CHAPTER 2

Business ActivitiesThe Source of Accounting Information

THINKING BEYOND THE QUESTION How do we know how well our business is doing? Revenues are earned when goods are transferred or services are provided to customers. In most cases, these events are associated with completion of certain critical events, such as delivery of goods. Expenses are incurred when resources are consumed in the process of providing goods and services. Therefore, a system that identifies when goods are transferred, services are provided, and resources are consumed is important for identifying revenues and expenses. Some resources are consumed when goods or services are transferred to customers: the cost of goods, supplies, and labor associated with particular jobs. In other cases, the amount of resources consumed is measured each fiscal period: salaries and wages, utilities, rent, and insurance. Depending on the type of resource consumed, identification of the cost of the resource associated with specific sales or identification of the cost of the resource associated with a fiscal period is an important event for identifying expenses during a fiscal period. QUESTIONS Q2-1 Chapter 2 illustrates two sources of money for companiesloans and owner contributions. Chapter 1 discussed the three forms of business organizationsproprietorships, partnerships, and corporations. To maintain control, Joan probably would want to organize her business as a proprietorship. If she has enough money or other resources, she can borrow the rest of the capital she needs from a bank. If she does not have enough money or other resources and cannot borrow as much as she needs, she may have to find one or more partners to help finance the business. Because this is a small business, she is unlikely to want or need to incorporate at this time or to issue bonds. Q2-2 Major sources of financing for corporations are stocks and debt. Bank loans also are possible. Managers should consider how much stock or how much debt they can incur, what amount of money they will receive
23

24

Chapter 2

from the issuance, and whether they can repay debt as it becomes due from the profits they expect to earn. Q2-3 From the corporations perspective, this event was a financing activity. The corporation raised capital (i.e., raised financing) by selling shares of stock to Jerrilyn. Q2-4 Assets = Liabilities + Equity. The question indicates that assets are accurately reported. Therefore, if liabilities are understated, equity must be overstated. For example, assume assets, liabilities, and equity are correctly reported as $10,000, $3,000, and $7,000 respectively ($10,000 = $3,000 + $7,000). If liabilities are understated by $1,000, equity must be overstated by $1,000 to make the accounting equation balance ($10,000 = $2,000 + $8,000). Q2-5 Both liabilities and owners equity represent claims to a companys resources. Q2-6 The accounting equation presents the relationship between resources and claims to resources. Financial resources to acquire assets are obtained from financing activities and from revenues earned by the company. When assets are consumed, expenses are created that reduce a companys profits. The profits earned during a period increase owners equity, as reported in retained earnings. The total amount of assets is equal to the total amount of liabilities and owners equity. Q2-7 Purchasing merchandise inventory is an operating activity. The operating activities section of the cash flow statement reports cash from selling goods and services and cash paid for expense-related activities. Q2-8 Contributed capital represents claims to resources provided by the owners. Sales revenue represents owners claims to resources that were earned and retained by the company. Q2-9 No. Retained Earnings represents earnings kept in the business. These earnings are reinvested and may be included in various kinds of assets. Retained Earnings does not equal cash. Q2-10 The possibilities will depend on the specific company selected and industry in which it operates. Exhibit 12 in the text should give students a good start on this question. Q2-11 The left side of a balance sheet reveals how an organizations managers have used investors capital. That is, what does the organization own? Or, what amount of capital has been committed to which assets? The right side of a balance sheet reveals where the capital came from to

