present in this case. 2-108 IFAB 2e – Chapter 2 – Solutions Manual ATC 2-7 This solution is based on Netflix’s 2018 financial report. a. Netflix’s accrual accounts are: Current content liabilities (though students will probably not list this account) Accounts payable Accrued expenses b. Netflix’s net income for 2018 was $1,211,242 c. Netflix’s retained earnings increased by $1,211,242 from 2017 to 2018. [$2,942,359 – $1,731,117 2-109