Chapter Two Questions
1. In business terminology, what does the term assets mean?
Assets are resources. They are things a company can
use. Examples include cash, supplies, and buildings.
2. What does the term liabilities mean?
Liabilities are sources of borrowed resources.
Accounts payable is an example of a liability.
3. What does the term stockholders' equity mean?
Sources of resources invested by owners and
generated by management and retained in the company are called stockholders'
equity. Examples of stockholders' equity are common stock and retained
earnings.
4. Identify the two separate parts of stockholders' equity.
Common stock represents the dollar amount of
resources invested by owners. Retained earnings is the dollar amount of
resources generated through management operations and retained in the company.
5. Why is it important that financial statements are logical?
Illogical financial statements do not relate to one
another. In logical financial statements, (1) net income on the income
statement also appears on the statement of retained earnings, (2) retained
earnings on the statement of retained earnings also appears on the balance
sheet, and (3) the balance sheet balances. In illogical financial statements,
the balance sheet does not balance. This suggests the information on the income
statement, statement of retained earnings, and balance sheet contains at least
one error and possibly many more. Such financial statements cannot be relied on
for information about a company.
6. What contribution did Fra Luca Pacioli make to accounting?
Fra Luca Pacioli developed the double-entry record
keeping system that makes use of the debits = credits rule.
7. What is the left side of a T account called?
Debit.
8. What is the right side of a T account called?
Credit.
9. How does the debits = credits rule affect the accounting equation?
If debits = credits, assets must equal liabilities +
stockholders' equity.
10. What term is used to identify the increase in resources through the process of providing service to customers?
Revenues are increases in resources through
providing service to customers.
11. What affect do revenues have on retained earnings?
Revenues increase retained earnings. Retained
earnings is part of stockholders' equity. Owners (stockholders) have rights to
resources generated through management operations.
12. What term is used to identify the decrease in resources through the process of providing service to customers?
Expenses are decreases in resources through
providing service to customers.
13. What affect do expenses have on retained earnings?
Expenses decrease retained earnings.
14. What term is used to identify the decrease in resources through payments made to owners?
Dividends reduce resources by distributing to owners
some of the resources generated through management operations.
15. What affect do dividends have on retained earnings?
Dividends reduce retained earnings.
16. Complete the following, using the terms debits and credits.
Assets increase through debits and decrease through credits .
Liabilities increase through credits and decrease through debits .
Stockholders' equity increases through credits and decreases through debits .
Revenues increase through credits and decrease through debits .
Expenses increase through debits and decrease through credits .
Dividends increase through debits and
decrease through credits .
Chapter Two Exercises
Exercise 2.1: Assets = Liabilities + Stockholders' Equity
Peoples Corporation began business on July 10. Between July 10 and August 31, the owners invested $35,000, the company borrowed $7,000, management generated $2,200 resources through operations, and the owners were paid dividends of $250.
1. Determine the Peoples Corporation's total liabilities on August 31.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $35,000 |
= |
|
|
+ $35,000 |
|
|
|
+ $7,000 |
= |
+ $7,000 |
|
|
|
|
|
+ $2,200 |
= |
|
|
|
|
+ $2,200 |
|
- $250 |
= |
|
|
|
|
- $250 |
|
$43,950 |
= |
$7,000 |
+ |
$35,000 |
+ |
$1,950 |
Liabilities = $7,000
2. Determine the Peoples Corporation's total stockholders' equity on August 31.
Stockholders' equity = $35,000 common stock + $1,950
retained earnings = $36,950
3. Determine the Peoples Corporation's total assets on August 31.
Assets = $43,950
Exercise 2.2: Cash T Account
On February 1, the Bussey Corporation had $18,500 cash on hand. During February, the company engaged in many cash events, including (a) receiving $2,500 additional investment from owners, (b) paying $1,800 for supplies, (c) receiving $6,000 from customers, (d) paying $3,200 on accounts payable, and (e) paying $500 dividends to owners.