Business ActivitiesThe Source of Accounting Information

25

acquire the assets listed on the left side. It reveals how much of the organizations capital was provided by investors loaning money or extending credit (i.e., liabilities). It also reveals how much capital was provided by the owners contributions (invested capital) as well as how much capital has been provided by profitable operations of the company (retained earnings). Q2-12 A balance sheet reports the assets, liabilities, and equity of an organization. The income statement reports revenues and expenses. The statement of cash flows reports the net cash flows from operating activities, investing activities, and financing activities. Q2-13 The accounting equation, Assets = Liabilities + Equity, illustrates that assets are provided by creditors (liabilities) or by owners (equity). Thus, creditors and owners have claims on a companys assets. Q2-14 The income statement provides information about how well a company has performed during a period based on the operating activities for that period. These activities may affect cash flows of prior or future periods. The income statement helps decision makers assess the long-run success of a company. The statement of cash flows describes the cash flows that resulted from current-period operating activities. It provides information about a companys ability to pay current obligations. A company must generate sufficient cash to pay creditors, suppliers, employees, and other providers of goods and services. Net income, as reported on the income statement, does not ensure short-run survival of a company. Q2-15 Most companies of size have hundreds or thousands of individual accounts. A mere list of accounts and balances would overwhelm the reader with detail and be unlikely to convey any useful information. Accounts and balances are arranged into financial statements for the purpose of conveying information quickly and conveniently. Similar accounts are grouped, such as all revenues, all expenses, all assets, etc. Then, to provide further information, certain groups of accounts are arranged into financial statements. For example, revenues and expenses are matched on the income statement. Assets, liabilities, and equity are grouped on the balance sheet. Account balances are summarized on financial statements because they yield more information in this form. EXERCISES E2-1 Definitions of all terms are listed in the glossary.

26

Chapter 2

E2-2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. E2-3 a. b. c. d. e. f. g. h. i. j. E2-4

Operating activity Financing activity Investing activity Financing activity Investing activity Operating activity Investing activity Financing activity Investing activity Operating activity I O F O O I F O O F
ASSETS = LIABILITIES + OWNERS' EQUITY Contributed Retained Capital Earnings 30,000 + 50,000 + 20,000

Date June 1 June 15

Accounts Beginning Amounts Merchandise Inventory Cash Cash Sales Revenue Cost of Goods Sold Merchandise Inventory Cash Bank Loan Payable Supplies Expense Cash Wages Expense Cash Equipment Cash Utilities Expense Cash Ending Amounts

Cash

Other Assets

40,000 + 60,000 = 15,000 15,000 60,000

60,000 28,000 28,000 250,000 250,000 2,000 2,000 5,000 5,000 100,000 100,000 6,000 6,000 222,000 +147,000 = 280,000 + 50,000 + 39,000

June 23 June 25 June 28 June 30 June 30

Business ActivitiesThe Source of Accounting Information

27

E2-5

June 1 June 15 June 23 June 25 June 28 June 30 June 30

Operating Operating Financing Operating Operating Investing Operating

E2-6
ASSETS Other Cash Assets = LIABILITIES + OWNERS' EQUITY Contributed Retained Capital Earnings 60,000 10,000 35,000 35,000 14,000 14,000 45,000 45,000 2,000 2,000 4,000 4,000 800 800 7,500 7,500 55,700 + 125,000 = 58,000 + 70,000 + 52,700 + 40,000

Date May 1 May 5

Accounts Beginning Amounts Cash Contributed Capital Cash Sales Cost of Goods Sold Merchandise Inventory Merchandise Inventory Cash Notes Payable Cash Equipment Cash Utilities Expense Cash Wages Expense Cash Ending Amounts

70,000 + 90,000 = 10,000

60,000 +

May 10 May 15 May 22 May 31 May 31

E2-7

May 1 May 5 May 10 May 15 May 22 May 31 May 31

Financing Operating Operating Financing Investing Operating Operating

E2-8 a. b. c.

Cash increased $18,000; Owners Investment increased $18,000. The owners invested $18,000 in the company. Equipment increased $12,000; Cash decreased $12,000. The company purchased equipment using cash. Cash decreased $8,500; Notes Payable decreased $8,500. The company paid down the balance of a note.

28

Chapter 2

d. e. f. g.

Supplies inventory increased $13,500; Cash decreased $13,500. The company purchased supplies costing $13,500 using cash. Merchandise Inventory decreased $10,000; Cost of Goods Sold increased $10,000. The company sold merchandise costing $10,000. Cash increased $23,500; Sales Revenue increased $23,500. The company sold goods for $23,500 cash. Supplies Expense increased $3,000; Supplies inventory decreased $3,000. The company removed supplies costing $3,000 from inventory and used them.

