Accounting Principles Manual

Exercises
E1.1 Genesis Company performs the following tasks during the year.
________ Analyzing and interpreting information.
________ Classifying economic events.
________ Explaining users, meaning, and limitations of data.
________ Keeping a systematic chronological diary of events.
________ Measuring events in dollars and cents.
________ Preparing accounting reports.
________ Reporting information in a standard format.
________ Selecting economic activities relevant to the company.
________ Summarizing economic events.
Accounting is “an information system that identifies, records and
communicates the economic events of an organization to interested users.”
Instructions:
Categorize the accounting tasks preformed by Genesis as relating to either
the identification (I), recording (R), or communication (C) aspects of
accounting.
Solution: (1) I, (2) I, (3) I, (4) R, (5) R, (6) R, (7) C, (7) C, (8) I, (9) R.

E1.2 (a) The following are users of financial statements.

____ Customers ____ Securities and Exchange Commission
____ Tax authorities ____ Store manager
____ Labor unions ____ Suppliers
____ Marketing manager ____ Vice president of finance
____ Production supervisor
Instructions:
Identify the users as being either external users or internal users.

(b) The following questions should be asked by an internal user or an

external user.
____ Can we afford to give our employees a pay raise?
____ Did the company earn a satisfactory income?
____ Do we need to borrow in the near future?
____ How does the company’s profitability compare to other companies?
____ What does it cost us to manufacture each unit produced?
____ Which product should we emphasize?
____ Will the company be able to pay its short-term debts?

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Instructions:
Identify each of the questions as being more likely asked by internal user or
an external user.

Solution: (a) Identification of External Users and Internal Users

External Users Internal Users
Customers Marketing manager
Labor unions Production supervisor
Securities and Exchange Commission Store manager
Tax authorities Vice president of finance
Suppliers

(a) Identification of Questions Asked by External Users and Internal Users:

Questions Asked by Internal Users
Can we afford to give our employees a pay raise?
Do we need to borrow in the near future?
What does it cost us to manufacture each unit produced?
Which product should we emphasize?
Questions Asked by External Users
Did the company earn a satisfactory income?
How does the company’s profitability compare to other companies?
Will the company be able to pay its short-term debts?

E1.3 Angela Duffy, president of Duffy Company (a corporation), has

instructed Jana Barth, the head of the accounting department for Duffy
Company, to report the company’s land in the company’s accounting
reports at its fair value of $170000 instead of its cost of $100000. Duffy says,
“Showing the land at $170000 will make our company look like a better
investment when we try to attract new investors next month.”
Instructions:
Explain the ethical situation involved for Jana Barth, identifying the
stakeholders and the alternatives.

Solution: Under historical cost principle the suggestion of the principle is not
ethical. The alternative accounting action for Jana Barth is to report the fair
value.

E1.4 The following situation involve accounting principles and

assumptions:
1. Sosa Company owns buildings that are worth substantially more than
any originally cost. In an effort to provide more relevant information,
Sosa reports the buildings at market value in its accounting reports.

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2. Mays Company includes in its accounting records only transaction
data that can be expressed in terms of money.
3. Curt Russell, owner of Curt’s Photography, records his personal living
costs as expresses of the business.
Instructions:
For each of the three situations, say if the accounting method used in
correct or incorrect. If correct, identify which principle or assumption
supports the method used. If incorrect, identify which principle or
assumption has been violated.
Solution:
1. Incorrect. The historical cost principal requires that assets be recorded
and reported at their cost.
2. Correct. The monetary unit assumption requires that companies include
the accounting records only transaction data that can be expressed in terms
of money.
3. Incorrect. The economic entity assumption requires that the activities of the
entity be kept separate and distinct from the activities of its owner and all
other economic entities.
E1.5 Diehl Cleaners has the following balance sheet items.
Accounts payable Accounts receivable
Cash Notes payable
Equipment Salaries and wages payable
Supplies Owner’s capital
Instructions:
Classify each item as an asset, liability, or owner’s equity.
Solution: DIEHL CLEANERS
Classification of Balance Sheet Items
Items Class
Accounts payable Liability
Cash Asset
Equipment Asset
Supplies Asset
Accounts receivable Asset
Notes payable Liability
Salaries and wages payable Liability
Owner’s capital Owner’s Equity
E1.6 Selected transactions for Poway Landscaping are listed below:
1. Made cash investment to start business.
2. Paid monthly rent.
3. Purchase equipment on account.
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4. Billed customers for services performed.
5. Withdrew cash for owner’s personal use.
6. Received cash from customers billed in (4).
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.
Instructions:
List the numbers of the above transactions and describe the effect of each
transaction on assets, liabilities, and owner’s equity. For example, the first
answer is: (1) Increase in assets and increase in owner’s equity.
Solution: POWAY LANDSCAPING
Analyses for the Effect of Transactions
Transaction Number Effects
(1) Increase in assets and increase in owner’s equity
(2) Decrease in assets and decrease in owner’s equity
(3) Increase in assets and increase in liabilities
(4) Increase in assets and increase in owner’s equity
(5) Decrease in assets and decrease in owner’s equity
(6) Increase in assets and decrease in assets
(7) Increase in liabilities and decrease in owner’s equity
(8) Increase in assets and decrease in assets
(9) Increase in assets and increase in owner’s equity

