Concept explainers
Exercise 3-2 Comparing a merchandising company with a service company
The following information is available for two different types of businesses for the 2018 accounting year. Hopkins CPAs is a service business that provides accounting services to small businesses. Sports Clothing is a merchandising business that sells sports clothing to college students.
Data for Hopkins CPAs
1. Borrowed $90,000 from the bank to start the business.
2. Provided $60,000 of services to clients and collected $50,000 cash.
3. Paid salary expense of $32,000.
Data for Sports Clothing
1. Borrowed $90,000 from the bank to start the business.
2. Purchased $60,000 inventory for cash.
3. Inventory costing $26,000 was sold for $50,000 cash.
4. Paid $8,000 cash for operating expenses.
Required
a. Prepare an income statement, balance sheet, and statement of
b. Which of the two businesses would have product costs? Why?
c. Why does Hopkins CPAs not compute gross margin on its income statement?
d. Compare the assets of both companies. What assets do they have in common? What assets are different? Why?
a.
Prepare an income statement, balance sheet and statement of cash flows for each of the companies.
Explanation of Solution
Income statement: This statement reports revenues and expenses from business operations and the result of those operations as net income or net loss. Net income is the positive difference between revenues and expenses. If the difference between revenues and expenses is negative, it results in net loss.
Prepare income statement for H CPAs:
H CPAs | |
Income Statement | |
For the Year Ended December 31, 2018 | |
Particulars | Amount |
Revenue | |
Service Revenue | $60,000 |
Expenses | |
Salaries Expense | ($32,000) |
Net Income | $28,000 |
Table (1)
Prepare income statement for S Clothing:
S Clothing | |
Income Statement | |
For the Year Ended December 31, 2018 | |
Particulars | Amount |
Net Sales Revenue | $50,000 |
Less: Cost of goods sold | ($26,000) |
Gross margin | $24,000 |
Expenses: | |
Operating expenses | ($8,000) |
Net Income | $16,000 |
Table (2)
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.
Prepare balance sheet for H CPAs:
H CPAs | ||
Balance Sheet | ||
As of December 31, 2018 | ||
Assets | ||
Cash (1) | $118,000 | |
Total Assets | $118,000 | |
Liabilities | ||
Notes Payable | $90,000 | |
Total Liabilities | $90,000 | |
Stockholders’ Equity | ||
Retained Earnings | $28,000 | |
Total Stockholders’ Equity | $28,000 | |
Total Liabilities and Stockholders’ Equity | $118,000 |
Table (3)
Prepare balance sheet for S Clothing:
S Clothing | ||
Balance Sheet | ||
As of December 31, 2018 | ||
Assets | ||
Cash (2) | $72,000 | |
Merchandised Inventory (1) | $34,000 | |
Total Assets | $106,000 | |
Liabilities | ||
Notes Payable | $90,000 | |
Total Liabilities | $90,000 | |
Stockholders’ Equity | ||
Retained Earnings | $16,000 | |
Total Stockholders’ Equity | $16,000 | |
Total Liabilities and Stockholders’ Equity | $106,000 |
Table (4)
Working note:
(1) Calculate the amount of cash account for H CPAs:
(2) Calculate the amount of cash account for S Clothing:
(3) Calculate the amount of merchandised account for S Clothing:
Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.
Prepare statement of cash flows for H CPAs:
H CPAs | ||
Statement of Cash Flows | ||
For Year Ended December 31, 2018 | ||
Cash Flows From Operating Activities: | ||
Cash Inflow from Clients | $50,000 | |
Cash Outflow for Salaries | ($32,000) | |
Net Cash Flow from Operating Activities | $18,000 | |
Cash Flows From Investing Activities | $0 | |
Cash Flows From Financing Activities: | ||
Cash Inflow from Loan | $90,000 | |
Net Cash Flow from Financing Activities | $90,000 | |
Net Increase in Cash | $108,000 | |
Add: Beginning Cash Balance | $0 | |
Ending Cash Balance | $108,000 |
Table (5)
Prepare statement of cash flows for S Clothing:
S Clothing | ||
Statement of Cash Flows | ||
For Year Ended December 31, 2018 | ||
Cash Flows From Operating Activities: | ||
Cash Inflow from Customers | $50,000 | |
Cash Outflow for Inventory | ($60,000) | |
Cash Outflow for Expenses | ($8,000) | |
Net Cash Used for Operating Activities | ($18,000) | |
Cash Flows From Investing Activities | $0 | |
Cash Flows From Financing Activities: | ||
Cash Inflow from Loan | $90,000 | |
Net Cash Flow from Financing Activities | $90,000 | |
Net Increase in Cash | $72,000 | |
Add: Beginning Cash Balance | $0 | |
Ending Cash Balance | $72,000 |
Table (6)
b.
