CHAPTER 1
INTRODUCTION TO ACCOUNTING
AND BUSINESS
CLASS DISCUSSION QUESTIONS
1. The objective of most businesses is to
maximize profits. Profit is the difference
between the amounts received from
customers for goods or services provided
and the amounts paid for the inputs used to
provide those goods or services.
2. The stakeholders of a business normally
include owners, managers, employees,
customers, creditors, and the government.
3. Simply put, the role of accounting is to
provide information for managers to use in
operating the business. In addition,
accounting provides information to other
stakeholders to use in assessing the
economic performance and condition of the
business.
4. Three sound principles that form the
foundation for ethical behavior are (1) avoid
small ethical lapses, (2) focus on your long-
term reputation, and (3) be willing to suffer
adverse personal consequences for holding
to an ethical position.
5. Accountants serving a business firm,
governmental agency, not-for-profit
organization, etc., as an employee are
engaged in private accounting. Accountants
who provide accounting services to clients
on a fee basis are engaged in public
accounting.
6. FASB stands for the Financial Accounting
Standards Board. The FASB sets generally
accepted accounting principles by first
identifying specific issues in financial
accounting. As these issues arise, the FASB
conducts extensive research to identify the
primary concerns involved and possible
solutions. Generally, after issuing discussion
memoranda and preliminary proposals and
evaluating comments from interested
parties, the Board issues Statements of
Financial Accounting Standards. These
standards become part of generally
accepted accounting principles. To explain,
clarify, or elaborate on existing standards,
the Board also issues Interpretations, which
have the same authority as the Standards.
1
7. No. The business entity concept limits the
recording of economic data to transactions
directly affecting the activities of the
business. The payment of the interest of
$3,500 is a personal transaction of Lynda
Lyons and should not be recorded by Fast
Delivery Service.
8. The land should be recorded at its cost of
$97,500 to Neece Repair Service. This is
consistent with the cost concept.
9. a. No. The offer of $400,000 and the
increase in the assessed value should
not be recognized in the accounting
records.
b. Cash would increase by $400,000, land
would decrease by $350,000, and
owners equity would increase by
$50,000.
10. The two principal rights to the properties of
a business are liabilities (the rights of
creditors) and owner's equity (the rights of
the owner).
11. The three elements of the accounting
equation are assets, liabilities, and owner's
equity.
12. An account receivable is a claim against a
customer for goods or services sold. An
account payable is an amount owed to a
creditor for goods or services purchased.
Therefore, an account receivable in the
records of the seller is an account payable
in the records of the purchaser.
13. The business incurred a net loss of $15,000.
14. The business realized net income of
$10,000.
15. The two types of transactions that increase
the owners equity of a proprietorship are
revenue and an investment by the owner.
16. The income statement presents a summary
of the revenues and expenses of a business
for a specific period of time. The statement
of owners equity indicates the changes in
owners equity that have occurred over a
specific period of time. The balance sheet
presents a listing of the assets, liabilities,
 and owner's equity of a business as of a
specific date. The statement of cash flows
presents a summary of the cash receipts
and cash payments of a business entity for
a specific period of time.
17. An income statement, a statement of
owners equity, and a statement of cash
2
flows are for a specific period of time. The
balance sheet is for a specific date.
18. Net income or net loss
Owners equity at the end of the period
19. The statement of cash flows reports cash
flows from operating activities, investing
activities, and financing activities.
 EXERCISES

Ex. 11

As in many ethics issues, there is no one right answer. The Naples Daily News
reported on this issue in these terms: "The company covered up the first report,
and the local newspaper uncovered the company's secret. The company was
forced to not locate here (Collier County). It became patently clear that doing the
least that is legally allowed is not enough."

Ex. 12

1. B
2. F
3. R
4. B
5. B
6. F
7. X
8. R
9. B
10. X

Ex. 13

Coca-Cola owners equity: $21,623 $12,110 = $9,513

PepsiCo owners equity: $17,551 $10,670 = $6,881

Ex. 14

a. $51,500 ($20,000 + $31,500)

b. $52,750 ($62,750 $10,000)
c. $19,000 ($57,000 $38,000)
Ex. 15

a. $183,000 ($325,000 $142,000)

b. $230,000 ($183,000 + $84,000 $37,000)
c. $158,000 ($183,000 $8,000 $17,000)
d. $275,500 ($183,000 + $75,000 + $17,500)
e. Net income: $137,000 ($425,000 $105,000 $183,000)

Ex. 16

a. owner's equity
b. asset
c. owner's equity
d. asset
e. liability
f. asset

Ex. 17

a. Increases assets and increases owners equity.

b. Increases assets and increases owners equity.
c. Increases assets and decreases assets.
d. Decreases assets and decreases owners equity.
e. Increases assets and increases liabilities.

Ex. 18

a. (1) Total assets increased $50,000.

(2) No change in liabilities.
(3) Owners equity increased $50,000.

b. (1) Total assets decreased $28,000.

(2) Total liabilities decreased $28,000.
(3) No change in owners equity.
Ex. 19

1. increase
2. increase
3. decrease
4. decrease

Ex. 110

1. c 6. a
2. d 7. e
3. c 8. a
4. e 9. e
5. c 10. e

Ex. 111

a. (1) Sale of catering services for cash, $15,000.

