CH01SM

Chapter 1
Role of Accounting in Starting a Business
ANSWERS TO QUESTIONS
1.
A sole proprietorship is a business owned by one individual. It is relatively

inexpensive to form a sole proprietorship, but the owner is personally liable for all
debts of the business.
A partnership is legally similar to a sole proprietorship, but has two or more owners
of the business.
Unlike proprietorships and partnerships, a corporation is a separate entity both
legally and from an accounting perspective. Although it is much more expensive to
form a corporation than a partnership or sole proprietorship, two major advantages
of a corporation are that (1) owners cannot be held responsible for debts that are
greater than their investment in the company and (2) shareholders can sell their
shares at any time if they wish to leave the business.
2. Accounting is an information system that collects and processes (analyzes,

measures, and records) information about an organization and communicates that
information to decision makers both inside and outside the organization.
3. Financial accounting involves preparation of the four basic financial statements and
related disclosures for external decision makers. Managerial accounting involves
the preparation of detailed plans and continually updated performance reports for
internal decision makers.
Accountants employed by a single business or nonprofit organization are in private
accounting. Accountants who charge fees for services to a variety of businesses
and nonprofit organizations are in public accounting.
4. Financial reports are used by both internal and external groups and individuals.
The internal groups are comprised of the various managers of the entity. The
external groups include the owners, investors, creditors, governmental agencies,
other interested parties, and the public at large.
McGraw-Hill/Irwin
Principles of Accounting
The McGraw-Hill Companies, Inc., 2010

1-1
5. Assets = Liabilities + Owners Equity

Assets are the measurable economic resources owned by the business that are
likely to provide future benefits to the firm. Liabilities are the measurable and
probable obligations that require the business to pay goods or services to others in
the future. Owners Equity is the difference between the assets the business owns
and the liabilities that the business owes.
6. Revenues Expenses = Net Income (or net loss)
Revenues are the amounts earned when goods or services are delivered to
customers. Expenses are the dollar amount of resources used by an entity to
generate revenues during the period. Net income and net loss are defined in the
next question.
7.
Net income is the positive difference between revenues earned during a period and
the expenses that were incurred to generate the revenues during the period. Net
loss is the result when expenses exceed revenues during the period.
8.
Beginning Owners Equity + Additional Investments Withdrawals + Net Income (or

net loss) = Ending Owners Equity
Beginning and Ending Owners Equity is the difference between the assets the
business owns and the liabilities the business owes at the beginning and ending of
the accounting period, respectively. Additional investments is the amount of
additional money that the owner invested in the business during the period, while
withdrawals represent money that the owner withdrew from the business. Net
income and net loss were defined in the previous question.
9.
+/- Cash from Operating Activities

+/- Cash from Investing Activities
+/- Cash from Financing Activities
Change in cash during the period
+ Cash at beginning of period
Cash at end of period
Cash from operating activities is the cash received and used in running the
business to earn profit. Cash from investing activities is the cash received and
used in buying and selling productive resources with long lives. Cash from
financing activities is cash received and used in financing the business itself, such
as through bank loans or additional investments/withdrawals by owners.
McGraw-Hill/Irwin
1-2

Solutions Manual
10. (a)
The purpose of the balance sheet is to report the financial position of an entity
at a point in time information about the assets, obligations, and owners
equity of the entity as of a specific date.
(b) The purpose of the income statement is to present information about the
revenues, expenses, and net income (or loss) of the entity for a specified
period of time.
(c) The statement of owners equity reports the changes in owners equity during
the period from any additional amounts invested, earnings, and any amounts
withdrawn.
(d) The purpose of the statement of cash flows is to present information about the
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
and the net increase or decrease in cash during the period.
11. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
12. The purpose of the notes to the financial statements is to provide information to
help those who study the statements to understand how the amounts were
measured and what additional relevant information may affect their decisions.
13. The Securities and Exchange Commission (SEC) is the U.S. government agency
that supervises the work of the Financial Accounting Standards Board (FASB) and
Public Company Accounting Oversight Board (PCAOB). The Financial Accounting
Standards Board (FASB) is the private sector body given the primary responsibility
for setting detailed rules of accounting which become generally accepted
accounting principles.
14. Ethical dilemmas in accounting arise when managers and owners decide between
reporting fraudulently or accurately in the face of personal greed and the desire to
appear successful. Ethical dilemmas harm many: employees, the business
reputation, the corporations stock price, lenders, and the public in general.
McGraw-Hill/Irwin