E2-9
ASSETS Date Feb. 2 Feb. 3 Feb. 4 Feb. 4 Feb. 5 Feb. 5 Feb. 6 Feb. 6 Accounts Beginning Amounts Cash Revenues Rent Expense Cash Cash Loan Payable Miscellaneous Expense Cash Cash Revenues Equipment Cash Wages Expense Cash Office Supplies Expense Cash Ending Amounts 128 5,662 + 3,200 = 1,200 + 3,000 + 4,662 525 128 3,200 525 3,200 35 4,250 4,250 1,200 300 300 35 Cash 5,000 1,800 1,800 1,200 Other Assets = 1,500 + = LIABILITIES + OWNERS' EQUITY Contributed Retained Capital Earnings 3,000 + 500

Amelios Law Firm Income Statement For the First Week of February Revenues Rent Miscellaneous Wages $ 6,050 (1,200) (35) (525)

Business ActivitiesThe Source of Accounting Information

29

Office supplies Net income E2-10 Feb. 2Operating Feb. 3 Operating Feb. 4 Financing Feb. 4 Operating Feb. 5 Operating Feb. 5 Investing Feb. 6 Operating Feb. 6 Operating E2-11 Assets

(128) $ 4,162

Liabilities

Owners Equity

Cash $ 1,500 Flowers and Plants 26,000 Supplies Inventory 4,350 Buildings 79,500 Equipment 12,750 Notes Payable Proprietors Capital Total E2-12
ASSETS Other Cash Assets 220,000 80,000 140,000 45,150 45,150 129,600 129,600 85,000 85,000 43,200* 43,200 12,300 15,500 4,800 650 1,290 = LIABILITIES + OWNERS' EQUITY Contributed Retained Capital Earnings

$57,500 $66,600 $124,100 = $57,500 + $66,600

Date Accounts Cash Contributed Capital Bank Loan Equipment Cash Merchandise Inventory Cash Cash Sales Cost of Goods Sold Merchandise Inventory Wages Expense Rent Expense Utilities Expense Postage Expense Insurance Expense

a. b. c.

d.

30 Cash * $129,600 3 = $43,200 34,540

Chapter 2

E2-13

Changs Pottery Schedule of Retained For the Month Ended November 30 $ 95,000 15,000 (4,000) $106,000

Works Earnings

Retained earnings, November 1 Net income for November Less: Payment to owners in November Retained earnings, November 30 E2-14

Christmas Cookie Income For the Month Ended December 31 Sales revenue Cost of goods sold Wages expense Utilities expense Net income $234,000 (60,000) (97,500) (24,000) $ 52,500

Company Statement

E2-15 a.

Cash flows from financing activities: Proceeds from owners Proceeds from issuance of note payable Payments of debt Net cash used for financing activities $ 30,957 13,057 (80,323) $(36,309)

b.

Cash flows from investing activities: Proceeds from sales of plant and equipment Additions to plant and equipment Net cash provided by investing activities $ 1,986 (5,379) $ (3,393)

E2-16

Cash collected from customers Cash paid for merchandise inventory Cash paid for utilities Cash paid for insurance Cash paid to employees Cash paid for postage Net cash from operating activities Wages expense Cost of goods sold Sales revenue Merchandise inventory

$270,000 (83,500) (25,000) (23,000) (58,000) (7,500) $ 73,000

E2-17

Income statement Income statement Income statement Balance sheet

Business ActivitiesThe Source of Accounting Information

31

Net income Retained earnings Contributed capital Rent expense Cash Notes payable E2-18

Income statement Balance sheet Balance sheet Income statement Balance sheet, Statement of cash flows Balance sheet