Determine which business have product cost.
Explanation of Solution
Product costs: The costs are incurred to acquire the merchandise, ship the stock, prepare the merchandise for sale, and store the inventory are collectively referred to as product costs or inventory costs.
S Clothing business is considered as a merchandising business because it has inventory and the goods are sold. Hence, S Clothing business has product cost. However, H CPAs is a service oriented business and that firm does not have product costs.
c.
Determine the why H CPAs does not compute gross margin on its income statement.
Explanation of Solution
H CPAs is a service oriented business and that firm does not have product costs. Hence, H CPAs does not require computing gross margin on its income statement. However, it only has selling and administrative expense (period expense).
d.
Compare the assets of both the companies and explain the common assets and different asset of both the companies.
Explanation of Solution
Comparison of the common assets and different asset of given the companies:
- The common asset for both companies is Cash.
- Cash is the only asset that H CPAs hold it.
- S Clothing has cash plus inventory as an asset.
- H CPAs not having any inventory and does not sell.
- S Clothing sells products and must carry inventory available for sale to customers.
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Chapter 3 Solutions
Loose Leaf Survey of Accounting
- Exercise 1-34 Business Activities Bill and Steve recently formed a company that manufactures and sells high-end kitchen appliances. The following is a list of activities that occurred during the year. Bill and Steve each contributed cash in exchange for common stock in the company Land and a building to be used as a factory to make the appliances were purchased for cash. Machines used to make the appliances were purchased for cash. Various materials used in the production of the appliances were purchased for cash. Three employees were paid cash to operate the machines and make the appliances. Running low on money, the company borrowed money from a local bank. The money from the bank loan was used to buy advertising on local radio and television stations. The company sold the appliances to local homeowners for cash. Due to extremely high popularity of its products, Bill and Steve bum another factory building on its land for cash. The company paid a cash dividend to Bill and Steve Required: Classify each of the business activities listed as either an operating activity (0). an investing activity (I), or a financing activity (F).arrow_forwardComprehensive problem 1 Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2016. The accounting cycle for Kelly Consulting for April, including financial statements, was illustrated in this chapter. During May, Kelly Consulting entered into the following transactions: May 3. Received cash from clients as an advance payment for services to be provided and recorded it as unearned fees, 4,500. 5. Received cash from clients on account, 2,450. 9. Paid cash for a newspaper advertisement. 225. 13. Paid Office Station Co. for part of the debt incurred on April 5, 640. 15. Recorded services provided on account for the period May 1-15; 9,180. 16. Paid part-time receptionist for two weeks salary including the amount owed on April 30, 750. 17. Recorded cash from cash clients for fees earned during the period May 1-16, 8,360. Record the following transactions on Page 6 of the journal: 20. Purchased supplies on account, 735. 21. Recorded services provided on account for the period May 16-20, 4,820. 25. Recorded cash from cash clients for fees earned for the period May 17-23, 7,900. 27. Received cash from clients on account, 9,520. 28. Paid part-time receptionist for two weeks salary, 750. 30. Paid telephone bill for May, 260. 31. Paid electricity bill for May, 810. 31. Recorded cash from cash clients for fees earned for the period May 26-31, 3,300. 31. Recorded services provided on account for the remainder of May, 2,650. 31. Paid dividends, 10,500. Instructions 1. The chart of accounts for Kelly Consulting is shown in Exhibit 9, and the post-closing trial balance as of April 30, 2016, is shown in Exhibit 17. For each account in the post-closing trial balance, enter the balance in the appropriate Balance column of a four-column account. Date the balances May 1, 2016, and place a check mark () in the Posting Reference column. Journalize each of the May transactions in a two- column journal starting on Page 5 of the journal and using Kelly Consultings chart of accounts. (Do not insert the account numbers in the journal at this time.) 2. Post the journal to a ledger of four-column accounts. 