1-3
Authors' Recommended Solution Time

(Time in minutes)
Mini-exercises
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
Time
3
3
5
3
3
3
5
5
5
3
6
3
10
Exercises
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Time
12
12
12
20
25
20
15
25
25
30
15
20
12
30
30
15
20
Problems
No.
PA1-1
PA1-2
PA1-3
PA1-4
PA1-5
PA1-6
PB1-1
PB1-2
PB1-3
PB1-4
PB1-5
PB1-6
Time
45
45
45
45
45
45
45
45
45
45
45
45
Skill
Development
Cases
No.
Time
1
20
2
20
3
*
4
30
5
20
6
60
* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time discussing research strategies. When we want the students
to focus on a real accounting issue, we offer suggestions about possible companies or
industries.
McGraw-Hill/Irwin
1-4

Solutions Manual
MINI-EXERCISES
M11
Firm type
B
(1) Manufacturing business
(2) Merchandising business
(3) Service business
M12
B
(1) Sole proprietorship
(2) Partnership
(3) Corporation
M13
1.) The primary internal users are a companys managers and owner/managers
(sole proprietors and partners) who make business decisions affecting the
operating, investing, and financing activities of the organization.
2.) The primary external users are bankers, suppliers, governments, and owners
(stockholders in corporations) who are not directly involved in the business but
make decisions such as whether to lend the firm money, whether to extend credit
to the firm, how much to collect in taxes from the firm, and whether to invest
additional money in the firm as well as evaluate how current investments are
doing.
McGraw-Hill/Irwin

1-5
M14
L
(1)
Accounts Payable
(2)
Accounts Receivable
(3)
Cash
(4)
Cost of Goods Sold
(5)
Buildings
(6)
Interest Expense
(7)
Inventories
(8)
Selling and Administrative Expenses
(9)
Sales Revenue
(10)
Notes Payable
M15
A
(1) Inventories
(2)
Accounts payable
(3)
Sales revenue
(4)
Property and equipment
(5)
Notes payable
OE
(6)
Owners capital
(7)
Accounts receivable
(8) Cash
(9)
Promotion expense
(10)
Cost of goods sold
McGraw-Hill/Irwin
1-6

Solutions Manual
M16
Element
Financial Statement
(1) Expenses
A. Balance sheet
(2) Cash flows from investing activities
B. Income statement
(3) Assets
C. Statement of owners equity
C*
(4) Withdrawals
D. Statement of cash flows
(5) Revenues
(6) Cash flows from operating activities
(7) Liabilities
(8) Cash flows from financing activities
*Withdrawals paid in cash are also subtracted in the Financing section of the Statement
of Cash Flows
M17
The Tea Room
Income Statement
For the year ended December 31, 2010
The Tea Room

Statement of Owners Equity
For the year ended December 31, 2010
M18
Gerry Stayman, Capital, January 1, 2010

Add: Additional investments
Net income
Less: Gerry Stayman, Drawing
Gerry Stayman, Capital, December 31, 2010
McGraw-Hill/Irwin
$ 0
100,000
70,000
(20,000)
$ 150,000

1-7
M19
The Tea Room
Balance Sheet
December 31, 2010
Assets
Total assets
$180,000
$180,000
Liabilities
Owners Equity
Total liabilities and owners equity
$ 30,000
150,000
$180,000
M110
Assets
Example: Borrowed
$30,000 from a bank.
Liabilities
+
Notes
Payable +30,000
Owners Equity
Cash
+30,000
a. Received $10,000
contribution from
owner, Alecia
Simpson.
Cash
+10,000
b. Purchased a
$4,000 computer
for use in the
business on
account.
Equipment +4,000
c. Provided $22,000
of service to
customers for
cash.
Cash
+22,000
Service
Revenue +22,000
d. Paid employees
$15,000 cash.
Cash
-15,000
Salaries
Expense -15,000
e. Withdrew $1,200
cash from the
profits of the
business.
Cash
-1,200
A. Simpson,
Drawing -1,200
McGraw-Hill/Irwin
1-8
A. Simpson,
Capital +10,000
Accounts
Payable +4,000

