Accounting chapter one -Summary and questions

Discussion Questions

  1. What are generally accepted accounting principles (GAAP)?
  2. When is revenue recognised?
  3. How does the matching concept more accurately determine the Net Income of a business?
  4. What are the qualities that accounting information is expected to have? What are the limitations on the disclosure of useful accounting information?
  5. What are assets?
  6. To what do the terms liability and equity refer?
  7. Explain the term financial transaction. Include an example of a financial transaction as part of your explanation.
  8. Identify the three forms of business organization.
  9. What is the business entity concept of accounting? Why is it important?
  10. What is the general purpose of financial statements? Name the four financial statements?
  11. Each financial statement has a title that consists of the name of the financial statement, the name of the business, and a date line. How is the date line on each of the four financial statements the same or different?
  12. What is the purpose of an income statement? a balance sheet? How do they interrelate?
  13. Define the terms revenue and expense.
  14. What is net income? What information does it convey?
  15. What is the purpose of a statement of changes in equity? a statement of cash flows?
  16. Why are financial statements prepared at regular intervals? Who are the users of these statements?
  17. What is the accounting equation?
  18. Explain double-entry accounting.
  19. What is a year-end? How does the timing of year-end financial statements differ from that of interim financial statements?
  20. How does a fiscal year differ from a calendar year?


EXERCISE 1–1 Matching

Ethics, Managerial accounting, Financial accounting, Partnership, International Financial Reporting Standards, Separate legal entity, Limited liability, Unlimited liability.
Required: Match each term in the above alphabetized list to the corresponding description below.
a. ——————The owners pay tax on the business’s net income.
b. ——————Accounting standards followed by PAEs in Canada.
c. ——————Rules that guide us in interpreting right from wrong.
d. —————–Accounting aimed at communicating information to external users.
e. —————–Accounting aimed at communicating information to internal users.
f. ——————The business is distinct from its owners.
g. ——————The owner(s) are not responsible for the debts of the business.
h. ——————-If the business is unable to pay its debts, the owner(s) are responsible.

EXERCISE 1–2 (LO3) Accounting Principles
Business entity, Full disclosure, Materiality, Consistency, Going concern, Monetary unit, Cost Matching, Recognition

Required: Identify whether each of the following situations represents a violation or a correct application of GAAP, and which principle is relevant in each instance.

a.—— A small storage shed was purchased from a home supply store at a discount sale price of $5,000 cash. The clerk recorded the asset at $6,000, which was the regular price.
b. ——One of the business partners of a small architect firm continually charges the processing of his family vacation photos to the business firm.
c. ——An owner of a small engineering business, operating as a proprietorship from his home office, also paints and sells watercolour paintings in his spare time. He combines all the transactions in one set of books.
d. ——ABS Consulting received cash of $6,000 from a new customer for consulting services that ABS is to provide over the next six months. The transaction was recorded as a credit to revenue.
e. —–Tyler Tires, purchased a shop tool for cash of $20 to replace the one that had broken earlier that day. The tool would be useful for several years, but the transaction was recorded as a debit to shop supplies expense instead of to shop equipment (asset).
f. ——Embassy Lighting, a small company operating in Canada, sold some merchandise to a customer in California and deposited cash of $5,000 US. The bookkeeper recorded it as a credit to revenue of $7,250 CAD, which was the Canadian equivalent currency at that time.
g. —– An owner of a small car repair shop purchased shop supplies for cash of $2,200, which will be used over the next six months. The transaction was recorded as a debit to shop supplies (asset) and will be expensed as they are used.
h. —-At the end of each year, a business owner looks at his estimated net income for the year and decides which depreciation method he will use in an effort to reduce his business income taxes to the lowest amount possible.
i. —– XYZ is in deep financial trouble and recently was able to obtain some badly needed cash from an investor who was interested in becoming an equity partner. However, a few days ago, the investor unexpectedly changed the terms of his cash investment in XYZ company from the proposed equity partnership to a long-term loan. XYZ does not disclose this to their bank, who they recently applied to for an increase in their overdraft line-of-credit.

a. During 2015, no share capital was issued and no dividends were declared.

b. During 2015, no share capital was issued and dividends of $5,000 were declared.
c. During 2015, share capital of $12,000 was issued and no dividends were declared.
d. During 2015, share capital of $8,000 was issued and $12,000 of dividends were declared.

a. Calculate total assets.
b. Calculate total liabilities.
c. Calculate share capital.
d. Calculate retained earnings.
e. Calculate total equity.

EXERCISE 1–10 (LO4) Net Income, Dividends, Shares Issued

Required: Wallaby Inc. began operations on February 1, 2014. After its second month, Wallaby Inc.’s accounting system showed the information above. During the second month, no dividends were declared and no additional shares were issued. Complete the income statement, statement
of changes in equity, and balance sheet using the templates provided below.

EXERCISE 1–14 (LO4) Statement of Changes in Equity
Required: Using the data in EXERCISE 1–13, prepare a statement of changes in equity similar to the example illustrated in Section 1.4.

EXERCISE 1–15 (LO4) Balance Sheet
Required: Using the data in EXERCISE 1–13, prepare a balance sheet similar to the example illustrated in Section 1.4.

