Financial Accounting Chapter 1

Would an external or internal user ask the following: Did the company earn a satisfactory income?

External user

T/F Managerial accounting provides reports to help investors and creditors evaluate a company.

False. Managerial accounting provides internal reports to help users make decisions about their companies.

Harper Travel Agency purchased land for $85,000 cash on December 10, 2022. At December 31, 2022, the land's value has increased to $93,000. What amount should be reported for land on Harper's balance sheet at December 31, 2022? Explain.

Harper Travel Agency should report the land at $85,000 on its December 31, 2022 balance sheet. This is true not only at the time the land is purchased, but also over the time the land is held. In determining which measurement principle to use (historical cost or fair value) companies weigh the factual nature of cost figures versus the relevance of fair value. In general, companies use historical cost. Only in situations where assets are actively traded do companies apply the fair value principle.

In February 2022, Rachel Paige invested an additional $10,000 in Drumlin Company. Drumlin's accountant, Liz Cooke, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not?

No, this treatment is not appropriate. While the transaction does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in stockholders' equity resulting from business activities entered into for the purpose of earning income. This transaction is simply an additional investment made by one of the owners of the business.

Juana Perez is the owner of a successful printing shop. Recently, her business has been increasing, and Juana has been thinking about changing the organization of her business from a proprietorship to a corporation. Discuss some of the advantages Juana would enjoy if she were to incorporate her business.

One of the advantages Juana would enjoy is that ownership of a corporation is represented by transferable shares of stock. This would allow Juana to raise money easily by selling a part of her ownership in the company. Another advantage is that because holders of the shares (stockholders) enjoy limited liability, they are not personally liable for the debts of the corporate entity. Also, because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life.

Which aspect of accounting does classifying economic events relate to?

Recording

Which aspect of accounting does keeping a systematic chronological diary of events relate to?

Recording

Which aspect of accounting does measuring events in dollars and cents relate to?

Recording

Which aspect of accounting does summarizing economic events relate to?

Recording

What is the basic accounting equation?

The basic accounting equation is Assets = Liabilities + Stockholders' Equity.

T/F Internal users include human resources managers.

True.

T/F The accounting process includes the bookkeeping function.

True.

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity. -Stockholders invest cash in the business.

When stockholders invest cash in the business, they receive shares of stock (I); it increases stockholders' equity.

Can a business enter into a transaction in which only the left side of the basic accounting equation is affected? If so, give an example.

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the Equipment account which is offset by a decrease in the Cash account is a specific example.

"A company's net income appears directly on the income statement and the retained earnings statement, and it is included indirectly in the company's balance sheet." Do you agree? Explain.

Yes. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears on the retained earnings statement—it is shown as an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company is also included on the balance sheet. It is included in the end-of-period retained earnings which appears in the stockholders' equity section of the balance sheet.

What uses of financial accounting information are made by (a) investors and (b) creditors?

(a) Investors (owners) use accounting information to make decisions to buy, hold, or sell stock. (b) Creditors use accounting information to evaluate the risks of granting credit or lending money.

Who are examples of external users of financial statements?

Customers Internal Revenue Service Labor unions Securities and Exchange Commission Suppliers

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity. -Dividends.

Dividends is dividends (D); it decreases stockholders' equity.

T/F The primary accounting standard-setting body in the United States is the Securities and Exchange Commission (SEC).

False. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB).

Would an external or internal user ask the following: Do we need to borrow in the near future?

Internal user

Are the following events recorded in the accounting records? Explain your answer in each case. (A) The president of the company dies. (B) Supplies are purchased on account. (C) An employee is fired.

Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic accounting equation. (a) No, the death of the president of the company is not a business transaction as it does not affect the basic accounting equation. (b) Yes, supplies purchased on account is a business transaction as it affects the basic accounting equation. (c) No, an employee being fired is not a business transaction as it does not affect the basic accounting equation.

Which of the following items are liabilities of jewelry stores? (A) Cash. (B) Accounts payable. (C) Dividends. (D) Accounts receivable. (E) Supplies. (F) Equipment. (G) Salaries and wages payable. (H) Service revenue. (I) Rent expense.

The liabilities are (b) Accounts payable and (g) Salaries and Wages Payable.

What is the monetary unit assumption?

The monetary unit assumption requires that only transaction data capable of being expressed in terms of money be included in the accounting records. This assumption enables accounting to quantify (measure) economic events.

Which aspect of accounting does analyzing and interpreting information relate to?

Communication

Which aspect of accounting does explaining uses, meaning, and limitations of data relate to?

Communication

(A) Define the terms assets, liabilities, and stockholders' equity. (B) What items affect stockholders' equity?

(a) Assets are resources owned by a business. Liabilities are creditor claims against assets—that is, existing debts and obligations. Stockholders' equity is the ownership claim on total assets. (b) Stockholders' equity is affected by stockholders' investments, dividends, revenues, and expenses.

Indicate how the following business transactions affect the basic accounting equation. (A) Paid cash for janitorial services. (B) Purchased equipment for cash. (C) Invested cash in the business for stock. (D) Paid accounts payable in full.

(a) Decrease assets and decrease stockholders' equity. (b) Increase assets and decrease assets. (c) Increase assets and increase stockholders' equity. (d) Decrease assets and decrease liabilities.

