Chapter 3

Operating Decisions and

the Accounting System

ANSWERS TO QUESTIONS

1. A typical business operating cycle for a manufacturer would be as follows:

Inventory is purchased, cash is paid to suppliers, the product is manufactured and
sold on credit, and the cash is collected from the customer. For a service provider,
a typical operating cycle would be as follows: Employee labor would be used, cash
is paid to the employees, service is rendered, and the cash is collected from the
client.

2. The time period assumption means that the financial condition and performance
of a business can be reported periodically, usually every month, quarter, or year,
even though the life of the business is much longer.

3. Net Income = Revenues (Gains) - Expenses (Losses).

Each element is defined as follows:

Revenues -- The amounts earned and recorded from a company’s day-to-day
business activities, mostly when a company sells products or
provides services to customers or clients.
Gains -- Result primarily from the disposal of assets for more than their cost
minus the amount of the cost depreciated in the past.
Expenses -- The costs of operating the business that are incurred to generate
revenues during the period.
Losses -- Result primarily from the disposal of assets for less than their cost
minus the amount of the cost depreciated in the past.

4. Both revenues and gains are inflows of net assets. However, revenues occur in
the normal course of operations, whereas gains occur from transactions not central
to the activities of the company. An example is selling an investment at a price
above cost (at a gain) for companies not in the business of selling investments.

Both expenses and losses are outflows of net assets. However, expenses occur
in the normal course of operations, whereas losses occur from transactions not
central to the activities of the company. An example is a loss suffered from fire
damage.

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5. Accrual accounting requires recording revenues when earned (when goods and
services are provided to customers) and recording expenses when incurred to
generate revenues in the same period, regardless of the timing of cash receipts or
payments. Cash basis accounting is recording revenues when cash is received
and expenses when cash is paid.

6. a. The five-step model for determining the amount and timing of revenue recognition
is:
(1) Identify the contract
(2) Identify the seller’s performance obligations (promised goods and
services)
(3) Determine the transaction price
(4) Allocate the transaction price to the performance obligations
(5) Recognize revenue when each performance obligation is satisfied.

b. The critical point that must be met for revenue to be recognized under the
accrual basis of accounting is when the company transfers promised goods or
services to customers in the amount it expects to be entitled to receive.

7. The expense recognition principle requires that expenses be recorded when

incurred in earning revenue – expenses are matched to the period in which the
revenues are earned. For example, the cost of inventory sold during a period is
recorded in the same period as the sale, not when the goods are produced and
held for sale.

8. Net income equals revenues minus expenses. Revenues increase net income
(and thus retained earnings as part of stockholders’ equity) and expenses
decrease net income (thus reducing retained earnings as part of stockholders’
equity).

9. Revenues increase stockholders’ equity and expenses decrease stockholders’

equity. To increase stockholders’ equity, an account must be credited; to decrease
stockholders’ equity, an account must be debited. Thus, revenues are recorded as
credits and expenses as debits.

10. Item Increase Decrease

Revenues Credit Debit
Losses Debit Credit
Gains Credit Debit
Expenses Debit Credit

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 11. Item Debit Credit
Revenues Decrease Increase
Losses Increase Decrease
Gains Decrease Increase
Expenses Increase Decrease

12. Operating, Direction

Transaction Investing, or of the Effect
Financing on Cash

Cash paid to suppliers Operating –

Sale of goods on account None None
Cash received from customers Operating +
Purchase of investments Investing –
Cash paid for interest Operating –
Issuance of stock for cash Financing +

13. The net profit margin ratio is calculated as:

Net Income ÷ Net Sales (or Operating Revenues).

The net profit margin ratio measures how much of every sales dollar is profit. An
increasing ratio suggests that the company is managing its sales and expenses
effectively.

ANSWERS TO MULTIPLE CHOICE

1. c
2. a
3. b
4. b
5. c
6. c
7. d
8. b
9. a
10. b

Financial Accounting, 11/e 3-3

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 Authors' Recommended Solution Time
(Time in minutes)

Alternate Cases and

Mini-exercises Exercises Problems Problems Projects
No. Time No. Time No. Time No. Time No. Time
1 5 1 10 1 20 1 30 1 20
2 6 2 20 2 20 2 30 2 30
3 6 3 20 3 25 3 25 3 30
4 6 4 20 4 40 4 40 4 20
5 6 5 20 5 20 5 20 5 30
6 6 6 18 6 40 6 40 6 60
7 6 7 20 7 30 7 30 7 30
8 8 8 20 8 20 8 20 8 *
9 5 9 20
10 6 10 20
11 15
12 20 Continuing
13 20 Problem
14 20 1 30
15 20 Comprehensive
16 20 Problem
17 20 1 90
18 15
19 15

* Due to the nature of this project, it is very difficult to estimate the amount of time students
will need to complete the assignment. As with any open-ended project, it is possible for
students to devote a large amount of time to these assignments. While students often
benefit from the extra effort, we find that some become frustrated by the perceived
difficulty of the task. You can reduce student frustration and anxiety by making your
expectations clear. For example, when our goal is to sharpen research skills, we devote
class time to discussing research strategies. When we want the students to focus on a
real accounting issue, we offer suggestions about possible companies or industries.

3-4 Solutions Manual

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MINI-EXERCISES

M3–1.
TERM
G (1) Losses
C (2) Expense recognition principle
F (3) Revenues
E (4) Time period assumption
B (5) Operating cycle

M3–2.

Revenue Account Title Amount of Revenue Earned in July

a. Games Revenue $15,000

b. Snack Bar Revenue $800
c. None No revenue earned in July; cash collections in
July related to earnings in June.
d. None No revenue earned in July; earnings process is
not yet complete – Unearned Revenue is
recorded upon receipt of cash.

M3–3.

Expense Account Title Amount of Expense Incurred in July

e. None None  No expense is incurred when supplies
are purchased, only when used.
f. None None  No expense is incurred in July;
payment related to June electricity usage.
g. Wages Expense $3,600
h. None None  Not incurred until future months of
coverage – recorded as Prepaid Expense (A).
i. Repairs Expense $700
j. Utilities Expense $900

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M3–4.

a. Cash (+A) ............................................................................ 15,000

Games revenue (+R, +SE) ............................................ 15,000

b. Cash (+A) ............................................................................ 800

Snack bar revenue (+R, +SE)........................................ 800

c. Cash (+A) ............................................................................ 400

Accounts receivable (−A) ............................................... 400

d. Cash (+A) ............................................................................ 2,500

Unearned revenue (+L) ................................................. 2,500

M3–5.

e. Supplies (+A) ...................................................................... 680

Accounts payable (+L) .................................................. 90
Cash (−A) ...................................................................... 590

f. Accounts payable (–L) ........................................................ 500

Cash (−A) ...................................................................... 500

g. Wages expense (+E, −SE) .................................................. 3,600

Cash (−A) ...................................................................... 3,600

h. Prepaid expenses (+A) ....................................................... 1,500

Cash (−A) ...................................................................... 1,500

i. Repairs expense (+E, −SE) ................................................ 700

Cash (−A) ...................................................................... 700

j. Utilities expense (+E, −SE) ................................................. 900

Accounts payable (+L) ................................................... 900

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M3–6.
Balance Sheet Income Statement
Stockholders’ Net
Assets Liabilities Equity Revenues Expenses Income
a. +15,000 NE +15,000 +15,000 NE +15,000

b. +800 NE +800 +800 NE +800

c. +400 NE NE NE NE NE
–400

d. +2,500 +2,500 NE NE NE NE

Transaction (c) results in an increase in an asset (cash) and a decrease in an asset

(accounts receivable). Therefore, there is no net effect on assets.

M3–7.
Balance Sheet Income Statement
Stockholders’ Net
Assets Liabilities Equity Revenues Expenses Income
e. +680 +90 NE NE NE NE
–590

f. –500 –500 NE NE NE NE

g. –3,600 NE –3,600 NE +3,600 –3,600

h. +1,500 NE NE NE NE NE
–1,500

i. –700 NE –700 NE +700 –700

j. NE +900 –900 NE +900 –900

Transaction (e) results in a net increase in assets of +90.

Transaction (h) results in an increase in an asset (prepaid expenses) and a decrease in
an asset (cash). Therefore, there is no net effect on assets.

Financial Accounting, 11/e 3-7

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M3–8.
Bennett’s Bowling, Inc.
Unadjusted Income Statement
For the Month of July
Revenues:
Games revenue $15,000
Snack bar revenue 800
Total revenues 15,800
Expenses:
Wages expense 3,600
Repairs expense 700
Utilities expense 900
Total expenses 5,200
Net income $10,600

M3–9.

Net ÷ Net Sales = Net Profit Margin

Income Revenue Ratio
2024 $51,000 $163,000 0.3129 or 31.3%
2023 45,000 151,000 0.2980 or 29.8%
2022 25,000 132,000 0.1894 or 18.9%

These results suggest that Jen’s Jewelry Company earned approximately $0.31 for
every dollar of revenue in 2024 and over time, the ratio has improved. Jen’s has
become more effective at managing sales and expenses.

As additional analysis:

Percentage Change Percentage Change

in Net Income in Net Sales Revenue
From 2023 to ($51,000 - $45,000) / ($163,000 - $151,000) / $151,000
2024 $45,000 +7.9%
+13.3%
From 2022 to ($45,000 - $25,000) / ($151,000 - $132,000) / $132,000
2023 $25,000 +14.4%
+80.0%

From 2022 to 2023 and from 2023 to 2024, sales have increased at a lower percentage
than net income. This suggests that the company has been more effective at controlling
expenses than generating revenues.
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M3–10.