3. Prepare an unadjusted trial balance. 4. At the end of May, the following adjustment data were assembled. Analyze and use these data to complete parts (5) and (6). a. Insurance expired during May is 275. b. Supplies on hand on May 31 are 715. c. Depreciation of office equipment for May is 330. d. Accrued receptionist salary on May 31 is 325. e. Rent expired during May is 1,600. f. Unearned fees on May 31 are 3,210. 5. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. 6. Journalize and post the adjusting entries. Record the adjusting entries on Page 7 of the journal. 7. Prepare an adjusted trial balance. 8. Prepare an income statement, a retained earnings statement, and a balance sheet. 9. Prepare and post the closing entries. Record the closing entries on Page 8 of the journal. (Income Summary is account 34 in the chart of accounts.) Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry. 10. Prepare a post-closing trial balance.arrow_forwardProblem 2-56A Analyzing Transactions Luis Madero, after working for several years with a large public accounting firm decided to open his own accounting service. The business is operated as a corporation under the name Madero Accounting Services. The following captions and amounts summarize Maderos balance sheet at July 31, 2019. The following events occurred during August 2019. Issued common stock to Ms. Garriz in exchange for $15,000 cash. Paid $850 for first months rent on office space. Purchased supplies of $2,250 on credit. Borrowed $8,000 from the bank. Paid $1,080 on account for supplies purchased earlier on credit. Paid secretarys salary for August of $2,150. Performed amounting services for clients who paid cash upon completion of the service in the total amount of $4,700. Used $3,180 of the supplies on hand. Perfumed accounting services for clients on credit in the total amount of $1,920. Purchased $500 in supplies for cash. Collected $1,290 cash from clients for whom services were performed on credit. Paid $1,000 dividend to stockholders. Required: Record the effects of the transactions listed above on the accounting equation. Use the format given in the problem, starting with the totals at July 31, 20l9. Prepare the trial balance at August 31, 2019.arrow_forward
- Brief Exercise 2-30 Transaction Analysis Galle Inc. entered into the following transactions during January. Borrowed $50,000 from First Street Bank by signing a new payable. Purchased $25,000 of equipment for cash. (Continued) Paid $500 to landlord for rent for January. Performed services for customers on account, $10,000. Collected $31000 from customers for services performed in Transaction d. Paid salaries of $2,500 for the current month. Required: Show the effect of each transaction using the following model.arrow_forwardExercise 2-43 Transaction Analysis Goal Systems, a business consulting firm, engaged in the following transactions: Issued common stock for $75,000 cash. Borrowed $35,000 from a bank. Purchased equipment for $12,000 cash. Prepaid rent on office space for 6 months in the amount of $7.800. Performed consulting services in exchange for $6,300 cash. Perfumed consulting services on credit in the amount of $18,750. Incurred and paid wage expense of $9,500. Collected $10,200 of the receivable arising from Transaction f. Purchased supplies for $1,800 on credit. Used $1,200 of the supplies purchased in Transaction i. Paid for all of the supplies purchased in Transaction i. Required: For each transaction described above. indicate the effects on assets, liabilities, and stockholders equity using the format below.arrow_forwardBrief Exercise 2-28 Assumptions and Principles Five common accounting practices are listed below: A customer pays $20 to mail a package on December 30. The delivery company recognizes revenue when the package is delivered in January. Jim Trotter owns C**S Heating Company. In preparing the financial statements, Trotter makes sure that the purchase of a new truck for personal use is not included in C&S’s financial statements. Moseley Inc. recorded land at its purchase price of $50,000. In future periods, the land is reflected in the financial statements at $50,000. Mack Company purchases inventory in March. However, it does not expense that inventory until it is sold in April. Mueller Inc. prepares quarterly and annual financial statements. Required: Identify the amounting principle or assumption that best describes each practicearrow_forward
