solution to Financial Accounting Libby 6th Edition chap003.docx

1、solution to Financial Accounting Libby 6th Edition chap003Chapter 3Operating Decisions andthe Income StatementANSWERS TO QUESTIONS1. A typical business operating cycle for a manufacturer would be as follows: inventory is purchased, cash is paid to suppliers, the product is manufactured and sold on c

2、redit, and the cash is collected from the customer.2. The time period assumption means that the financial condition and performance of a business can be reported periodically, usually every month, quarter, or year, even though the life of the business is much longer.3. Net Income = Revenues + Gains

3、- Expenses - Losses. Each element is defined as follows:Revenues - increases in assets or settlements of liabilities from ongoing operations.Gains - increases in assets or settlements of liabilities from peripheral transactions.Expenses - decreases in assets or increases in liabilities from ongoing

4、operations.Losses - decreases in assets or increases in liabilities from peripheral transactions. 4. Both revenues and gains are inflows of net assets. However, revenues occur in the normal course of operations, whereas gains occur from transactions peripheral to the central activities of the compan

5、y. An example is selling land at a price above cost (at a gain) for companies not in the business of selling land. Both expenses and losses are outflows of net assets. However, expenses occur in the normal course of operations, whereas losses occur from transactions peripheral to the central activit

6、ies of the company. An example is a loss suffered from fire damage. 5. Accrual accounting requires recording revenues when earned and recording expenses when incurred, regardless of the timing of cash receipts or payments. Cash basis accounting is recording revenues when cash is received and expense

7、s when cash is paid. 6. The four criteria that must be met for revenue to be recognized under the accrual basis of accounting are (1) delivery has occurred or services have been rendered, (2) there is persuasive evidence of an arrangement for customer payment, (3) the price is fixed or determinable,

8、 and (4) collection is reasonably assured. 7. The matching principle requires that expenses be recorded when incurred in earning revenue. For example, the cost of inventory sold during a period is recorded in the same period of the sale, not when the goods are produced and held for sale. 8. Net inco

9、me equals revenues minus expenses. Thus revenues increase net income and expenses decrease net income. Because net income increases stockholders equity, revenues increase stockholders equity and expenses decrease it. 9. Revenues increase stockholders equity and expenses decrease stockholders equity.

10、 To increase stockholders equity, an account must be credited; to decrease stockholders equity, an account must be debited. Thus revenues are recorded as credits and expenses as debits.10.ItemIncreaseDecreaseRevenuesCreditDebitLossesDebitCreditGainsCreditDebitExpensesDebitCredit11.ItemDebitCreditRev

11、enuesDecreaseIncreaseLossesIncreaseDecreaseGainsDecreaseIncreaseExpensesIncreaseDecrease12.TransactionOperating, Investing, or FinancingDirection of the Effect on CashCash paid to suppliersOperatingSale of goods on accountNoneNoneCash received from customersOperating+Purchase of investmentsInvesting

12、Cash paid for interestOperatingIssuance of stock for cashFinancing+13. Asset turnover is calculated as Sales Average total assets. The asset turnover ratio measures the sales generated per dollar of assets. A high ratio suggests that the company is managing its assets (resources used to generate rev

13、enues) efficiently.ANSWERS TO MULTIPLE CHOICE 1. b 2. c 3. d 4. c 5. a 6. d 7. c 8. a 9. b10. dAuthors Recommended Solution Time(Time in minutes)Mini-exercisesExercisesProblemsAlternate ProblemsCases and ProjectsNo.TimeNo.TimeNo.TimeNo.TimeNo.Time15110120130120262152202302303632032533533045420440440

14、42055520520520530656206406406307571873076086820830969209*1061020116112012151320142015201620172018101910* Due to the nature of this project, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open-ended project, it is possible for students t

15、o devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sh

16、arpen research skills, we devote class time discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries.MINI-EXERCISESM31. TERMF(1) LossesD(2) Matching principleG(3) RevenuesC(4) Time period assumption E(5

17、) Operating cycleM32.Cash Basis Income StatementAccrual Basis Income StatementRevenues: Cash sales Customer deposits $7,0003,000Revenues: Sales to customers $12,000Expenses: Inventory purchases Wages paid 1,000500Expenses: Cost of sales Wages expense Utilities expense 8,000500200Net Income$8,500Net

