Accounting Tools for Business Decision Making 4th edition

Paul D. KimmelJerry J. Weygandt and Donald E. Kieso

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Accounting : Tools for Business Decision Making (ISBN10: 0470534788; ISBN13: 9780470534786)   

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BE1-1
Match each of the following forms of business organization with a set of characteristics:
sole proprietorship (SP), partnership (P), corporation (C).

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

(b) _____ Simple to set up and maintains control with founder.

(c) _____ Easier to transfer ownership and raise funds, no personal liability.


BE1-2
Match each of the following types of evaluation with one of the listed users of
accounting information.

1. Trying to determine whether the company complied with tax laws.

2. Trying to determine whether the company can pay its obligations.

3. Trying to determine whether a marketing proposal will be cost effective.

4. Trying to determine whether the company’s net income will result in a stock price
increase.

5. Trying to determine whether the company should employ debt or equity financing.

(a) _____ Investors in common stock.
(d) _____ Chief Financial Officer.

(b) _____ Marketing managers.
(e) _____ Internal Revenue Service.

(c) _____ Creditors.


BE1-3
Indicate in which part of the statement of cash flows each item would appear:
operating activities (O), investing activities (I), or financing activities (F).

(a) _____ Cash received from customers.

(b) _____ Cash paid to stockholders (dividends).

(c) _____ Cash received from issuing new common stock.


(d) _____ Cash paid to suppliers.


(e) _____ Cash paid to purchase a new office building.


BE1-4
Presented below are a number of transactions. Determine whether each transaction
affects common stock (C), dividends
(d), revenue (R), expense
(e), or does not
affect stockholders’ equity (NSE). Provide titles for the revenues and expenses.

(a) Costs incurred for advertising.

(b) Assets received for services performed.

(c) Costs incurred for insurance.


(d) Amounts paid to employees.


(e) Cash distributed to stockholders.

(f) Assets received in exchange for allowing the use of the company’s building.

(g) Costs incurred for utilities used.

(h) Cash purchase of equipment.

(i) Issued common stock for cash.


BE1-5
In alphabetical order below are balance sheet items for Wyoming Company at
December 31, 2012. Prepare a balance sheet following the format of Illustration 1-7.

Accounts payable $65,000

Accounts receivable 71,000

Cash 22,000

Common stock 28,000


BE1-6
Eskimo Pie Corporation markets a broad range of frozen treats, including its
famous Eskimo Pie ice cream bars. The following items were taken from a recent income
statement and balance sheet. In each case, identify whether the item would appear on the
balance sheet (BS) or income statement (IS).

(a) _____ Income tax expense. (f ) _____ Net sales.

(b) _____ Inventories. (g) _____ Cost of goods sold.

(c) _____ Accounts payable. (h) _____ Common stock.


(d) _____ Retained earnings. (i) _____ Receivables.


(e) _____ Property, plant, and equipment. (j) _____ Interest expense.

BE1-7
Indicate which statement you would examine to find each of the following items:
income statement (I), balance sheet (B), retained earnings statement (R), or statement of
cash flows (C).

(a) Revenue during the period.

(b) Supplies on hand at the end of the year.

(c) Cash received from issuing new bonds during the period.


(d) Total debts outstanding at the end of the period.

BE1-8
Use the basic accounting equation to answer these questions.

(a) The liabilities of Daley Company are $90,000 and the stockholders’ equity is $230,000.
What is the amount of Daley Company’s total assets?

(b) The total assets of Laven Company are $170,000 and its stockholders’ equity is
$80,000. What is the amount of its total liabilities?

(c) The total assets of Peterman Co. are $800,000 and its liabilities are equal to onefourth
of its total assets. What is the amount of Peterman Co.’s stockholders’ equity?

BE1-9
At the beginning of the year, Peale Company had total assets of $800,000 and
total liabilities of $500,000.

(a) If total assets increased $150,000 during the year and total liabilities decreased
$80,000, what is the amount of stockholders’ equity at the end of the year?

