Michael Pirone

Problem 1 (10 Points)

Indicate in the space provided by each item whether it would appear on the income statement
(IS), balance sheet (BS), or retained earnings statement (RE):
a. IS____ Advertising Expense g. BS_ Accounts Receivable

b. IS____ Utilities Expense h. RE_ Common Stock

c. BS___ Cash i. BS_ Equipment

d. BS___ Accounts Payable j. IS _ Service Revenue

e. BS___ Supplies k. RE_ Dividends

f. IS____ Salaries and Wages Expense l. BS_ Notes Payable

Problem 2 (10 Points)

For the items listed below, fill in the appropriate code letter to indicate whether the item is an
asset, liability, or stockholders’ equity item.
Code
Asset A
Liability L
Stockholders’ Equity SE

SE____ 1. Rent Expense A_____ 6. Cash

A_____ 2. Equipment A_____ 7. Accounts Receivable

L_____ 3. Accounts Payable SE____ 8. Retained Earnings

SE____ 4. Common Stock SE____ 9. Service Revenue

SE____ 5. Insurance Expense L_____10. Notes Payable

Problem 3 (3 Points)

Compute the missing amount in each category of the accounting equation. You MUST show
your work.

Assets Liabilities Stockholders’ Equity

Assets = Liabilities + Stockholders’ Equity

(a) $245,000 $145,000 $ 100,000

245,000 = Liabilities + 100,000

245,000 – 100,000 = Liabilities
Liabilities = 145,000

(b) $185,000 $ 80,000 $105,000

185,000 = 80,000 + Stockholders’ Equity

185,000 – 80000 = Stockholders’ Equity
Stockholders’ Equity = 105,000

(c) $ 430,000 $210,000 $220,000

Assets = 210,000 + 220,000

Assets = 430,000
Problem 4 (10 Points)

Match the items below by entering the appropriate code letter in the space provided.

A. Internal users F. Corporation

B. Management discussion and analysis G. Assets
C. Annual report H. Liabilities
D. Sole proprietorship I. Expenses
E. Dividends J. Investing activities

D____ 1. Ownership is limited to one person.

I____ 2. Consumed assets or services.

E____ 3. Distributions of cash from a corporation to its stockholders.

A____ 4. Officers and others who manage the business.

H____ 5. Creditor claims against the assets of the business.

J____ 6. Involves acquiring the resources necessary to run the business.

C____ 7. A report prepared by management that presents financial information.

B____ 8. A section of the annual report that presents management’s views.

G____ 9. Future economic benefits.

F____ 10. A separate legal entity under state laws.

Problem 5 (10 Points)
The following lettered items represent a classification scheme for a balance sheet, and
the numbered items represent data found on balance sheets. In the blank next to each
account, write the letter indicating to which category it belongs.

A. Current assets
B. Investments
C. Property, plant, and equipment
D. Intangible assets
E. Current liabilities
F. Long-term liabilities
G. Stockholders’ equity
H. Not on the balance sheet

C------ 1. Equipment H--------6. Sales revenue

G_____2. Common stock D_____7. Patents

A_____3. Inventory A_____8. Prepaid insurance

E_____4. Accounts payable F_____9. Mortgage payable

G--------_5. Retained earnings C-------10. Land (held for investment)

Problem 6 (15 Points)

The following information is available for The Eagles Company for the year ended December
31, 2020:

Accounts payable 7,000

Stock investments (long-term) 9,400
Accumulated depreciation, building 6,000
Retained earnings 18,000
Common stock 4,800
Intangible assets 2,500
Notes payable (due in 5 years) 103,000
Accounts receivable 2,800
Cash 2,600
Debt investments (short-term) 3,000
Land 12,000
Building 106,500

Instructions
Use the above information to prepare a classified balance sheet for the year ended December
31, 2020.
 The Eagles Company
Balance Sheet
December 31, 2020

Current Assets
Cash 2,600
Debt investments (short-term) 3,000
Accounts Receivable 2,800
Total Current Assets 8,400

Long-term Investments
Stock investments (long-term) 9,400

Plant, Property & Equipment

Land 12,000
Building 106,500
Less: Accumulated Depreciation, building ( 6,000)
100,500
Total Plant, Property & Equipment 112,500

Other Assets
Intangible assets 2,500

Total Assets 132,800

Current Liabilities
Accounts payable 7,000

Long-term Liabilities
Notes payable (due in 5 years) 103,000

Total Liabilities 110,000

Stockholders’ Equity
Common Stock 4,800
Retained Earnings 18,000
Total Stockholder’s Equity 22,800