E1.7 Falske Computer Timeshare Company entered into the following

transactions during May 2022.
1. Purchased computer terminals for $20000 from Digital Equipment on
account.
2. Paid $4000 cash for May rent on storage space.
3. Received $17000 cash from customers for contracts billed in April.
4. Provided computer services to Viking Construction for $4000 cash.
5. Paid Tri-State Power Co. $11000 cash for energy usage in May.
6. Falske invested an additional $29000 in the business.
7. Paid Digital Equipment for the terminals purchased in (1) above.
8. Incurred advertising expense for May of $1200 on account.
Instructions:
Indicate with the appropriate letter whether each of the transactions above
results in:
(a) An increase in assets and a decrease in assets.
(b) An increase in assets and an increase in owner’s equity.
(c) An increase in assets and an increase in liabilities.
(d) A decrease in assets and a decrease in owner’s equity.
(e) A decrease in assets and a decrease in liabilities.
(f) An increase in liabilities and a decrease in owner’s equity.
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(g) An increase in owner’s equity and a decrease in liabilities.
Solution
FALSKE COMPUTER TIMESHARE COMPANY
Analyses for the Effect of Transactions
Transaction Number Effects
(1) (c)
(2) (d)
(3) (a)
(4) (b)
(5) (d)
(6) (b)
(7) (e)
(8) (f)

E1.8 An analysis of the transactions made by Peat Deloitte & Co., a

certified public accounting firm, for the month of August is shown below.
The expenses were $560 for rent, $4800 for salaries and wages, and $400 for
utilities.
Accounts Accounts Owner’s Owner’s
Cash Receivable Supplies Equipment= Payable Capital Drawing Revenues Expenses
1. +$15000 + $15000
2. – 2000 + $5000 + $3000
3. – 750 + $750
4. + 4000 + $4500 +$8500
5. – 1500 – 1500
6. – 2000 –$2000 –$560
7. – 560 – 650
8. + 450 – 450
9. – 4800 – 4800
10. + 400 – 400
Instructions:
(a) Describe each transaction that occurred for the month.
(b) Determine how much owner’s equity increased for the month.
(c) Compute the amount of net income for the month.
Solution:
(a) Description of given transactions are as follows:
1. Invested $15000 to the business.
2. Purchased office equipment for $5000, paying $2000 cash, and the balance
of $3000 on account.
3. Paid $750 cash for supplies.
4. Performed service revenue for $8500, receiving $4000 cash, and $4500 on
account.
5. Paid $1500 cash on accounts payable.

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6. Owner withdrew $2000 cash for personal use.
7. Paid $560 cash for rent.
8. Collected $450 cash from customers on account.
9. Paid salaries and wages of $4800.
10. Incurred $400 of utilities expense on account.
(b) Calculation of owner’s equity for the month.
Accounts Title Amount
Investment $15000
Service revenue 8500
Drawings (2000)
Rent expense (560)
Salaries and wages expense (4800)
Utilities expense (400)
Increase in owner’s equity $15740

(c) Calculation of net income for the month

Accounts Title Amount
Service revenue $8500
Rent expense (560)
Salaries and wages expense (4800)
Utilities expense (400)
Increase in owner’s equity $2740

E1.8 An analysis of the transactions made by Peat Deloitte & Co., a

certified public accounting firm, for the month of August is shown below.
The expenses were $560 for rent, $4800 for salaries and wages, and $400 for
utilities.
Accounts Accounts Owner’s Owner’s
Cash Receivable Supplies Equipment= Payable Capital Drawing Revenues Expenses
1. +$15000 + $15000
2. – 2000 + $5000 + $3000
3. – 750 + $750
4. + 4000 + $4500 +$8500
5. – 1500 – 1500
6. – 2000 –$2000 –$560
7. – 560 – 650
8. + 450 – 450
9. – 4800 – 4800
10. + 400 – 400
Instructions:
Prepare an income statement and an owner’s equity statement for August
and a balance sheet at August 31, 2022. Assume that August is the
company’s first month of business.
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Solution: PEAT DELOITTE & CO.
Income Statement
For the Year Ended August 31, 2022
Revenues: Amount Amount
Service revenue $8500
Total revenues $8500
Expenses:
Rent expense $560
Salaries and wages expense 4800
Utilities expense 400
Total expenses (5,760)
Net income $2740

PEAT DELOITTE & CO.