- Comprehensive Problem 1 8 Net income. 31,425 Kelly Pitney began her consulting business. Kelly Consulting, on April 1, 20Y8. The accounting cycle for Kelly Consulting for April, including financial statements, was illustrated in this chapter During May, Kelly Consulting entered into the following transactions: May 3.Received cash from clients as an advance payment for services to be provided and recorded it as unearned tree 4,500 5.Received cash from clients on account 2,450. 9.Paid cash for a newspaper advertisement 225. 13.Raid Office Station Co for part of the debt incurred on April , 640. 15.Recorded services provided on account for the period May 1-15, 9,180. 16 Paid part-time receptionist for two weeks salary including the amount owed on April 30, 750. 17.Recorded cash from cash clients for fees earned during the period May 116, 8,360. Record the following transactions on Page 6 of the Journal 20.Purchased support on account 735. 21.Recorded services provided on account for the period May 1620. 4,820 25.Recorded cash from cash clients for fees earned for the period May 1723, 7,900 27.Received cash from clients on account 9,520. 28.Paid part-time receptionist for two weeks salary. 7S0. 30.Raid telephone bill for May. 260 31.Paid electricity bill for May, 810. 31.Recorded cash from cash clients tor lees earned for the period May 2031. 3,300. 31.Recorded services provided on account for the remainder of May, 2,650. 31.Paid dividends 10,500 Instructions 1.The chart of accounts foe Kelly Consulting is shown us Exhibit 9. and the post-closing trial balance as of April 30, 20Y8, is shown in Exhibit 17. for each account in the post-closing trial balance, enter the balance in the appropriate Balance column of a four-column account. Date the balances May 1. 20Y8. and place a check mark () in the Posting Reference column. Journalize each of the May transactions in a two-column journal starting cm Page of the journal and using Kelly Consultings chart of accounts. (Do not insert the account numbers in the journal at this time.) 2.Post the journal to a ledger of four-column accounts. 5.Prepare an unadjusted trial balance. 4.At the end of May, the following adjustment data were assembled. Analyze and use these data to complete parts (5) and (6). (a)Insurance expired during May is 275. (b)Supplies on hand on May II are 715. (c)Depreciation of office equipment for May is 330. (d)Accrued receptionist salary on May 31 is 325. (e)Rent expired during May is 1600. (f)Unearned fees on May 31 are 3,210 5.(Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet 6.Journalize and post the adjusting entries. Record the adjusting entries on Page 7 of the journal. 7.Prepare an adjusted trial balance. 8.Prepare an income statement, a statement of stockholders equity, and a balance sheet. 9.Prepare and post the closing entries. Record the closing entries on Page 8 of the journal. Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry. 10.Prepare a post-closing trial balance.arrow_forwardQuick ratio American Eagle Outfitters Inc. (AEO) operates specialty retail stores, selling clothing such as denim, sweaters, t-shins, and fleece outerwear that targets 15 to 25 year old men and women, that targets 15 to 25 year old men and women. The following asset and liability data (in millions) were adapted from recent financial statements. Compute quick assets for Years 2 and 1.arrow_forwardExercise 2-40 Transaction Analysis Amanda Webb opened a home health care business under the name Home Care Inc. During its first month of operations. the business had the following transactions: Issued common stock to Ms. Webb and other stockholders in exchange for $30,000 cash. Paid $18,500 cash for a parcel of land on which the business will eventually build an office building. Purchased supplies for $2350 on credit. Used the supplies purchased in Transaction c. Paid rent for the month on office space and equipment. $800 cash. Performed services for clients in exchange for $3,910 cash. Paid salaries for the month. $1,100. Paid $650 cash for advertising in the current month. Paid $1,900 on account for supplies purchased in Transaction c. Performed services for clients on credit in the amount of 51,050. Paid a $600 dividend to stockholders Required: Prepare an analysis of the effects of these transactions on the accounting equation of the business. Use the format below.arrow_forward
