Marshall2e IRM Ch02

CHAPTER 2
Financial statements and accounting

concepts/principles
CHAPTER OUTLINE
I. Financial statements
A. From transactions to financial statements
B. Financial statements illustrated
C. Explanations and definitions
1. Balance sheet
2. Income statement
3. Statement of changes in owners' equity
4. Cash flow statement
D. Comparative statements in subsequent years
E. Illustration of financial statement relationships
II. Accounting concepts and principles
A. Schematic model of concepts and principles
B. Concepts or principles related to the entire model
C. Concepts or principles related to transactions
D. Concepts or principles related to the accounting process
E. Concepts or principles related to financial statements
F. Limitations of financial statements
III. The companys annual report
IV. The ROA and ROE ratios
Instructor Resource Manual T/a Accounting: What the numbers mean by Marshall, McCartney, Van Rhyn et al.
2-1
TEACHING AND LEARNING OBJECTIVES

Principal
Tohavethestudent:
illustratethefourprincipalfinancialstatementsandtheirbasicformanddemonstrate
theirrelationships
understandandusetheterminologyoffinancialstatements
understandandusetheaccountingequation
explaintheconceptsoffinancialaccountingandfinancialstatementpresentation.
Supporting
Tohavethestudent:
showthatfinancialstatementsaretheproductoffinancialaccountingandthatthe
statementsrepresentahistoricalsummaryofpasttransactions
explainsomeofthelimitationsoffinancialstatements
illustratethefinancialstatementsthatareincludedinthecompanyannualreport
explainseveralbusinessproceduresandtheirterminology.
TEACHING OBSERVATIONS AND ASSIGNMENT SUGGESTIONS
1.
2.
This is the keystone chapter of the text, and the material presented here becomes a
foundation for all subsequent financial accounting topics. The instructor must resist
tryingtoteachtheentirecoursefromthisonechapter!Instead,trytohelpstudentssort
outthekeyideasthatmustbelearnednowfromthosethattheyshouldbeacquaintedwith,
butthatwillreallybelearnedwhensubsequentmaterialiscovered.Thisisverymuchan
introductiontotheclassificationsystemaccountinguses.Itemstobelearnednowinclude:
a.
definitionofatransaction
b.
thenameofeachfinancialstatementandwhatitshows
c.
theaccountingequation
d.
financialstatementrelationships
e.
limitationsoffinancialstatements.
Asignificantamountoftimeshouldbespentillustratingandexplainingthepurposeand
contentbyclassificationcategory(asset,liability,ownersequity,revenue,expense)of
eachfinancialstatementandhowthefinancialstatementslinktogether.Someinstructors
maywishtodiscussgainsandlossesatthispoint,butrestraintisrecommended.Thekeyis
tokeepitassimpleaspossible.
2-2
Itisrecommendedthatthefollowingmodelsbeemphasised:
a.
BalanceSheet:
Beginning of
Period
Changes During
Period
End of Period
b.
Assets
$
+/
Liabilities
$
+/
Owners' Equity
$
+/
$
IncomeStatement:
Income
Expenses
= Net profit
c.
+
+
4.
5.
6.
7.
8.
9.
10.
StatementofChangesinOwnersEquity:
Beginning Balance of Owners' Equity

Owners' Investment
Net profit
Dividends
Ending Balance of Owners' Equity
(Aswiththediscussionofgainsandlosses,someinstructorsmaywishtoacknowledge
other sources of changes in owners equity. It usually based on the extent to which
studentshavebeenpreviouslyexposedtorealworldfinancialstatements.Anearlydoseof
realitycanberefreshingforgraduatestudents,butmaybedistractingoroverwhelmingto
anundergraduatelessexperiencedaudience.)
Itishelpfultospendtimewiththeconceptsandprinciplesmodel,explainingwhateach
conceptorprinciplemeansandshowinghowitrelatestotheTransactionstoFinancial
Statementsprocess.
Itisappropriatetoemphasisethelimitationsoffinancialstatementsnowbecausestudents
cancreateamindsetthathelpsunderstandspecificaccountingprincipleswhentheyare
coveredlater. Reallife limitations oftherole ofestimates inaccounting canneverbe
emphasisedenough.
The Business In Practice sections are designed to enhance student understanding by
removingsomejargonandexplanationfromtheflowofthetextmaterialwhileprovidinga
contextforthatmaterial.Theseprovidegoodclassdiscussiontopics.Theinstructorspress
gallery is also a useful source of current topical news items in manageable bitesize
proportionsthatcanusefullybeincorporatedintolessons.
Whenintroducingthematerialinthischapter,keepinmindthebigpicture.
TheInsidersView isintendedtohelpstudentsappreciatetherelevanceofthestudyof
accountingandcanbeusedtoaddrelevancetothenumbers.Theseareespeciallyhelpful
tononaccountingmajors.Accountingmajorscanseetheextentoftheirserviceindustry.
So What Do You Think? is intended to personally engage the student and encourage
reflectionandassociationwiththeessentialtopicsofthechapter.
Thetakehomequizprovidedforeachchapterisausefulfeedbackresourcethatcanalso
beusedasaminiclassquiz.Manyofthequizzesareinskeletonformatsotheycanbe
2-3
appliedtoavarietyofcompanies.Thistemplateapproachenablesyoutoclaimthatyour
courseiscurrentwithminimaladditionaleffort.Italsoenables multiplequizzes tobe
generatedformulticampusoperations.
11. Atthisstage,studentsshouldhavepurchasedtheirbooksandtimecanusefullybespent
lookingatthevariousfeaturesofthetextbookandtalkingabouthowtheycanaddvalueas
part of the study program. This is your opportunity to provide guidance as to the
examinationrelevanceofthevariousfeatures.
2-4
ASSIGNMENT OVERVIEW
Thischapterprovidesawidevarietyofassignmentsrangingfromthebasicassociationtype
exercises tothemorechallenging analyticaltypeproblems. Becareful nottooverassignor
underassignhomeworkfromthischapter.Someadvancedtopicsareincluded(e.g.gains or
lossesonthesaleofnoncurrentassets)toexpandconceptsandintroduceterminology.Thereis
noneedtogetintotechnicalmeasurementissuesatthisstage.
No.
Level
E2.1
E2.2
E2.3
E2.4
Learning
objectives
2, 4
2, 4
2, 8
6
E2.5
E2.6
7
4, 5
Easy
Easy
E2.7
2, 3
Easy
Evaluate info
Computer
literacy
Identify info
E2.8
E2.9
2, 3
2, 3
Easy
Easy
Identify info
Organise info
E2.10
E2.11
2, 3
2, 3
Easy
Easy
Organise info
Organise,
manage info
E2.12
2, 3
Med
E2.13
2, 3
Hard
Organise,
manage info
Reason,
conceptualise
E2.14
2, 3
Med
P2.15
2, 3, 6
Easy
P2.16
2, 3, 6
Easy
P2.17
2, 3, 4
Med
P2.18
2, 3, 4
Med
P2.19
2, 3, 4
Med
Evaluate
Organise info
Organise,
manage info
Organise,
manage info
Analyse, reason
P2.20
P2.21
2, 3, 4
2, 3
Med
Easy
Analyse, reason
Interpret data
P2.22
2, 3
Easy
Analyse data
Easy
Easy
Easy
Easy
General
attributes
Identify info
Identify info
Terminology
Differentiate
Reason,
conceptualise
Evaluate,
Organise info
Other
Comments
Simple accounts identification exercise
See E2.1
Familiar terms in an annual report
Difference between cash and net profitfirst pass at a difficult
concept
Limitations of annual reports
Demonstrate the variety of sources of publicly available
accounting info
Simple exercise but may need concrete examples to help
explanation
See E2.7
Reinforces the balance sheet equation and stresses the
distinction between SC and RE
See E2.9
'Retained earnings are affected only by net profit (loss) and
dividends.' This is a bit of fiction but it works effectively in
Chapter 2. Other effects on retained earnings (i.e. dividends
and prior period adjustments) are not discussed until Chapter
8
See E2.11 Good homework assignment
The worksheet format is used to help students understand
financial statement relationships.
Explain that 'net assets' = A L = OE
See E2.7 Good in-class demonstration exercise
Can be used to illustrate the sale of assets as gains/losses
and to emphasise the difference between cash and owners
equity
See P2.15
Straightforward problem emphasising financial statement
relationships. Works well as an illustration of problem solving
See P2.17
Similar to P2.14 and P2.15 but requires the preparation of
financial statements. Good for in-class demonstration
See P2.19 Good homework assignment
Good intro to transaction analysis and can be used as
preparation for Chapter 4
Group learning problem. Good in-class demonstration
problem.
2-5
P2.23
P2.24
P2.25
2, 3, 4
2, 3, 5, 6
2, 4
Med
Med
Hard
P2.26
2, 4
Hard
P2.27
2, 4, 6, 7
Hard
Interpret data
Interpret data
Interpret data
and reports
Interpret data
and reports
Stress the importance of the historical cost principle