Monique Enterprises had a stockholders' equity balance of $158,000 at the beginning of the period. At the end of the accounting period, the stockholders' equity balance was $198,000. (A) Assuming no additional investment or dividends during the period, what is the net income for the period? (B) Assuming an additional investment of $16,000 but no dividends during the period, what is the net income for the period?

(a) Ending stockholders' equity balance: $198,000 Beginning stockholders' equity balance: 158,000 Net income: $ 40,000 (b) Ending stockholders' equity balance: $198,000 Beginning stockholders' equity balance: 158,000 -40,000 Deduct: Investment: 16,000 Net income: $ 24,000

Listed below are some items found in the financial statements of Jonas Co. Indicate in which financial statement(s) the following items would appear. (A) Service revenue. (B) Equipment. (C) Advertising expense. (D) Accounts receivable. (E) Retained earnings. (F) Salaries and wages payable.

(a) Income statement. (b) Balance sheet. (c) Income statement. (d) Balance sheet. (e) Balance sheet and retained earnings statement. (f) Balance sheet.

(A) Who are internal users of accounting data? (B) How does accounting provide relevant data to these users?

(a) Internal users are those who plan, organize, and run the business and therefore are officers and other decision makers. (b) To assist management, accounting provides internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year.

Summarized operations for Lakeview Co. for the month of July are as follows. Revenues recognized: for cash $30,000; on account $70,000. Expenses incurred: for cash $26,000; on account $38,000. Indicate for Lakeview Co. (a) the total revenues, (b) the total expenses, and (c) net income for the month of July.

(a) Total revenues ($30,000 + $70,000)= $100,000 (b) Total expenses ($26,000 + $38,000)= $64,000 (c) Total revenues $100,000 - Total expenses 64,000 = Net income $ 36,000

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity. -Advertising expense.

Advertising expense is an expense (E); it decreases stockholders' equity.

Identify and describe the activities in the accounting process.

Accounting is the process of identifying, recording, and communicating the economic events of an organization to interested users of the information. The first activity of the accounting process is to identify economic events that are relevant to a particular business. Once identified and measured, the events are recorded to provide a history of the financial activities of the organization. Recording consists of keeping a chronological diary of these measured events in an orderly and systematic manner. The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements. A vital element in the communication process is the accountant's ability and responsibility to analyze and interpret the reported information.

The basic accounting equation is Assets = Liabilities + Stockholders' equity. Replacing the words in that equation with dollar amounts, what is Apple's accounting equation at September 29, 2018?

Apple's accounting equation (in millions) at September 29, 2018 was $365,725 = $258,578 + $107,147

Which aspect of accounting does preparing accounting reports relate to?

Communication

Which aspect of accounting does reporting information in a standard format relate to?

Communication

Is the following accounting method used correct or incorrect? If correct, identify the principle/assumption that supports the method used. If incorrect, identify which principle/method has been violated: Fayette Company includes in its accounting records only transaction data that can be expressed in terms of money.

Correct. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money.

Would an external or internal user ask the following: How does the company's profitability compare to other companies?

External user

Would an external or internal user ask the following: Will the company be able to pay its short-term debts?

External user

"Bookkeeping and accounting are the same." Explain why this statement is true or false.

False. Bookkeeping usually involves only the recording of economic events and therefore is just one part of the entire accounting process. Accounting, on the other hand, involves the entire process of identifying, recording, and communicating economic events.

T/F Congress passed the Sarbanes-Oxley Act to ensure that investors invest only in companies that will be profitable.

False. Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals.

T/F The standards of conduct by which actions are judged as loyal or disloyal are ethics.

False. The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair, are ethics.

T/F The three steps in the accounting process are identification, recording, and examination.

False. The three steps in the accounting process are identification, recording, and communication.

Which aspect of accounting does selecting economic activities relevant to the company relate to?

Identification

Is the following accounting method used correct or incorrect? If correct, identify the principle/assumption that supports the method used. If incorrect, identify which principle/method has been violated: Omar Shariff, president of Omar's Oasis, records his personal living costs as expenses of the Oasis.

Incorrect. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

Is the following accounting method used correct or incorrect? If correct, identify the principle/assumption that supports the method used. If incorrect, identify which principle/method has been violated: Tina Company owns buildings that are worth substantially more than they originally cost. In an effort to provide more relevant information, Tina reports the buildings at fair value in its accounting reports.

Incorrect. The historical cost principle requires that assets (such as buildings) be recorded and reported at their cost.

Would an external or an internal user ask the following: Can we afford to give our employees a pay raise?

Internal user

Would an external or internal user ask the following: What does it cost us to manufacture each unit produced?

Internal user

Would an external or internal user ask the following: Which product should we emphasize?

Internal user

Who are examples of internal users of financial statements?

Marketing managers Production supervisors Store managers Vice-president of finance

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity. -Rent revenue.

Rent revenue is revenue (R); it increases stockholders' equity.

What is the economic entity assumption?

The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities.

What are the three basic forms of profit-oriented business organizations?

The three basic forms of business organizations are (1) proprietorship, (2) partnership, and (3) corporation.

T/F The historical cost principle dictates that companies record assets at their cost and continue to report them at their cost over the time the assets are held.

True.

T/F The monetary unit assumption requires that companies record only transactions that can be measured in money terms.

True.

T/F The two most common types of external users are investors and creditors.

True.

"Accounting is ingrained in our society and it is vital to our economic system." Explain why this statement is true or false.

True. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively.