Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,800 stores. Lowe’s recently reported the following balance sheet data (in millions):
Year 2 | Year 1
Total assets $31,827 | $32,732
Total liabilities 21,859 | 20,879
a. Determine the total stockholders’ equity at the end of Years 2 and 1.
b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.
c. What conclusions regarding the risk to the creditors can you draw from (b)?
d. Using the balance sheet data for The Home Depot in Exercise 1-26, how does the ratio of liabilities to stockholders’ equity of Lowe’s compare to that of The Home Depot?
Answers:
a.
Year 2: $9,968 ($31,827 – $21,859)
Year 1: $11,853 ($32,732 – $20,879)
b.
Year 2: 2.19 ($21,859 ÷ $9,968)
Year 1: 1.76 ($20,879 ÷ $11,853)
c.
The risk for creditors has increased from 1.76 in Year 1 to 2.19 in Year 2.
d.
The Home Depot’s ratio of liabilities to stockholders’ equity (3.29 in Year 2 and 2.24 in Year 1) is more in both years than is Lowe’s ratio of liabilities to stockholders’ equity (2.19 in Year 2 and 1.76 in Year 1). Thus, the risk to creditors of The Home Depot is slightly more than that of Lowe’s.
Showing posts with label Chapter 01 Exercises. Show all posts
Showing posts with label Chapter 01 Exercises. Show all posts
Friday, December 14, 2018
We-Sell Realty, organized August 1, 2019, is owned and operated by Omar Farah. How many errors can you find in the following statements
We-Sell Realty, organized August 1, 2019, is owned and operated by Omar Farah. How many errors can you find in the following statements for We-Sell Realty, prepared after its first month of operations?
We-Sell Realty
Income Statement
August 31, 2019
Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000
Expenses:
Office salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $87,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Automobile expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,850
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000
Omar Farah
Statement of Owner’s Equity
August 31, 2018
Omar Farah, capital, August 1, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0
Withdrawals during August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,000)
$(10,000)
Investment on August 1, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
$ 5,000
Net income for August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Omar Farah, capital, August 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000
Balance Sheet
For the Month Ended August 31, 2019
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,900
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,350
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,250
Liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,600
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Owner’s Equity
Omar Farah, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Total liabilities and owner’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,600
Answers:
1. All financial statements should contain the name of the business in their heading. The statement of owner’s equity is incorrectly headed as “Omar Farah” rather than We-Sell Realty. The heading of the balance sheet needs the name of the business.
2. The income statement and statement of owner’s equity cover a period of time and should be labeled “For the Month Ended August 31, 2019.”
3. The year in the heading for the statement of owner’s equity should be 2019 rather than 2018.
4. The balance sheet should be labeled “August 31, 2019,” rather than “For the Month Ended August 31, 2019.”
5. In the income statement, the miscellaneous expense amount should be listed as the last expense.
6. In the income statement, the total expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $24,150. This also affects the statement of owner’s equity and the amount of Omar Farah, Capital, that appears on the balance sheet.
7. In the statement of owner’s equity, the additional investment should be added first to Omar Farah, capital, as of August 1, 2019. The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield the increase in owner’s equity. The increase in owner’s equity is added to Omar Farah, capital on August 1, 2019, to determineOmar Farah, capital on August 31, 2019.
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 owner’s equity.
Corrected financial statements appear as follows:
Sales commissions$140,000
Expenses:
Office salaries expense$87,000
Rent expense18,000
Automobile expense7,500
Supplies expense1,150
Miscellaneous expense2,200
Total expenses115,850
Net income$ 24,150
Omar Farah, capital, August 1, 2019$ 0
Investment on August 1, 2019$ 15,000
Net income for August24,150
Withdrawals during August(10,000)
Increase in owner’s equity29,150
Omar Farah, capital, August 31, 2019$29,150
Cash$ 8,900
Accounts receivable38,600
Supplies4,000
Total assets$51,500
Accounts payable$22,350
Omar Farah, capital29,150
Total liabilities and owner’s equity$51,500
We-Sell Realty
Income Statement
August 31, 2019
Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000
Expenses:
Office salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $87,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Automobile expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,850
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000
Omar Farah
Statement of Owner’s Equity
August 31, 2018
Omar Farah, capital, August 1, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0
Withdrawals during August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,000)
$(10,000)
Investment on August 1, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
$ 5,000
Net income for August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Omar Farah, capital, August 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000
Balance Sheet
For the Month Ended August 31, 2019
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,900
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,350
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,250
Liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,600
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Owner’s Equity
Omar Farah, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Total liabilities and owner’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,600
Answers:
1. All financial statements should contain the name of the business in their heading. The statement of owner’s equity is incorrectly headed as “Omar Farah” rather than We-Sell Realty. The heading of the balance sheet needs the name of the business.