(2) Purchase of land for cash, $2,000.
(3) Payment of expenses, $11,250.
(4) Purchase of supplies on account, $500.
(5) Withdrawal of cash by owner, $1,500.
(6) Payment of cash to creditors, $5,300.
(7) Recognition of cost of supplies used, $800.

b. ($5,050) ($950 $6,000)

c. $1,450 ($30,700 $29,250)
d. $2,950 ($15,000 $11,250 $800)
e. $1,450 ($2,950 $1,500)

Ex. 112

It would be incorrect to say that the business had incurred a net loss of $7,250.
The excess of the withdrawals over the net income for the period is a decrease in
the amount of owners equity in the business.
Ex. 113

Company W
Owner's equity at end of year ($600,000 $325,000).. $275,000
Owner's equity at beginning of year
($375,000 $150,000).................................................. 225,000
Net income (increase in owner's equity).............. $ 50,000

Company X
Increase in owner's equity (as determined for W)....... $ 50,000
Add withdrawals.............................................................. 30,000
Net income................................................................... $ 80,000

Company Y
Increase in owner's equity (as determined for W)....... $ 50,000
Deduct additional investment........................................ 75,000
Net loss......................................................................... $ (25,000)

Company Z
Increase in owner's equity (as determined for W)....... $ 50,000
Deduct additional investment........................................ 75,000
$ (25,000)
Add withdrawals.............................................................. 30,000
Net income................................................................... $ 5,000

Ex. 114

Balance sheet items: 3, 5, 6, 8, 9, 10

Ex. 115

Income statement items: 1, 2, 4, 7

Ex. 116

DOUMA COMPANY
Statement of Owners Equity
For the Month Ended June 30, 2003
Meg Douma, capital, June 1, 2003.............................. $317,500
Net income for the month............................................ $91,250
Less withdrawals.......................................................... 15,000
Increase in owners equity.......................................... 76,250
Meg Douma, capital, June 30, 2003............................ $393,750

Ex. 117
SURGERY SERVICES
Income Statement
For the Month Ended April 30, 2003
Fees earned.................................................................. $165,800
Operating expenses:
Wages expense......................................................... $71,500
Rent expense............................................................ 25,000
Supplies expense..................................................... 3,250
Miscellaneous expense............................................ 2,250
Total operating expenses.................................... 102,000
Net income.................................................................... $ 63,800
Ex. 118

In each case, solve for a single unknown, using the following equation:
Owners equity (beginning) + Investments Withdrawals + Revenues
Expenses = Owners equity (ending)

I. Owner's equity at end of year ($745,000 $325,000)............. $420,000

Owner's equity at beginning of year ($600,000 $360,000). . 240,000
Increase in owner's equity......................................................... $180,000
Deduct increase due to net income ($197,750 $108,000). . . 89,750
$ 90,250
Add withdrawals......................................................................... 40,000
Additional investment in the business................................ (a) $130,250

II. Owner's equity at end of year ($175,000 $55,000)............... $120,000

Owner's equity at beginning of year ($125,000 $65,000).... 60,000
Increase in owner's equity......................................................... $ 60,000
Add withdrawals......................................................................... 8,000
$ 68,000
Deduct additional investment................................................... 25,000
Increase due to net income....................................................... $ 43,000
Add expenses............................................................................. 32,000
Revenue................................................................................... (b) $ 75,000

III. Owner's equity at end of year ($90,000 $80,000)................. $ 10,000

Owner's equity at beginning of year ($100,000 $76,000).... 24,000
Decrease in owner's equity.......................................................
$ (14,000)
Deduct decrease due to net loss ($115,000 $122,500)........ (7,500)
$ (6,500)
Deduct additional investment................................................... 10,000
Withdrawals from the business............................................ (c) $ (16,500)

IV. Owner's equity at end of year ($310,000 $170,000)............. $140,000

Add decrease due to net loss ($140,000 $160,000)............. 20,000
$160,000
Add withdrawals......................................................................... 75,000
$235,000
Deduct additional investment................................................... 50,000
$185,000
Add liabilities at beginning of year.......................................... 150,000
Assets at beginning of year.................................................. (d) $335,000
Ex. 119

a.
REVIVAL INTERIORS
Balance Sheet
August 31, 20
Assets Liabilities
Cash.................................. $15,000 Accounts payable........... $ 3,850
Accounts receivable........ 8,500
Supplies............................ 750 Owners Equity
Laura Fedro, capital....... 20,400
Total liabilities and
Total assets...................... $24,250 owners equity............ $24,250

REVIVAL INTERIORS
Balance Sheet
September 30, 20
Assets Liabilities
Cash.................................. $25,500 Accounts payable........... $ 4,150
Accounts receivable........ 9,780
Supplies............................ 600 Owners Equity
Laura Fedro, capital....... 31,730
Total liabilities and
Total assets...................... $35,880 owners equity............ $ 35,880

b. Owner's equity, September 30....................................... $31,730

Owner's equity, August 31............................................. 20,400
Net income................................................................ $11,330

c. Owner's equity, September 30....................................... $31,730

Owner's equity, August 31............................................. 20,400
Increase in owner's equity....................................... $11,330
Add withdrawal................................................................ 7,500
Net income................................................................ $18,830
Ex. 120

Balance sheet: b, c, e, f, h, i, j, l, m, n, o
Income statement: a, d, g, k

Ex. 121

1. cfinancing activity
2. binvesting activity
3. aoperating activity
4. aoperating activity