O, I, or F Activity (or No
Transaction Effect) on Statement of Direction and Amount
Cash Flows of Effect
a. O +15,000
b. O +800
c. O +400
d. O +2,500
e. O -590
f. O -500
g. O -3,600
h. O -1,500
i. O -700
j. NE NE

Financial Accounting, 11/e 3-9

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EXERCISES

E3–1.
TERM
K (1) Expenses
E (2) Gains
G (3) Revenue recognition principle
I (4) Cash basis accounting
M (5) Unearned revenue
C (6) Operating cycle
D (7) Accrual basis accounting
F (8) Prepaid expenses
J (9) Revenues − Expenses = Net Income
L (10) Ending Retained Earnings =
Beginning Retained Earnings + Net Income − Dividends Declared

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E3–2.

Activity Revenue Amount of Revenue

Account Title Earned in September
a. None No revenue earned in September; earnings
process is not yet complete.
b. Interest revenue $125
(= $15,000 x 10% x 1 month/12 months)
c. Sales revenue $32,000
d. None No transaction has occurred; exchange of
promises only.
e. Sales revenue $21,000
(= 1,000 shirts x $21 per shirt)
Revenue earned when goods are delivered.
f. None Payment is related to revenue recorded
previously in (e) above when delivered, not when
cash is received.
g. None No revenue earned in September; earnings
process is not yet complete; recorded as the
liability Unearned Revenue (deferred revenue).
h. None No revenue is earned; the issuance of stock is a
financing activity.
i. None No revenue earned in September; earnings
process is not yet complete; recorded as the
liability Unearned Revenue (deferred revenue).
j. Ticket sales revenue $3,920,000
(= $27,440,000 ÷ 7 games)
k. None No revenue earned in September; earnings
process is not yet complete.
l. Sales revenue $60,000
m. Sales revenue $300

Financial Accounting, 11/e 3-11

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E3–3.

Expense Amount of Expense

Activity Account Title Incurred in January
a. Utilities expense $3,800
b. Advertising expense $450 (= $1,350 x 1 month/3 months) incurred in
January.
The remainder is a prepaid expense (A) that is not
incurred until February and March.
c. Salaries expense $201,500 incurred in January.
The remaining half was incurred and expensed in
December.
d. None Expense will be recorded when the related revenue
has been earned; the payment is recorded in the asset
Prepaid Expense.
e. None Expense will be recorded in the future when the
related revenue has been earned; it is recorded as
inventory when received.
f. Cost of goods sold $84,000 (= 400 books x $210 cost per book)
g. None December expense paid in January. Not an expense
when paid.
h. Commission expense $55,560
i. None No expense until the grill is used to produce revenue.
Expense will be recorded as depreciation (used
portion of asset’s cost) over the equipment’s useful
life.
j. Supplies expense $4,700 (= $3,500 + $2,600 - $1,400)
k. Wages expense $184 (= 8 hours x $23 per hour)
l. Insurance expense $400 (= $4,800 ÷ 12 months)
The remaining amount is Prepaid Insurance.
m. Repairs expense $600
n. Utilities expense $154
o. Consulting expense $2,034
p. None December expense paid in January.
q. Cost of goods sold $9,450 (= 450 shirts x $21 per shirt)

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E3–4. (dollars in millions)
Balance Sheet Income Statement
Stockholders’ Net
Assets Liabilities Equity Revenues Expenses Income
a. + 623 NE + 623 NE NE NE

b. + 6,320 + 1,427 NE NE NE NE
– 4,893
or +1,427
net effect

c. – 5,300 - 5,000 – 300 NE + 300 – 300

d. + 223,949 NE + 280,522 + 280,522 NE + 280,522

+ 56,573
or + 280,522
net effect

e. NE + 25,249 – 25,249 NE + 25,249 – 25,249

f. – 118,241 – 118,241 NE NE NE NE

g. – 18,878 NE – 18,878 NE + 18,878 – 18,878

h. + 38,200 NE NE NE NE NE
– 38,200
or no
net effect

i. + 16,231 + 16,231 NE NE NE NE

j. – 165,536 NE – 165,536 NE + 165,536 – 165,536

k. - 830 - 830 NE NE NE NE

Financial Accounting, 11/e 3-13

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E3–5. (dollars in millions)

Balance Sheet Income Statement

Stockholders’ Net
Assets Liabilities Equity Revenues Expenses Income
a. + 21.4 NE + 21.4 NE NE NE

b. + 1,626.6 + 1,626.6 NE NE NE NE

c. – 43.8 – 40.1 – 3.7 NE + 3.7 – 3.7

d. + 2,350.0 NE + 2,350.0 + 2,350.0 NE +2,350.0

e. – 1,426.6 NE – 1,426.6 NE + 1,426.6 – 1,426.6

f. – 23.0 NE – 23.0 NE NE NE

g. +/– 32.4 NE NE NE NE NE
or NE*

h. – 535.2 + 178.4 – 713.6 NE +713.6 – 713.6

i. + 0.40 NE + 0.50 + 0.50 NE + 0.50

+ 0.10

j. NE + 35.0 – 35.0 NE + 35.0 – 35.0

*Transaction (g) results in an increase in an asset (property, plant, and equipment) and
a decrease in an asset (cash). Therefore, there is no net effect on assets.

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E3–6. (dollars in millions)

a. Buildings (+A) ...................................................................... 432

Equipment (+A) ................................................................... 254
Cash (−A) .................................................................... 686
[A 0 = L 0 + SE 0; Debits 686 = Credits 686]

b. Cash (+A) ............................................................................ 119

Short-term notes payable (+L) ................................... 119
[A 119 = L 119 + SE 0; Debits 119 = Credits 119]

c. Cash (+A) ............................................................................ 26,813

Accounts receivable (+A) .................................................... 28,558
Service revenue (+R, +SE) ......................................... 55,371
[A 55,371= L 0 + SE 55,371; Debits 55,371 = Credits 55,371]

d. Accounts payable (−L) ........................................................ 132,074

Cash (−A) .................................................................... 132,074
[A –132,074 = L –132,074 + SE 0; Debits 132,074 = Credits 132,074]

e. Inventory (+A) ..................................................................... 41,683

Accounts payable (+L) ................................................ 41,683
[A 41,683 = L 41,683 + SE 0; Debits 41,683 = Credits 41,683]

f. Wages expense (+E, −SE) .................................................. 6,540

Cash (−A) .................................................................... 6,540
[A –6,540 = L 0 + SE –6,540; Debits 6,540 = Credits 6,540]

g. Cash (+A) ............................................................................ 22,043

Accounts receivable (−A) ........................................... 22,043
[A 0 = L 0 + SE 0; Debits 22,043 = Credits 22,043]

Financial Accounting, 11/e 3-15

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E3–6. (continued)

h. Fuel expense (+E, −SE) ...................................................... 1,750

Cash (−A) .................................................................... 1,750
[A –1,750 = L 0 + SE –1,750; Debits 1,750 = Credits 1,750]

i. Retained earnings (−SE) ..................................................... 698

Dividends payable (+L) ............................................... 698
[A 0 = L 698 + SE –698; Debits 698 = Credits 698]

j. Utilities expense (+E, −SE) ................................................. 121

Cash (−A) .................................................................... 110
Accounts payable (+L) ................................................ 11
[A –110 = L 11 + SE –121; Debits 121 = Credits 121]

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E3–7.

Req. 1

a. Cash (+A) ................................................................... 2,300,000

Short-term note payable (+L) ........................... 2,300,000

b. Equipment (+A) .......................................................... 98,000

Cash (−A)......................................................... 98,000

c. Inventory (+A) ............................................................. 35,000

Accounts payable (+L) ..................................... 35,000

d. Repairs expense (+E, −SE) ........................................ 62,000

Cash (−A)......................................................... 62,000

e. Cash (+A) ................................................................... 390,000

Unearned pass revenue (+L) ........................... 390,000

f. Accounts receivable (+A)............................................ 700

Ski shop sales revenue (+R, +SE) ................... 700

g. Cost of goods sold (+E, −SE) ..................................... 400

Inventory (−A) .................................................. 400

h. Cash (+A) ................................................................... 320,000

Lift revenue (+R, +SE) ..................................... 320,000

i. Cash (+A) ................................................................... 3,500

Unearned rent revenue (+L) ............................ 3,500

j. Accounts payable (−L) ................................................ 17,500

Cash (−A)......................................................... 17,500

k. Cash (+A) ................................................................... 400

Accounts receivable (−A) ................................. 400

l. Wages expense (+E, −SE) ......................................... 245,000

Cash (−A)......................................................... 245,000

Req. 2
Accounts Receivable
Beg. bal. 1,000 400 (k)
(f) 700
End. bal. 1,300

Financial Accounting, 11/e 3-17

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E3–8.

2/1 Rent expense (+E, −SE) ..................................................... 275

Cash (−A) .................................................................. 275

2/2 Fuel expense (+E, −SE) ...................................................... 490

Accounts payable (+L) .............................................. 490

2/4 Cash (+A) ............................................................................ 820

Unearned revenue (+L) ............................................. 820

2/7 Cash (+A) ............................................................................ 910

Transport revenue (+R, +SE) .................................... 910

2/10 Advertising expense (+E, −SE) ........................................... 175

Cash (−A) .................................................................. 175

2/14 Wages payable (−L) ............................................................ 2,300

Cash (−A) .................................................................. 2,300

2/18 Cash (+A) ............................................................................ 1,600

Accounts receivable (+A) .................................................... 2,200
Transport revenue (+R, +SE) .................................... 3,800

2/25 Parts supplies (+A) .............................................................. 2,550

Accounts payable (+L) .............................................. 2,550

2/27 Retained earnings (−SE) ..................................................... 200

Dividends payable (+L) ............................................. 200

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E3–9.