2. The income statement and statement of owner’s equity cover a period of time and should be labeled “For the Month Ended August 31, 2019.”
3. The year in the heading for the statement of owner’s equity should be 2019 rather than 2018.
4. The balance sheet should be labeled “August 31, 2019,” rather than “For the Month Ended August 31, 2019.”
5. In the income statement, the miscellaneous expense amount should be listed as the last expense.
6. In the income statement, the total expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $24,150. This also affects the statement of owner’s equity and the amount of Omar Farah, Capital, that appears on the balance sheet.
7. In the statement of owner’s equity, the additional investment should be added first to Omar Farah, capital, as of August 1, 2019. The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield the increase in owner’s equity. The increase in owner’s equity is added to Omar Farah, capital on August 1, 2019, to determineOmar Farah, capital on August 31, 2019.
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 owner’s equity.
Corrected financial statements appear as follows:
Sales commissions$140,000
Expenses:
Office salaries expense$87,000
Rent expense18,000
Automobile expense7,500
Supplies expense1,150
Miscellaneous expense2,200
Total expenses115,850
Net income$ 24,150
Omar Farah, capital, August 1, 2019$ 0
Investment on August 1, 2019$ 15,000
Net income for August24,150
Withdrawals during August(10,000)
Increase in owner’s equity29,150
Omar Farah, capital, August 31, 2019$29,150
Cash$ 8,900
Accounts receivable38,600
Supplies4,000
Total assets$51,500
Accounts payable$22,350
Omar Farah, capital29,150
Total liabilities and owner’s equity$51,500
The Home Depot is the world’s largest home improvement retailer and one of the largest retailers in the United States based on net sales volume
The Home Depot is the world’s largest home improvement retailer and one of the largest retailers in the United States based on net sales volume. The Home Depot operates over 2,200 Home Depot® stores that sell a wide assortment of building materials and home improvement and lawn and garden products.
The Home Depot recently reported the following balance sheet data (in millions):
Year 2 | Year 1
Total assets $39,946 | $40,518
Total stockholders’ equity 9,322 | 12,522
a. Determine the total liabilities at the end of Years 2 and 1.
b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.
c. What conclusions regarding the margin of protection to the creditors can you draw from (b)?
Answers:
a.
Year 2: $30,624 ($39,946 – $9,322)
Year 1: $27,996 ($40,518 – $12,522)
b.
Year 2: 3.29 ($30,624 ÷ $9,322)
Year 1: 2.24 ($27,996 ÷ $12,522)
c.
The ratio of liabilities to stockholders’ equity increased from 2.24 to 3.29 indicating an increase in risk for creditors from Year 1 to Year 2.
The Home Depot recently reported the following balance sheet data (in millions):
Year 2 | Year 1
Total assets $39,946 | $40,518
Total stockholders’ equity 9,322 | 12,522
a. Determine the total liabilities at the end of Years 2 and 1.
b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.
c. What conclusions regarding the margin of protection to the creditors can you draw from (b)?
Answers:
a.
Year 2: $30,624 ($39,946 – $9,322)
Year 1: $27,996 ($40,518 – $12,522)
b.
Year 2: 3.29 ($30,624 ÷ $9,322)
Year 1: 2.24 ($27,996 ÷ $12,522)
c.
The ratio of liabilities to stockholders’ equity increased from 2.24 to 3.29 indicating an increase in risk for creditors from Year 1 to Year 2.
A summary of cash flows for Ethos Consulting Group for the year ended May 31, 2019, follows: Cash receipts:
A summary of cash flows for Ethos Consulting Group for the year ended May 31, 2019, follows:
Cash receipts:
Cash received from customers $637,500
Cash received from additional investment of owner 62,500
Cash payments:
Cash paid for operating expenses 475,000
Cash paid for land 90,000
Cash paid to owner for personal use 17,500
The cash balance as of June 1, 2018, was $58,000.
Prepare a statement of cash flows for Ethos Consulting Group for the year ended May 31, 2019.
