CHAPTER 1
INTRODUCTION TO ACCOUNTING AND BUSINESS
DISCUSSION QUESTIONS
1. Some users of accounting information include managers, employees, investors, creditors, customers, and
the government.
2. The role of accounting is to provide information for managers to use in operating the business. In
addition, accounting provides information to others to use in assessing the economic performance and
condition of the business.
3. The corporate form allows the company to obtain large amounts of resources by issuing stock. For this
reason, most companies that require large investments in property, plant, and equipment are organized
as corporations.
4. No. The business entity assumption limits the recording of economic data to transactions directly
affecting the activities of the business. The payment of the interest of $4,500 is a personal transaction of
Josh Reilly and should not be recorded by Dispatch Delivery Service.
5. The land should be recorded at its cost of $167,500 to Reliable Repair Service. This is consistent with
the cost principle.
6. a. No. The offer of $2,000,000 and the increase in the assessed value should not be recognized in the
accounting records.
b. Cash would increase by $2,125,000, land would decrease by $900,000, and stockholders’ equity
would increase by $1,225,000.
7. An account receivable is a claim against a customer for goods or services sold. An account payable is an
amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the
records of the seller is an account payable in the records of the purchaser.
8. (b) The business realized net income of $91,000 ($679,000 – $588,000).
9. (a) The business incurred a net loss of $75,000 ($640,000 – $715,000).
10. (a) Net income or net loss
(b) Common stock and retained earnings at the end of the period
(c) Cash at the end of the period
1-1
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Introduction to Accounting and Business
BASIC EXERCISES
BE 1–1
$275,000. Under the cost principle, the land should be recorded at the cost to Ritts Roofing.
BE 1–2
a. A = L + SE
$395,000 = $97,000
SE = $298,000
b. A = L + SE
–$65,000 = $36,000
SE = –$101,000
SE on December 31, 20Y2 = $298,000
SE on December 31, 20Y3 = $197,000
BE 1–3
(2) Expense (Advertising Expense) increases by $4,850;
Asset (Cash) decreases by $4,850.
(3) Asset (Supplies) increases by $2,100;
Liability (Accounts Payable) increases by $2,100.
(4) Asset (Accounts Receivable) increases by $14,700;
Revenue (Delivery Service Fees) increases by $14,700.
(5) Asset (Cash) increases by $8,200;
Asset (Accounts Receivable) decreases by $8,200.
BE 1–4
Paradise Travel Service
Income Statement
For the Year Ended May 31, 20Y6
Fees earned $ 900,000
Expenses:
Wages expense $450,000
Office expense 300,000
Miscellaneous expense 15,000
Total expenses (765,000)
Net income $ 135,000
1-2
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Introduction to Accounting and Business
BE 1–5
Paradise Travel Service
Statement of Stockholders’ Equity
For the Year Ended May 31, 20Y6
Common Retained
Stock Earnings Total
Balances, June 1, 20Y5 $ 60,000 $300,000 $360,000
Issued common stock 40,000 40,000
Net income 135,000 135,000
Dividends (10,000) (10,000)
Balances, May 31, 20Y6 $100,000 $425,000 $525,000
BE 1–6
Paradise Travel Service
Balance Sheet
May 31, 20Y6
Assets
Cash $ 52,000
Accounts receivable 38,000
Supplies 3,000
Land 450,000
Total assets $ 543,000
Liabilities
Accounts payable $ 18,000
Stockholders’ Equity
Common stock $100,000
Retained earnings 425,000
Total stockholders’ equity 525,000
Total liabilities and stockholders’ equity $ 543,000
1-3
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Introduction to Accounting and Business
BE 1–7
Paradise Travel Service
Statement of Cash Flows
For the Year Ended May 31, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers $ 880,000
Cash paid for operating expenses (758,000)
Net cash flows from operating activities $ 122,000
Cash flows from (used for) investing activities:
Cash paid for purchase of land (150,000)
Cash flows from (used for) financing activities:
Cash received from issuing common stock $ 40,000
Cash paid for dividends (10,000)
Net cash flows from financing activities 30,000
Net increase in cash $ 2,000
Cash balance, June 1, 20Y5 50,000
Cash balance, May 31, 20Y6 $ 52,000
BE 1–8
a. Dec. 31, Dec. 31,
20Y4 20Y3
Total liabilities $4,085,000 $2,880,000
Total stockholders’ equity $4,300,000 $3,600,000
Ratio of liabilities to stockholders’ equity 0.95* 0.80**
* $4,085,000 ÷ $4,300,000
** $2,880,000 ÷ $3,600,000
b. Increased
1-4
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
INTRODUCTION TO ACCOUNTING AND BUSINESS
DISCUSSION QUESTIONS
1. Some users of accounting information include managers, employees, investors, creditors, customers, and
the government.
