Exercise 1-1

Chapter #1: Introduction to Financial Statements
Brief Exercises
BE 1-1 Match each of the following forms of business organization with a set of characteristics: sole proprietorships (SP), partnership (P), corporation (C).
_P__ Shared control, tax advantages, increased skills and resources.
_SP_ Simple to set up and maintains control with owner.
_C__ Easier to transfer ownership and rise funds, no personal liability.
BE 1-2 Match each of the following types of evaluation with one of the listed users of accounting information.
Trying to determine whether the company complied with tax laws.
Trying to determine whether the company can pay its obligations.
Trying to determine whether an advertising proposal will be cost-effective.
Trying to determine whether the company’s net income will result in a stock price increase.
Trying to determine whether the company should employ debt or equity financing.
_4_ Investors in common stock.
_3_ Marketing managers.
_2_ Creditors.
_5_ Chief Financial Officer.
_1_ Internal Revenue Service.
BE 1-3 Indicate in which part of the statement of cash flows each item would appear: operating activities (O), investing activities (I), or financing activities (F).
_O_ Cash received from customers.
_F_ Cash pay to stockholders (dividends).
_F_ Cash received from issuing new common stock.
_O_ Cash paid to suppliers.
_I__ Cash paid to purchase a new office building.
BE 1-4 Presented below are a number of transactions. Determine whether each transaction affects common stock (C), dividends (D), revenue (R), expense (E), or does not affects stockholder’s equity (NSE). Provide titles for the revenues and expenses.
Costs incurred for advertising. _E_ → Advertising expense
Assets received for services performed. _R_ → Service revenue
Costs incurred for insurance. _E_ → Insurance expense
Amount paid to employees. _E_ → Salaries and wage expense
Cash distributed to stockholders. _D_ → Dividends
Assets received in exchange for allowing the use of the company’s building. _R_ → Rent revenue
Costs incurred for utilities used. _E_ → Utilities expense
Cash purchase of equipment. _NSE_ → Cash purchase of
equipment
Cash received from investors. _C_ → Issued common stock for cash
BE 1-5 In alphabetical order below are balance sheet items for Burnett Company at December 31, 2014. Prepare a balance sheet following the format of Illustration 1-7 (page 14).
Accounts payable $65,000
Accounts receivable 71,000
Cash 22,000
Common stock 18,000
Retained earnings 10,000
Burnett Company
Balance Sheet
December 31, 2014

Assets
Current Assets
Cash$2,600
Debt Investment 3,000
Accounts receivable 1,500
Total current assets$93,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $65,000
Stockholder’s equity
Common stock$18,000
Retained earnings 10,000 28,000
Total liabilities and stockholders’ equity $93,000

Problems lefttop Hightower Service Co.
Income Statement
For the Month Ended June 30, 2014

Revenues
Service revenue$7,500
Expenses
Salaries and wages expense$1,400
Supplies expense 1,000
Maintenance and repairs expense 600
Advertising expense 400
Utilities expense__300
Total expenses_3,700
Net income$3.800
Hightower Service Co.
Retained Earnings Statement
For the Month Ended June 30, 2014

Retained earnings, June 1$ 0 Add: Net income 3,800 3,800
Less: Dividends 1,400
Retained earnings, June 30 $ 2,400

Hightower Service Co.
Balance Sheet
For the Month Ended June 30, 2014

Assets
Cash $ 4,600Account receivable 4,000
Supplies 2,400
Equipment 26,000
Total assets $37,000
Liabilities and Stockholder’s Equity
Liabilities
Notes payable$12,000
Accounts payable 500
Total liabilities $12,500
Stockholder’s equity
Common stock 22,100
Retained earnings 2,400
Total stockholder’s equity 24,500
Total liabilities and stockholder’s equity $37,000
Hightower had a very successful first moth, earning $3,800 or 51% os service revenues ($3,800 ÷ $7,500).
Its net income represents a 17% return on the initial investment ($3,800 ÷ $22,100).
Distributing a dividend after only one month of operation is probably unusual. Most new businesses choose to build up a cash balance to provide for future operating and investing activities or pay down debt. Hightower distributes 37% ($1,400 ÷ $3,800) of its first month’s income but had adequate cash to do so and still showed a significant increase in retained earnings.

The items listed above that should be included in a statement of cash flows are:
Cash paid to suppliers
Cash dividends paid
Cash at beginning of period
Cash paid to purchase equipment
Cash received from customers
Cash received from issuing
Wenger Corporation
Statement of Cash Flows
For the Year Ended December 31,
2014

Cash flows from operating activities
Cash received from customers$132,000
Cash paid to suppliers (104,000)
Net cash provided by operating expenses$28,000
Cash flows from investing activities
Cash paid to purchase equipment(12,000) Net cash used by investing activities(12,000)
Cash flow from financial activities
Cash received from issuing common stock 22,000
Cash dividends paid (7,000)
Net cash provided by financing activities 15,000
Net increase in cash 31,000
Cash at beginning of period 9,000
Cash at end of period $40,000