Req. 1 and 2

Cash Accounts Receivable Supplies

Beg. 6,400 Beg.32,000 Beg. 1,500
(a) 19,000 2,300 (g) 7,200 (d) (k) 960
(b) 600 16,500 (i)
(c) 850 2,200 (j)
(d) 7,200 960 (k)
320 (l)
11,770 24,800 2,460

Equipment Land Building

Beg. 9,500 Beg. 7,400 Beg. 25,300
(h) 920
10,420 7,400 25,300

Accounts Unearned Long-term

Payable Revenue Note Payable
9,600 Beg. 3,840 Beg. 48,500 Beg.
(g) 2,300 400 (e) 600 (b)
7,700 4,440 48,500

Additional
Common Stock Paid-in Capital Retained Earnings
1,600 Beg. 7,000 Beg. 11,560 Beg.
100 (h) 820 (h) (j) 2,200
1,700 7,820 9,360

Rebuilding Fees Rent

Revenue Revenue
0 Beg. 0 Beg.
19,000 (a) 850 (c)
19,000 850

Wages Expense Utilities Expense Interest Expense

Beg. 0 Beg. 0 Beg. 0
(i) 16,500 (e) 400 (l) 320
16,500 400 320

Item (f) is not a transaction; there has been no exchange.

Financial Accounting, 11/e 3-19

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E3–9. (continued)

Req. 3

Net income using the accrual basis of accounting:

Revenues $19,850 ($19,000 + $850)

– Expenses 17,220 ($16,500 + $400 + $320)
Net Income $ 2,630
(accrual basis)

Assets = Liabilities + Stockholders’ Equity

$11,770 $ 7,700 $ 1,700
24,800 4,440 7,820
2,460 48,500 9,360
10,420 2,630 net income
7,400
25,300
$82,150 = $60,640 + $21,510

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E3–10.

STACEY’S PIANO REBUILDING COMPANY

Income Statement (unadjusted)
For the Month Ended January 31, Year 2
Operating Revenues:
Rebuilding fees revenue $19,000
Rent revenue 850
Total operating revenues 19,850
Operating Expenses:
Wages expense 16,500
Utilities expense 400
Total operating expenses 16,900
Operating Income 2,950
Other Items:
Interest expense 320
Net Income $ 2,630

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E3–11.

O, I, or F Activity
Transaction (or No Effect) on Direction and
Statement of Cash Flows Amount of Effect
a. O +19,000
b. O +600
c. O +850
d. O +7,200
e. NE NE
f. NE NE
g. O -2,300
h. NE NE
i. O -16,500
j. F -2,200
k. O -960
l. O -320

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E3–12.

Req. 1

a. Cash (+A) ............................................................................ 9,500

Consulting fees revenue (+R, +SE) ............................. 9,500

b. Cash (+A) [10 shares x $120 per share] .............................. 1,200

Common stock (+SE) [10 shares x $1 par] .................. 10
Additional paid-in capital (+SE) [$1,200 - $10] ............ 1,190

c. Office equipment (+A) ......................................................... 640

Cash (−A) .................................................................... 160
Short-term note payable (+L) ...................................... 480

d. Cash (+A) ............................................................................ 890

Unearned revenue (+L) .............................................. 890

e. Supplies (+A) ...................................................................... 470

Accounts payable (+L) ................................................ 470

f. Utilities expense (+E, −SE) ................................................. 1,800

Cash (−A) .................................................................... 1,800

g. Accounts receivable (+A) .................................................... 1,620

Consulting fee revenue (+R, +SE) .............................. 1,620

h. Cash (+A) ........................................................................... 2,980

Accounts receivable (−A) ............................................ 2,980

i. Salaries expense (+E, −SE) ................................................. 6,210

Cash (−A) .................................................................... 5,300
Salaries payable (+L) .................................................. 910

j. Short-term investments (+A) ............................................... 1,230

Prepaid expenses (+A) ....................................................... 800
Cash (−A) .................................................................... 2,030

k. Cash (+A) ............................................................................ 10

Interest revenue (+R, +SE) ......................................... 10

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E3–12. (continued)

Req. 2
Cash Short-Term Investments Accounts Receivable
Beg. 1,900 Beg. 410 Beg. 3,570
(a) 9,500 160 (c) (j) 1,230 (g) 1,620 2,980 (h)
(b) 1,200 1,800 (f)
(d) 890 5,300 (i)
(h) 2,980 2,030 (j)
(k) 10
7,190 1,640 2,210

Supplies Prepaid Expenses Office Equipment

Beg. 150 Beg. 4,720 Beg. 1,050
(e) 470 (j) 800 (c) 640
620 5,520 1,690

Accounts Unearned
Payable Revenue
210 Beg. 1,320 Beg.
470 (e) 890 (d)
680 2,210

Salaries Payable Short-Term Note Payable

870 Beg. 780 Beg.
910 (i) 480 (c)
1,780 1,260

Additional
Common Stock Paid-in Capital Retained Earnings
50 Beg. 6,560 Beg. 2,010 Beg.
10 (b) 1,190 (b)
60 7,750 2,010

Consulting Fees Interest

Revenue Revenue
0 Beg. 0 Beg.
9,500 (a) 10 (k)
1,620 (g)
11,120 10

Salaries Expense Utilities Expense

Beg. 0 Beg. 0
(i) 6,210 (f) 1,800
6,210 1,800
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E3–12. (continued)

Req. 3

Net income using the accrual basis of accounting:

Revenues $11,130 ($11,120 + $10)
– Expenses 8,010 ($6,210 + $1,800)
Net Income $ 3,120
(accrual basis)

Assets = Liabilities + Stockholders’ Equity

$ 7,190 $ 680 $ 60
1,640 2,210 7,750
2,210 1,780 2,010
620 1,260 3,120 net income
5,520
1,690
$18,870 $5,930 $12,940

E3–13.

Freeman, Inc.
Income Statement (unadjusted)
For the Year Ended December 31

Operating Revenues:
Consulting fees revenue $11,120
Total operating revenues 11,120
Operating Expenses:
Salaries expense 6,210
Utilities expense 1,800
Total operating expenses 8,010
Operating Income 3,110
Other Item:
Interest revenue 10
Net Income $ 3,120

Financial Accounting, 11/e 3-25

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
E3–14.

Req. 1 and 2

Cash Accounts Receivable Supplies

Beg. 0 72,000 (b) Beg. 0 Beg. 0
(a)160,000 10,200 (d) (a) 2,000 (a) 1,200
(c) 50,000 363 (i) (e) 1,600 (d) 10,200 10,830 (g)
(e) 2,600 6,280 (j)
(f) 16,900 600 (k)
70,000 (l)
70,057 3,600 570

Equipment Building Accounts Payable

Beg. 0 Beg. 0 0 Beg.
(a) 18,300 (b) 420 (h)
(l) 50,000 360,000
(l)
20,000
68,300 380,000 420

Note Payable Mortgage Payable

0 Beg. 0 Beg.
50,000 (c) 288,000(b)
50,000 288,000

Common Additional Retained

Stock Paid-in Capital Earnings
0 Beg. 0 0 Beg.
1,000 (a) Beg. (k) 600
180,500
(a)
1,000 180,500 600

Catering Sales
Food Sales Revenue Revenue
0 0 Beg.
Beg. 4,200 (e)
16,900 (f)
16,900 4,200

Supplies Expense Utilities Expense Wages Expense

Beg. 0 Beg. 0 Beg. 0
(g) 10,830 (h) 420 (j) 6,280
10,830 420 6,280

Fuel Expense
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 Beg. 0
(i) 363
363

Financial Accounting, 11/e 3-27

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E3–15.

Req. 1
TRAVELING GOURMET, INC.
Income Statement (unadjusted)
For the Month Ended March 31

Revenues:
Food sales revenue $ 16,900
Catering sales revenue 4,200
Total revenues 21,100
Expenses:
Supplies expense 10,830
Utilities expense 420
Wages expense 6,280
Fuel expense 363
Total expenses 17,893
Net Income $ 3,207

Req. 2
O, I, or F Activity (or No
Transaction Effect) on Statement of Direction and Amount
Cash Flows of Effect
a. F +160,000
b. I -72,000
c. F +50,000
d. O -10,200
e. O +2,600
f. O +16,900
g. NE NE
h. NE NE
i. O -363
j. O -6,280
k. F -600
l. I -70,000

Req. 3
The company generated a profit of $3,207 during its first month of operations, before
making any adjusting entries. The adjusting entries for use of the building and equipment
and interest expense on the borrowing will lower the net income. Net cash flows from
operating activities were also positive at $2,657 (= +16,900 + 2,600 – 10,200 – 363 –
6,280). So far, the company appears to be successful, but it is only in its first month of
operating a retail store and no adjustments have yet been recorded. A net loss may result
after adjustments are made. In that case, dividends should not be paid to shareholders.
It is not unusual for small businesses to report a loss or have negative cash flows from
operations as they start up operations.
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E3–16.

Req. 1

Transaction Brief Explanation

a Issued 10,000 shares of common stock to shareholders for $82,000
cash.

b Purchased store fixtures for $15,400 cash.

c Purchased $24,800 of inventory, paying $6,200 cash and the balance

on account.

d Sold $14,000 of goods or services to customers, receiving $9,820 cash

and the balance on account. The cost of the goods sold was $7,000.

e Used $1,480 of utilities during the month, not yet paid.

f Paid $1,300 in wages to employees.

g Paid $2,480 in cash for rent, $620 related to the current month and
$1,860 related to future months.

h Received $3,960 cash from customers, $1,450 related to current sales

and $2,510 related to goods or services to be provided in the future.

