Chapter 1 Exercise
Chapter 1 Exercise
CHAPTER 1
Introduction to Financial Statements
I/ Key Things to Know
The Purpose of Financial Accounting is to:
1) Record 2) Summarize, and 3) Report transactions of the company:
Internal Users: managers who plan, organize and run the company
External Users: Investors who invest in the company
Creditors who loan money to the company
Financial Statements:
Balance Sheet: States what your business owns (assets) and owes (liabilities) on
a specific date.
Also shows the amount owned – assets less liabilities
Income Statement: Shows how much the business earned during a period of time.
This is what you have earned from providing goods and services
less what it costs you to provide goods and services
What does each financial statement really tell you about the business?
Each statement has a heading that states the company name and the date
or time period covered
Balance Sheet: What the company has and what they owe on a certain date
Income Statement: How much the company earned during a specific period of time
(monthly, quarterly, year)
Owner’s Equity: What occurred that impacted the owners of the company during
a specific period of time
Cash Flows: How much cash was generated from day to day operations
What the cash was used for
Where additional cash came from and how much was received
Liability: The company’s debts and obligations What the company OWES
1) Probable use of a future economic benefit (an asset)
2) Owed
3) Resulting from a past transaction
You will give up an asset to pay what you owe
Stockholder’s Equity: Earnings kept in the company / financing provided by the owners
1) Owner contributions to the company
2) Less dividends paid to owners
3) Plus profits and less losses, also called net income
Stockholder’s Equity is also equal to total assets less total liabilities
Important: Revenues and expenses do not occur when the cash is received
or paid. They occur when the good or service is exchanged.
Revenues: the company gives the good or service
Expense: the company receives the service or uses up the asset
** Net Income (Revenues – Expenses) will not equal cash.
Revenues
What you have you owe for or own outright - Expenses
Net profit or loss
Auditor’s Report:
A professional accountant examines the company’s financial statements and gives a
report that determines if the statements are fairly stated in accordance with GAAP.
a. inventory
b. prepaid expenses
c. sales
d. cost of goods sold
e. cash
f. accounts payable
g. accrued expenses
h. cash from operations
i. accounts receivable
j. interest revenue
k. notes payable
l. dividends paid
m. rent expense
n. taxes payable
o. accumulated depreciation
Q3. A company had assets of $230,000 and liabilities of $145,000 at the beginning of the year.
During the year the company earned $45,000 and reduced what it owed by $22,000. What is total
assets at the end of the year?
a. $185,000
b. $275,000
c. $253,000
d. $297,000
Q4. The company received bills for services provided to them during this month totaling $11,800
and paid bills this month totaling $13,600. What will be reported as expenses for this month?
a. $13,600
b. $11,800
c. $25,400
d. $ 1,800
Q5. The company provided goods to customers totaling $34,800 and collected payments from
customers this month in the amount of $39,200. What will be reported as revenues for this month?
a. $39,200
b. $34,800
c. $74,000
d. $ 4,400
Q6. State whether each of the following is an asset (A), liability (L), stockholder’s equity (S),
revenue ( R), or an expense (E)
______1. Paid for advertising run this month.
______2. Amounts that the company owes for utilities
______3. Buildings
______4. Items held only to sell to a customer
______5. A customer pays for a service provided at the time it is provided
______6. Paying expenses before they are used
______7. Patents
______8. The cost of inventory that was sold to customers
______9. Total profits and losses for all periods
_____10. Earning interest on investments this period
Q7. During the first month of business the company had the following transactions:
1) issued stock to investors for $100,000
2) purchased inventory on account for $35,000
3) sold inventory that cost $29,000 to customers on account for $45,000
4) workers will be paid $10,000, they are paid the first of the following month
PH D. NGUYEN THANH NAM
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Q8. Review each of the following transactions and determine if the transaction will increase
(I) decrease (D) or have no effect (NA) on TOTAL ASSET of the company
Transaction: an act that creates an exchange of something for something else
a. provide a service or goods to a customer in exchange for cash
b. purchase a delivery truck, pay cash for the truck
c. pay an employee for work
d. pay the utility company for providing electricity
e. receive money from the bank and agree to pay it back later
Q9. Review each of the following transactions and determine if the transaction will increase
(I) decrease (D) or have no effect (NA) on TOTAL LIABILITY of the company.
_______1. Borrow money from the bank
_______2. Pay cash for inventory to sell to the customers
_______3. Issue common stock to investors
_______4. Purchase a truck for company use, agree to a notes payable
_______5. Pay employees who worked this week
_______6. Receive the utility bill – it will be paid later
_______7. Sell goods to a customer on account
_______8. Pay for insurance for the next 6 months
_______9. Use cash to make an investment to be held long term
______10. Purchase the company’s own stock from investors
Q11. Question Briefly explain how each of the following transactions would affect a company's
balance sheet.
a. Purchase a new $40 million building, financed 25 percent with cash and 75 percent with a
bank loan.
b. Purchase a new building for $40 million cash.
c. A $10,00 payment to trade creditors.
d. Sale of 100,000 of merchandise cash.
e. Sale of 100,000 of merchandise credit.
Required: Show transaction similar to sample above
What does each financial statement really tell you about the business?
Balance Sheet: What the company has and what they owe on this date
Income Statement: How much the company earned during this period of time
Owner’s Equity: What occurred that impacted the owners of the company
Cash Flows: Cash generated from day to day operations, use for, and additional cash from?
“Retained Earnings” is the amount of cumulative profits and losses kept in the company
Beginning R.E. + Net Income – Dividends Paid = Ending R. E. put on the balance sheet
Liability: The company’s debts and obligations What the company OWES
1) Probable use of a future economic benefit (an asset)
2) Owed 3) Resulting from a past transaction Give up an asset to pay what is owed
Stockholder’s Equity: Earnings and financing provided by the owners (Assets – Liabilities)
Important: Revenues and Expenses do not occur when the cash is received or paid
The Accounting Equation: Must always stay in balance Assets = Liabilities + O.E.
Auditor’s Report:
A professional accountant examines the company’s financial statements and gives a
report that determines if the statements are fairly stated in accordance with GAAP.