See P2.23
Group learning problem. Emphasises the structure of the
income statement
Explain why 'other income' is excluded from gross profit
Excellent conceptual case with personal relevance but make
sure to relate student responses back to the terminology
introduced in the chapter
2-6
SOLUTIONS
E2.1
Category
Financial Statement
Cash............................................................................
Accounts payable........................................................
A
L
BS
BS
Ordinary shares...........................................................
Depreciation expense..................................................
Net sales.....................................................................
Income tax expense....................................................
Short-term investments...............................................
Gain on sale of land....................................................
Retained earnings.......................................................
Dividends payable.......................................................
Accounts receivable....................................................
Short-term borrowings................................................
OE
E
I
E
A
G
OE
L
A
L
BS and SCOE
IS
IS
IS
BS
IS
BS and SCOE
BS
BS
BS
Category
Financial Statement
-A
L
A
LS
OE
A
L
OE
E
OE
I
E
BS
BS
BS
IS
IS and SCOE
BS
BS
SCOE
IS
SCOE
IS
IS
E2.2
Accumulated depreciation...........................................
Long-term borrowings.................................................
Equipment...................................................................
Loss on sale of short-term investments......................
Profit for the period.....................................................
Inventory......................................................................
Other accrued liabilities..............................................
Dividends paid.............................................................
Cost of goods sold......................................................
Additional share capital...............................................
Interest income............................................................
Selling expenses.........................................................
Trickquestion!DividendspaidappearsonlyontheStatementofChangesinOwners
Equity.Dividendspaidaredistributionsofearningsthatreduceretainedearningsonthe
balancesheet.Dividendspaidarenotexpensesanddonotappearontheincomestatement.
Accumulateddepreciationisanegativeasset.Itisasetoffamountknowntechnicallyasa
'contra'accountandshownasadeductionoftherelatednoncurrentasset.
E2.3TheCEOistheChiefExecutiveDirector,alsoknownastheManagingDirector.Thisisa
salaried position. The CFO is the Chief Financial Officer and is usually the main
accountant. Sometimes this person also acts as the public secretary who takes
responsibility forcomplianceissuesrelatingtothelistingonthestockexchange.
2-7
E2.4 Profit is a function of income earned exceeding expenses incurred. Many of these
transactionsareoncreditwithpartiesbuyingnowandpayinglater.
Thecashbalanceisafunctionofmoneycominginandmoneygoingout.Manycash
transactionsdonotinvolveanincomeoranexpense,e.g.aloanreceivedorrepaid.
Whileitmaybethataprofitablebusinessalsohasmoneyinthebank,thisisafunctionof
efficientmanagement.
Apossiblereasonforacompanynothavingenoughcashtopaythebillscouldoccurinthe
early set up phase of a business where the company needs to fill their shelves with
inventoryandmaynothaveestablishedcrediblelinesofcreditwiththeirsuppliers.They
maybeenticingnewcustomerswithofferingextendedperiodsofcredit.Therewouldbe
cashoutlaysrequiredtoprovideinfrastructure(noncurrentassets)priortoopeningthe
business.Thesewouldbeexpensedovertheirusefullives,likelytoexceedayear.
E2.5 Financial statements report quantitative economic data; they do not reflect qualitative
economic variables, e.g. value of management team or morale of workforce. Such
qualitative attributes of the firm are frequently relevant to the decisions and informed
judgmentsthatthefinancialstatementuserismaking,buttheyarenotcommunicatedin
thefinancialstatementsbecausetheycannotbemeasuredobjectively.
Inaddition,themoneymeasurementappliedtotransactionsistheoriginalcost.Noholding
gainsarerecognised forchanges inthepurchasepowerofthedollar orforeconomic
appreciationuntiltheassetissold.
E2.6 Answers will differ between students. Intention of this question is to demonstrate the
wealthofaccountinginformationavailable.Linkthisintofinancialliteracy.
E2.7Manyofthesetransactionsneedqualificationsoastorybehindthewordsmayhelp.Show
howthedetailmakesallthedifferencetothequalification.
Asset
Equipment
Liability
Rentpayable*
Stamps
Loanpayable
Electricity
payable*
Equity
Sharecapital
Income
Dividends
received
Expense
Costofgoods
sold
Rent*
Electricity
expense*
2-8
E2.8Manyofthesetransactionsneedqualificationsoastorybehindthewordsmayhelp.Show
howthedetailmakesallthedifferencetothequalification.
Asset
Equipment
Liability
Equity
Sharecapital
Inventory
Fixeddeposit
Income
Expense
Electricity
expense
