Accounting in Action Assignment Classification Table

CHAPTER 1
Accounting in Action
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Brief
Exercises
Questions
1. Explain what accounting is.
1, 2
2. Identify the users and explain

the uses of accounting.
3, 4, 5
3. Demonstrate an understanding
of why ethics is a fundamental
business concept.
4. Explain the meaning of

generally accepted accounting
principles and the cost
principle.
5. Explain the meaning of the

going concern, monetary unit,
and economic entity
assumptions.
8, 9, 10, 11
6. State and utilize the basic

accounting equation and
explain the meaning of assets,
liabilities, and owners equity.
Problems
Set B
Problems
Set A
Exercises
1, 2
2,3
2,3
1, 2, 7
2, 3
2, 3
12, 13, 14,

15
3, 4, 5
3, 4, 7, 8, 9
4, 7
4, 7
7. Calculate the effect of business

transactions on the basic
accounting equation.
16, 17, 18
6, 7, 8
5, 6, 10
4, 5, 6, 8, 9, 10
4, 5, 6, 8, 9,
10
8. Understand what the four

financial statements are and
how they are prepared.
19, 20, 21,

22, 23
9, 10, 11, 12
7, 8, 9, 10,
11, 12, 13,
14, 15, 16
5, 6, 7, 8, 9,
10, 11
5, 6, 7, 8, 9,
10, 11
1-1
ASSIGNMENT CHARACTERISTICS TABLE

Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Identify users and uses of financial statements.
Simple
10-15
2A
Discuss accounting assumptions and GAAP related to

value.
Simple
10-15
3A
Identify assumption or principle violated.
Simple
15-20
4A
Analyse transactions and calculate net income.
Simple
35-45
5A
Analyse transactions and prepare financial statements.
Simple
40-50
6A
Analyse transactions and prepare balance sheet.
Moderate
40-50
7A
Use financial statement relationships to determine

missing amounts.
Moderate
25-35
8A
Prepare financial statements.
Moderate
45-55
9A
Determine financial statement amounts, prepare a

statement of owners equity, and comment.
Moderate
45-55
10A
Moderate
35-45
11A
Prepare income statement and statement of owners

equity.
Simple
35-45
1B
Identify users and uses of financial statements.
Simple
10-15
2B
Discuss accounting assumptions and GAAP related to

value.
Simple
10-15
3B
Identify assumption or principle violated.
Simple
15-20
4B
Analyse transactions and calculate net income.
Simple
35-45
5B
Analyse transactions and prepare financial statements.
Simple
40-50
6B
Analyse transactions and prepare income statement and

balance sheet.
Moderate
40-50
7B
Use financial statement relationships to determine

missing amounts.
Moderate
25-35
8B
Prepare financial statements.
Moderate
45-55
9B
Determine financial statement amounts, prepare a

statement of owners equity, and comment.
Moderate
45-55
10B
Moderate
35-45
11B
Prepare income statement and statement of owners

equity.
Simple
35-45
1-2
BLOOMS TAXONOMY TABLE
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective
Knowledge
1. Explain what accounting is.

2. Identify the users and
explain the uses of
accounting.
BE1-1
Comprehension
Q1-1
Q1-2
Q1-3
Q1-4
Q1-5
Application
Analysis
Synthesis
Evaluation
P1-1A
P1-1B
3. Demonstrate an
understanding of why
ethics is a fundamental
business concept.
Q1-6
4. Explain the meaning of

generally accepted
accounting principles and
the cost principle.
E1-1
E1-2
Q1-7
P1-3A
P1-3B
P1-2A
P1-2B
P1-3A
P1-3B
P1-2A
P1-2B
5. Explain the meaning of the

going concern, monetary
unit, and economic entity
assumptions.
Q1-9
E1-7
Q1-8
Q1-10
E1-1
E1-2
Q1-11
BE1-2
6. State and utilize the basic

accounting equation and
explain the meaning of
assets, liabilities, and
owners equity.
Q1-12
Q1-14
E1-7
Q1-13
Q1-15
BE1-3
BE1-4
BE1-5
E1-3
E1-4
E1-8
E1-9
P1-4A
P1-7A
P1-4B
P1-7B
Q1-16
Q1-17
BE1-6
BE1-7
BE1-8
E1-5
E1-10
P1-8A
Q1-19
Q1-21
Q1-22
BE1-9
BE1-11
BE1-12
E1-8
E1-9
E1-10
E1-11
E1-12
E1-14
BYP1-4
P1-9A
P1-10A
P1-5B
P1-6B
P1-8B
P1-9B
P1-10B
Q1-18
E1-7
P1-4A
P1-5A
P1-6A
P1-4B
E1-16
P1-8A
P1-9A
P1-10A
P1-11A
P1-5B
P1-6B
P1-8B
P1-9B
P1-10B
P1-11B
E1-13
E1-15
P1-5A
P1-6A
P1-7A
P1-7B
7. Calculate the effect of

business transactions on
the basic accounting
equation.
8. Understand what the four

financial statements are
and how they are
prepared.
E1-7
Q1-20
Q1-23
BE1-10
Broadening Your Perspective
BYP1-3
BYP1-1
1-3
BYP1-2
BYP1-5
BYP1-6
ANSWERS TO QUESTIONS
1. Yes. Accounting is the financial information system that provides relevant
financial information to every person who owns and uses economic
resources or otherwise engages in economic activity.
2. Accounting is the process of identifying, recording, and communicating
the economic events of an organization to interested users of the
information. The first step of the accounting process is to identify
events that are (a) considered evidence of economic activity and (b)
relevant to a particular business enterprise. Once identified and
measured, the events are recorded to provide a permanent history of the
financial activities of the organization. Recording consists of keeping a
chronological diary of these measured events in an orderly and
systematic manner. The information is communicated through the
preparation and distribution of accounting reports, the most common of
which are called financial statements. A vital element in the
communication process is the accountant's ability and responsibility to
analyse and interpret the reported information.
3. (a)
Internal users are those who manage the business, and therefore
are officers and other decision makers.
(b) To assist management, accounting provides internal reports.
Examples include financial comparisons of operating alternatives,
projections of income from new sales campaigns, and forecasts of
cash needs for the next year.
4. (a)
Investors use the financial accounting information to evaluate a

companys performance. They would look for answers to questions
such as Is the company earning satisfactory income?
(b) Creditors use financial accounting information to evaluate a
companys credit risk. They look for answers to question like Can
the company pay its debts as they come due?
5. Bookkeeping usually involves only the recording of economic events,

and is just one part of the entire accounting process. Accounting, on the
other hand, involves the entire accounting process, including
identification, measurement, recording, communication, and analysis.
1-4
Questions Chapter 1 (Continued)

6. Ethics is a fundamental business concept. If accountants do not have a
high ethical standard the information they produce will not have any
credibility.
7. Ouellette Travel Agency should report the land at $75,000 on its
December 31, 2002 balance sheet. An important concept that
accountants follow is the cost principle, which states that assets should
be recorded at their cost. Cost has important advantages over other
valuations: it is reliable, objective and verifiable. The answer would not
change if the value of the land declined to $65,000. In addition, the
market value of the land is not relevant when a company is a going
concern. The going concern assumption assumes the company will
continue in business indefinitely using the land, not selling the land.
8. The monetary unit assumption requires that only transaction data
capable of being expressed in terms of money be included in the
accounting records of the economic entity. An important corollary to the
monetary unit assumption is the added assumption that the unit of
measure remains sufficiently constant over time. The assumption of a
stable monetary unit has been seriously challenged during periods of
high inflation (rising prices). In such cases, dollars of different
purchasing power are added together without any adjustment for the
effect of inflation.
9. The economic entity assumption states that economic events can be
identified with a particular unit of accountability. This assumption
requires that the activities of the entity be kept separate and distinct
from (1) the activities of its owners and (2) all other economic entities.
10. The three basic forms of business organizations are (1) proprietorship,
(2) partnership, and (3) corporation.
1-5

