solution to Financial Accounting Libby 6th Edition chap003.docx

solution to Financial Accounting Libby 6th Edition chap003.docx

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solutiontoFinancialAccountingLibby6thEditionchap003

Chapter3

OperatingDecisionsand

theIncomeStatement

ANSWERSTOQUESTIONS

1.Atypicalbusinessoperatingcycleforamanufacturerwouldbeasfollows:

inventoryispurchased,cashispaidtosuppliers,theproductismanufacturedandsoldoncredit,andthecashiscollectedfromthecustomer.

2.Thetimeperiodassumptionmeansthatthefinancialconditionandperformanceofabusinesscanbereportedperiodically,usuallyeverymonth,quarter,oryear,eventhoughthelifeofthebusinessismuchlonger.

3.NetIncome=Revenues+Gains-Expenses-Losses.

Eachelementisdefinedasfollows:

Revenues--increasesinassetsorsettlementsofliabilitiesfromongoingoperations.

Gains--increasesinassetsorsettlementsofliabilitiesfromperipheraltransactions.

Expenses--decreasesinassetsorincreasesinliabilitiesfromongoingoperations.

Losses--decreasesinassetsorincreasesinliabilitiesfromperipheraltransactions.

4.Bothrevenuesandgainsareinflowsofnetassets.However,revenuesoccurinthenormalcourseofoperations,whereasgainsoccurfromtransactionsperipheraltothecentralactivitiesofthecompany.Anexampleissellinglandatapriceabovecost（atagain）forcompaniesnotinthebusinessofsellingland.

Bothexpensesandlossesareoutflowsofnetassets.However,expensesoccurinthenormalcourseofoperations,whereaslossesoccurfromtransactionsperipheraltothecentralactivitiesofthecompany.Anexampleisalosssufferedfromfiredamage.

5.Accrualaccountingrequiresrecordingrevenueswhenearnedandrecordingexpenseswhenincurred,regardlessofthetimingofcashreceiptsorpayments.Cashbasisaccountingisrecordingrevenueswhencashisreceivedandexpenseswhencashispaid.

6.Thefourcriteriathatmustbemetforrevenuetoberecognizedundertheaccrualbasisofaccountingare

（1）deliveryhasoccurredorserviceshavebeenrendered,

（2）thereispersuasiveevidenceofanarrangementforcustomerpayment,（3）thepriceisfixedordeterminable,and（4）collectionisreasonablyassured.

7.Thematchingprinciplerequiresthatexpensesberecordedwhenincurredinearningrevenue.Forexample,thecostofinventorysoldduringaperiodisrecordedinthesameperiodofthesale,notwhenthegoodsareproducedandheldforsale.

8.Netincomeequalsrevenuesminusexpenses.Thusrevenuesincreasenetincomeandexpensesdecreasenetincome.Becausenetincomeincreasesstockholders’equity,revenuesincreasestockholders’equityandexpensesdecreaseit.

9.Revenuesincreasestockholders’equityandexpensesdecreasestockholders’equity.Toincreasestockholders’equity,anaccountmustbecredited;todecreasestockholders’equity,anaccountmustbedebited.Thusrevenuesarerecordedascreditsandexpensesasdebits.

10.

Item

Increase

Decrease

Revenues

Credit

Debit

Losses

Debit

Credit

Gains

Credit

Debit

Expenses

Debit

Credit

11.

Item

Debit

Credit

Revenues

Decrease

Increase

Losses

Increase

Decrease

Gains

Decrease

Increase

Expenses

Increase

Decrease

12.

Transaction

Operating,Investing,orFinancing

Direction

oftheEffect

onCash

Cashpaidtosuppliers

Operating

–

Saleofgoodsonaccount

None

None

Cashreceivedfromcustomers

Operating

+

Purchaseofinvestments

Investing

–

Cashpaidforinterest

Operating

–

Issuanceofstockforcash

Financing

+

13.AssetturnoveriscalculatedasSalesAveragetotalassets.Theassetturnoverratiomeasuresthesalesgeneratedperdollarofassets.Ahighratiosuggeststhatthecompanyismanagingitsassets（resourcesusedtogeneraterevenues）efficiently.

ANSWERSTOMULTIPLECHOICE

1.b

2.c

3.d

4.c

5.a

6.d

7.c

8.a

9.b

10.d

Authors'RecommendedSolutionTime

（Timeinminutes）

Mini-exercises

Exercises

Problems

AlternateProblems

CasesandProjects

No.

Time

No.

Time

No.

Time

No.

Time

No.

Time

1

5

1

10

1

20

1

30

1

20

2

6

2

15

2

20

2

30

2

30

3

6

3

20

3

25

3

35

3

30

4

5

4

20

4

40

4

40

4

20

5

5

5

20

5

20

5

20

5

30

6

5

6

20

6

40

6

40

6

30

7

5

7

18

7

30

7

60

8

6

8

20

8

30

9

6

9

20

9

*

10

6

10

20

11

6

11

20

12

15

13

20

14

20

15

20

16

20

17

20

18

10

19

10

*Duetothenatureofthisproject,itisverydifficulttoestimatetheamountoftimestudentswillneedtocompletetheassignment.Aswithanyopen-endedproject,itispossibleforstudentstodevotealargeamountoftimetotheseassignments.Whilestudentsoftenbenefitfromtheextraeffort,wefindthatsomebecomefrustratedbytheperceiveddifficultyofthetask.Youcanreducestudentfrustrationandanxietybymakingyourexpectationsclear.Forexample,whenourgoalistosharpenresearchskills,wedevoteclasstimediscussingresearchstrategies.Whenwewantthestudentstofocusonarealaccountingissue,weoffersuggestionsaboutpossiblecompaniesorindustries.

