Solution Manual for Accounting Text and Cases 13th Edition
by Anthony
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The chapter has been updated.
Approach
On the first day, the usual objective is to create interest in the subject, to set the scene, and to give an
overview of the course. The first part of the chapter does this. The second part of the chapter gives a fairly
specific introduction to the nature of financial accounting. Instructors probably may want to bring in
material from their own reading or experience to make the introductory points.
Cases
The cases are intended to get the student to start thinking like accountants and users of accounting
information, without knowledge of any of the techniques. Ribbons an’ Bows gives students an
opportunity to construct a simple set of financial statements. Kim Fuller can be used as a springboard for
any type of discussion: uses of information by various parties, the cost of record-keeping, or even the
development of a complete accounting system. Baron Coburg illustrates practically all of the basic
accounting concepts, without naming them. It is a difficult case, but enlightening, even for those with
some prior accounting training.
Problems
Problem 1-1
CHARLES COMPANY
BALANCE SHEET AS OF DECEMBER 31, ----.
Assets Liabilities and Owners’ Equity
Cash......................................................................................................................................................................$ 12,000 Bank loan..........................................................................................$ 40,000
Inventory..............................................................................................................................................................95,000 Owners’ Equity
Other assets...........................................................................................................................................................13,000 Owners’ equity...............................................................................80,000
Total assets............................................................................................................................................................$120,000
Total liabilities and
owners’ equity...................................................................................$120,000
This problem can be used to explain certain accounting presentation conventions. For example, the use of
double lines to underscore a total, the position of the dollar sign at the top of a column of numbers, and
the dating of the balance sheet.
The purpose of this problem is to illustrate the equality of the basic accounting equation: assets equal
liabilities plus owners’ equity.
1-1
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Problem 1-2
The missing numbers are:
Year 1
Noncurrent assets........................................................................................ $410,976 ...................................................................................Noncurrent liabilities................................................................................... 240,518 ...................................................................................Year 2
Current assets......................................................................................... $ 90,442 ........................................................................................Total assets........................................................................................... 288,456 ..........................................................................................
Noncurrent liabilities................................................................................... 78,585 ...................................................................................Year 3
Total assets........................................................................................... $247,135 ..........................................................................................
Current liabilities.................................................................................... 15,583 ........................................................................................Total liabilities and owners’ equity....................... 247,135 ..........................................................................................................................Year 4
Current assets......................................................................................... $ 69,090 ........................................................................................Current liabilities.................................................................................... 17,539 ........................................................................................The basic accounting equation is
Assets = Liabilities + Owners’ equity
The instructor might want to explain how this equation is used (as it is in this problem) to calculate “plug”
numbers when managers construct projected balance sheets. The manager does not have to complete
every balance because the manager can plug certain balances.
The instructor may also draw attention to the other equations illustrated in the problem. These include:
Current assets + Noncurrent assets = Total assets
Current liabilities + Noncurrent liabilities = Total liabilities
Paid-in capital + Retained earnings = Owners’ equity.
Later in the course the instructor should explain that the additional paid-in capital account is a special
account to record the excess of capital received over par value in common stock issuances. At this stage
in the course it is better to simply use a descriptive term, like paid-in capital, to describe capital received
from stockholders. Also it avoids the use of the term common stock, which some students many not
understand.
1-2
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Problem 1-3
The missing numbers are:
Year 1
Gross margin........................................................................................... $9,000 ...........................................................................Tax expense.............................................................................................. 1,120 .........................................................................Year 2
Sales................................................................................................. $11,968 ..................................................................................Profit before taxes....................................................................................... 2,547 .......................................................................Year 3
Cost of goods sold......................................................................................... $2,886 ....................................................................Other expenses............................................................................................ 6,296 .......................................................................Other accounting equations such as the following are also illustrated by this problem:
Gross margin = Sales - Cost of goods sold
Profit before taxes = Gross margin - Other expenses
Net income = Profit before taxes - Tax expense
The instructor may want to point out to the students that ratios are often used by managers to construct
projected financial statements. Year 4 is an example of this application.
In order to estimate Year 4, the key ratios to compute are:
Year 1 Year 2 Year 3 Average
Sales.............................................. 100.0% 100.0% 100.0% 100.0% .....................................................................................................................................Gross margin........................................ 75.0 75.0 75.0 75.0% ..............................................................................................................................Profit before
taxes............................................... 23.3 21.3 20.5 21.7% ....................................................................................................................................Net income........................................... 14.0 12.8 12.2 13.0% ..............................................................................................................................Tax rate........................................... 40.0 40.0 40.0 40.0 ...................................................................................................................................Year 4
Sales................................................................................................. $10,000 ..................................................................................Cost of goods sold......................................................................................... 2,500 ....................................................................Gross margin (75% of sales).............................$ 7,500 .................................................................................................................Other expenses............................................................................................ 5,330 .......................................................................Profit before taxes (21.7% of sales)...................... $ 2,170 .............................................................................................................Tax expense.............................................................................................. 870 .........................................................................Net income (13% of sales)................................................................................ $ 1,300 .................................................................The basic accounting equation used is: Net income = Revenues – Expenses [Show Less]