Brothers Lawn Service Income Statement For the Six Months Ended June 30, 2007 Service revenue $ 12,300 Supplies expense (4,000) Wages expense (6,000) Utilities expense (500) Rent expense (1,000) Net income $ 800 E2-19 Brothers Lawn Service Balance Sheet At June 30, 2007 Assets Cash Supplies inventory Equipment Total assets Liabilities and Owners Equity Notes payable Contributed capital Retained earnings Total liabilities and owners equity E2-20
June 1 June 15 Merchandise Inventory Cash Cash Sales Cost of Goods Sold Merchandise Inventory Cash Bank Loan Payable Supplies Expense Cash Wages Expense Cash Equipment Cash Utilities Expense Cash 15,000 15,000 60,000 60,000 28,000 28,000 250,000 250,000 2,000 2,000 5,000 5,000 100,000 100,000 6,000 6,000

$3,000 500 5,000 $8,500 $1,000 6,700 800 $8,500

June 23 June 25 June 28 June 30 June 30

32

Chapter 2

E2-21
May 1 May 5 Cash Contributed Capital Cash Sales Cost of Goods Sold Merchandise Inventory Merchandise Inventory Cash Notes Payable Cash Equipment Cash Utilities Expense Cash Wages Expense Cash Cash Revenues Rent Expense Cash Loan Payable Cash Miscellaneous Expense Cash Cash Revenues Equipment Cash Wages Expense Cash Office Supplies Expense Cash 10,000 10,000 35,000 35,000 14,000 14,000 45,000 45,000 2,000 2,000 4,000 4,000 800 800 7,500 7,500 1,800 1,800 1,200 1,200 300 300 35 35 4,250 4,250 3,200 3,200 525 525 128 128

May 10 May 15 May 22 May 31 May 31

E2-22
Feb 2 Feb 3 Feb 4 Feb 4 Feb 5 Feb 5 Feb 6 Feb 6

E2-23
Cash Contributed Capital Bank Loan Equipment Cash Merchandise Inventory Cash Cash Sales Cost of Goods Sold * Merchandise Inventory Wages Expense Rent Expense Utilities Expense 220,000 80,000 140,000 45,150 45,150 129,600 129,600 85,000 85,000 43,200 43,200 12,300 15,500 4,800

a. b. c.

d.

Business ActivitiesThe Source of Accounting Information Postage Expense Insurance Expense Cash * $129,600 3 = $43,200 650 1,290 34,540

33

34

Chapter 2

PROBLEMS P2-1 A.
ASSETS Other Cash Assets 5,800 89,460 89,460 60,000 60,000 28,600 28,600 4,900 4,900 65,000 65,000 59,430 59,430 11,900 11,900 48,600 48,600 3,750 3,750 = LIABILITIES + OWNERS' EQUITY Contributed Retained Capital Earnings 5,800

Date Accounts 1 Cash Utilities Expense 2 Cash Sales Cost of Goods Sold Merchandise Inventory 3 Equipment Cash 4 Notes Payable Cash 5 Cash Notes Payable 6 Salaries Expense Cash 7 Maintenance Expense Cash 8 Cash Contributed Capital 9 Supplies Expense Cash

B.

Financing decisions: When, how much, and where to borrow. Investing decisions: What property and equipment to purchase and when to purchase it. What future earnings is the investment likely to bring?

P2-2 1. 2. 3. 4. 5. 6. 7. 8. 9.

Operating Operating Investing Financing Financing Operating Operating Financing Operating

Business ActivitiesThe Source of Accounting Information

35

P2-3 Cash Merchandise Inventory Equipment Notes Payable Contributed Capital Retained Earnings Total

Assets $10,000 30,000 45,000

= Liabilities +

Equity

$20,000 $85,000 = $20,000 + $35,000 30,000 $65,000

P2-4
Date June 1

A.

Accounts Cash Contributed Capital June 2 Rent Expense Cash June 7 Merchandise Inventory Cash June 12 Advertising Expenses Cash June 26 Cash Sales Revenue Cost of Goods Sold Merchandise Inventory June 30 Wages Expense Utilities Expense Cash Ending Amounts

ASSETS = LIABILITIES + OWNERS' EQUITY Other Contributed Retained Cash Assets Capital Earnings 7,000 7,000 525 525 5,000 5,000 800 800 7,500 7,500 4,500 4,500 850 228 1,078 7,097 + 500 = 7,000 + 597

B.