Interestearned
Dividendspaid
E2.9 Usetheaccountingequationtodeterminethemissinginformation.
FirmA:
A
A
$420 000
=
L
= $215 000
+
+
+
OE
SC
$75 000
+
+
(Beg. RE
($78 000
+
+
NP
?
DIV
$50 000
=
=
End RE)
)
Inthiscase,theendingbalanceofretainedearningsmustbedeterminedfirst:
$420000=$215000+$75000+EndRE
Retainedearnings31/12/08=$130000
Oncetheendingbalanceofretainedearningsisknownnetprofitcanbedetermined:
$78000+NP$50000=$130000
Netprofitfor2008=$102000
FirmB:
A
A
$540 000
=
L
= $145 000
OE
+
+
SC
?
+
+
(Beg. RE
(
?
+
+
NP
$83 000
DIV
$19 000
=
=
End RE)
$310 000)
(Beg. RE
($42 000
+
NP
+ $113 000
DIV
$65 000
=
=
End RE)
?
)
$540000=$145000+CC+$310000
Contributedcapital31/12/08=$85000
Beg.RE+$83000$19000=$310000
FirmC:
A
A
$325 000
=
=
=
L
L
?
+
OE
+
SC
+ $40 000
+
+
$42000+$113000$65000=EndRE
Oncetheendingbalanceofretainedearningsisknownliabilitiescanbedetermined:
$325000=L+$40000+$90000
Totalliabilities31/12/08=$195000
2-9
AnalternativeapproachcouldbetoconsidertheStatementofChangesinEquityand
use a Balance sheet schedule to solve for the missing numbers rather than an
equation:
FirmA
FirmB
FirmC
ShareCapital
75000
85000(ii)
40000
RetainedEarnings
BeginningBal
78000
246000(iii)
42000
PlusProfit
102000(iii)
83000
113000
LessDividends
(50000)
(19000)
(65000)
RetainedEarningsat
endofyear
130000(ii)
310000
90000(i)
Liabilities
TotalL+OE
215000
420000(i)
145000
540000(i)
195000(iii)
325000(ii)
TotalAssets
420000
540000
325000
2-10
E2.10Usetheaccountingequationtosolveforthemissinginformation.
FirmA:
A
A
?
=
=
=
L
L
$80 000
+
OE
+
SC
+ $55 000
+
+
(Beg. RE
($50 000
+
+
NP
$68 000
DIV
$12 000
=
=
End RE )
?
)
$50000+$68000$12000=EndRE.
Oncetheendingbalanceofretainedearningsisknown,totalassetscanbedetermined:
A=$80000+$55000+$106000
Totalassets31/12/08=$241000
FirmB:
A
A
$435 000
=
=
=
L
L
?
+
OE
+
SC
+ $59 000
+
+
(Beg. RE
($124 000
+
+
NP
$110 000
DIV
?
=
=
End RE)
$186 000)
+
+
NP
$81 000
DIV
$28 000
=
=
End RE)
?
)
$435000=L+$59000+$186000
Totalliabilities31/12/08=$190000
$124000+$110000DIV=$186000
Dividendsdeclaredandpaidduring2008=$48000
FirmC:
A
A
$520 000
=
L
=
L
= $205 000
+
+
+
OE
SC
+
(Beg. RE
$140 000
+ (?
$520000=$205000+$140000+End.RE
Oncetheendingbalanceofretainedearningsisknown,thebeginningbalanceofretained
earningscanbedetermined:
Beg.RE+$81000$28000=$175000
2-11
AnalternativeapproachcouldbetoconsidertheStatementofChangesinEquityand
use a Balance sheet schedule to solve for the missing numbers rather than an
equation:
FirmA
FirmB
FirmC
ShareCapital
55000
59000
140000
RetainedEarnings
BeginningBal
50000
124000
122000(iii)
PlusProfit
68000
110000
81000
LessDividends
(12000)
(48000)(ii)
(28000)
RetainedEarningsat
endofyear
106000(i)
186000
175000(ii)
Liabilities
TotalL+OE
80000
241000(ii)
190000(iii)
435000(i)
205000
520000(i)
TotalAssets
241000(iii)
435000
520000
E2.11
UseEquationforRetEarnings:
(Beg. RE
NP
DIV
End RE)
$311800$4700$18500=$288600
Alternatively:
Preparetheretainedearningsportionofastatementofchangesinowners'equityfortheyear
ended31December2008:
Retained earnings 31 December 2007......................................................................................
Less: Net loss for the year ended 31 December 2008..............................................................
Less: Dividends declared and paid in 2008..............................................................................
$311 800
(4 700)
(18 500)
$288 600
E2.12
UseEquationforRetEarnings:
(Beg. RE
NP
DIV
End RE)
?+$22600$4500=$210300
BeginR.E.=$192200
OrUseScheduleofchangesinEquityformat
Net profit for the year ended 31 December 2008......................................................................
Dividends declared and paid in 2008........................................................................................
$?
22 600
(4 500)
$210 300
Solvingthemodelretainedearningsat31December2007was$192200.
2-12
E2.13Thecluetothisistheunderlinedwordsnetassetsinthequestion
OE
Beginning:
Changes:
Ending:
SC
RE
$12 400
?
?
=
=
=
$7 000
1 200
+
+
+
$0
0
0
+
+
+
$5 400
3 000
$6 000
(net profit)
(dividends)
Begin$12,400=$7,000+$0+$5,400(i)
Changes(ii)600=1,200+3,000(NP)
2,400(div)(iv)
End(ii)11,800=5,800+6,000(iii)
A_L=6,000
A=11,800
AL=OE=6,000
Solutionapproach:
(Rememberthatnetassets=AssetsLiabilities=Ownersequity=SC+RE)
Sincesharecapitaldidnotchangeduringtheyear,letthebeginningandendingbalances
equal$0.Thus,beginningretainedearnings=$12400 $7000= $5400 andending
retainedearnings=netassetsattheendoftheyear=$6000.BylookingattheREcolumn
itcanbeseenthatdividendsmusthavebeen $2400.Alsobylookingattheliabilities
columnitcanbeseenthatendingliabilitiesare$5800andthereforeendingassetsmustbe
$11800.Thus,totalassetsdecreasedby$600duringtheyear($12400$11800),which
isequaltothenetdecreaseontherighthandsideofthebalancesheet($1200liabilities+
$3000netincome $2400dividends = $600net decrease inassets).Theaccounting
equationistrueatthebeginningoftheyear,theendoftheyearandforchangesduringthe
year.
E2.14
OE
Beginning:
Changes:
Ending:
A
?
65 000
=
=
=
L
$320 000
18 000
+
+
+
SC
$ 30 000
?
$192 000
+
+
+
+
RE
?
?
25 000
?
(net profit or loss)