(b) During the year, total liabilities increased $100,000 and stockholders’ equity decreased
$70,000. What is the amount of total assets at the end of the year?

(c) If total assets decreased $80,000 and stockholders’ equity increased $110,000 during
the year, what is the amount of total liabilities at the end of the year?

BE1-10
Indicate whether each of these items is an asset (A), a liability (L), or part of
stockholders’ equity (SE).

(a) Accounts receivable.
(d) Supplies.

(b) Salaries and wages payable.
(e) Common stock.

(c) Equipment. (f ) Notes payable.

BE1-11
Which is not a required part of an annual report of a publicly traded company?


(a) Statement of cash flows.

(b) Notes to the financial statements.

(c) Management discussion and analysis.

(d) All of these are required.

1-1 Identify each of the following organizational characteristics with the organizational
form or forms with which it is associated.

(a) Easier to transfer ownership
(d) Tax advantages

(b) Easier to raise funds
(e) No personal legal liability

(c) More owner control
1-2 Classify each item as an asset, liability, common stock, revenue, or expense.

(a) Issuance of ownership shares

(b) Land purchased

(c) Amounts owed to suppliers

(d) Bonds payable

(e) Amount earned from selling a product

(f) Cost of advertising

Do it!
Review

1-3
Gould Corporation began operations on January 1, 2012. The following information
is available for Gould Corporation on December 31, 2012.

Accounts payable $ 5,000 Notes payable $ 7,000

Accounts receivable 2,000 Rent expense 10,000

Advertising expense 4,000 Retained earnings ?

Cash 3,100 Service revenue 25,000

Common stock 15,000 Supplies 1,900

Dividends 2,500 Supplies expense 1,700

Equipment 26,800

Prepare an income statement, a retained earnings statement, and a balance sheet for
Gould Corporation.

1-4
Indicate whether each of the following items is most closely associated
with the management discussion and analysis (MD&A), the notes to the financial statements,
or the auditor’s report.

(a) Description of ability to pay near-term obligations

(b) Unqualified opinion

(c) Details concerning liabilities, too voluminous to be included in the statements

(d) Description of favorable and unfavorable trends

(e) Certified Public Accountant (CPA)

(f ) Descriptions of significant accounting policies

Exercises

E1-1
Here is a list of words or phrases discussed in this chapter:

1. Corporation 4. Partnership 7. Accounts payable

2. Creditor 5. Stockholder 8. Auditor’s opinion

3. Accounts receivable 6. Common stock

Instructions

Match each word or phrase with the best description of it.
______ (a) An expression about whether financial statements conform with generally accepted
accounting principles.
______ (b) A business enterprise that raises money by issuing shares of stock.

______ (c) The portion of stockholders’ equity that results from receiving cash from
investors.

______ (d) Obligations to suppliers of goods.

______ (e) Amounts due from customers.

______ (f ) A party to whom a business owes money.

______ (g) A party that invests in common stock.

______ (h) A business that is owned jointly by two or more individuals but does not
issue stock.


E1-2
All businesses are involved in three types of activities—financing, investing, and
operating. Listed below are the names and descriptions of companies in several different
industries.

Abitibi Consolidated Inc.
—manufacturer and marketer of newsprint

Cal State–Northridge Stdt Union
—university student union

Oracle Corporation
—computer software developer and retailer

Sportsco Investments
—owner of the Vancouver Canucks hockey club

Grant Thornton LLP
—professional accounting and business advisory firm

Southwest Airlines
—discount airline

Instructions

(a) For each of the above companies, provide examples of
(1) a financing activity,
(2) an
investing activity, and
(3) an operating activity that the company likely engages in.

(b) Which of the activities that you identified in

(a) are common to most businesses?

Which activities are not?

E1-3 The Fair View Golf & Country Club details the following accounts in its financial
statements.