Ex. 122

1. All financial statements should contain the name of the business in their
heading. The statement of owners equity is incorrectly headed as Lynn
Soby rather than Aspen Realty. The heading of the balance sheet needs the
name of the business.
2. The income statement and statement of owners equity cover a period of time
and should be labeled For the Month Ended March 31, 2003.
3. The year in the heading for the statement of owners equity should be 2003
rather than 2002.
4. The balance sheet should be labeled as of March 31, 2003, rather than For
the Month Ended March 31, 2003.
5. In the income statement, the miscellaneous expense amount should be listed
as the last operating expense.
6. In the income statement, the total operating expenses are incorrectly
subtracted from the sales commissions, resulting in an incorrect net income
amount. The correct net income should be $3,625.00. This also affects the
statement of owners equity and the amount of Lynn Soby, capital, that
appears on the balance sheet.
7. In the statement of owners equity, the additional investment should be added
first to Lynn Soby, capital, as of March 1, 2003. The net income should be
presented next, followed by the amount of withdrawals, which is subtracted
from the net income to yield a net increase in owners equity.
8. Accounts payable should be listed as a liability on the balance sheet.
9. Accounts receivable and supplies should be listed as assets on the balance
sheet.
10. The balance sheet assets should equal the sum of the liabilities and owners
equity.
Ex. 122 Concluded

Corrected financial statements appear as follows:

ASPEN REALTY
Income Statement
For the Month Ended March 31, 2003
Sales commissions............................................................. $37,100
Operating expenses:
Office salaries expense............................................... $23,150
Rent expense................................................................ 7,800
Automobile expense.................................................... 1,750
Supplies expense......................................................... 225
Miscellaneous expense............................................... 550
Total operating expenses........................................ 33,475
Net income........................................................................... $ 3,625

ASPEN REALTY
Statement of Owners Equity
For the Month Ended March 31, 2003
Lynn Soby, capital, March 1, 2003..................................... $ 7,450
Additional investment during March................................. $ 1,500
Net income for March.......................................................... 3,625
$ 5,125
Less withdrawals during March......................................... 1,000
Increase in owners equity.................................................. 4,125
Lynn Soby, capital, March 31, 2003................................... $11,575

ASPEN REALTY
Balance Sheet
March 31, 2003
Assets Liabilities
Cash.................................. $ 2,350 Accounts payable........... $ 2,300
Accounts receivable........ 10,200
Supplies............................ 1,325 Owners Equity
Lynn Soby, capital.......... 11,575
Total liabilities and
Total assets...................... $13,875 owners equity............ $13,875
 Ex. 123

a. 2000: 0.20 ($5,196,000,000 $26,497,000,000)

1999: 0.26 ($3,038,000,000 $11,811,000,000)

b. The margin of protection to the creditors increased in 2000. A comparison

with the ratio for similar businesses and with earlier periods for Cisco
Systems might be useful in assessing these ratios further.
 PROBLEMS

Prob. 11A

1.
Owners
Assets = Liabilities + Equity

Accounts Accounts Linda Neece,

Cash + Receivable + Supplies = Payable + Capital
a. +10,000 +10,000 Investment
b. + 1,150 + 1,150
Bal. 10,000 1,150 1,150 10,000
c. + 4,500 + 4,500 Fees earned
Bal. 14,500 1,150 1,150 14,500
d. 2,500 2,500 Rent expense
Bal. 12,000 1,150 1,150 12,000
e. 675 675
Bal. 11,325 1,150 475 12,000
f. + 3,250 + 3,250 Fees earned
Bal. 11,325 3,250 1,150 475 15,250
g. 1,755 980 Auto expense
775 Misc. expense
Bal. 9,570 3,250 1,150 475 13,495
h. 1,500 1,500 Salaries exp.
Bal. 8,070 3,250 1,150 475 11,995
i. 935 935 Supplies exp.
Bal. 8,070 3,250 215 475 11,060
j. 1,000 1,000 Withdrawal
Bal. 7,070 3,250 215 475 10,060

2. Owner's equity is the right of owners to the assets of the business. These
rights are increased by owners investments and revenues and decreased by
owner's withdrawals and expenses.
Prob. 12A

1.
FLY AWAY TRAVEL AGENCY
Income Statement
For the Year Ended December 31, 2003
Fees earned.......................................................................... $ 117,480
Operating expenses:
Wages expense............................................................ $35,500
Rent expense................................................................ 27,000
Utilities expense........................................................... 10,240
Supplies expense......................................................... 2,125
Miscellaneous expense............................................... 1,750
Total operating expenses........................................ 76,615
Net income........................................................................... $ 40,865

2.
FLY AWAY TRAVEL AGENCY
Statement of Owners Equity
For the Year Ended December 31, 2003
Ryan Stecker, capital, January 1, 2003.............................. $14,500
Net income for the year....................................................... $40,865
Less withdrawals................................................................. 30,000
Increase in owners equity.................................................. 10,865
Ryan Stecker, capital, December 31, 2003........................ $25,365

3.
FLY AWAY TRAVEL AGENCY
Balance Sheet
December 31, 2003
Assets Liabilities
Cash.................................. $ 7,200 Accounts payable........... $ 3,200
Accounts receivable........ 19,500
Supplies............................ 1,865 Owners Equity
Ryan Stecker, capital..... 25,365
Total liabilities and
Total assets...................... $ 28,565 owners equity............ $ 28,565
Prob. 13A