Owner’s Equity Statement
For the Month Ended August 31, 2022
Amount Amount
Owner’s capital, August 1 $15000
Add: Net income 2740
$17740
Less: Drawings (2000)
Owner’s capital, August 31 $15740

PEAT DELOITTE & CO.

Balance Sheet
August 31, 2022
Assets Amount
Cash $7840
Accounts receivable 4050
Supplies 750
Equipment 5000
Total assets $17640
Liabilities and Owner’s Equity
Liabilities:
Accounts payable $2000
Total liabilities $2000
Owner’s equity:
Owner’s capital 15740
Total liabilities and owner’s equity $17640
Answers: (a) Net income = $2740
(b) Ending owner’s equity = $15740
(c) Balance sheet totals = $17640

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Notes:
(1) Cash balance = $(15000–2000–750 + 4000–1500–2000–560 + 450–4800) = $7840
(2) Accounts receivable balance = $(4500 – 450) = $4050
(3) Accounts payable balance = $(3000 – 1500 + 500) = $2000
E1.10 Hawke Company had the following assets and liabilities on the dates
indicated.
December 31 Total Assets Total Liabilities
2021 $400000 $250000
2022 $460000 $300000
2023 $590000 $400000
Hawke began business on January 1, 2021, with an investment of $100000.
Instructions:
From an analysis of the change in owner’s equity during the year, compute
the net income (or loss) for:
(a) 2021, assuming Hawke’s drawings were $12000 for the year.
(b) 2022, assuming Hawke made an additional investment of $34000
and had no drawings in 2023.
(c) 2023, assuming Hawke made an additional investment of $12000
and had drawings of $25000 in 2023.
Solution:
(a) For 2021, we know
Asset = Liabilities + Owner’s Equity
 Asset = Liabilities + (Beginning investment + Additional investment
+ Net income – Drawings)
 $400000 = $250000 + $100000 + $0 + Net income – $12000
 $400000 = $338000 + Net income
 Net income = $62000 (Ans.)
(b) For 2022, we know
Asset = Liabilities + Owner’s Equity
 Asset = Liabilities + (Beginning investment + Additional investment
+ Net income – Drawings)
 $460000 = $300000 + $150000 + $34000 + Net income – $0
 $460000 = $484000 + Net income
 Net income = – $24000
 Net loss = $24000 (Ans.)
Note: Beginning investment = Beginning assets – Beginning liabilities
= $400000 – $250000 = $150000
(c) For 2023, we know
Asset = Liabilities + Owner’s Equity
 Asset = Liabilities + (Beginning investment + Additional investment
+ Net income – Drawings)
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 $590000 = $400000 + $160000 + $12000 + Net income – $25000
 $590000 = $547000 + Net income
 Net income = $43000 (Ans.)
Note: Beginning investment = Beginning assets – Beginning liabilities
= $460000 – $300000 = $160000
E1–11 Two items are omitted from each of the following summaries of
balance sheet and income statement data for two proprietorship for the
year 2022, Greene’s Goods and Solar Enterprises.
Greene’s Solar
Goods Enterprises
Beginning of year:
Total assets $110000 $129000
Total liabilities 85000 (c)
Total owner’s equity (a) 80000
End of year:
Total assets 160000 180000
Total liabilities 120000 50000
Total owner’s equity 40000 130000
Changes during year in owner’s equity:
Additional investment (b) 25000
Drawings 37000 (d)
Total revenues 220000 100000
Total expenses 175000 60000
Instructions:
Determine the missing amounts.

Solution:
GREENE’S GOODS
Analysis of Financial Statement
(Determination of Missing Amounts)_ __
(a) For beginning of the year, we know
Total assets = Total liabilities + Total owner’s equity
 $110000 = $85000 + Total owner’s equity
 Total owner’s equity = $25000 (Ans.)
(b) Ending owner’s equity = Beginning owner’s equity + Additional investment
+ Total revenues – Total expenses – Drawing
 $40000 = $25000 + Additional investment + $220000 – $175000 – $37000
 $40000 = $33000 + Additional investment
 Additional investment = $7000 (Ans.)

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SOLAR ENTERPRISES
Analysis of Financial Statement
(Determination of Missing Amounts) _
(c) For beginning of the year, we know
Total assets = Total liabilities + Total owner’s equity
 $129000 = Total liabilities + $80000
 Total liabilities = $49000 (Ans.)
(d) Ending owner’s equity = Beginning owner’s equity + Additional investment
+ Total revenues – Total expenses – Drawing
 $130000 = $80000 + $25000 + $100000 – $60000 – Drawing
 $130000 = $145000 – Drawing
 Drawing = $15000 (Ans.)

E1.12 The following information relates to Fleete Co. for the year 2022.
Owner’s capital, January 1, 2022 $42000 Advertising expense $1800
Owner’s drawings during 2022 6000 Rent expense 10400
Service revenue 63600 Utilities expense 3100
Salaries and wages expense 30200
Instructions:
After analyzing the data, prepare an income statement and an owner’s
equity statement for the year ending December 31, 2022.

Solution:
FLEETE CO.
Income Statement
For the Year Ended December 31, 2022
Revenues: Amount Amount
Service revenue $63600
Total revenues $63600
Expenses:
Salaries expense $30200
Advertising expense 1800
Rent expense 10400
Utilities expense 3100
Total expenses (45500)
Net income $18100

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FLEETE CO.
Owner’s Equity Statement
For the Year Ended December 31, 2022
Amount Amount
Owner’s capital, January 1 $42000
Add: Net income 18100
$60100
Less: Drawings (6000)
Owner’s capital, January 31 $54100
Answers: (a) Net income = $18100,
(b) Ending owner’s equity = $54100
E1.13 Abby Roland is the bookkeeper for Cheng Company. Abby has been
trying to determine the correct balance sheet for Cheng Company, shown
as follows.
CHENG COMPANY
Balance Sheet
December 31, 2022
Assets_ _ __ Liabilities_ __
Cash $15000 Accounts payable $21000
Supplies 8000 Accounts receivable (6500)
Equipment 46000 Owner’s capital 67500
Owner’s drawing 13000 Total liabilities and ____
Total assets $82000 owner’s equity $82000
Instructions:
Prepare a correct balance sheet.
Solution: CHENG COMPANY
Balance Sheet
December 31, 2022
Assets Amount
Cash $15000
Supplies 8000
Equipment 46000
Accounts receivable 6500
Total assets $75500
Liabilities and Owner’s Equity
Liabilities:
Accounts payable $21000
Total liabilities $21000
Owner’s equity:
Owner’s capital $67500
Owner’s drawings (13000) 54500
Total liabilities and owner’s equity $75500
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E1.14 Salra Morrow is the sole owner of Buena Vista Park, a public
camping ground near the Crater Lake National Recreation Area. Salra has
compiled the following financial information as of December 31, 2022.
Revenues during 2022 – camping fees $140000 Fair value of equipment $140000
Revenues during 2022 – general store 65000 Notes payable 60000
Accounts payable 11000 Expenses during 2022 160000
Cash on hand 23000 Accounts Receivable 17500
Land 115500
Instructions:
(a) Determine Salra Morrow’s net income from Buena Vista Park for 2022.
(b) Prepare a balance sheet for Buena Vista Park as of December 31, 2022.
Solution: (a) BUENA VISTA PARK
Income Statement
For the Year Ended December 31, 2022
Revenues: Amount Amount
Revenues during 2022 – camping fees $140000
Revenues during 2022 – general store 65000
Total revenues $205000
Expenses:
Expenses during 2022 $160000
Total expenses (160000)
Net income $45000
(b) BUENA VISTA PARK
Balance Sheet
December 31, 2022
Assets Amount
Cash on hand $23000
Supplies on hand 17500
Land 115500
Total assets $156000
Liabilities and Owner’s Equity
Liabilities:
Accounts payable $11000
Notes payable 60000
Total liabilities $71000
Owner’s equity:
Owner’s capital (balancing figure) 40000
Net income 45000
Total liabilities and owner’s equity $156000
Answers: (a) Net income = $40000
(b) Statement of Financial Position totals = $156000

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Notes:
(1) According to the cost principle, assets must be recorded at original cost
price. So fair value or market value of land is not considered.

