Chapter 2 HW Solutions

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CHAPTER 2

Business ActivitiesThe Source of Accounting Information

THINKING BEYOND THE QUESTION

How do we know how well our business is doing?

Revenues are earned when goods are transferred or services are provid-ed to customers. In most cases, these events are associated with com-pletion of certain critical events, such as delivery of goods. Expenses areincurred when resources are consumed in the process of providing

goods and services. Therefore, a system that identifies when goods aretransferred, services are provided, and resources are consumed is impor-tant for identifying revenues and expenses.

Some resources are consumed when goods or services are transferred tocustomers: the cost of goods, supplies, and labor associated with partic-ular jobs. In other cases, the amount of resources consumed is measuredeach fiscal period: salaries and wages, utilities, rent, and insurance. De-pending on the type of resource consumed, identification of the cost ofthe resource associated with specific sales or identification of the cost ofthe resource associated with a fiscal period is an important event for

identifying expenses during a fiscal period.

QUESTIONS

Q2-1 Chapter 2 illustrates two sources of money for companiesloans andowner contributions. Chapter 1 discussed the three forms of businessorganizationsproprietorships, partnerships, and corporations. Tomaintain control, Joan probably would want to organize her business asa proprietorship. If she has enough money or other resources, she canborrow the rest of the capital she needs from a bank. If she does not have

enough money or other resources and cannot borrow as much as sheneeds, she may have to find one or more partners to help finance thebusiness. Because this is a small business, she is unlikely to want orneed to incorporate at this time or to issue bonds.

Q2-2 Major sources of financing for corporations are stocks and debt. Bankloans also are possible. Managers should consider how much stock orhow much debt they can incur, what amount of money they will receive

23


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24 Chapter 2

from the issuance, and whether they can repay debt as it becomes duefrom the profits they expect to earn.

Q2-3 From the corporations perspective, this event was a financing activity. Thecorporation raised capital (i.e., raised financing) by selling shares ofstock to Jerrilyn.

Q2-4 Assets = Liabilities + Equity. The question indicates that assets areaccurately reported. Therefore, if liabilities are understated, equity mustbe overstated. For example, assume assets, liabilities, and equity arecorrectly reported as $10,000, $3,000, and $7,000 respectively ($10,000 =$3,000 + $7,000). If liabilities are understated by $1,000, equity must beoverstated by $1,000 to make the accounting equation balance ($10,000 =$2,000 + $8,000).

Q2-5 Both liabilities and owners equity represent claims to a companysresources.

Q2-6 The accounting equation presents the relationship between resources andclaims to resources. Financial resources to acquire assets are obtainedfrom financing activities and from revenues earned by the company.When assets are consumed, expenses are created that reduce acompanys profits. The profits earned during a period increase ownersequity, as reported in retained earnings. The total amount of assets isequal to the total amount of liabilities and owners equity.

Q2-7 Purchasing merchandise inventory is an operating activity. The operatingactivities section of the cash flow statement reports cash from selling

goods and services and cash paid for expense-related activities.

Q2-8 Contributed capital represents claims to resources provided by theowners. Sales revenue represents owners claims to resources that wereearned and retained by the company.

Q2-9 No. Retained Earnings represents earnings kept in the business. Theseearnings are reinvested and may be included in various kinds of assets.Retained Earnings does not equal cash.

Q2-10 The possibilities will depend on the specific company selected andindustry in which it operates. Exhibit 12 in the text should give students agood start on this question.

Q2-11 The left side of a balance sheet reveals how an organizations managershave used investors capital. That is, what does the organization own?Or, what amount of capital has been committed to which assets? Theright side of a balance sheet reveals where the capital came from to


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Business ActivitiesThe Source of Accounting Information 25

acquire the assets listed on the left side. It reveals how much of theorganizations capital was provided by investors loaning money orextending credit (i.e., liabilities). It also reveals how much capital wasprovided by the owners contributions (invested capital) as well as howmuch capital has been provided by profitable operations of the company(retained earnings).