EXERCISE 1–16 (LO4) Financial Statements with Errors
Below are the May 31, 2015, year-end financial statements for Gillespie Corp., prepared by a summer student. There were no share capital transactions in the year just ended.

EXERCISE 1–17 (LO4) Determining Missing Financial Information

Required: Complete the following calculations for each individual company:
a. If ColourMePink Ltd. has a retained earnings opening balance of $50,000 at the beginning of the year, and an ending balance of $40,000 at the end of the year, what would be the net income/loss, if dividends paid were $20,000?
b. If ForksAndSpoons Ltd. has net income of $150,000, dividends paid of $40,000 and a retained earnings ending balance of $130,000, what would be the retained earnings opening balance?

c. If CupsAndSaucers Ltd. has a retained earnings opening balance of $75,000 at the beginning of the year, and an ending balance of $40,000 at the end of the year, what would be the dividends paid, if the net loss was $35,000?

a. _____3_______ Purchased a truck for cash.
b. ____________ Issued share capital for cash.
c. _____________ Incurred a bank loan as payment for equipment.
d. _____________ Made a deposit for electricity service to be provided to the company in the future.
e. ____________ Paid rent expense.
f. _____________ Signed a new union contract that provides for increased wages in the future.
g. ____________ Wrote a letter of complaint to the prime minister about a mail strike and hired a messenger service to deliver letters
h. ____________ Received a collect telegram from the prime minister; paid the messenger.
i. _____________ Billed customers for services performed.
j. ____________ Made a cash payment to satisfy an outstanding obligation.
k.____________ Received a payment of cash in satisfaction of an amount owed by a customer.
l. ____________ Collected cash from a customer for services rendered.
m. Paid cash for truck operation expenses.
n. ___________ Made a monthly payment on the bank loan; this payment included a payment on part of the loan and also an amount of interest expense. (Hint: This transaction affects more than two parts of the accounting equation.)
o. ___________ Issued shares in the company to pay off a loan.


PROBLEM 1–1 (LO4,5) Preparing Financial Statements

Following are the asset, liability, and equity items of Dumont Inc. at January 31, 2015, after its first month of operations.

  1. Prepare an income statement and statement of changes in equity for Dumont’s first month ended January 31, 2015.
  2. Prepare a balance sheet at January 31, 2015.

PROBLEM 1–3 (LO5) Transaction Analysis

  1. Use additions and subtractions in the table created in Part 1 to show the effects of the August
    transactions. For non-transactions that do not impact the accounting equation items (such as August 3), indicate ‘NE’ for ‘No Effect’.
  2. Total each column and prove the accounting equation balances.
    PROBLEM 1–4 (LO4) Preparing Financial Statements
    Required: Refer to your answer for Problem 1–3. Prepare an income statement and a statement of changes in equity for the month ended August 31, 2015. Label the revenue earned as Fees Earned. Prepare a balance sheet at August 31, 2015.

    PROBLEM 1–5 (LO5) Transaction Analysis and Table
    The following transactions occurred for Olivier Bondar Ltd., an restaurant management consulting service, during May, 2016:
    May 1______ Received a cheque in the amount of $5,000 from TUV Restaurant Ltd., for a restaurant food cleanliness assessment to be conducted in June.
    May 1____ Paid $5,000 for office rent for the month of May.
    May 2____ Purchased office supplies for $3,000 on account.
    May 3_____ Completed a consultation project for McDanny’s Restaurant and billed them $27,000 for the work.
    May 4_____ Purchased a laptop computer for $3,000 in exchange for a note payable due in 45 days.
    May 5_____ Olivier Bondar was a little short on cash, so the manager made an application for a bank loan in the amount of $20,000. It is expected that the bank will make their decision regarding the loan next week.
    May 6______ Received an invoice from the utilities company for electricity in the amount of $300.
    May 10_____ Bank approved the loan and deposited $20,000 into Olivier Bondar’s bank account. First loan payment is due on June 10.
    May 11____ Paid for several invoices outstanding from April for goods and services received for a total of $8,000. The breakdown of the invoice costs are: telephone expense $500;
    advertising expense $3,000; office furniture $2,000; office supplies $2,500.
    May 13______ Paid employee salaries owing from May 1 to May 13 in the amount of $3,000.
    May 14_______ Completed consulting work for a U.S. client and invoiced $18,000 US (US funds). The Canadian equivalent is $25,000 CAD.
    May 15______ Received $25,000 cash for work done and invoiced in April.
    May 18_______ Hired a new employee who will begin work on May 25. Salary will be $2,500 every two weeks.
    May 21_____ Placed an order request for new shelving for the office. Catalogue price is $2,500.
    May 27______ Paid employee salaries owing from May 14 to May 27 in the amount of $3,500.
    May 29______ The bookkeeper was going to be away for two weeks, so the June rent of $5,000 was paid.
    May 31_______ Reimbursed $50 in cash to an employee for use of his personal vehicle for company business on May 20.
    May 31______ Shelving unit ordered on May 21 was delivered and installed. Total cost was $3,000, including labour.
    Required: Create a table with the following column headings and opening balances. Below the opening balance, number each row from 1 to 18:

PROBLEM 1–6 (LO5) Transaction Analysis and Table
Required: Using the data from the table in PROBLEM 1–5, prepare the balance sheet as at May 31, 2016.

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