(a)
(b)

Accounts payable _____ _____

Accounts receivable _____ _____

Equipment _____ _____

Sales revenue _____ _____

Service revenue _____ _____

Inventory _____ _____

Mortgage payable _____ _____

Supplies expense _____ _____

Rent expense _____ _____

Salaries and wages expense _____ _____

Instructions

(a) Classify each of the above accounts as an asset
(a), liability (L), stockholders’ equity
(SE), revenue (R), or expense

(e) item.

(b) Classify each of the above accounts as a financing activity

(f), investing activity (I),
or operating activity (O). If you believe a particular account doesn’t fit in any of these
activities, explain why.

E1-4
This information relates to Alexis Co. for the year 2012.

Retained earnings, January 1, 2012 $67,000

Advertising expense 1,800

Dividends paid during 2012 6,000

Rent expense 10,400

Service revenue 58,000

Utilities expense 2,400

Salaries and wages expense 30,000

Instructions

After analyzing the data, prepare an income statement and a retained earnings statement
for the year ending December 31, 2012.


E1-5
The following information was taken from the 2009 financial statements of pharmaceutical
giant Merck and Co. All dollar amounts are in millions.

Retained earnings, January 1, 2009 $43,698.8

Materials and production expense 9,018.9

Marketing and administrative expense 8,543.2

Dividends 3,597.7

Sales revenue 27,428.3

Research and development expense 5,845.0

Tax expense 2,267.6

Other revenue 11,147.7

Instructions

(a) After analyzing the data, prepare an income statement and a retained earnings statement
for the year ending December 31, 2009.

(b) Suppose that Merck decided to reduce its research and development expense by 50%.
What would be the short-term implications? What would be the long-term implications?
How do you think the stock market would react?

E1-6
Presented here is information for Packee Inc. for 2012.

Retained earnings, January 1 $130,000

Revenue from legal services 400,000

Total expenses 175,000

Dividends 65,000

Instructions

Prepare the 2012 retained earnings statement for Packee Inc.

E1-7
Consider each of the following independent situations.

(a) The retained earnings statement of Scott Corporation shows dividends of $68,000,
while net income for the year was $75,000.

Liabilities and Stockholders’ Equity

Liabilities

Accounts payable $ 5,000

Stockholders’ equity

Common stock

(a)

Retained earnings

(b)

Total liabilities and

stockholders’ equity $62,000

(b) The statement of cash flows for Silberman Corporation shows that cash provided by
operating activities was $10,000, cash used in investing activities was $110,000, and
cash provided by financing activities was $130,000.

Instructions

For each company provide a brief discussion interpreting these financial facts. For example,
you might discuss the company’s financial health or its apparent growth philosophy.

E1-8
The following items and amounts were taken from Linus Inc.’s 2012 income statement
and balance sheet.

______ Cash $ 84,700 ______ Accounts receivable 88,419

______ Retained earnings 123,192 ______ Sales revenue 584,951

______ Cost of goods sold 438,458 ______ Income taxes payable 6,499

______ Salaries and wages expense 115,131 ______ Accounts payable 49,384

______ Prepaid insurance 7,818 ______ Service revenue 4,806

______ Inventory $ 64,618 ______ Interest expense 1,882

Instructions

(a) In each, case, identify on the blank line whether the item is an asset
(a), liability (L),
stockholder’s equity (SE), revenue (R), or expense
(e) item.

(b) Prepare an income statement for Linus Inc. for the year ended December 31, 2012.


E1-9
Here are incomplete financial statements for Liam, Inc.

LIAM, INC.
Balance Sheet

Assets

Cash $ 7,000

Inventory 10,000

Buildings 45,000

Total assets $62,000

Income Statement

Revenues $85,000

Cost of goods sold

(c)

Salaries and wages expense 10,000

Net income $

(d)

Retained Earnings Statement

Beginning retained earnings $12,000

Add: Net income

(e)

Less: Dividends 5,000

Ending retained earnings $27,000

Instructions

Calculate the missing amounts.

