Chapter
One Questions
1. List four of your personal resources.
Cash, textbooks, pencils,
notebooks, clothes, car, stereo, and CDs.
2. Why do businesses want resources?
To achieve their goals. The
more resources a business has, the more alternatives it has available and the
easier it probably is to attain its goals. For example, Sears can sell more
merchandise with stores and display equipment than it can just through catalogs
and the internet.
3. List three ways that companies get resources.
Borrow, owners' investments,
generate through management's operation of the companies.
4. When companies borrow money from banks, what is the name of the fee that the companies are charged for using the banks' money?
Interest.
5. Why do owners invest their money in companies?
Owners have a right to any
resources generated by managements' operations of the companies. Also, stock
certificates may appreciate in value.
6. List the four questions for which financial reporting systems provide information.
What are the company's resources?
Where did the company get its resources?
What did management do with the company's resources?
What did the company do with
any resources generated by management's operation of the company?
7. Identify the two things a company can do with any resources management generates through operations.
The resources can be given to the owners (dividends).
The resources can be kept (or
retained) in the company.
8. What are the pieces of paper called that owners receive when they invest in corporations?
Common stock shares or
certificates.
9. What is the name of the source of resources account that shows a company owes money to a supplier?
Accounts payable.
10. What is the name of the resource account that shows a company's customers owe it money?
Accounts receivable.
11. What is the name of the source of resources account that shows the dollar amount of resources generated through management operations and kept in the business?
Retained earnings.
12. How do owners actually receive from companies some of the resources generated through management operations?
Owners receive the resources
when the companies declare and distribute dividends.
13. What is the name of the financial statement that provides information about what management did with the company's resources?
Income statement.
14. Define the term revenue.
A revenue is an increase in
resources through management operations of providing services or products to
customers.
15. Define the term expense.
An expense is a decrease in
resources through management operations of providing services or products to
customers.
16. What is the difference between revenues and expenses called?
Net income.
17. Why are a company's dividends not reported on its income statement?
The income statement reports
what management did with the company's resources. Dividends are not the
responsibility of management. Thus, dividends should not appear on the income
statement. Dividends are the responsibility of the company's board of
directors.
18. What is the name of the financial statement that provides information about what the company did with resources generated by management's operation of the business?
Statement of retained
earnings.
19. What is the dollar amount of resources generated through management operations and given to owners called?
Dividends.
20. What is the dollar amount of resources generated through management operations and kept in the business called?
Retained earnings.
21. Name the two financial statements on which a company's net income appears.
Income statement and
statement of retained earnings.
22. What is the name of the financial statement that provides information about the company's resources and where they came from?
Balance sheet.
23. What is the term used to identify a company's resources?
Assets.
24. What is the term used to identify the dollar amount of a company's sources of borrowed resources?
Liabilities.
25. What is the term used to identify the dollar amount of a company's resources obtained from owners or to which owners have rights?
Stockholders' equity.
26. Name the two financial statements on which a company's retained earnings appears.
Statement of retained
earnings and balance sheet.
27. Why is retained earnings considered a part of stockholders' equity?
Owners' rights are reported
in stockholders' equity. Owners have rights to resources generated through
management's operation of the business. The dollar amounts of resources
generated through management operations and kept in the business are shown in
retained earnings. Thus, owners' rights include retained earnings.
28. Why is it so important that the accounting equation, assets = liabilities + stockholders' equity, is always maintained?
If the accounting equation is
maintained, the financial statements will be logical. That is, the financial
statements will tie together. The income statement will relate to the statement
of retained earnings. The statement of retained earnings will relate to the
balance sheet. The balance sheet will balance.
Chapter One Exercises
Exercise 1.1: Resources = Sources of Resources
Curven Corporation began business on September 3. During its first year, the corporation acquired total resources of $130,000. At the end of its second year, the corporation's total sources of resources were $180,000. During its third year, the corporation acquired an additional $40,000 in resources.
1. Determine the Curven Corporation's total sources of resources at the end of its first year.
Resources = sources of
resources. Since the corporation's resources were $130,000 at the end of its
first year, its sources of resources were also $130,000.
2. Determine the Curven Corporation's
total resources at the end of its second year.
Resources = sources of
resources. Since the corporation's sources of resources were $180,000 at the
end of its second year, its resources were also $180,000.
3. Determine the Curven Corporation's
total sources of resources at the end of its third year.
