Acct 201

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ACCT 201
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Chapter 1 Solutions

The Financial Statements

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Short Exercises

(5 min.) S 1-1

Computed amounts in boxes|
| | | | | |
| Total Assets| =| Total Liabilities| +| Stockholders’ Equity| | | | | | |
a.| $340,000| =| $130,000| +| $210,000|
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b.| 250,000| =| 70,000| +| 180,000|
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c.| 190,000| =| 110,000| +| 80,000|

(5 min.) S 1-2

Ethics is a factor that should be included in every business and accounting decision, beyond the potential economic and legal consequences. Ideally, for each decision, honesty and truthfulness should prevail, considering the rights of others. The decision guidelines at the end of the chapter spell out the considerations we should take when making decisions. Simply, we might ask ourselves three questions: (1) is the action legal? (2) Who will be affected by the decision? (3) How will the decision make me feel afterward?

(10 min.) S 1-3

a.Corporation, Limited-liability partnership (LLP) and Limited-liability company (LLC). If any of these businesses fails and cannot pay its liabilities, creditors cannot force the owners to pay the business’s debts from the owners’ personal assets.

b.Proprietorship. There is a single owner of the business, so the owner is answerable to no other owner.

c.Partnership. If the partnership fails and cannot pay its liabilities, creditors can force the partners to pay the business’s debts from their personal assets. A partnership affords more protection for creditors than a proprietorship because there are two or more owners to share this liability.

(5 min.) S 1-4

1.The entity assumption applies.
2.Application of the entity assumption will separate Newman’s personal assets from the assets of Quality Food Brands. This will help Newman, investors, and lenders know how much in assets the business controls, and this knowledge will help all parties evaluate the business realistically.

(5-10 min.) S 1-5

a.Historical cost principle
b.Stable-monetary-unit assumption
c.Entity assumption
d.Historical cost principle

(5 min.) S 1-6

1.Owners’ Equity = Assets − Liabilities
This way of determining the amount of owners’ equity applies to any company, your household, or a single Denny’s restaurant.
2.Liabilities = Assets − Owners’ Equity
(5 min.) S 1-7

1.Assets are the economic resources of a business that are expected to produce a benefit in the future.
Owners’ equity represents the insider claims of a business, the owners’ interest in its assets.
Assets and owners’ equity differ in that assets are resources and owners’ equity is a claim to assets.
Assets must be at least as large as owners’ equity, so equity can be smaller than assets.

2.Both liabilities and owners’ equity are claims to assets.
Liabilities are the outsider claims to the assets of a business; they are obligations to pay creditors.
Owners’ equity represents the insider claims to the assets of the business; they are the owners’ interest in its assets.

(5-10 min.) S 1-8

a.| Accounts payable L | g.| Accounts receivable A  | | | | |
b.| Common stock E  | h.| Long-term debt L   | | | | |
c.| Supplies A   | i.| Merchandise inventory A  | | | | |
d.| Retained earnings   E  | j.| Notes payable L| | | | |
e.| Land A| k.| Expenses payable L |
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f.| Prepaid expenses A   | l.| Equipment A   |

(5 min.) S 1-9

1.Revenues and expenses...
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