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<p>BASIC FINANCIAL STATEMENTS Brief Learning Exercises Topic Objectives Skills B. Ex. 2.1 Recording transactions 2 - 3 Analysis, communication B. Ex. 2.2 Recording transactions 2 - 3 Analysis, communication B. Ex. 2.3 Computing retained earnings 2 - 4 Analysis B. Ex. 2.4 Computing total liabilities 2 - 4 Analysis B. Ex. 2.5 Computing net income 2 - 5 Analysis B. Ex. 2.6 Computing net income 2 - 5 Analysis B. Ex. 2.7 Computing change in cash 2 - 6 Analysis B. Ex. 2.8 Alternative forms of equity 2 - 8 Analysis B. Ex. 2.9 Alternative forms of equity 2 - 8 Analysis B. Ex. 2.10 Articulation of financial statements 2 - 7 Analysis Learning Exercises Topic Objectives Skills 2.1 Real World: American Airlines, 2 - 3 Communication Boston Redsox Nature of assets and liabilities 2.2 Preparing a balance sheet 2 - 4 Analysis 2.3 Preparing a balance sheet 2 - 4 Analysis 2.4 2 - 2 Communication, judgment 2.5 Using the accounting equation 2 - 3 Analysis 2.6 Accounting equation 2 - 3 Analysis 2.7 Effects of business transactions 2 - 3 Analysis 2.8 Forms of business organizations 2 - 8 Analysis 2.9 Factors contributing to solvency 2 - 9 Analysis, judgment 2.10 Professional judgment 2 - 2 Communication 2.11 Statement of cash flows 2 - 6 Analysis 2.12 Income statement 2 - 5 Analysis 2.13 Income statement 2 - 5 Analysis 2.14 Statement of cash flows 2 - 6 Analysis 2.15 Window dressing financial statement 2 - 9 Analysis 2.16 Real World: Home Depot Analysis, communication Home Depot financial statements 2.17 Real World: McKesson Corporation 2 - 5 Analysis, communication Assessing financial results 2–4 through 2 - 6 CHAPTER 2 Accounting principles and asset valuation OVERVIEW OF BRIEF EXERCISES, EXERCISES, AND CRITICAL THINKING CASES Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Problems Learning Sets A, B Topic Objectives Skills 2.1 A,B 2 - 4 Analysis, communication 2.2 A,B Effects of transactions 2 - 3 Analysis 2.3 A,B Effects of transactions 2 - 3 Analysis 2.4 A,B Effects of transactions 2 - 3 Analysis 2.5 A,B Preparing a balance sheet, effects of 2 - 4 Communication, judgment transactions 2.6 A,B Preparing a balance sheet, effects of 2 - 4 Analysis, communication transactions 2.7 A,B Preparing a balance sheet and statement 2 - 3, 2 - 4, 2 - Analysis, communication of cash flows, effects of transactions 2.8 A,B Preparing financial statements, effects of 2- 4 through Analysis, communication of transactions, evaluating solvency 2.9 A,B 2 - 4, 2 - 8 2.10 A,B 2 - 2, 2 - 4 Preparing and evaluating a balance sheet Preparing a balance sheet, discussion of GAAP Preparing a balance sheet, discussion of GAAP Analysis, communication, judgment Analysis, communication, judgment Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 2.1 Prepare a realistic balance sheet for a 2 - 4 hypothetical entity 2.2 Real World: Company of student choice 2.3 Using a balance sheet 2 - 4 2.4 Using a statement of cash flows 2 - 6 2.5 Window dressing 2 - 4 2.6 2 - 4 (Ethics, fraud & corporate governance) 2.7 2 - 4, 2 - 5 DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES Problems (Sets A and B) 2.1 A,B 15 Easy 2.2 A,B 15 Easy 2.3 A,B 15 Medium 2.4 A,B 15 Medium Locate and evaluate the financial statements of a publicly owned company Critical Thinking Cases Analysis, communication, judgment Communication, research, technology Analysis, communication, research Analysis, communication judgment Analysis, communication, judgment Note: Additional Internet assignments for this chapter are available in Appendix B. Memphis Moving Company/Prosperity Rocky Mountain Lodge/Tri-State Lodge Shown below are brief descriptions of each problem and case. These descriptions are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially filled-in working papers. Real World: Public Company Accounting Oversight Board Technology Real World: Cisco Systems (Internet) Introduction to EDGAR 2 - 4 through 2 - 6 Judgment Phillips Truck Rental/MaxxTrucking Show in tabular form the effects of various business transactions upon the accounting equation. (Alternate to Problem 2–3.) Prepare a balance sheet from a list of balance sheet items in random order. Determine the amount of one item as a plug figure. Also evaluate the company’s solvency. Effects of transactions upon the accounting equation are illustrated in tabular form. Students are asked to write a sentence or two explaining the nature of each transaction. Maxwell Communications/Delta Corporation Show in tabular form the effects of various business transactions upon the accounting equation. (Problem 2–4 is an alternate.) Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Problems (cont'd) Here Come the Clowns/Circus World Alexander Farms, Inc./Maple Valley Farms Franklin Bakery/Collier Butcher Shop The Soda Shop/The Sweet Shop Spencer Playhouse/Old Town Playhouse Big Screen Scripts/Star Scripts Critical Thinking Cases Content of a Balance Sheet Using Financial Statements *Omits time required to obtain an annual report. 2.5 A,B 20 Medium 2.6 A,B 20 Medium Preparation of a balance sheet for a circus—an entity with an unusual variety of asset accounts. Also requires students to explain the effects upon this balance sheet of a fire that destroys one of the assets. (Problem 2–6 is an alternate.) Prepare a balance sheet for a farm—an entity with a wide variety of assets. Also, explain the effects upon this balance sheet of the destruction of one of the assets. (Alternate to Problem 2–5.) 2.7 A,B 35 Medium 2.8 A,B 40 Strong Prepare a balance sheet from an alphabetical listing of accounts, and prepare a second balance sheet and a statement of cash flows after some additional transactions. Evaluate the company’s relative solvency at each date. The student is asked to prepare a balance sheet from an alphabetical list of accounts and then to prepare a second balance sheet as well as an income statement and a statement of cash flows, after several transactions. Evaluate the company’s relative solvency at each date. 35 Strong 2.10 A,B 30 Strong Given an improperly prepared balance sheet, student is asked to prepare a corrected balance sheet and to explain the proper valuation of assets, liabilities, and owners’ equity. Stresses generally accepted accounting principles. Given a balance sheet and supplementary information concerning the assets and liabilities, the student is asked to prepare a corrected balance sheet and to explain the violations that exist as to asset valuation and the entity concept. Stresses GAAP. 2.9 A,B 30 Medium 2.2 30 Strong* Students are to obtain an annual report from the library and answer questions about the company’s balance sheet, income statement, and statement of cash flows. Suitable assignment for groups or individuals. Students are to prepare a realistic balance sheet for a hypothetical business—the nature of which is specified by the instructor. Challenges the student to think about the types of assets and liabilities arising in an actual business. Suitable assignment either for groups or individuals. 