2. The role of accounting is to provide information for managers to use in operating the business. In
addition, accounting provides information to others to use in assessing the economic performance and
condition of the business.
3. The corporate form allows the company to obtain large amounts of resources by issuing stock. For this
reason, most companies that require large investments in property, plant, and equipment are organized
as corporations.
4. No. The business entity assumption limits the recording of economic data to transactions directly
affecting the activities of the business. The payment of the interest of $4,500 is a personal transaction of
Josh Reilly and should not be recorded by Dispatch Delivery Service.
5. The land should be recorded at its cost of $167,500 to Reliable Repair Service. This is consistent with
the cost principle.
6. a. No. The offer of $2,000,000 and the increase in the assessed value should not be recognized in the
accounting records.
b. Cash would increase by $2,125,000, land would decrease by $900,000, and stockholders’ equity
would increase by $1,225,000.
7. An account receivable is a claim against a customer for goods or services sold. An account payable is an
amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the
records of the seller is an account payable in the records of the purchaser.
8. (b) The business realized net income of $91,000 ($679,000 – $588,000).
9. (a) The business incurred a net loss of $75,000 ($640,000 – $715,000).
10. (a) Net income or net loss
(b) Common stock and retained earnings at the end of the period
(c) Cash at the end of the period
1-1
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Introduction to Accounting and Business
BASIC EXERCISES
BE 1–1
$275,000. Under the cost principle, the land should be recorded at the cost to Ritts Roofing.
BE 1–2
a. A = L + SE
$395,000 = $97,000
SE = $298,000
b. A = L + SE
–$65,000 = $36,000
SE = –$101,000
SE on December 31, 20Y2 = $298,000
SE on December 31, 20Y3 = $197,000
BE 1–3
(2) Expense (Advertising Expense) increases by $4,850;
Asset (Cash) decreases by $4,850.
(3) Asset (Supplies) increases by $2,100;
Liability (Accounts Payable) increases by $2,100.
(4) Asset (Accounts Receivable) increases by $14,700;
Revenue (Delivery Service Fees) increases by $14,700.
(5) Asset (Cash) increases by $8,200;
Asset (Accounts Receivable) decreases by $8,200.
BE 1–4
Paradise Travel Service
Income Statement
For the Year Ended May 31, 20Y6
Fees earned $ 900,000
Expenses:
Wages expense $450,000
Office expense 300,000
Miscellaneous expense 15,000
Total expenses (765,000)
Net income $ 135,000
1-2
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Introduction to Accounting and Business
BE 1–5
Paradise Travel Service
Statement of Stockholders’ Equity
For the Year Ended May 31, 20Y6
Common Retained
Stock Earnings Total
Balances, June 1, 20Y5 $ 60,000 $300,000 $360,000
Issued common stock 40,000 40,000
Net income 135,000 135,000
Dividends (10,000) (10,000)
Balances, May 31, 20Y6 $100,000 $425,000 $525,000
BE 1–6
Paradise Travel Service
Balance Sheet
May 31, 20Y6
Assets
Cash $ 52,000
Accounts receivable 38,000
Supplies 3,000
Land 450,000
Total assets $ 543,000
Liabilities
Accounts payable $ 18,000
Stockholders’ Equity
Common stock $100,000
Retained earnings 425,000
Total stockholders’ equity 525,000
Total liabilities and stockholders’ equity $ 543,000
1-3
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Introduction to Accounting and Business
BE 1–7
Paradise Travel Service
Statement of Cash Flows
For the Year Ended May 31, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers $ 880,000
Cash paid for operating expenses (758,000)
Net cash flows from operating activities $ 122,000
Cash flows from (used for) investing activities:
Cash paid for purchase of land (150,000)
Cash flows from (used for) financing activities:
Cash received from issuing common stock $ 40,000
Cash paid for dividends (10,000)
Net cash flows from financing activities 30,000
Net increase in cash $ 2,000
Cash balance, June 1, 20Y5 50,000
Cash balance, May 31, 20Y6 $ 52,000
BE 1–8
a. Dec. 31, Dec. 31,
20Y4 20Y3
Total liabilities $4,085,000 $2,880,000
Total stockholders’ equity $4,300,000 $3,600,000
Ratio of liabilities to stockholders’ equity 0.95* 0.80**
* $4,085,000 ÷ $4,300,000
** $2,880,000 ÷ $3,600,000
b. Increased
1-4
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