Solutions Manual
M111
Abbreviation
Full Designation
(1) CPA
Certified Public Accountant.
(2) GAAP
Generally Accepted Accounting Principles.
(3) FASB
Financial Accounting Standards Board.
(4) SEC
Securities and Exchange Commission.
M112
1.) This is an example of an ethical dilemma. The government will be harmed
because an insufficient amount of tax revenue will be collected from the client,
which will in turn harm the public as well.
2.) This is an example of an ethical dilemma. Both of you will be harmed if you are
caught, but you will be harmed regardless of whether you are caught because
without doing the homework for yourself you lose an opportunity to learn the
material.
3.) This is an example of an ethical dilemma. The owner(s) of the store will be
harmed because of lost revenue, and both you and your manager will likely lose
your jobs if you are caught.
M113
Private
1. Preparing financial statements for external users.
Public
2. Consulting
Private
3. Cost accounting.
Public
4. Auditing by CPA.
Private
5. Internal auditing.
Both
6. Reviewing financial information for compliance with generally

accepted accounting principles.
McGraw-Hill/Irwin

1-9
EXERCISES
E11
1. Partnership (P)
2. Sole proprietorship (S)
3. Corporation (C)
4. Sole proprietorship (S)
E12
Net
Total
Total
Income
or
Case Revenues - Expenses =
(Loss)
Total
Assets
Total
= Liabilities
+
Owners
Equity
$100,000 -
$82,000 =
$18,000
$150,000 =
$70,000 +
$80,000
92,000 -
80,000 =
12,000
112,000 =
52,000 +
60,000
80,000 -
86,000 =
(6,000)
104,000 =
26,000 +
78,000
50,000 -
37,000 =
13,000
99,000 =
22,000 +
77,000
75,000 -
81,000 =
(6,000)
101,000 =
73,000 +
28,000
E13
SOE, B/S
1.
I/S
1. Total owners equity

2. Sales Revenue
B/S
3. 3. Total assets
SCF
4. 4. Cash flows from operating activities
B/S
5. 5. Total liabilities
I/S, SOE6. 6. Net income

SCF
McGraw-Hill/Irwin
1-10
7. 7. Cash flows from financing activities

Solutions Manual
E14
A
(1) Inventories
(2)
Accounts Payable
(3)
Income Tax Expense
A
A
(4) Equipment
(6)
Notes Payable
OE
(7)
Owners Capital
(8)
Cost of Goods Sold
(9)
Selling and Administrative Expense

Sales Revenue
(5)
Accounts Receivable
(10)
(1)
Accounts Payable
(7) Cash
(2)
Accounts Receivable
(8) Machinery
(3)
Wages Payable
(9)
OE
(4)
Owners Capital
(10)
Sales Revenue
(5)
Income Tax Expense
(11)
Notes Payable to Banks
(12)
Selling and Administrative Expenses
E15
(6) Inventory
McGraw-Hill/Irwin
Promotion and Advertising Expenses

1-11
E16
Req. 1
Clay Company
Income Statement
For the Month Ended January 31, 2010
Revenue:
Service Revenue
Expenses:
Wages Expense
Other Expenses
Net income
$130,000
15,000
80,000
$ 35,000
Clay Company
Statement of Owner's Equity
For the Month Ended January 31, 2010
J. Clay, Capital, January 1, 2010
Add: Additional investments by owner
Net income
Less: J. Clay, Drawing
J. Clay, Capital, January 31, 2010
0
26,000
35,000
(0)
$ 61,000
Clay Company
Balance Sheet
At January 31, 2010
Assets
Cash
Accounts Receivable
Supplies
Total Assets
Liabilities
Accounts Payable
Total liabilities
Owner's Equity
J. Clay, Capital
Total liabilities and owner's equity
$ 30,000
15,000
42,000
$ 87,000
$ 26,000
26,000
61,000
$ 87,000
Req. 2
Clay Company should be able to pay its liabilities because its cash balance is $30,000
and its liabilities are only $26,000.
McGraw-Hill/Irwin
1-12

Solutions Manual
E17
a)
Lucas Rock Company
Income Statement
For the Year Ended December 31, 2011
(in thousands)
Revenue
Expenses
Net income
$ 10,500
9,200
$ 1,300
b)
Lucas Rock Company
(in thousands)
L. Rock, Capital, January 1, 2011
Add: Additional investments by
owner
Net income
Less: L. Rock, Drawings
L. Rock, Capital, December 31, 2011
3,500
150
1,300
(500)
4,450
c)
Lucas Rock Company
Balance Sheet
At December 31, 2011
(in thousands)
Assets
Total Assets
$ 18,200
$ 18,200
Liabilities and Owners Equity

Total liabilities
L. Rock, Capital
$ 13,750
4,450
$ 18,200
McGraw-Hill/Irwin

1-13
E17 (continued)
d)
Lucas Rock Company
Statement of Cash Flows
(in thousands)
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Change in cash
Cash at January 1, 2011
Cash at December 31, 2011
$ 1,600
(1,000)
(900)
(300)
1,000
$ 700
E18
Req. 1
FedEx
Income Statement
For the Year Ended May 31, 2007
(in millions)
Revenue:
Delivery Revenue
Expenses:
Salaries Expense
Fuel Expense
Rent Expense
Maintenance and Repairs Expense
Other Expenses
Total expenses
Net income
$ 22,527
8,051
2,946
1,598
1,440
7,241
21,276
$ 1,251
Req. 2
FedExs largest expense is Salaries Expense.
McGraw-Hill/Irwin
1-14