2.1 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Using a Balance Sheet Using Statements of Cash Flow on hand. Ethics and Window Dressing 2.6 Public Company Accounting Oversight Board 30 Easy Ethics, Fraud & Corporate Governance Gathering Financial Information Internet 30 Medium Students locate the PCAOB and state the mission, identify the members, and describe the authority and responsibility of the PCAOB. 2.5 2.3 2.4 2.7 25 Easy Visit EDGAR, the SEC’s database, and gather financial information about Cisco Systems. A user-friendly “meet EDGAR” type of problem. 30 Medium A tried-and-true case in which students are to evaluate the financial position of two similar companies first from the viewpoint of a short-term creditor and then from the viewpoint of a buyer of the business. We always use this one. 35 Medium Students are presented with abbreviated cash flow information and asked to decide which is in a stronger position. An excellent way to show that how a company generates its cash is equally important to how much cash it has Students are to distinguish between legitimate window dressing and fraudulent misrepresentation. Allows introduction of ethics, securities laws, and the role of independent audits. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 1. 2. 3. 4. 5. 6. The basic accounting equation is assets = liabilities + owners’ equity. Assets are resources owned by the company that are used in carrying out its business activities. Liabilities are debts owed by the enterprise, and owners’ equity is the interest of the owners in the enterprise’s assets. The going concern assumption states that in the absence of evidence to the contrary (i.e., bankruptcy proceedings), an enterprise is expected to continue to operate in the foreseeable future. This means, for example, that it will continue to use the assets it has in its financial statements for the purpose for which they were acquired. Under the going concern assumption, all elements in the financial statements are based on an assumption that the business will continue for the foreseeable future. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS Many of these questions are well suited to classroom discussions. These discussions can stimulate students’ interest, help develop verbal skills, and provide instructors with an opportunity to introduce ideas and situations not discussed in the text. If class size permits, we also encourage instructors to review and evaluate selected written assignments throughout the course. The basic purpose of accounting is to provide decision makers with information useful in making economic decisions. A knowledge of accounting terms and concepts is useful to persons other than professional accountants because nearly everyone working in business, government, or the professions will encounter these terms and concepts. Supervisors and managers at every level use financial statements, budgets, or other forms of accounting reports. Investment in securities or real estate also calls for the understanding and use of accounting information. In every election, propositions on the ballot and in the platforms of candidates can be much better understood by voters who are familiar with accounting. Accounting information is also useful to individuals in handling their personal financial affairs. In short, all economic activity is supported by accounting information. Revenues result from transactions in which goods or services are transferred (i.e., sold) to customers. Expenses are costs associated with earning revenues. Revenues result in positive cash flows, while expenses result in negative cash flows. An enterprise’s net income is determined as the excess of revenues over expenses for a period of time. If expenses exceed revenues, however, the difference is called a net loss. Business transactions affect a company’s financial position, and as a result, they change the statement of financial position or balance sheet. The other financial statements—the income statement and the statement of cash flows—are detailed expansions of certain aspects of the statement of financial position and help explain in greater detail how the company’s financial position changed over time. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 7. 8. a. b. 9. 10. 11. 12. Adequate disclosure refers to the requirement that financial statements, including accompanying notes, must include information necessary for reasonably informed users of financial statements to understand the company’s financial activities. This requirement is met, in part, by the addition of notes to the financial statements. Financial statement notes include both quantitative and qualitative information that is not included in the body of the financial statements. Operating activities—Cash provided by and used in revenue and expense transactions. Investing activities—Cash provided by and used as a result of investments in assets, such as machinery, equipment, land, and buildings. Financial statements—the balance sheet, income statement, statement of cash flows—are all based on the same underlying transactions. They reflect different aspects of the enterprise’s activities. Their relationship is referred to as “articulation.” For example, the revenues and expenses in the income statement result from changes in the assets and liabilities in the balance sheet and their cash effects are presented in the operating activities section of the statement of cash flows. Financing activities—Cash provided by and used in debt and equity financing, such as borrowing and repaying loans, and new capital received from investors and dividends paid to