Total Liabilities & Stockholders’ Equity 132,800

Problem 7 (10 Points)
Pink Floyd decides to open a pizza parlor near the local college campus that will operate as a
corporation. Analyze the following transactions for the month of June in terms of their effect on
the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the
dollar amount of each item affected. Indicate the new balance of each item after a transaction is
recorded. It is not necessary to identify the cause of changes in stockholders’ equity.
Transactions
(1) Pink Floyd invests $25,000 cash in exchange for common stock to start a pizza parlor
business on June 1.
(2) Purchased equipment for $4,000 paying $2,000 in cash and the remainder due in 30
days.
(3) Purchased supplies for $1,200 cash.
(4) Received a bill from Campus News for $200 for advertising in the campus newspaper.
(5) Cash receipts from customers for pizza sales amounted to $1,500.
(6) Paid salaries of $200 to employees.
(7) Billed the Tiger Football Team $300 for pizzas ordered.
(8) Paid $200 to Campus News for advertising that was previously billed in Transaction 4.
(9) Pink Floyd was paid dividends of $1,200.
(10) Incurred utility expenses for month on account, $100.

Trans- Accounts Accounts Common Retained

action Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings
(1)
25,000 25,000
Balance 25,000 + 0 + 0 + 0 = 0 + 25,000 + 0
(2)
-2,000 4,000 2,000

Balance 23,000 + 0 + 0 + 4,000 = 2,000 + 25,000 + 0

(3)
-1,200 1,200
Balance 21,800 + 0 + 1,200 + 4,000 = 2,000 + 25,000 + 0
(4)
200 -200
Balance 21,800 + 0 + 1,200 + 4,000 = 2,200 + 25,000 + -200
(5)
1,500 1,500
Balance 23,300 + 0 + 1,200 + 4,000 = 2,200 + 25,000 + 1,300
(6)
-200 -200
Balance 23,100 + 0 + 1,200 + 4,000 = 2,200 + 25,000 + 1,100
(7)
300 300
Balance 23,100 + 300 + 1,200 + 4,000 = 2,200 + 25,000 + 1,400
(8)
-200 -200
Balance 22,900 + 300 + 1,200 + 4,000 = 2,000 + 25,000 + 1,400
(9)
-1,200 -1,200
Balance 21,700 + 300 + 1,200 + 4,000 = 2,000 + 25,000 + 200
(10)
100 -100
Totals
 21,700 + 300 + 1,200 + 4,000 = 2,100 + 25,000 + 100

Problem 8 (10 Points)

Use the following data to calculate the liquidity and profitability ratios listed below.

Average common shares outstanding 20,000 Current liabilities $120,000

Capital expenditures $20,000 Net income 40,000
Cash provided by operating activities 42,000 Net sales 160,000
Dividends paid to common stockholders 7,000 Total liabilities 145,000
Current assets 220,000 Total assets 380,000

Instructions
Compute the following:
(a) Current ratio. (d) Debt to assets ratio.
(b) Working capital. (e) Free cash flow.
(c) Earnings per share.

(a) 220,000 / 120,000 = 1.83

(b) 220,000 – 120,000 = 100,000
(c) 40,000 / 20,000 = $2.00 per share
(d) 145,000 / 380,000 = 0.38
(e) 42,000 – 20,000 = 22,000
a.
Problem 9 (20 Points)

The following items are taken from the financial statements of Grove Company for 2020:
Accounts payable $18,500
Accounts receivable 8,000
Accumulated depreciation-equipment 4,800
Bonds payable 18,000
Cash 24,000
Common stock 25,000
Cost of goods sold 27,000
Depreciation expense 4,800
Dividends 5,300
Equipment 44,000
Interest expense 2,500
Patents 7,500
Retained earnings, January 1 20,000
Salaries and wages expense 5,200
Sales revenue 50,500
Supplies 4,500

Instructions

(a) Prepare an income statement and a retained earnings statement for Grove
Company.

Grove Company
Income Statement
For the Year Ended December 31, 2020

Revenues
Sales revenue 50,500

Expenses
Cost of goods sold 27,000
Salaries and wages expense 5.200
Interest expense 2,500
Depreciation expense 4.800
Total Expenses 39,500

Net Income 11,000

Grove Company
Statement of Retained Earnings
December 31, 2020

Retained earnings, January 1 20,000

Add: Net Income 11,000
Less: Dividends ( 5,300)
Retained earnings, December 31 25,700
Problem 10 (10 Points)

Presented here are five economic events. For each item, indicate whether the event increased
(+), decreased (–), or had no effect (NE) on assets, liabilities, and stockholders’ equity.

