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General Comments for Chapter 2
Note to users of previous
edition: coverage of deferrals is now
included in Chapter 2, rather than separately in Chapter 3 as was the case in
the previous edition.
This chapter introduces
accrual accounting. A key concept in
this chapter is for the student to understand that revenues earned must be matched
with expenses incurred to earn those revenues, regardless of when the cash
exchange occurs. You can introduce the
subject simply by using a single accounting event in which a business provides
services on account. Chapter 1 assumed
that all transactions were cash-based, but we all know that reality in the
business world includes products and services purchased and sold ‘on credit’ or
‘on account’. Show students the effect
of this accrual by having them prepare an income statement, a statement of retained
earnings, a balance sheet, and a statement of cash flows. Students will often stumble on the concept of
Unearned Revenue, thinking that it’s actually a revenue account when in fact
it’s a liability. Explain how customer
payments that are received before goods or services are provided must be
refunded to the customer if those promised goods or services are never actually
delivered. Similarly, show students the
effect of interest on the financial statements without mixing interest
computations into the example. Students
frequently get so lost in the computations they overlook the financial
statement impact of interest. Initially
provide students with the amount of interest, freeing them to focus on its
effects. Once students understand how
accrued interest affects the financial statements, then cover the mechanics of
interest computations. Encourage
students to record transactions using the horizontal financial statements
model, even when problems do not require them to do so. Developing the habit of recording transactions
using the model will help students see the impact of each transaction on the
financial statements as well as help students identify their errors if the
accounting equation is not in balance. Specific
examples are provided in the detailed lesson plan outline. If you would like to begin the chapter with a
problem-based learning exercise, see the notes below.
Problem-Based Learning
Case: Accrual Accounting
(We describe problem-based learning in the introduction to
this manual.)
Instructions: The
case appears on the following page in a format you can copy or display. Distribute copies of the case to the class
before explaining accrual accounting.
Ask students to individually develop answers. After allowing students time to develop their
individual answers, put them into groups to reach consensus on an answer. Also, ask each group to select a
spokesperson. Allow groups time to
develop answers, then call on some of the spokespersons to share their solutions. As you respond to the student solutions,
explain the basic concepts of accrual accounting with respect to revenues
earned and expenses incurred on account.
The final result is:
Net income: revenue
of $145,000 less expenses of $80,000 =
$65,000.
Total assets: cash,
$45,000 plus accounts receivable, $25,000 = $70,000.
Total liabilities:
salaries payable: $5,000.
Chapter 2 Problem-Based Learning Case: Accrual Accounting
|
Professional Headhunters,
Inc. (PHI), a job placement company,
operates in the northeastern United States
Detailed
Outline of a Lesson Plan for Chapter 2
I. Distribute copies of Demonstration Problem
2-1, found near the back of this chapter of the Instructor’s Manual.
A. Explain the phrase “on account.” Tell students this means Packard recognizes
the revenue when it is earned, which may be before it collects the cash. Packard’s customers created charge accounts
and purchased goods or services by charging the purchases to their
accounts. Revenue is recognized in the accounting
period in which the services are provided regardless of when cash changes
hands. This discussion should lead to
defining the term accrual. In general,
transactions in which a revenue or expense is recognized before cash changes
hands are called accruals. Demonstrate
this point by recording the revenue recognition for Packard using the
horizontal financial statements model.
Next, have your students prepare an income statement, a statement of retained
earnings, a balance sheet, and a statement of cash flows. To minimize the time required to prepare
these financial statements, you may provide students with copies of the workpaper
for Demonstration Problem 2-1. The workpaper
is near the back of this chapter of the Instructor’s Manual.
B. Since Packard did not issue any stock, the statement of changes in
stockholders’ equity becomes a statement of retained earnings. Although the text does not cover a statement
of retained earnings, students should be able to infer the format from their
experience with the statement of changes in stockholders’ equity. Use the exercise to discuss diversity in
reporting practice. Although there is
general consistency in financial reporting, there is also variety. Students should learn to understand different
reporting formats.