Req. 2
Kate’s Kite Company
Income Statement (unadjusted)
For the Month Ended April 30

Sales Revenue $ 15,450

Expenses:
Cost of sales 7,000
Wages expense 1,300
Rent expense 620
Utilities expense 1,480
Total operating expenses 10,400
Income from operations 5,050
Income tax expense 0
Net Income $ 5,050

Because there were no nonoperating revenues or expenses, such as interest revenue

and interest expense, there is no need to add the Other Items section of the classified
income statement. Also, since adjustments have not yet been recorded, there is no
income tax expense. Net income is the same as operating income in this instance.
Financial Accounting, 11/e 3-29
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
E3–16. (continued)

Kate’s Kite Company

Balance Sheet
At April 30

Assets Liabilities and Shareholders’ Equity

Current Assets: Current Liabilities:
Cash $ 70,400 Accounts payable $ 20,080
Accounts receivable 4,180 Unearned revenue 2,510
Inventory 17,800 Total current liabilities 22,590
Prepaid expenses 1,860 Shareholders’ Equity:
Total current assets 94,240 Common stock 10,000
Store fixtures 15,400 Additional paid-in capital 72,000
Retained earnings 5,050
Total shareholders’ equity 87,050
Total Liabilities &
Total Assets $109,640 Shareholders’ Equity $109,640

E3–17.

Req. 1

Assets = Liabilities + Stockholders’ Equity

$ 3,200 $ 2,400 $ 800
8,000 5,600 4,000
6,400 1,600 3,200
$17,600 $9,600 $ 8,000

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E3–17. (continued)

Req. 2

Accounts Long-Term
Cash Receivable Investments
Beg. 3,200 Beg. 8,000 Beg. 6,400
(a) 48,000 57,200 (d) (a) 10,000 5,600 (b)
(b) 5,600 480 (g)
(c) 400
(e) 1,600
1,120 12,400 6,400

Accounts Unearned Long-Term

Payable Revenue Notes Payable
2,400 Beg. 5,600 Beg. 1,600 Beg.
(d) 1,600 800 (f) 1,600 (e)
1,600 7,200 1,600

Additional
Common Stock Paid-in Capital Retained Earnings
800 Beg. 4,000 Beg. (g) 480 3,200 Beg.
800 4,000 2,720

Consulting Fee Interest

Revenue Revenue
0 Beg. 0 Beg.
58,000 (a) 400 (c)
58,000 400

Wages Expense Travel Expense Utilities Expense

Beg. 0 Beg. 0 Beg. 0
(d) 36,000 (d) 12,000 (f) 800
36,000 12,000 800

Rent Expense
Beg. 0
(d) 7,600
7,600

Financial Accounting, 11/e 3-31

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E3–17. (continued)

Req. 3

Revenues $58,400 ($58,000 from sales + $400 on investments)

– Expenses 56,400 ($36,000 + $12,000 + $800 + $7,600)
Net Income $ 2,000

Assets = Liabilities + Stockholders’ Equity

$ 1,120 $ 1,600 $ 800
12,400 7,200 4,000
6,400 1,600 2,720
2,000 net income
$19,920 $10,400 $ 9,520

Req. 4

Net Profit Margin Net Income $2,000 0.0345

= = =
Ratio Sales (Operating) Revenues $58,000* or 3.45%

* The $400 of investment income is not an operating revenue and is not included in the
computation.

The increasing trend in the net profit margin ratio (from 2.5% in 2022 to 2.9% in 2023
and then to 3.45% in 2024) suggests that the company is managing its sales and
expenses more effectively over time.

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E3–18.

Req. 1

Accounts Receivable increases with customer sales on account and decreases with
cash payments received from customers.
Prepaid Expenses increases with cash payments for expenses related to future periods
and decreases as these expenses are incurred over time.
Unearned Subscriptions Revenue increases with cash payments received from
customers for goods or services to be provided in the future and decreases when those
goods or services are provided.

Req. 2 (dollars in millions)

Accounts Prepaid Unearned

Receivable Expenses Subscriptions Revenue
1/1 174 1/1 50 105 1/1
1,394 1,129 1,142 1,063 681 795
12/31 439 12/31 129 219 12/31

Computations:
Beginning + “+” − “−” = Ending
Accounts 174 + 1,394 − ? = 439
receivable ? = 1,129
Customer cash payments
Prepaid 50 + 1,142 − ? = 129
expenses ? = 1,063
Expenses incurred
Unearned 105 + 795 − ? = 219
subscriptions ? = 681
revenue Revenue earned

Financial Accounting, 11/e 3-33

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
 E3–19.
ITEM LOCATION
1. Description of a company’s Letter to shareholders;
primary business(es). Management’s Discussion and Analysis;
Summary of significant accounting policies
note
2. Income taxes paid. Notes; Statement of cash flows
3. Accounts receivable. Balance sheet
4. Cash flow from operating Statement of cash flows
activities.
5. Description of a company’s Summary of significant accounting policies
revenue recognition policy. note
6. The inventory sold during the Income statement (Cost of Goods Sold)
year.
7. The data needed to compute the Income statement
net profit margin ratio.

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PROBLEMS

P3-1.
Transactions Debit Credit
a. Example: Purchased equipment for use in the business;
paid one-third cash and signed a note payable for the balance. 5 1, 8
b. Paid cash for salaries and wages earned by employees this
period. 15 1
c. Paid cash on accounts payable for expenses
incurred last period. 7 1
d. Purchased supplies to be used later; paid cash. 3 1
e. Performed services this period on credit. 2 14
f. Collected cash on accounts receivable for services
performed last period. 1 2
g. Issued stock to new investors for cash greater than par value 1 11, 12
h. Paid operating expenses incurred this period. 15 1
i. Incurred operating expenses this period to be paid
next period. 15 7
j. Purchased a patent (an intangible asset); paid cash. 6 1
k. Collected cash for services performed this period. 1 14
l. Used some of the supplies on hand for operations. 15 3
m. Paid three-fourths of the income tax expense for the year;
the balance will be paid next year. 16 1, 10
n. Made a payment on the equipment note in (a); the payment
was part principal and part interest expense. 8, 17 1
o. On the last day of the current period, paid cash for an
insurance policy covering the next two years. 4 1

Financial Accounting, 11/e 3-35

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P3–2.

a. Cash (+A) [2,000 shares x $20 per share] .......................... 40,000

Common stock (+SE) [2,000 shares x $0.01 par value) 20
Additional paid-in capital (+SE) [difference] ................... 39,980

b. Cash (+A)............................................................................ 60,000

Note payable (long-term) (+L) ....................................... 60,000

c. Rent expense (+E, −SE) ..................................................... 1,500

Prepaid rent (+A) ................................................................ 1,500
Cash (−A) ...................................................................... 3,000

d. Prepaid insurance (+A) ....................................................... 2,400

Cash (−A) ..................................................................... 2,400

e. Furniture and fixtures (or Equipment) (+A) ......................... 15,000

Accounts payable (+L) .................................................. 12,000
Cash (−A) ..................................................................... 3,000

f. Inventory (+A) ..................................................................... 2,800

Cash (−A) ..................................................................... 2,800

g. Advertising expense (+E, −SE) ........................................... 350

Cash (−A) ..................................................................... 350

h. Cash (+A)............................................................................ 850

Accounts receivable (+A) .................................................... 850
Sales revenue (+R, +SE) .............................................. 1,700

i. Cost of goods sold (+E, −SE).............................................. 900

Inventory (−A) ............................................................... 900

j. Accounts payable (−L) ........................................................ 12,000

Cash (−A) ..................................................................... 12,000

k. Cash (+A)............................................................................ 210

Accounts receivable (−A) .............................................. 210

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P3–3.

Req. 1 Req. 2

Balance Sheet Income Statement Stmt of

Stockholders’ Net Cash
Assets Liabilities Equity Revenues Expenses Income Flows
a. +/– + NE NE NE NE O

b. +/– NE NE NE NE NE I

c. – + – NE + – O

d. + NE + + NE + O

e. – NE – NE + – NE*

f. – NE – NE NE NE F

g. + NE + + NE + O

h. – NE – NE + – O

* Cash is not affected in this transaction.

Financial Accounting, 11/e 3-37

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
P3–4.

Req. 1 and 2

Cash Accounts Receivable Supplies

Beg. 0 Beg. 0 Beg. 0
(a) 30,200 5,250 (b) (h) 825 600 (l) (d) 1,560
(e) 11,000 1,560 (d)
(h) 2,675 11,000 (f)
(l) 600 400 (g)
(n) 1,200 550 (j)
1,300 (k)
400 (m)
25,215 225 1,560

Inventory Prepaid Expenses Equipment

Beg. 0 Beg. 0 Beg. 0
(c) 6,000 1,600 (i) (b) 5,250 (f) 2,750
600 (o)
3,800 5,250 2,750

Furniture and Fixtures Accounts Payable Notes Payable

Beg. 0 0 Beg. 0 Beg.
(f) 8,250 (j) 550 6,000 (c) 11,000 (e)
8,250 5,450 11,000

Common Additional Paid-in

Stock Capital
0 Beg. 0
40 (a) Beg.
30,160 (a)
40 30,160

Sales Revenue Cost of Goods Sold Repair Expense

0 Beg. Beg. 0 Beg. 0
3,500 (h) (i) 1,600 (m) 400
1,200 (n) (o) 600
4,700 2,200 400

Advertising Expense Wage Expense

Beg. 0 Beg. 0
(g) 400 (k) 1,300
400 1,300

3-38 Solutions Manual

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P3–4. (continued)

Req. 3
KAYLEE’S SWEETS
Income Statement (unadjusted)
For the Month Ended February 28
Revenues:
Sales revenue $ 4,700

Expenses:
Cost of goods sold 2,200
Advertising expense 400
Wage expense 1,300
Repair expense 400
Total expenses 4,300
Net Income $ 400

Req. 4

Date: (today’s date)

To: Kaylee James
From: (your name)
After analyzing the effects of transactions for Kaylee’s Sweets for February, the
company has realized a profit of $400. This is 8.5% of sales revenue. However, this is
based on unadjusted amounts. There are several additional expenses that will decrease
the net income amount, perhaps resulting in a net loss. These include rent, supplies,
depreciation on the use of the equipment, furniture, and fixtures, interest on the
borrowing, and wages. Therefore, the company does not appear to be profitable, which
is common for small businesses at the beginning of operations. A focus on maintaining
expenses while increasing revenues should result in profit in future periods. It would also
be useful to prepare a budget of cash flows each month for the upcoming year to decide
how potential cash shortages will be handled.