Q2-12 A balance sheet reports the assets, liabilities, and equity of anorganization. The income statement reports revenues and expenses. Thestatement of cash flows reports the net cash flows from operatingactivities, investing activities, and financing activities.

Q2-13 The accounting equation, Assets = Liabilities + Equity, illustrates thatassets are provided by creditors (liabilities) or by owners (equity). Thus,creditors and owners have claims on a companys assets.

Q2-14 The income statement provides information about how well a company has

performed during a period based on the operating activities for thatperiod. These activities may affect cash flows of prior or future periods.The income statement helps decision makers assess the long-runsuccess of a company.

The statement of cash flows describes the cash flows that resultedfrom current-period operating activities. It provides information about acompanys ability to pay current obligations. A company must generatesufficient cash to pay creditors, suppliers, employees, and other pro-viders of goods and services. Net income, as reported on the incomestatement, does not ensure short-run survival of a company.

Q2-15Most companies of size have hundreds or thousands of individualaccounts. A mere list of accounts and balances would overwhelm thereader with detail and be unlikely to convey any useful information.Accounts and balances are arranged into financial statements for thepurpose of conveying information quickly and conveniently. Similaraccounts are grouped, such as all revenues, all expenses, all assets, etc.Then, to provide further information, certain groups of accounts arearranged into financial statements. For example, revenues and expensesare matched on the income statement. Assets, liabilities, and equity aregrouped on the balance sheet. Account balances are summarized onfinancial statements because they yield more information in this form.

EXERCISES

E2-1 Definitions of all terms are listed in the glossary.


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26 Chapter 2

E2-2 1. Operating activity2. Financing activity3. Investing activity4. Financing activity5. Investing activity

6. Operating activity7. Investing activity8. Financing activity9. Investing activity

10. Operating activity

E2-3 a. Ib. Oc. Fd. Oe. O

f. Ig. Fh. Oi. O

j. F

E2-4

ASSETS = LIABILITIES + OWNERS' EQUITY

Date Accounts CashOtherAssets

ContributedCapital

RetainedEarnings

Beginning Amounts 40,000 + 60,000 = 30,000 + 50,000 + 20,000

June 1 Merchandise Inventory 15,000Cash 15,000

June 15 Cash 60,000

Sales Revenue 60,000

Cost of Goods Sold 28,000

Merchandise Inventory 28,000

June 23 Cash 250,000

Bank Loan Payable 250,000

June 25 Supplies Expense 2,000

Cash 2,000

June 28 Wages Expense 5,000

Cash 5,000

June 30 Equipment 100,000

Cash 100,000

June 30 Utilities Expense 6,000

Cash 6,000

Ending Amounts 222,000 +147,000 = 280,000 + 50,000 + 39,000


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E2-5 June 1 OperatingJune 15 OperatingJune 23 FinancingJune 25 OperatingJune 28 OperatingJune 30 Investing

June 30 Operating

E2-6



ContributedCapital

RetainedEarnings

Beginning Amounts 70,000 + 90,000 = 60,000 + 60,000 + 40,000

May 1 Cash 10,000

Contributed Capital 10,000

May 5 Cash 35,000

Sales 35,000Cost of Goods Sold 14,000


May 10 Merchandise Inventory 45,000

Cash 45,000

May 15 Notes Payable 2,000

Cash 2,000

May 22 Equipment 4,000

Cash 4,000

May 31 Utilities Expense 800

Cash 800

May 31 Wages Expense 7,500

Cash 7,500

Ending Amounts 55,700 + 125,000 = 58,000 + 70,000 + 52,700

E2-7 May 1 FinancingMay 5 OperatingMay 10 OperatingMay 15 FinancingMay 22 InvestingMay 31 OperatingMay 31 Operating

E2-8 a. Cash increased $18,000; Owners Investment increased $18,000.The owners invested $18,000 in the company.

b. Equipment increased $12,000; Cash decreased $12,000.The company purchased equipment using cash.

c. Cash decreased $8,500; Notes Payable decreased $8,500.The company paid down the balance of a note.


