Financial Accounting Tools for Business Decision Making 7th Edition Kimmel Solutions Manual by kylelu50

CHAPTER 1 Introduction to Financial Statements

LearningObjectives

1. Describetheprimaryformsofbusinessorganization.

2. Identifytheusersandusesofaccountinginformation.

3. Explainthethreeprincipaltypesofbusinessactivity.

4. Describethecontentandpurposeofeachofthefinancialstatements.

5. Explainthemeaningofassets,liabilities,andstockholders’equity,andstatethebasic accountingequation.

6. Describethecomponentsthatsupplementthefinancialstatementsinanannualreport.

SummaryofQuestionsbyLearningObjectivesandBloom’sTaxonomy Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT Questions 1. 1 K 6. 2 C 10. 4 C 14. 5 K 18. 6 K 2. 1 K 7. 3 C 11. 4 K 15. 5 K 19. 6 C 3. 1 K 8. 4 K 12. 4 C 16. 5 AP 20. 6 K 4. 2 C 9. 4 C 13. 4 AP 17. 5 C 21. 5 C 5. 2 C Brief Exercises 1. 1 K 4. 4 C 6. 4,5 K 8. 5 AP 10. 5 K 2. 2 K 5. 4,5 AP 7. 4 K 9. 5 AP 11. 6 K 3. 3 K Do It! Review Exercises 1. 1 C 2. 3 K 3. 4,5 AP 4. 6 C Exercises 1. 1,2, 4,6 K 5. 4 AP 9. 4,5 AP 12. 5 AP 15. 5 AP 2. 3 C 6. 4 AP 10. 4,5 AP 13. 5 AP 16. 5 AP 3. 3,4 C 7. 4 AP 11. 4,5 AP 14. 5 AP 17. 6 K 4. 4 AP 8. 4,5 C Problems: Set A 1. 1 C 2. 2,4, 5 K 3. 4,5 AP 4. 4,5 AP 5. 4,5 AP Problems: Set B 1. 1 C 2. 2,4, 5 K 3. 4,5 AP 4. 4,5 AP 5. 4,5 AP Financial Accounting Tools for Business Decision Making 7th Edition Kimmel Solutions Manual Full Download: http://testbanktip.com/download/financial-accounting-tools-for-business-decision-making-7th-edition-kimmel-solutions-manual/ Download all pages and all chapters at: TestBankTip.com

ASSIGNMENTCHARACTERISTICSTABLE

Problem Number Description Difficulty Level Time Allotted (min.) 1A Determineformsofbusinessorganization. Simple 15–20 2A Identifyusersandusesoffinancialstatements. Simple 15–20 3A Prepareanincomestatement,retainedearnings statement,andbalancesheet;discussresults. Moderate 40–50 4A Determineitemsincludedinastatementofcashflows, preparethestatement,andcomment. Moderate 30–40 5A Commentonproperaccountingtreatmentandprepare acorrectedbalancesheet. Moderate 40–50 1B Determineformsofbusinessorganization. Simple 15–20 2B Identifyusersandusesoffinancialstatements. Simple 15–20 3B Prepareanincomestatement,retainedearnings statement,andbalancesheet;discussresults. Moderate 40–50 4B Determineitemsincludedinastatementofcashflows, preparethestatement,andcomment. Moderate 30–40 5B Commentonproperaccountingtreatmentandprepare acorrectedincomestatement. Moderate 40–50

ANSWERS TO QUESTIONS

1. The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and(3)corporation.

2. Advantages of a corporation are limited liability (stockholders not being personally liable for corporate debts),easytransferabilityof ownership, andease ofraisingfunds. Disadvantages ofacorporationareincreasedtaxationandgovernmentregulations.

3. Proprietorshipsandpartnershipsreceivefavorabletaxtreatmentcomparedtocorporationsand are easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships and partnerships are unlimited liability (proprietors/partners are personally liableforalldebts)anddifficultyinobtainingfinancingcomparedtocorporations.