- Brief Exercise 1-23 Business Activities Marni Restaurant Company engaged in the following transactions during March, its first month of operations. Received $100,000 cash from the sale of stock. Purchased of $20,000 inventory from J&J Wholesale Company. Purchased $30,000 of kitchen equipment for its restaurants. Obtained a $25,000 loan from First State Bank. Sold $18,000 of food to customers. paid employee weekly salaries of $8,500. Repaid S 10,000 of principal relating to the loan in Item d. Required: For each of the above business activities, indicate whether it is an operating, investing, or financing activity.arrow_forwardProblem 2-62B Comprehensive Problem Mulberry Services sells electronic data processing services to firms too Email to own their own computing equipment. Mulberry had the following amounts and amount balances as of January 1, 2019: During 2019, the following transactions occurred (the events described below are aggregations of many individual events): During 2019, Mulberry sold $690,000 of computing services, all on credit. Mulberry collected $570,000 from the credit sales in Transaction a and an additional $129,000 from the accounts receivable outstanding at the beginning of the year. Mulberry paid the interest payable of $8,000. A Wages of $379,000 were paid in cash. Repairs and maintenance of $9,000 were incurred and paid. The prepaid rent at the beginning of the year was used in 2019. In addition, $28,000 of computer rental costs were incurred and paid. There is no prepaid rent or rent payable at year-end. Mulberry purchased computer paper for $13,000 cash in late December. None of the paper was used by year-end. Advertising expense of $26,000 was incurred and paid. Income tax of $10,300 was incurred and paid in 2019. Interest of $5,000 was paid on the long-term loan. (Continued) Required: Establish a T-account for the accounts listed above and enter the beginning balances. Use a chart of accounts to order the T-accounts. Analyze each transaction; Journalize as appropriate. (Note: Ignore the date because these events are aggregations of individual events.) Post your journal entries to the T-accounts. Add additional T-accounts when needed. Use the ending balances in the T-accounts to prepare a trial balance.arrow_forwardProblem 3-70B Comprehensive Problem: Reviewing the Accounting Cycle Wilburton Riding Stables provides stables, care for animals, and grounds for riding and showing horses. The account balances at the beginning of 2019 were: During 2019, the following transactions occurred: Wilburton provided animal care services, all on credit, for $210,300. Wilburton rented stables to customers for $20,500 cash. Wilburton rented its grounds to individual riders, groups, and show organizations for $41,800 cash. There remains $15,600 of accounts receivable to be collected at December 31, 2019. Feed in the amount of $62,900 was purchased on credit and debited to the supplies Straw was purchased for $7,400 cash and debited to the supplies account. Wages payable at the beginning of 2019 were paid early in 2019. Wages were earned and paid during 2019 in the amount of $12,000. The income taxes payable at the beginning of 2019 were paid early in 2019. Payments of $73,000 were made to creditors for supplies previously purchased on credit. One years interest at 9% was paid on the note payable on July 1, 2019. During 2019, Jon Wilburton, a principal stockholder, purchased a horse for his Wife, Jennifer, to ride. The horse cost $7,000, and Wilburton used his personal credit to purchase it. The horse is stabled at the Wilburton home rather than at the riding stables. Property taxes were paid on the land and buildings in the amount of S17,000. Dividends were declared and paid in the amount Of The following data are available for adjusting entries: • Supplies (feed and straw) in the amount of $30,400 remained at year end. • Annual depreciation on the buildings is $6,000. • Annual depreciation on the equipment is • Wages of $4,000 were unrecorded and unpaid at year end. • Interest for 6 months at 9% per year on the note is unpaid and unrecorded at year end. • Income taxes of $16,500 were unpaid and unrecorded at year end. Required: Post the 2019 beginning balances to T-accounts. Prepare journal entries for Transactions a through k and post the journal entries to T-accounts, adding any new T-accounts you need. Prepare the adjustments and post the adjustments to the T-accounts, adding any new T-accounts you need. Prepare an income statement. Prepare a retained earnings statement. Prepare a classified balance sheet. Prepare closing entries. CONCEPTUAL CONNECTION Did you include Transaction i among Wilburtons 2019 journal entries? Why or why not?arrow_forward
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