the enterprise’s owners. Positive cash flows means that cash increases. Negative cash flows means that cash decreases. Generally, revenues result in positive cash flows—either at the time of the revenue transaction, earlier, or later. Expenses result in negative cash flows—either at the time the expense is incurred, earlier, or later. The three categories and the information included in each are: No, a business transaction could not affect only a single asset. There must be an offsetting change elsewhere in the accounting equation. If the transaction increases an asset, for example, it must reduce another asset, increase a liability, or increase owners’ equity (or some combination of these). On the other hand, if the transaction decreases an asset, it must increase another asset, decrease a liability, or decrease owners’ equity (or some combination of these). An example of a transaction that would cause one asset to increase and another asset to decrease without any effect on the liabilities or owners’ equity is the receipt of cash in collection of an account receivable. Another common example is the payment of cash to buy land, a building, office equipment, or other assets. An example of a transaction that would cause both total assets and total liabilities to increase without any effect on the owners’ equity is the purchase of an asset on credit. The acquisition of the asset could be entirely on credit or could involve a partial cash payment with the balance on credit. Another example is an increase in cash as a result of borrowing from a bank. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 13. 14. 15. A strong income statement is one that has significantly more dollars of revenue than expenses, resulting in net income that is a relatively high percentage of the revenue figure. A trend of relatively high income numbers over several accounting periods signals a particularly strong income situation. A strong statement of cash flows is one that shows significant amounts of cash generated from operating activities. This means that the enterprise is generating cash from its ongoing activities and is not required to rely heavily on debt and equity financing, or on the sale of its major assets, to finance its daily operations. A trend of relatively high cash flows provided by operations numbers over several accounting periods signals a particularly strong cash flow situation. The term “window dressing” refers to enhancing the appearance of the enterprise’s financial statements by taking certain steps near the end of the financial reporting period. While some steps that may be taken, or delayed, are appropriate, care must be taken that steps taken are not unethical or illegal. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello B. Ex. 2.1 B. Ex. 2.2 B. Ex. 2.3 B. Ex. 2.4 B. Ex. 2.5 B. Ex. 2.6 B. Ex. 2.7 Increases in cash: Revenues $100,000 Sale of land 10,000 Borrowing from bank 15,000 $125,000 Decreases in cash: Expenses 56,000 Purchase of truck 25,000 (81,000) Net increase in cash $44,000 B. Ex. 2.8 Joe Solway, Capital $25,000 Tom Solway, Capital 25,000 $50,000 B. Ex. 2.9 Capital stock $40,000 Retained earnings 10,000 $50,000 $70,000 (total equity) - $50,000 (capital stock) = $20,000 (retained earnings) SOLUTIONS TO BRIEF EXERCISES Walters Company's assets (machinery) will increase by $20,000. The company's liabilities will also increase by $20,000 to include the new obligation the company has assumed. Foster Inc.'s assets will increase by a net amount of $30,000. Cash will decrease by $5,000 and the truck account will increase by $35,000, a net increase of $30,000. The company's liabilities will also increase by $30,000 to reflect the new obligation that has been assumed. $155,000 (assets) - $85,000 (liabilities) = $70,000 (total equity) $135,000 (revenues) - $50,000 (expenses) = $85,000 net income Note: The year-end cash balance of $35,000 does not affect the amount of net income. Yes, the company has liabilities because its assets exceed its capital stock and its retained earnings. $780,000 (assets - [$500,000 + 150,000](equity) = $130,000 (liabilities) $300,000 (revenues) - $205,000 (expenses) = $95,000 (net income) Note: The purchase of land for $55,000 does not affect net income. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello B. Ex. 2.10 50,000 $ Add: 20,000 25,000 95,000 $ Net income for 2015…………………………… Balance, December 31, 2015………………………………… The end-of-year balance of owner’s equity in the balance sheet is $95,000. This amount articulates with the amount of net income in the income statement because net income is added to the amount of beginning owner’s equity, plus additional investment, to determine the ending balance that appears in the December 31 statement of financial position. The accounting equation stays in balance because the amount of net income is reflected in changes in the balances of various assets and liabilities that are also presented in the balance sheet. Ben Washington, owner’s equity: Balance, January 1, 2015…………………………………… Investment during 2015………………………… Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Ex. 2.1 a. 1. 2. b. 1. 2. Liabilities: $79,000 $288,000 70,000 36,000 14,000 $324,000 165,000 Owners’ equity: 80,000 92,000 70,000 62,000 $478,000 $478,000 Capital stock…………………….. SOLUTIONS TO EXERCISES Assets are economic resources owned by the business entity. Among the assets of American Airlines we might expect to find investments, accounts receivable (say, from travel agents), fuel (in storage), maintenance supplies, aircraft, and various types of equipment. The company also owns land and buildings—as, for example, its corporate headquarters. Among the assets of a professional sports team are investments (in stocks and bonds), notes receivable (often from players), training equipment, supplies, and office furniture. (The balance sheet of a professional sports team may not include land or buildings, as they generally do not own the stadiums in which they play.) Liabilities & Owners' Equity Notes payable ……………………. Accounts payable ………………… Total liabilities……………….. Assets Cash ………………………. Accounts receivable ……… Supplies …………………… Automobiles ……………… Building ………………….. Land ………………….. Total ……………………… Total………………………………… Retained earnings……………….. Note to instructor: You may wish to expand this solution to include