1.
EAGLE FINANCIAL SERVICES
Income Statement
For the Month Ended January 31, 2003
Fees earned.......................................................................... $13,100
Operating expenses:
Rent expense................................................................ $2,500
Salaries expense.......................................................... 2,000
Auto expense................................................................ 1,250
Supplies expense......................................................... 1,050
Miscellaneous expense............................................... 350
Total operating expenses........................................ 7,150
Net income........................................................................... $ 5,950

2.
EAGLE FINANCIAL SERVICES
Statement of Owners Equity
For the Month Ended January 31, 2003
Loren Thurlow, capital, January 1, 2003........................... $ 0
Investment on January 1, 2003.......................................... $12,500
Net income for January....................................................... 5,950
$18,450
Less withdrawals................................................................. 3,000
Increase in owners equity.................................................. 15,450
Loren Thurlow, capital, January 31, 2003......................... $15,450

3.
EAGLE FINANCIAL SERVICES
Balance Sheet
January 31, 2003
Assets Liabilities
Cash.................................. $11,250 Accounts payable........... $ 425
Accounts receivable........ 4,350
Supplies............................ 275 Owners Equity
Loren Thurlow, capital... 15,450
Total liabilities and
Total assets...................... $15,875 owners equity............ $15,875
Prob. 14A

1.
Owners
Assets = Liabilities + Equity

Accounts Dori French,

Cash + Supplies = Payable + Capital
a. + 5,000 + 5,000 Investment
b. +1,250 +1,250
Bal. 5,000 1,250 1,250 5,000
c. 850 850
Bal. 4,150 1,250 400 5,000
d. + 16,200 + 16,200 Sales commissions
Bal. 20,350 1,250 400 21,200
e. 2,000 2,000 Rent expense
Bal. 18,350 1,250 400 19,200
f. 4,500 4,500 Withdrawal
Bal. 13,850 1,250 400 14,700
g. 2,250 1,900 Auto expense
350 Misc. expense
Bal. 11,600 1,250 400 12,450
h. 4,250 4,250 Salaries expense
Bal. 7,350 1,250 400 8,200
i. 650 650 Supplies expense
Bal. 7,350 600 400 7,550

2.
DEAL REALTY
Income Statement
For the Month Ended March 31, 20
Sales commissions............................................................. $16,200
Operating expenses:
Office salaries expense............................................... $4,250
Rent expense................................................................ 2,000
Automobile expense.................................................... 1,900
Supplies expense......................................................... 650
Miscellaneous expense............................................... 350
Total operating expenses........................................ 9,150
Net income........................................................................... $ 7,050
Prob. 14A Concluded

DEAL REALTY
Statement of Owners Equity
For the Month Ended March 31, 20
Dori French, capital, March 1, 20................................... $ 0
Investment on March 1, 20.............................................. $ 5,000
Net income for March.......................................................... 7,050
$12,050
Less withdrawals................................................................. 4,500
Increase in owners equity.................................................. 7,550
Dori French, capital, March 31, 20................................. $7,550

DEAL REALTY
Balance Sheet
March 31, 20
Assets Liabilities
Cash.................................. $ 7,350 Accounts payable........... $ 400
Supplies............................ 600
Owners Equity
Dori French, capital........ 7,550
Total liabilities and
Total assets...................... $ 7,950 owners equity............ $ 7,950
Prob. 15A

1.
Assets = Liabilities + Owner's Equity

Accounts Accounts
Cash + Receivable + Supplies + Land = Payable + Bea Cheever, Capital
6,250 + 18,100 + 2,200 + 40,000 = 7,800 + Bea Cheever, Capital
66,550 = 7,800 + Bea Cheever, Capital
58,750 = Bea Cheever, Capital
Prob. 15A Continued
2.
Owners
Assets = Liabilities + Equity

Accounts Accounts Bea Cheever,

Cash + Receivable + Supplies + Land = Payable + Capital
Bal. 6,250 18,100 2,200 40,000 7,800 58,750
a. + 15,750 + 15,750 Dry cleaning sales
Bal. 22,000 18,100 2,200 40,000 7,800 74,500
b. 2,500 2,500 Rent expense
Bal. 19,500 18,100 2,200 40,000 7,800 72,000
c. + 1,650 + 1,650
Bal. 19,500 18,100 3,850 40,000 9,450 72,000
d. 5,100 5,100
Bal. 14,400 18,100 3,850 40,000 4,350 72,000
e. + 8,920 + 8,920 Dry cleaning sales
Bal. 14,400 27,020 3,850 40,000 4,350 80,920
f. + 6,000 6,000 Dry cleaning expense
Bal. 14,400 27,020 3,850 40,000 10,350 74,920
g. 5,570 2,400 Wages expense
1,580 Truck expense
960 Utilities expense
630 Miscellaneous expense
Bal. 8,830 27,020 3,850 40,000 10,350 69,350
h. + 12,100 12,100
Bal. 20,930 14,920 3,850 40,000 10,350 69,350
i. 1,350 1,350 Supplies expense
Bal. 20,930 14,920 2,500 40,000 10,350 68,000
j. 7,500 7,500 Withdrawals
Bal. 13,430 14,920 2,500 40,000 10,350 60,500
Prob. 15A Concluded