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28 Chapter 2

d. Supplies inventory increased $13,500; Cash decreased $13,500.The company purchased supplies costing $13,500 using cash.

e. Merchandise Inventory decreased $10,000; Cost of Goods Sold in-creased $10,000.The company sold merchandise costing $10,000.

f. Cash increased $23,500; Sales Revenue increased $23,500.

The company sold goods for $23,500 cash.g. Supplies Expense increased $3,000; Supplies inventory decreased

$3,000.The company removed supplies costing $3,000 from inventory andused them.

E2-9


Date Accounts CashOther

AssetsContributed

CapitalRetainedEarnings

Beginning Amounts 5,000 = 1,500 + 3,000 + 500Feb. 2 Cash 1,800

Revenues 1,800

Feb. 3 Rent Expense 1,200

Cash 1,200

Feb. 4 Cash 300

Loan Payable 300

Feb. 4 Miscellaneous Expense 35

Cash 35

Feb. 5 Cash 4,250

Revenues 4,250

Feb. 5 Equipment 3,200

Cash 3,200

Feb. 6 Wages Expense 525

Cash 525

Feb. 6 Office Supplies Expense 128

Cash 128

Ending Amounts 5,662 + 3,200 = 1,200 + 3,000 + 4,662

Amelios Law Firm

Income StatementFor the First Week of February

Revenues $ 6,050Rent (1,200)Miscellaneous (35)Wages (525)


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Office supplies (128 )Net income $ 4,162

E2-10 Feb. 2OperatingFeb. 3 OperatingFeb. 4 Financing

Feb. 4 OperatingFeb. 5 OperatingFeb. 5 InvestingFeb. 6 OperatingFeb. 6 Operating

E2-11 Assets = Liabilities + Owners Equity

Cash $ 1,500Flowers and Plants 26,000Supplies Inventory 4,350

Buildings 79,500Equipment 12,750

Notes Payable $57,500

Proprietors Capital $66,600

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

E2-12


Date Accounts Cash

Other

Assets

Contributed

Capital

Retained

EarningsCash 220,000


Bank Loan 140,000

a. Equipment 45,150

Cash 45,150

b. Merchandise Inventory 129,600

Cash 129,600

c. Cash 85,000

Sales 85,000

Cost of Goods Sold 43,200*


d. Wages Expense 12,300

Rent Expense 15,500

Utilities Expense 4,800

Postage Expense 650

Insurance Expense 1,290


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30 Chapter 2

Cash 34,540

* $129,600 3 = $43,200

E2-13 Changs Pottery WorksSchedule of Retained Earnings

For the Month Ended November 30

Retained earnings, November 1 $ 95,000Net income for November 15,000Less: Payment to owners in November (4,000 )Retained earnings, November 30 $106,000

E2-14 Christmas Cookie CompanyIncome Statement

For the Month Ended December 31

Sales revenue $234,000Cost of goods sold (60,000)Wages expense (97,500)Utilities expense (24,000 )Net income $ 52,500

E2-15 a. Cash flows from financing activities:

Proceeds from owners $ 30,957Proceeds from issuance of note payable 13,057Payments of debt (80,323 )

Net cash used for financing activities $(36,309)

b. Cash flows from investing activities:

Proceeds from sales of plant and equipment $ 1,986Additions to plant and equipment (5,379 )

Net cash provided by investing activities $ (3,393 )

E2-16 Cash collected from customers $270,000Cash paid for merchandise inventory (83,500)Cash paid for utilities (25,000)Cash paid for insurance (23,000)Cash paid to employees (58,000)

Cash paid for postage (7,500 )Net cash from operating activities $ 73,000

E2-17 Wages expense Income statementCost of goods sold Income statementSales revenue Income statementMerchandise inventory Balance sheet


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Net income Income statementRetained earnings Balance sheetContributed capital Balance sheetRent expense Income statementCash Balance sheet, Statement of cash flowsNotes payable Balance sheet

E2-18 Brothers Lawn ServiceIncome Statement

For the Six Months Ended June 30, 2007

Service revenue $12,300Supplies expense (4,000)Wages expense (6,000)Utilities expense (500)Rent expense (1,000 )Net income $ 800

