Chapter 1 Exercises

E1.1
Classify the three activities of accounting.
(LO 1) Genesis Company performs the following accounting tasks during the year.
 ________ Analyzing and interpreting information.
 ________ Classifying economic events.
 ________ Explaining uses, meaning, and limitations of data.
 ________ Keeping a systematic chronological diary of events.
 ________ Measuring events in dollars and cents.
 ________ Preparing accounting reports.
 ________ Reporting information in a standard format.
 ________ Selecting economic activities relevant to the company.
 ________ Summarizing economic events.
Accounting is “an information system that identifies, records, and communicates the economic events of an
organization to interested users.”
Instructions
Categorize the accounting tasks performed by Genesis as relating to either the identification (I), recording (R),
or communication (C) aspects of accounting.

E1.2
Identify users of accounting information.
(LO 1)
(a) The following are users of financial statements.
 ________ Customers
 ________ Internal Revenue Service
 ________ Labor unions
 ________ Marketing manager
 ________ Production supervisor
 ________ Securities and Exchange Commission
 ________ Store manager
 ________ Suppliers
 ________ Vice president of finance
Instructions
Identify the users as being either external users or internal users.
(b) The following questions could be asked by an internal user or an external user.
 ________ Can we afford to give our employees a pay raise?
 ________ Did the company earn a satisfactory income?
 ________ Do we need to borrow in the near future?
 ________ How does the company's profitability compare to other companies?
 ________ What does it cost us to manufacture each unit produced?
 ________ Which product should we emphasize?
 ________ Will the company be able to pay its short-term debts?
Instructions
Identify each of the questions as being more likely asked by an internal user or an external user.

E1.3
Discuss ethics and the historical cost principle.
(LO 2) Angela Duffy, president of Duffy Company, has instructed Jana Barth, the head of the accounting
department for Duffy Company, to report the company's land in the company's accounting reports at its fair
value of $170,000 instead of its cost of $100,000. Duffy says, “Showing the land at $170,000 will make our
company look like a better investment when we try to attract new investors next month.”
Instructions
Explain the ethical situation involved for Jana Barth, identifying the stakeholders and the alternatives.

E1.4
Use accounting concepts.
(LO 2) The following situations involve accounting principles and assumptions.
 1.Sosa Company owns buildings that are worth substantially more than they originally cost. In an effort to
provide more relevant information, Sosa reports the buildings at fair value in its accounting reports.
 2.Mays Company includes in its accounting records only transaction data that can be expressed in terms of
money.
 3.Curt Russell, owner of Curt's Photography, records his personal living costs as expenses of the business.
Instructions
For each of the three situations, say if the accounting method used is correct or incorrect. If correct, identify
which principle or assumption supports the method used. If incorrect, identify which principle or assumption
has been violated.

E1.5
Classify accounts as assets, liabilities, and owner's equity.
(LO 3) Diehl Cleaners has the following balance sheet items.
Accounts payable Accounts receivable
Cash Notes payable
Equipment Salaries and wages payable
Supplies Owner's capital
Instructions
Classify each item as an asset, liability, or owner's equity.

E1.6
Analyze the effect of transactions.
(LO 4) Selected transactions for Green Valley Lawn Care Company are listed below.
 1.Made cash investment to start business.
 2.Paid monthly rent.
 3.Purchased equipment on account.
 4.Billed customers for services performed.
 5.Withdrew cash for owner's personal use.
 6.Received cash from customers billed in (4).
 7.Incurred advertising expense on account.
 8.Purchased additional equipment for cash.
 9.Received cash from customers when service was performed.
Instructions
List the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and
owner's equity. For example, the first answer is: (1) Increase in assets and increase in owner's equity.

E1.7
Analyze the effect of transactions on assets, liabilities, and owner's equity.
(LO 4) Falske Computer Timeshare Company entered into the following transactions during May 2020.
 1.Purchased computers for $20,000 from Digital Equipment on account.
 2.Paid $4,000 cash for May rent on storage space.
 3.Received $17,000 cash from customers for contracts billed in April.
 4.Performed computer services for Viking Construction Company for $4,000 cash.
 5.Paid Tri-State Power Co. $11,000 cash for energy usage in May.
 6.Falske invested an additional $29,000 in the business.
 7.Paid Digital Equipment for the computers purchased in (1) above.
 8.Incurred advertising expense for May of $1,200 on account.
Instructions
Indicate with the appropriate letter whether each of the transactions above results in:
(a) An increase in assets and a decrease in assets.
(b) An increase in assets and an increase in owner's equity.
(c) An increase in assets and an increase in liabilities.
(d) A decrease in assets and a decrease in owner's equity.
(e) A decrease in assets and a decrease in liabilities.
(f) An increase in liabilities and a decrease in owner's equity.
(g) An increase in owner's equity and a decrease in liabilities.

E1.8
Analyze transactions and compute net income.
(LO 4) An analysis of the transactions made by Peat Deloitte & Co., a certified public accounting firm, for the
month of August is shown below. The expenses were $560 for rent, $4,800 for salaries and wages, and $400 for
utilities.
Account Accou Owner Owner'
s nts 's s
Receiva Suppli Equipm Payabl Capita Drawin Revenu Expens
Cash + ble + es + ent = e + l − gs + es − es
1. + +
$15,00 $15,00
0 0
2. −2,000 +$5,000 +
$3,000
3. −750 +$750
4. +4,000 +$4,500 +
$8,500
5. −1,500 −1,50
0
6. −2,000 −
$2,000
7. −560 −$560
8. +450 −450
9. −4,800 −4,80
0
1 +40 −400
0. 0
Instructions
(a) Describe each transaction that occurred for the month.
(b) Determine how much owner's equity increased for the month.
(c) Compute the amount of net income for the month.

E1.9
Prepare financial statements.
(LO 5) An analysis of transactions for Peat DeLoitte & Co. was presented in E1.8.
Instructions
Prepare an income statement and an owner's equity statement for August and a balance sheet at August 31,
2020. Assume that August is the company's first month of business.

E1.10
Determine net income (or loss).
(LO 5) Hawke Company had the following assets and liabilities on the dates indicated.
December 31 Total Assets Total Liabilities
2019 $400,000 $250,000
2020 $460,000 $300,000
2021 $590,000 $400,000
Hawke began business on January 1, 2019, with an investment of $100,000.
Instructions
From an analysis of the change in owner's equity during the year, compute the net income (or loss) for:
(a) 2019, assuming Finch's drawings were $12,000 for the year.
(b) 2020, assuming Finch made an additional investment of $34,000 and had no drawings in 2020.
(c) 2021, assuming Finch made an additional investment of $12,000 and had drawings of $25,000 in 2021.

E1.11
Analyze financial statements items.
(LO 5) Two items are omitted from each of the following summaries of balance sheet and income statement
data for two proprietorships for the year 2017, Greene's Goods and Solar Enterprises.
Greene's Goods Solar Enterprises
Beginning of year:
Total assets $110,000 $129,000
Total liabilities 85,000 (c)
Total owner's equity (a) 80,000
End of year:
Total assets 160,000 180,000
Total liabilities 120,000 50,000
Total owner's equity 40,000 130,000
Changes during year in owner's equity:
Additional investment (b) 25,000
Drawings 37,000 (d)
Total revenues 220,000 100,000
Total expenses 175,000 60,000
Instructions
Determine the missing amounts.

E1.12
Prepare income statement and owner's equity statement.
(LO 5) The following information relates to Fleete Co. for the year 2020.
Owner's capital, January 1, $42,000
2020
Owner's drawings during 2020 6,000
Service revenue 63,600
Salaries and wages expense 30,200
Advertising expense $ 1,800
Rent expense 10,400
Utilities expense 3,100
Instructions
After analyzing the data, prepare an income statement and an owner's equity statement for the year ending
December 31, 2020.

E1.13
Correct an incorrectly prepared balance sheet.
(LO 5) Abby Roland is the bookkeeper for Cheng Company. Abby has been trying to determine the correct
balance sheet for Cheng Company. Cheng's balance sheet is shown below.
Cheng Company
Balance Sheet
December 31, 2020
Assets Liabilities
Cash $15,000 Accounts payable $21,000
Supplies 8,000 Accounts receivable (6,500)
Equipment 46,000 Owner's capital 67,500
Owner's drawings 13,000 Total liabilities and owner's
equity
Total assets $82,000 $82,000
Instructions
Prepare a correct balance sheet.

E1.14
Compute net income and prepare a balance sheet.
(LO 5) Saira Morrow is the sole owner of Buena Vista Park, a public camping ground near the Crater Lake
National Recreation Area. Saira has compiled the following financial information as of December 31, 2020.
Revenues during 2020—camping $140,000
fees
Revenues during 2020—general store 65,000
Accounts payable 11,000
Cash on hand 23,000
Original cost of equipment 115,500
Fair value of equipment $140,000
Notes payable 60,000
Expenses during 2020 160,000
Accounts receivable 17,500
Instructions
(a) Determine Loren Satina's net income from Clear View Park for 2020.
(b) Prepare a balance sheet for Clear View Park as of December 31, 2020.

E1.15
Prepare an income statement.
(LO 5) Presented below is financial information related to the 2020 operations of Sea Legs Cruise Company.
Maintenance and repairs $ 95,000
expense
Utilities expense 13,000
Salaries and wages expense 142,000
Advertising expense 24,500
Ticket revenue 410,000
Instructions
Prepare the 2020 income statement for Sea Legs Cruise Company.

E1.16
Prepare an owner's equity statement.
(LO 5) Presented below is information related to the sole proprietorship of Helen Archer, attorney.
Legal service revenue—2020 $330,000
Total expenses—2020 211,000
Assets, January 1, 2020 98,000
Liabilities, January 1, 2020 62,000
Assets, December 31, 2020 168,000
Liabilities, December 31, 2020 100,000
Drawings—2020 ?
Instructions
Prepare the 2020 owner's equity statement for Helen Archer's legal practice.

E1.17
Prepare a cash flow statement.
(LO 5) This information is for Paulo Company for the year ended December 31, 2020.
Cash received from revenues from customers $600,000
Cash received from investment by owner 280,000
 Cash paid for new equipment 115,000
Cash drawings by owner paid 18,000
Cash paid for expenses 430,000
Cash balance 1/1/20 30,000
Instructions
Prepare the 2020 statement of cash flows for Paulo Company.

E1.18
Identify cash flow activities.
(LO 5) The statement of cash flows classifies each transaction as an operating activity, an investing activity, or
a financing activity. Operating activities are the types of activities the company performs to generate profits.
Investing activities include the purchase of long-lived assets such as equipment or the purchase of investment
securities. Financing activities are borrowing money, investment by owner, and cash drawings by owner.
Presented below are the following transactions.
 1.Owner invested $20,000 cash.
 2.Issued note payable for $12,000 cash.
 3.Purchased office equipment for $11,000 cash.
 4.Received $15,000 cash for services performed.
 5.Paid $1,000 cash for rent.
 6.Paid $600 cash drawings to owner.
 7.Paid $5,700 cash for salaries.
Instructions
Classify each of these transactions as operating, investing, or financing activities.
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