During its third year, the
corporation's resources increased by $40,000, from $180,000 to $220,000.
Resources = sources of resources. Since the corporation's resources were
$220,000 at the end of its third year, its sources of resources were also
$220,000.
Exercise 1.2: Sources of Resources
Determine the dollar amount of the Ng Corporation's sources of resources for each of the following independent situations.
1. On February 5, the Ng Corporation's
total resources were $245,000. $50,000 of resources had been invested by owners
and $23,000 of resources had been generated through management's operations of
the business. What is the dollar amount of borrowed resources?
|
Resources |
= |
Sources of Resources |
||||
|
Resources |
= |
Borrowed |
+ |
Owner |
+ |
Management |
|
$245,000 |
= |
X |
+ |
$50,000 |
+ |
$23,000 |
X = $172,000
Borrowed resources = $172,000
2. On February 5, the Ng Corporation's
total resources were $452,000. $250,000 of resources had been borrowed and
$93,000 of resources had been generated through management's operations of the
business. What is the dollar amount of resources invested by owners?
|
Resources |
= |
Sources of Resources |
||||
|
Resources |
= |
Borrowed |
+ |
Owner |
+ |
Management |
|
$452,000 |
= |
$250,000 |
+ |
X |
+ |
$93,000 |
X = $109,000
Owner invested resources =
$109,000
3. On February 5, the Ng Corporation's
total resources were $524,000. $306,000 of resources had been borrowed and
$120,000 of resources had been invested by owners. What is the dollar amount of
resources generated through management's operations of the company?
|
Resources |
= |
Sources of Resources |
||||
|
Resources |
= |
Borrowed |
+ |
Owner |
+ |
Management |
|
$524,000 |
= |
$306,000 |
+ |
$120,000 |
+ |
X |
X = $98,000
Management generated
resources = $98,000
Exercise 1.3: Resources = Sources of
Resources
During the first week in March, the Hale Corporation experienced the events presented below. For each event, determine the effects on the corporation's resources and sources of resources. The first event has been done for you.
1. The owners invested $10,000 in the
business.
|
Resources |
= |
Sources of Resources |
|
+ $10,000 |
= |
+ $10,000 |
2. The corporation purchased $2,000 of
supplies for cash.
|
Resources |
= |
Sources of Resources |
|
+ $2,000 |
|
|
3. The corporation provided $1,200
services to a customer. The customer promised to pay for the services within 30
days.
|
Resources |
= |
Sources of Resources |
|
+ $1,200 |
= |
+ $1,200 |
4. The corporation purchased $500 of
supplies on account.
|
Resources |
= |
Sources of Resources |
|
+ $500 |
= |
+ $500 |
5. The corporation paid its employees
wages of $800.
|
Resources |
= |
Sources of Resources |
|
- $800 |
= |
- $800 |
6. The corporation paid a $100 dividend to
its owners.
|
Resources |
= |
Sources of Resources |
|
- $100 |
= |
- $100 |
Exercise 1.4: Sources of Resources:
Retained Earnings
During the year, the Stryker Corporation's resources increased by $95,000. $20, 000 of this increase was from borrowing and $75,000 was from resources generated by management's operations and kept (or retained) in the business. The $20,000 increase in resources also increased the corporations liabilities by $20,000, while the $75,000 increase in resources also increased retained earnings by $75,000. Determine the appropriate dollar amounts for each of the following independent situations.
1. An analysis of the Stryker
Corporation's retained earnings account showed revenues of $180,000 and
expenses of $100,000. Determine the corporation's dividends for the year.
|
Resources |
= |
Sources of Resources |
|||||
|
Resources |
= |
Borrowed |
+ |
Owner |
+ |
Management |
|
|
+ $180,000 |
= |
|
|
|
|
+ $180,000 |
Revenues |
|
- $100,000 |
= |
|
|
|
|
- $100,000 |
Expenses |
|
- X |
= |
|
|
|
|
- X |
Dividends |
|
$75,000 |
= |
|
|
|
|
$75,000 |
Retained |
X = $5,000
Dividends = $5,000
2. An analysis of the Stryker
Corporation's retained earnings account showed revenues of $220,000 and dividends
of $30,000. Determine the corporation's expenses for the year.