C. After accounting for the 2010 revenue, assume Packard collects the
$5,000 account receivable in 2011. This
is the only 2011 transaction. Have
students record the event using the horizontal financial statements model and
prepare the four basic financial statements for the 2011 accounting
period. Encourage students to analyze
the difference between the amount of net income and the amount of cash flow
from operating activities. This single
transaction clearly illustrates differences between the income statement and
the statement of cash flows.
D. Introduce the term unearned revenue before starting part B of
this problem. Explain that unearned
revenue is a liability because it represents an obligation to
provide future services. Make
the point that businesses can be obligated to provide services as
well as to pay cash. Show your students
how to record the liability using the horizontal financial statements model.
E. Explain the year-end adjustment necessary to recognize three months
of earned revenue on December 31.
Emphasize the difference between the amount of cash collected and the
amount of revenue recognized. Highlight
that Jackson
F.
Also note the connection
between reducing the liability account (unearned revenue) and recognizing
revenue, reinforcing that revenue is an increase in assets or a
decrease in liabilities from providing services or products to customers. Similarly, an expense is a decrease in
assets or an increase in liabilities that occurs in efforts to produce
revenue. Net income is a change in wealth
(increase in net assets). It is not
enough to orally define terms. You must
repeatedly demonstrate the definitions within the context of problems. Gradually, students will understand
fundamental accounting interrelationships.
II. Use Demonstration Problem 2-2 to introduce
accrued
interest. Master copies of the
problem, solution, and workpapers are located near the back of this chapter of
the Instructor’s Manual. The following description of the transactions
includes explanatory comments in italics.
A. Events for 2010 are as
follows:
1. Canton Company borrowed
$10,000 cash from the National Bank on September 1, 2010. The loan was to be repaid in 2011, along with
all interest associated with the loan. The 2010 transactions do not in
volve common stock,
dividends, or other superfluous elements that are not germane to the subject of
interest. Whenever possible, use an
isolated set of transactions that focuses on a specific topic. When multiple topics are introduced
simultaneously, students experience information overload, which leads to memorization. This problem focuses on borrowing money,
using the borrowed money to invest in revenue-earning assets, and matching the
investment revenue with the interest expense.
2. Canton
3. Canton
4. As of December 31, 2010,
accrued interest (interest expense) on Canton Canton
had the use of the borrowed money from September through December 2010 and that
interest represents the expense that Canton
Have students record the events using the horizontal financial
statements model and prepare financial statements for the accounting period
ended December 31, 2010. This might be a
good point to ask the students if Canton Canton
B. After preparing the 2010
statements, assume these 2011 events:
1. Canton
2. Canton
3. Canton
4. Canton
5. Canton
III. Use separate
examples to introduce other types of deferrals (prepaid assets, supplies, and
long-term depreciable assets). You can use exercises 2-3 A or B or 2-9 A or
B in the textbook as demonstration problems, or create your own. We often make up demonstration problems like
these in the classroom. Encourage students
to think by asking them to attempt to record the effects of events before you
discuss them. For example, instead of
defining prepaid assets, simply give the students an event involving a prepaid
asset. Say, “On October 1, 2010, ABC
Company paid $1,200 in advance for one year of property insurance
protection.” Without having ever
discussed prepaid insurance, ask the students to record the event using the
horizontal financial statements model.
Make them write down an answer.
Don’t be concerned with accuracy.
Be concerned with involvement.
Walk around the room and look at what they are doing. Occasionally collect these exercises from the
students as in-class assignments. Give
them credit regardless of their answers.
The grade is for participation, not accuracy. Your objective is to motivate them to think
about the problem before you offer a solution.
At this stage, you are not evaluating their performance.
IV. Time
considerations and homework assignments.
Completing Demonstration Problems 2-1 and 2-2 should require approximately one hour of
class time. Have the students work along
with you as you explain the problems. Exercises
2-3, 2-9, 2-13, and 2-16 parallel the Demonstration Problems and can be considered
for homework assignments.
V.
Use Demonstration Problem 2-3 as a comprehensive summary problem. This is a two-cycle
problem. Explain the first cycle (2011)
and then use the second cycle as an in-class assignment. Allot approximately one hour to complete this
assignment. Students needing additional
time can finish the problem as homework.
Problem 2-28A or B mirrors the demonstration problem and can be used as a
homework assignment.
VI.