MINI-EXERCISES

M3–1.

TERM

F

（1）Losses

D

（2）Matchingprinciple

G

（3）Revenues

C

（4）Timeperiodassumption

E

（5）Operatingcycle

M3–2.

CashBasis

IncomeStatement

AccrualBasis

IncomeStatement

Revenues:

Cashsales

Customerdeposits

$7,000

3,000

Revenues:

Salestocustomers

$12,000

Expenses:

Inventorypurchases

Wagespaid

1,000

500

Expenses:

Costofsales

Wagesexpense

Utilitiesexpense

8,000

500

200

NetIncome

$8,500

NetIncome

$3,300

M3–3.

RevenueAccountAffected

AmountofRevenueEarnedinJuly

a.

GameFeesRevenue

$11,000

b.

SalesRevenue

$6,000

c.

None

NorevenueearnedinJuly;cashcollectionsinJulyrelatedtoearningsinJune.

d.

None

NorevenueearnedinJuly;earningsprocessisnotyetcomplete–UnearnedRevenueisrecordeduponreceiptofcash.

M3–4.

ExpenseAccountAffected

AmountofExpenseIncurredinJuly

e.

CostofGoodsSold

$2,190

f.

None

NoexpenseisincurredinJuly;paymentrelatedtoJuneelectricityusage.

g.

WagesExpense

$3,800

h.

InsuranceExpense

$600incurredandexpensedinJuly;

$1,200notincurreduntilfuturemonths

i.

RepairsExpense

$1,200

j.

UtilitiesExpense

$2,300incurredinJuly

M3–5.

a.

Cash（+A）

11,000

GameFeesRevenue（+R,+SE）

11,000

b.

Cash（+A）

4,000

AccountsReceivable（+A）

2,000

SalesRevenue（+R,+SE）

6,000

c.

Cash（+A）

1,500

AccountsReceivable（A）

1,500

d.

Cash（+A）

1,600

UnearnedRevenue（+L）

1,600

M3–6.

e.

CostofGoodsSold（+E,SE）

2,190

Inventory（A）

2,190

f.

AccountsPayable（–L）

1,800

Cash（A）

1,800

g.

WagesExpense（+E,SE）

3,800

Cash（A）

3,800

h.

InsuranceExpense（+E,SE）

600

PrepaidExpenses（+A）

1,200

Cash（A）

1,800

i.

RepairsExpense（+E,SE）

1,200

Cash（A）

1,200

j.

UtilitiesExpense（+E,SE）

2,300

AccountsPayable（+L）

2,300

M3–7.

BalanceSheet

IncomeStatement

Assets

Liabilities

Stockholders’Equity

Revenues

Expenses

Net

Income

a.

+11,000

NE

+11,000

+11,000

NE

+11,000

b.

+6,000

NE

+6,000

+6,000

NE

+6,000

c.

+1,500

–1,500

NE

NE

NE

NE

NE

d.

+1,600

+1,600

NE

NE

NE

NE

Transaction（c）resultsinanincreaseinanasset（cash）andadecreaseinanasset（accountsreceivable）.Therefore,thereisnoneteffectonassets.

M3–8.

BalanceSheet

IncomeStatement

Assets

Liabilities

Stockholders’Equity

Revenues

Expenses

Net

Income

e.

–2,190

NE

–2,190

NE

+2,190

–2,190

f.

–1,800

–1,800

NE

NE

NE

NE

g.

–3,800

NE

–3,800

NE

+3,800

–3,800

h.

–1,800/

+1,200

NE

–600

NE

+600

–600

i.

–1,200

NE

–1,200

NE

+1,200

–1,200

j.

NE

+2,300

–2,300

NE

+2,300

–2,300

Transaction（h）resultsinanincreaseinanasset（prepaidexpenses）andadecreaseinanasset（cash）.Therefore,theneteffectonassetsis600.

M3–9.

Bob’sBowling,Inc.

IncomeStatement

FortheMonthofJuly2011

Revenues:

Gamefees

$11,000

Sales

6,000

Totalrevenues

17,000

Expenses:

Costofgoodssold

2,190

Utilitiesexpense

2,300

Wagesexpense

3,800

Insuranceexpense

600

Repairsexpense

1,200

Totalexpenses

10,090

Netincome

$6,910

M3–10.

Bob’sBowling,Inc.

PartialStatementofCashFlows

FortheMonthofJuly2011

CashFlowsfromOperatingActivities:

Cashreceivedfromcustomers

（=$11,000+$4,000+$1,500+$1,600）

$18,100

Cashpaidtosuppliers（=$1,800+$1,800+$1,200）

（4,800）

Cashpaidtoemployees

（3,800）

Totalcashfromoperatingactivities

$9,500

M3–11.

2011

2012

TotalAsset

=

Sales

$147,000

=

3.1

$156,000

=

2.8

Turnover

AverageTotalAssets

$47,000*

$56,500**

*（$41,000+$53,000）÷2

**（$53,000+$60,000）÷2

Thedecreaseintheassetturnoverratiosuggeststhatthecompanyismanagingitsassetslessefficiently,generatingfewersalesperdollarofassetsin2012thanin2011.

EXERCISES

E3–1.

TERM

F

（1）Expenses

E

（2）Gains

G

（3）Revenueprinciple

I

（4）Cashbasisaccounting

D

（5）Unearnedrevenue

C

（6）Operatingcycle

M

（7）Accrualbasisaccounting

K

（8）Prepaidexpenses

J

（9）RevenuesExpenses=NetIncome

L

（10）EndingRetainedEarnings=

Beginn