Req. 5.
Net Income ÷ Net Sales Revenue = Net Profit Margin Ratio
2025 $22,000 $93,500 0.235 or 23.5%
2024 11,000 82,500 0.133 or 13.3%
2023 4,400 55,000 0.080 or 8.0%

The ratio increased each year, nearly tripling in three years. This suggests that the
company’s management is very effective at generating sales and controlling expenses.
As long as the expenses related to opening the new store are not greater as a percentage
of sales revenue than currently, the company should continue to experience a high net
profit margin. Based on this rationale, the manager should be promoted.

Financial Accounting, 11/e 3-39

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P3–5.
O, I, or F Activity (or No
Transaction Effect) on Statement of Direction and Amount
Cash Flows of Effect
a. F +30,200
b. O -5,250
c. NE NE
d. O -1,560
e. F +11,000
f. I -11,000
g. O -400
h. O +2,675
i. NE NE
j. O -550
k. O -1,300
l. O +600
m. O -400
n. O +1,200
o. NE NE

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P3–6.

Req. 1 (in millions, except par value)

Debit Credit
(a) Cash (+A) 1,390
Receivables (+A) 24,704
Delivery service revenue (+R, +SE) 26,094

(b) Property, plant and equipment (+A) 3,434

Long-term notes payable (+L) 3,434

(c) Rent expense (+E, –SE) 3,136

Prepaid expenses (+A) 4,728
Cash (–A) 7,864

(d) Repairs expense (+E, –SE) 864

Cash (–A) 864

(e) Cash (+A) 24,285

Receivables (–A) 24,285

(f) Long-term notes payable (-L) 150

Cash (–A) 150

(g) Cash (+A) 16

Common stock (+SE) [200 x $0.01 par value] 2
Additional paid-in capital (+SE) [difference] 14

(h) Wages expense (+E, –SE) 9,276

Cash (–A) 9,276

(i) Spare parts, supplies, and fuel (+A) 6,564

Cash (–A) 6,564

(j) Spare parts, supplies, and fuel expense (+E, –SE) 6,450
Spare parts, supplies, and fuel (–A) 6,450

(k) Accounts payable (–L) 784

Cash (–A) 784

(l) No entry required.

Financial Accounting, 11/e 3-41

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P3–6. (continued)
Req. 2 (in millions)
Spare Parts, Supplies,
Cash Receivables and Fuel
Beg. 5,238 7,864 (c) Beg. 9,552 Beg. 511
(a) 1,390 864 (d) (a) 24,704 24,285 (e) (i) 6,564 6,450 (j)
(e) 24,285 150 (f)
(g) 16 9,276 (h)
6,564 (i)
784 (k)
5,427 9,971 625
Property, Plant and
Prepaid Expenses Other Current Assets Equipment (net)
Beg. 108 Beg. 809 Beg. 30,482
(c) 4,728 (b) 3,434
4,836 809 33,916
Other Non-current Accounts Accrued Expenses
Assets Payable Payable
Beg. 1,082 5,555 2,552 Beg.
(k) 784 Beg.

1,082 4,771 2,552

Other Current Long-Term Other Non-current
Liabilities Notes Payable Liabilities
1,641 21,320 1,437 Beg.
Beg. (f) 150 Beg.
3,434 (b)
1,641 24,604 1,437
Common Additional Paid-in Retained
Stock Capital Earnings
9 Beg. 150 Beg. 9,105
2 (g) 14 (g) Beg.

11 164 9,105
Delivery Service Rent Repairs
Revenue Expense Expense
0 Beg. Beg. 0 Beg. 0
26,094 (a) (c) 3,136 (d) 864
26,094 3,136 864
Wages Spare Parts, Supplies,
Expense and Fuel Expense Item (l) does not
constitute a transaction.
Beg. 0 Beg. 0
(h) 9,276 (j) 6,450

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 9,276 6,450

Financial Accounting, 11/e 3-43

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P3–6. (continued)

Req. 3

UPS
Income Statement (unadjusted)
For the Year Ended December 31 (current year)
(in millions)

Revenues:
Delivery service revenue $ 26,094
Expenses:
Rent expense 3,136
Wages expense 9,276
Spare parts, supplies, and fuel expense 6,450
Repairs expense 864
Total expenses 19,726
Net Income $ 6,368

Req. 4

Net Profit Margin Ratio = Net Income = $6,368 = 0.24 or 24%

Net Sales (or Operating) $26,094
Revenues

The net profit margin ratio suggests that the company obtained $0.24 in net income for
every $1 in service revenue. To analyze this result, we would need to calculate the ratio
for the company over time to observe the trend in how effectively management is at
generating sales and/or controlling expenses. We would also need the industry ratio or
competitors’ ratios for the current period to determine how the company is doing in
comparison to others in the industry.

3-44 Solutions Manual

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P3–7.

(in thousands)
a. Cash (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 795,271
Admissions revenue (+R, +SE) . . . . . . . . . . . . . . . 795,271

b. Wages expense (+E, −SE) . . . . . . . . . . . . . . . . . . . . . . 433,416

Cash (−A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,630
Wages payable (+L) . . . . . . . . . . . . . . . . . . . . . . . 31,786

c. Long-term notes payable (−L). . . . . . . . . . . . . . . . . . . . 47,100

Cash (−A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,100

d. Cash (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,693

Sales revenue (+R, + SE) . . . . . . . . . . . . . . . . . . . 365,693

e. Cost of goods sold (+E, −SE). . . . . . . . . . . . . . . . . . . . 92,057

Inventory (−A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,057

f. Equipment (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,190

Cash (−A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,190

g. Cash (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,855

Accounts receivable (+A) . . . . . . . . . . . . . . . . . . . . . . . 1,139
Accommodations revenue (+R, +SE). . . . . . . . . . . 82,994

h. Interest expense (+E, −SE). . . . . . . . . . . . . . . . . . . . . . 153,326

Cash (−A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,326

i. Inventory (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,531

Cash (−A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,431
Accounts payable (+L) . . . . . . . . . . . . . . . . . . . . . . 28,100

j. Advertising expenses (+E, −SE) . . . . . . . . . . . . . . . . . . . 140,426

Cash (−A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,044
Accounts payable (+L). . . . . . . . . . . . . . . . . . . . . . . 6,382

k. Accounts payable (−L). . . . . . . . . . . . . . . . . . . . . . . . . . . 11,600

Cash (−A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,600

Financial Accounting, 11/e 3-45

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P3–8.

Operating, Investing, or Direction and Amount

Transaction Financing Cash Flows of the Effect (in thousands)
(a) O +795,271
(b) O –401,630
(c) F –47,100
(d) O +365,693
(e) NE NE
(f) I –90,190
(g) O +81,855
(h) O –153,326
(i) O –119,431
(j) O –134,044
(k) O –11,600

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ALTERNATE PROBLEMS

AP3-1.
Transactions Debit Credit
a. Example: Issued stock to new investors. 1 11, 12
b. Incurred and recorded operating expenses on credit to
be paid next period. 15 7
c. Purchased on credit but did not use supplies this period.
3 7
d. Performed services for customers this period on credit.
2 14
e. Prepaid a fire insurance policy this period to cover the
next 12 months. 4 1
f. Purchased a building this period by making a 20 percent
cash down payment and signing a mortgage loan for the
balance. 5 1, 8
g. Collected cash this year for services rendered and
recorded in the prior year. 1 2
h. Collected cash for services rendered this period. 1 14
i. Paid cash this period for wages earned and recorded
last period. 9 1
j. Paid cash for operating expenses charged on accounts
payable in the prior period. 7 1
k. Paid cash for operating expenses incurred in the current
period. 15 1
l. Made a payment on the mortgage loan, which was part
principal repayment and part interest. 8, 15 1
m. This period a shareholder sold some shares of her stock
to another person for an amount above the original
issuance price. None None
n. Used supplies on hand to clean the offices. 15 3
o. Recorded income taxes for this period to be paid at the
beginning of the next period. 16 10
p. Declared and paid a cash dividend this period. 13 1

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AP3–2.

a. Accounts receivable (+A) ..................................................... 23,500

Service revenue (+R, +SE) ........................................ 23,500

b. Accounts payable (−L) ......................................................... 3,005

Cash (−A) ................................................................... 3,005

c. Supplies (+A) ....................................................................... 2,600

Accounts payable (+L) ............................................... 2,600

d. Equipment (+A) .................................................................... 3,800

Cash (−A) ................................................................... 3,800

e. Advertising expense (+E, −SE) ............................................ 1,400

Cash (−A) ................................................................... 1,400

f. Wages expense (+E, −SE) ................................................... 8,100

Wages payable (−L) ............................................................. 3,800
Cash (−A) ................................................................... 11,900

g. Cash (+A) ............................................................................. 135,000

Common stock (+SE) ................................................. 1,500
Additional paid-in capital (+SE) .................................. 133,500

h. Cash (+A) ............................................................................. 12,500

Accounts receivable (−A) ........................................... 12,500

i. Accounts receivable (+A) ..................................................... 14,500

Service revenue (+R, +SE) ........................................ 14,500

j. Land (+A) ............................................................................. 10,000

Cash (−A) ................................................................... 3,000
Note payable (+L) ...................................................... 7,000

k. Utilities expense (+E, −SE) .................................................. 1,950

Accounts payable (+L) ............................................... 1,950

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AP3–3.