intangible assets, such as the team’s league franchise, and player contracts, the right to receive the future services of a given player. (Player contracts only appear as an asset if they have a cost—that is, if they were purchased from other teams. Advance payments to players usually are shown as prepaid expenses.) We address intangible assets in Chapter 9, but the concept is consistent with the discussion of assets in Chapter 2. Liabilities are existing debts and other obligations of the entity. Among the liabilities of American Airlines, we might expect to find accounts payable, notes payable (or mortgages or bonds payable) stemming from purchases of aircraft, salaries payable, interest payable, rent payable (for space in airports), and income taxes payable. The balance sheet of a professional sports team might include accounts payable, rent payable (for the stadium), salaries payable, interest payable, and income taxes payable. Note to instructor: In a classroom discussion, you might want to point out that both an airline and a professional sports team may have liabilities for unearned revenue. The airline sells many tickets in advance, thus incurring an obligation to render services (flights) or to refund the customers’ money. A sports team has a similar obligation with respect to advance sales of tickets, particularly season tickets. We discuss unearned revenue in Chapter 4, but the concept can be introduced earlier at the instructor’s discretion. Ex. 2.2 WILLIS TRANSPORTATION SERVICE Balance Sheet February 28, 2015 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello $36,300 Liabilities: 56,700 Notes payable ………………………… $207,000 12,400 Accounts payable ……………………… 43,800 210,000 $250,800 90,000 Owners’ equity: Capital stock …………………………… 88,000 66,600 $405,400 $405,400 Ex. 2.4 a. b. c. Ex. 2.5 a. b. c. The amount of retained earnings is calculated as the difference between total assets and liabilities plus capital stock: $405,400 – ($250,800 + $88,000) = $66,600 The supplies should be presented at $1,400 in World-Wide’s balance sheet. Presenting the supplies at their estimated liquidation value violates the assumption that World-Wide is a going concern, and will use these supplies in normal business operations, rather than sell them on the open market. The $500 amount also violates the objectivity principle, as it is largely a matter of personal opinion. $293,000: Assets $635,000 liabilities $342,000 = owners’ equity $293,000 $1,172,500: Liabilities $562,500 + owners’ equity $610,000 = assets $1,172,500 $120,300: Assets $307,500 owners’ equity $187,200 = liabilities $120,300 The presentation of the two land parcels at a combined value of $340,000 in the 2015 balance sheet conforms to generally accepted accounting principles. This treatment illustrates both the cost principle and the stable-dollar assumption. The presentation of the computer system at $14,000 in the December 31, 2015 balance sheet conforms to generally accepted accounting principles, as this is the cost of the system, and at the balance sheet date, it was an asset owned by the company. The retail value of $20,000 is not presented in the balance sheet, as his amount is not the cost incurred by the entity, nor is it an objective measurement. However, the company’s failure to disclose the loss of the equipment subsequent to the balance sheet date may violate the principle of adequate disclosure. To properly interpret the company’s balance sheet, users may need to be aware that this asset no longer exists. Several issues must be considered in deciding whether or not disclosure of the burglary loss is necessary. For example, was the asset insured? And is a $14,000 asset significant (material) in relation to the assets and operations of this business? Is this amount large enough that it might impact investors’ and creditors’ decisions regarding the company? Balance Sheet December 31, 2011 Total……………………………………… Retained earnings …………………… Total ………………………… Total liabilities………………………… Liabilities & Owners' Equity Cash ………………………… Ex. 2.3 KINER COMPANY Assets Accounts receivable ………… Office Equipment …………… Building …………………….. Land……………. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Ex. 2.6 Assets = Liabilities + Owners’ I I NE NE* NE NE D D NE D D NE I NE I I I NE I NE I NE* NE NE NE* NE NE Ex. 2.7 a. b. c. d. e. Ex. 2.8 a. $ 390,000 $ 240,000 150,000 $ 390,000 $ 270,000 120,000 $ 390,000 Retained earnings …………………………………………………… Total stockholders' equity ……………………………………… *Capital stock = 27 x $10,000 = $270,000. Retained earnings = $390,000 $270,000 capital stock = $120,000. Total ……………………………………………………………. *Yato’s capital = $390,000 Spencer's capital, $240,000 = $150,000. (3) Stockholders' equity: Capital Stock ………………………………………………………… (2) Partners' equity: f g h i Note to instructor: These are examples, but many others exist. (1) Owner's equity Transaction a b c d e Johanna Spencer, capital …………………………………………… Mikki Yato, capital ………………………………………………… *Could be I/D offsetting The purchase of office equipment (or any other asset) on credit will cause an increase in the asset (office equipment) and an increase in a liability. The cash payment of an account payable or note payable will cause a decrease in the asset cash and a decrease in the liability paid. The collection of an account receivable will cause an increase in one asset (cash) and a decrease in another asset (accounts receivable). Other examples include the purchase of land for cash, and the sale of land for cash. The investment of cash in the business by the owners will cause an increase in an asset (cash) and an increase in the owners’ equity. The purchase of an automobile (or other asset) paying part of the cost in cash and promising to pay the remainder at a later time would cause an increase in one asset (automobile), a decrease in another asset (cash), and an increase in a liability by the amount of the unpaid portion. Johanna Spencer, capital …………………………………………. *$850,000 in assets $460,000 in liabilities = $390,000. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello b. Ex. 2.9 a. b. c. d. Ex. 2.10 a. b. The situations encountered in the practice of accounting and auditing are too complex and too varied for all specific answers to be set forth in a body of official rules. Therefore, individual accountants must resolve many situations based upon their general knowledge of accounting, their experience, and their ethical standards—in short, their professional judgment. Accountants must rely on their professional judgment in such matters as determining (three required) (1) how to record an unusual transaction that is not discussed in accounting literature, (2) whether or not a specific situation requires disclosure, (3) what information will be most useful to specific decision makers, (4) how an accounting system should be designed to operate most efficiently, (5) the audit procedures necessary in a given situation, (6) what constitutes a fair presentation of financial information, (7) whether specific actions are ethical and are in keeping with the accountants’ responsibilities to serve the public interests. Accounts payable is a liability that requires payment, usually in the near future and usually by paying cash. Thus, existing accounts payable detract from liquidity. Accounts receivable are assets that will shortly convert into cash as payments are received from customers. Therefore, they contribute to the company’s liquidity. The capital stock account is the owners’ equity in the business. It represents amounts originally invested in the business by the owners, but says nothing about the form in which the company now holds these resources—nor even whether the resources are still on hand. Thus, the capital stock account has no direct effect upon liquidity. On the other hand, the amount of the owners’ equity, related to the amount of the liabilities is an important factor in evaluating liquidity. Yes; the form of Spencer's organization is relevant to a lender. If the company is not incorporated, the owner or owners are personally liable for the debts of the business organization. Thus, if the business is organized as a sole proprietorship, it is actually Spencer’s personal debt-paying ability that determines the collectibility of loans to the business. If the business is a partnership, all of the partners are personally liable for the company’s debts. On the other hand, if Spencer is organized as a corporation, a lender may look only to the corporate entity for payment. Note to instructor: You may wish to point out that some lenders would not make sizable loans to a small corporation unless one or more of the stockholders personally guaranteed the loan. This is accomplished by having the stockholder(s) cosign the note. Cash is the most liquid of all assets. In fact, companies must use cash in paying most bills. Therefore, cash contributes more to a company’s liquidity than any other asset. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Cash received from revenues ………………………………… Cash paid for expenses ……………………………………… Net cash provided by operating activities …………………… 4,400 (2,500) Cash flows from financing activities: Cash received from sale of capital stock …………………… Cash used to repay bank loans ……………………………… Net cash provided by financing activities …………………… 4,500 6,400 $ Cash balance, October 1, 2011 ………………………………… 7,450 13,850 $ $ 9,850 Expenses ……………………………………………………………………….. 5,465 $ 4,385 $ 17,000 7,800 $ 9,200 Investment by stockholders Loan from bank Payments to long-term creditors Purchase of land The following four items represent cash flows, but are not revenues or expenses that are in the income statement: Income Statement For the Month Ended August 31, 2015 Service revenues ……………………………………���………………………… (3,000) $ Net income ……………………………………………………………………… PRESTWICK COMPANY Expenses ………………………………………………………………………… Revenues ………………………………………………………………………… Net income ……………………………………………………………………… Income Statement Ex. 2.11 WELLER COMPANY Statement of Cash Flows For the Month Ended October 31, 2015 Ex. 2.13 Ex. 2.12 JIMINEZ, INC. Cash paid for equipment ………………………………………………. For the Month Ended March 31, 2015 The cash received from bank loans is a positive cash flow—financing activity—in the statement of cash flows, but is not included in the income statement. Dividends paid to stockholders are a negative cash flow—financing activity—in the statement of cash flows, but are not included in the income statement. Cash flows from operating activities: 12,000 $ (7,600) $ Increase in cash …………………………………………………… Cash flows from investing activities: Cash balance, October 31, 2011 ………………………………… 7,500 $ Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 17,000 $ (7,800) 9,200 (16,000) 15,000 $ 5,000 (11,700) 8,300 1,500 $ 7,200 8,700 Cash flows from financing activities: Cash balance, August 1, 2015 …………���……………………… Cash balance, August 31, 2015 …………………………………… Statement of Cash Flows For the Month Ended August 31, 2015 Increase in cash Cash received from investment by stockholders …………… Cash paid to long-term creditors …………………………… Cash received from bank loan …………………………… Ex. 2.14 Cash received from revenues ………………………………… Cash paid for expenses ……………………………………… Net cash provided by operating activities …………………… Cash paid for purchase of land ……………………………… Cash flows from operating activities: Cash flows from investing activities: PRESTWICK COMPANY Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Ex. 2.15 Steps to Window Dress IS—No impact BS—Higher cash balance BS—Higher cash and liability balances Impact on Financial Statements* BS—Higher cash balance IS—No impact SCF—Higher cash from operating activities SCF—Higher cash flow from financing activities SCF—Lower cash used in investing activities BS—Reduced cash and liability balances Delay cash payment of expenses at year-end (assume expense already incurred) Accelerate payment of liabilities at year-end SCF—Lower cash balance Delay purchase of equipment (or other noncurrent asset) BS—Higher receivables and owners’ equity IS—No impact Note to instructor: Many examples of steps to improve the financial statements could be cited. The ones listed below are those that the authors believe are most likely to be identified by students. SCF—No impact (assuming receivables not Acceleration of credit sales at year-end IS—No impact SCF—Higher cash flow from financing activities IS—No impact balances Year-end borrowing BS—Higher cash and owners’ equity balances *BS = Balance sheet; IS = Income statement; SCF = Statement of cash flows Year-end investment by owner IS—Higher sales and net income Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Ex. 2.16 a. b. End Beginning