Use the horizontal financial statements model to highlight the differences
between accrual and cash basis accounting. For example, suppose a company provides
$5,000 of services on account and later collects $3,000 of the account
receivable. The effect of these two
events on the financial statements is shown below.
|
|
Event
|
|
Balance Sheet
|
|
Income Statement
|
|
Statement of
|
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||||||||||
|
|
No.
|
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Cash
|
+
|
Acct. Rec.
|
=
|
Liab.
|
+
|
Equity
|
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Rev.
|
─
|
Exp.
|
=
|
Net Inc.
|
|
Cash Flows
|
|
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|
1
|
|
NA
|
+
|
5,000
|
=
|
NA
|
+
|
5,000
|
|
5,000
|
─
|
n/a
|
=
|
5,000
|
|
NA
|
|
|
|
2
|
|
3,000
|
+
|
(3,000)
|
=
|
NA
|
+
|
NA
|
|
NA
|
─
|
n/a
|
=
|
NA
|
|
+3,000 OA
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
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|
Include other events you deem appropriate. By this point students have a sufficient
background to use the horizontal financial statements model. It is critically important to establish a
firm foundation in the basics before progressing to more advanced representations. Introduce the model gradually.
VII. Hand out the official answers to any of the Demonstration
Problems that you covered in class. Doing so allows the students to focus more on understanding the
material than on taking notes for later reference. If they know that they will have access to
the official answers to the problems worked in class, then they will not be as
concerned about recording those answers during the discussion.
Demonstration Problem 2-1A - Revenue Earned
on Account
Part A
Packard Consultants was started in 2010. During that year the company earned $5,000 of
consulting revenue on account. Assume this
is the only event experienced by Packard during 2010.
Required
1. Record the event using the horizontal financial
statements model.
2. Prepare an income statement, a statement of
retained earnings, a balance sheet, and a statement of cash flows for 2010.
Part B
During 2011, Packard Consultants collected $5,000 cash from the account
receivable it established in Part A.
Required
1. Record the event under using the horizontal financial
statements model.
2. Prepare an income statement, a statement of
retained earnings, a balance sheet, and a statement of cash flows for 2011.
Demonstration Problem 2-1B - Unearned Revenue
Jackson Legal Services was
started when a client paid the firm a $12,000 cash retainer on October 1,
2010. Jackson
Required
1. Record the events for 2010 and 2011 using the
horizontal financial statements model.
2. Prepare an income statement, a statement of
retained earnings, a balance sheet, and a statement of cash flows for 2010 and
2011.
Demonstration Problem 2-2 - Accrued
Interest Payable
Part A
Canton Company experienced the following accounting events during 2010:
1. Canton Company borrowed $10,000 cash from the
National Bank on September 1, 2010.
2. Canton
3. Canton
4. As of December 31, 2010, accrued interest
(interest expense) on Canton
Required
1. Record the events using the horizontal financial
statements model.
2. Prepare an income statement, a statement of
retained earnings, a balance sheet, and a statement of cash flows for 2010.
Part B
Canton Company experienced the following accounting events during 2011:
1. Canton
2. Canton
3. Canton
4. Canton
5. Canton
Required
1. Record the events using the horizontal financial
statements model.
2. Prepare an income statement, a statement of
retained earnings, a balance sheet, and a statement of cash flows for 2011.
Demonstration Problem 2-3 - Accruals
and Deferrals
Part A Smith Company experienced the following
accounting events during 2011:
1. Smith Company was
started when it issued common stock for $2,000 cash.
2. Smith invested
$1,000 cash in a certificate of deposit at Savings Bank.
3. During the year,
the company recognized $1,500 of consulting revenue on account.
4. The company
collected $1,200 cash from accounts receivable.
5. Smith accrued
salary expense during the year of $900.
6. Paid $700 of the
salaries payable liability.
7. Paid dividends of
$100 to the stockholders.
8. Paid $360 cash for an insurance policy that covered the company for
one year beginning March 1, 2011.
9. On November 1, 2011, Smith collected $2,880 cash in advance for consulting
services to be provided under a one-year contract.
10. Smith adjusted
the books to recognize accrued interest on the certificate of deposit. The certificate was purchased on September 1,
2011. It had a 6 percent annual interest
rate and a one-year term. The company
closes its books on December 31 of each year.