(dividends)
($429 000 total
OE)
OE
Beginning:
Changes:
A
666 000(v)
65 000
=
=
=
L
$320 000
18 000
+
+
+
SC
$ 30 000
162 000 (ii)
+
+
+
RE
316 000(vi)
-54 000(vii)
25 000
(net profit or loss)

(dividends)
2-13
Ending:
731 000(iv) =
302 000(i)
$192 000
237 000(iii)
($429 000 total

OE)
SC+RE=429000
Oncethebeginningandendingretainedearningsbalances,areknownthenetprofitorloss
fortheyearcanbedeterminedasfollows:
Retained earnings beginning..................................................................................................
Less: Net profit or loss for the year........................................................................................
Less: Dividends declared and paid during the year...............................................................
Retained earnings ending.......................................................................................................
$316 000
?
(25 000)
$237 000
Solvingthemodel,thenetlossoftheyear=$54000.
P2.15Setuptheaccountingequationandshowtheeffectsofthetransactionsdescribed.Since
totalassetsmustequaltotalliabilitiesandownersequity,theunadjustedownersequity
canbecalculatedbysubtractingliabilitiesfromthetotaloftheassetsgiven.
Cash +
Data given
Liquidation of
inventory *
Collection of acc.
rec. *
Sale of plant &
equipment *
Payment of liabilities
Balance
$ 22 800
+
+
+49 120
+108 490
Inventory
61 400
61 400
A
Accounts
Receivable
114 200
+
+
=
=
L
Liabilities
305 600
+
+
OE
Owners' Equity
157 800
12 280
5 710
114 200
+190 000
305 600
$ 64 810
Plant
&Equipment
265 000
265 000
+
75 000
=
305 600
0
$ 64 810
*Theeffectsofthesetransactionsonownersequityrepresentlossesfromthesale(orcollection)ofthe
noncashassets.
P2.16
(a) TheapproachtothissolutionissimilartothatshowninProblem2.15.Gainsorlossescan
becalculatedforthesale(orcollection)ofeachofthenoncashassetsforKimberLtdas
follows:
Cash received upon

sale or collection of asset
Inventory
Accounts
receivable
Buildings &
Equipment
Land
Gain (loss) recorded and

effect on Owners Equity
$114 700 85% =

$62 600 88% =
$97 495
55 088
$114 700 15% =

$62 600 12% =
BV# + $40 000 =
188 000
Amount above BV =
Appraised amount =
65 000
Total cash received
$405 583
$65 000 $51 000

=
Net gain
$(17 205)
(7 512)
40 000
14 000
$ 29 283
#$343000$195000accumulateddepreciation=$148000bookvalueofbuildings&equipment.
The$405583cashreceivedfromtheliquidationofnoncashassetswouldbeaddedtothe
beginningcashbalanceof$18400,making
2-14
$423983theamountofcashavailabletopaytheclaimsofcreditorsandshareholders.
Liabilitieswouldbepaidfirst(includingtheamountsthatare not shownonthebalance
sheet)andthebalancewouldbepaidtotheshareholders:
Total cash available............................................................................................
Accounts payable................................................................................................
Loan payable......................................................................................................
Wages payable (not shown on balance sheet)...................................................
Interest payable (not shown on balance sheet)..................................................
Long-term borrowings.........................................................................................
Total cash available to shareholders..............................................................
$423 983
$46 700
58 500
2 400
5 250
64 800
(177 650)
$246 333
Thetotalcashavailabletoshareholdersuponliquidationcanbeverified,asfollows:
Total owners equity (unadjusted from balance sheet)..............................................................
Add: Net gain calculated first calculation above......................................................................
Less: Unrecorded wages expense.............................................................................................
Less: Unrecorded interest expense...........................................................................................
Total owners equity, as adjusted...........................................................................................
$224 700
29 283
(2 400)
(5 250)
$246 333
(b)
Asshowninthescheduleabove,totalownersequityonthebalancesheet(beforethe
effectsofliquidation)hadnotbeenadjustedforthegainsandlossesfromthesale(or
collection) of the noncash assets; nor had it been adjusted for the effects of the
expense/liabilityaccrualsforwagesandinterest.
P2.17
(a)
Accounts receivable....................................................................................................
Cash ...........................................................................................................................
Supplies.......................................................................................................................
Inventory......................................................................................................................
Total current assets.....................................................................................................
$ 33 000
9 000
6 000
31 000
$ 79 000
Accounts payable .......................................................................................................

Long-term borrowings.................................................................................................
Share capital...............................................................................................................
Retained earnings at year end....................................................................................
Total liabilities and owners equity ..............................................................................
$ 23 000
40 000
10 000
59 000
$132 000
Sales revenue..............................................................................................................
Cost of goods sold......................................................................................................
Gross profit..................................................................................................................
Service revenue...........................................................................................................
Depreciation expense..................................................................................................
Supplies expense........................................................................................................
Operating profit...........................................................................................................
$140 000
(90 000)
$ 50 000
20 000
(12 000)
(14 000)
$ 44 000
Operating profit...........................................................................................................
Interest expense..........................................................................................................
Profit before tax...........................................................................................................
Income tax expense....................................................................................................
Net profit......................................................................................................................
$ 44 000
(4 000)
$ 40 000
(12 000)
$ 28 000
(b)
(c)
(d)
(e)$12000incometaxexpense/$40000profitbeforetax100=30%averagetaxrate
(f)
Retained earnings, 1 January 2008 ...........................................................................
?
2-15
Net profit for the year..................................................................................................