Answers:
Cash flows from operating activities:
Cash receipts from customers
Cash payments for operating expenses
Net cash flow from operating activities
Cash flows used for investing activities:
Cash payments for purchase of land
Cash flows from financing activities:
Cash receipts from owner as investment
Cash withdrawals by owner
Net cash flow from financing activities
Net increase in cash during year
Cash as of June 1, 2018
Cash as of May 31, 2019
ETHOS CONSULTING GROUP
Statement of Cash Flows
For the Year Ended May 31, 2019
$162,500
(475,000)
$ 637,500
$175,500
Cash receipts:
Cash received from customers $637,500
Cash received from additional investment of owner 62,500
Cash payments:
Cash paid for operating expenses 475,000
Cash paid for land 90,000
Cash paid to owner for personal use 17,500
The cash balance as of June 1, 2018, was $58,000.
Prepare a statement of cash flows for Ethos Consulting Group for the year ended May 31, 2019.
Answers:
Cash flows from operating activities:
Cash receipts from customers
Cash payments for operating expenses
Net cash flow from operating activities
Cash flows used for investing activities:
Cash payments for purchase of land
Cash flows from financing activities:
Cash receipts from owner as investment
Cash withdrawals by owner
Net cash flow from financing activities
Net increase in cash during year
Cash as of June 1, 2018
Cash as of May 31, 2019
ETHOS CONSULTING GROUP
Statement of Cash Flows
For the Year Ended May 31, 2019
$162,500
(475,000)
$ 637,500
$175,500
Each of the following items is shown in the financial statements of Exxon Mobil Corporation: 1. Accounts payable
Each of the following items is shown in the financial statements of Exxon Mobil Corporation:
1. Accounts payable
2. Cash equivalents
3. Crude oil inventory
4. Equipment
5. Exploration expenses
6. Income taxes payable
7. Investments
8. Long-term debt
9. Marketable securities
10. Notes and loans payable
11. Notes receivable
12. Operating expenses
13. Prepaid taxes
14. Sales
15. Selling expenses
a. Identify the financial statement (balance sheet or income statement) in which each item would appear.
b. Can an item appear on more than one financial statement?
c. Is the accounting equation relevant for Exxon Mobil Corporation?
Answers:
a.
Balance sheet: 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 13
Income statement: 5, 12, 14, 15
b.
Yes. An item can appear on more than one financial statement. For example, cash appears on both the balance sheet and statement of cash flows. However, the same item cannot appear on both the income statement and balance sheet.
c.
Yes. The accounting equation is relevant to all companies, including Exxon Mobil Corporation.
1. Accounts payable
2. Cash equivalents
3. Crude oil inventory
4. Equipment
5. Exploration expenses
6. Income taxes payable
7. Investments
8. Long-term debt
9. Marketable securities
10. Notes and loans payable
11. Notes receivable
12. Operating expenses
13. Prepaid taxes
14. Sales
15. Selling expenses
a. Identify the financial statement (balance sheet or income statement) in which each item would appear.
b. Can an item appear on more than one financial statement?
c. Is the accounting equation relevant for Exxon Mobil Corporation?
Answers:
a.
Balance sheet: 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 13
Income statement: 5, 12, 14, 15
b.
Yes. An item can appear on more than one financial statement. For example, cash appears on both the balance sheet and statement of cash flows. However, the same item cannot appear on both the income statement and balance sheet.
c.
Yes. The accounting equation is relevant to all companies, including Exxon Mobil Corporation.
Indicate whether each of the following activities would be reported on the statement of cash flows as (a) an operating activity
Indicate whether each of the following activities would be reported on the statement of cash flows as (a) an operating activity, (b) an investing activity, or (c) a financing activity:
1. Cash received from fees earned.
2. Cash paid for expenses.
3. Cash paid for land.
4. Cash paid to owner for personal use.
Answers:
1. (a) operating activity
2. (a) operating activity
3. (b) investing activity
4. (c) financing activity
Financial information related to the proprietorship of Ebony Interiors for February and March 2019 is as follows:
Financial information related to the proprietorship of Ebony Interiors for February and March 2019 is as follows:
February 29, 2019 | March 31, 2019
Accounts payable $310,000 | $400,000
Accounts receivable 800,000 | 960,000
Cash 320,000 | 380,000
Justin Berk, capital ? | ?
Supplies 30,000 | 35,000
a. Prepare balance sheets for Ebony Interiors as of February 29 and March 31, 2019.
b. Determine the amount of net income for March, assuming that the owner made no additional investments or withdrawals during the month.
c. Determine the amount of net income for March, assuming that the owner made no additional investments but withdrew $50,000 during the month.