Davidson Enterprises Income Statement For the Month Ended June 30, 2007 Sales Cost of goods sold Rent expense Advertising Wages Utilities Net income $7,500 (4,500) (525) (800) (850) (228) $ 597

36

Chapter 2

C.

Davidson Enterprises Balance Sheet At June 30, 2007 Assets Cash Merchandise inventory Total assets Liabilities and Owners Equity Contributed capital Retained earnings Total liabilities and owners equity $7,097 500 $7,597 $7,000 597 $7,597

P2-5 June 1 June 2 June 7 June 12 June 26 June 30

Financing Operating Operating Operating Operating Operating

P2-8

A.

1. 2. 3. 4. 5. 6. 7.

Jill contributed $5,000 to the business. The company acquired $300 of supplies inventory by paying cash. The company earned $4,200 for providing services. The company paid $450 for utilities consumed. The company paid $500 for transportation expenses. The company paid $700 for insurance. Jill took $1,300 cash from the company for her personal use.

B. P2-9 A.

The company earned $2,550 ($4,200 $450 $500 $700). Mar. 1 3 5 18 18 23 31 Jacqueline contributed $10,000 cash to the business. The company borrowed $7,000 by issuing a note payable. The company purchased $8,100 of inventory and paid cash. The company sold goods costing $7,500 for $15,250 in cash. The company paid wages of $650. The company paid $2,500 on the note. Jacqueline took $2,000 cash from the company for her personal use.

B.

1. The company earned $7,100 ($15,250 $7,500 $650).

Business ActivitiesThe Source of Accounting Information

37

2. Owners Equity is $15,100 ($10,000 + $5,100). P2-10 1. 2. 3. 4. 5. 6. 7. P2-11 A.

Date Accounts
1 2 3 4 5 6 7 8 Cash Contributed Capital Cash Bank Loan Payable Equipment Cash Merchandise Inventory Cash Cash Sales Revenue Cost of Goods Sold Merchandise Inventory Bank Loan Payable Cash Retained Earnings Cash Ending Amounts

Owners contributed $15,000 to the business. A bank loan of $6,285 was obtained. Equipment costing $11,000 was purchased. A loan was obtained to purchase the equipment. Services totaling $2,250 were performed. Rent of $400 was paid. Wages of $250 were paid. Internet service costs of $35 were paid.
ASSETS Other Cash Assets 10,000 10,000 30,000 30,000 25,000 25,000 12,000 12,000 27,000 27,000 10,000 10,000 300 300 800 800 28,900 + 27,000 = 29,700 + 10,000 + 16,200 = LIABILITIES + OWNERS' EQUITY Contributed Retained Capital Earnings

B.

Sand Dune Trading Company Income Statement For the Month Ended May 31, 2007 Sales revenue Cost of goods sold Net income $27,000 10,000 $17,000

C.

Sand Dune Trading Company

38

Chapter 2

Balance Sheet At May 31, 2007 Assets Cash Merchandise inventory Equipment Total assets Liabilities and Owners Equity Bank loan Contributed capital Retained earnings Total liabilities and owners equity $28,900 2,000 25,000 $55,900 $29,700 10,000 16,200 $55,900

P2-12 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. P2-13

I B B B C I C I, C B C Moonbeam Enterprises Income Statement For the Month Ended April 30, 2007

Sales revenue Cost of goods sold Supplies expense Interest expense Wage expense Insurance expense Income tax expense Net income

$26,000 (15,050) (1,300) (900) (1,500) (550) (1,060) $ 5,640

Moonbeam Enterprises Balance Sheet At April 30, 2007 Assets Cash $ 10,360

Business ActivitiesThe Source of Accounting Information

39

Merchandise inventory Buildings Land Total assets Liabilities and Owners Equity Notes payable Contributed capital Retained earnings Total liabilities and owners equity