|
Resources |
= |
Sources of Resources |
|||||
|
Resources |
= |
Borrowed |
+ |
Owner |
+ |
Management |
|
|
+ $220,000 |
= |
|
|
|
|
+ $220,000 |
Revenues |
|
- $30,000 |
= |
|
|
|
|
- $30,000 |
Dividends |
|
- X |
= |
|
|
|
|
- X |
Expenses |
|
$75,000 |
= |
|
|
|
|
$75,000 |
Retained |
X = $115,000
Expenses = $115,000
3. An analysis of the Stryker
Corporation's retained earnings account showed expenses of $140,000 and
dividends of $25,000. Determine the corporation's revenues for the year.
|
Resources |
= |
Sources of Resources |
|||||
|
Resources |
= |
Borrowed |
+ |
Owner |
+ |
Management |
|
|
- $140,000 |
= |
|
|
|
|
- $140,000 |
Expenses |
|
- $25,000 |
= |
|
|
|
|
- $25,000 |
Dividends |
|
+ X |
= |
|
|
|
|
+ X |
Revenues |
|
$75,000 |
= |
|
|
|
|
$75,000 |
Retained |
X = $240,000
Revenues = $240,000
Exercise 1.5: Assets = Liabilities +
Stockholders' Equity
Calculate the appropriate amount for the Ruiz Corporation in each of the following independent situations.
1. The corporation's liabilities are
$300,000 and its stockholders' equity is $100,000. Determine the corporation's
assets.
|
Resources |
= |
Sources of Resources |
||
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
X |
= |
$300,000 |
+ |
$100,000 |
X = $400,000
Assets = $400,000
2. The corporation's assets are $900,000
and its stockholders' equity is $360,000. Determine the corporation's
liabilities.
|
Resources |
= |
Sources of Resources |
||
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
$900,000 |
= |
X |
+ |
$360,000 |
X = $540,000
Liabilities = $540,000
3. The corporation's assets are $675,000
and its liabilities are $250,000. Determine the corporation's stockholders'
equity.
|
Resources |
= |
Sources of Resources |
||
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
$675,000 |
= |
$250,000 |
+ |
X |
X = $425,000
Stockholders' equity =
$425,000
4. At the beginning of the year, the
corporation's assets were $580,000 and its liabilities were $370,000. During
the year, assets increased by $90,000 and stockholders' equity increased by
$20,000. Determine the corporation's liabilities at the end of the year.
|
Resources |
= |
Sources of Resources |
||
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
$580,000 |
= |
$370,000 |
+ |
$210,000 |
|
+ $90,000 |
= |
+$70,000 |
+ |
+ $20,000 |
|
$670,000 |
= |
$440,000 |
+ |
$230,000 |
Liabilities = $440,000
Exercise 1.6: Accounting Equation
During the first week in August, the Sok Corporation experienced the events presented below. For each event, determine the effects on the corporation's assets, liabilities, and stockholders' equity. The first event has been done for you.
1. The owners invested $18,000 in the
business.
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
+ $18,000 |
= |
|
|
+ $18,000 |
2. The corporation provided $1,800
services to a customer for cash.
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
+ $1,800 |
= |
|
|
+ $1,800 |
3. The corporation purchased $1,400 of
supplies on account.
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
+ $1,400 |
= |
+ $1,400 |
|
|
4. The corporation paid its employees
wages of $500.
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
- $500 |
= |
|
|
- $500 |
5. The corporation paid for half of the
supplies purchased on account in part 3.
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
- $700 |
= |
- $700 |
|
|
6. The corporation paid a $90 dividend to
its owners.
|
Assets |
= |
Liabilities |
+ |
Stockholders' |
|
- $90 |
= |
|
|
- $90 |
Exercise 1.7: Financial Statements
Determine the dollar amounts that
correspond to the letters in the financial statements of the Farina
Corporation.