(2) We know, Assets = Liabilities + Owner’s Equity

 Assets = Liabilities + (Capital + Net Income)
 $156000 = $71000 + Capital + $45000
 Capital = $40000

E1.15 Presented below is financial information related to operations of Sea

Legs Cruise Company for the year ended December 31, 2022.
Maintenance and repairs expense $95000
Utilities expense 13000
Salaries and wages expense 142000
Advertising expense 24500
Ticket revenue 410000

Instructions:
Prepare the 2022 income statement for Sea Legs Cruise Company.
Solution:
SEA LEGS CRUISE COMPANY
Income Statement
For the Period of 2022
Amount Amount
Revenues:
Ticket revenue $410000
Total revenues $410000
Expenses:
Maintenance and repairs expense $95000
Utilities expense 13000
Salaries and wages expense 142000
Advertising expense 24500
Total expenses (274500)
Net income $135500
Answer: Net income = $135500

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E1.16 Presented below is information related to the sole proprietorship of
Helen Archer, attorney.

Legal service revenue – 2022 $330000

Total expense – 2022 211000
Assets, January 1, 2022 98000
Liabilities, January 1, 2022 62000
Assets, December 31, 2022 168000
Liabilities, December 31, 2022 100000
Drawings – 2022 ?
Instructions:
Prepare the 2022 owner’s equity statement for Helen Archer’s legal
practice.
Solution: HELEN ARCHER, ATTORNEY AT LAW
Owner’s Equity Statement
For the Year Ended December 31, 2022
Amount Amount
Owner’s capital, January 1 $36000
Add: Net income 119000
$155000
Less: Drawings (87000)
Owner’s capital, December 31 $68000
Answer: Ending owner’s equity = $68000.
Notes:
(1) We know,
Beginning owner’s equity = Beginning assets – Beginning liabilities
= $98000 – $62000
= $36000
Here, beginning owner’s equity = Owner’s capital, January 1.
(2) We know,
Ending owner’s equity = Ending assets – Ending liabilities
= $168000 – $100000
= $68000
(3) We know,
Net Income = Revenues – Expenses
= $330000 – $211000
= $119000
(4) We know,
Ending owner’s equity = Beginning owner’s equity + net income – Drawings
 $68000 = $36000 + $119000 – Drawings
 Drawings = $87000

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E1.17 This information is for Paulo Company for the year ended December
31, 2022.
Cash received from revenues from customers $600000
Cash received from investment by owner 280000
Cash paid for new equipment 115000
Cash drawings by owner paid 18000
Cash paid for expenses 430000
Cash balance 1/1/22 30000

Instructions:
Prepare the 2022 statement of cash flows for Paulo Company.
Solution:
PAULO COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2022
Particulars Amount ($) Amount ($)
(A) Cash flows from operating activities:
(+) Cash received from customers 600000
(–) Cash paid for expenses (430000)
Net cash provided by operating activities 170000

(B) Cash flows from investing activities:

(–) Cash paid for new equipment (115000)
Net cash used by investing activities (115000)

(C) Cash flows from financing activities:

(+) Cash investment by owner 280000
(–) Cash drawings by owner paid (18000)
Net cash provided by financing activities 262000
Net cash increase (A+B+C) 317000
Add: Beginning cash balance 1/1/22 30000
Ending cash balance 31/12/22 347000
Answer: Ending cash balance 31/12/22 = $347000.

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E1.18 The statement of cash flows classifies each transaction as an
operating activity, an investing activity, or a financing activity. Operating
activities are the types of activities the company performs to generate
profits. Investing activities include the purchase of long-lived assets such as
equipment or the purchase of securities. Financing activities are borrowing
money, investment by owner, and cash drawing by owner.

Presented below are the following transactions.

1. Owner invested $20000 cash.
2. Issued note payable for $12000 cash.
3. Purchase office equipment for $11000 cash.
4. Received $15000 cash for service performed.
5. Paid $1000 cash for rent.
6. Paid $600 cash drawings to owner.
7. Paid $5700 cash for salaries.
Instructions:
Classify each of these transactions as operating, investing, or financing
activities.

Solution:
Classification of the transactions
Transactions Operating Investing Financing
Activities Activities Activities
1. Owner invested $20000 cash. 
2. Issued note payable for $12000 cash. 
3. Purchase office equipment for $11000 cash. 
4. Received $15000 cash for service performed. 
5. Paid $1000 cash for rent. 
6. Paid $600 cash drawings to owner. 
7. Paid $5700 cash for salaries. 

Helpline: 01815443199 (Muhammad Shamim)

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Problems
&
Solutions
of
Chapter 1
(P1.1 to P1.5)

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