11. In a proprietorship, the business is owned by one person and the equity
is termed owners equity. Owners equity is increased by an owners
investments and the revenues generated by the business. Owners
equity is decreased by an owners drawings and the expenses incurred
by the business.
In the corporate form of business organization, the owners are the
shareholders and the equity is termed shareholders equity.
Shareholders equity is separated into two components: share capital
and retained earnings. The investments by the shareholders (owners)
are called share capital. Retained earnings represent the accumulated
earnings of the company that have not been distributed to shareholders.
Withdrawals by the shareholders decrease retained earnings and are
called dividends.
12. The basic accounting equation is Assets = Liabilities + Owner's Equity.
13. (a)
Assets are economic resources owned by a business. Liabilities

are creditors' claims against the assets. Put more simply, liabilities
are existing debts and obligations. Owner's equity is the
ownership claim on the assets.
(b) The items affecting owner's equity are invested capital, drawings,
revenues, and expenses.
14. The liabilities are (b) Accounts payable and (g) Salaries payable.
15. Yes, a business can enter into a transaction in which only the left side
of the accounting equation is affected. An example would be a
transaction where an increase in one asset is offset by a decrease in
another asset, such as when equipment is purchased for cash
(resulting in an increase in the equipment account which is offset by a
decrease in the cash account).
1-6

16. Business transactions are the economic events of the enterprise
recorded by accountants because they affect the basic equation.
(a) The death of the owner of the company is not a business
transaction, as it does not affect the basic equation.
(b) Supplies purchased on account is a business transaction, because
it affects the basic equation (+A; +L).
(c) A terminated employee is not a business transaction, as it does
not affect the basic equation.
(d) A withdrawal of cash from the business is a business transaction,
because it affects the basic equation (-A; -OE).
17. (a)
Decrease assets (cash) and decrease owner's equity (due to the

expense incurred).
(b) Increase assets (equipment) and decrease assets (cash).
(c) Increase assets (cash) and increase owner's equity (due to the
capital invested).
(d) Decrease assets (cash) and decrease liabilities (accounts payable).
18. No, this treatment is not proper. While the transaction does involve a
receipt of cash, it does not represent revenues. Revenues are the gross
increase in owner's equity resulting from business activities entered
into for the purpose of earning income. This transaction is simply an
additional investment of capital in the business, made by the owner.
19. Yes. Net income does appear on the income statementit is the result
of subtracting expenses from revenues. In addition, net income appears
in the statement of owner's equityit is shown as an addition to the
beginning-of-period capital. Indirectly, the net income of a company is
also included in the balance sheet, as it is included in the capital
account which appears in the owner's equity section of the balance
sheet.
20. (a) Income statement.
(b) Balance sheet.
(c) Income statement.
(d) Balance sheet.

(e) Balance sheet and
statement of owner's equity.
(f) Balance sheet.
1-7

21. (a)
Ending capital balance.........................................................

Beginning capital balance.....................................................
Net income.............................................................................
$198,000
168,000
$ 30,000
(b)Ending capital balance............................................................

Beginning capital balance.......................................................
Increase in capital....................................................................
Deduct: Portion of increase arising from investment..........
Net income................................................................................
$198,000
0168,000
30,000
18,000
$ 12,000
22. (a) Total revenues ($35,000 + $70,000)......................................
$105,000
(b) Total expenses ($26,000 + $40,000).....................................
$66,000
(c) Total revenues.......................................................................

Total expenses......................................................................
Net income............................................................................
$105,000
66,000
$ 39,000
23. The notes to the financial statements present explanatory information

such as a description of the accounting policies used and additional
detail on the information in the financial statements. The annual report
includes information on financial and non-financial information, such
as management discussion of the companys plans.
1-8
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 1-1
5
3
2
4
1
(a) Owner
(b) Marketing managers
(c) Creditors
(d) Chief Financial Officer
(e) Canada Customs and Revenue Agency
BRIEF EXERCISE 1-2

P (a) Simple to set up, founder retains control.
PP (b) Shared control, increased skills and resources
C (c) Easier to transfer ownership and raise funds, no personal liability.
BRIEF EXERCISE 1-3
(a) $80,000 $50,000 = $30,000 (Owner's Equity).
(b) $45,000 + $70,000 = $115,000 (Assets).
(c) $94,000 $62,000 = $32,000 (Liabilities).
BRIEF EXERCISE 1-4
(a) $90,000 + $240,000 = $330,000 (Total assets).
(b) $170,000 $80,000 = $90,000 (Total liabilities).
(c) $600,000 (2/3 x $600,000) = $200,000 (Owner's equity).
1-9
BRIEF EXERCISE 1-5

(a) ($700,000 + $150,000) ($500,000 $80,000) = $430,000
equity).
(Owner's
(b) ($500,000 + $100,000) + ($200,000 $70,000) = $730,000 (Assets).

(c) ($700,000 $90,000) ($200,000 + $120,000) = $290,000 (Liabilities).
BRIEF EXERCISE 1-6
Assets
(a)
(b)
(c)
(d)
(e)
(f)
Liabilities
Owner's Equity
+
NE
NE
NE
NE
NE
NE
+ (Revenue earned)
(Expenses incurred)
+ (Capital)
(Drawings)
NE
+
+
NE
(both + and )
BRIEF EXERCISE 1-7

R
NA
E
(a) Received cash for services performed

(b) Paid cash to purchase equipment
(c) Paid employee salaries
BRIEF EXERCISE 1-8

E
R
E
E
R
R
E
D
(a) Cost incurred for advertising

(b) Commission earnings
(c) Insurance paid
(d) Amounts paid to employees
(e) Services performed
(f) Rent received
(g) Utilities incurred
(h) Cash distributed to owner
1-10
BRIEF EXERCISE 1-9

YUNG COMPANY
Balance Sheet
December 31, 2002
Assets
Cash......................................................................................................
Accounts receivable............................................................................
Total assets..................................................................................
$040,500
0071,000
$111,500
Liabilities and Owner's Equity
Liabilities
Accounts payable........................................................................
Owner's Equity
Kim Yung, Capital.........................................................................
Total liabilities and owner's equity......................................
BRIEF EXERCISE 1-10
A
L
A
A
(a) Accounts receivable

(b) Salaries payable
(c) Equipment
(d) Office supplies
OE
L
OE
(e) Capital invested

(f) Notes payable
(g) Drawings
IS
BS
IS
OE
Fees earned
Interest receivable
Service revenue
Harrison, Drawings
BRIEF EXERCISE 1-11

BS
IS
OE, BS
BS
Notes payable
Advertising expense
Harrison, Capital
Cash
1-11
$080,000
0031,500
$111,500
BRIEF EXERCISE 1-12

BS
BS
IS
BS
BS
IS
IS
BS
BS
IS
(a) Accounts receivable

(b) Inventories
(c) Food services expense
(d) Share capital
(e) Building
(f) Stampede revenue
(g) Horse racing revenue
(h) Accounts payable and accrued liabilities
(i) Cash and short-term deposits
(j) Administration, marketing and park services expenses
1-12
SOLUTIONS TO EXERCISES
EXERCISE 1-1
3
4
2
1
(a)
Is the rationale for why capital assets are not reported at

liquidation value. [Note: Do not use the cost principle.]
(b) Indicates that personal and business record-keeping
should be separately maintained.
(c) Assumes that the dollar is the measuring stick used to
report on financial performance.
(d) Indicates that the market value changes after purchase are
not recorded in the accounts.
EXERCISE 1-2
(a) This is a violation of the cost principle. Land was reported at its market
value, when it should have been recorded and reported at cost.
(b) This is a violation of the economic entity assumption. An owners
personal transactions should be kept separate from those of the
business.
(c) This is a violation of the monetary unit assumption. An important part of
the monetary unit assumption is the stability of the monetary unit (the
dollar) over time. Inflation is considered a non-issue for accounting
purposes in Canada and is ignored.
1-13
EXERCISE 1-3
(a)
A
A
OE
L
A
L
A
L
A
OE
L
(b)
Cash
Accounts receivable
Share capital
Notes payable
Other assets
Other liabilities
Inventories
Income taxes payable
Property, plant and equipment
Retained earnings
Accounts payable
$ 108.6
1,674.4
265.4
480.2
1,064.7
1,042.1
1,396.6
28.9
1,153.1
2,996.2
584.6
Assets = Liabilities + Shareholders Equity

$108.6 + $1,674.4 + $1,064.7 + $1,396.6 + $1,153.1 = ($480.2 + $1,042.1
+ $28.9 + $584.6) + ($265.4 + $2,996.2)
$5,397.4 = $2,135.8 + $3,261.6
EXERCISE 1-4
Assets
(b) Cash
(c) Cleaning equipment
(d) Cleaning supplies
(e) Accounts receivable
Liabilities
(a) Accounts payable
(f) Notes payable
(g) Salaries payable
1-14
Owner's Equity
(h) Ace, Capital
EXERCISE 1-5
1.
2.
3.
4.
5.
6.
7.
8.
9.
Increase in assets (cash) and increase in owner's equity (capital).