12,480 50,000 45,000 $117,840 $ 33,000 38,770 46,070 $117,840

P2-15

June 3 Operating June 4 Financing June 5 Operating June 5 Operating June 6 Operating June 6 Investing June 7 Operating P2-16 A. Crimson Florist Statement of Cash Flows For the Month Ended July 31 Operating Activities Cash received from sales to customers Cash paid for wages Cash paid for supplies Cash paid for utilities Net cash flow from operating activities Investing Activities Cash paid for equipment Financing Activities Cash received from owners Cash received from creditors Net cash flow from financing activities Net cash flow for July Cash balance, July 1 Cash balance, July 31 B. $ 13,000 9,000 22,000 $ 19,800 3,300 $ 23,100 $ 15,000 (4,500) (3,000) (2,700) $ 4,800 (7,000)

The purpose of the statement of cash flows is to allow users to determine the sources and uses of cash during a fiscal period. The

40

Chapter 2

cash flow statement does not report profitability, but the amounts and sources (or uses) of cash.

P2-17

The College Shop Statement of Cash Flows For the Month Ended January 31 Operating Activities Cash received from sales to customers Cash paid for wages Cash paid for insurance Rent Cash paid for merchandise Cash paid for utilities Net cash flow from operating activities Investing Activities Cash paid for equipment Financing Activities Cash received from owners Cash received from creditors Net cash flow from financing activities Net cash flow for January Cash balance, January 1 Cash balance, January 31 $ 9,000 10,500 19,500 $ 12,300 4,000 $ 16,300 (7,000) $13,000 (1,200) (2,500) (5,300) (4,000) (200) $ (200)

P2-18

A. B. C.

ROA = Net Income Total Assets = $4,000 $30,600 = 13% ROA measures the amount a company earned for each dollar of total investment. Managers can make changes to produce more income by increasing sales or by reducing expenses. By improving inefficient operations, managers can improve profitability and ROA. Managers also can reduce assets by selling nonproductive equipment and returning the cash to owners in the form of a dividend. Thus, if earnings remain the same, and total assets declines, ROA will improve.

Business ActivitiesThe Source of Accounting Information

41

P2-19
1 2 Utilities Expense Cash Cash Sales Cost of Goods Sold Merchandise Inventory Equipment Cash Notes Payable Cash Cash Notes Payable Salaries Expense Cash Maintenance Expense Cash Cash Contributed Capital Supplies Expense Cash 5,800 5,800 89,460 89,460 60,000 60,000 28,600 28,600 4,900 4,900 65,000 65,000 59,430 59,430 11,900 11,900 48,600 48,600 3,750 3,750

3 4 5 6 7 8 9

P2-20
1 2 3 4 Cash Contributed Capital Cash Notes Payable Merchandise Inventory Cash Cash Sales Revenue Cost of Goods Sold Merchandise Inventory Commissions Expense Cash Notes Payable Cash Retained Earnings Cash 3,000 3,000 4,000 4,000 3,500 3,500 2,500 2,500 825 825 500 500 1,500 1,500 750 750

4 5 6

42

Chapter 2

P2-21
June 1 June 2 June 3 June 16 June 16 June 18 June 30 June 30 June 30 Cash Note PayableDad Contributed Capital Equipment Rental Expense Cash Equipment Rental Expense Cash Cash Service Revenue Gas and Oil Expense Cash Advertising Expense Cash Cash Service Revenue Gas and Oil Expense Cash Interest Expense Note PayableDad Cash 750 450 300 85 85 135 135 650 650 67 67 70 70 507 507 105 105 5 225 230

P2-22
1 2 3 4 5 6 7 8 Cash Contributed Capital Cash Bank Loan Payable Equipment Cash Merchandise Inventory Cash Cash Sales Revenue Cost of Goods Sold Merchandise Inventory Bank Loan Payable Cash Retained Earnings Cash 10,000 10,000 30,000 30,000 25,000 25,000 12,000 12,000 27,000 27,000 10,000 10,000 300 300 800 800

P2-23 See Excel spreadsheet on page 49.