c. debt ($9,475 million), followed by accounts payable ($5,376 million). Ex. 2.17 Net income as a percentage of revenue for each year is as follows: 2010: $1,263/$108,702 = 1.16% 2011: $1,202/$112,084 = 1.07% Home Depot reports a net income (earnings) of $4,535 million for the year ended February 3, 2013. Cash balances at the beginning and end of the year were: $2,494 million $1,987 million The trend is variable. In all three years, the percentage of net income to revenues is slightly above 1%. Despite this somewhat negative trend in the percentage of net income to revenue, the absolute dollar amounts of net income are quite large, and the most current year (2012) is a significant improvment over 2011. Revenues have grown steadily over the period, which is a positive sign. It declines in 2011, then returns in 2012 to almost the same percentage as in 2010. The three largest causes of decreases in cash during the year were capital expenditures ($1,312 million), repurchases of common stock ($3,984 million), and cash dividends paid to stockholders ($1,743 million). 2012: $1,403/$122,734 = 1.14% The largest asset is property and equipment ($38,491 million - $14,422 million: $24,069 million) followed by merchandise inventory ($10,710 million). The Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello a. Liabilities & Owners' Equity Cash 31,400 $ Liabilities: Accounts receivable 10,600 Accounts payable 54,800 $ Furnishings 58,700 Salaries payable 33,500 Equipment 39,200 Interest payable 12,000 Snowmobiles 15,400 Notes payable 620,000 Buildings 500,000 720,300 $ Land 425,000 Owners' equity: Capital stock 135,000 Retained earnings (1) 225,000 Total 1,080,300 $ Total 1,080,300 $ (1) Computed as total assets, $1,080,300, less total liabilities, $720,300, less capital stock, $ 135,000. b. SOLUTIONS TO PROBLEMS SET A PROBLEM 2.1A ROCKY MOUNTAIN LODGE 15 Minutes, Easy Note to instructor: Students were asked to base their answers to part b on the balance sheet alone. Students may correctly point out that a balance sheet does not indicate the rate at which cash flows into a business. Perhaps the company can generate enough cash from daily operations to pay its debts. A recent statement of cash flows would be useful in making a more complete analysis of the company's financial position. Assets ROCKY MOUNTAIN LODGE Balance Sheet December 31, 2015 The balance sheet indicates that Rocky Mountain Lodge is in a weak financial position. The highly liquid assets—cash and receivables—total only $42,000, but the company has $100,300 of debts due in the near future (accounts payable, salaries payable, and interest payable). Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 15 Minutes, Easy a. b. c. d. e. f. PROBLEM 2.2A $15,000 cash was received from the sale of capital stock. Purchased equipment on account for $7,500. MEMPHIS MOVING COMPANY Purchased equipment at a cost of $13,500; paid $3,500 cash as down payment and incurred a liability (account payable) for the remaining $10,000. Paid $14,500 of accounts payable. Received $900 cash from collection of accounts receivable. Purchased equipment for cash at a cost of $3,200. Description of transactions: Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 15 Minutes, Medium Owners' Assets = Equity Office Notes Accounts Capital Cash + Equipment + Building + Land = Payable + Payable + Stock December 31 balances 37,000 $ 51,250 $ 125,000 $ 95,000 $ 80,000 $ 28,250 $ 200,000 $ (1) 35,000 35,000 Balances 72,000 $ 51,250 $ 125,000 $ 95,000 $ 80,000 $ 28,250 $ 235,000 $ (2) (22,500) 55,000 35,000 67,500 Balances 49,500 $ 51,250 $ 180,000 $ 130,000 $ 147,500 $ 28,250 $ 235,000 $ (3) 9,500 9,500 Balances 49,500 $ 60,750 $ 180,000 $ 130,000 $ 147,500 $ 37,750 $ 235,000 $ (4) 20,000 20,000 Balances 69,500 $ 60,750 $ 180,000 $ 130,000 $ 167,500 $ 37,750 $ 235,000 $ (5) (22,250) $ (22,250) $ Balances 47,250 $ 60,750 $ 180,000 $ 130,000 $ 167,500 $ 15,500 $ 235,000 $ MAXWELL COMMUNICATIONS Liabilities + PROBLEM 2.3A Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 15 Minutes, Medium Owners' Assets = Equity Accounts Office Notes Accounts Capital Cash + Receivable + Equipment + Trucks = Payable + Payable + Stock December 31 balances 9,500 $ 13,900 $ 3,800 $ 68,000 $ 20,000 $ 10,200 $ 65,000 $ (1) (2,700) 2,700 Balances 6,800 $ 13,900 $ 6,500 $ 68,000 $ 20,000 $ 10,200 $ 65,000 $ (2) 4,000 (4,000) Balances 10,800 $ 9,900 $ 6,500 $ 68,000 $ 20,000 $ 10,200 $ 65,000 $ (3) (3,200) (3,200) Balances 7,600 $ 9,900 $ 6,500 $ 68,000 $ 20,000 $ 7,000 $ 65,000 $ (4) 10,000 10,000 Balances 17,600 $ 9,900 $ 6,500 $ 68,000 $ 30,000 $ 7,000 $ 65,000 $ (5) (15,000) 30,500 15,500 Balances 2,600 $ 9,900 $ 6,500 $ 98,500 $ 45,500 $ 7,000 $ 65,000 $ (6) 85,000 85,000 Balances 87,600 $ 9,900 $ 6,500 $ 98,500 $ 45,500 $ 7,000 $ 150,000 $ PHILLIPS TRUCK RENTAL Liabilities + PROBLEM 2.4A Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 20 Minutes, Medium a. Liabilities & Owners' Equity Cash * 22,520 $ Liabilities: Notes receivable 9,500 Notes payable 180,000 $ Accounts receivable 7,450 Accounts payable 26,100 Animals 189,060 Salaries payable 9,750 Cages 24,630 Total liabilities 215,850 $ Costumes 31,500 Owners' equity: 89,580 Capital stock 300,000 Tents 63,000 Retained earnings 27,230 Trucks & wagons 105,840 Total $543,080 Total $543,080 * b. PROBLEM 2.5A HERE COME THE CLOWNS! The loss of an asset, Tents, from a fire would require a revised balance sheet that reflects a decrease in total assets. When total assets are decreased, the other balance sheet total (that is, the total of liabilities and owners’ equity) must also decrease. Since there is no change in liabilities as a result of the destruction of an asset, the decrease on the right-hand side of the balance sheet must be in owners' equity---specifically, the retained earnings account. The amount of the decrease in the assets Tents, in Retained earnings, and in both balance sheet totals, is $14,300. HERE COME THE CLOWNS! Balance Sheet Props and equipment June 30, 2015 Assets Total liabilities and owners' equity, $543,080, minus total of all other assets, $520,560 ($9,500 + $7,450 + $189,060 + $24,630 + $31,500 + $89,580 + $63,000 + $105,840). Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello 20 Minutes, Medium a. Liabilities & Owners' Equity Cash 16,710 $ Liabilities: Accounts receivable 22,365 Notes payable 330,000 $ Barns and sheds 78,300 Accounts payable 77,095 Citrus trees 76,650 Property taxes payable 9,135 Livestock 120,780 Wages payable 5,820 20,125 Total liabilities 422,050 $ Farm machinery 42,970 Owners' equity: Fences & gates 33,570 Capital stock 290,000 Land 490,000 Retained earnings * 189,420 Total 901,470 $ Total 901,470 $ b. PROBLEM 2.6A ALEXANDER FARMS, INC. September 30, 2015 Assets *Total assets, $901,470, minus total liabilities, $422,050, less capital stock, $290,000. The loss of an asset, Barns and Sheds, from a tornado would cause a decrease in total assets. When total assets are decreased, the balance sheet total of liabilities and owners’ equity must also decrease. Since there is no change in liabilities as a result of the destruction of an asset, the decrease on the right-hand side of the balance sheet must be in the retained earnings account. The amount of the decrease in Barns and Sheds, in the owners’ equity, and in both balance sheet totals, is $14,000. ALEXANDER FARMS, INC. Balance Sheet Irrigation system Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello a. Liabilities & Owners' Equity Cash 6,940 $ Liabilities: Accounts receivable 11,260 Notes payable 74,900 $ Supplies 7,000 Accounts payable 16,200 44,500 Salaries payable 8,900 Building 84,000 Total liabilities 100,000 $ Land 67,000 Owners' equity: Capital stock 80,000 Retained earnings * 40,700 Total 220,700 $ Total 220,700 $ b. Liabilities & Owners' Equity Cash 14,490 $ Liabilities: Accounts receivable 11,260 Notes payable 74,900 $ Supplies 8,250 Accounts payable 7,200 51,700 Salaries payable 8,900 Building 84,000 Total liabilities 91,000 $ 67,000 Owners' equity: Capital stock 105,000 Retained earnings 40,700 Total 236,700 $ Total 236,700 $ PROBLEM 2.7A FRANKLIN BAKERY 35 Minutes, Medium FRANKLIN BAKERY Balance Sheet Equipment & fixtures August 1, 2015 Assets FRANKLIN BAKERY Balance Sheet August 3, 2015 *Retained earnings ($40,700) = Total assets ($220,700), less total liabilities ($100,000) and capital stock ($80,000). Assets Land Equipment & fixtures Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Cash flows from operating activities: (16,200) $ (1,250) Cash used in operating activities: (17,450) $ None Sale of capital stock 25,000 $ Increase in cash 7,550 $ Cash balance, August 1, 2015 6,940 Cash balance, August 3, 2015 14,490 $ c. Note to instructor: The analysis of financial position strength in part c is based solely upon the balance sheets at August 1 and August 3. Students may raise the issue regarding necessity of information about operations, and the rate at which cash flows into the business, etc. In this problem, the improvement in financial position results solely from the sale of capital stock. Statement of Cash Flows For the Period August 1-3, 2015 Franklin Bakery is in a stronger financial position on August 3 than it was on August 1. Cash payment of accounts payable Cash purchase of supplies Cash flows from financing activities: Cash flows from investing activities: PROBLEM 2.7A FRANKLIN BAKERY (concluded) FRANKLIN BAKERY On August 1, the highly liquid assets (cash and accounts receivable) total only $18,200, but the company has $25,100 in debts due in the near future (accounts payable plus salaries payable). On August 3, after additional infusion of cash from the sale of stock, the liquid assets total $25,750, and debts due in the near future amount to $16,100. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello a. Liabilities & Owners' Equity Cash 7,400 $ Liabilities: Accounts receivable 1,250 Notes payable * 70,000 $ Supplies 3,440 Accounts payable 8,500 20,000 Total liabilities 78,500 $ Building 45,500 Owners' equity: Land 55,000 Capital stock 50,000 Retained earnings 4,090 Total 132,590 $ Total 132,590 $ b. Liabilities & Owners' Equity Cash 29,400 $ Liabilities: Accounts receivable 1,250 Notes payable 70,000 $ Supplies 4,440 Accounts payable 18,000 Furniture and fixtures 38,000 Total liabilities 88,000 $ Building 45,500 Owners' equity: Land 55,000 Capital stock 80,000 Retained earnings 5,590 Total 173,590 $ Total 173,590 $ 5,500 $ (4,000) 1,500 $ Balance Sheet October 6, 2015 Assets Expenses THE SODA SHOP Balance Sheet Furniture and fixtures September 30, 2015 Assets PROBLEM 2.8A THE SODA SHOP 40 Minutes, Strong THE SODA SHOP *Total assets, $132,590 less owners’ equity, $54,090 less accounts payable, $8,500, equals notes payable. Net income THE SODA SHOP Income Statement For the Period October 1-6, 2015 Revenues Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello Cash flows from operating activities: 5,500 $ Cash paid for expenses (4,000) Cash paid for accounts payable (8,500) (1,000) (8,000) $ None 30,000 $ Increase in cash 22,000 $ Cash balance, October 1, 2015 7,400 Cash balance, October 6, 2015 29,400 $ c. PROBLEM 2.8A THE SODA SHOP (concluded) THE SODA SHOP The Soda Shop is in a stronger financial position on October 6 than on September 30. On September 30, the company had highly liquid assets (cash and accounts receivable) of $8,650, which barely exceeded the $8,500 in liabilities (accounts payable) due in the near future. On October 6, after the additional investment of cash by stockholders, the company's cash alone exceeded its short-term obligations. Statement of Cash Flows For the Period October 1-6, 2015 Cash received from revenues Cash paid for supplies Cash flows from financing activities: Cash flows from investing activities: Cash used in operating activities Cash received from sale of capital stock Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello a. Liabilities & Owner's Equity Cash 16,900 $ Liabilities: Accounts receivable 7,200 Notes payable 15,000 $ Props and costumes 18,000 Accounts payable 3,900 Lighting equipment 9,400 Salaries payable 4,200 $ Total liabilities 23,100 $ Owner's equity: Helen Berkeley, capital 28,400 Total 51,500 $ Total 51,500 $ b. (1) (2) (3) (4) (5) (6) (7) As the automobile is not used in the business, it appears to be Anita Spencer’s personal asset rather than an asset of the business entity. Therefore, it should not be included in the balance sheet of the business. (Note: The advertised sales price of a similar automobile is not an appropriate valuation figure even if the automobile were to be included.) The accounts payable should be limited to the debts of the business, $3,900, and