SOLUTIONS MANUAL
Financial Accounting, 17/E Carl Warren
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 owner’s
capital 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) Owner’s capital at the end of the period
(c) Cash at the end of the period
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, CHAPTER 1 Introduction to Accounting and Business
BASIC EXERCISES
BE 1–1
$320,000. Under the cost principle, the land should be recorded at the cost to Tin
Roofing.
BE 1–2
a. A = L + OE
$690,000 = $375,000 + OE
OE = $315,000
b. A = L + OE
$690,000 + $80,000 = $375,000 + $51,500 + OE
$770,000 = $426,500 + OE
OE = $343,500
BE 1–3
(2) Expense (Advertising Expense) increases by $3,500;
Asset (Cash) decreases by $3,500.
(3) Asset (Supplies) increases by $2,500;
Liability (Accounts Payable) increases by $2,500.
(4) Asset (Accounts Receivable) increases by $18,750;
Revenue (Delivery Service Fees) increases by $18,750.
(5) Asset (Cash) increases by $14,150;
Asset (Accounts Receivable) decreases by $14,150.
BE 1–4
A-One Travel Service
Income Statement
For the Year Ended August 31, 20Y6
Fees earned $1,150,000
Expenses:
Wages expense $640,000
Office expense 150,000
Miscellaneous expense 45,000
Total expenses (835,000)
Net income $ 315,000
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, CHAPTER 1 Introduction to Accounting and Business
BE 1–5
A-One Travel Service
Statement of Owner’s Equity
For the Year Ended August 31, 20Y6
Kate Duffner, capital, September 1, 20Y5 $ 835,000
Additional investment by owner 15,000
Net income for the year 315,000
Withdrawals (50,000)
Kate Duffner, capital, August 31, 20Y6 $1,115,000
BE 1–6
A-One Travel Service
Balance Sheet
August 31, 20Y6
Assets
Cash $ 184,500
Accounts receivable 68,000
Supplies 17,500
Land 880,000
Total assets $1,150,000
Liabilities
Accounts payable $ 35,000
Owner’s Equity
Kate Duffner, capital 1,115,000
Total liabilities and owner’s equity $1,150,000
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, CHAPTER 1 Introduction to Accounting and Business
BE 1–7
A-One Travel Service
Statement of Cash Flows
For the Year Ended August 31, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers $1,125,000
Cash paid for operating expenses (815,000)
Net cash flows from operating activities $ 310,000
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 owner’s investment $ 15,000
Cash paid for owner withdrawals (50,000)
Net cash flows used for financing activities (35,000)
Net increase in cash $ 125,000
Cash balance, September 1, 20Y5 59,500
Cash balance, August 31, 20Y6 $ 184,500
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
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