Solutions Manual
E19
Req. 1
Dave & Buster's Inc.
Balance Sheet
At February 4, 2007
(in millions)
Assets
Cash
Supplies
Property and Equipment
Other Assets
Total Assets
Liabilities
Accounts Payable
Notes Payable
Wages Payable
Other Liabilities
Total liabilities
Owners Equity
Owners Capital
10
13
317
167
507
19
254
46
91
410
97
507
Req. 2
Dave & Busters largest asset is its property and equipment.
Req. 3
Most of the financing for assets come from creditors ($410 million in liabilities vs. $97
million in owners equity)
McGraw-Hill/Irwin

1-15
E110
Req. 1
READ MORE STORE
Balance Sheet
ASSETS
Cash
Accounts Receivable
Equipment
LIABILITIES
$48,900
26,000
48,000
Accounts Payable
Notes Payable
Total liabilities
$ 8,000
2,120
$10,120
OWNERS EQUITY
Total assets
$122,900
T. Lopez, Capital
Total liabilities and
owners equity
112,780
$122,900
Req. 2
T. Lopez, Capital, January 1, 2010
+ Additional owner contributions
+ Net income
- Owner withdrawals
T. Lopez, Capital, December 31, 2010
$
0
100,000
?
(0)
$112,780
$100,000 + Net income = 112,780

Net Income = $12,780
Req. 3
Most of the financing comes from the owner, Terry Lopez.
McGraw-Hill/Irwin
1-16

Solutions Manual
E111
COLLEGIATE LAUNDRY SERVICE
Income Statement
For the Month of October 2010
Revenue:
Laundry services for cash
Laundry services on credit
Total service revenue
Expenses:
Wages expense
Supplies expense
Advertising expense
Other expenses
Total expenses
Net Income
$ 12,000
1,000
13,000
3,500
800
600
500
5,400
$ 7,600
E112
TNT Cleaning Service
Income Statement
Cleaning Service Revenue
Expenses:
Wages Expense
Supplies Expense
Advertising Expense
Fuel Expense
Total expenses
Net income
McGraw-Hill/Irwin
$ 166,000
102,775
18,500
9,025
525
130,825
$ 35,175

1-17
E113
O, I or F
+ or
A.
Cash paid to suppliers and employees
B.
Cash collected from customers
C.
Cash received from borrowing long-term debt
D.
Cash received from owners as additional investments
E.
Cash paid to purchase equipment
E114
O, I, or F
+ or -
A. Cash paid for purchases of buildings and equipment.
B. Cash paid to owners as distributions of profits.
C. Cash received on sales of buildings and equipment.
D. Cash paid to suppliers and employees.
E. Cash received from owners as additional investments.
F. Cash received from borrowing long-term debt.
G. Cash received from customers.
H. Cash paid on long-term debt.
E115
Req. A
General Mills will report $6,375 million on its cash flow statement.
Req. B
Microsoft will report $25.4 billion on its cash flow statement.
McGraw-Hill/Irwin
1-18

Solutions Manual
E116
Ex. Cash
Assets
+100,000
1.
Cash
Building
+40,000
2.
Supplies
+1,000
3.
4.
- 30,000
Liabilities
+1,000
Accounts
Receivable
+31,000
Cash
-19,000
Accounts
Payable
Cash
7.
Cash
Equipment
8.
Cash
+6,200
Owners Equity
C. Reyes,
Capital
+100,000
Note Payable +10,000
Accounts
Payable
5.
6.
+600
Service
Revenue
+31,000
Wages
Expense
-19,000
Utilities
Expense
-600
Service
Revenue
+6,200
C.Reyes,
Drawing
-5,000
-3,000
+3,000
McGraw-Hill/Irwin
-5,000

1-19
E117
I
F
D
E
A
C
J
G
B
L
K
H
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
SEC
Investing activities
Private company
Corporation
Accounting
Partnership
FASB
Financing activities
Monetary unit
GAAP
Public company
Operating activities
McGraw-Hill/Irwin
1-20