E1-10
Deer Track Park is a private camping ground near the Lathom Peak Recreation
Area. It has compiled the following financial information as of December 31, 2012.

Revenues during 2012: camping fees $132,000 Dividends $ 9,000

Revenues during 2012: general store 25,000 Notes payable 50,000

Accounts payable 11,000 Expenses during 2012 126,000

Cash 8,500 Supplies 5,500

Equipment 114,000 Common stock 40,000

Retained earnings (1/1/2012) 5,000

Instructions

(a) Determine Deer Track Park’s net income for 2012.

(b) Prepare a retained earnings statement and a balance sheet for Deer Track Park as of
December 31, 2012.

(c) Upon seeing this income statement, Ken Zilber, the campground manager, immediately
concluded, “The general store is more trouble than it is worth—let’s get
rid of it.” The marketing director isn’t so sure this is a good idea. What do you
think?

E1-11
Kellogg Company is the world’s leading producer of ready-to-eat cereal and a
leading producer of grain-based convenience foods such as frozen waffles and cereal bars.
The following items were taken from its 2009 income statement and balance sheet. All
dollars are in millions.

____ Retained earnings $5,481 ____ Long-term debt $ 4,835

____ Cost of goods sold 7,184 ____ Inventories 910

____ Selling and ____ Net sales 12,575
administrative expenses 3,390 ____ Accounts payable 1,077

____ Cash 334 ____ Common stock 105

____ Notes payable 44 ____ Income tax expense 476

____ Interest expense 295 ____ Other expense 22

Instructions

Perform each of the following.

(a) In each case identify whether the item is an asset

(a), liability (L), stockholders’ equity
(SE), revenue (R), or expense
(e).

(b) Prepare an income statement for Kellogg Company for the year ended December 31,
2009.

E1-12
This information is for O’Brien Corporation for the year ended December 31,
2012.

Cash received from lenders $20,000

Cash received from customers 50,000

Cash paid for new equipment 28,000

Cash dividends paid 8,000

Cash paid to suppliers 16,000

Cash balance 1/1/12 12,000

Instructions

(a) Prepare the 2012 statement of cash flows for O’Brien Corporation.

(b) Suppose you are one of O’Brien’s creditors. Referring to the statement of cash flows,
evaluate O’Brien’s ability to repay its creditors.

E1-13
The following data are derived from the 2009 financial statements of Southwest
Airlines. All dollars are in millions. Southwest has a December 31 year-end.

Cash balance, January 1, 2009 $1,390

Cash paid for repayment of debt 122

Cash received from issuance of common stock 144

Cash received from issuance of long-term debt 500

Cash received from customers 9,823

Cash paid for property and equipment 1,529

Cash paid for dividends 14

Cash paid for repurchase of common stock 1,001

Cash paid for goods and services 6,978

Instructions

(a) After analyzing the data, prepare a statement of cash flows for Southwest Airlines
for the year ended December 31, 2009.

(b) Discuss whether the company’s cash from operations was sufficient to finance
its investing activities. If it was not, how did the company finance its investing
activities?

E1-14
Andrew Davis is the bookkeeper for Cheyenne Company. Andrew has been trying
to get the balance sheet of Cheyenne Company to balance. It finally balanced, but
now he’s not sure it is correct.

Instructions

Prepare a correct balance sheet.

E1-15
The following items were taken from the balance sheet of Nike, Inc.

1. Cash $2,291.1 7. Inventories $2,357.0

2. Accounts receivable 2,883.9 8. Income taxes payable 86.3

3. Common stock 2,874.2 9. Property, plant, and equipment 1,957.7

4. Notes payable 342.9 10. Retained earnings 5,818.9

5. Other assets 3,759.9 11. Accounts payable 2,815.8

6. Other liabilities 1,311.5

Instructions

Perform each of the following.

(a) Classify each of these items as an asset, liability, or stockholders’ equity and determine
the total dollar amount for each classification. (All dollars are in millions.)