Dividends declared and paid during the year..............................................................
Retained earnings, 31 December 2008......................................................................
$ 28 000
(16 000)
$ 59 000
Solving the model, the beginning retained earnings balance must have been $47 000
becausetheaccountbalanceincreasedby$12000duringtheyeartoanendingbalanceof
$59000.
(g) PopesGaragePtyLtd
StatementofChangesinOwnersEquityfortheyearended31December2008
Ownersequityat1January2008
Sharecapital$10000
Retainedearnings47000$57000
Netprofit28000
Dividendsdeclaredandpaid(16000)
Ownersequityatendoftheyear$69000
P2.18
(a)
Inventory.........................................................................................................................
Accounts receivable.......................................................................................................
Cash...............................................................................................................................
Total current assets........................................................................................................
Less: Accounts payable *...............................................................................................
Current assets less current liabilities.............................................................................
$210 000
48 000
36 000
$294 000
(23 000)
$271 000
*Noothercurrentliabilitiesareincludedintheproblem.
(b)
Total current assets (from(a))........................................................................................
Land................................................................................................................................
Equipment......................................................................................................................
Accumulated depreciation..............................................................................................
Total assets....................................................................................................................
$294 000
320 000
18 000
(6 000)
$626 000
Sales revenue.................................................................................................................
Cost of goods sold.........................................................................................................
Gross profit....................................................................................................................
Rent expense..................................................................................................................
Depreciation expense.....................................................................................................
Operating profit..............................................................................................................
$778 000
(440 000)
$338 000
(18 000)
(3 000)
$317 000
Operating profit..............................................................................................................
Interest expense.............................................................................................................
Profit before tax..............................................................................................................
Income tax expense.......................................................................................................
Net profit.........................................................................................................................
$317 000
(30 000)
$287 000
(86 100)
$ 200 900
(c)
(d)
(e)
(f)
$86100incometaxexpense/$287000earningsbeforetax=30%averagetaxrate
Retained earnings, 1 January 2008 ..............................................................................
Net profit for the year.....................................................................................................
Dividends declared and paid during the year................................................................
Retained earnings, 31 December 2008.........................................................................
?
$ 200 900
(64 000)
$383 000
2-16
Solving the model, the beginning retained earnings balance must have been $246100
becausetheaccountbalanceincreasedby$136100duringtheyeartoanendingbalanceof
$383000.
2-17
P2.19
(a)
BREANNA LTD
Income Statement
For the Year Ended 31 December 2008
Sales...............................................................................................................................
Cost of goods sold.........................................................................................................
Gross profit....................................................................................................................
Selling general and administrative expenses ...............................................................
Net profit from operations (operating profit)..................................................................
Interest expense.............................................................................................................
Net profit before tax........................................................................................................
Income tax expense.......................................................................................................
Net profit.........................................................................................................................
$200 000
(128 000)
$ 72 000
(34 000)
$ 38 000
(6 000)
$ 32 000
(8 000)
$ 24 000
BREANNA LTD
Statement of Changes in Owners Equity
Contributed capital:
Ordinary shares ............................................................................................
Retained earnings:
Beginning balance.........................................................................................
Net profit for the year ...................................................................................
Less: Dividends declared and paid during the year......................................
Ending balance ............................................................................................
Total owners equity.......................................................................................
$ 90 000
$ 23 000
24 000
(12 000)
35 000
$125 000
BREANNA LTD
Balance Sheet
31 December 2008
Assets:
Cash .......................................................................................................
Accounts receivable................................................................................
Inventory..................................................................................................
Total current assets.................................................................................
Equipment...............................................................................................
Less: Accumulated depreciation.............................................................
Total assets..............................................................................................
Liabilities:
Accounts payable....................................................................................
Long-term borrowings.............................................................................
Total liabilities..........................................................................................
$ 65 000
10 000
37 000
$112 000
120 000
(52 000)
$ 15 000
Owners Equity:
Ordinary shares ......................................................................................
Retained earnings ..................................................................................
Total owners equity.................................................................................
Total liabilities and owners equity...........................................................
(b)
(c)
68 000
180 000
40 000
$ 55 000
$ 90 000
35 000
$125 000
$180 000
$8000incometaxexpense/$32000earningsbeforetax=25%averagetaxrate.
$6 000 interest expense / $40 000 longterm borrowings = 15% interest rate. This
assumesthattheyearendbalanceoflongtermborrowingsisrepresentativeoftheaverage
longtermborrowingsaccountbalancethroughouttheyear.
2-18
(d)
$12000dividendsdeclaredandpaid/$24000netprofit= 50%.Thisassumesthatthe
boardofdirectorshasapolicytopaydividendsinproportiontonetprofit.Beforethiscan
beestablished,thetrendofdividenddistributionswouldneedtobestudied.
P2.20
(a)
SHAH LTD
Income Statement
Sales........................................................................................................
Cost of goods sold...................................................................................
Gross profit..............................................................................................
Selling general and administrative expenses .........................................
Net profit from operations (operating profit)...........................................
Interest expense......................................................................................
Profit before tax.......................................................................................
Income tax expense.................................................................................
Net profit..................................................................................................
$150 000
(90 000)
$ 60 000
(12 000)
$ 48 000
(8 000)
$ 40 000
(14 000)
$ 26 000
SHAH LTD
Statement of Changes in Owners Equity
Contributed capital:
Ordinary shares.......................................................................................
Retained earnings:
Beginning balance...................................................................................
Net profit for the year .............................................................................
Less: Dividends declared and paid during the year................................
Ending balance .......................................................................................
$ 35 000
$ 21 500
26 000
(6 500)
41 000
$ 76 000
SHAH LTD
Balance Sheet
At 31 December 2008
Assets:
Cash .......................................................................................................
Accounts receivable................................................................................
Inventory..................................................................................................
Total current assets.................................................................................
Buildings and equipment.........................................................................
Less: Accumulated depreciation.............................................................
Total assets..............................................................................................
Liabilities:
Accounts payable....................................................................................
Accrued liabilities.....................................................................................
Loan payable (long term)........................................................................
Total liabilities..........................................................................................
Owners Equity:
Ordinary shares ......................................................................................
Retained earnings ..................................................................................
Total liabilities and owners equity...........................................................
$ 32 000
20 000
44 000
$ 96 000
84 000
(36 000)
8 000
$144 000
$ 15 000
3 000
50 000
$ 68 000
$ 35 000
41 000
$ 76 000
$144 000
2-19
(b)
(c)
(d)
$14000incometaxexpense/$40000netprofitbeforetax=35%averagetaxrate
$8000interestexpense/$50000notespayable(longterm)= 16%interestrate.This
assumesthattheyearendbalanceoflongtermborrowingsisrepresentativeoftheaverage
longtermborrowingsaccountbalancethroughouttheyear.Iflargeamountsofcashhad
been borrowed near the end of the year then the interest rate charged on longterm
borrowingswouldbegreaterthan16%becausetheaverageborrowingsoutstandingwould
havebeenlessthan$50000.Likewiseiflargerepaymentsoflongtermborrowingshad
occurrednearyearendthentheinterestratewouldbelessthan16%becausetheaverage
outstandinglongtermborrowingswouldhavebeengreaterthan$50000.
$6500dividendsdeclaredandpaid/$26000netprofit= 25%.Thisassumesthatthe
boardofdirectorshasapolicytopaydividendsinproportiontonetprofit.
P2.21Tutorsshouldidentifythetheaccountsaffectedandhowtheyaffecttheaccounmting
equation.Ausefulanalysischartisprovidedbelowtheanswer.Incomeandexpensescouldbe
combinedintoOEifthisiswheretheastudentsareat.Amountscaneasilybeassumedto
demonstratethechangeintheaccountingequation
a.
b.
c.
d.
e.
f.
g.
h.
i.
Assets
= Liabilities +
Owners
Equity
+
+
NE
+
NE
+
NE
NE
NE
NE
NE
NE
+
NE
NE
+
Borrowed cash on a bank loan