Solutions Manual
PROBLEMS SET A
PA11
Req. 1
NUCLEAR COMPANY
Income Statement
Revenue:
Service Revenue
Expenses:
Wages Expense
Advertising Expense
Other Expenses
Total expenses
Net Income
$140,000
60,000
1,100
38,000
99,100
$ 40,900
Req. 2
NUCLEAR COMPANY
C. Reed, Capital, January 1, 2010
Net income (from req. 1)
Less: C. Reed, Drawing
C. Reed, Capital, December 31, 2010
0
87,000
40,900
(15,270)
$ 112,630
Req. 3
NUCLEAR COMPANY
Balance Sheet
Assets:
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities:
Accounts Payable
Notes Payable
Total Liabilities
Owners Equity:
C. Reed, Capital
McGraw-Hill/Irwin
$25,000
12,000
90,000
45,000
$172,000
$ 57,370
2,000
59,370
112,630
$172,000
1-21
PA12
Req. 1
FAMILY MEDICINE
Income Statement
For the Year Ended June 30, 2009
Revenue:
Medical Service Revenue
Expenses:
Wages Expense
Utilities Expense
Other Expenses
Total expenses
Net Income
$ 90,000
46,000
6,500
2,000
54,500
$ 35,500
Req. 2
FAMILY MEDICINE
For the Year Ended June 30, 2009
A. Jones, Capital, July 1, 2008
Less: A. Jones, Drawing
A. Jones, Capital, June 30, 2009
0
62,000
35,500
(6,000)
$ 91,500
Req. 3
FAMILY MEDICINE
Balance Sheet
At June 30, 2009
Assets:
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities and Owners Equity:
Liabilities:
Accounts Payable
Notes Payable
Total liabilities
Owners Equity:
A. Jones, Capital
McGraw-Hill/Irwin
1-22
$13,500
9,500
17,000
76,000
$116,000
3,500
21,000
24,500
91,500
$116,000

Solutions Manual
PA13
McGraw-Hill/Irwin

1-23
PA1-3 (continued)
McGraw-Hill/Irwin
1-24

Solutions Manual
PA14
Req. 1
Average monthly revenue, $216,000 12 = $18,000.
Req. 2
Average monthly wages expense, $84,000 12 = $7,000
Req. 3
Supplies Expense" is an expense because it represents the cost of the supplies that
the company used during the period.
Req. 4
Advertising Expense is an expense because it represents the amount of advertising
completed during the period to generate revenues.
Req. 5
No, the cash balance at December 31, 2011 cannot be determined from the information
provided. The amount of cash the company had on December 31, 2011, is not the
same as net income because net income represents the profit or loss of the company
during the preceding year, regardless of whether purchases or sales were made with
cash or credit.
PA1-5
a.)
Hannah Company
Income Statement
For the Quarter Ended September 30, 2010
Revenue
Expenses
Net income
$ 32,100
18,95
0
$ 13,150
b.)
Hannah Company
D. Hannah, Capital , June 30, 2010
Net income
Less: D. Hannah, Drawings
D. Hannah, Capital, September 30, 2010
McGraw-Hill/Irwin
$ 51,000
1,750
13,150
(4,900)
$ 61,000

1-25
PA1-5 (continued)
c)
Hannah Company
Balance Sheet
At September 30, 2010
Assets:
Total Assets
Total liabilities
Owners Equity
D. Hannah, Capital
$ 79,500
$ 79,500
$ 18,500
61,000
$ 79,500
d)
Hannah Company
Change in cash
Cash at the beginning of the period
Cash at the end of the period
McGraw-Hill/Irwin
1-26
$ 15,700
(7,200)
(5,300)
3,200
3,200
$ 6,400

Solutions Manual
PA1-6
a)
OSI Restaurant Partners, Inc.
Income Statement
(in millions)
Revenues:
Restaurant Sales Revenue
Other Revenues
Total revenues
Expenses:
Food and Supplies Expenses
General and Administrative Expenses
Wages Expenses
Utilities and Other Expenses
Total expenses
Net income
$ 3,920
21
3,941
1,415
235
1,087
1,104
3,841
$
100
b)
(in millions)
Owners Capital, January 1, 2006
Add: Additional investments by owners
Net income
Less: Owners Drawings (distributions)
Owners Capital, December 31, 2006
McGraw-Hill/Irwin
1,144
16
100
(39)
1,221

1-27
PA1-6 (continued)
c)
Balance Sheet
(in millions)
Assets
Cash
Food and Supply Inventories
Property, Fixtures, and Equipment
Other Assets
Total Assets
Liabilities and Owners Equity
Liabilities
Accounts Payable
Notes Payable
Wages and Taxes Payable
Unearned Revenue
Other Liabilities
Total liabilities
Owners Equity
Owners Capital
Total Liabilities and Owners Equity
McGraw-Hill/Irwin
1-28
94
87
1,549
529
2,259
166
235
120
187
330
1,038
1,221
2,259