Decrease in assets (cash) and decrease in owner's equity (rent
expense).
Increase in assets (equipment) and increase in liabilities (accounts
payable).
Increase in assets (accounts receivable) and increase in owner's equity
(service revenue).
Decrease in assets (cash) and decrease in owner's equity (drawings).
Increase in assets (cash) and decrease in assets (accounts receivable).
Increase in liabilities (accounts payable) and decrease in owner's equity
(advertising expense).
Increase in assets (equipment) and decrease in assets (cash).
Increase in assets (cash) and increase in owner's equity (service
revenue).
EXERCISE 1-6
1.
2.
3.
4.
(c)
(d)
(a)
(b)
5.
6.
7.
8.
(d)
(b)
(e)
(f)
EXERCISE 1-7
8
5
6
1
7
2
3
4
(a) An examination of financial statements to determine

whether they are presented in accordance with generally
accepted accounting principles
(b) A business enterprise that raises money by issuing shares
(c) The portion of owners equity that results from receiving
investments from the owner
(d) Obligations to suppliers of goods
(e) Amounts due from customers
(f) A party to whom a business owes money
(g) A financial statement that reports assets, liabilities, and
owners equity at a specific date
(h) A business that is owned by one individual
1-15
EXERCISE 1-8
(a) Total assets (beginning of year)...............................................
Total liabilities (beginning of year)...........................................
Total owner's equity (beginning of year)..................................
$95,000
0 80,000
$15,000
(b) Total owner's equity (end of year)............................................

Increase in owner's equity........................................................
$40,000
15,000
$25,000
Total revenues............................................................................
Total expenses...........................................................................
Net income.................................................................................
$215,000
175,000
$ 40,000
Increase in owner's equity.....................................

Less: Net income.................................................. $(40,000)
Add: Drawings...................................................... 0 24,000
Investments............................................................
$025,000
(c) Total assets (beginning of year)...............................................

Total liabilities (beginning of year)...........................................
$125,000
95,000
$ 30,000
(d) Total owner's equity (end of year)............................................

$130,000
95,000
$ 35,000
Total revenues............................................................................
Total expenses...........................................................................
Net income.................................................................................
$100,000
85,000
$ 15,000
Increase in owner's equity.....................................

Less: Net income.................................................. $(15,000)
Investments................................................. (25,000)
Drawings.................................................................
$035,000
1-16
(16,000)
$ 9,000
(40,000)
$ 5,000
EXERCISE 1-9
(a) Owner's equity12/31/01 ($400,000 $250,000)....................... $150,000
Owner's equity1/1/01................................................................ 0
0
Increase in owner's equity...........................................................
150,000
Less: Owners investment..........................................................
100,000
50,000
Add: Drawings...........................................................................0
15,000
Net income for 2001..................................................................... $ 65,000
(b) Owner's equity12/31/02 ($460,000 $320,000)....................... $140,000
Owner's equity12/31/01see (a)...........................................
150,000
Increase (decrease) in owner's equity......................................
(10,000)
Less: Investment...................................................................... 0 50,000
Net loss for 2002........................................................................
$ 60,000
(c) Owner's equity12/31/03 ($590,000 $400,000).....................
Owner's equity12/31/02see (b)...........................................
Less: Investment......................................................................
Add: Drawings.........................................................................
Net income for 2003...................................................................
1-17
$190,000
0 140,000
50,000
0 10,000
40,000
20,000
$ 60,000
EXERCISE 1-10
(a) 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Owner invested $12,000 cash in the business.

Purchased office equipment for $5,000, paying $2,000 in cash with
the balance of $3,000 on account.
Paid $750 cash for supplies.
Earned $6,000 in fees, receiving $2,600 cash with the remaining
$3,400 on account.
Paid $1,500 cash on accounts payable.
Owner withdrew $2,000 cash for personal use.
Paid $650 cash for rent.
Collected $450 cash from customers on account.
Paid salaries of $2,900.
Incurred $500 of utilities expense on account.
(b) Investment....................................................................................
Fees earned..................................................................................
Drawings.......................................................................................
Rent expense................................................................................
Salaries expense..........................................................................
Utilities expense...........................................................................
Increase in capital........................................................................
$12,000
6,000
(2,000)
(650)
(2,900)
(500)
$11,950
(c) Fees earned..................................................................................

Rent expense................................................................................
Salaries expense..........................................................................
Utilities expense...........................................................................
Net income...................................................................................
$06,000
(650)
(2,900)
(500)
$ 1,950
1-18
EXERCISE 1-11
BOURQUE & CO.
Income Statement
For the Month Ended August 31, 2003
Revenues
Fees earned..................................................................
Expenses
Salaries expense..........................................................
Rent expense...............................................................
Utilities expense..........................................................
Total expenses.....................................................
Net income...........................................................................
$6,000
$2,900
650
500
4,050
$1,950
BOURQUE & CO.

Statement of Owner's Equity
Bourque, Capital, August 1.............................................
Add: Investments...........................................................
Net income.............................................................
Less: Drawings...............................................................
Bourque, Capital, August 31...........................................
1-19
$12,000
1,950
$00,000
13,950
13,950
2,000
$11,950
EXERCISE 1-11 (Continued)

BOURQUE & CO.
Balance Sheet
August 31, 2003
Assets
Cash......................................................................................................
Supplies................................................................................................
Office equipment.................................................................................
Total assets..................................................................................
$ 5,250
2,950
750
5,000
$13,950
Liabilities
Owner's equity
Bourque, Capital..........................................................................
1-20
$02,000
11,950
$13,950
EXERCISE 1-12
SERG CO.
Income Statement
For the Year Ended December 31, 2002
Revenues
Service revenue........................................................
Expenses
Salaries expense......................................................
Rent expense............................................................
Utilities expense.......................................................
Advertising expense................................................
Interest expense.......................................................
Total expenses..................................................
Net income........................................................................
$55,000
$28,000
10,400
3,100
1,800
0 1,700
45,000
$10,000
SERG CO.
Serg, Capital, January 1......................................................................
Add: Net income................................................................................
Less: Drawings...................................................................................
Serg, Capital, December 31................................................................
1-21
$48,000
10,000
58,000
5,000
$53,000
EXERCISE 1-13
OTAGO COMPANY
Balance Sheet
December 31, 2002
Assets
Cash......................................................................................................
Supplies................................................................................................
Equipment............................................................................................
Total assets..................................................................................
$20,500
10,000
8,000
46,000
$84,500
Liabilities
Owner's equity
Otago, Capital ($67,500 $3,000)................................................
1-22
$20,000
64,500
$84,500
EXERCISE 1-14
(a) Camping fee revenue...................................................................
General store revenue.................................................................
Total revenue........................................................................
Expenses......................................................................................
Net income...................................................................................
(b)
$160,000
40,000
200,000
150,000
$ 50,000
DEER PARK
Balance Sheet
December 31, 2002
Assets
Cash..............................................................................................
Supplies........................................................................................
Equipment....................................................................................
Total assets...........................................................................
$020,000
2,500
115,500
$138,000
Liabilities
Notes payable.......................................................................
Accounts payable.................................................................
Total liabilities...............................................................
Owner's equity
Judy Cumby, Capital ($17,000 + $50,000)..........................
Total liabilities and owner's equity..............................
1-23
$060,000
11,000
71,000
67,000
$138,000
EXERCISE 1-15
ATLANTIC CRUISE COMPANY
Income Statement
For the Month Ended October 31, 2003
Revenues
Ticket revenue..........................................................
Expenses
Salaries expense......................................................
Maintenance expense..............................................
Food, fuel and other operating expenses...............
Property tax expense...............................................
Advertising expense................................................
Total expenses..................................................
Net income........................................................................
1-24
$325,000
$142,000
80,000
20,500
10,000
3,500
256,000
$ 69,000
EXERCISE 1-16
LORRAINE RING, LAWYER
For the Year Ended January 31, 2003
Lorraine Ring, Capital, February 1.............................................
Add: Net income........................................................................
Less: Drawings...........................................................................
Lorraine Ring, Capital, January 31.............................................
$023,000 (a)
155,000 (b)
178,000
80,000*
$ 98,000 (c)
Supporting Calculations
(a) Assets, February 1, 2002.............................................................
Liabilities, February 1, 2002........................................................
Capital, February 1, 2002.............................................................
$085,000
62,000
$ 23,000
(b) Legal fees earned.........................................................................