Req. 1 Req. 2
Balance Sheet Income Statement
Stockholders’ Net Stmt of
Assets Liabilities Equity Revenues Expenses Income Cash Flows
a. – + – NE + – O
b. – NE – NE + – O
c. + NE + + NE + NE
d. – NE – NE + – NE
e. +/– NE + + NE + I
(Net +)
f. +/– NE NE NE NE NE O
g. – NE – NE + – NE
h. – – NE NE NE NE F
i. + NE + + NE + O
j. +/– + NE NE NE NE I
(Net +)
k. – – NE NE NE NE O
l. + NE + NE NE NE F
m. – NE – NE + – O

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AP3–4.

Req. 1 and 2
Cash Accounts Receivable Supplies
Beg. 0 31,000 (b) Beg. 0 Beg. 0
(a) 60,000 1,240 (g) (c) 35,260 10,000 (i) (a) 12,000
(d) 13,200 2,700 (h) (f) 3,810
(e) 2,400 6,000 (j)
(i) 10,000 3,600 (k)
500 (m)
40,560 25,260 15,810

Prepaid Insurance Land Barns

Beg. 0 Beg. 0 Beg. 0
(k) 3,600 (a) 90,000 (a)100,000
(b) 62,000
3,600 90,000 162,000

Long-Term
Accounts Payable Unearned Revenue Note Payable
0 0 Beg. 0
(h) 2,700 Beg. 2,400 (e) Beg.
3,810 (f) 31,000 (b)
1,800 (l)
2,910 2,400 31,000

Common Additional Paid-in Retained

Stock Capital Earnings
0 Beg. 0 0 Beg.
150 (a) Beg. (m) 500
261,850 (a) 500
150 261,850

Animal Care Rental

Service Revenue Revenue
0 Beg. 0
35,260 (c) Beg.
13,200 (d)
35,260 13,200

Utilities Expense Wages Expense

Beg. 0 Beg. 0
(g) 1,240 (j) 6,000
(l) 1,800
3,040 6,000
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AP3–4. (continued)

Req. 3

ALPINE STABLES, INC.

Income Statement (unadjusted)
For the Month Ended April 30, 2023

Revenues:
Animal care service revenue $ 35,260
Rental revenue 13,200
Total revenues 48,460

Expenses:
Wages expense 6,000
Utilities expense 3,040
Total expenses 9,040
Net Income $ 39,420

Req. 4

Date: (today’s date)

To: Shareholders of Alpine Stables, Inc.
From: (your name)

After analyzing the effects of transactions for Alpine Stables, Inc., for April, the
company has realized a profit of $39,420. This is 81% of total revenues. However, this is
based on unadjusted amounts. There are several additional expenses that will decrease
the net income amount. These include depreciation for use of the barns, used supplies,
used insurance, incurred interest not yet paid, and incurred wages not yet paid. Therefore,
the company appears to have earned a small profit in its first month. It would be useful to
prepare a budget of income and of cash flows each month for the upcoming year to decide
whether the positive income and cash flows are likely to continue in the future.

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AP3–4. (continued)

Req. 5

Net ÷ Net Sales (or = Net Profit Margin

Income Operating) Revenue Ratio
2025 $50,000 $450,000 0.1111 or 11.11%
2024 30,000 400,000 0.0750 or 7.5%
2023 (10,000) 360,000 (0.0278) or (2.78%)

Under your management, the net profit margin ratio appears to be increasing over time.
This suggests that management is more effective over time at generating revenues and/or
controlling expenses. In addition, with the new facilities, revenues should increase in the
future. However, expenses should also increase. As long as the increase in expenses is
proportional to the increase in revenues, the net profit margin ratio should remain around
11%. Based on this rationale, you should be promoted.

AP3–5.

Operating, Investing, or Direction and Amount

Transaction Financing Cash Flows of the Effect
(a) F +60,000
(b) I -31,000
(c) NE NE
(d) O +13,200
(e) O +2,400
(f) NE NE
(g) O -1,240
(h) O -2,700
(i) O +10,000
(j) O -6,000
(k) O -3,600
(l) NE NE
(m) F -500

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AP3–6.

Req. 1 (in millions)

Debit Credit
(a) Property and equipment (+A) 1,610
Accounts payable (+L) 1,610

(b) Cash (+A) 3,100

Accounts receivable (–A) 3,100

(c) Utilities expense (+E, –SE) 3

Cash (–A) 3

(d) Accounts receivable (+A) 39,780

Sales revenue (+R, +SE) 39,780

(e) Cost of sales (+E, –SE) 5,984

Inventories (–A) 5,984

(f) Wages expense (+E, –SE) 1,238

Cash (-A) 1,238

(g) Income taxes payable (–L) [3/4 x $1,580] 1,185

Cash (–A) 1,185

(h) Inventories (+A) 23

Accounts payable (+L) 23

(i) Prepaid expenses (+A) 82

Cash (–A) 82

(j) Other long-term debt (–L) 10

Interest expense (+E, –SE) 1
Cash (–A) 11

(k) Other assets and intangibles (+A) 6

Cash (–A) 6

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AP3–6. (continued)
Req. 2 (in millions)
Cash Short-Term Investments Accounts Receivable
Beg. 3,089 3 (c) Beg. 985 Beg. 26,966
(b) 3,100 1,238 (f) (d) 39,780 3,100 (b)
1,185 (g)
82 (i)
11 (j)
6 (k)
3,664 985 63,646
Inventories Prepaid Expenses Other Current Assets
Beg. 18,528 Beg. 484 Beg. 1,469
(h) 23 5,984 (e) (i) 82
12,567 566 1,469
Property & Other Assets and
Long-Term Investments Equipment (net) Intangibles
Beg. 43,164 Beg. Beg. 16,363
253,018 (k) 6
(a) 1,610
43,164 254,628 16,369
Accounts Income Taxes Short-Term
Payable Payable Notes Payable
41,831 1,580 Beg. 20,578
Beg. (g) 1,185 Beg.
1,610 (a)
23 (h)
43,464 395 20,578
Long-Term Other Common
Notes Payable Long-Term Debt Stock
26,342 21,416 Beg. 15,637
Beg. (j) 10 Beg.

26,342 21,406 15,637

Retained Earnings Sales Revenue Cost of Sales
421,341 ` 0 Beg. 0
Beg. Beg.
39,780 (d) (e) 5,984
421,341 39,780 5,984
Utilities Expense Interest Expense Wages Expense
Beg. 0 Beg. 0 Beg. 0
(c) 3 (j) 1 (f) 1,238
3 1 1,238
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AP3–6. (continued)

Req. 3

Exxon Mobil Corporation

Income Statement (unadjusted)
For the Month Ended January 31
(in millions)

Revenues:
Sales revenue $39,780

Expenses:
Cost of sales 5,984
Wages expense 1,238
Utilities expense 3
Total expenses 7,225
Operating income 32,555

Other Items:
Interest expense 1
Net Income $32,554

Req. 4

Net Income = $32,554

= 0.8184 or 81.84%
Net Sales (or Operating) $39,780
Revenue

The net profit margin ratio suggests that the company had nearly $0.82 in net income
for each $1 of sales revenue. This is high, primarily because the accounts are
unadjusted. Many additional expenses have yet to be recorded, such as the using of
property, plant, and equipment. The actual net profit margin for ExxonMobil based on
information reported in its recent annual report was 8.5%, not nearly 82% as determined
above.

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AP3–7.

(in thousands)
Debit Credit
(a) Cash (+A) 641,042
Admissions revenue (+R, +SE) 641,042

(b) Long-term notes payable (–L) 49,800

Cash (–A) 49,800

(c) Equipment (+A) 98,290

Cash (–A) 98,290

(d) Cash (+A) 88,605

Accounts receivable (+A) 1,589
Accommodations revenue (+R, +SE) 90,194

(e) Wages expenses (+E, –SE) 469,416

Cash (–A) 437,630
Wages payable (+L) 31,786

(f) Cash (+A) 401,693

Sales revenue (+R, +SE) 401,693

(g) Cost of goods sold (+E, –SE) 101,057

Inventory (–A) 101,057

(h) Interest expense (+E, –SE) 171,326

Cash (–A) 171,326

(i) Inventory (+A) 161,031

Cash (–A) 130,231
Accounts payable (+L) 30,800

(j) Accounts payable (–L) 13,400

Cash (–A) 13,400

(k) Advertising expenses (+E, –SE) 153,926

Cash (–A) 143,944
Accounts payable (+L) 9,982

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AP3–8.

Operating, Investing, or Direction and Amount

Transaction Financing Cash Flows of the Effect (in thousands)
(a) O +641,042
(b) F –49,800
(c) I –98,290
(d) O +88,605
(e) O –437,630
(f) O +401,693
(g) NE NE
(h) O –171,326
(i) O –130,231
(j) O –13,400
(k) O –143,944

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CONTINUING PROBLEM

CON3–1.