3. a.
PERSNICKETY DRY CLEANERS
Income Statement
For the Month Ended July 31, 20
Dry cleaning sales............................................................... $24,670
Operating expenses:
Dry cleaning expense.................................................. $6,000
Rent expense................................................................ 2,500
Wages expense............................................................ 2,400
Truck expense.............................................................. 1,580
Supplies expense......................................................... 1,350
Utilities expense........................................................... 960
Miscellaneous expense............................................... 630
Total operating expenses........................................ 15,420
Net income........................................................................... $ 9,250

b.
PERSNICKETY DRY CLEANERS
Statement of Owners Equity
For the Month Ended July 31, 20
Bea Cheever, capital, July 1, 20...................................... $58,750
Net income for July............................................................. $9,250
Less withdrawals................................................................. 7,500
Increase in owners equity.................................................. 1,750
Bea Cheever, capital, July 31, 20.................................... $60,500

c.
PERSNICKETY DRY CLEANERS
Balance Sheet
July 31, 20
Assets Liabilities
Cash.................................. $13,430 Accounts payable........... $10,350
Accounts receivable........ 14,920
Supplies............................ 2,500 Owners Equity
Land.................................. 40,000 Bea Cheever, capital...... 60,500
Total liabilities and
Total assets...................... $70,850 owners equity............ $70,850
Prob. 16A

a. Fees earned, $15,000

b. Supplies expense, $1,500
c. Ray Conway, capital, April 1, 2003, $0
d. Net income for April, $6,200
e. $26,200
f. Increase in owners equity, $23,200
g. Ray Conway, capital, April 30, 2003, $23,200
h. Total assets, $24,000
i. Ray Conway, capital, $23,200
j. Total liabilities and owners equity, $24,000
k. Cash received from customers, $15,000
i. Net cash flow from operating activities, $5,900
m. Cash payments for acquisition of land, $(20,000)
n. Cash received as owners investment, $20,000
o. Cash withdrawal by owner, $(3,000)
p. Net cash flow from financing activities, $17,000
q. Net cash flow and April 30, 2003 cash balance, $2,900
Prob. 11B

1.
Owners
Assets = Liabilities + Equity

Accounts Accounts Fran Cowles,

Cash + Receivable + Supplies = Payable + Capital
a. +15,000 +15,000 Investment
b. + 750 + 750
Bal. 15,000 750 750 15,000
c. 625 625
Bal. 14,375 750 125 15,000
d. + 5,250 + 5,250 Fees earned
Bal. 19,625 750 125 20,250
e. 1,000 1,000 Rent expense
Bal. 18,625 750 125 19,250
f. 1,230 880 Auto expense
350 Misc. expense
Bal. 17,395 750 125 18,020
g. 1,200 1,200 Salaries exp.
Bal. 16,195 750 125 16,820
h. 575 575 Supplies exp.
Bal. 16,195 175 125 16,245
i. + 7,350 + 7,350 Fees earned
Bal. 16,195 7,350 175 125 23,595
j. 1,500 1,500 Withdrawal
Bal. 14,695 7,350 175 125 22,095

2. Owner's equity is the right of owners to the assets of the business. These rights
are increased by owners investments and revenues and decreased by owner's
withdrawals and expenses.
Prob. 12B

1.
HIAWATHA TRAVEL SERVICE
Income Statement
For the Year Ended April 30, 2003
Fees earned.......................................................................... $131,600
Operating expenses:
Wages expense............................................................ $65,850
Rent expense................................................................ 18,900
Utilities expense........................................................... 11,250
Supplies expense......................................................... 3,550
Taxes expense.............................................................. 2,800
Miscellaneous expense............................................... 1,475
Total operating expenses........................................ 103,825
Net income........................................................................... $ 27,775

2.
HIAWATHA TRAVEL SERVICE
Statement of Owners Equity
For the Year Ended April 30, 2003
Rob Graybill, capital, May 1, 2002..................................... $25,000
Net income for the year....................................................... $27,775
Less withdrawals................................................................. 15,000
Increase in owners equity.................................................. 12,775
Rob Graybill, capital, April 30, 2003.................................. $37,775

3.
HIAWATHA TRAVEL SERVICE
Balance Sheet
April 30, 2003
Assets Liabilities
Cash.................................. $ 26,525 Accounts payable........... $ 6,100
Accounts receivable........ 15,675
Supplies............................ 1,675 Owner's Equity
Rob Graybill, capital...... 37,775
Total liabilities and
Total assets...................... $ 43,875 owners equity............ $43,875
Prob. 13B

1.
INFINET COMPUTER SERVICES
Income Statement
For the Month Ended October 31, 2003
Fees earned.......................................................................... $8,250
Operating expenses:
Salaries expense.......................................................... $2,000
Rent expense................................................................ 1,800
Auto expense................................................................ 780
Supplies expense......................................................... 325
Miscellaneous expense............................................... 375
Total operating expenses........................................ 5,280
Net income........................................................................... $2,970

2.
INFINET COMPUTER SERVICES
Statement of Owners Equity
For the Month Ended October 31, 2003
Chester Hoche, capital, October 1, 2003.......................... $ 0
Investment on October 1, 2003.......................................... $5,000
Net income for October...................................................... 2,970
$7,970
Less withdrawals................................................................. 1,000
Increase in owners equity.................................................. 6,970
Chester Hoche, capital, October 31, 2003........................ $6,970