Answers:
a.
Cash$ 320,000
Accounts receivable800,000
Supplies30,000
Total assets$1,150,000
Accounts payable$ 310,000
Justin Berk, capital840,000
Total liabilities and owner’s equity$1,150,000
Cash$ 380,000
Accounts receivable960,000
Supplies35,000
Total assets$1,375,000
Accounts payable$ 400,000
Justin Berk, capital975,000
Total liabilities and owner’s equity$1,375,000
b. Owner’s equity, March 31............................................................... $975,000
Owner’s equity, February 29.......................................................... 840,000
Net income.............................................................................. $135,000
c. Owner’s equity, March 31............................................................... $975,000
Owner’s equity, February 29.......................................................... 840,000
Increase in owner’s equity......................................................... $135,000
Add withdrawal.............................................................................. 50,000
Net income.............................................................................. $185,000
One item is omitted in each of the following summaries of balance sheet and income statement data for the following four different proprietorships:
One item is omitted in each of the following summaries of balance sheet and income statement data for the following four different proprietorships:
Freeman Heyward Jones Ramirez
Beginning of the year:
Assets$ 900,000 $490,000 $115,000 (d)
Liabilities360,000 260,000 81,000 $120,000
End of the year:
Assets1,260,000 675,000 100,000 270,000
Liabilities330,000 220,000 80,000 136,000
During the year:
Additional investment in the business (a) 150,000 10,000 55,000
Withdrawals from the business 75,000 32,000 (c) 39,000
Revenue570,000 (b) 115,000 115,000
Expenses240,000 128,000 122,500 128,000
Determine the missing amounts, identifying them by letter. (Hint: First, determine the amount of increase or decrease in owner’s equity during the year.)
Answers:
In each case, solve for a single unknown, using the following equation:
Owner’s Equity (beginning) + Investments – Withdrawals + Revenues – Expenses
= Owner’s Equity (ending)
Freeman
Owner’s equity at end of year ($1,260,000 – $330,000).................. $930,000
Owner’s equity at beginning of year ($900,000 – $360,000)............ 540,000
Increase in owner’s equity......................................................... $390,000
Deduct increase due to net income ($570,000 – $240,000)............ 330,000
Increase due to additional investment less withdrawals............... $ 60,000
Add withdrawals...................................................................... 75,000
Additional investment in the business.................................... (a) $135,000
Heyward
Owner’s equity at end of year ($675,000 – $220,000)..................... $455,000
Owner’s equity at beginning of year ($490,000 – $260,000)............ 230,000
Increase in owner’s equity......................................................... $225,000
Add withdrawals...................................................................... 32,000
Increase due to additional investment and net income.................. $257,000
Deduct additional investment................................................... 150,000
Increase due to net income...................................................... $107,000
Add expenses......................................................................... 128,000
Revenue...............................................................................(b) $235,000
Jones
Owner’s equity at end of year ($100,000 – $80,000)........................ $ 20,000
Owner’s equity at beginning of year ($115,000 – $81,000)............... 34,000
Decrease in owner’s equity...................................................... $(14,000)
Add decrease due to net loss ($115,000 – $122,500)..................... (7,500)
Decrease due to withdrawals less additional investment............... $ (6,500)
Deduct additional investment................................................... 10,000
Withdrawals from the business............................................. (c) $(16,500)
Ramirez
Owner’s equity at end of year ($270,000 – $136,000)..................... $134,000
Add decrease due to net loss ($115,000 – $128,000)..................... 13,000
Add withdrawals...................................................................... 39,000
Beginning owner’s equity plus additional investment .................. $186,000
Deduct additional investment................................................... 55,000
Owner’s equity at beginning of year.......................................... $131,000
Add liabilities at beginning of year............................................. 120,000
Assets at beginning of year................................................... (d) $251,000
Freeman Heyward Jones Ramirez
Beginning of the year:
Assets$ 900,000 $490,000 $115,000 (d)
Liabilities360,000 260,000 81,000 $120,000
End of the year:
Assets1,260,000 675,000 100,000 270,000
Liabilities330,000 220,000 80,000 136,000
During the year:
Additional investment in the business (a) 150,000 10,000 55,000
Withdrawals from the business 75,000 32,000 (c) 39,000
Revenue570,000 (b) 115,000 115,000
Expenses240,000 128,000 122,500 128,000
Determine the missing amounts, identifying them by letter. (Hint: First, determine the amount of increase or decrease in owner’s equity during the year.)
Answers:
In each case, solve for a single unknown, using the following equation:
Owner’s Equity (beginning) + Investments – Withdrawals + Revenues – Expenses
= Owner’s Equity (ending)
Freeman
Owner’s equity at end of year ($1,260,000 – $330,000).................. $930,000
Owner’s equity at beginning of year ($900,000 – $360,000)............ 540,000
Increase in owner’s equity......................................................... $390,000
Deduct increase due to net income ($570,000 – $240,000)............ 330,000
Increase due to additional investment less withdrawals............... $ 60,000
Add withdrawals...................................................................... 75,000
Additional investment in the business.................................... (a) $135,000
Heyward
Owner’s equity at end of year ($675,000 – $220,000)..................... $455,000
Owner’s equity at beginning of year ($490,000 – $260,000)............ 230,000
Increase in owner’s equity......................................................... $225,000
Add withdrawals...................................................................... 32,000
Increase due to additional investment and net income.................. $257,000
Deduct additional investment................................................... 150,000
Increase due to net income...................................................... $107,000
Add expenses......................................................................... 128,000
Revenue...............................................................................(b) $235,000
Jones
Owner’s equity at end of year ($100,000 – $80,000)........................ $ 20,000
Owner’s equity at beginning of year ($115,000 – $81,000)............... 34,000
Decrease in owner’s equity...................................................... $(14,000)
Add decrease due to net loss ($115,000 – $122,500)..................... (7,500)
Decrease due to withdrawals less additional investment............... $ (6,500)
Deduct additional investment................................................... 10,000
Withdrawals from the business............................................. (c) $(16,500)
Ramirez
Owner’s equity at end of year ($270,000 – $136,000)..................... $134,000
Add decrease due to net loss ($115,000 – $128,000)..................... 13,000
Add withdrawals...................................................................... 39,000
Beginning owner’s equity plus additional investment .................. $186,000
Deduct additional investment................................................... 55,000
Owner’s equity at beginning of year.......................................... $131,000
Add liabilities at beginning of year............................................. 120,000
Assets at beginning of year................................................... (d) $251,000
Dairy Services was organized on August 1, 2019. A summary of the revenue and expense transactions for August follows:
Dairy Services was organized on August 1, 2019. A summary of the revenue and expense transactions for August follows:
Fees earned $783,000
Wages expense 550,000
Rent expense 35,000
Supplies expense 8,500
Miscellaneous expense 11,400
Prepare an income statement for the month ended August 31.
Answers:
DAIRY SERVICES
Income Statement
For the Month Ended August 31, 2019
Fees earned$783,000
Expenses:
Wages expense$550,000
Rent expense35,000
Supplies expense8,500
Miscellaneous expense11,400
Total expenses604,900
Net income$178,100
Fees earned $783,000
Wages expense 550,000
Rent expense 35,000
Supplies expense 8,500
Miscellaneous expense 11,400
Prepare an income statement for the month ended August 31.
Answers:
DAIRY SERVICES
Income Statement
For the Month Ended August 31, 2019
Fees earned$783,000
Expenses:
Wages expense$550,000
Rent expense35,000
Supplies expense8,500
Miscellaneous expense11,400
Total expenses604,900
Net income$178,100
Financial information related to Udder Products Company, a proprietorship, for the month ended April 30, 2019, is as follows:
Financial information related to Udder Products Company, a proprietorship, for the month ended April 30, 2019, is as follows:
Net income for April $166,000
Mark Kominksy’s withdrawals during April 25,000
Mark Kominksy’s capital, April 1, 2019 384,500
a. Prepare a statement of owner’s equity for the month ended April 30, 2019.
b. Why is the statement of owner’s equity prepared before the April 30, 2019, balance sheet?
Answers:
a.
Mark Kominksy, capital, April 1, 2019$384,500
Net income for April$166,000
Withdrawals(25,000)
Increase in owner’s equity141,000
Mark Kominksy, capital, April 30, 2019$525,500
b. The statement of owner’s equity is prepared before the April 30, 2019, balance
sheet because Mark Kominksy, Capital as of April 30, 2019, is needed for the
balance sheet.