Req. 1

(a) Advertising expense (+E, −SE) ............................................ 2,600

Cash (−A) .................................................................. 2,600

(b) Cash (+A).............................................................................. 16,000

Accounts receivable (+A) ...................................................... 3,200
Pool cleaning revenue (+R, +SE) ............................... 19,200

(c) Accounts payable (−L) ......................................................... 10,600

Cash (−A) .................................................................. 10,600

(d) Cash (+A) ............................................................................. 10,000

Unearned revenue (+L) .............................................. 10,000

(e) Wages payable (−L) ............................................................. 1,500

Wages expense (+E, −SE ) .................................................. 3,000
Cash (−A) ................................................................... 4,500

(f) Repairs expense (+E, −SE) ................................................. 310

Cash (−A) ................................................................... 310

(g) Utilities expense (+E, −SE) .................................................. 220

Cash (−A) ................................................................... 220

(h) Cash (+A) ............................................................................. 75

Interest revenue (+R, +SE) ....................................... 75

(i) Property tax expense (+E, −SE) .......................................... 600

Property taxes payable (+L) ...................................... 600

(j) Prepaid expenses (+A) ........................................................ 2,400

Cash (−A) .................................................................. 2,400

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CON3–1. (continued)

Req. 2
Penny’s Pool Service & Supply, Inc.
Income Statement (unadjusted)
For the Quarter Ended September 30

Pool cleaning revenue $19,200

Operating expenses:
Advertising expense 2,600
Wages expense 3,000
Repairs expense 310
Utilities expense 220
Property tax expense 600
Total operating expenses 6,730

Income from operations 12,470

Other items:
Interest revenue 75
Net income* $12,545

* This is actually income before taxes, since income tax expense has not
yet been determined.

Req. 3

Income before Operating Net Profit Margin

÷ =
Taxes Revenue Ratio
Quarter
ended 9/30 $12,545 $19,200 0.653 or 65.3%

PPSS’s net profit margin ratio suggests that the company received approximately $0.65
for every dollar of revenue. The company appears to be very effective at generating
revenues and controlling expenses.

However, the ratio is very high because there are several adjustments that have not yet
been recorded. These would include primarily expenses, such as for the use of
buildings and equipment, interest on any borrowings, the use of insurance during the
quarter, additional wages of the receptionist not yet paid by the end of the quarter, and
income taxes incurred but to be paid next quarter.

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COMPREHENSIVE PROBLEM (Chapters 1 - 3)
COMP3-1

Req. 1
Debit Credit
a. Cash (+A) [200 shares x $40 market per share] 8,000
Common stock (+SE) [200 shares x $0.01 par] 2
Additional paid-in capital (+SE) [difference] 7,998

b. Cash (+A) 20,000

Long-term note payable (+L) 20,000

c. Rent expense (+E, −SE) 600

Prepaid expenses (+A) 1,800
Cash (−A) 2,400

d. Equipment (+A) 15,200

Cash (−A) 3,040
Accounts payable (+L) 12,160

e. No transaction (no exchange until the items are

received)

f. Short-term note receivable (+A) 1,000

Cash (−A) 1,000

g. Supplies (+A) 2,600

Accounts payable (+L) 2,600

h. Prepaid expenses (+A) 2,000

Cash (−A) 2,000

i. Insurance expense (+E, −SE) 200

Prepaid expenses (+A) 2,200
Cash (−A) 2,400

j. Short-term investments (+A) 10,000

Cash (−A) 10,000

k. Cash (+A) 21,000

Accounts receivable (+A) 21,000
Service revenue (+R, +SE) 42,000

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COMP3–1. (continued)

Debit Credit
l. Wages expense (+E, −SE) 18,000
Cash (−A) 18,000

m. Utilities expense (+E, −SE) 310

Utilities payable (+L) 310

n. Long-term note payable (−L) 1,500

Cash (−A) 1,500

o. Cash (+A) 35
Interest revenue (+R, +SE) 35

p. Training expense (+E, −SE) 2,100

Cash (−A) 2,100

q. Cash (+A) 1,400

Unearned revenue (+L) 1,400

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COMP3–1. (continued)
Req. 2
Cash Short-Term Investments Accounts Receivable
Beg. 0 Beg. 0 Beg. 0
(a) 8,000 2,400 (c) (j) 10,000 (k) 21,000
(b) 20,000 3,040 (d) 10,000 21,000
(k) 21,000 1,000 (f)
(o) 35 2,000 (h)
(q) 1,400 2,400 (i) Supplies Prepaid Expenses
10,000 (j) Beg. 0 Beg. 0
18,000 (l) (g) 2,600 (c) 1,800
1,500 (n) (h) 2,000
2,100 (p) (i) 2,200
7,995 2,600 6,000
Note Receivable Equipment Accounts Payable
Beg. 0 Beg. 0 Beg
(f) 1,000 0 12,160 (d)
(d) 15,200
2,600 (g)
1,000 15,200 14,760
Utilities Unearned Long-Term Note
Payable Revenue Payable
0 Beg. 0 Beg. 0 Beg.
310 (m) 1,400 (q) (n) 1,500 20,000 (b)
310 1,400 18,500
Common Additional Paid-in Retained
Stock Capital Earnings
0 Beg. 0 Beg. 0 Beg.
2 (a) 7,998 (a)
2 7,998 0
Service Revenue Interest Revenue Wages Expense
0 Beg. 0 Beg. Beg. 0
42,000 (k) 35 (o) (l) 18,000
42,000 35 18,000
Training Expense Insurance Expense Rent Expense
Beg. 0 Beg. 0 Beg. 0
(p) 2,100 (i) 200 (c) 600
2,100 200 600
Utilities Expense
Beg. 0
(m) 310
310
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COMP3–1. (continued)

Req. 3
IthacaDeep, Inc.
Unadjusted Trial Balance
April 30
Debit Credit
Cash 7,995
Short-term investments 10,000
Accounts receivable 21,000
Supplies 2,600
Prepaid expenses 6,000
Short-term note receivable 1,000
Equipment 15,200
Accounts payable 14,760
Utilities payable 310
Unearned revenue 1,400
Long-term note payable 18,500
Common stock 2
Additional paid-in capital 7,998
Retained earnings 0
Service revenue 42,000
Interest revenue 35
Wages expense 18,000
Training expense 2,100
Insurance expense 200
Rent expense 600
Utilities expense 310
Total 85,005 85,005

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COMP3–1. (continued)

Req. 4

IthacaDeep, Inc.
Unadjusted Income Statement
For the Month Ended April 30
Service revenue $42,000
Total operating revenues 42,000
Operating expenses:
Wages expense 18,000
Training expense 2,100
Insurance expense 200
Rent expense 600
Utilities expense 310
Total operating expenses 21,210
Income from operations 20,790
Other items:
Interest revenue 35
Income before income taxes 20,825
Income tax expense 0
Net income $20,825

Earnings per share ($20,825 ÷ 200 shares) $104.13

IthacaDeep, Inc.
Statement of Stockholders’ Equity
For the Month Ended April 30
Common Additional Retained Total
Stock Paid-in Capital Earnings Stockholders’ Equity
Balances, April 1 $ 0 $ 0 $ 0 $ 0
Issue stock 2 7,998 8,000
Net income 20,825 20,825
Balances, April 30 $ 2 $7,998 $20,825 $28,825

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COMP3–1. (continued)
Req. 4 (continued)

IthacaDeep, Inc.
Balance Sheet
April 30
Assets
Current assets:
Cash $
7,995
Short-term investments 10,000
Accounts receivable 21,000
Supplies 2,600
Prepaid expenses 6,000
Note receivable 1,000
Total current assets 48,595
Equipment 15,200

Total assets $63,795

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $14,760
Utilities payable 310
Unearned revenue 1,400
Total current liabilities 16,470
Long-term note payable 18,500
Total liabilities 34,970
Stockholders’ Equity:
Common stock ($0.05 par value) 2
Additional paid-in capital 7,998
Retained earnings 20,825
Total stockholders’ equity 28,825
Total liabilities and stockholders’ equity $63,795

Req. 5
Current ratio = Current assets ÷ Current liabilities
= $48,595 ÷ $16,470 = 2.95
Net profit margin = Net income ÷ Net sales (Operating revenues)
= $20,825 ÷ $42,000 = 0.50

IthacaDeep has a strong current ratio and is able to pay off short-term obligations with
current assets. Likewise, the company earns $0.50 on every dollar of service revenue.
Of course, these ratios are based on unadjusted numbers.
Financial Accounting, 11/e 3-65
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CASES AND PROJECTS
CP3–1.

1. b.
2. c.
3. d.
4. a.
5. c.

CP3-2. (dollars in millions)

1. $13,706
2. $6,858
3. 2.45%
4. $6,116
5. b.

CP3-3.

1. Target’s percentage change in total revenues = 0.198 increase

Walmart’s percentage change in total revenues = 0.067 increase

2. January 30, 2021 Target = 0.047 January 31, 2021 Walmart = 0.025
February 1, 2020 Target = 0.042 January 31, 2020 Walmart = 0.029

3. b.
4. d.
5. c.

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 CP3-4.