Stockholders’
Assets = Liabilities + Equity

1. Received cash for services rendered. +_______ NE_____ +_______

2. Purchased supplies on account. +_______ +_______ NE_____

3. Paid employees' salaries. -_______ NE_____ -_______

4. Dividends paid in cash. -________ NE______ -________

5. Billed a customer for services rendered. +_______ NE_____ +_______

Problem 11 (10 Points)

For each of the following transactions of Woods Inc., identify the accounts effected and the
whether they were increased or decreased.

1. Purchased supplies for cash.

2. Billed a customer for services rendered.
3. Paid monthly rent.
4. Received a bill for advertisement to be paid at a later date.
Transaction Accounts Increase/Decrease

1
Supplies Increase
Cash Decrease

2
Accounts Receivable Increase
Sales Revenue Increase

3
Cash Decrease
Rent Expense Increase

4
Accounts Payable Increase
Advertising Expense Increase
Problem 12 (10 Points)

Analyze the transactions of a business organized as a corporation described below and indicate
their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a
minus sign (–) to indicate a decrease.
Stockholders’
Assets = Liabilities + Equity

1. Received cash for services rendered. +_______ NE_____ +_______

2. Purchased office equipment on credit. +_______ +_______ NE_____

3. Paid employees' salaries. -_______ NE_____ -_______

4. Received cash from customer in payment

on account. NE_____ NE_____ NE_____

5. Paid telephone bill for the month. -_______ NE_____ -_______

6. Paid for office equipment purchased in

transaction 2. -_______ -_______ NE_____

7. Purchased office supplies on credit. +_______ -_______ NE_____

8. Paid dividends. -_______ NE_____ -_______

9. Obtained a loan from the bank. +_______ +_______ NE_____

10. Billed customers for services rendered. +_______ NE_____ +_______

Problem 13 (12 points)

. Match the items below by entering the appropriate code letter in the space provided.
A. Relevance G. Historical cost principle
B. Monetary unit assumption H. Fair value principle
C. Comparability I. Full disclosure principle
D. Consistency J. Cost constraint
E. Periodicity assumption K. Economic entity assumption
F. Going concern assumption L. Materiality

__J___1. Weighs the cost of providing information to financial statement users against the
benefits to be derived.
__D___2. Same accounting principles and methods used from year to year within a company.

__A___3. Information that has a bearing on a decision.

__K___4. Economic events can be identified with a particular unit of accountability.

__L___5. An item important enough to influence the decision of an investor or creditor.

__H___6. Report assets that are actively traded at their market price

__F___7. The belief that a company will remain in operation for the foreseeable future.

__E___8. The practice of preparing financial reports at regular intervals.

__I___ 9. Reporting all information that would influence financial statement users.

__C___10.Different companies using the same accounting principles.

__B___11.Reporting only those transactions that can be measured in dollars.

__G___12. The belief that assets should be reported at their purchase price
Problem 14 (20 Points)

Green Day Insurance Agency prepares monthly financial statements. Presented below is an
income statement for the month of June that is correct on the basis of information considered.

GREEN Day INSURANCE AGENCY

Income Statement
For the Month Ended June 30
Revenues
Service Revenue ......................................................................... $50,000
Expenses
Salaries and Wages Expense ...................................................... $12,000
Advertising Expense .................................................................... 800
Rent Expense .............................................................................. 4,200
Depreciation Expense ................................................................. 2,800
Total Expenses ............................................................................ 19,800
Net Income ........................................................................................... $30,200

Additional Data: When the income statement was prepared, the company accountant neglected
to take into consideration the following information:

1. A utility bill for $1,000 was received on the last day of the month for electric and gas service
for the month of June.
2. A company insurance salesperson sold a life insurance policy to a client for a premium of
$10,000. The agency billed the client for the policy and is entitled to a commission of 20%.
3. Supplies on hand at the beginning of the month were $2,000. The agency purchased
additional supplies during the month for $1,500 in cash and $1,000 of supplies were on
hand at June 30.
4. The agency purchased a new car at the beginning of the month for $48,000 cash. The car
will depreciate $6,000 per year.
5. Salaries owed to employees at the end of the month total $4,000. The salaries will be paid
on July 5.

Instructions:
Prepare a corrected income statement.
 GREEN Day INSURANCE AGENCY
Income Statement
For the Month Ended June 30
Revenues
Service Revenue ......................................................................... $52,000
Expenses
Supplies Expense …………………………………………………… $ 2,500
Salaries and Wages Expense ...................................................... 16,000
Advertising Expense .................................................................... 800
Utilities Expense ……………………………………………………… 1,000
Rent Expense .............................................................................. 4,200
Depreciation Expense ................................................................. 8,800
Total Expenses ............................................................................ 33,300
Net Income ........................................................................................... $18.700