E2-19 Brothers Lawn ServiceBalance Sheet

At June 30, 2007

AssetsCash $3,000Supplies inventory 500Equipment 5,000

Total assets $8,500

Liabilities and Owners EquityNotes payable $1,000

Contributed capital 6,700Retained earnings 800

Total liabilities and owners equity $8,500

E2-20June 1 Merchandise Inventory 15,000

Cash 15,000June 15 Cash 60,000


Merchandise Inventory 28,000June 23 Cash 250,000

Bank Loan Payable 250,000June 25 Supplies Expense 2,000Cash 2,000

June 28 Wages Expense 5,000Cash 5,000

June 30 Equipment 100,000Cash 100,000

June 30 Utilities Expense 6,000Cash 6,000


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32 Chapter 2

E2-21May 1 Cash 10,000

Contributed Capital 10,000May 5 Cash 35,000



May 10 Merchandise Inventory 45,000Cash 45,000

May 15 Notes Payable 2,000Cash 2,000

May 22 Equipment 4,000Cash 4,000

May 31 Utilities Expense 800Cash 800

May 31 Wages Expense 7,500Cash 7,500

E2-22Feb 2 Cash 1,800

Revenues 1,800Feb 3 Rent Expense 1,200

Cash 1,200Feb 4 Loan Payable 300

Cash 300Feb 4 Miscellaneous Expense 35

Cash 35Feb 5 Cash 4,250

Revenues 4,250Feb 5 Equipment 3,200

Cash 3,200Feb 6 Wages Expense 525

Cash 525Feb 6 Office Supplies Expense 128Cash 128

E2-23Cash 220,000

Contributed Capital 80,000Bank Loan 140,000

a. Equipment 45,150Cash 45,150

b. Merchandise Inventory 129,600

Cash 129,600c. Cash 85,000

Sales 85,000Cost of Goods Sold * 43,200

Merchandise Inventory 43,200d. Wages Expense 12,300

Rent Expense 15,500Utilities Expense 4,800


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Postage Expense 650Insurance Expense 1,290

Cash 34,540

* $129,600 3 = $43,200


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34 Chapter 2

PROBLEMS

P2-1 A. ASSETS = LIABILITIES + OWNERS' EQUITY


ContributedCapital

RetainedEarnings

1 Cash 5,800

Utilities Expense 5,8002 Cash 89,460

Sales 89,460



3 Equipment 28,600

Cash 28,600

4 Notes Payable 4,900

Cash 4,900

5 Cash 65,000

Notes Payable 65,000

6 Salaries Expense 59,430

Cash 59,430

7 Maintenance Expense 11,900

Cash 11,900

8 Cash 48,600


9 Supplies Expense 3,750

Cash 3,750

B. Financing decisions: When, how much, and where to borrow.

Investing decisions: What property and equipment to purchase and

when to purchase it. What future earnings is the investment likely tobring?

P2-2 1. Operating2. Operating3. Investing4. Financing5. Financing6. Operating7. Operating8. Financing

9. Operating


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P2-3 Assets = Liabilities + Equity

Cash $10,000Merchandise Inventory 30,000Equipment 45,000

Notes Payable $20,000Contributed Capital $35,000Retained Earnings 30,000Total $85,000 = $ 20,000 + $6 5,000



ContributedCapital

RetainedEarnings

June 1 Cash 7,000Contributed Capital 7,000

June 2 Rent Expense 525Cash 525

June 7 Merchandise Inventory 5,000Cash 5,000

June 12 Advertising Expenses 800

Cash 800

June 26 Cash 7,500Sales Revenue 7,500



June 30 Wages Expense 850

Utilities Expense 228Cash 1,078

Ending Amounts 7,097 + 500 = 7,000 + 597

B. Davidson EnterprisesIncome Statement

For the Month Ended June 30, 2007

Sales $7,500

Cost of goods sold (4,500)Rent expense (525)Advertising (800)Wages (850)Utilities (228 )Net income $ 597


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36 Chapter 2

C. Davidson EnterprisesBalance Sheet

At June 30, 2007

AssetsCash $7,097

Merchandise inventory 500Total assets $7,597

Liabilities and Owners EquityContributed capital $7,000Retained earnings 597


P2-5 June 1 FinancingJune 2 OperatingJune 7 Operating

June 12 OperatingJune 26 OperatingJune 30 Operating

P2-8 A. 1. Jill contributed $5,000 to the business.2. The company acquired $300 of supplies inventory by paying

cash.3. The company earned $4,200 for providing services.