Paid an account payable
Issued ordinary shares in the company
Purchased inventory on account
Declared and paid dividends
Collected an account receivable
Sold inventory on account at a profit
Paid operating expenses in cash
Repaid principal and interest on a bank loan
Trans Accounts
Classification
Inc/Dec
Proof of effect
onaccequation
+=+
A,L,OE,Inc,Ex
a
Cash
Inc
LoanPay
Inc
Cash
Dec
AccPay
Dec
Cash
Inc
ShareCapital
OE
Inc
Inventory
Inc
+=+
+=+
2-20
f.
g.
AccPay
Inc
Cash
Dec
RetEarn
OE
Dec
Cash
Inc
AccRec
Dec
AccRec
Inc
Sales
Inc
Inc
Inventory
Dec
CostofGoodssold
Ex
Inc
Cash
Dec
Operatingexp
Exp
Inc
Cash
Dec
LoanPay
Dec
Interestexpense
Ex
Inc
+=
+=+
=+
P2.22
(a)
1 August 2008 totals........................................................................

3 August borrowed $15 000 in cash from the bank ........................
New totals.........................................................................................
7 August bought inventory valued at $32 000 on account...............
Assets
$420 000
+ 15 000
$435 000
+32 000
= Liabilities
$345 000
+ 15 000
$360 000
+32 000
New totals.........................................................................................
10 August paid $3 000 cash operating expenses.............................
New totals..........................................................................................
14 August received $30 000 in cash from sales..............................
of merchandise that had cost $21 000 ............................................
New totals..........................................................................................
17 August paid $8 000 owed on accounts payable..........................
New totals..........................................................................................
21 August collected $11 000 of accounts receivable.......................
$467 000
3 000
$464 000
+30 000
21 000
$473 000
8 000
$465 000
0
$392 000
$392 000
$392 000
8 000
$384 000
2-21
Owners
+ Equity
$75 000
$75 000
$75 000
3 000
$72 000
+30 000
21 000
$81 000
$81 000
New totals..........................................................................................
24 August repaid $10 000 to the bank plus $200 interest................
New totals..........................................................................................
29 August paid Cynthia Merkin a $2 000 cash dividend .................
31 August 2008 totals......................................................................
(b)
$465 000
10 200
$454 800
2 000
$452 800
$384 000
10 000
$374 000
= $374 000
$81 000
200
$80 800
2 000
+ $78 800
Total revenues were $30 000 (from sales) and total expenses were $24 200 (which
included$3000ofoperatingexpenses,$21000ofcostofgoodssoldand$200ofinterest
expense).Thus,netprofitwas$5800($30000$24200).
Alternativecalculation:Ownersequityincreasedby$3800duringthemonthofAugust
(seeanswertopart(c))eventhougha$2000cashdividendwasdeclaredandpaidto
CynthiaMerkin.Sincetherewerenosharetransactionsduringthemonth,netprofitwas
$5800.($75000beginningownersequity,plus$5800netprofit,minus$2000dividends
equals$78800endingownersequity.)
(c)
Total assets.......................................................................
Total liabilities...................................................................
Total owners equity..........................................................
1 August
$420 000
345 000
75 000
31 August
$452 800
374 000
78 800
Net Change
$32 800
29 000
3 800
(d)
CynthiaMerkinsownersequity increased by$9000asaresultofthesaleonAugust

14th($30000revenue$21000costofgoodssold).Herownersequitydecreasedby$3
000fortheoperatingexpensesrecordedonAugust10th,by$200fortheinterestexpense
recordedonAugust24thandby$2000forthecashdividendrecordedonAugust29th.In
other words, her owners equity was increased by revenues and it was decreased by
expensesanddividends.
(e) Interestisanexpensebecauseitrepresentsanecessarypaymentto others(i.e.creditors)
for the use of their moneythus it is a cost of doing business. Dividends are a
distributionofprofitstotheownersofthefirmandrepresentapartialliquidationofthe
firm. A dividend is not an expense because it represents a profit distribution; it is a
transactionwiththeownerinhercapacityasowner.
(f) Whenmoneyisborrowedfromthebank,anasset(cash)isincreasedandaliability(loan
payable)isalsoincreasedbyanequalamount.Netprofitisincreasedonlywhenrevenue
hasbeenearnedandmoneyborrowedfromthebankrepresentsaliabilitythatmustbe
repaidnotrevenuethathasbeenearned.
(g) Payingoffaccountspayabledecreasesanasset(cash)anddecreasesaliability(accounts
payable)byanequalamount.Collectinganaccountreceivableincreasesanasset(cash)
anddecreasesanotherasset(accountsreceivable)byequalamounts. Inbothcases, only
balancesheetaccountsareinvolved.Netprofitisincreasedbyrevenuesanddecreasedby
expenses.Theexpenseassociatedwithacashpaymentofanaccountpayablewouldhave
beenrecordedinanearliertransaction(whentheexpensewas incurred andtheaccount
payablewasestablished).Bythesamelogictherevenueassociatedwiththecollectionof
an account receivable would have been recorded in an earlier transaction (when the
revenuewasearnedandtheaccountreceivablewasestablished).
P2.23Amountsshowninthebalancesheetbelowreflectthefollowinguseofthedatagiven:
(a) An asset should have a probable future economic benefit; therefore, the accounts
receivablearestatedattheamountexpectedtobecollectedfromcustomers.
(b) Assetsarereportedatoriginalcostnotcurrentworth.Depreciationinaccountingreflects
theallocationofthecostofanassetoveritsestimatedusefullife.
2-22
(c)
(d)
Assetsarereportedatoriginalcostnotatanassessedorappraisedvalue.
TheamountoftheloanpayableiscalculatedusingtheaccountingequationA=L+OE.
Totalassetscanbedeterminedbasedonitems(a)(b)and(c);totalowners'equityisknown
afterconsideringitem(e);andtheloanpayableisthedifferencebetweentotalliabilities
andtheaccountspayable.
2-23
(e)
Retainedearningsrepresents,thedifferencebetweencumulativenetprofitandcumulative
dividends.
Assets:
Cash ....................................................
Accounts receivable.............................
Land......................................................
Motor vehicle........................................
Less: Accumulated depreciation..........
$ 700
3 400
11 000
$18 000
(6 000)
Total assets...........................................
12 000
$27100
Liabilities and Owners Equity:

Loan payable....................
$ 2 200
Accounts payable...........
3 400
Total liabilities................
$ 5 600
Contributed capital.........
8 000
Retained earnings.........
13 500
Total owners equity.......
21 500
Total liabilities and owners
equity..............................
$27100
P2.24
Assets
Current assets:
Cash...............................
Accounts receivable.......
Inventory........................
Total current assets........
Land...............................
Equipment......................
Less: Accumulated
depreciation...................
Total land & equipment. .
Total assets....................
1.
EPSI LTD
Balance Sheets
31 December 2008 and 2007
2008
2007
Liabilities
: Current liabilities
$ 38
$ 30 Loan payable.................
126
120 Accounts payable...........
241
230 Total current liabilities...
$ 405
$ 380 Long-term borrowings...
$ 25
$ 25
Owners Equity..............
390
375 Ordinary shares.............
(180)
$ 235
$ 640
(160)
$ 240
$ 620
Retained earnings..........
Total owners equity.......
Total liabilities & owners
equity..............................
2008
2007
$ 49
123
$ 172
$ 60
$ 40
110
$ 150
$ 80
$ 200
$ 200
208
$ 408
190
$ 390
$ 640
$ 620
Solutionapproach:
Retained earnings 31/12/07...............................................................................................................
Net profit for 2008 (given)..................................................................................................................
Dividends for 2008 (given).................................................................................................................
Retained earnings 31/12/08 ..............................................................................................................
$190
26
(8)
$208
2.
3.
4.
5.
6.
7.
Cashat31/12/08is$8morethanat31/12/07.
Costofequipmentat31/12/08is$15morethanthebalanceat31/12/07
Landbalanceat31/12/08isthesameasat31/12/07.Fairmarketvalueisirrelevant.
Calculatetotalcurrentassets,totallandandequipment,andtotalassets.
Totalassetscanthenbeusedfortotalliabilitiesandownersequity.
Totalownersequityiscalculatedandaddedtototalcurrentliabilities.Thisamountis
subtractedfromtotalliabilitiesandownersequitytodeterminelongtermborrowings.
P2.25
(a)
2008
For the years ended 31 December 2007 and 2008, respectively:

Net sales...........................................................................................
Cost of goods sold............................................................................
Gross profit.......................................................................................
Marketing, general, administrative and other operating expenses
Operating profit.................................................................................
Interest expense ...............................................................................
Profit before taxes.............................................................................
Income tax expense..........................................................................
Profit for the period...........................................................................
$ 4 258 674
2 461 198
1 797 476
. 1 318 179
. 479 297
239 608
239 689
88 685
$ 151 004
2007
$ 4 645 126
2 690 170
1 954 956
1 416 194
538 762
195 082
343 680
120 288
$ 223 392
2-24
Dividends declared and paid.............................................................

As at 31 December 2007 and 2008, respectively:
Total assets.......................................................................................
Total liabilities...................................................................................
Total shareholders' deficit.................................................................
Accumulated deficit *........................................................................
* Accumulated deficit 31 December 2007.........................................
Add: Net profit for the year...............................................................
Less: Cash dividends declared.........................................................
Accumulated deficit 31 December 2008...........................................
$0
$0
$ 2 983 486
3 919 429
(935 943)
(1 020 860)
$(1 171 864)
151 004
. (0)
$(1 020 860)
$ 3 205 728
4 304 301
(1 098 573)
(1 171 864)
NotethatitmakeseconomicsensethatLeviStrauss&Co.wouldfollowazerodividends
policydespitethenetprofitfiguresreportedin2007and2008becausetheiraccumulated
deficitissolarge(i.e.netprofitisusedeachyeartoreducethedeficit).Recallthatthere
mustbeasufficientpositivebalanceinretainedearnings(toabsorbthedividendwithout
creating a deficit) for the board of directors to declare legally a dividend to its
shareholders.Thus,whenadeficitexists,dividendsareinappropriateindeedcontraryto
theCorporationsAct.
(b) Thedifferencebetweentotalshareownersequityandaccumulateddeficitrelatesprimarily
tocontributedcapitalamounts.
P2.26
(a)
Net sales and other income..........................................................................
Less: Other income.......................................................................................
Net sales........................................................................................................
Less: Cost of sales........................................................................................
Gross profit...................................................................................................
Gross profit/net sales....................................................................................
2008
$219 812
(2 013)
$217 799
(171 562)
$ 46 237
2007
$193 295
(1 966)
$191 329
(150 255)
$ 41 074
21.2%
21.5%
Thechangeinthegrossprofit/netsalesratioduringtheyearended31January2008was
insignificant,relativetotheprioryear,suggestingthatthecompanyssalesmixandpricing
strategieshavebeenconsistent.
(b)
Gross profit (from part (a) above)..................................................................
Operating selling and general and administrative expenses..........................
Operating profit...............................................................................................
2008
$ 46 237
(36 173)
$ 10 064
Operating profit/net sales.................................................................................
2007
$ 41 074
(31 150)
$ 9 924
4.6%
5.2%
Thechangeinoperatingprofitasapercentageofnetsalesduringthefinancialyearended
on31January2008wasslightlyunfavourabledueto1)thedecreaseingrossprofitmargin
(ascalculatedinpart(a)and2)theincreaseinotheroperatingexpenses(asapercentof
sales).
(c)
Operating profit (from part (b) above) ...........................................................
Other income..................................................................................................
Interest costs...................................................................................................
Other non-operating expenses.......................................................................
Profit before tax...............................................................................................
Income tax expense.........................................................................................
Net profit.........................................................................................................
2008
$10 064
2 013
(1 326)
(183)
$10 568
(3 897)
$ 6 671
2007
$ 9 924
1 966
(1 374)
(129)
$10 387
(4 092)
$ 6 295
2-25
Solution approach: Thekeytoansweringpart (c)correctly istoreformat theincome

