Financial Accounting Information for Decisions 7th Edition by Wild Solution Manual

Chapter 2

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Accounting System and

Financial Statements

QUESTIONS

1.     a.  Common asset accounts: cash, accounts receivable, notes receivable, prepaid expenses (rent, insurance, etc.), office supplies, store supplies, equipment, building, and land.

        b. Common liability accounts: accounts payable, notes payable, and unearned revenue, wages payable, and taxes payable.

        c.  Common equity accounts: common stock and dividends.

2.     A note payable is formal promise, usually denoted by signing a promissory note to pay a future amount. A note payable can be short-term or long-term, depending on when it is due. An account payable also references an amount owed to an entity. An account payable can be oral or implied, and often arises from the purchase of inventory, supplies, or services.  An account payable is usually short-term.

3.     There are several steps in processing transactions: (1) Identify and analyze the transaction or event, including the source document(s), (2) apply double-entry accounting, (3) record the transaction or event in a journal, and (4) post the journal entry to the ledger.  These steps would be followed by preparation of a trial balance and then with the reporting of financial statements.

4.     A general journal can be used to record any business transaction or event.

5.     Debited accounts are commonly recorded first. The credited accounts are commonly indented.

6.     A transaction is first recorded in a journal to create a complete record of the transaction in one place.  (The journal is often referred to as the book of original entry.)  This process reduces the likelihood of errors in ledger accounts.

7.     Expense accounts have debit balances because they are decreases to equity (and equity has a normal credit balance).

8.     The recordkeeper prepares a trial balance to summarize the contents of the ledger and to verify the equality of total debits and total credits.  The trial balance also serves as a helpful internal document for preparing financial statements and other reports.

9.     The error should be corrected with a separate (subsequent) correcting entry. The entry’s explanation should describe why the correction is necessary.

10.   The four financial statements are: income statement, balance sheet, statement of retained earnings, and statement of cash flows.

11.   The balance sheet provides information that helps users understand a company’s financial position at a point in time.  Accordingly, it is often called the statement of financial position.  The balance sheet lists the types and dollar amounts of assets, liabilities, and equity of the business. 

12.   The income statement lists the types and amounts of revenues and expenses, and reports whether the business earned a net income (also called profit or earnings) or a net loss. 

13.   An income statement user must know what time period is covered to judge whether the company’s performance is satisfactory.  For example, a statement user would not be able to assess whether the amounts of revenue and net income are satisfactory without knowing whether they were earned over a week, a month, a quarter, or a year.

14.   (a) Assets are probable future economic benefits obtained or controlled by a specific entity as a result of past transactions or events. (b) Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.  (c) Equity is the residual interest in the assets of an entity that remains after deducting its liabilities.  (d) Net assets refer to equity.

15.   The balance sheet is sometimes referred to as the statement of financial position.

16.   Debit balance accounts on the Apple balance sheet include: Cash and cash equivalents; Short-term marketable securities; Accounts receivable; Inventories; Deferred tax assets; Vendor non-trade receivables; Other current assets; Long-term marketable securities; Property, plant and equipment, net; Goodwill; Acquired intangible assets, net; Other assets.

        Credit balance accounts on the Apple balance sheet include: Accounts Payable; Accrued expenses; Deferred revenue; Deferred revenue – non-current; Other non-current liabilities; Common stock; Retained earnings; Accumulated other comprehensive income.

17.   The asset accounts with receivable in its account title are: Accounts receivable, net and Receivable under reverse repurchase agreements.  The liabilities with payable in the account title are: Accounts payable, Securities lending payable, and Income taxes payable, net.

18.   Samsung’s balance sheet lists the following current liabilities: Trade and other payables; Short-term borrowings; Advance received; Withholdings; Accrued expense; Income tax payable; Current portion of long-term borrowings and debentures; Provisions; Other current liabilities. 

        Samsung’s balance sheet lists the following noncurrent liabilities: Long-term trade and other payables; Debentures; Long-term borrowings; Retirement benefit liabilities; Deferred income tax liabilities; Provisions; Other non-current liabilities.

19.   Current ratio:           Current assets / Current liabilities = $60,454/$14,337 = 4.22
Debt ratio:                Total liabilities / Total assets = $22,083/$93,798 = 0.24
Profit margin:          Net income / Net sales = $10,737/$50,175 = 0.21
Price-to-Earnings:   Price per share / Earnings per share = $707.38/$32.97 = 21.46
                                   (some students will use $32.81 as EPS, which is fine at this early stage)

Quick Studies

Quick Study 2-1 (10 minutes)

The likely source documents include:

a.    Sales ticket

d.    Telephone bill

e.    Invoice from supplier

i.     Bank statement

Quick Study 2-2 (5 minutes)

a.    A       Asset

b.    EQ     Equity

c.    EQ     Equity

d.    A       Asset

e.    A       Asset

f.     A       Asset

g.    A       Asset

h.    L        Liability

i.     L        Liability

Quick Study 2-3 (5 minutes)

a.    E       Expense

b.    R       Revenue

c.    A       Asset

d.    A       Asset

e.    L        Liability

f.     A       Asset

g.    L        Liability

h.    EQ     Equity

i.     E       Expense

Quick Study 2-4 (10 minutes)

a.	Debit	d.	Debit	g.	Credit
b.	Debit	e.	Debit	h.	Debit
c.	Credit	f.	Debit	i.	Credit

Quick Study 2-5 (10 minutes)

a.	Debit	e.	Debit	i.	Credit
b.	Debit	f.	Credit	j.	Debit
c.	Credit	g.	Credit	k.	Debit
d.	Credit	h.	Debit	l.	Credit

Quick Study 2-6 (10 minutes)

a.	Debit	e.	Debit	i.	Credit
b.	Credit	f.	Credit	j.	Debit
c.	Debit	g.	Credit
d.	Credit	h.	Credit

Quick Study 2-7 (15 minutes)

a.  1) Analyze:

Assets	=	Liabilities	+	Equity
Cash        Equipment				Common Stock
70,000   +     30,000	=	0	+	100,000

     2) Record:

Date	Account Titles and Explanation	PR	Debit	Credit
May 15	Cash	101	70,000
	Equipment	167	30,000
	Common Stock	307		100,000
	Owner invests cash & equipment for stock.