Business ActivitiesThe Source of Accounting Information

43

P2-24

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

b a b d d c a b a a b

CASES C2-1 It is unlikely that Frank gets much information from his current accounting system. Since his personal finances are commingled with his business activities, he cant tell (for sure) whether his business is profitable or not. About all he knows is his checking account balance. Once a month, he gets a statement from the bank, which he could use to verify his checking account. The receipts he keeps could provide information about some of his expenses and revenues, but Frank probably is not making use of this information. Frank should be able to obtain information about his companys assets, liabilities, owners equity, revenues, and expenses from a new accounting system. In addition, he will need revenue information for each location separately because the monthly fee paid to each retailer is partially dependent on this amount. For management control purposes, Frank will probably want to have all categories of financial information broken down by individual location. This information would allow him to evaluate whether a particular location (or operator) is performing satisfactorily. A monthly income statement by location would be useful for evaluating the performance of each stand and employee. An analysis of the companys checking account would help Frank understand how much cash the company is producing, its cash needs, and how the cash is being used. The accounting system could be improved by (a) establishing a separate checking account for the business; (b) establishing a ledger to keep accounts for each of the firms assets, liabilities, owners equities, revenues, and expenses; and (c) providing periodic (monthly) income statements and balance sheets. At a minimum, separate revenue accounts should be maintained for each location. At a maximum, each account type could be divided into separate accounts for each location.

44

Chapter 2

The following accounts would be useful: Account Name Cash Hot Dogs Canned Soda Condiments Supplies Carts Notes Payable Investment by Owner Retained Earnings Sales Revenue (Location 1, 2, etc.) Cost of Goods Sold (Location 1, 2, etc.) Wages Expense (Location 1, 2, etc.) Location Fee Expense (Location 1, 2, etc.) Equipment Usage Expense* (Location 1, 2, etc.) Repair Expense (Location 1, 2, etc.) Account Type asset asset asset asset asset asset liability owners equity owners equity revenue expense expense expense expense expense

*As you will learn in Chapter 3, this usually is referred to as Depreciation Expense. Separate accounts by location would be useful for Carts, Sales Revenue, Cost of Goods Sold, Wages Expense, Location Fee Expense, Depreciation Expense, and Repair Expense. This would allow Frank to determine net income for each location and compare profitability among the locations.

C2-2 The following questions are examples of key decisions needing to be made at each stage of the transformation process. Financing decisions: How much money is needed for investment and operations? How and when should money be obtained? Investing decisions: What building and equipment resources are needed? Do any new long-lived resources need to be added? From where and when should new long-lived resources be obtained? Operating decisions: How can resources be used most effectively and efficiently? What materials need to be acquired?

Business ActivitiesThe Source of Accounting Information

45

What employees need to be hired, how should they be trained, and what specific tasks should they be assigned to do? What will be the cost of adding new employees? How should the products be designed to ensure they can be constructed with the time and resources available to meet customer needs? What schedules are needed for the construction, transportation, and assembly phases in order to minimize waste of labor and materials? What marketing strategy should be followed in order to maximize sales?

P2-23
Cost Investment Inventory $2,343.28 $43,297.00 $123,452.88 $100,000.00 $62,318.47 $ Supplies Equipment Notes Payable by Owners Earnings 38,246.50 Retained Sales $

of

Cash

$ 4,238.72 38,246.50

$235,892.35

Goods Date Sold 9/30/2007 10/31/2007 10/31/2007 10/31/2007 10/31/2007 $2,343.28 $43,297.00 $123,452.88 $100,000.00 10,927.57 $73,246.04

27,318.93 38,246.50 $ 0.00

$42,485.22

$208,573.42

27,318.93 27,318.93 $ 0.00

Business ActivitiesThe Source of Accounting Information

Balance Sheet Liabilities & Equity Notes Payable $123,452.88 Investment by Owners 100,000.00 Retained Earnings 73,246.04 Total $296,698.92 Net Income Revenues Sales Expenses Cost of Good Sold

Income Statement $38,246.50 27,318.93 $10,927.57

Assets Cash Inventory Supplies Equipment Total

$ 42,485.22 208,573.42 2,343.28 43,297.00 $296,698.92

46

Business ActivitiesThe Source of Accounting Information

47