should not include Anita Spencer’s personal liabilities. Only the amount receivable from Artistic Tours ($7,200) should be included in the company’s accounts receivable as of September 30. The amounts expected from future tickets sales do not relate to completed transactions and are not yet assets of the business. The props and costumes should be shown in the balance sheet at their cost, $18,000 , not at just the portion of the cost that was paid in cash. The $15,000 note payable is a debt of the business arising from a completed purchase transaction. Therefore, it should be included among the company’s liabilities. The date at which this liability must be paid is not relevant. The theater building is not owned by Spencer Playhouse. Therefore, it is not an asset of this business entity and should not appear in the balance sheet. The lighting equipment is an asset of the business and should be presented in the balance sheet at its cost, $9,400. The cash in Anita Spencer's personal savings account is not an asset of the business entity Spencer Playhouse. Therefore, it should not appear in the balance sheet of the business. The money on deposit in the business bank account ($15,000) and in the company safe ($1,900) constitute cash owned by the business. It is not necessary to state separately in the balance sheet amounts of cash at different locations; thus, the cash owned by the business at September 30 totals $16,900. PROBLEM 2.9A SPENCER PLAYHOUSE 35 Minutes, Strong SPENCER PLAYHOUSE Balance Sheet September 30, 2015 Assets Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello (8) (9) PROBLEM 2.9A Owner’s equity is not valued at either the original amount invested or at the estimated market value of the business. In fact, owner’s equity cannot be valued independently of the amounts assigned to assets and liabilities. Rather, it is a residual figure—the excess of total assets over total liabilities. (If liabilities exceed assets, owner's equity would be a negative amount.) Thus, the amount of Anita Spencer's capital is determined by subtracting the corrected figure for total liabilities ($23,100) from the corrected amount of total assets ($51,500). This indicates owner's equity of $28,400. The amount owed to stagehands for work done through September 30 is the result of completed transactions and should be included among the liabilities of the business. Even if agreement has been reached with Mario Dane for him to perform in a future play, he has not yet performed and therefore, is not yet owed any money. Thus, this $25,000 is not yet a liability of the business. SPENCER PLAYHOUSE (concluded) Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello a. Liabilities & Owner's Equity Cash 3,940 $ Liabilities: Notes receivable 2,200 Notes payable 73,500 $ Accounts receivable 2,450 Accounts payable 32,700 Office Furniture* 12,825 Total liabilities 106,200 $ Building 54,320 Owner's equity: 39,000 Capital stock 5,000 Retained earnings * 3,535 Total 114,735 $ Total 114,735 $ * $8,850 + $6,500 - $2,525. * Total assets ($114,735), Less (Total Liabilities, $106,200, + Capital Stock, $5,000) b. (1) (2) (3) (4) (5) (6) (7) The accounts payable should be limited to the debts of the business, $32,700, and should not include Pippin’s personal liabilities. The proper valuation for the land is its historical cost of $39,000, the amount established by the transaction in which the land was purchased. Although the land may have a current fair value in excess of its cost, the offer by the friend to buy the land if Pippin would move the building appears to be mere conversation rather than solid, verifiable evidence of the fair value of the land. The "cost principle," although less than perfect, produces far more reliable financial statements than would result if the owners could "pull figures out of the air" in recording asset values. The $22,400 described as “Other assets” is not an asset, because there is no valid legal claim or any reasonable expectation of recovering the income taxes paid. Also, the payment of federal income taxes by Pippin was not a business transaction by Big Screen Scripts. If a refund were obtained from the government, it would come to Pippin personally, not to the business entity. The cash in Pippin’s personal savings account is not an asset of the business entity Big Screen Scripts and should not appear in the balance sheet of the business. The money on deposit in the business bank account ($3,400) and in the company safe ($540) constitute cash owned by the business. Thus, the cash owned by the business at November 30 is $3,940. The year-old IOU from a poker game does not qualify as a business asset for two reasons. Most importantly, it does not belong to the business entity. Also, it appears to be uncollectible. Even if the IOU were an asset of Big Screen Scripts, a receivable that cannot be collected is not viewed as an asset, as it represents no future economic benefit. The total amount to be included in “Office furniture” for the rug is $9,400, the total cost, regardless of whether this amount was paid in cash. Consequently, “Office furniture” should be increased by $6,500. The $6,500 liability arising from the purchase of the rug came into existence prior to the balance sheet date and must be added to the "Notes payable" amount. The computer is no longer owned by Big Screen Scripts and therefore cannot be included in the assets. To do so would cause an overstatement of both assets and owner's equity. The “Office furniture” amount must be reduced by $2,525. PROBLEM 2.10A BIG SCREEN SCRIPTS 30 Minutes, Strong BIG SCREEN SCRIPTS Balance Sheet Land November 30, 2015 Assets Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Full file at http://TestbanksCafe.eu/Solution-Manual-for-Financial-and-Managerial-Accounting-The-Basis-for-Business-Decisions-17th-Edition-Williams,-Haka,-Bettner,-Carcello a. Liabilities & Owners' Equity Cash 9,100 $ Liabilities: Accounts receivable 3,300 Accounts payable 27,400 $ Furnishings 22,600 Salaries payable 13,200 Equipment 9,000 Interest payable 4,000 Building 430,000 Notes payable 217,000 Land 140,000 261,600 $ Owners' equity: Capital stock (1) 127,000 Retained earnings 225,400 Total 614,000 $ Total 614,000 $ (1) Computed as total assets, $614,000, less total liabilities, $261,600, less retained earnings, $225,400 </p>