4. Yes.Apersoncannotearnaliving,spendmoney,buyoncredit,makeaninvestment,orpay taxes without receiving, using, or dispensing financial information. Accounting provides financial information to interested users through the preparation and distribution of financial statements.

5. Internalusersaremanagerswhoplan,organize,andrunabusiness.Toassistmanagement, accounting provides timely internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, forecasts of cash needsforthenextyear,andfinancialstatements.

6. External users are those outside the business who have either a present or potential direct financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regulatoryagencies,laborunions,customers,andeconomicplanners).

7. Thethreetypesofbusinessactivitiesarefinancingactivities,investingactivities,andoperating activities. Financing activities include borrowing money and selling shares of stock. Investing activitiesincludethepurchaseandsaleofproperty,plant,andequipment.Operatingactivities includesellinggoods,performingservices,andpurchasinginventory.

(a) Incomestatement.

(b) Balancesheet.

(d) Balancesheet.

(e) Balancesheet.

(f) Balancesheet.

9. When a companypays dividends, it reduces theamountof assetsavailable to paycreditors. Therefore, banks and other creditors monitor dividend payments to ensure they do not put a company’sabilitytomakedebtpaymentsatrisk.

10. Yes. Net income does appear on the income statement—it is the result of subtracting expensesfromrevenues.Inaddition,netincomeappearsintheretainedearningsstatement—it isshownasanadditiontothebeginning-of-periodretainedearnings.Indirectly,thenetincome of a company is also included in the balance sheet. It is included in the retained earnings accountwhichappearsinthestockholders’equitysectionofthebalancesheet.

11. The primary purpose of the statement of cash flows is to provide financial information about thecashreceiptsandcashpaymentsofabusinessforaspecificperiodoftime.

(For

Use Only) 1-3

Instructor

Questions Chapter 1 (Continued)

12. Thethreecategoriesofthestatementofcashflowsareoperatingactivities,investingactivities, and financing activities. The categories were chosen because they represent the three principaltypesofbusinessactivities.

13. Retainedearningsisthenetincomeretainedinacorporation.Retainedearningsisincreased bynetincomeandisdecreasedbydividendsandanetloss.

14. ThebasicaccountingequationisAssets=Liabilities+Stockholders’Equity.

15. (a) Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownershipclaimonnetassets.

(b) The items that affect stockholders’ equity are common stock, retained earnings, dividends,revenues,andexpenses.

16. Theliabilitiesare(b)Accountspayableand(g)Salariesandwagespayable.

17. (a) Netincomefromtheincomestatementisreportedasanincreasetoretainedearningson theretainedearningsstatement.

(b) The ending amount on the retained earnings statement is reported as the retained earningsamountonthebalancesheet.

18. The purpose of the management discussion and analysis section is to provide management’s views on its ability to pay short-term obligations, its ability to fund operations and expansion, and its results of operations. The MD&A section is a required part of the annualreport.

19. Anunqualifiedopinionshowsthat,intheopinionofanindependentauditor,thefinancialstatementshavebeenpresentedfairly,inconformitywithgenerallyacceptedaccountingprinciples. Thisgivesinvestorsmoreconfidencethattheycanrelyonthefiguresreportedinthefinancial statements.

20. Informationincludedinthenotestothefinancialstatementsclarifiesinformationpresentedin the financial statements and includes descriptions of accounting policies, explanations of uncertaintiesandcontingencies,andstatisticsanddetailstoovoluminoustobereportedinthe financialstatements.

1-4

Assets = Liabilities + Stockholders’Equity $857,856,000 $191,921,000* $665,935,000 *$58,355,000+$133,566,000

21. Usingdollaramounts,TootsieRoll’saccountingequationis:

SOLUTIONS TO BRIEF EXERCISES

BRIEFEXERCISE1-1

(a) P Shared control, tax advantages, increased skills and resources.