18、Income$3,300M33.Revenue Account Affected Amount of Revenue Earned in Julya.Game Fees Revenue $11,000b.Sales Revenue $6,000c.NoneNo revenue earned in July; cash collections in July related to earnings in June.d.NoneNo revenue earned in July; earnings process is not yet complete Unearned Revenue is re

19、corded upon receipt of cash.M34.Expense Account Affected Amount of Expense Incurred in Julye.Cost of Goods Sold $2,190f.NoneNo expense is incurred in July; payment related to June electricity usage.g.Wages Expense $3,800h.Insurance Expense $600 incurred and expensed in July; $1,200 not incurred unti

20、l future monthsi.Repairs Expense $1,200j.Utilities Expense $2,300 incurred in JulyM35.a.Cash (+A) 11,000Game Fees Revenue (+R, +SE) 11,000b.Cash (+A) 4,000Accounts Receivable (+A) 2,000Sales Revenue (+R, +SE) 6,000c.Cash (+A) 1,500Accounts Receivable (A) 1,500d.Cash (+A) 1,600Unearned Revenue (+L) 1

21、,600M36.e.Cost of Goods Sold (+E, SE) 2,190Inventory (A) 2,190f.Accounts Payable (L) 1,800Cash (A) 1,800g.Wages Expense (+E, SE) 3,800Cash (A) 3,800h.Insurance Expense (+E, SE) 600Prepaid Expenses (+A) 1,200Cash (A) 1,800i.Repairs Expense (+E, SE) 1,200Cash (A) 1,200j.Utilities Expense (+E, SE) 2,30

22、0Accounts Payable (+L) 2,300M37.Balance SheetIncome StatementAssetsLiabilitiesStockholders EquityRevenuesExpensesNet Incomea.+11,000NE+11,000+11,000NE+11,000b.+6,000NE+6,000+6,000NE+6,000c.+1,5001,500NENENENENEd.+1,600+1,600NENENENETransaction (c) results in an increase in an asset (cash) and a decr

23、ease in an asset (accounts receivable). Therefore, there is no net effect on assets.M38.Balance SheetIncome StatementAssetsLiabilitiesStockholders EquityRevenuesExpensesNet Incomee.2,190NE2,190NE+2,1902,190f.1,8001,800NENENENEg.3,800NE3,800NE+3,8003,800h.1,800/+1,200NE600NE+600600i.1,200NE1,200NE+1,

24、2001,200j.NE+2,3002,300NE+2,3002,300Transaction (h) results in an increase in an asset (prepaid expenses) and a decrease in an asset (cash). Therefore, the net effect on assets is 600.M39.Bobs Bowling, Inc.Income StatementFor the Month of July 2011Revenues:Game fees$11,000Sales6,000Total revenues17,

25、000Expenses:Cost of goods sold 2,190Utilities expense2,300Wages expense3,800Insurance expense600Repairs expense1,200Total expenses 10,090Net income$ 6,910M310.Bobs Bowling, Inc.Partial Statement of Cash FlowsFor the Month of July 2011Cash Flows from Operating Activities:Cash received from customers(

26、=$11,000+$4,000+$1,500+$1,600)$18,100Cash paid to suppliers (=$1,800+$1,800+$1,200)(4,800)Cash paid to employees(3,800)Total cash from operating activities$ 9,500M311.20112012Total Asset=Sales$147,000=3.1$156,000=2.8Turnover Average Total Assets$47,000*$56,500* ($41,000 + $53,000) 2* ($53,000 + $60,

27、000) 2The decrease in the asset turnover ratio suggests that the company is managing its assets less efficiently, generating fewer sales per dollar of assets in 2012 than in 2011.EXERCISESE31. TERMF (1) ExpensesE (2) GainsG (3) Revenue principleI (4) Cash basis accountingD (5) Unearned revenueC (6) Operating cycleM (7) Accrual basis accountingK (8) Prepaid expensesJ (9) Revenues Expenses = Net IncomeL(10) Ending Retained Earnings = Beginn