11. Recognized insurance expense for ten months.
12. Recognized income earned under the one-year contract
Part B Smith Company experienced the following
accounting events during 2012:
- Smith
Company issued additional common stock for $3,000 cash.
- During the
period Smith recognized $2,700 of consulting revenue earned on account.
- Smith
collected $2,800 cash from accounts receivable.
- Smith
accrued salary expense of $1,500.
- The company
paid $1,350 of the salaries payable liability.
- Smith paid
dividends of $300 to the stockholders.
- Smith
borrowed $2,000 cash from the State Bank.
- On August 31 Smith accrued the
remaining $40 of interest on the certificate of deposit, collected the
cash due from interest receivable, and received the return of principal.
- Paid $420 cash to renew the insurance
policy for another one-year term.
- On November 1, Smith purchased
land for $6,000 cash. The land had
a market value of $6,400 as of December 31, 2012.
- Smith
adjusted the books to recognize accrued interest of $75 on the note payable
(see Event No.7) to the State Bank.
12. Smith adjusted the books to reflect the insurance expense that had
been incurred
13. Smith adjusted the books to reflect the revenue earned under the
one-year consulting contract that began in 2011 (event 9 in 2011).
Required
1. Record the events using the horizontal financial
statements model.
2. Prepare an income statement, a statement of
retained earnings, a balance sheet, and a statement of cash flows for 2011 and 2012.
Demonstration
Problem 2-1A Solution, part 1.
(
|
|
Assets
|
=
|
Liabilities
|
+
|
Equity
|
||||
|
Part
A, 2010
|
Cash
|
+
|
Accounts
Receivable
|
=
|
Liabilities
|
+
|
Common
Stock
|
+
|
Retained Earnings
|
|
Beginning
balances
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
Effect
of recognizing revenue
|
|
|
5,000
|
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5,000
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Part
B, 2011
|
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Effect
of collecting cash
|
5,000
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(5,000)
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|
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─────
|
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────
|
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────
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─────
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─────
|
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Ending
balances
|
$5,000
|
+
|
$ 0
|
=
|
$ 0
|
+
|
$ 0
|
+
|
$5,000
|
|
|
═════
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════
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═════
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═════
|
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═════
|
Demonstration
Problem 2-1A Solution, part 2. Financial
Statements
|
Packard Consultants
|
|||||
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Income Statements
|
|||||
|
For
the Years Ended December 31,
|
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2010
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2011
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Consulting
revenue
|
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$5,000
|
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$ 0
|
|
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Expenses
|
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0
|
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0
|
|
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Net
income
|
|
$5,000
|
|
$ 0
|
|
|
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|
|
|
|
|
Statements of Retained Earnings
|
|||||
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Beginning
retained earnings
|
|
$
0
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$5,000
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Plus: Net income
|
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5,000
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0
|
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|
Less: Dividends
|
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0
|
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0
|
|
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Ending
retained earnings
|
|
$5,000
|
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$5,000
|
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|
|
Balance Sheets at December 31
|
|||||
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Assets
|
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Cash
|
|
$ 0
|
|
$5,000
|
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Accounts receivable
|
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5,000
|
|
0
|
|
|
Total
assets
|
|
$5,000
|
|
$5,000
|
|
|
|
|
|
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|
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Equity
|
|
|
|
|
|
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Retained earnings
|
|
$5,000
|
|
$5,000
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows
|
|||||
|
Cash
flows from operating activities
|
|
$
0
|
|
$5,000
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
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0
|
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0
|
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|
|
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|
|
|
Cash
flows from financing activities
|
|
0
|
|
0
|
|
|
Net
change in cash
|
|
0
|
|
5,000
|
|
|
Beginning
cash balance
|
|
0
|
|
0
|
|
|
Ending
cash balance
|
|
$ 0
|
|
$5,000
|
|
|
|
|
|
|
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|
Demonstration
Problem 2-1B Solution, part 1.
|
|
Assets
|
=
|
Liabilities
|
+
|
Equity
|
||
|
2010
|
Cash
|
=
|
Unearned
Revenue
|
+
|
Com. Stock
|
+
|
Ret. Earn.
|
|
Beginning
balances
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
1.