Solutions Manual
PA1-6 (continued)
d)
(in millions)
Cash received from customers
2,946
(2,578)
36
8
Cash provided by operating activities

Cash received from sale of fixtures & equipment
Other cash outflows from investing activities
(384)
32
(2)
Cash used in investing activities
(354)

37
5
16
(294)
(39)
(62)
Cash received from bank borrowings

Additional investments by owners
Repayments of bank borrowings
Withdrawals (distributions to owners)
Other cash outflows from financing activities
Cash used in financing activities
Change in cash
Cash at December 31, 2006
McGraw-Hill/Irwin
(4)
10
84
94

1-29
PROBLEMS SET B
PB1-1
Req. 1
WRITE-r-WRONG COMPANY
Income Statement
For the Year Ended April 30, 2011
Revenue:
Service Revenue
Expenses:
Wages Expense
Supplies Expense
Other Expenses
Total expenses
Net Income
$270,000
138,500
22,000
10,000
170,500
$ 99,500
Req. 2
For the Year Ended April 30, 2011
M. Waxman, Capital, May 1, 2010
Less: M. Waxman, Drawing
M. Waxman, Capital, April 30, 2011
0
186,000
99,500
(27,150)
$ 258,350
Req. 3
Balance Sheet
At April 30, 2011
Assets:
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities:
Accounts Payable
Notes Payable
Total liabilities
Owners Equity:
M. Waxman, Capital
McGraw-Hill/Irwin
1-30
$ 39,150
27,500
35,000
208,000
$309,650
$ 47,800
3,500
51,300
258,350
$309,650
Solutions Manual
PB12
Req. 1
SWEATERS n THINGS COMPANY
Income Statement
Revenue:
Sales Revenue
Expenses:
Cost of Goods Sold
Utilities Expense
Other Expenses
Total expenses
Net Income
$ 945,000
746,000
42,500
2,000
790,500
$ 154,500
Req. 2
E. Rosati, Capital, January 1, 2012
Less: E. Rosati, Drawing
E. Rosati, Capital, December 31, 2012
0
200,000
154,500
(58,500)
$ 296,000
Req. 3
Balance Sheet
Assets:
Cash
Accounts Receivable
Inventories
Fixtures and Equipment
Total Assets
Liabilities:
Accounts Payable
Notes Payable
Total Liabilities
Owners Equity:
E. Rosati, Capital
McGraw-Hill/Irwin
$ 31,500
79,000
152,000
140,000
$402,500
$ 71,500
35,000
106,500
296,000
$402,500

1-31
PB1-3
McGraw-Hill/Irwin
1-32

Solutions Manual
PB1-3 (continued)
McGraw-Hill/Irwin

1-33
PB1-4
Req. 1
Average monthly revenue, $468,000 12 = $39,000.
Req. 2
Average monthly expenses, $420,000 12 = $35,000.
Req. 3
Cost of Goods Sold" is an expense because it represents the cost of the inventory that
the company sold (used) during the period.
Req. 4
Utilities Expense is an expense because it represents the amount of utilities used
during the period to generate revenues.
Req. 5
No, cash at the end of the year cannot be determined from the information provided.
The amount of cash the company had on December 31, 2010, is not the same as net
income because net income represents the profit or loss of the company during the
preceding year, regardless of whether purchases or sales were made with cash or
credit.
PB1-5
a.)
Darryl Company
Income Statement
Revenue
Expenses
Net income
$ 135,600
128,100
$ 7,500
b.)
Darryl Company
J. Darryl, Capital, January 1, 2009
Net income
Less: J. Darryl, Drawing
J. Darryl, Capital, December 31, 2009
McGraw-Hill/Irwin
1-34
$ 7,400
6,000
7,500
(4,900)
$ 16,000

Solutions Manual
PB1-5 (continued)
c)
Darryl Company
Balance Sheet
Assets:
Total Assets
$ 97,500
$ 97,500

Total liabilities
J. Darryl, Capital
Total Labilities and Owner's Equity
$ 81,500
16,000
$ 97,500
d)
Darryl Company
Change in cash
Cash at the beginning of the period
Cash at the end of the period
McGraw-Hill/Irwin
20,200
(47,000)
40,100
13,300
8,200
$ 21,500