From the following list of selected items taken from the records of Rosewood Appliance Service as of a specific date
From the following list of selected items taken from the records of Rosewood Appliance Service as of a specific date, identify those that would appear on the balance sheet:
1. Accounts Payable
2. Accounts Receivable
3. Andrew King, Capital
4. Cash
5. Fees Earned
6. Land
7. Rent Expense
8. Supplies
9. Wages Expense
10. Wages Payable
Answers:
Balance sheet items: 1, 2, 3, 4, 6, 8, 10
1. Accounts Payable
2. Accounts Receivable
3. Andrew King, Capital
4. Cash
5. Fees Earned
6. Land
7. Rent Expense
8. Supplies
9. Wages Expense
10. Wages Payable
Answers:
Balance sheet items: 1, 2, 3, 4, 6, 8, 10
Based on the data presented in Exercise 1-16, identify those items that would appear on the income statement.
Based on the data presented in Exercise 1-16, identify those items that would appear on the income statement.
Answers:
Income statement items: 5, 7, 9
Answers:
Income statement items: 5, 7, 9
Four different proprietorships, Jupiter, Mars, Saturn, and Venus, show the same balance sheet data at the beginning and end of a year
Four different proprietorships, Jupiter, Mars, Saturn, and Venus, show the same balance sheet data at the beginning and end of a year. These data, exclusive of the amount of owner’s equity, are summarized as follows:
Total Assets | Total Liabilities
Beginning of the year $550,000 | $215,000
End of the year 844,000 | 320,000
On the basis of the preceding data and the following additional information for the year, determine the net income (or loss) of each company for the year. (Hint: First, determine the amount of increase or decrease in owner’s equity during the year.)
Jupiter: The owner had made no additional investments in the business and had made no withdrawals from the business.
Mars: The owner had made no additional investments in the business but had withdrawn $36,000.
Saturn: The owner had made an additional investment of $60,000 but had made no withdrawals.
Venus: The owner had made an additional investment of $60,000 and had withdrawn $36,000.
Answers:
Jupiter
Owner's equity at end of year ($844,000 – $320,000)................................. $524,000
Deduct owner's equity at beginning of year ($550,000 – $215,000)............ 335,000
Net income (increase in owner’s equity)............................................. $189,000
Increase in owner’s equity (as determined for Jupiter)........................... $189,000
Add withdrawals................................................................................. 36,000
Net income.................................................................................... $225,000
Increase in owner’s equity (as determined for Jupiter)........................... $189,000
Deduct additional investment............................................................... 60,000
Net income.................................................................................... $129,000
Increase in owner’s equity (as determined for Jupiter)........................... $189,000
Deduct additional investment............................................................... 60,000
$129,000
Add withdrawals................................................................................. 36,000
Net income.................................................................................... $165,000
Total Assets | Total Liabilities
Beginning of the year $550,000 | $215,000
End of the year 844,000 | 320,000
On the basis of the preceding data and the following additional information for the year, determine the net income (or loss) of each company for the year. (Hint: First, determine the amount of increase or decrease in owner’s equity during the year.)
Jupiter: The owner had made no additional investments in the business and had made no withdrawals from the business.
Mars: The owner had made no additional investments in the business but had withdrawn $36,000.
Saturn: The owner had made an additional investment of $60,000 but had made no withdrawals.
Venus: The owner had made an additional investment of $60,000 and had withdrawn $36,000.
Answers:
Jupiter
Owner's equity at end of year ($844,000 – $320,000)................................. $524,000
Deduct owner's equity at beginning of year ($550,000 – $215,000)............ 335,000
Net income (increase in owner’s equity)............................................. $189,000
Increase in owner’s equity (as determined for Jupiter)........................... $189,000
Add withdrawals................................................................................. 36,000
Net income.................................................................................... $225,000
Increase in owner’s equity (as determined for Jupiter)........................... $189,000
Deduct additional investment............................................................... 60,000
Net income.................................................................................... $129,000
Increase in owner’s equity (as determined for Jupiter)........................... $189,000
Deduct additional investment............................................................... 60,000
$129,000
Add withdrawals................................................................................. 36,000
Net income.................................................................................... $165,000
Teri West operates her own catering service. Summary financial data for July are presented in equation form as follows
Teri West operates her own catering service. Summary financial data for July are presented in equation form as follows. Each line designated by a number indicates the effect of a transaction on the equation. Each increase and decrease in owner’s equity, except transaction (5), affects net income.