Req. 1

Net profit margin ratio:

FY FY FY FY FY
Ending ending ending ending ending
1/29/2021 1/31/2020 2/1/2019 2/2/2018 2/3/2017
Net income $2,655.1 $1,712.6 $1,589.5 $1,539.0 $1,251.1
Net sales $33,746.8 $27,754.0 $26,625.0 $23,471.0 $21,986.6
NPM ratio = 0.079 = 0.062 = 0.062 = 0.066 = 0.057

Req. 2

For the first four years, the net profit margin was fairly stable around 0.060, suggesting
that Dollar General earned on average about $0.60 for every dollar of sales. Dollar
General’s management was effective at generating revenues and controlling costs to
maintain earnings stability over time.
However, for the fiscal year ending on January 29, 2021, the net profit margin jumped to
0.079 – an increase over the previous year of over 27% – as a result of the significant
increase in customer demand for many products due to the COVID-19 pandemic. The
shift in consumer demand for products and consumer behavior toward fewer trips to the
store, but for more items, may or may not continue into the future, causing the net profit
margin to fluctuate perhaps closer to historic levels near 0.060.

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CRITICAL THINKING CASES

CP3–5.

Req. 1

Estela used the cash basis of accounting. We can infer this from his references to income
collected rather than earned, expenses paid rather than incurred, and supplies purchased
rather than used. Accrual accounting should be adopted because it correctly assigns
revenues and expenses to the accounting period in which they are earned or incurred.

Req. 2

(a) Building (+A) ........................................................................ 21,000

Tools and equipment (+A) .................................................... 17,000
Land (+A) ............................................................................. 20,000
Cash (+A) ............................................................................. 1,000
Common stock (+SE) [1,000 shares x $1 par value] .. 1,000
Additional paid-in capital (+SE) [difference] ............... 58,000

(b) Cash (+A).............................................................................. 55,000

Accounts receivable (+A) ...................................................... 52,000
Unearned revenue (+L) .............................................. 20,000
Service fees revenue (+R, +SE) ................................ 87,000

(c) No entry (the stock is not owned by the company)

(d) Operating expenses (+E, −SE) ............................................ 61,000

Accounts payable (+L) ............................................... 39,000
Cash (−A) ................................................................... 22,000

(e) Supplies expense (+E, −SE)* ............................................... 2,500

Supplies (+A) ....................................................................... 700
Cash (−A) ................................................................... 3,200

(f) Loss from theft (+E, −SE) ..................................................... 500

Cash (−A) ................................................................... 500

(g) Tools and equipment (+A) .................................................... 1,000

Cash (−A) ................................................................... 1,000

* Supplies purchased, $3,200 − Supplies on hand at end of current year, $700 = $2,500
supplies used

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CP3–5. (continued)

Req. 2 (continued)

ASSETS:
Cash Accounts Receivable Supplies
Beg. 0 Beg. 0 Beg. 0
(a) 1,000 22,000 (d) (b) 52,000 (e) 700
(b) 55,000 3,200 (e)
500 (f)
1,000 (g)
29,300 52,000 700

Building Land Tools and Equipment

Beg. 0 Beg. 0 Beg. 0
(a) 21,000 (a) 20,000 (a) 17,000
(g) 1,000

21,000 20,000 18,000

LIABILITIES:
Accounts Payable Unearned Revenue
0 Beg. 0 Beg.
39,000 (d) 20,000 (b)
39,000 20,000

SHAREHOLDER’S EQUITY:
Common Additional Paid-in Retained
Stock Capital Earnings
0 Beg. 0 Beg. 0 Beg.
1,000 (a) 58,000 (a)
1,000 58,000 0

REVENUES AND EXPENSES:

Service Fees Revenue Operating Expenses Supplies Expense
0 Beg. Beg. 0 Beg. 0
87,000 (b) (d) 61,000 (e) 2,500
87,000 61,000 2,500

Loss from Theft

Beg. 0
(f) 500
500

Financial Accounting, 11/e 3-69

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CP3–5. (continued)

Req. 3

ESTELA COMPANY
(1) Income Statement
(2) For the Year Ended December 31

(3) Revenues:
(4) Service fees revenue $ 87,000
(5) [see note]
(6) Expenses:
(7) Operating expenses 61,000
(8) Supplies expense 2,500
(9) Loss from theft 500
(10) Total expenses 64,000
(11) Net Income $ 23,000

(1) Use the standard title.

(2) Date to indicate time period covered.
(3) Use appropriate title.
(4) Use accrual figure -- revenue earned, rather than cash collected.
(5) Exclude the dividends because the stock is owned by Julio and not the
company -- apply the separate entity assumption.
(6) Use appropriate title.
(7) Use accrual figure -- expenses incurred, not cash paid.
(8) Expense is supplies used, $2,500; the $700 is still an asset until used.
(9) Stolen property should be recorded as a loss for the amount not covered by
insurance.
(10) Use appropriate caption.
(11) Use standard terminology.

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CP3–5. (continued)

Req. 3 (continued)

Common Additional Retained Total Stockholder’s

Stock Paid-in Earnings Equity
Capital
Beginning balance $ 0 $ 0 $ 0 $ 0
Stock issuance 1,000 58,000 59,000
Net income 23,000 23,000
Ending balance $1,000 $58,000 $23,000 $82,000

ESTELA COMPANY
Balance Sheet
At December 31
ASSETS
Current Assets:
Cash $ 29,300
Accounts receivable 52,000
Supplies 700
Total current assets 82,000
Building 21,000
Land 20,000
Tools and equipment 18,000
Total assets $141,000

LIABILITIES AND STOCKHOLDER’S EQUITY

Current Liabilities:
Accounts payable $ 39,000
Unearned revenue 20,000
Total current liabilities 59,000
Stockholder’s Equity:
Common stock 1,000
Additional paid-in capital 58,000
Retained earnings 23,000
Total stockholder’s equity 82,000
Total liabilities and stockholder’s equity $141,000

Financial Accounting, 11/e 3-71

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 CP3–5. (continued)

Req. 4

The revised income statement does not yet take into account most year-end
adjustments, including depreciation and income taxes. The adjusting entry for
income taxes is especially important because of the implication for future cash
flows.

The revised statements also report the building, land, and tools and equipment
originally contributed in exchange for shares in the new company at their market
value at the time of the exchange (historical cost principle). Their current market
value at year-end is more relevant to a loan decision. Current market values for the
building and land are provided ($32,000 and $30,000, respectively), but the current
value of the tools and equipment is also needed.

The stock in ABC Industrial is owned by Julio and not the company. However, it
may be used as collateral if Julio is willing to sign an agreement pledging personal
assets as collateral for the loan. This is a common requirement for small start-up
businesses. Other personal assets of Julio’s could also be considered for
collateral.

Lastly, pro forma financial statements (or budgets) outlining the expected revenues,
expenses, and cash flows from the expanded business would be helpful to gauge
its viability.

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CP3–5. (continued)

Req. 5

(today’s date)

Dear Mr. Estela:

We regret to inform you that your request for a $100,000 loan has been denied.

Your current business appears profitable and appears to generate sufficient cash to
maintain operations, even once additional expenses, such as income taxes, are
considered. However, pro forma financial statements (or budgets) outlining the
expected revenues, expenses, and cash flows from the expanded business would
be needed to gauge its future viability.

We also require that there be sufficient collateral pledged against the loan before we
can consider it. A loan of this size would increase your company’s size by over 70%
of its current asset base. The current market value of the building and land held by
the company are insufficient as collateral. The current value of the tools and
equipment may provide additional collateral, if you provide us with this information.
Your personal investments may also be considered viable collateral if you are willing
to sign an agreement pledging these assets as collateral for the loan. This is a
common requirement for small start-up businesses.

If you would like us to reconsider your application, please provide us with the pro
forma financial statements and with the current market values of any assets you
would pledge as collateral.

Regards,
(your name)

Loan Application Department,

Your Bank

Financial Accounting, 11/e 3-73

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CP3–6.

Req. 1

This type of ethical dilemma occurs quite frequently. The situation is difficult personally
because of the possible repercussions to you by your boss, Mr. Lynch, if you do not meet
his request. At the same time, the ethical and professional response is to follow the
revenue recognition rule and account for the cash collection as unearned revenue (as
was done). To record the collection as revenue overstates income in the current period.

Req. 2

In the short run, Mr. Lynch would benefit by receiving a larger bonus. You also
benefit in the short run because you would not experience any negative repercussions
from your boss. However, there is the risk that sometime in the future, perhaps through
an audit, the error will be found. At that point, both you and Mr. Lynch could be implicated
in a fraud. In addition, this may be the first instance where you are being asked to account
for a transaction in violation of accepted principles or company policies. There is a very
strong possibility Mr. Lynch may ask you for additional favors in the future if you
demonstrate your willingness at this point.

Req. 3

In the larger picture, shareholders are harmed by the misleading income figures
by relying on them to purchase stock at inflated prices. In addition, creditors may lend
funds to the insurance company based on the misleading information. The negative
impact of the discovery of misleading financial information will cause stock prices to fall,
causing shareholders to lose on their investment. Creditors will be concerned about
future debt repayment. You will also experience diminished self-respect because of the
violation of your integrity.

Req. 4

Managers are agents for shareholders. To act in ways to the benefit of the
manager at the detriment of the shareholders is inappropriate. Therefore, the ethically
correct response is to fail to comply with Mr. Lynch's request. Explaining your position to
Mr. Lynch will not be easy. You may want to express that you understand the reason for
his request, but cannot ethically or professionally comply.

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YOU AS ANALYST: ONLINE COMPANY RESEARCH

CP3–7.

The solution to this project will depend on the company(ies) and/or accounting periods
selected for analysis.

BUSINESS ANALYTICS AND DATA VISUALIZATION IN EXCEL AND

TABLEAU

The solutions to these exercises are auto-graded on Connect, as assigned by the

instructor.

Financial Accounting, 11/e 3-75

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