1-35
PB1-6
a)
The Cheesecake Factory
Income Statement
For the Year Ended January 2, 2007
(in thousands)
Revenues:
Restaurant Sales Revenues
Other Revenues
Total revenues
Expenses:
Food and Supplies Expense
Wages Expenses
Utilities and other Expenses
General and Administrative Expenses
Total expenses
Net income
$1,315,325
8,171
1,323,496
333,528
420,957
414,978
72,751
1,242,214
$ 81,282
b)
(in thousands)
Net income
Less: Owners Drawings (distributions)
McGraw-Hill/Irwin
1-36
$ 646,699
33,555
81,282
(49,994)
$ 711,542

Solutions Manual
PB1-6 (continued)
c)
Balance Sheet
At January 2, 2007
(in thousands)
Assets:
Cash
Accounts Receivable
Food and Supply Inventories
Prepaid Rent
Property and Equipment
Other Assets
Total Assets
44,790
11,639
20,775
43,870
732,204
186,453
$1,039,731

Liabilities:
Accounts Payable
$ 45,570
Notes Payable
39,381
Wages and Other Expenses Payable
117,226
Other Liabilities
126,012
Total liabilities
328,189
Owners Equity:
Owners Capital
711,542
$1,039,731
McGraw-Hill/Irwin

1-37
PB1-6 (continued)
d)
(in thousands)
Cash received from customers
Cash provided by operating activities
$1,276,008
(1,123,353
)
152,655

Cash received from sale of long-term assets
Cash used in investing activities
(243,211)
115,975
(127,236)

Additional investments by owners
Borrowings
Repayments of borrowings
Withdrawals (distributions to owners)
Cash used in financing activities
33,555
175,000
(170,242)
(49,994)
(11,681)
Change in cash
McGraw-Hill/Irwin
1-38
13,738
31,052
$ 44,790

Solutions Manual
CASES AND PROJECTS

CP1-1
Req. 1
Home Depot is organized as a corporation. Only a corporation issues shares of stock
to its owners in exchange for their investment.
Req. 2
The income statement reports net income of $4,395. Note that the amounts on the
financial statements are rounded to the nearest million, so this is actually
$4,395,000,000.
Req. 3
The income statement shows that sales revenue of $77,349,000,000 was earned in the
most recent year.
Req. 4
The balance sheet shows that inventory costing $11,731,000,000 was on hand at
February 3, 2008.
Req. 5
The balance sheet and statement of cash flows show cash of $445,000,000 on hand at
February 3, 2008.
Req. 6
Because Home Depots stock is traded on the New York Stock Exchange, Home Depot
must be a public company.
McGraw-Hill/Irwin

1-39
CP1-2
Req. 1
Lowes net income for the year ended February 1, 2008 was $2,809,000,000. This is
lower than the $4,395,000,000 earned by Home Depot for the year ended February 3,
2008.
Req. 2
Lowes reported revenue of $48,283,000,000 for the year ended February 1, 2008. This
is lower than the $77,349,000,000 reported by Home Depot for the year ended
February 3, 2008.
Req. 3
Lowes inventory as of February 1, 2008 was $7,611,000,000. This is lower than the
$11,731,000,000 reported by Home Depot as of February 3, 2008.
Req. 4
Lowes cash as of February 1, 2008 was $281,000,000. This is lower than the
$445,000,000 reported by Home Depot as of February 3, 2008.
Req. 5
Like Home Depot, Lowes is a public company. It trades on the New York Stock
Exchange under the symbol LOW.
Req. 6
Two measures of financial success are the companys net income and revenues. As
noted for requirements 1 and 2, Home Depot reported greater amounts for both of
these measures, suggesting that the company was more successful during fiscal year
2007. It is important to note, though, that Home Depot is a bigger company than
Lowes, with more locations, more inventory (see requirement 3), and more total assets.
Given these differences, it is reasonable to expect that Home Depot would produce
more revenue and net income than Lowes. To truly determine whether Home Depot is
run more successfully than Lowes, a complete analysis is required. Such an analysis
would take into account size differences between the two companies. (Youll learn
about this kind of analysis later chapters).
CP1-3
McGraw-Hill/Irwin
1-40

Solutions Manual
The solutions to this case will depend on the company and/or accounting period
selected for analysis.
CP1-4
Req. 1
The accounting concept that the Rigas family is accused of violating is the separate
entity concept.
Req. 2
Based on the limited information available, it is difficult to categorize particular dealings
as appropriate or inappropriate. Dealings would clearly be inappropriate if they
involved Adelphia paying for items for the owners personal use or to unfairly transfer
some of the resources of Adelphia (and its stockholders) to the Rigas family. However,
we cannot determine the propriety of the payments from the limited information
available.
Req. 3
Investors should take at least two actions to ensure this kind of behavior does not occur
or does not occur without their knowledge.
(1) First, they should ensure that the managers of the business are accountable for
their actions. The most common way of doing this is to appoint a board of
directors who are independent of top management. These directors should
review and challenge the actions taken by management and require that the
financial statements disclose significant transactions with related parties.
(2) Second, investors should read the financial statements, including any notes
describing related party transactions. Any questionable dealings should be
raised with top management at the companys annual meeting. If investors dont
receive satisfactory answers to their concerns, they should sell their investment
in the companys stock.
Req. 4
Other parties that might be harmed by the actions committed by the Rigas family are
creditors (such as suppliers and banks), the companys auditors, governmental
agencies (such as the IRS and SEC), and the public at large.
McGraw-Hill/Irwin