(b) SP Simpletosetupandmaintainscontrolwithfounder.

BRIEFEXERCISE1-2

(a) 4 Investorsincommonstock

(b) 3 Marketingmanagers

(d) 5 ChiefFinancialOfficer

(e) 1 InternalRevenueService

BRIEFEXERCISE1-3

O (a) Cashreceivedfromcustomers.

F (b) Cashpaidtostockholders(dividends).

F (c) Cashreceivedfromissuingnewcommonstock.

O (d) Cashpaidtosuppliers.

I (e) Cashpaidtopurchaseanewofficebuilding.

BRIEFEXERCISE1-4

E (a) Advertisingexpense

R (b) Servicerevenue

E (c) Insuranceexpense

E (d) Salariesandwagesexpense

D (e) Dividends

R (f) Rentrevenue

E (g) Utilitiesexpense

NSE (h) Cashpurchaseofequipment

C (i) Issuedcommonstockforcash.

Inc.

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BRIEFEXERCISE1-6

IS (a) Incometaxexpense

BS (b) Inventory

BS (c) Accountspayable

BS (d) Retainedearnings

BS (e) Equipment IS (f) Salesrevenue IS (g) Costofgoodssold

BS (h) Commonstock

BS (i) AccountsReceivable IS (j) Interestexpense

BRIEFEXERCISE1-7

IS (a) Revenueduringtheperiod.

BS (b) Suppliesonhandattheendoftheyear.

SCF (c) Cashreceivedfromissuingnewbondsduringtheperiod.

BS (d) Totaldebtsoutstandingattheendoftheperiod.

1-6 Copyright © 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 7/e, Solutions Manual (For Instructor Use Only) BRIEFEXERCISE1-5 BURNETTCOMPANY BalanceSheet December31,2014 Assets Cash............................................................................... $22,000 Accountsreceivable..................................................... 71,000 Totalassets................................................................... $93,000 LiabilitiesandStockholders’Equity Liabilities Accountspayable.................................................. $65,000 Stockholders’equity Commonstock....................................................... $18,000 Retainedearnings.................................................. 10,000 28,000 Totalliabilitiesandstockholders’equity..................... $93,000

BRIEFEXERCISE1-8

(a) $90,000+$230,000=$320,000 (Totalassets)

(b) $170,000–$80,000=$90,000 (Totalliabilities)

BRIEFEXERCISE1-9

(a) ($800,000+$150,000)–($500,000–$80,000)=$530,000 (Stockholders’equity)

(b) ($500,000+$100,000)+($800,000–$500,000–$70,000)=$830,000 (Assets)

BRIEFEXERCISE1-10

BRIEFEXERCISE1-11

(d) Allofthesearerequired.

A (a) Accountsreceivable L (b) Salariesandwagespayable A (c) Equipment

(d) Supplies SE (e) Commonstock L (f) Notespayable

DOIT!1-1

(a) Easiertotransferownership:corporation

(b) Easiertoraisefunds:corporation

(d) Taxadvantages:soleproprietorshipandpartnership

(e) Nopersonallegalliability:corporation

DOIT!1-2

(a) Issuanceofownershipsharesisclassifiedascommonstock.

(b) Landpurchasedisclassifiedasanasset.

(d) Bondspayableareclassifiedasliabilities.

(e) Amountearnedfromsellingaproductisclassifiedasrevenue.

(f) Costofadvertisingisclassifiedasexpense.

