Chapter 1
The Financial Statements
Ethics Check
(5-10 min.) EC 1-1
a. Objectivity and independence
b. Due care
c. Integrity
d. Integrity
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-1
,Short Exercises
(10 min.) S 1-1
a. Corporation, limited partners of a Limited-liability
partnership (LLP) and Limited-liability company (LLC).
If any of these businesses fails and cannot pay its
liabilities, creditors cannot force the owners to pay the
business’s debts from the owners’ personal assets.
Creditors can go after the general partner of a limited
liability partnership.
b. Proprietorship. There is a single owner of the business,
so the owner is answerable to no other owner.
c. Partnership. If the partnership fails and cannot pay its
liabilities, creditors can force the partners to pay the
business’s debts from their personal assets. A
partnership affords more protection for creditors than a
proprietorship because there are two or more owners to
share this liability.
(5 min.) S 1-2
1. The entity assumption applies.
2. Application of the entity assumption will separate
Osmond’s personal assets from the assets of Simple
Treats, Inc. This will help Osmond, investors, and
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-2
, lenders know how much assets, liabilities and equity the
business has, and this knowledge will help all parties
evaluate the business realistically.
(5-10 min.) S 1-3
a. Stable-monetary-unit assumption
b. Historical cost principle; $300 is the accounting value
of the laptop
c. Historical cost principle; the sale price is the amount
actually received from the sale
d. Entity assumption
(10 min.) S 1-4
Computed amounts in boxes
Total Assets = Total + Stockholders’
Liabilities Equity
a. $660,000 = $300,000 + $360,000
b. 85,000 = 50,000 + 35,000
c. 350,000 = 75,000 + 275,000
(5 min.) S 1-5
1. Liabilities = Assets − Owners’ Equity
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-3
, 2. Owners’ Equity = Assets − Liabilities
This way of determining the amount of owners’ equity
applies to any company or your household.
(5-10 min.) S 1-6
a. Land A g. Retained earnings S
b. Accrued expenses h. Prepaid expenses A
payable L
c. Supplies A i. Accounts payable L
d. Equipment A j. Accounts receivable
A
e. Notes payable L k. Merchandise inventory
A
f. Long-term debt L l. Common stock S
(5-10 min.) S 1-7
1. Assets are the economic resources of a business that
are expected to produce a benefit in the future.
Owners’ (stockholders’) equity represents the insider
claims of a business, the owners’ interest in its assets.
Assets and owners’ equity differ in that assets are
resources and owners’ equity is a claim to assets.
Assets must be at least as large as owners’ equity, so
equity can be smaller than assets.
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-4
The Financial Statements
Ethics Check
(5-10 min.) EC 1-1
a. Objectivity and independence
b. Due care
c. Integrity
d. Integrity
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-1
,Short Exercises
(10 min.) S 1-1
a. Corporation, limited partners of a Limited-liability
partnership (LLP) and Limited-liability company (LLC).
If any of these businesses fails and cannot pay its
liabilities, creditors cannot force the owners to pay the
business’s debts from the owners’ personal assets.
Creditors can go after the general partner of a limited
liability partnership.
b. Proprietorship. There is a single owner of the business,
so the owner is answerable to no other owner.
c. Partnership. If the partnership fails and cannot pay its
liabilities, creditors can force the partners to pay the
business’s debts from their personal assets. A
partnership affords more protection for creditors than a
proprietorship because there are two or more owners to
share this liability.
(5 min.) S 1-2
1. The entity assumption applies.
2. Application of the entity assumption will separate
Osmond’s personal assets from the assets of Simple
Treats, Inc. This will help Osmond, investors, and
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-2
, lenders know how much assets, liabilities and equity the
business has, and this knowledge will help all parties
evaluate the business realistically.
(5-10 min.) S 1-3
a. Stable-monetary-unit assumption
b. Historical cost principle; $300 is the accounting value
of the laptop
c. Historical cost principle; the sale price is the amount
actually received from the sale
d. Entity assumption
(10 min.) S 1-4
Computed amounts in boxes
Total Assets = Total + Stockholders’
Liabilities Equity
a. $660,000 = $300,000 + $360,000
b. 85,000 = 50,000 + 35,000
c. 350,000 = 75,000 + 275,000
(5 min.) S 1-5
1. Liabilities = Assets − Owners’ Equity
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-3
, 2. Owners’ Equity = Assets − Liabilities
This way of determining the amount of owners’ equity
applies to any company or your household.
(5-10 min.) S 1-6
a. Land A g. Retained earnings S
b. Accrued expenses h. Prepaid expenses A
payable L
c. Supplies A i. Accounts payable L
d. Equipment A j. Accounts receivable
A
e. Notes payable L k. Merchandise inventory
A
f. Long-term debt L l. Common stock S
(5-10 min.) S 1-7
1. Assets are the economic resources of a business that
are expected to produce a benefit in the future.
Owners’ (stockholders’) equity represents the insider
claims of a business, the owners’ interest in its assets.
Assets and owners’ equity differ in that assets are
resources and owners’ equity is a claim to assets.
Assets must be at least as large as owners’ equity, so
equity can be smaller than assets.
Copyright © 2022 Pearson Education Inc. Chapter 1 The Financial Statements 1-4