(b) Determine Nike’s accounting equation by calculating the value of total assets, total
liabilities, and total stockholders’ equity.

(c) To what extent does Nike rely on debt versus equity financing?

E1-16
The summaries of data from the balance sheet, income statement, and retained
earnings statement for two corporations, Bates Corporation and Wilson Enterprises, are
presented below for 2012.

Bates Corporation Wilson Enterprises

Beginning of year

Total assets $110,000 $150,000

Total liabilities 70,000
(d)

Total stockholders’ equity

(a) 70,000

End of year

Total assets

(b) 180,000

Total liabilities 120,000 55,000

Total stockholders’ equity 60,000
(e)
Changes during year in retained
earnings
Dividends

(c) 5,000

Total revenues 215,000 (f )

Total expenses 165,000 80,000

Instructions

Determine the missing amounts. Assume all changes in stockholders’ equity are due to
changes in retained earnings.

E1-17
The annual report provides financial information in a variety of formats, including
the following.

Management discussion and analysis (MD&A)

Financial statements

Notes to the financial statements

Auditor’s opinion

Instructions

For each of the following, state in what area of the annual report the item would be presented.
If the item would probably not be found in an annual report, state “Not disclosed.”



Exercises: Set B and
Challenge Exercises

Visit the book’s companion website, at
www.wiley.com/college/kimmel, and choose
the Student Companion site to access Exercise Set B and Challenge Exercises.

Problems: Set A

P1-1A
Presented below are five independent situations.

(a) Three physics professors at MIT have formed a business to improve the speed of information
transfer over the Internet for stock exchange transactions. Each has contributed
an equal amount of cash and knowledge to the venture. Although their approach
looks promising, they are concerned about the legal liabilities that their
business might confront.

(b) Ed Toth, a college student looking for summer employment, opened a bait shop in
a small shed at a local marina.

(c) Joan Stuebben and Ron Klinke each owned separate shoe manufacturing businesses.
They have decided to combine their businesses. They expect that within the coming
year they will need significant funds to expand their operations.

(d) Crystal, Allie, and Harry recently graduated with marketing degrees. They have been
friends since childhood. They have decided to start a consulting business focused on
marketing sporting goods over the Internet.

(e) Mark Willis wants to rent CD players and CDs in airports across the country. His
idea is that customers will be able to rent equipment and CDs at one airport, listen
to the CDs on their flights, and return the equipment and CDs at their destination
airport. Of course, this will require a substantial investment in equipment and CDs,
as well as employees and locations in each airport. Mark has no savings or personal
assets. He wants to maintain control over the business.

Instructions
In each case, explain what form of organization the business is likely to take—sole proprietorship,
partnership, or corporation. Give reasons for your choice.


P1-2A
Financial decisions often place heavier emphasis on one type of financial statement
over the others. Consider each of the following hypothetical situations independently.

(a)
The North Face, Inc. is considering extending credit to a new customer. The terms
of the credit would require the customer to pay within 30 days of receipt of goods.

(b) An investor is considering purchasing common stock of
Amazon.com. The investor
plans to hold the investment for at least 5 years.

(c)
Chase Manhattan is considering extending a loan to a small company. The company
would be required to make interest payments at the end of each year for 5 years, and
to repay the loan at the end of the fifth year.

(d) The president of
Campbell Soup is trying to determine whether the company is generating
enough cash to increase the amount of dividends paid to investors in this and
future years, and still have enough cash to buy equipment as it is needed.

Instructions

In each situation, state whether the decision maker would be most likely to place primary
emphasis on information provided by the income statement, balance sheet, or statement
of cash flows. In each case provide a brief justification for your choice. Choose only
one financial statement in each case.