Total expenses.............................................................................
Net income...................................................................................
$360,000
205,000
$155,000
(c) Assets, January 31, 2003.............................................................

Liabilities, January 31, 2003........................................................
Capital, January 31, 2003.............................................................
$168,000
70,000
$ 98,000
* This is simply the amount required to account for the difference between
$178,000 and $98,000.
1-25
SOLUTIONS TO PROBLEMS
PROBLEM 1-1A
(a)In deciding to extend credit to a new customer, North Face would focus
its attention on the balance sheet. The terms of credit they are
extending require repayment in a short period of time. Funds to repay
the credit would come from cash on hand. The balance sheet will show
if the company has enough cash to meet its obligations.
(b)An investor purchasing common shares of WestJet Airlines that they
intend to hold for a long period of time, 5 years, should focus on the
companys income statement. The income statement reports the
companys past performance in terms of revenues, expenses and net
income. This is generally regarded as a good indicator of the
companys future performance.
(c)
In deciding whether to extend a loan, the Caisse Dconomie Base

Montral is interested in two thingsthe ability of the company to
make interest payments on an annual basis for the next five years and
the ability to repay the principal amount at the end of five years. In
order to evaluate both of these factors the focus should be on the cash
flow statement. This statement provides information on the cash the
company generates from its operations on an ongoing basis. This will
be the most important factor in determining if the company will survive
and be able to repay the loan.
1-26
PROBLEM 1-2A
MEMO
Date:
To:
From:
Re:
President, Richelieu Motors

Controller
Change in Value of Company vs. Reported Income
The change in the value of the company includes items that are recognized
by the basic accounting model and items that are not.
This is primarily due to the cost principle. For accounting purposes, assets
are recorded at the cost at the time of purchase. There is no recognition of
the increase in their value. The market value of the company is not
considered relevant, if the company intends to operate as a going concern.
Additionally, the monetary unit assumption only records transactions that
are quantifiable in the accounting records.
Net income is not always indicative of what a company is worth. For
example, the cost of long-lived assets is amortized and allocated as an
expense on the income statement, reducing net income. This occurs even
while assets (e.g., building) may be appreciating in value. Other items that
may contribute to increased earnings potential are not recorded in the
accounting process. These include intellectual property and knowledge
assets of the people who work for the company. Many high-tech companies
report losses, but are worth much more to potential investors than is
indicated by their financial performance. Worth is a very subjective concept,
reflecting future expectations and other qualitative factors that are not
reported in the financial statements.
1-27
PROBLEM 1-3A
1. The cost principle has been violated. Dot.com did not purchase the
employees. It cannot use an estimated value to record them on the
balance sheet. Also, by recording the value of its people, Dot.com
Company is violating the monetary unit assumption.
They are
estimating and recording the value of the knowledge assets but at
this present time, there is no method to measure this value in monetary
terms.
2. Barton violated the cost principle, which states that assets are recorded
at the amount that was paid to acquire them. It does not permit writing
them up in value.
3. Wolfson violated the economic entity assumption. Assets for her
personal use should be kept separate from the company.
1-28
PROBLEM 1-4A
(a)
PEPER TRAVEL AGENCY

Cash
Apr. 1
Accounts
Office
Accounts
Merle Peper,
+ Receivable + Supplies + Equipment = Payable +
Capital
+$15,000
+$15,000
15,000
2
400
=
2,500
+
000000
12,100
600
+$600
11,500
11
+1,000
+
+$8,000
12,500 +
15
200
300
0000 00
2,200
0000 00
8,000 +
0000 00
9,800 +
30
8,000 +
+8,000
$17,800 +
600 +
00 0
8,000 +
12,000 +
30
00 0
8,000 +
12,300 +
25
600 +
8,000
$
0 +
00 0
00
00 0
600 +
+$300
00
00 0
00 0
00 0
00
300
00 0
00
$600 +
$2,500 =
00 0
00 0
0
$20,900 = $20,900
1-29
23,300
Drawings
23,100
23,100
2,200
0 +
$
Service Revenue
000000
0 +
2,500 =
14,300
200
300 +
2,500 =
14,300
+9,000
300 +
2,500 =
Adv. Expense
000000
300 +
2,500 =
0
300
300 +
2,500 =
00
600 +
14,600
2,500 =
00
600 +
000000
2,500 =
00
Rent Expense
14,600
+$2,500
12,100
7
15,000
400
14,600
Investment
20,900
000000
$20,900
Salaries Expense
PROBLEM 1-4A (Continued)

(b) Ending capital..............................................................................
Add: Drawings.............................................................................
Deduct: Investments...................................................................
Net income...................................................................................
$20,900
200
21,100
15,000
$ 6,100
OR
PEPER TRAVEL AGENCY
Income Statement
For the Month Ended April 30
Service revenue.........................................................
Expenses
Salaries...............................................................
Rent.....................................................................
Advertising.........................................................
Net income................................................................
1-30
$9,000
$2,200
400
300
2,900
$6,100
PROBLEM 1-5A
(a)
JULIE SZO, BARRISTER & SOLICITOR

Cash
Bal
Aug. 4
Accounts
Office
Notes
Accounts
+ Receivable + Supplies + Equipment = Payable + Payable +
$4,000 +
$1,500 +
$500 +
$5,000 =
$4,200 +
$ 6,800
+1,400
1,400
0000
00000
00000
000000
5,000 =
4,200 +
5,400 +
7
2,700
2,700 +
+3,000
100 +
00000
100 +
+3,400
5,700 +
3,500 +
400
00000
5,300 +
3,500 +
12
15
500 +
0000
500 +
0000
500 +
0000
500 +
00000
2,700
5,000 =
1,500 +
00000
00000
+6,400 Fees Earned
5,000 =
1,500 +
13,200
+600
000000
2,100 +
13,200
+1,000
6,000 =
2,500
-350
26
29
6,800
2,500 Salaries Expense

900 Rent Expense
00000
1,550 +
3,500 +
550
00000
1,000 +
3,500 +
+2,000
6,800
000000
-900
20
Julie Szo,
Capital
00000
3,000 +
3,500 +
00000
00000
$3,000 +
$3,500 +
0000
500 +
0000
500 +
0000
500 +
00000
00000
350 Advertising Exp.
6,000 =
2,100 +
9,450
00000
00000
550 Drawings
6,000 =
2,100 +
8,900
00000
+$2,000
00000
000000
6,000 =
2,000 +
2,100 +
8,900
0000
00000
00000
+250
250 Utilities Expense
$500 +
$6,000 =
$2,000
$13,000 = $13,000
$2,350
$ 8,650

(b)

Income Statement
Revenues
Fees earned............................................................
Expenses
Salaries expense....................................................
Rent expense..........................................................
Advertising expense...............................................
Utilities expense.....................................................
Total expenses................................................
$6,400
$2,500
900
350
250
Net income......................................................................
4,000
$2,400

Julie Szo, Capital, August 1...........................................................
Add: Net income...........................................................................
Less: Drawings..............................................................................
Julie Szo, Capital, August 31.........................................................
1-32
$6,800
2,400
9,200
550
$8,650

Balance Sheet
August 31, 2003
Assets
Cash..............................................................................................
Accounts receivable....................................................................
Supplies on hand.........................................................................
Office equipment..........................................................................
$03,000
3,500
500
6,000
Total assets...........................................................................
$13,000

Liabilities
Notes payable.......................................................................
$02,000
2,350
4,350
Owner's Equity
Julie Szo, Capital..................................................................
8,650
$13,000
1-33
PROBLEM 1-6A
(a)
JEANNIE LETOURNEAU, LAWYER
Transaction
Cash
+ Damage + Office + Computer + Office = Notes + Accounts + LeTourneau,

Deposit
Supplies Equipment
Furniture
Payable
Payable
Capital
Mar. 10 +$75,000
16
-2,000
25
-3,000
+$75,000
+$2,000
+$7,000
27
31
+1,500
+$1,500
-5,000
$65,000
Note:
+$4,000
+5,000
$2,000
$1,500
$7,000
$5,000
$80,500
= $4,000
= $80,500
$1,500
$75,000
Items 1 (March 4), 2 (March 7), and 4 (March 14) are not relevant to the business entity. They
are personal transactions.
Item 6 (March 20) is not recorded, because the transaction has not yet been completed. There
is no expense, nor liability, until he begins working.
1-34