Recognize liability
|
12,000
|
|
12,000
|
|
|
|
|
|
2.
Adjustment for earned revenue
|
|
|
(3,000)
|
|
|
|
3,000
|
|
|
─────
|
|
────
|
|
─────
|
|
─────
|
|
Ending/beginning
balances
|
$12,000
|
=
|
$ 9,000
|
+
|
$ 0
|
+
|
$3,000
|
|
2011
|
|
|
|
|
|
|
|
|
1.
Adjustment for earned revenue
|
|
|
(9,000)
|
|
|
|
9,000
|
|
|
─────
|
|
────
|
|
─────
|
|
─────
|
|
Ending
balances
|
$12,000
|
|
$ 0
|
|
$ 0
|
|
$12,000
|
|
|
═════
|
|
═════
|
|
═════
|
|
═════
|
Demonstration
Problem 2-1B Solution, part 2. Financial
Statements
|
Jackson Legal Services
Financial Statements
|
|||||
|
Income Statements
|
|||||
|
For
the Years Ended December 31,
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
Fees
revenue
|
|
$
3,000
|
|
$ 9,000
|
|
|
Expenses
|
|
0
|
|
0
|
|
|
Net
income
|
|
$
3,000
|
|
$ 9,000
|
|
|
|
|
|
|
|
|
|
Statements of Retained Earnings
|
|||||
|
Beginning
retained earnings
|
|
$ 0
|
|
$ 3,000
|
|
|
Plus: Net income
|
|
3,000
|
|
9,000
|
|
|
Less: Dividends
|
|
0
|
|
0
|
|
|
Ending
retained earnings
|
|
$
3,000
|
|
$12,000
|
|
|
|
|
|
|
|
|
|
Balance Sheets as of December 31
|
|||||
|
Assets
|
|
|
|
|
|
|
Cash
|
|
$12,000
|
|
$12,000
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Unearned revenue
|
|
$ 9,000
|
|
$ 0
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Retained earnings
|
|
3,000
|
|
12,000
|
|
|
Total liabilities and equity
|
|
$12,000
|
|
$12,000
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows
|
|||||
|
Cash
flows from operating activities
|
|
$12,000
|
|
$ 0
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
0
|
|
0
|
|
|
Net
change in cash
|
|
12,000
|
|
0
|
|
|
Beginning
cash balance
|
|
0
|
|
12,000
|
|
|
Ending
cash balance
|
|
$12,000
|
|
$12,000
|
|
|
|
|
|
|
|
|
Demonstration
Problem 2-2 Solution, part 1.
|
|
Assets
|
=
|
Liabilities
|
+
|
Equity
|
||||||
|
2010
|
Cash
|
+
|
Investment Securities
|
=
|
Notes
Payable
|
+
|
Interest
Payable
|
+
|
Com.
Stock
|
+
|
Ret.
Earn.
|
|
Beginning
balances
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
1.
Effect of borrowing
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
2.
Purchased securities
|
(10,000)
|
|
10,000
|
|
|
|
|
|
|
|
|
|
3.
Earned revenue
|
600
|
|
|
|
|
|
|
|
|
|
600
|
|
4.
Accrued interest exp.
|
|
|
|
|
|
|
400
|
|
|
|
(400)
|
|
|
─────
|
|
─────
|
|
─────
|
|
────
|
|
─────
|
|
──────
|
|
Ending
/ beg. balances
|
$ 600
|
+
|
$10,000
|
=
|
$10,000
|
+
|
$ 400
|
+
|
$ 0
|
+
|
$ 200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
Earned revenue
|
1,350
|
|
|
|
|
|
|
|
|
|
1,350
|
|
2.
Sold securities
|
10,000
|
|
(10,000)
|
|
|
|
|
|
|
|
|
|
3.
Accrued interest exp.
|
|
|
|
|
|
|
800
|
|
|
|
(800)
|
|
4.
Paid cash for interest
|
(1,200)
|
|
|
|
|
|
(1,200)
|
|
|
|
|
|
5.