P1-3A
On June 1, Beardsley Service Co. was started with an initial investment in the
company of $22,100 cash. Here are the assets and liabilities of the company at June 30,
and the revenues and expenses for the month of June, its first month of operations:

Cash $ 4,600 Notes payable $12,000

Accounts receivable 4,000 Accounts payable 500

Service revenue 7,500 Supplies expense 1,000

Supplies 2,400 Maintenance and repairs expense 600

Advertising expense 400 Utilities expense 300

Equipment 26,000 Salaries and wages expense 1,400

In June, the company issued no additional stock, but paid dividends of $1,400.

Instructions

(a) Prepare an income statement and a retained earnings statement for the month of
June and a balance sheet at June 30, 2012.

(b) Briefly discuss whether the company’s first month of operations was a success.

(c) Discuss the company’s decision to distribute a dividend.

P1-4A
Presented below is selected financial information for Yvonne Corporation for
December 31, 2012.

Inventory $ 25,000 Cash paid to purchase equipment $ 12,000

Cash paid to suppliers 104,000 Equipment 40,000

Building 200,000 Revenues 100,000

Common stock 50,000 Cash received from customers 132,000

Cash dividends paid 7,000 Cash received from issuing

common stock 22,000

Instructions

(a) Determine which items should be included in a statement of cash flows and then
prepare the statement for Yvonne Corporation.

(b) Comment on the adequacy of net cash provided by operating activities to fund the
company’s investing activities and dividend payments.


P1-5A
Gabelli Corporation was formed on January 1, 2012. At December 31, 2012, John
Paulus, the president and sole stockholder, decided to prepare a balance sheet, which appeared
as follows.

GABELLI CORPORATION

Balance Sheet

December 31, 2012

Assets Liabilities and Stockholders’ Equity

Cash $20,000 Accounts payable $30,000

Accounts receivable 50,000 Notes payable 15,000

Inventory 36,000 Boat loan 22,000

Boat 24,000 Stockholders’ equity 64,000

John willingly admits that he is not an accountant by training. He is concerned that his
balance sheet might not be correct. He has provided you with the following additional
information.

1. The boat actually belongs to Paulus, not to Gabelli Corporation. However, because
he thinks he might take customers out on the boat occasionally, he decided to list it
as an asset of the company. To be consistent, he also listed as a liability of the corporation
his personal loan that he took out at the bank to buy the boat.

2. The inventory was originally purchased for $25,000, but due to a surge in demand
John now thinks he could sell it for $36,000. He thought it would be best to record
it at $36,000.

3. Included in the accounts receivable balance is $10,000 that John loaned to his brother
5 years ago. John included this in the receivables of Gabelli Corporation so he
wouldn’t forget that his brother owes him money.

Instructions

(a) Comment on the proper accounting treatment of the three items above.

(b) Provide a corrected balance sheet for Gabelli Corporation. (
Hint: To get the balance
sheet to balance, adjust stockholders’ equity.)


Problems: Set B

P1-1B
Presented below are five independent situations.

(a) Rachel Jackson, a college student looking for summer employment, opened a vegetable
stand along a busy local highway. Each morning she buys produce from local
farmers, then sells it in the afternoon as people return home from work.

(b) Colin Doyle and Jason Elliot each owned separate swing-set manufacturing businesses.
They have decided to combine their businesses and try to expand their reach
beyond their local market. They expect that within the coming year they will need
significant funds to expand their operations.

(c) Three chemistry professors at FIU have formed a business to employ bacteria to clean
up toxic waste sites. Each has contributed an equal amount of cash and knowledge
to the venture. The use of bacteria in this situation is experimental, and legal obligations
could result.

(d) Brittany Medler has run a successful, but small cooperative health food store for over
20 years. The increased sales of her store have made her believe that the time is right
to open a national chain of health food stores across the country. Of course, this
will require a substantial investment in stores, inventory, and employees in each store.
Brittany has no savings or personal assets. She wants to maintain control over the
business.

(e) Cheryl Lamb and Tom Majors recently graduated with masters degrees in economics.
They have decided to start a consulting business focused on teaching the basics of
international economics to small business owners interested in international trade.
Instructions

In each case, explain what form of organization the business is likely to take—sole proprietorship,
partnership, or corporation. Give reasons for your choice.