(b)
JEANNIE LETOURNEAU, LAWYER
Balance Sheet
March 31, 2003
Assets
Cash..............................................................................................
Damage Deposit (Receivable).....................................................
Office Supplies.............................................................................
Computer Equipment..................................................................
Office Furniture............................................................................
$65,000
2,000
1,500
7,000
5,000
Total assets...........................................................................
$80,500

Note Payable.................................................................................
Accounts Payable.........................................................................
Total Liabilities......................................................................
$ 4,000
1,500
5,500
Owners Equity
Jeannie LeTourneau, Capital...............................................
75,000
Total liabilities and owner's equity....................................
$80,500
PROBLEM 1-7A
(a) Using the balance sheet equation:
Assets = Liabilities + Owners Equity
$1,235,000 = Liabilities + $250,000
Liabilities = $985,000
(b) Using the income statement equation:
Revenues Expenses = Net Income
$749,000 Expenses = $59,000
Expenses = $690,000
(c) Using the statement of owner's equity equation:
$250,000
+ 23,000
+ 59,000
- 64,000
$268,000
Beginning capital
Additional investments
Net income
Drawn by owner
Ending capital
OR using the balance sheet equation:

$1,208,000 [from part (d)] = $940,000 + Owner's Equity
Owner's Equity = $268,000
(d) Using the balance sheet equation:
Assets = $940,000 + ($250,000 + $23,000 $64,000 + $59,000)
Assets = $1,208,000
1-36
PROBLEM 1-8A
(a)
NATURAL COSMETICS CO.

Income Statement
For the Month Ended June 30, 2003
Revenues
Service revenue....................................................
Expenses
Supplies expense.................................................
Gas and oil expense.............................................
Advertising expense............................................
Utilities expense...................................................
Total expenses..............................................
$6,500
$1,200
800
500
300
Net income...................................................................
2,800
$3,700

Ann Okah, Capital, June 1...........................................
Add: Investments.......................................................
Net income.........................................................
$00,000
$27,200
3,700
Less: Drawings............................................................
30,900
30,900
1,700
Ann Okah, Capital, June 30.........................................
$29,200
1-37

(a) (Continued)
Balance Sheet
June 30, 2003
Assets
Cash..............................................................................................
Supplies on hand.........................................................................
Equipment....................................................................................
$12,000
4,000
2,400
25,000
Total assets...........................................................................
$43,400

Liabilities
Notes payable.......................................................................
$13,000
1,200
14,200
Owner's equity
Ann Okah, Capital................................................................
29,200
$43,400
1-38

(b) 1.
The addition of $800 fees would increase revenue (service revenue)

and net income $800 in the income statement. In the balance sheet,
assets (accounts receivable) and the owners capital would also be
increased by $800.
2.
An additional $100 of gas and oil expense would increase expenses

(gas and oil expense) and decrease net income $100 in the income
statement. In the balance sheet, liabilities (accounts payable) would
increase and owners capital would decrease by $100.
The revised financial statements, incorporating these two changes,

follow:
Income Statement
Revenues
Service revenue ($6,500 + $800).......................
Expenses
Supplies expense...............................................
Gas and oil expense ($800 + $100)...................
Advertising expense..........................................
Utilities expense................................................
Total expenses...........................................
Net income.................................................................
1-39
$7,300
$1,200
900
500
300
2,900
$4,400

Ann Okah, Capital, June 1........................................
Add: Investments....................................................
Net income......................................................
$27,200
4,400
Deduct: Drawings....................................................
Ann Okah, Capital, June 30.......................................
$00,000
31,600
31,600
1,700
$29,900

Balance Sheet
June 30, 2003
Assets
Cash..............................................................................................
Accounts receivable ($4,000 + $800)..........................................
Supplies on hand.........................................................................
Equipment....................................................................................
$12,000
4,800
2,400
25,000
Total assets...........................................................................
$44,200

Liabilities
Notes payable.......................................................................
Accounts payable ($1,200 + $100).......................................
Owner's equity
Ann Okah, Capital................................................................
1-40
$13,000
1,300
14,300
29,900
$44,200
PROBLEM 1-9A
(a)
Baker Lake
Company
Come by
Chance
Company
Georgian Bay
Company
Edmonton
Company
(a) $75,000 $50,000 =

$25,000
(d) $90,000 $60,000 =

$30,000
(g) $75,000 +
$45,000 =
$120,000
(j) $150,000 $90,000 =

$60,000
(b) $55,000 +
$45,000
= $100,000
(e) $120,000 $62,000 =

$58,000
(h) $180,000 $110,000 =

$70,000
(k) $80,000 +
$140,000
= $220,000
(c) $25,000 + X $10,000 +

$350,000 $335,000 =
$45,000;
X = $15,000
(f) $60,000 +
$8,000 - X +
$400,000 $385,000 =
$58,000;
X = $25,000
(i) $45,000 +
$10,000 $12,000 + X $360,000 =
$110,000;
X = $427,000
(l) $90,000 +
$15,000 $10,000 +
$500,000 - X =
$140,000;
X = $455,000
(b)
BAKER LAKE COMPANY

Capital, January 1..................................................
Add: Investments..................................................
Net income....................................................
Less: Drawings.....................................................
Capital, December 31.............................................
1-41
$25,000
$15,000
15,000
30,000
55,000
10,000
$45,000

(c)
MEMO
Date:
To:
From:
Re:
Student
Preparation and Interrelationship of Financial Statements
The sequence of preparing financial statements is (1) income statement,

(2) statement of owner's equity, and (3) balance sheet. It should be noted
that the balance sheet is usually presented first, even though it is
prepared last.
The interrelationship of the statement of owner's equity to the other
financial statements results from the fact that net income from the
income statement is reported in the statement of owner's equity. The
ending capital calculated in the statement of owner's equity is the
amount reported for owner's equity on the balance sheet.
1-42
PROBLEM 1-10A
LOONIE BIN COIN SHOP
Balance Sheet
April 30, 2003
Assets
Cash..........................................................................................(a)
Office and store supplies............................................................
Land..............................................................................................
Office equipment.....................................................................(b)
Store furnishings.........................................................................
Building........................................................................................
$ 6,000
7,000
4,000
36,000
69,000
48,000
110,000
Total assets...........................................................................
$280,000

Liabilities
Notes payable..................................................................(c)
Accounts payable............................................................(d)
Long-term debt payable..................................................(e)
$ 36,000
007,000
100,000
Total liabilities.......................................................................
143,000
Owner's equity:
Capital...................................................................................
137,000
$280,000
1-43
PROBLEM 1-10A (CONTINUED)

Supporting calculations:
(a) $12,000 (1) $3,000 (2) $1,000 + (4) $5,000 (5) $7,000 = $6,000
(b) $59,000 + (2) $15,000 (4) $5,000 = $69,000
(c) $22,000 + (2) $14,000 = $36,000
(d) $10,000 (1) $3,000 = $7,000
(e) $107,000 (5) $7,000 = $100,000
Note the following points:

Item 3 is not recorded, as there was no transaction.
The capital balance is unchanged because there were no transactions
affecting owner's equity on April 30.
1-44
PROBLEM 1-11A
(a)
MULTI-MEDIA CONSULTING CO.

Income Statement
For the Month Ended March 31, 2003
Revenues
Fees earned.................................................
Expenses
Salaries expense......................................... $1,900 (B)
Advertising expense................................... 1,400 (C)
Rent expense..............................................
750
Utilities expense..........................................
400 (D)
Property tax expense..................................
150
Repair expense...........................................
150 (E)
Total expenses.....................................
Net income..........................................................
(A)
(B)
(C)
(D)
(E)
$9,650 (A)
4,750
$4,900
(6) $3,250 + (12) $2,100 + (20) $3,200 + (29) $1,100 = $9,650

(11) $1,000 + (32) $900 = $1,900
(8) $400 + (24) $1,000 = $1,400
(15) $250 + (36) $150 = $400
(22) $200 $50 = $150
1-45
PROBLEM 1-11A (CONTINUED)

(b)
MULTI-MEDIA CONSULTING CO.