DOIT!1-3

MARSHCORPORATION IncomeStatement FortheYearEndedDecember31,2014 Revenues Servicerevenue........................................... $25,000 Expenses Rentexpense................................................ $10,000 Advertisingexpense.................................... 4,000 Suppliesexpense......................................... 1,700 Totalexpenses.................................. 15,700 Netincome........................................................... $ 9,300

MARSHCORPORATION RetainedEarningsStatement FortheYearEndedDecember31,2014 Retainedearnings,January1................................. $ –0–Add: Netincome.................................................... 9,300 9,300 Less: Dividends...................................................... 2,500 Retainedearnings,December31............................ $6,800 MARSHCORPORATION BalanceSheet December31,2014 Assets Cash.......................................................................... $ 3,100 Accountsreceivable................................................ 2,000 Supplies.................................................................... 1,900 Equipment................................................................ 26,800 Totalassets.............................................................. $33,800 LiabilitiesandStockholders’Equity Liabilities Notespayable................................................... $ 7,000 Accountpayable............................................... 5,000 Totalliabilities........................................ $12,000 Stockholder’sequity Commonstock.................................................. 15,000 Retainedearnings............................................. 6,800 Totalstockholders’equity..................... 21,800 Totalliabilitiesandstockholder’sequity............... $33,800

DOIT!1-3(Continued)

(1) Descriptionofabilitytopaynear-termobligations:MD&A

(2) Unqualifiedopinion:auditor’sreport

(3) Detailsconcerningliabilities,toovoluminoustobeincludedinthe statements:notes

(4) Descriptionoffavorableandunfavorabletrends:MD&A

(5) CertifiedPublicAccountant(CPA):auditor’sreport

(6) Descriptionsofsignificantaccountingpolicies:notes

DOIT!1-4

SOLUTIONS TO EXERCISES

EXERCISE1-1

(a) 8. Auditor’sopinion

(b) 1. Corporation

(d) 7. Accountspayable

(e) 3. Accountsreceivable

(f) 2. Creditor

(g) 5. Stockholder

(h) 4. Partnership

EXERCISE1-2

(a) Answerswillvary.

Financing

Saleofstock

Purchaselong-term investments Saleof newsprint

Investing Operating AbitibiConsolidated Inc.

CalState—Northridge StdtUnion

OracleCorporation

Borrowmoney fromabank

Saleofbonds

Purchaseoffice equipment

Purchaseother companies

Paymentof wagesand benefits

Paymentof research expenses

SportscoInvestments

Paymentof dividendsto stockholders

Purchasehockey equipment

Paymentfor rinkrentals

GrantThorntonLLP

Distribute earningsto partners

Purchase computers

Billclientsfor professional services

SouthwestAirlines

Saleofstock

Purchase airplanes

Paymentfor jetfuel

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(b) Financing

Sale of stock is common to all corporations. Borrowing from a bank iscommontoallbusinesses.Paymentofdividendsiscommontoall corporations.Saleofbondsiscommontolargecorporations.

Investing

Purchase and sale of property, plant, and equipment would be common to all businesses—the types of assets would vary according to the type of business and some types of businesses require a larger investment in long-lived assets. Anew business or expanding business would be more apt to acquire property, plant, and equipment while a mature or declining business would be more apt tosellit.

Operating

The general activities identified would be common to most businesses,althoughtheserviceorproductwoulddiffer.

EXERCISE1-2(Continued)

EXERCISE1-3 (a) (b) Accountspayable L O Accountsreceivable A O Equipment A I Salesrevenue R O Servicerevenue R O Inventory A O Mortgagepayable L F Suppliesexpense E O Rentexpense E O Salariesandwagesexpense E O

Copyright © 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 7/e, Solutions Manual (For Instructor Use Only) 1-13 EXERCISE1-4 MOLINACO. IncomeStatement FortheYearEndedDecember31,2014 Revenues Servicerevenue...................................................... $58,000 Expenses Salariesandwagesexpense................................. $30,000 Rentexpense.......................................................... 10,400 Utilitiesexpense..................................................... 2,400 Advertisingexpense.............................................. 1,800 Totalexpenses................................................ 44,600 Netincome..................................................................... $13,400 MOLINACO. RetainedEarningsStatement FortheYearEndedDecember31,2014 Retainedearnings,January1......................................................... $67,000 Add: Netincome............................................................................ 13,400 80,400 Less: Dividends.............................................................................. 6,000 Retainedearnings,December31.................................................... $74,400

(b)

of $2,922.5($5,845X50%)resultinginacorrespondingincreaseinincome (ignoring income taxes). If all other revenues and expenses remain unchanged, decreasing research and development expenses would produce22.7%morenetincome($2,922.5÷$12,901.3).