Assets 5 Liabilities 1 Owner’s Equity
Cash 1 Supplies 1 Land 5
Accounts
Payable 1
Teri West ,
Capital −
Teri West ,
Drawing 1
Fees
Earned − Expenses
Bal. 40,000 3,000 82,000 7,500 117,500
1. +71,800+71,800
2. –15,000 +15,000
3. –47,500−47,500
4. +1,100 +1,100
5. –5,000–5,000
6. –4,000 –4,000
7. –1,500–1,500
Bal. 40,300 2,600 97,000 4,600 117,500 –5,000 71,800 –49,000
a. Describe each transaction.
b. What is the amount of the net increase in cash during the month?
c. What is the amount of the net increase in owner’s equity during the month?
d. What is the amount of the net income for the month?
e. How much of the net income for the month was retained in the business?
Answers:
a.
(1) Provided catering services for cash, $71,800.
(2) Purchase of land for cash, $15,000.
(3) Payment of cash for expenses, $47,500.
(4) Purchase of supplies on account, $1,100.
(5) Withdrawal of cash by owner, $5,000.
(6) Payment of cash to creditors, $4,000.
(7) Recognition of cost of supplies used, $1,500.
b. $300 ($40,300 – $40,000)
c. $17,800 (–$5,000 + $71,800 – $49,000)
d. $22,800 ($71,800 – $49,000)
e. $17,800 ($22,800 – $5,000)
Assets 5 Liabilities 1 Owner’s Equity
Cash 1 Supplies 1 Land 5
Accounts
Payable 1
Teri West ,
Capital −
Teri West ,
Drawing 1
Fees
Earned − Expenses
Bal. 40,000 3,000 82,000 7,500 117,500
1. +71,800+71,800
2. –15,000 +15,000
3. –47,500−47,500
4. +1,100 +1,100
5. –5,000–5,000
6. –4,000 –4,000
7. –1,500–1,500
Bal. 40,300 2,600 97,000 4,600 117,500 –5,000 71,800 –49,000
a. Describe each transaction.
b. What is the amount of the net increase in cash during the month?
c. What is the amount of the net increase in owner’s equity during the month?
d. What is the amount of the net income for the month?
e. How much of the net income for the month was retained in the business?
Answers:
a.
(1) Provided catering services for cash, $71,800.
(2) Purchase of land for cash, $15,000.
(3) Payment of cash for expenses, $47,500.
(4) Purchase of supplies on account, $1,100.
(5) Withdrawal of cash by owner, $5,000.
(6) Payment of cash to creditors, $4,000.
(7) Recognition of cost of supplies used, $1,500.
b. $300 ($40,300 – $40,000)
c. $17,800 (–$5,000 + $71,800 – $49,000)
d. $22,800 ($71,800 – $49,000)
e. $17,800 ($22,800 – $5,000)
The income statement of a proprietorship for the month of February indicates a net income of $17,500.
The income statement of a proprietorship for the month of February indicates a net income of $17,500. During the same period, the owner withdrew $25,500 in cash from the business for personal use.
Would it be correct to say that the business had incurred a net loss of $8,000 during the month? Discuss.
Answers:
No. It would be incorrect to say that the business had incurred a net loss of $8,000. The excess of the withdrawals over the net income for the period is a decrease in the amount of owner’s equity in the business.
Would it be correct to say that the business had incurred a net loss of $8,000 during the month? Discuss.
Answers:
No. It would be incorrect to say that the business had incurred a net loss of $8,000. The excess of the withdrawals over the net income for the period is a decrease in the amount of owner’s equity in the business.
Indicate whether each of the following types of transactions will either (a) increase owner’s equity or (b) decrease owner’s equity:
Indicate whether each of the following types of transactions will either (a) increase owner’s equity or (b) decrease owner’s equity:
1. expenses
2. owner’s investments
3. owner’s withdrawals
4. revenues
Answers:
1. (b) decrease
2. (a) increase
3. (b) decrease
4. (a) increase
The following selected transactions were completed by Silverado Delivery Service during February: 1. Received cash from owner as additional investment, $25,000.