For the Month Ended March 31, 2003
M. Carrier, Capital, March 1....................................
Add: Investments...................................................
Net income.....................................................
Less: Drawings *....................................................
M. Carrier, Capital, March 31..................................
* (18) $500 + (22) $50 + (27) $300 + (34) $50 = $900
1-46
$00,000
$15,000
4,900
19,900
19,900
900
$19,000
PROBLEM 1-1B
(a)In making an investment, the Ontario investor is becoming a partial

owner of the company. In this case the investment will be held for
three years. The information that will be most relevant to him will be
on the income statement. The income statement reports the past
performance of the company in terms of its revenue, expenses and
net income. This is the best indicator of the companys future
potential.
(b)In deciding to extend credit to a new customer Bombardier would
focus its attention on the balance sheet. The terms of credit they are
extending require repayment in a short period of time. Funds to
repay the credit would come from cash on hand. The balance sheet
will show if the company has enough cash to meet its obligations.
(c)In deciding whether to extend a loan, the Laurentian Bank is
interested in two things, the ability of the company to make interest
payments on an annual basis for the next five years and the ability
to repay the principal amount at the end of five years. In order to
evaluate both of these factors the focus should be on the cash flow
statement. This statement provides information on the cash the
company generates from its operating activities on an ongoing
basis. This will be the most important factor in determining if the
company will survive and be able to repay the loan.
1-47
PROBLEM 1-2B
MEMO
Date:
To:
From:
Re:
President, Montiero Company

Controller
Change in Value of Company vs. Reported Income
The change in the value of the company includes items that are
recognized by the basic accounting model and items that are not. This is
primarily due to the cost principle. For accounting purposes, assets are
recorded at the cost at the time of purchase. There is no recognition of
the increase in their value. For example the companys land and
buildings may be increasing in value, but this increase is not recognized
on the companys books. In defence of the cost principle, it creates
information that is reliable and verifiable, thus increasing the credibility
of the financial statements. In addition, the market value of the company
is not relevant, if the company intends to operate as a going concern.
1-48
PROBLEM 1-3B
1. Recording the impact of the Presidents death violated the cost
principle and monetary unit assumption. Although the President
may be very important to the company, his appointment (and death)
did not trigger an accounting transaction. Disclosure of the
presidents death could be made in the companys report but it
should not be recorded in the accounting records or on the financial
statements.
2. This violates the economic entity assumption. The portion of the
asset and expense relating to Paradiss family should not be
recorded in the companys records. It would be best to treat this as a
personal asset. When it is used for business purposes, the Paradis
family might consider renting to the company, rather than having the
company own it.
3. Recording the equipment at $300,000 violated the cost principle,
which states that assets are recorded at the amount that was paid to
acquire them. It does not permit writing them up in value.
1-49
PROBLEM 1-4B
(a)
KUMARS REPAIR SHOP

Cash
May 1
Accounts
Accounts
+ Receivable + Supplies + Equipment = Payable +
+$15,000
+$15,000
15,000
2
5,000
+
400
000000
+$500
9,600
9
+4,100
500
1,000
12,060 +
30
+120
$12,180 +
500 +
0000
140
000000
500
500 +
+
+$400
400 +
500 +
0000
500 +
-400
+$500
0000
0000
0000
00000
5,000 =
0000
0000
0000
00000
0000
$280 +
$500 +
$5,000 =
$500
$17,960 = $17,960
Utilities Expense
17,060
17,460
000000
Salaries Expense
17,200
+400
500 +
Drawings
18,200
140
500 +
-120
1-50
18,700
-1,000
500 +
5,000 =
Service Revenue
500
500 +
5,000 =
14,600
+4,100
500 +
5,000 =
00000
000000
500 +
5,000 =
00000
Rent Expense
14,600
5,000 =
00000
0000
12,060 +
28
15,000
5,000 =
00000
0000
12,200 +
23
500 +
13,200
15
5,000 =
00000
0000
13,700
15
000000
00000
9,600
Investment
15,000
+$5,000
10,000
5
U. Kumar,
Capital
$17,460
Service Revenue
PROBLEM 1-4B (Continued)

(b) Ending capital..............................................................................
Add: Drawings............................................................................
Deduct: Investments..................................................................
Net income...................................................................................
$17,460
500
17,960
15,000
$ 2,960
OR
KUMARS REPAIR SHOP
Income Statement
For the Month Ended May 31
Service revenue.........................................................
Expenses
Salaries...............................................................
Rent.....................................................................
Utilities................................................................
Net income................................................................
$4,500
$1,000
400
140
1,540
$2,960
PROBLEM 1-5B
(a)
SMITH VETERINARY CLINIC

Cash
Bal
Sept. 1
Accounts
Office
Notes
Accounts
+ Receivable + Supplies + Equipment = Payable + Payable +
$9,000 +
$1,700 +
$600 +
$6,000 =
$3,600 +
$13,700
-3,100
00000
0000
00000
-3,100
000000
5,900 +
4
+1,300
7,200 +
-800
6,400 +
17
19
25
30
30
B. Smith,
Capital
1,700 +
-1,300
400 +
00000
400 +
2,500
3,400
8,900 +
3,800 +
-600
00000
8,300 +
3,800 +
+7,000
00000
15,300 +
3,800 +
600 +
0000
600 +
0000
600 +
0000
600 +
0000
600 +
0000
600 +
6,000 =
500 +
00000
00000
6,000 =
13,700
000000
500 +
13,700
2,100
1,300
000000
8,100 =
1,800 +
13,700
00000
00000
8,100 =
1,800 +
00000
00000
8,100 =
1,800 +
19,000
00000
000000
1,800 +
19,000
00000
8,100 =
+$7,000
7,000 +
5,900 Fees Earned

19,600
600 Drawings
-700
-700 Salaries Expense
-900
-900 Rent Expense
-300
00000
13,400 +
3,800 +
000000
00000
$13,400 +
$3,800 +
0000
600 +
00000
00000
00000
300 Advertising Exp
8,100 =
7,000 +
1,800 +
0000
00000
00000
+170
$600 +
$8,100 =
$7,000
$25,900 = $25,900
1-52
$1,970
17,100
-170 Utilities Expense
$16,930

(b)

Income Statement
For the Month Ended September 30, 2003
Revenues
Fees earned..........................................................................
$5,900
Expenses
Salaries expense.................................................
$700
Rent expense.......................................................
900
Advertising expense...........................................
300
Utilities expense..................................................
170
Total expenses..............................................................
2,070
Net income...................................................................................
$3,830

Bruce Smith, Capital, September 1............................................
Add: Net income.........................................................................
Less: Drawings...........................................................................
Bruce Smith, Capital, September 30...........................................
$13,700
3,830
17,530
600
$16,930

(b) (Continued)
Balance Sheet
September 30, 2003
Assets
Cash..............................................................................................
Supplies on hand.........................................................................
$13,400
3,800
600
8,100
Total assets...........................................................................
$25,900

Liabilities
Notes payable.......................................................................
$07,000
1,970
8,970
Owner's Equity
Bruce Smith, Capital..........................................................0
16,930
$25,900
1-54
PROBLEM 1-6B
(a)
Transaction
BELL CONSULTING
Cash
May 1 +$4,000
2
-800
3
5
-50
9 +1,000
12
-700
15
17 -2,500
20
-500
23 +2,000
26 +5,000
29 -2,400
30
-150
$4,900 +
Accounts +
Office
Receivable
Supplies
Office
=
Equipment
Notes
Payable
Accounts
Payable
Bell,
Capital
+$4,000
-800
+$500
+$500
-50
+1,000
-700
+3,000
-2,500
+$3,000
-500
-2,000
+$5,000
+$2,400
-150
$1,000 +
$500 +
$2,400 =
$5,000 +
$8,800 = $8,800
1-55
$ 0 +
$3,800

(b)
BELL CONSULTING
Income Statement
For the Month Ended May 31, 2003
Revenues
Fees earned..........................................................................
$4,000
Expenses
Salaries expense.................................................
$ 2,500
Rent expense.......................................................
800
Advertising expense...........................................
50
Utilities expense..................................................
150
Total expenses..............................................................
3,500
Net income...................................................................................
$ 500
1-56

(c)
BELL CONSULTING
Balance Sheet
May 31, 2003
Assets
Cash..............................................................................................
Office supplies.............................................................................
$4,900
1,000
500
2,400
Total assets...........................................................................
$8,800

Liabilities
Note payable.........................................................................
$5,000
Owners equity
Jessica Bell, Capital.............................................................
3,800*
Total liabilities and owner's equity....................................
$8,800
*Capital = $4,000 investment $700 withdrawal + $500 net income = $3,800
1-57
PROBLEM 1-7B
(a) Using the balance sheet equation:
$1,265,000 = Liabilities + $245,000
Liabilities = $1,020,000
(b) Using the income statement equation:
Revenues Expenses = Net Income
$687,000 Expenses = $56,000
Expenses = $631,000
(c) Using the statement of owner's equity equation:
$245,000
+ 30,000
+ 56,000
- 74,000
$257,000
Beginning capital
Investments
Net income
Drawn by owner
Ending capital
OR using the balance sheet equation:

$1,167,000 [from part (d)] = $910,000 + Owner's Equity
Owner's Equity = $257,000
(d) Using the balance sheet equation:
Assets =$ 910,000 + $257,000
Assets = $1,167,000
1-58
PROBLEM 1-8B
(a)
SPECIALTY COSMETICS CO.