1. Set up a T account for the Bussey Corporation's cash.
|
Cash |
|
|
2/1 18,500 |
|
2. Using debits and credits, show how each of the five above events affected
the company's cash T account.
|
Cash |
|
|
2/1 18,500 |
1,800 (b) |
3. Calculate the Bussey Corporation's cash balance at the end of February.
|
Cash |
|
|
2/1 18,500 |
1,800 (b) |
|
2/28 21,500 |
|
Exercise 2.3: Retained Earnings T Account
On November 1, the Raymond Corporation had retained earnings of $46,900. During November, the company engaged in many events, including (a) receiving $1,000 additional investment from owners, (b) receiving $4,500 cash from customers for services provided to them in November, (c) paying $1,200 to employees for work they did for the company in November, (d) receiving $2,900 accounts receivable from customers for services provided to them in November, and (e) paying $300 dividends to owners.
1. Set up a T account for the Raymond Corporation's retained earnings.
|
Retained Earnings |
|
|
|
46,900 11/1 |
2. Using debits and credits, show how each of the five above events affected
the company's retained earnings T account. Hint: one event does not affect
retained earnings!
|
Retained Earnings |
|
|
(c) 1,200 |
46,900 11/1 |
3. Calculate the Raymond Corporation's retained earnings balance at the end of
November.
|
Retained Earnings |
|
|
(c) 1,200 |
46,900
11/1 |
|
|
52,800 11/30 |
4. Calculate the Raymond Corporation's net income for November.
Net income = revenues - expenses
Net income = $4,500 + $2,900 - $1,200 = $6,200
Exercise 2.4: Cash, Supplies, and Accounts Payable T Accounts
On April 1, the Gately Corporation had cash of $18,000, supplies of $5,600, and accounts payable of $6,700. During April, the company engaged in many events, including (a) paying $2,000 for additional supplies, (b) paying $3,400 for supplies purchased in January, (c) buying $2,500 additional supplies on account, and (d) using a total of $4,000 of supplies to provide services to customers in April.
1. Set up T accounts for the Gately Corporation's cash, supplies, and
accounts payable.
|
Cash |
|
Supplies |
|
Accounts Payable |
|||
|
4/1 18,000 |
|
|
4/1 5,600 |
|
|
|
6,700 4/1 |
2. Using debits and credits, show how each of the four above events affected
the company's cash, supplies, and accounts payable T accounts.
|
Cash |
|
Supplies |
|
Accounts Payable |
|||
|
4/1 18,000
|
2,000 (a) |
|
4/1 5,600 |
4,000 (d) |
|
(b) 3,400 |
6,700 4/1 |
3. Calculate the balances in the Gately Corporation's cash, supplies, and
accounts payable accounts.
|
Cash |
|
Supplies |
|
Accounts Payable |
|||
|
4/1 18,000
|
2,000 (a)
|
|
4/1 5,600 |
4,000 (d) |
|
(b) 3,400 |
6,700 4/1 |
|
4/30 12,600 |
|
|
4/30 6,100 |
|
|
|
5,800 4/30 |
Exercise 2.5: Cash, Accounts Receivable, and Retained Earnings T Accounts
On December 1, the Bickford Corporation had cash of $24,000, accounts receivable of $9,200, and retained earnings of $67,000. During December, the company engaged in many events, including (a) receiving $12,000 from customers for services provided during December, (b) paying $700 to owners for dividends, (c) receiving a total of $5,000 from customers for services provided to them in October and November, and (d) receiving promises of $7,000 from customers for services provided to them in December.