|
Income Statement |
Year 1 |
Year 2 |
Year 3 |
|
Revenues |
$2,400 |
H=$3,100 |
$3,700 |
|
Expenses |
$1,800 |
$2,200 |
Q = $2,400 |
|
Net Income |
A=$600 |
G=$900 |
$1,300 |
|
|
|
|
|
|
Statement of Retained Earnings |
|
|
|
|
Beginning Balance |
$4,300 |
I=$4,700 |
R=$5,300 |
|
Net Income |
B=$600 |
$900 |
S=$1,300 |
|
Subtotal |
C=$4,900 |
J=$5,600 |
T=$6,600 |
|
Dividends |
$200 |
L=$300 |
$500 |
|
Ending Balance |
$4,700 |
K=$5,300 |
U=$6,100 |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
Assets |
$22,000 |
M=$23,300 |
$25,000 |
|
Liabilities |
$9,300 |
$9,500 |
Y=$9,900 |
|
Stockholders' Equity |
|
|
|
|
Common Stock |
$8,000 |
P=$8,500 |
$9,000 |
|
Retained Earnings |
D=$4,700 |
$5,300 |
V=$6,100 |
|
Total Stockholders' Equity |
E=$12,700 |
N=$13,800 |
W=$15,100 |
|
Total Liabilities and Stockholders' Equity |
F=$22,000 |
$23,300 |
X=$25,000 |
A = revenues - expenses = $2,400 - $1,800 = $600.
B = A. Net income = $600.
C = $4,300 + $600 = $4,900.
D = $4,700 from the statement of retained earnings ending balance.
E = $8,000 (common stock) + $4,700 (retained earnings) = $12,700.
F = $9,300 (liabilities) + $12,700 (total stockholders' equity) = $22,000.
G = $900 net income from the statement of retained earnings.
H = $3,100. Revenues - expenses = net income.
Revenues - $2,200 = $900.
Revenues = $2,200 + $900 = $3,100
I = $4,700 from Year 1 statement of retained earnings
ending balance.
J = $4,700 + $900 = $5,600.
K = $5,300 from balance sheet retained earnings.
L = $300.
Retained earnings subtotal - dividends = retained earnings ending balance.
$5,600 - dividends = $5,300.
Dividends = $5,600 - $5,300 = $300.
M = $23,300. Assets = liabilities + stockholders'
equity.
N = $13,800.
Liabilities + stockholders' equity = $23,300.
$9,500 + stockholders' equity = $23,300.
Stockholders' equity = $23,300 - $9,500 = $13,800.
P = $8,500.
Common stock + retained earnings = total stockholders' equity.
Common stock + $5,300 = $13,800.
Common stock = $13,800 - $5,300 = $8,500.
Q = $2,400.
Revenues - expenses = net income.
$3,700 - expenses = $1,300.
Expenses = $3,700 - $1,300 = $2,400.
R = $5,300 from Year 2 statement of retained earnings
ending balance.
S = $1,300 net income from income statement.
T = $5,300 + $1,300 = $6,600.
U = $6,600 - $500 = $6,100.
V = $6,100 from statement of retained earnings ending balance.
W = $15,100.
Common stock + retained earnings = total stockholders' equity.
$9,000 + $6,100 = $15,100.
X = $25,000.
Assets = liabilities + stockholders' equity.
$25,000 = liabilities + stockholders' equity.
Y = $9,900.
Liabilities + stockholders' equity = $25,000.
Liabilities + $15,100 = $25,000.
Liabilities = $25,000 - $15,100 = $9,900.
Exercise 1.8: Financial Statements
The following information concerning the Darling Corporation became available at the end of its first year of operations. Accounts Payable, $5,600; Accounts Receivable, $9,500; Cash, $5,000; Common Stock, $8,500; Dividends, $400; Expenses, $18,500; Revenues, $21,000; Supplies, $1,700.
Determine the following for the Darling Corporation.
1. Net income for the year.
Net Income = Revenues - Expenses
Net Income = $21,000 -
$18,500 = $2,500
2. Retained earnings at the end of the
year.
|
Statement of Retained Earnings |
|
|
Beginning Balance |
$0 |
|
+ Net Income |
$2,500 |
|
Subtotal |
$2,500 |
|
- Dividends |
$400 |
|
Ending Balance |
$2,100 |
3. Total assets at the end of the year.
|
Assets |
|
|
Cash |
$5,000 |
|
Accounts Receivable |
$9,500 |
|
Supplies |
$1,700 |
|
Total Assets |
$16,200 |
4. Total liabilities at the end of the
year.
Total liabilities = Accounts
payable $5,600.
5. Total stockholders' equity at the end
of the year.
|
Stockholders' Equity |
|
|
Common Stock |
$8,500 |
|
Retained Earnings |
$2,100 |
|
Total Stockholders' Equity |
$10,600 |
Note: Total assets = $16,200;
total liabilities + stockholders' equity = $16,200.