Income Statement
Revenues
Service revenue....................................................
$5,900
Expenses
Total expenses..............................................
$1,500
600
1,300
Net income...................................................................
3,400
$2,500

Emily Jackson, Capital, September 1.........................
Add:
Investments......................................................
Net income.......................................................
$00,000
$20,000
2,500
22,500
22,500
Less: Drawings...........................................................
2,600
Emily Jackson, Capital, September 30.......................
$19,900
1-59

(a) (Continued)
Balance Sheet
September 30, 2003
Assets
Cash..............................................................................................
Supplies on hand.........................................................................
Equipment....................................................................................
$ 9,000
5,000
2,700
20,000
Total assets...........................................................................
$36,700

Liabilities
Notes payable.......................................................................
$15,000
1,800
16,800
Owner's equity
Emily Jackson, Capital.........................................................
19,900
$36,700
1-60

(b) 1.
2.
The addition of $900 fees would increase revenue (service revenue)

and net income $900 in the income statement. In the balance sheet,
assets (accounts receivable) and the owners capital would also be
increased by $900.
An additional $300 of gas and oil expense would increase expenses
(gas and oil expense) and decrease net income $300 in the income
statement. In the balance sheet, liabilities (accounts payable) would
increase and owners capital would decrease by $300.
The revised financial statements, incorporating these two changes,

follow:
Income Statement
Revenues
Service revenue ($5,900 + $900)..........................
Expenses
Gas and oil expense.............................................
Total expenses..............................................
Net income...................................................................
1-61
$6,800
$1,500
600
300
1,300
3,700
$3,100

(b) (Continued)
Emily Jackson, Capital, September 1.........................
Add: Investments......................................................
Net income.......................................................
$20,000
3,100
Less: Drawings...........................................................
Emily Jackson, Capital, September 30.......................
$00,000
23,100
23,100
2,600
$20,500

Balance Sheet
September 30, 2003
Assets
Cash..............................................................................................
Accounts receivable ($5,000 + $900)..........................................
Supplies on hand.........................................................................
Equipment....................................................................................
Total assets...........................................................................
$ 9,000
5,900
2,700
20,000
$37,600

Liabilities
Notes payable.......................................................................
Accounts payable ($1,800 + $300).......................................
$15,000
2,100
17,100
Owner's equity
Emily Jackson, Capital.........................................................
20,500
$37,600
1-62
PROBLEM 1-9B
(a)
Montreal
Company
Calgary
Company
Edmonton
Company
(a) $80,000 $50,000 =

$30,000
(d) $110,000 $60,000 =

$50,000
(g) $75,000 +
$50,000 =
$125,000
(j) $170,000 $90,000 =

$80,000
(b) $55,000 +
$58,000
= $113,000
(e) $145,000 $65,000 =

$80,000
(h) $200,000 $130,000 =

$70,000
(k) $80,000 +
$180,000
= $260,000
(c) $30,000 + X $25,000 +

$350,000 $320,000 =
$58,000;
X = $23,000
(f) $60,000 +
$15,000 - X +
$420,000 $385,000 =
$80,000;
X = $30,000
(i) $50,000 +
$10,000 $14,000 + X $350,000 =
$130,000;
X = $434,000
(l) $90,000 +
$15,000 $20,000 +
$520,000 - X =
$180,000;
X = $425,000
(b)
Vancouver
Company
CALGARY COMPANY
Capital, January 1
Add: Investments
Net income
$15,000
35,000
Less: Drawings
Capital, December 31
1-63
$60,000
50,000
110,000
30,000
$80,000

(c)
MEMO
Date:
To:
From:
Re:
Student
Preparation and Interrelationship of Financial Statements
The sequence of preparing financial statements is (1) income statement, (2)

statement of owner's equity, and (3) balance sheet. It should be noted that
the balance sheet is usually presented first, even though it is prepared last.
The interrelationship of the statement of owner's equity to the other financial
statements results from the fact that net income from the income statement
is reported in the statement of owner's equity. The ending capital calculated
in the statement of owner's equity is the amount reported for owner's equity
on the balance sheet.
1-64
PROBLEM 1-10B
FRANC DOR COIN SHOP
Balance Sheet
June 30, 2003
Assets
Cash..........................................................................................(a)
Office and store supplies............................................................
Inventory.......................................................................................
Land..............................................................................................
Office equipment.....................................................................(b)
Store equipment......................................................................(c)
Building........................................................................................
$ 4,000
6,000
6,000
110,000
40,000
17,000
19,500
120,000
Total assets...........................................................................
$322,500

Liabilities
Notes payable..................................................................(d)
Accounts payable............................................................(e)
Long-term debt payable...................................................(f)
$ 23,500
007,000
103,000
133,500
Owner's equity
Capital...................................................................................
189,000
$322,500
1-65

Supporting calculations:
(a) $13,000 (1) $4000 (2) $1,500 + (4) $4,500 (5) $8,000 = $4,000
(b) $12,000 + (2) $5,000 = $17,000
(c)
$24,000 (4) $4,500 = $19,500
(d) $20,000 + (2) $3,500 = $23,500

(e) $11,000 (1) $4,000 = $7,000
(f)
$111,000 (5) $8,000 = $103,000
Note the following points:

Item 3 is not recorded, as there was no transaction.
The capital balance is unchanged because there were no transactions

affecting owner's equity on June 30.
1-66
PROBLEM 1-11B
(a)
NASH CONSULTING CO.

Income Statement
For the Month Ended January 31, 2003
Revenues
Fees earned.................................................
Expenses
Salaries expense.........................................
Advertising expense...................................
Rent expense..............................................
Utilities expense..........................................
Property tax expense..................................
Repair expense...........................................
Total expenses.....................................
$10,950 (A)
$1,700
1,550
800
480
150
250
(B)
(C)
(D)
(E)
Net income..........................................................
(A)
(B)
(C)
(D)
(E)
(6) $3,750 + (12) $2,300 + (20) $3,700 + (29) $1,200 = $10,950

(11) $1,200 + (32) $1,000 (32) $500 = $1,700
(8) $450 + (24) $1,100 = $1,550
(15) $300 + (36) $180 = $480
$250 (34) $100 = $150
1-67
4,930
$6,020

(b)
NASH CONSULTING CO.

For the Month Ended January 31, 2003
T. Nash, Capital, January 1.....................................
Add: Investment....................................................
Net income.....................................................
$00,000
$12,000
6,020
Less: Drawings ......................................................

T. Nash, Capital, January 31...................................
* (18) $600 + (27) $400 + (32) $500 + (34) $100 = $1,600
1-68
18,020
18,020
*1,600
$16,420
BYP 1-1 FINANCIAL REPORTING PROBLEM

(a)
The financial statements themselves take up three pages (14-16). There

are 15 notes to the financial statements, which occupy ten pages (1726).
(b) Ordinarily the fiscal year-end for the Second Cup is the last Saturday in
June. This is disclosed in Note 1 (page 18). In 1999 the fiscal year was
extended to Wednesday, June 30 in order to reflect the disposition of the
Companys investment in Coffee People, Inc.
(c) The auditors are PricewaterhouseCoopers, Chartered Accountants.
(See page 13.)
(d) Total assets as at
June 24, 2000:
June 30, 1999:
$18,565,000
$49,584,000
(e) $11,067,000 (From a loss of $10,095,000 to net earnings of $972,000.)