P1-2B
Financial decisions often place heavier emphasis on one type of financial statement
over the others. Consider each of the following hypothetical situations independently.

(a) An investor is considering purchasing common stock of the
Bally Total Fitness company.
The investor plans to hold the investment for at least 3 years.

(b)
Boeing is considering extending credit to a new customer. The terms of the credit
would require the customer to pay within 60 days of receipt of goods.

(c) The president of
Northwest Airlines is trying to determine whether the company is
generating enough cash to increase the amount of dividends paid to investors in this
and future years, and still have enough cash to buy new flight equipment as it is
needed.

(d)
Bank of America is considering extending a loan to a small company. The company
would be required to make interest payments at the end of each year for 5 years, and
to repay the loan at the end of the fifth year.

Instructions

In each of the situations above, state whether the decision maker would be most likely
to place primary emphasis on information provided by the income statement, balance
sheet, or statement of cash flows. In each case, provide a brief justification for your choice.

Choose only one financial statement in each case.


P1-3B
Special Delivery was started on May 1 with an investment of $45,000 cash. Following
are the assets and liabilities of the company on May 31, 2012, and the revenues
and expenses for the month of May, its first month of operations.

Accounts receivable $ 6,200 Notes payable $28,000

Service revenue 10,400 Salaries and wages expense 2,000

Advertising expense 800 Equipment 56,000

Accounts payable 2,400 Maintenance and repairs expense 2,900

Cash 15,800 Insurance expense 400

No additional common stock was issued in May, but a dividend of $1,700 in cash was paid.

Instructions

(a) Prepare an income statement and a retained earnings statement for the month of
May and a balance sheet at May 31, 2012.

(b) Briefly discuss whether the company’s first month of operations was a success.

(c) Discuss the company’s decision to distribute a dividend.


P1-4B
Presented below are selected financial statement items for Rowe Corporation for
December 31, 2012.

Inventory $ 55,000 Cash paid to purchase equipment $ 30,000

Cash paid to suppliers 154,000 Equipment 40,000

Buildings 400,000 Revenues 200,000

Common stock 20,000 Cash received from customers 172,000

Cash dividends paid 6,000 Cash received from issuing
bonds payable 40,000

Instructions

(a) Determine which items should be included in a statement of cash flows, and then
prepare the statement for Rowe Corporation.

(b) Comment on the adequacy of net cash provided by operating activities to fund the
company’s investing activities and dividend payments.

P1-5B
Austin Corporation was formed during 2011 by Joanna Kay. Joanna is the president
and sole stockholder. At December 31, 2012, Joanna prepared an income statement
for Austin Corporation. Joanna is not an accountant, but she thinks she did a reasonable
job preparing the income statement by looking at the financial statements of other companies.

She has asked you for advice. Joanna’s income statement appears as follows.

AUSTIN CORPORATION

Income Statement

For the Year Ended December 31, 2012

Accounts receivable $17,000

Service revenue 47,000

Rent expense 10,000

Insurance expense 7,000

Vacation expense 4,000

Net income $43,000

Joanna has also provided you with these facts.

1. Included in the service revenue account is $3,000 of revenue that the company earned
and received payment for in 2011. She forgot to include it in the 2011 income statement,
so she put it in this year’s statement.

2. Joanna operates her business out of the basement of her parents’ home. They do
not charge her anything, but she thinks that if she paid rent it would cost her
about $10,000 per year. Therefore, she included $10,000 of rent expense in the income
statement.

3. To reward herself for a year of hard work, Joanna went to Greece. She did not use
company funds to pay for the trip, but she reported it as an expense on the income
statement since it was her job that made her need the vacation.

Instructions

(a) Comment on the proper accounting treatment of the three items above.

(b) Prepare a corrected income statement for Austin Corporation.