4. The company paid $450 for utilities consumed.5. The company paid $500 for transportation expenses.6. The company paid $700 for insurance.7. Jill took $1,300 cash from the company for her personal use.

B. The company earned $2,550 ($4,200 $450 $500 $700).

P2-9 A. Mar. 1 Jacqueline contributed $10,000 cash to the business.3 The company borrowed $7,000 by issuing a note payable.5 The company purchased $8,100 of inventory and paid

cash.18 The company sold goods costing $7,500 for $15,250 in

cash.18 The company paid wages of $650.23 The company paid $2,500 on the note.31 Jacqueline took $2,000 cash from the company for her

personal use.

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


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2. Owners Equity is $15,100 ($10,000 + $5,100).

P2-10 1. Owners contributed $15,000 to the business.2. A bank loan of $6,285 was obtained.3. Equipment costing $11,000 was purchased. A loan was obtained to

purchase the equipment.

4. Services totaling $2,250 were performed.5. Rent of $400 was paid.6. Wages of $250 were paid.7. Internet service costs of $35 were paid.


Date Accounts CashOther

AssetsContributed

CapitalRetainedEarnings

1 Cash 10,000


2 Cash 30,000Bank Loan Payable 30,000

3 Equipment 25,000

Cash 25,000

4 Merchandise Inventory 12,000

Cash 12,000

5 Cash 27,000

Sales Revenue 27,000

6 Cost of Goods Sold 10,000


7 Bank Loan Payable 300

Cash 300

8 Retained Earnings 800Cash 800

Ending Amounts 28,900 + 27,000 = 29,700 + 10,000 + 16,200

B. Sand Dune Trading CompanyIncome Statement

For the Month Ended May 31, 2007

Sales revenue $27,000Cost of goods sold 10,000Net income $17,000

C. Sand Dune Trading Company


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38 Chapter 2

Balance Sheet

At May 31, 2007

AssetsCash $28,900

Merchandise inventory 2,000Equipment 25,000Total assets $55,900

Liabilities and Owners EquityBank loan $29,700Contributed capital 10,000Retained earnings 16,200


P2-12 1. I2. B3. B4. B5. C6. I7. C8. I, C9. B

10. C

P2-13 Moonbeam EnterprisesIncome Statement

For the Month Ended April 30, 2007

Sales revenue $26,000Cost of goods sold (15,050)Supplies expense (1,300)Interest expense (900)Wage expense (1,500)Insurance expense (550)Income tax expense (1,060 )

Net income $ 5,640

Moonbeam EnterprisesBalance Sheet

At April 30, 2007

AssetsCash $ 10,360


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Merchandise inventory 12,480Buildings 50,000Land 45,000

Total assets $ 117,840

Liabilities and Owners Equity

Notes payable $ 33,000Contributed capital 38,770Retained earnings 46,070


P2-15 June 3 OperatingJune 4 FinancingJune 5 Operating

June 5 Operating

June 6 OperatingJune 6 InvestingJune 7 Operating

P2-16 A. Crimson FloristStatement of Cash Flows

For the Month Ended July 31

Operating ActivitiesCash received from sales to customers $15,000

Cash paid for wages (4,500)Cash paid for supplies (3,000)Cash paid for utilities (2,700 )Net cash flow from operating activities $ 4,800

Investing ActivitiesCash paid for equipment (7,000)

Financing ActivitiesCash received from owners $13,000Cash received from creditors 9,000