(f)
June 24, 2000: $1,446,000

June 30, 1999: $ 822,000
(g) The percentage change in systemwide sales from 1996-2000 was a

negative 25.43%.
$159,198,000 $213,488,000 = (25.43%)
$213,488,000
1-69
BYP 1-2 INTERPRETING FINANCIAL STATEMENTS

(a) For a software company such as Corel, the most important economic
resources are the knowledge, skills, and creativity of its people. These
human resources are not reflected in the balance sheet.
(b) The balance sheet reflects only the results of business transactions,
based upon the cost principle. It does not attempt to show what the
company's assets are currently worth.
In the case of a company which has just recently been formed, the
accounting (or book) values recorded on the balance sheet may be
approximately the same as the economic (or market) values. For
companies which have been in existence for some time, however, there
may be a great difference between the historical amounts recorded in
the accounting system and the current values of these items, in
economic terms.
(c) There are several reasons why Corel might prepare its financial
statements in US dollars. It might be done for regulatory reasons, in
order to be listed on American stock exchanges. It might also be done
because the company does a great deal of business in the US and
wants to be compared accurately with its American competitors.
Another possible reason is that Corel Corporation competes in over 70
countries worldwide, and the US dollar is a more recognized unit of
currency on a global basis.
1-70
BYP 1-3 ACCOUNTING ON THE WEB

Due to the frequency of change with regard to information available on the
world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can be
found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].
1-71
BYP 1-4 COLLABORATIVE LEARNING ACTIVITY

(a) The estimate of the $2,450 loss was based on the difference between
the $10,000 initially invested by the owner and the remaining bank
balance of $7,550 at May 31.
This is not a valid basis for determining income, because it only shows
the change in cash between two points in time.
(b) The balance sheet at May 31 is as follows:
LONG-SHOT DRIVING RANGE
Balance Sheet
May 31, 2003
Assets
Cash..............................................................................................
Caddy shack.................................................................................
Equipment....................................................................................
Total assets...........................................................................
$07,550
4,000
1,800
$13,350
Liabilities
Accounts payable ($150 + $100)..........................................
Owner's equity
P. & P. Ross, Capital ($10,000 + $3,900 - $800)...................
$00,250
13,100
$13,350
As shown in the balance sheet, the owner's capital at May 31 is $13,100

(the amount required to make Assets = Liabilities + Owner's Equity).
The estimate of $3,100 of net income is the difference between the initial
investment of $10,000 and $13,100.
This was not a valid basis for determining net income because
changes in owner's equity between two points in time may have been
caused by factors unrelated to net income. For example, there may be
drawings and/or additional capital investments by the owner.
1-72
BYP 1-4 (Continued)

(c) Actual net income for May can be determined by adding owner's
drawings to the change in owner's capital during the month, as shown
below:
Owner's capital, May 31, per balance sheet...............................
Owner's capital, May 1.................................................................
Increase in owner's capital..........................................................
Add: Drawings............................................................................
Net income...................................................................................
$13,100
10,000
3,100
800
$ 3,900
(d) Fees earned can be determined by adding expenses incurred during the
month to net income. May expenses were Rent, $1,000; Wages, $400;
Advertising, $750; and Utilities, $100; for a total of $2,250. Revenues
earned, therefore, were $6,150 ($2,250 + $3,900).
Alternatively, since all fees are received in cash, fees earned can be
calculated from an analysis of the changes in cash, as follows:
Beginning cash balance............................................
Less: Cash payments
Caddy shack...........................................
Golf balls and clubs...............................
Rent.........................................................
Advertising.............................................
Wages.....................................................
Drawings.................................................
Cash balance before fees.........................................
Actual cash balance, May 31....................................
Fees earned (cash receipts).....................................
1-73
$10,000
$4,000
1,800
1,000
600
400
800
8,600
1,400
7,550
$ 6,150
BYP 1-5 COMMUNICATION ACTIVITY

Date:
To: Israel Unger
From: Student
Subject:
Balance Sheet Correction
I have received the balance sheet of Mount Company as of December 31,
2002. A number of items in this balance sheet are not properly reported.
They are:
1.
The balance sheet should be dated as of a specific date, not for a

period of time. It should be stated "December 31, 2002."
2.
The bottom portion of the balance sheet should be headed "Liabilities

and Owner's Equity", with sub-headings for the Liabilities section and
the Owner's Equity section.
3.
Assets should be reordered, in order of liquidity. Equipment should be

reported below Supplies on the balance sheet. Accounts Receivable
should be shown as an asset and reported between Cash and Supplies.
4.
Accounts Payable should be shown as a liability, not an asset. The Note

Payable should be reported in the liability section.
5.
Unger, Capital and Unger, Drawings are not liabilities. They are part of
owner's equity. The Drawings account is not reported on the balance
sheet but is subtracted from Unger, Capital to arrive at owner's equity at
the end of the period.
1-74
BYP 1-5 (Continued)

A correct balance sheet is as follows:
MOUNT COMPANY
Balance Sheet
December 31, 2002
Assets
Cash......................................................................................................
Supplies................................................................................................
Equipment............................................................................................
Total assets..........................................................................
$09,000
3,000
2,000
21,500
$35,500

Liabilities
Note payable.................................................................................
Total liabilities.......................................................................
$10,500
6,000
16,500
Owner's equity
Unger, Capital...............................................................................
19,000
$35,500
1-75
BYP 1-6 ETHICS CASE

(a) The students should identify all of the stakeholders in the case; that is,
all the parties that are affected, either beneficially or negatively, by the
action or decision described in the case. The list of stakeholders are:
Stephane Pelli
The two firms
University of New Brunswick
(b) The students should identify the ethical issues, dilemmas, or other
considerations pertinent to the situation described in the case. In this
case the ethical issues are:
Is it proper that Stephane charged both firms for the total travel
costs, rather than splitting the actual amount of $244 between the
two firms?
Is collecting $488 as reimbursement for total costs of $244 ethical

behaviour?
Did Stephane deceive both firms or neither firm?
(c) Each student must answer the question for himself/herself. Would you
want to start your first job having deceived your employer before your
first day of work? Would you be embarrassed if either firm found out
that you double-charged? Would your school be embarrassed if your
act was uncovered? Would you be proud to tell your instructor, or your
family, that you collected your expenses twice?
1-76

Accounting in Action Assignment Classification Table

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CHAPTER 1

1. Explain what accounting is.

2. Identify the users and explain

4. Explain the meaning of

5. Explain the meaning of the

6. State and utilize the basic

12, 13, 14,

7. Calculate the effect of business

8. Understand what the four

19, 20, 21,

ASSIGNMENT CHARACTERISTICS TABLE

Identify users and uses of financial statements.

Discuss accounting assumptions and GAAP related to

Identify assumption or principle violated.

Analyse transactions and calculate net income.

Analyse transactions and prepare financial statements.

Analyse transactions and prepare balance sheet.

Use financial statement relationships to determine

Prepare financial statements.

Determine financial statement amounts, prepare a

Analyse transactions and prepare balance sheet.

Prepare income statement and statement of owners

Identify users and uses of financial statements.

Discuss accounting assumptions and GAAP related to

Identify assumption or principle violated.

Analyse transactions and calculate net income.

Analyse transactions and prepare financial statements.

Analyse transactions and prepare income statement and

Use financial statement relationships to determine

Prepare financial statements.

Determine financial statement amounts, prepare a

Analyse transactions and prepare balance sheet.

Prepare income statement and statement of owners

BLOOMS TAXONOMY TABLE

1. Explain what accounting is.

4. Explain the meaning of

5. Explain the meaning of the

6. State and utilize the basic

7. Calculate the effect of

8. Understand what the four

Broadening Your Perspective

Investors use the financial accounting information to evaluate a

5. Bookkeeping usually involves only the recording of economic events,

Questions Chapter 1 (Continued)

Questions Chapter 1 (Continued)

Assets are economic resources owned by a business. Liabilities

Questions Chapter 1 (Continued)

Decrease assets (cash) and decrease owner's equity (due to the

(d) Balance sheet.

Questions Chapter 1 (Continued)

Ending capital balance.........................................................

(b)Ending capital balance............................................................

22. (a) Total revenues ($35,000 + $70,000)......................................

(b) Total expenses ($26,000 + $40,000).....................................

(c) Total revenues.......................................................................

23. The notes to the financial statements present explanatory information

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 1-2

BRIEF EXERCISE 1-5

(b) ($500,000 + $100,000) + ($200,000 $70,000) = $730,000 (Assets).

BRIEF EXERCISE 1-7

(a) Received cash for services performed