3.
INFINET COMPUTER SERVICES
Balance Sheet
October 31, 2003
Assets Liabilities
Cash.................................. $3,295 Accounts payable........... $ 470
Accounts receivable........ 3,750
Supplies............................ 395 Owners Equity
Chester Hoche, capital. . 6,970
Total liabilities and
Total assets...................... $7,440 owners equity............ $ 7,440
Prob. 14B
1. Owners
Assets = Liabilities + Equity

Accounts Angie Tate,

Cash + Supplies = Payable + Capital

a. + 10,000 + 10,000 Investment

b. 3,600 3,600 Rent expense
Bal. 6,400 6,400
c. 1,450 900 Auto expense
550 Misc. expense
Bal. 4,950 4,950
d. +1,325 +1,325
Bal. 4,950 1,325 1,325 4,950
e. + 18,750 + 18,750 Sales commissions
Bal. 23,700 1,325 1,325 23,700
f. 690 690
Bal. 23,010 1,325 635 23,700
g. 4,000 4,000 Salaries expense
Bal. 19,010 1,325 635 19,700
h. 3,000 3,000 Withdrawal
Bal. 16,010 1,325 635 16,700
i. 725 725 Supplies expense
Bal. 16,010 600 635 15,975

2.
VOGUE REALTY
Income Statement
For the Month Ended August 31, 2003
Sales commissions............................................................. $18,750
Operating expenses:
Office salaries expense............................................... $4,000
Rent expense................................................................ 3,600
Automobile expense.................................................... 900
Supplies expense......................................................... 725
Miscellaneous expense............................................... 550
Total operating expenses........................................ 9,775
Net income........................................................................... $ 8,975
Prob. 14B Concluded

VOGUE REALTY
Statement of Owners Equity
For the Month Ended August 31, 2003
Angie Tate, capital, August 1, 2003................................... $ 0
Investment on August 1, 2003............................................ $10,000
Net income for August........................................................ 8,975
$18,975
Less withdrawals................................................................. 3,000
Increase in owners equity.................................................. 15,975
Angie Tate, capital, August 31, 2003................................. $15,975

VOGUE REALTY
Balance Sheet
August 31, 2003
Assets Liabilities
Cash.................................. $16,010 Accounts payable........... $ 635
Supplies............................ 600
Owners Equity
Angie Tate, capital.......... 15,975
Total liabilities and
Total assets...................... $16,610 owners equity............ $16,610
Prob. 15B

1.
Assets = Liabilities + Owner's Equity

Accounts Accounts
Cash + Receivable + Supplies + Land = Payable + Merritt Paisley, Capital
7,400 + 13,750 + 1,560 + 25,000 = 3,880 + Merritt Paisley, Capital
47,710 = 3,880 + Merritt Paisley, Capital
43,830 = Merritt Paisley, Capital
Prob. 15B Continued

2.
Owners
Assets = Liabilities + Equity

Merritt
Accounts Accounts Paisley,
Cash + Receivable + Supplies + Land = Payable + Capital
Bal. 7,400 13,750 1,560 25,000 3,880 43,830
a. 3,000 3,000 Rent expense
Bal. 4,400 13,750 1,560 25,000 3,880 40,830
b. + 6,150 + 6,150 Dry cleaning sales
Bal. 4,400 19,900 1,560 25,000 3,880 46,980
c. 1,680 1,680
Bal. 2,720 19,900 1,560 25,000 2,200 46,980
d. + 840 + 840
Bal. 2,720 19,900 2,400 25,000 3,040 46,980
e. + 14,600 + 14,600 Dry cleaning sales
Bal. 17,320 19,900 2,400 25,000 3,040 61,580
f. + 11,750 11,750
Bal. 29,070 8,150 2,400 25,000 3,040 61,580
g. + 5,400 5,400 Dry cleaning expense
Bal. 29,070 8,150 2,400 25,000 8,440 56,180
h. 3,225 1,800 Wages expense
725 Truck expense
510 Utilities expense
190 Miscellaneous expense
Bal. 25,845 8,150 2,400 25,000 8,440 52,955
i. 1,050 1,050 Supplies expense
Bal. 25,845 8,150 1,350 25,000 8,440 51,905
j. 5,000 5,000 Withdrawal
Bal. 20,845 8,150 1,350 25,000 8,440 46,905
Prob. 15B Concluded

3. a.
SWAN DRY CLEANERS
Income Statement
For the Month Ended November 30, 20
Dry cleaning sales............................................................... $20,750
Operating expenses:
Dry cleaning expense.................................................. $5,400
Rent expense................................................................ 3,000
Wages expense............................................................ 1,800
Supplies expense......................................................... 1,050
Truck expense.............................................................. 725
Utilities expense........................................................... 510
Miscellaneous expense............................................... 190
Total operating expenses........................................ 12,675
Net income........................................................................... $ 8,075

b.
SWAN DRY CLEANERS
Statement of Owners Equity
For the Month Ended November 30, 20
Merritt Paisley, capital, November 1, 20........................ $43,830
Net income for November................................................... $8,075
Less withdrawals................................................................. 5,000
Increase in owners equity.................................................. 3,075
Merritt Paisley, capital, November 30, 20...................... $46,905