Net cash flow from financing activities 22,000

Net cash flow for July $19,800Cash balance, July 1 3,300Cash balance, July 31 $ 23,100

B. The purpose of the statement of cash flows is to allow users to de-termine the sources and uses of cash during a fiscal period. The


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40 Chapter 2

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

P2-17 The College Shop

Statement of Cash FlowsFor the Month Ended January 31

Operating Activities

Cash received from sales to customers $13,000Cash paid for wages (1,200)Cash paid for insurance (2,500)Rent (5,300)Cash paid for merchandise (4,000)Cash paid for utilities (200 )Net cash flow from operating activities $ (200)

Investing Activities

Cash paid for equipment (7,000)

Financing Activities

Cash received from owners $ 9,000Cash received from creditors 10,500Net cash flow from financing activities 19,500

Net cash flow for January $12,300

Cash balance, January 1 4,000Cash balance, January 31 $ 16,300

P2-18 A. ROA = Net Income Total Assets = $4,000 $30,600 = 13%

B. ROA measures the amount a company earned for each dollar of totalinvestment.

C. Managers can make changes to produce more income by increasingsales or by reducing expenses. By improving inefficient operations,managers can improve profitability and ROA.

Managers also can reduce assets by selling nonproductive equip-ment and returning the cash to owners in the form of a dividend.

Thus, if earnings remain the same, and total assets declines, ROAwill improve.


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P2-191 Utilities Expense 5,800

Cash 5,8002 Cash 89,460



3 Equipment 28,600Cash 28,600

4 Notes Payable 4,900Cash 4,900

5 Cash 65,000Notes Payable 65,000

6 Salaries Expense 59,430Cash 59,430

7 Maintenance Expense 11,900Cash 11,900

8 Cash 48,600Contributed Capital 48,600

9 Supplies Expense 3,750Cash 3,750

P2-201 Cash 3,000


2 Cash 4,000

Notes Payable 4,000

3 Merchandise Inventory 3,500

Cash 3,500

4 Cash 2,500Sales Revenue 2,500

Cost of Goods Sold 825

Merchandise Inventory 825

4 Commissions Expense 500

Cash 500

5 Notes Payable 1,500

Cash 1,500

6 Retained Earnings 750

Cash 750


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42 Chapter 2

P2-21June 1 Cash 750

Note PayableDad 450Contributed Capital 300

June 2 Equipment Rental Expense 85Cash 85

June 3 Equipment Rental Expense 135Cash 135

June 16 Cash 650Service Revenue 650

June 16 Gas and Oil Expense 67Cash 67

June 18 Advertising Expense 70Cash 70

June 30 Cash 507Service Revenue 507

June 30 Gas and Oil Expense 105Cash 105

June 30 Interest Expense 5

Note PayableDad 225Cash 230

P2-221 Cash 10,000

Contributed Capital 10,0002 Cash 30,000

Bank Loan Payable 30,0003 Equipment 25,000

Cash 25,0004 Merchandise Inventory 12,000

Cash 12,0005 Cash 27,000Sales Revenue 27,000

6 Cost of Goods Sold 10,000Merchandise Inventory 10,000

7 Bank Loan Payable 300Cash 300

8 Retained Earnings 800Cash 800

P2-23 See Excel spreadsheet on page 49.


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P2-24 1. b 2. a 3. b 4. d 5. d6. c 7. a 8. b 9. a

10. a11. b

CASES

C2-1 It is unlikely that Frank gets much information from his current accountingsystem. Since his personal finances are commingled with his business

activities, he cant tell (for sure) whether his business is profitable or not.About all he knows is his checking account balance. Once a month, hegets a statement from the bank, which he could use to verify his checkingaccount. The receipts he keeps could provide information about some ofhis expenses and revenues, but Frank probably is not making use of thisinformation.

