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
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