Repaid loan
|
(10,000)
|
|
|
|
(10,000)
|
|
|
|
|
|
|
|
|
─────
|
|
────
|
|
────
|
|
────
|
|
─────
|
|
─────
|
|
Ending
balances
|
$ 750
|
+
|
$ 0
|
=
|
$ 0
|
+
|
$ 0
|
+
|
$ 0
|
+
|
$ 750
|
|
|
═════
|
|
══════
|
|
═════
|
|
════
|
|
═════
|
|
═════
|
Demonstration Problem 2-2 Solution, Financial
Statements
|
Canton Company
|
|||||
|
Income Statements
|
|||||
|
For
the Years Ended December 31,
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
Investment
revenue
|
|
$600
|
|
$1,350
|
|
|
Interest
expense
|
|
(400)
|
|
(800)
|
|
|
Net
income
|
|
$200
|
|
$550
|
|
|
|
|
|
|
|
|
|
Statements of Retained Earnings
|
|||||
|
Beginning
retained earnings
|
|
$ 0
|
|
$200
|
|
|
Plus: Net income
|
|
200
|
|
550
|
|
|
Less: Dividends
|
|
0
|
|
0
|
|
|
Ending
retained earnings
|
|
$200
|
|
$750
|
|
|
|
|
|
|
|
|
|
Balance Sheets at December 31
|
|||||
|
Assets
|
|
|
|
|
|
|
Cash
|
|
$ 600
|
|
$750
|
|
|
Investment securities
|
|
10,000
|
|
0
|
|
|
Total
assets
|
|
$10,600
|
|
$750
|
|
|
Liabilities
|
|
|
|
|
|
|
Interest payable
|
|
$ 400
|
|
$ 0
|
|
|
Note payable
|
|
10,000
|
|
0
|
|
|
Equity
|
|
|
|
|
|
|
Retained earnings
|
|
200
|
|
750
|
|
|
Total liabilities and equity
|
|
$10,600
|
|
$750
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows
|
|||||
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Inflow from investment income
|
|
$ 600
|
|
$ 1,350
|
|
|
Outflow for interest expense
|
|
0
|
|
(1,200)
|
|
|
Net
inflow from operating activities
|
|
600
|
|
150
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
Inflow from sale of securities
|
|
0
|
|
10,000
|
|
|
Outflow for purchase of securities
|
|
(10,000)
|
|
0
|
|
|
Net
inflow (outflow) from investing activities
|
|
(10,000)
|
|
10,000
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
Inflow from issuing note payable
|
|
10,000
|
|
0
|
|
|
Outflow for repayment of note payable
|
|
0
|
|
(10,000)
|
|
|
Net
inflow (outflow) from financing activities
|
|
10,000
|
|
(10,000)
|
|
|
Net
change in cash
|
|
600
|
|
150
|
|
|
Beginning
cash balance
|
|
0
|
|
600
|
|
|
Ending
cash balance
|
|
$ 600
|
|
$ 750
|
|
|
|
|
|
|
|
|
Reviewer’s
note –I suggest that the revenue and expense columns be added along with the
cash flow columns – in essence the full model – not just the accounting
equation portion that’s shown here.
Doing so allows the students to understand how each transaction impacted
the financial statements that they are asked to prepare in part 2 of this
problem. If the columns were added, then
2010 beginning balances would be $0 for all.
Item 1 would have $10,000 in the cash flow column, tagged as FA. Item 2 would have ($10,000) in the cash flow
column tagged as IA. Item 3 would have
$600 in the revenue column and $600 in the cash flow column tagged as OA. Item 4 would have $400 in the expense
column. Ending balances would be $0 for
the revenue, expense, and cash flow columns.
For the 2011 activities, item 1 would have $1350 in the revenue column
and the cash flow column and would be tagged OA. Item 2 would have $10,000 in the cash flow column
and would be tagged IA. Item 3 would
have $800 in the expense column. Item 4
would have ($1,200) in the cash flow column and would be tagged OA. Item 5 would have ($10,000) in the cash flow
column and would be tagged FA. Ending
balances in the revenue, expense, and cash flow columns for 2011 would be $0)
Demonstration Problem 2-3 Solution,
part 1. Horizontal Financial Statements
Model for 2011
A spreadsheet is
embedded to reflect the solution to this question. This spreadsheet covers both 2011 and
2012. The workpaper for students’ use in
answering this question would basically be the solution with the amounts
deleted for all events except for the 2011 beginning balance.
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