The following selected transactions were completed by Silverado Delivery Service during February:
1. Received cash from owner as additional investment, $25,000.
2. Purchased supplies for cash, $750.
3. Paid rent for February, $3,000.
4. Paid advertising expense, $1,500.
5. Received cash for providing delivery services, $16,800.
6. Billed customers for delivery services on account, $32,500.
7. Paid creditors on account, $1,400.
8. Received cash from customers on account, $23,770.
9. Determined that the cost of supplies on hand was $275 and $475 of supplies had been used during the month.
10. Paid cash to owner for personal use, $5,000.
Indicate the effect of each transaction on the accounting equation by listing the numbers identifying the transactions, (1) through (10), in a column and inserting at the right of each number the appropriate letter from the following list:
a. Increase in an asset, decrease in another asset.
b. Increase in an asset, increase in a liability.
c. Increase in an asset, increase in owner’s equity.
d. Decrease in an asset, decrease in a liability.
e. Decrease in an asset, decrease in owner’s equity.
Answers:
1. c
2. a
3. e
4. e
5. c
6. c
7. d
8. a
9. e
10. e
1. Received cash from owner as additional investment, $25,000.
2. Purchased supplies for cash, $750.
3. Paid rent for February, $3,000.
4. Paid advertising expense, $1,500.
5. Received cash for providing delivery services, $16,800.
6. Billed customers for delivery services on account, $32,500.
7. Paid creditors on account, $1,400.
8. Received cash from customers on account, $23,770.
9. Determined that the cost of supplies on hand was $275 and $475 of supplies had been used during the month.
10. Paid cash to owner for personal use, $5,000.
Indicate the effect of each transaction on the accounting equation by listing the numbers identifying the transactions, (1) through (10), in a column and inserting at the right of each number the appropriate letter from the following list:
a. Increase in an asset, decrease in another asset.
b. Increase in an asset, increase in a liability.
c. Increase in an asset, increase in owner’s equity.
d. Decrease in an asset, decrease in a liability.
e. Decrease in an asset, decrease in owner’s equity.
Answers:
1. c
2. a
3. e
4. e
5. c
6. c
7. d
8. a
9. e
10. e
Indicate whether each of the following is identified with (1) an asset, (2) a liability, or (3) owner’s equity: a. accounts receivable
Indicate whether each of the following is identified with (1) an asset, (2) a liability, or (3) owner’s equity:
a. accounts receivable
b. accounts payable
c. cash
d. fees earned
e. land
f. rent expense
g. supplies
Answers:
a. (1) asset
b. (2) liability
c. (1) asset
d. (3) owner’s equity (revenue)
e. (1) asset
f. (3) owner’s equity (expense)
g. (1) asset
a. accounts receivable
b. accounts payable
c. cash
d. fees earned
e. land
f. rent expense
g. supplies
Answers:
a. (1) asset
b. (2) liability
c. (1) asset
d. (3) owner’s equity (revenue)
e. (1) asset
f. (3) owner’s equity (expense)
g. (1) asset
Describe how the following business transactions affect the three elements of the accounting equation: a. Invested cash in business.
Describe how the following business transactions affect the three elements of the accounting equation:
a. Invested cash in business.
b. Paid for utilities used in the business.
c. Purchased supplies for cash.
d. Purchased supplies on account.
e. Received cash for services performed.
Answers:
a. Increases assets and increases owner’s equity.
b. Decreases assets and decreases owner’s equity.
c. Increases assets and decreases assets.
d. Increases assets and increases liabilities.
e. Increases assets and increases owner’s equity.
A vacant lot acquired for $115,000 is sold for $298,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?
a. A vacant lot acquired for $115,000 is sold for $298,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?
b. Assume that the seller owes $80,000 on a loan for the land. After receiving the $298,000 cash in (a), the seller pays the $80,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?
c. Is it true that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation? Explain.
Answers:
a.
(1) Total assets increased $183,000 ($298,000 – $115,000).
(2) No change in liabilities.
(3) Owner’s equity increased $183,000.
b.
(1) Total assets decreased $80,000.
(2) Total liabilities decreased $80,000.
(3) No change in owner’s equity.
c. No. It is false that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation. Some transactions affect only one element of the accounting equation. For example, purchasing supplies for cash only affects assets.
b. Assume that the seller owes $80,000 on a loan for the land. After receiving the $298,000 cash in (a), the seller pays the $80,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?
c. Is it true that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation? Explain.
Answers:
a.
(1) Total assets increased $183,000 ($298,000 – $115,000).
(2) No change in liabilities.
(3) Owner’s equity increased $183,000.
b.
(1) Total assets decreased $80,000.
(2) Total liabilities decreased $80,000.
(3) No change in owner’s equity.
c. No. It is false that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation. Some transactions affect only one element of the accounting equation. For example, purchasing supplies for cash only affects assets.
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