Frank should be able to obtain information about his companys assets,liabilities, owners equity, revenues, and expenses from a new accountingsystem. In addition, he will need revenue information for each locationseparately because the monthly fee paid to each retailer is partially de-pendent on this amount. For management control purposes, Frank will

probably want to have all categories of financial information broken downby individual location. This information would allow him to evaluatewhether a particular location (or operator) is performing satisfactorily. Amonthly income statement by location would be useful for evaluating theperformance of each stand and employee. An analysis of the companyschecking account would help Frank understand how much cash the com-pany is producing, its cash needs, and how the cash is being used.

The accounting system could be improved by (a) establishing a separatechecking account for the business; (b) establishing a ledger to keep ac-counts for each of the firms assets, liabilities, owners equities, rev-

enues, and expenses; and (c) providing periodic (monthly) income state-ments and balance sheets. At a minimum, separate revenue accountsshould be maintained for each location. At a maximum, each accounttype could be divided into separate accounts for each location.


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44 Chapter 2

The following accounts would be useful:

Account Name Account Type

Cash

Hot Dogs

Canned Soda

CondimentsSupplies

Carts

Notes Payable

Investment by Owner

Retained Earnings

Sales Revenue (Location 1, 2, etc.)

Cost of Goods Sold (Location 1, 2, etc.)

Wages Expense (Location 1, 2, etc.)

Location Fee Expense (Location 1, 2, etc.)

Equipment Usage Expense* (Location 1, 2, etc.)Repair Expense (Location 1, 2, etc.)

asset

asset

asset

assetasset

asset

liability

owners equity

owners equity

revenue

expense

expense

expense

expenseexpense

*As you will learn in Chapter 3, this usually is referred to asDepreciation Expense.

Separate accounts by location would be useful for Carts, SalesRevenue, Cost of Goods Sold, Wages Expense, Location Fee Ex-pense, Depreciation Expense, and Repair Expense. This would al-low Frank to determine net income for each location and compareprofitability among the locations.

C2-2 The following questions are examples of key decisions needing to be madeat each stage of the transformation process.

Financing decisions: How much money is needed for investment and operations? How and when should money be obtained?

Investing decisions: What building and equipment resources are needed? Do any new long-lived resources need to be added? From where and when should new long-lived resources be obtained?

Operating decisions: How can resources be used most effectively and efficiently? What materials need to be acquired?


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What employees need to be hired, how should they be trained, andwhat specific tasks should they be assigned to do?

What will be the cost of adding new employees? How should the products be designed to ensure they can be con-

structed with the time and resources available to meet customerneeds?

What schedules are needed for the construction, transportation, andassembly phases in order to minimize waste of labor and materials?

What marketing strategy should be followed in order to maximizesales?


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P2-2

3

Cost

of

Investment

Retained

Goods

Date

Cash

Inventory

Supplies

Equipment

Notes

Payable

by

Owners

Earnings

Sales

Sold

9/30/2007

$4,2

38.7

2

$23

5,8

92.3

5

$2,3

43.2

8

$43,

297.0

0

$123,4

52.8

8

$100,00

0.0

0

$62,3

18.4

7

$

$

10/31/2007

38,2

46.5

0

38,2

46.5

0

10/31/2007

2

7,3

18.9

3

27,3

18.9

3

10/31/2007

10,9

27.5

7

38,2

46.5

0

27,3

18.9

3

10/31/2007

$42,4

85.2

2

$20

8,5

73.4

2

$2,3

43.2

8

$43,

297.0

0

$123,4

52.8

8

$100,00

0.0

0

$73,2

46.0

4

$

0.0

0

$

0.0

0

Ba

lance

Shee

t

Income

Statemen

t

Asse

ts

Liabilities

&Equ

ity

Revenues

Cash

$42,4

85.2

2

NotesPayable

$123,4

52.88

Sales

$38,2

46.5

0

Inventory

208,5

73.4

2

InvestmentbyOwners

100,0

00.00

Expenses

Supplies

2,3

43.2

8

RetainedEarnings

73,2

46.04

CostofGoodSold

27,3

18.9

3

Equipment

43,2

97.0

0

Total

$296,6

98.9

2

Total

$296,6

98.92

NetIncome

$10,9

27.5

7


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Chapter 2 HW Solutions

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