c.
SWAN DRY CLEANERS
Balance Sheet
November 30, 20
Assets Liabilities
Cash.................................. $20,845 Accounts payable........... $ 8,440
Accounts receivable........ 8,150
Supplies............................ 1,350 Owners Equity
Land.................................. 25,000 Merritt Paisley, capital.... 46,905
Total liabilities and
Total assets...................... $55,345 owners equity............ $55,345
Prob. 16B

a. Wages expense, $5,375

b. Net income, $11,550
c. R. J. Cain, capital, June 1, 2003, $0
d. Investment on June 1, 2003, $45,000
e. Net income for June, $11,550
f. $56,550
g. Withdrawals, $6,000
h. Increase in owners equity, $50,550
i. R. J. Cain, capital, June 30, 2003, $50,550
j. Land, $36,000
k. Total assets, $51,750
l. R. J. Cain, capital, $50,550
m. Total liabilities and owners equity, $51,750
n. Cash received from customers, $23,500
o. Net cash flow from operating activities, $11,750
p. Net cash flow from financing activities, $39,000
q. Net cash flow and June 30, 2003 cash balance, $14,750
 CONTINUING PROBLEM

1. Owners
Assets = Liabilities + Equity

Lynn
Accounts Accounts Kwan,
Cash + Receivable + Supplies = Payable + Capital
Nov. 1 + 3,500 + 3,500 Investment
2 + 1,000 + 1,000 Fees earned
Bal. 4,500 4,500
Nov. 2 500 500 Office rent exp.
Bal. 4,000 4,000
Nov. 4 + 175 + 175
Bal. 4,000 175 175 4,000
Nov. 6 300 300 Advertising exp.
Bal. 3,700 175 175 3,700
Nov. 8 325 325 Equip. rent exp.
Bal. 3,375 175 175 3,375
Nov. 12 100 100 Music expense
Bal. 3,275 175 175 3,275
Nov. 13 50 50
Bal. 3,225 175 125 3,275
Nov. 16 + 75 + 75 Fees earned
Bal. 3,300 175 125 3,350
Nov. 22 + 600 + 600 Fees earned
Bal. 3,300 600 175 125 3,950
Nov. 25 + 250 + 250 Fees earned
Bal. 3,550 600 175 125 4,200
Nov. 29 120 120 Music expense
Bal. 3,430 600 175 125 4,080
Nov. 30 + 450 + 450 Fees earned
Bal. 3,880 600 175 125 4,530
Nov. 30 200 200 Wages expense
Bal. 3,680 600 175 125 4,330
Nov. 30 150 150 Utilities exp.
Bal. 3,530 600 175 125 4,180
Nov. 30 90 90 Supplies exp.
Bal. 3,530 600 85 125 4,090
Nov. 30 75 75 Misc. expense
Bal. 3,455 600 85 125 4,015
Nov. 30 250 250 Music expense
Bal. 3,205 600 85 125 3,765
Nov. 30 125 125 Withdrawal
Bal. 3,080 600 85 125 3,640
Continuing Problem Concluded

2.
DANCIN MUSIC
Income Statement
For the Month Ended November 30, 2002
Fees earned.......................................................................... $2,375
Operating expenses:
Office rent expense...................................................... $ 500
Music expense.............................................................. 470
Equipment rent expense.............................................. 325
Advertising expense.................................................... 300
Wages expense............................................................ 200
Utilities expense........................................................... 150
Supplies expense......................................................... 90
Miscellaneous expense............................................... 75
Total operating expenses........................................ 2,110
Net income........................................................................... $ 265

3.
DANCIN MUSIC
Statement of Owners Equity
For the Month Ended November 30, 2002
Lynn Kwan, capital, November 1, 2002............................. $ 0
Investment on November 1, 2002...................................... $3,500
Net income for November................................................... 265
$3,765
Less withdrawals................................................................. 125
Increase in owners equity.................................................. 3,640
Lynn Kwan, capital, November 30, 2002........................... $3,640

4.
DANCIN MUSIC
Balance Sheet
November 30, 2002
Assets Liabilities
Cash.................................. $3,080 Accounts payable........... $ 125
Accounts receivable........ 600
Supplies............................ 85 Owners Equity
Lynn Kwan, capital......... 3,640
Total liabilities and
Total assets...................... $3,765 owners equity............ $3,765
 SPECIAL ACTIVITIES

Activity 11

1. Acceptable professional conduct requires that Joel Phinney supply Bridger

National Bank with all the relevant financial statements necessary for the
bank to make an informed decision. Therefore, Joel should provide the
complete set of financial statements. These can be supplemented with a
discussion of the net loss in the past year or other data explaining why
granting the loan is a good investment by the bank.
2. a. Owners are generally willing to provide bankers with information about the
operating and financial condition of the business, such as the following:
Operating Information:
description of business operations
results of past operations
preliminary results of current operations
plans for future operations
Financial Condition:
list of assets and liabilities (balance sheet)
estimated current values of assets
owners personal investment in the business
owners commitment to invest additional funds in the business
Owners are normally reluctant to provide the following types of
information to bankers:
Proprietary Operating Information. Such information, which might hurt
the business if it becomes known by competitors, might include special
processes used by the business or future plans to expand operations
into areas that are not currently served by a competitor.
Personal Financial Information. Owners may have little choice here
because banks often require owners of small businesses to pledge their
personal assets as security for a business loan. Personal financial
information requested by bankers often includes the owner's net worth,
salary, and other income. In addition, bankers usually request
information about factors that might affect the personal financial
condition of the owner. For example, a pending divorce by the owner
might significantly affect the owner's personal wealth.
Activity 11 Concluded

b. Bankers typically want as much information as possible about the ability

of the business and the owner to repay the loan with interest. Examples of
such information are described above.
c. Both bankers and business owners share the common interest of the
business doing well and being successful. If the business is successful,
the bankers will receive their loan payments on time with interest, and the
owners will increase their personal wealth.