     3) Post

Cash       101
70,000

Equipment   167
30,000

Common Stock  307
	100,000

Quick Study 2-7 (Continued)

b.  1) Analyze:

Assets	=	Liabilities	+	Equity
Office Supplies		Accounts Payable
280	=	280	+	0

     2) Record:

Date	Account Titles and Explanation	PR	Debit	Credit
May 21	Office Supplies	124	280
	Accounts Payable	201		280
	Purchased office supplies on credit.

     3) Post

Office Supplies 124
280

Accounts Payable 201
	280

c. 1) Analyze:

Assets	=	Liabilities	+	Equity
Cash				Landscaping Revenue
7,800	=	0	+	7,800

     2) Record:

Date	Account Titles and Explanation	PR	Debit	Credit
May 25	Cash	101	7,800
	Landscaping Revenue	403		7,800
	Received cash for landscaping services.

     3) Post

Cash      101
7,800

Landscaping Revenue        403
	7,800

Quick Study 2-7 (Continued)

d. 1) Analyze:

Assets	=	Liabilities	+	Equity
Cash		Unearned Landscaping Revenue
1,000	=	1,000	+	0

     2) Record:

Date	Account Titles and Explanation	PR	Debit	Credit
May 30	Cash	101	1,000
	Unearned Landscaping Revenue	236		1,000
	Received cash in advance for landscaping services.

     3) Post

Cash      101
1,000

Unearned Landscaping Revenue           236
	1,000

Quick Study 2-8 (10 minutes)

The correct answer is a.

Explanation: If a $2,250 debit to Utilities Expense is incorrectly posted as a credit, the effect is to understate the Utilities Expense debit balance by $4,500.  This causes the Debit column total on the trial balance to be $4,500 less than the Credit column total. 

Quick Study 2-9 (10 minutes)

a.	I	e.	B	i.	E
b.	B	f.	B	j.	B
c.	B	g.	B	k.	I
d.	I	h.	I	l.	I

Quick Study 2-10 (10 minutes)

a.  Accounting under IFRS follows the same debit and credit system as under US GAAP.

b.  The same four basic financial statements are prepared under IFRS and US GAAP: income statement, balance sheet, statement of changes in equity, and statement of cash flows. Although some variations from these titles exist within both systems, the four basic statements are present.

c.  Accounting reports under both IFRS and US GAAP are likely different depending on the extent of accounting controls and enforcement. For example, the absence of controls and enforcement increase the possibility of fraudulent transactions and misleading financial statements. Without controls and enforcement, all accounting systems run the risk of abuse and manipulation.

Exercises

Exercise 2-1 (10 minutes)

   1      a.  Analyze each transaction from source documents.

   4      b.  Prepare and analyze the trial balance.

   2      c.  Record relevant transactions in a journal.

   3      d.  Post journal information to ledger accounts.

Exercise 2-2 (10 minutes)

a.	3	d.	5
b.	4	e.	2
c.	1

Exercise 2-3 (5 minutes)

a.

2

b.

1

Exercise 2-4 (15 minutes)

		Type of	Normal	Increase
	Account	Account	Balance	(Dr. or Cr.)
a.	Cash...........................................	asset	debit	debit
b.	Legal Expense............................	expense	debit	debit
c.	Prepaid Insurance......................	asset	debit	debit
d.	Land........................................... ...................................................	asset	debit	debit
e.	Accounts Receivable.................	asset	debit	debit
f.	Dividends...................................	equity	debit	debit
g.	License Fee Revenue.................	revenue	credit	credit
h.	Unearned Revenue.....................	liability	credit	credit
i.	Fees Earned...............................	revenue	credit	credit
j.	Equipment.................................	asset	debit	debit
k.	Notes Payable............................	liability	credit	credit
l.	Common Stock..........................	equity	credit	credit

Exercise 2-5 (15 minutes)

a.	Beginning accounts payable (credit)......................................	$152,000
	Purchases on account in October (credits)..........................	281,000
	Payments on accounts in October (debits)...........................	(           ?)
	Ending accounts payable (credit)............................................	$132,500
	Payments on accounts in October (debits)...........................	$300,500
b.	Beginning accounts receivable (debit)..................................	$102,500
	Sales on account in October (debits).....................................	?
	Collections on account in October (credits).........................	(102,890)
	Ending accounts receivable (debit)........................................	$  89,000
	Sales on account in October (debits).....................................	$  89,390
c.	Beginning cash balance (debit)...............................................	$           ?
	Cash received in October (debits)...........................................	102,500
	Cash disbursed in October (credits).......................................	(103,150)
	Ending cash balance (debit).....................................................	$  18,600
	Beginning cash balance (debit)...............................................	$  19,250

Exercise 2-6 (15 minutes)

Of the items listed, the following effects should be included:

a.    $28,000 increase in a liability account.

b.   $10,000 increase in the Cash account.

e.    $62,000 increase in a revenue account.

Explanation: This transaction created $62,000 in revenue, which is the value of the service provided. Payment is received in the form of a $10,000 increase in cash, an $80,000 increase in computer equipment, and a $28,000 increase in its liabilities.  The net value received by the company is $62,000.