1. Set up T accounts for the Bickford Corporation's cash, accounts
receivable, and retained earnings.
|
Cash |
|
Accounts Receivable |
|
Retained Earnings |
|||
|
12/1 24,000 |
|
|
12/1 9,200 |
|
|
|
67,000 12/1 |
2. Using debits and credits, show how each of the four above events affected
the company's cash, accounts receivable, and retained earnings T accounts.
|
Cash |
|
Accounts Receivable |
|
Retained Earnings |
|||
|
12/1 24,000 |
700 (b) |
|
12/1 9,200 |
5,000 (c) |
|
(b) 700 |
67,000 12/1 |
3. Calculate the balances in the Bickford Corporation's cash, accounts
receivable, and retained earnings accounts.
|
Cash |
|
Accounts Receivable |
|
Retained Earnings |
|||
|
12/1 24,000 |
700 (b) |
|
12/1 9,200 |
5,000 (c) |
|
(b) 700 |
67,000 12/1 |
|
12/31 40,300 |
|
|
12/31 11,200 |
|
|
|
85,300 12/31 |
Exercise 2.6: Income Statement
The Almeida Corporation's income statement for the month ended January 31,
is shown below.
|
Almeida
Corporation |
|
|
Revenues |
$24,000 |
|
Expenses |
$15,000 |
|
Net Income |
$9,000 |
1. Determine the dollar amount of resources obtained from customers for services provided to them in January.
Revenues = resources obtained from customers for services provided to them.
Revenues = $24,000
2. Determine the dollar amount of resources used up in providing services to
customers in January.
Expenses = the dollar amount of resources used up in providing service to customers.
Expenses = $15,000
3. Determine the net dollar amount by which the company's resources increased
through management operations in January.
Net income = the net dollar amount by which the company's resources increased through management operations in January.
Net income = $9,000
Exercise 2.7: Statement of Retained Earnings
The Almeida Corporation's statement of retained earnings for the month ended
January 31, is shown below.
|
Almeida
Corporation |
|
|
Beginning Balance |
$43,000 |
|
Net Income |
$9,000 |
|
Subtotal |
$52,000 |
|
Dividends |
$3,000 |
|
Ending Balance |
$49,000 |
1. Determine the dollar amount of resources generated through management operations and retained in the company prior to January 1.
The beginning retained earnings balance is the dollar amount of resources generated through management operations and retained in the company prior to January 1.
The beginning retained earnings balance is $43,000.
2. Determine the net dollar amount by which the company's resources increased
through management operations in January.
Net income = the net dollar amount by which the company's resources increased through management operations in January.
Net income = $9,000.
3. Determine the dollar amount of resources paid to owners in January.
Dividends = the dollar amount of resources paid to owners.
Dividends = $3,000
4. Determine the dollar amount of resources generated through management
operations and retained in the company by January 31.
The ending retained earnings balance is the dollar amount of resources generated through management operations and retained in the company by January 31.
The ending retained earnings balance is $49,000.
Exercise 2.8: Balance Sheet
The Almeida Corporation's balance sheet on January 31, is shown below.
|
Almeida
Corporation |
||||
|
Assets |
|
|
Liabilities |
|
|
Cash |
$55,000 |
|
Accounts Payable |
$27,000 |
|
Accounts Receivable |
$32,000 |
|
Stockholders' Equity |
|
|
Supplies |
$6,000 |
|
Common Stock |
$17,000 |
|
Total Assets |
$93,000 |
|
Retained Earnings |
$49,000 |
|
|
|
|
Total Liab. & Stock. Equity |
$93,000 |
1. Determine the dollar amount of resources on January 31.
Assets = resources.
Assets = $93,000
2. Determine the dollar amount of borrowed resources.
Liabilities = the dollar amount of sources of borrowed resources.
Liabilities = $27,000
3. Determine the dollar amount of resources invested by owners.
Common stock = the dollar amount of sources of owner invested resources.
Common stock = $17,000
4. Determine the dollar amount of resources generated through management
operations and retained in the company as of January 31.
Retained earnings is the dollar amount of resources generated through management operations and retained in the company.
Retained earnings = $49,000