Activity 12

The difference in the two bank balances, $150,000 ($180,000 $30,000), may not
be pure profit from an accounting perspective. To determine the accounting profit
for the seven-month period, the revenues for the period would need to be
matched with the related expenses. The revenues minus the expenses would
indicate whether the business generated net income (profit) or a net loss for the
period. Using only the difference between the two bank account balances ignores
such factors as amounts due from customers (receivables), liabilities (accounts
payable) that need to be paid for wages or other operating expenses, additional
investments that Dr. North may have made in the business during the period, or
withdrawals during the period that Dr. North might have taken for personal
reasons unrelated to the business.
Some businesses that have few, if any, receivables or payables may use a cash
basis of accounting. The cash basis of accounting ignores receivables and
payables because they are assumed to be insignificant in amount. However, even
with the cash basis of accounting, additional investments during the period and
any withdrawals during the period have to be considered in determining the net
income (profit) or net loss for the period.
Activity 13

1.
Owners
Assets = Liabilities + Equity

Yvonne
Accounts Tobin,
Cash + Supplies = Payable + Capital
a. + 500 + 500 Investment
b. 160 + 160
Bal. 340 160 500
c. 80 80 Rent expense
Bal. 260 160 420
d. 70 + 30 100 Rent expense
Bal. 190 160 30 320
e. + 800 + 800 Service revenue
Bal. 990 160 30 1,120
f. + 150 + 150 Service revenue
Bal. 1,140 160 30 1,270
g. 300 300 Salary expense
Bal. 840 160 30 970
h. 75 75 Misc. expense
Bal. 765 160 30 895
i. + 300 + 300 Service revenue
Bal. 1,065 160 30 1,195
j. 85 85 Supplies expense
Bal. 1,065 75 30 1,110
k. 400 400 Withdrawal
Bal. 665 75 30 710

2.
FORTYLOVE
Income Statement
For the Month Ended September 30, 20
Service revenue................................................................... $1,250
Operating expenses:
Salary expense............................................................. $300
Rent expense................................................................ 180
Supplies expense......................................................... 85
Miscellaneous expense............................................... 75
Total operating expenses........................................ 640
Net income........................................................................... $ 610
Activity 13Continued

3.
FORTYLOVE
Statement of Owners Equity
For the Month Ended September 30, 20
Yvonne Tobin, capital, September 1, 20........................ $ 0
Investment on September 1, 20...................................... $ 500
Net income for September.................................................. 610
$1,110
Less withdrawals................................................................. 400
Increase in owners equity.................................................. 710
Yvonne Tobin, capital, September 30, 20...................... $710

4.
FORTYLOVE
Balance Sheet
September 30, 20
Assets Liabilities
Cash.................................. $665 Accounts payable........... $ 30
Supplies............................ 75
Owners Equity
Yvonne Tobin, capital..... 710
Total liabilities and
Total assets...................... $740 owners equity............ $740

5. a. Forty-Love would provide Yvonne with $50 more income per month than
working as a waitress. This amount is computed as follows:

Net income of Forty-Love, per month...................................... $610

Earnings as waitress, per month:
20 hours per week $7 per hour 4 weeks........................ 560
Difference.................................................................................... $ 50
Activity 13Concluded

b. Other factors that Yvonne should consider before discussing a long-term

arrangement with the Racquet Club include the following:

Yvonne should consider whether the results of operations for September are
indicative of what to expect each month. For example, Yvonne should
consider whether club members will continue to request lessons or use the
ball machine during the winter months when interest in tennis may slacken.
Yvonne should evaluate whether the additional income of $50 per month from
FortyLove is worth the risk being taken and the effort being expended.

Yvonne should also consider how much her investment in FortyLove could
have earned if invested elsewhere. For example, if the initial investment of
$500 had been deposited in a money market or savings account at 3%
interest, it would have earned $1.25 interest in September, or $15 for the year.

Note to Instructors: Numerous other considerations could be mentioned by

students, such as the ability of Yvonne to withdraw cash from FortyLove for
personal use. Unlike a money market account or savings account, some of
her investment in FortyLove will be in the form of supplies (tennis balls, etc.)
which may not be readily convertible to cash. The objective of this case is not
to mention all possible considerations, but rather to encourage students to
begin thinking about the use of accounting information in making business
decisions.

Activity 14

Note to Instructors: The purpose of this activity is to familiarize students with the
certification requirements and their on-line availability.

Activity 15

1998 1997 1996

Net cash flows from operating activities positive positive negative
Net cash flows from investing activities negative negative negative
Net cash flows from financing activities positive positive positive

Start-up companies normally experience negative cash flows from operating and
investing activities. Also, start-up companies normally have positive cash flows
from financing activitiesactivities from raising capital.