MERCKANDCO.

FortheYearEndedDecember31,2014 (inmillions) Revenues Salesrevenue.................................................. $38,576.0 Expenses Costofgoodssold......................................... $ 9,018.9 Sellingandadministrativeexpenses............. 8,543.2 Researchanddevelopmentexpense............ 5,845.0 Incometaxexpense........................................ 2,267.6 Totalexpenses............................................ 25,674.7 Netincome............................................................... $12,901.3 MERCKANDCO. RetainedEarningsStatement FortheYearEndedDecember31,2014 (inmillions) Retainedearnings,January1................................. $43,698.8 Add: Netincome.................................................... 12,901.3 56,600.1 Less: Dividends...................................................... 3,597.7 Retainedearnings,December31............................ $53,002.4

(a)

IncomeStatement

The short-term implication would be a decrease in expenses

EXERCISE1-5(Continued)

The long-term implications would be more difficult to quantify but it is safe to predict that a reduction in research and development expenseswouldprobablyresultinlowersalesrevenuesinthefuture. Pharmaceutical companies are usually able to charge higher prices for newly developed products while lower cost generic versions usually replace older products. Decreasing research and developmentactivitieswillprobablymeanfewernewproducts.

The stock market’s initial reaction might be positive since Merck’s net income would increase significantly. Such a reaction would probably be very short-lived as more knowledgeable investors reviewed Merck’s financial statements and discovered the cause of theincrease.

DEVITOINC. RetainedEarningsStatement FortheYearEndedDecember31,2014 Retainedearnings,January1................................. $130,000 Add: Netincome.................................................... 225,000* 355,000 Less: Dividends...................................................... 65,000 Retainedearnings,December31............................ $290,000 *Servicerevenue...................................................... $400,000 *Totalexpenses........................................................ 175,000 *Netincome.............................................................. $225,000

EXERCISE1-6

EXERCISE1-7

(a) Grant Corporation is distributing nearly all of this year’s net income as dividends. This suggests that Grant is not pursuing rapid growth. Companies that have a lot of opportunities for growth pay low dividends.

(b) RemingtonCorporationisnotgeneratingsufficientcashprovidedby operating activities to fund its investing activities. Instead it generates additional cash through financing activities. This is commonforcompaniesintheirearlyyearsofexistence.

EXERCISE1-8

(a) A Cash SE Retainedearnings E Costofgoodssold E Salariesandwagesexpense A Prepaidinsurance A Inventory A Accountsreceivable R Salesrevenue L Notespayable L Accountspayable R Servicerevenue E Interestexpense (b) MOTTEINC. IncomeStatement FortheYearEndedDecember31,2014 Revenues Salesrevenue...................................... $584,951 Servicerevenue.................................. 4,806 Totalrevenues................................. $589,757 Expenses Costofgoodssold............................. 438,458 Salariesandwagesexpense.............. 115,131 Interestexpense.................................. 1,882 Totalexpenses................................ 555,471 Netincome.................................................. $ 34,286

EXERCISE1-9

First note that the retained earnings statement shows that (b) equals $27,000.

Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders’ equity

$5,000+a+$27,000=$62,000 a+$32,000=$62,000 a=$30,000

Beginning retained earnings + Net income – Dividends = Ending retained earnings

$12,000+e–$5,000=$27,000

$7,000+e=$27,000 e=$20,000

Fromabove,weknowthatnetincome(d)equals$20,000.

Revenue – Cost of goods sold – Salaries and wages expense = Net income

$85,000–c–$10,000=$20,000 $75,000–c=$20,000 c=$55,000

Inc.