1-41
CP1-5
Req. 1
You should take the position that an independent annual audit of the financial
statements is an absolute must. This is the best way to ensure that the financial
statements are complete, are free from bias, and conform with GAAP. You should be
prepared to reject the partners uncle as the auditor because there is no evidence
about his competence as an accountant or auditor. Also, he does not appear
independent because he is related to the partner who prepares the financial
statements, resulting in a potential conflict of interest. Hire an independent CPA.
Req. 2
You should strongly recommend the selection of an independent CPA in public practice
because the financial statements should be audited by a competent and independent
professional who must follow prescribed accounting and auditing standards on a strictly
independent basis. An audit by an uncle would not meet these requirements.
McGraw-Hill/Irwin
1-42

Solutions Manual
CP16
Req 1.
Own:
PlayStation
Cash
'75 Mustang
Trading cards
Total owned
Owe:
Car loan
Student loan
Tuition bill
Total owed
Excess
September
Jack
Jill
$ 350
6,000
6,350
$1,000
800
250
2,050
250
4,800
800
5,600
250
750
$1,800
Although Jack owns more

than Jill, he also owes more as well. Jill has $1,050 more net assets (assets
liabilities) than Jack.
Req 2.
Own:
September position
Monthly salary
Lottery winnings
Total owned
Owe:
September position
Rent expense paid
Other living expenses
Total owed
Excess
October
Jack
Jill
$ 6,350
$ 2,050
500
950
7,300
2,550
5,600
450
300
6,350
250
120
300
670
950
$1,880
Jack acquired more than Jill ($950 in October as compared to Jills $500). He also
incurred higher expenses ($750 in October as compared to Jills $420), but they were
significantly lower than Jills as a percentage of earnings. Thus, Jack had net profits in
October of $200, while Jill had $80 in net profits. However, when these effects are
added to the net assets from September, Jill clearly has done better than Jack overall.
In addition, Jill has more sustainable earnings than Jack Jack cannot depend on
lottery winnings every period; he needs to get a job.
McGraw-Hill/Irwin

1-43

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Chapter 1

Role of Accounting in Starting a Business

A sole proprietorship is a business owned by one individual. It is relatively

2. Accounting is an information system that collects and processes (analyzes,

The McGraw-Hill Companies, Inc., 2010

5. Assets = Liabilities + Owners Equity

Beginning Owners Equity + Additional Investments Withdrawals + Net Income (or

+/- Cash from Operating Activities

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

Authors' Recommended Solution Time

The McGraw-Hill Companies, Inc., 2010

(1) Manufacturing business

(2) Merchandising business

(3) Service business

(1) Sole proprietorship

The McGraw-Hill Companies, Inc., 2010

Cost of Goods Sold

Selling and Administrative Expenses

Property and equipment

Cost of goods sold

The McGraw-Hill Companies, Inc., 2010

(2) Cash flows from investing activities

C. Statement of owners equity

D. Statement of cash flows

(6) Cash flows from operating activities

(8) Cash flows from financing activities

The Tea Room

Gerry Stayman, Capital, January 1, 2010

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

Generally Accepted Accounting Principles.

Financial Accounting Standards Board.

Securities and Exchange Commission.

1. Preparing financial statements for external users.

6. Reviewing financial information for compliance with generally

The McGraw-Hill Companies, Inc., 2010

1. Total owners equity

4. 4. Cash flows from operating activities

I/S, SOE6. 6. Net income

7. 7. Cash flows from financing activities

The McGraw-Hill Companies, Inc., 2010

Income Tax Expense

Cost of Goods Sold

Selling and Administrative Expense

Income Tax Expense

Notes Payable to Banks

Selling and Administrative Expenses

Promotion and Advertising Expenses

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

Liabilities and Owners Equity

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

$100,000 + Net income = 112,780

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

Cash paid to suppliers and employees

Cash collected from customers

Cash received from borrowing long-term debt

Cash received from owners as additional investments

Cash paid to purchase equipment

A. Cash paid for purchases of buildings and equipment.