SOLUTIONS MANUAL
Survey of Accounting 10th Edition by Carl Warren
CHAPTER 1
THE ROLE OF ACCOUNTING IN BUSINESS
CLASS DISCUSSION QUESTIONS
1. The objective of most businesses is to maximize profits. Profit is the difference between
the amounts received from customers for goods or services provided and the amounts
paid for the inputs used to provide those goods or services.
2. A manufacturing business changes basic inputs into products that are sold to customers. In
contrast, a merchandising business purchases products in a form that can be sold to
customers without any additional changes. Examples of manufacturing businesses include
Alcoa, Boeing, Caterpillar, and Dow Chemical. Examples of merchandising businesses
include Best Buy, Macy’s, Target, and Walmart.
3. A manufacturing business changes basic inputs into products that are sold to customers. A
service business provides services rather than products to customers. A restaurant, such
as McDonald’s, has characteristics of both a manufacturing and a service business in that
McDonald’s takes raw inputs, such as cheese, fish, and beef, and processes them into
products for consumption by its customers. At the same time, McDonald’s provides
services of waiting on its customers.
4. The corporate form allows the company to obtain large amounts of resources by issuing
stock. In addition, in a corporation, the stockholders’ liability to creditors for the debts of the
company is limited to their investment in the corporation. For these reasons, most large
companies that require large investments in property, plant, and equipment are organized
as corporations.
5. eBay services its customers by maintaining a Web-based community in which buyers and
sellers are brought together in an efficient format to browse, buy, and sell items such as
collectibles, automobiles, high-end or premium art pieces, jewelry, consumer electronics,
and a host of practical and miscellaneous items.
6. No. The stakeholders within a group do not always share the same interests. For example,
bankers are primarily concerned about the ability of the business to repay its debt,
including interest. In contrast, stockholders are more concerned about the long-term
profitability of the business, the business’s ability to pay dividends, and the future
appreciation of their stock.
7. Examples of financing activities for Southwest Airlines could include issuing stock,
borrowing from banks, and paying dividends. Examples of investing activities could include
purchasing new aircraft, acquiring new terminal facilities, and upgrading its computerized
reservation systems. Examples of operating activities could include transporting
passengers and freight.
8. The role of accounting is to provide information for managers to use in operating the
business. In addition, accounting provides information to other stakeholders to use in
assessing the economic performance and condition of the business.
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,CLASS DISCUSSION QUESTIONS (Continued)
9. The income statement presents a summary of the revenues and expenses of a business for
a specific period of time. The statement of stockholders’ equity indicates the changes in
retained earnings that have occurred over a specific period of time. The balance sheet
presents a listing of the assets, liabilities, and stockholders’ equity of a business as of a
specific date. The statement of cash flows presents a summary of the cash receipts and cash
payments of a business entity for a specific period of time.
10. Target reported net income of $6,946 million ($106,005 million – $99,059 million).
11. Net income or net loss will appear on the income statement and the statement of
stockholders’ equity. The Retained Earnings and Common Stock balances at the end of the
period will appear on the statement of stockholders’ equity and the balance sheet. Finally, the
Cash balance at the end of the period will appear on the balance sheet and the statement of
cash flows.
12. No. The business entity concept limits the recording of economic data to transactions directly
affecting the activities of the business. The payment of the interest of $6,000 is a personal
transaction of Billy Jessop and should not be recorded by Valley Delivery Service.
13. The land should be recorded at its cost of $110,000 to Wok Repair Service. This is consistent
with the cost concept.
14. No. The offer of $975,000 and the increase in the assessed value should not be recognized
in the accounting records. This is consistent with the cost concept.
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, EXERCISES
E1–1
1. service 6. merchandising 11. manufacturing
2. merchandising 7. manufacturing 12. service
3. manufacturing 8. manufacturing 13. service
4. manufacturing 9. service 14. service
5. service 10. manufacturing 15. merchandising
E1–2
(in millions)
Best Buy: $17,504 – 14,484 = $3,020
Gamestop: $3,499 – 1,897 = $1,602
E1–3
(in millions)
Apple: $351,002 – $287,912 = $63,090
Microsoft: $333,779 – $191,791 = $141,988
E1–4
a. $295,500 + $475,000 = $770,500
b. $1,110,000 – $737,500 = $372,500
c. $3,350,000 – $1,050,000 = $2,300,000
E1–5
a. $59,268 – $41,190 = $18,078
b. $53,811 – $12,827 = $40,984
c. $152,969 + $91,891 = $244,860
E1–6
It would be incorrect to say the business had incurred a net loss of $10,000. The
excess of the dividends over the net income for the period is a decrease in the
amount of retained earnings in the business.
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, E1–7
Company Chang
Stockholders’ equity at end of year ($900,000 – $300,000).................................... $600,000
Deduct stockholders’ equity at beginning of year ($775,000 – $400,000)............. (375,000)
Net income (increase in stockholders’ equity)................................................... $225,000
Company Henry
Increase in stockholders’ equity (as determined for Chang)................................. $225,000
Add dividends............................................................................................................. 90,000
Net income............................................................................................................. $315,000
Company Nagel
Increase in stockholders’ equity (as determined for Chang)................................. $225,000
Deduct additional issuance of capital stock............................................................ (125,000)
Net income............................................................................................................. $100,000
Company Wilcox
Increase in stockholders’ equity (as determined for Chang)................................. $225,000
Deduct additional issuance of capital stock............................................................ (125,000)
$100,000
Add dividends............................................................................................................. 90,000
Net income............................................................................................................. $190,000
E1–8
a. (1) $4,865 – $1,438 = $3,427
(2) $5,614 – $3,734 = $1,880
b. $8,465 – $6,602 – $1,629 – $3 – $44 = $187 net income
E1–9
Balance sheet items: 1, 2, 3, 7, 8
E1–10
Income statement items: 4, 5, 6, 9, 10
E1–11
1. a—asset 6. a—asset
2. b—liability 7. b—liability
3. a—asset 8. d—expense
4. e—dividend 9. d—expense
5. c—revenue 10. d—expense
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