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EXERCISE1-10 (a) Servicerevenue............................................ $132,000 Salesrevenue............................................... 25,000 Totalrevenue........................................ $157,000 Expenses...................................................... 126,000 Netincome.................................................... $ 31,000 (b) FLINTHILLSPARK RetainedEarningsStatement FortheYearEndedDecember31,2014 Retainedearnings,January1................................................. $ 5,000 Add: Netincome.................................................................... 31,000 36,000 Less: Dividends...................................................................... 9,000 Retainedearnings,December31........................................... $27,000

(c) The income statement indicates that revenues from the general store were only about 16% ($25,000 ÷ $157,000) of total revenue which tendstosupportJoe’sopinion.Inordertodecideifthestoreis“more trouble than it is worth,” I would need to know the amount of expenses attributable to the general store. The income statement reports all expenses in a single category rather than separating them into camping and general store expenses to correspond with revenues. A break down into two categories would help me decide if thegeneralstoreisgeneratingaprofitorloss.

Even if the general store is operating at a loss, I might recommend retaining it if campers indicated that the convenience of having a general store on site was an important amenity in selecting a camp ground.

FLINTHILLSPARK BalanceSheet December31,2014 Assets Cash.................................................................... $ 8,500 Supplies.............................................................. 5,500 Equipment.......................................................... 114,000 Totalassets........................................................ $128,000 LiabilitiesandStockholders’Equity Liabilities Notespayable............................................. $50,000 Accountspayable...................................... 11,000 Totalliabilities..................................... $ 61,000 Stockholders’equity Commonstock........................................... 40,000 Retainedearnings...................................... 27,000 67,000 Totalliabilitiesandstockholders’equity......... $128,000

EXERCISE1-10(Continued)

Copyright © 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 7/e, Solutions Manual (For Instructor Use Only) 1-19 EXERCISE1-11 (a) SE Retainedearnings E Costofgoodssold E Sellingandadministrativeexpenses A Cash L Notespayable E Interestexpense L Bondspayable A Inventory R Salesrevenue L Accountspayable SE Commonstock E Incometaxexpense (b) KELLOGGCOMPANY IncomeStatement FortheYearEndedDecember31,2014 (inmillions) Revenues Salesrevenue............................................ $12,575 Expenses Costofgoodssold................................... $7,184 Sellingandadministrativeexpenses...... 3,390 Incometaxexpense.................................. 498 Interestexpense....................................... 295 Totalexpenses.................................. 11,367 Netincome........................................................ $ 1,208

(b) Asacreditor,IwouldfeelreasonablyconfidentthatDyckmanhasthe ability to repay its lenders. During 2014, Dyckman generated $34,000 of cash from its operating activities. This amount more than covered its expenditures for new equipment but not both equipment purchasesanddividends.

DYCKMANCORPORATION StatementofCashFlows FortheYearEndedDecember31,2014 Cashflowsfromoperatingactivities Cashreceivedfromcustomers...................... $50,000) Cashpaidtosuppliers.................................... (16,000) Netcashprovidedbyoperatingactivities..... $34,000) Cashflowsfrominvestingactivities Cashpaidfornewequipment......................... (28,000) Netcashusedbyinvestingactivities............ (28,000) Cashflowsfromfinancingactivities Cashreceivedfromlenders............................ 20,000 Cashdividendspaid....................................... (8,000) Netcashprovidedbyfinancingactivities..... 12,000 Netincreaseincash............................................... )18,000 Cashatbeginningofperiod................................... 12,000 Cashatendofperiod............................................. $30,000

(a)

Financial Accounting Tools for Business Decision Making 7th Edition Kimmel Solutions Manual Full Download: http://testbanktip.com/download/financial-accounting-tools-for-business-decision-making-7th-edition-kimmel-solutions-manual/ Download all pages and all chapters at: TestBankTip.com