statementdataasshownabove,rememberingtoincludeOtherincomeasasourceofnon
operatingrevenue.TheProfitbeforetaxlinehasbeenaddedtoemphasisetheimportance
ofunderstandingthedifferencebetweenoperatingandnonoperatingitemsontheincome
statement.Theproblemcouldbesolvedwithoutcalculatingthisnumber.
P2.27 Inparts (a),(b)and (d)ifstudents are willing tosharethe different kinds ofassets,
liabilities,revenues,expensesandcashflowstheyhaveidentified,thiscasecanbeusedto
review the basic characteristics of the balance sheet income statement and cash flow
statement.
Inpart(c),thepointisthat projected incomeactivityforthecurrentperiodhasadirect
impactontheprojectedbalancesheet.
Inpart(e),thepointisthatincomeandcashflowaretwodifferentthingsentirely.Possible
explanationsmightinclude:
Receipt of student loan proceeds (orscholarships grants) towards the end of the
semester.
Certaincostsofattendingcollege(i.e.tuitionroomandboardmealplans)mightbe
incurredbythestudentbutnotpaidyet.
Many students work on a parttime (or fulltime) basis throughout the semester,
whichmaygeneratemorecashflowthantheywereabletoaccumulatebeforethe
semester.
2-26
TAKE-HOME QUIZ:CHAPTER 2
NAME______________________________________________ ID_________________
PresentedbelowistheCashflowstatementforMystoreLtdfortheyearended31December
2008.Alsoshownisapartiallycompletedcomparativebalancesheetasat31December2008
and2007.
MYSTORE LTD
Cash flow statement
Cash flows from operating activities:
Net profit ................................................................................................................................
Add (deduct) items not affecting cash:
Depreciation expense.............................................................................................................
Decrease in accounts receivable............................................................................................
Decrease in accounts payable................................................................................................
Net cash provided by operating activities...............................................................................
$ 23 000
6 000
8 000
(6 000)
$ 31 000
Cash flows from investing activities:

Purchase of store fixtures.......................................................................................................
$ (4 000)
Cash flows from financing activities:

Repayment of long-term borrowings......................................................................................
Payment of cash dividends on ordinary shares.....................................................................
Net cash used by financing activities.....................................................................................
Increase in cash for the year..................................................................................................
$ (2 000)
(5 000)
$ (7 000)
$ 20 000
Current assets:
Cash..............................
Accounts receivable......
Total current assets......
Store fixtures.................
Less: Accumulated
depreciation..................
Net store fixtures...........
Total assets...................
1.
MYSTORE LTD
Balance Sheets
AT 31 December 2008 and 2007
2008
2007
Liabilities:
$ 37 000
$______ Accounts payable...........
______
39 000
Long-term borrowings...
$
$ Total liabilities................
$______
$ 24 000 Share capital..................
Retained earnings..........
(13 000)
______
Total owners equity......
. $______
$______
Total liabilities and
$______
$______ owners equity................
2008
2007
$ _____
18 000
$ _____
$ _____
______
$ _____
$ 18 000
______
$______
$ 20 000
______
$______
. $ _____
$______
CompletethebalancesheetsforMystoreLtdat31December2008and2007.Identifyyour
strategy by listing, in general, the sequence of steps you used to find the unknown
amounts.
Notetoinstructors
Theindirectformofcashflowstatementisgivenheresinceitprovidesinformationmoredirectlyforusein
completingthequiz.Assuch,studentscomprehensionoftermsisthefocusofthisexercise.
2.
3.
DoestheamountshownonthebalancesheetforNetStoreFixturesrepresentthecurrent
fairmarketvalueofthestorefixtures?Explainyouranswer.
PrepareaStatementofChangesinRetainedEarningsfortheyearended31December
2008.
2-27
TAKE-HOME QUIZ KEY: CHAPTER 2

1.
Useinformationinthecashflowstatementtodetermineeitherthebeginningor
endingamountsforassetsandliabilities.Forexample,accountsreceivabledecreased
$8000soattheendof2008thebalancewas$31000.
Based on total assets and total liabilities at the beginning and end of the year,
determinetotalowners'equityateachdate.
Usingtotalowners'equityattheendof2007,solveforretainedearningsatthatdate.
Thecashflowsfromfinancingactivitiesonthecashflowstatementdoesnotshow
anycashfromthesaleofadditionalstocksotheendingbalanceisthesameasthe
beginningbalance.Knowingthis,retainedearningsattheendoftheyearcanbe
determined.
Alternatively,useinformationaboutnetprofitanddividendsfromthecashflow
statementandthebeginningbalanceofretainedearnings(asdeterminedabove)to
calculateendingretainedearnings.Then,capitalcontributedattheendoftheyear
canbedetermined.
MYSTORE LTD
Balance Sheets
AT 31 December 2008 and 2007
2008
2007
Current assets:
Cash.................................
Accounts receivable.........
Total current assets.........
Store fixtures....................
Less: Accumulated
depreciation.....................
Net store fixtures..............
Total assets......................
2.
3.
$37 000
31 000
. $68 000
$28 000
$17 000
39 000
$56 000
$24 000
(13 000)
$15 000
. $83 000
(7 000)
$17 000
$73 000
Accounts payable.............
Long-term borrowings.....
Total liabilities...................
Contributed capital............
Retained earnings............
Total owners equity..........
Total liabilities and
owners equity..................
2008
2007
. $12 000
18 000
. $30 000
$20 000
. 33 000
. $53 000
$18 000
20 000
$38 000
$20 000
15 000
$35 000
. $83 000
$73 000
No, the balance sheet shows the original cost of assets less accumulated depreciation,
whichforaccountingpurposesisthatportionofthecostoftheassetthathasbeen'used
up.'
MYSTORELTD
Statementofchangesinownersequityfortheyearended31December2008
Owners equity at 31/12/07.......................................................................................................
Add: Net profit for the year.......................................................................................................
Less: Dividends declared and paid..........................................................................................
Owners equity at 31/12/08......................................................................................................
$35 000
23 000
(5 000)
$53 000
2-28

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Marshall2e IRM Ch02

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CHAPTER 2

Financial statements and accounting

TEACHING AND LEARNING OBJECTIVES

Beginning Balance of Owners' Equity

Stress the importance of the historical cost principle

(net profit or loss)

(net profit or loss)

($429 000 total

Cash received upon

Gain (loss) recorded and

$114 700 85% =

$114 700 15% =

BV# + $40 000 =

Total cash received

$65 000 $51 000

Accounts payable .......................................................................................................

Net profit for the year..................................................................................................

Borrowed cash on a bank loan

1 August 2008 totals........................................................................

CynthiaMerkinsownersequity increased by$9000asaresultofthesaleonAugust

Liabilities and Owners Equity:

For the years ended 31 December 2007 and 2008, respectively:

Dividends declared and paid.............................................................

Operating profit/net sales.................................................................................

Solution approach: Thekeytoansweringpart (c)correctly istoreformat theincome

Cash flows from investing activities:

Cash flows from financing activities:

TAKE-HOME QUIZ KEY: CHAPTER 2

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