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Company




Money
Notes Payable



Exhibit 5 provides an accounting representation of investing activities. On January
5, Mom’s Cookie Company paid $6,000 for office equipment. On January 6, the com-
pany bought a delivery van for $25,000. It paid $3,000 in cash and financed the re-
maining $22,000 of the purchase price with a note payable.


Exhibit 5 OWNERS’
Accounting ASSETS LIABILITIES EQUITY
Date Accounts
Representation of
Beginning Amounts 18,000 8,000 10,000
Investing Activities
Jan. 5 Equipment 6,000
Cash 6,000
Jan. 6 Equipment 25,000
Cash 3,000
Notes Payable 22,000
Ending Amounts 40,000 30,000 10,000
F49
CHAPTER F2: Business Activities—The Source of Accounting Information
48 Business Activities - The Source of Accounting Information

The January 6 entry above shows the equipment purchase as a single transaction
involving both the borrowing of $22,000 from the bank and the payment of an addi-
tional $3,000. An alternative way to record the purchase of the delivery van shows the
transaction as a two-step process. First the $22,000 is borrowed from the bank and then
the full $25,000 is paid to purchase the van. Recording the transaction in two steps is
presented below.


OWNERS’
ASSETS LIABILITIES EQUITY
Date Accounts
Beginning Amounts 18,000 8,000 10,000
Jan. 5 Equipment 6,000
Cash 6,000
Jan. 6 Cash 22,000
Notes Payable 22,000
Jan. 6 Equipment 25,000
Cash 25,000
Ending Amounts 40,000 30,000 10,000




Accounts used to record these transactions in-
LEARNING NOTE clude Equipment, Cash, and Notes Payable. Observe
that the second transaction involves both an invest-
Account titles vary in practice depending on the needs of a com-
ing activity (purchase of equipment) and a financing
pany. Accounts can be divided into as many subcategories as a
business needs. For example, Mom’s Cookie Company could use activity (borrowing to purchase van).
separate accounts for Office Equipment and Delivery Equipment In each transaction, the accounting equation
if it chose to do so. Although you should not get too concerned must balance. The January 5th transaction balances
about specific account titles, certain titles, such as Notes Payable, because the $6,000 increase in Equipment offsets the
are used by most businesses. You should learn the titles that are amount of the decrease in Cash. The January 6th
listed as terms in this book. Remember, what is most important transaction involves three accounts. Together the net
is that the account titles correctly represent the transactions. increase in assets of $22,000 ($25,000 $3,000)
equals the increase in liabilities of $22,000.
The ending amounts in Exhibit 5 indicate that
the accounting equation is in balance. Each transaction and all transactions taken to-
gether must preserve the relationship:

ASSETS LIABILITIES OWNERS’ EQUITY

Maintaining the accounting equation is an important accounting control. If indi-
vidual transactions or all transactions as a whole do not preserve the equality, an error
has occurred in recording one or more of the business activities.




1 SELF-STUDY PROBLEM Delphi Co. was started in 2004 when its owners contributed
$100,000 to the business and borrowed $120,000 from creditors.
These resources were used to purchase equipment at a cost of $160,000. In addition,
the company purchased a building at a cost of $400,000, paying $40,000 in cash and
signing a note for $360,000 with a local bank.

Required Using the format of Exhibit 5, record these financing and investing activi-
ties. Demonstrate that the accounting equation is in balance after the transactions have
been recorded.
The solution to Self-Study Problem 1 appears at the end of the chapter.
F50 SECTION F1: The Accounting Information System
49
Business Activities - The Source of Accounting Information


OPERATING ACTIVITIES
Financing and investing activities are necessary for a company to obtain the resources it
OBJECTIVE 4
needs to operate, but these activities do not involve operating the business. A business
Identify operating operates by obtaining or creating products or services and selling those products or ser-
activities and explain how vices to customers. Mom’s Cookie Company acquires cookies from a bakery and sells the
they create profits for a cookies to grocery stores. Operating activities are those activities necessary to acquire
company. and sell goods and services. When goods or services are sold to customers, revenue is
created. Revenue is the amount a company expects to receive when it sells goods or ser-
vices. Revenue can be thought of as the reward earned by serving customers. In addition
to goods and services for sale, operating activities use a variety of resources, including em-
ployee labor, supplies, and utilities. The consumption of these resources creates expenses.
Expense is the amount of resources consumed in the process of acquiring and selling
goods and services. Not all operating activities create revenues or expenses, but most do.
Exhibit 6 illustrates the purchase of goods to sell, which is one aspect of operating
activities that does not create a revenue or expense. Cookies are purchased from the
bakery in exchange for cash.


Exhibit 6
Operating Activities: Mo
m’s
Mo
okies
Purchase of Goods for m’s s Co
Mo
Cookie
m’s
Sale Mo ies
m’s Cook
ies
Cook




Merchandise




Mom’s Cookie
Company Suppliers




Money




Exhibit 7 describes how this type of transaction might be recorded. Mom’s Cookie
Company purchased cookies from the bakery at a cost of $9,000 on January 7. Mer-
chandise Inventory is an asset account and identifies the cost of goods a company has
purchased that are available for sale to customers. Observe that in this transaction the
company’s total assets have not changed. The particular assets controlled by the com-


Exhibit 7 OWNERS’
Accounting ASSETS LIABILITIES EQUITY
Date Accounts
Representation of
Beginning Amounts 40,000 30,000 10,000
Purchase of
Jan. 7 Merchandise Inventory 9,000
Merchandise
Cash 9,000
Ending Amounts 40,000 30,000 10,000
F51
CHAPTER F2: Business Activities—The Source of Accounting Information
50 Business Activities - The Source of Accounting Information

pany have changed. The company now has $9,000 of goods for sale but $9,000 less cash
than before. In fact, the company’s cash balance is now zero ($18,000 cash raised from
financing activities minus $6,000 spent on office equipment, $3,000 for the down pay-
ment on a delivery van, and $9,000 spent on merchandise).
Exhibit 8 illustrates a company’s sale of goods to a customer. When goods or services
are sold to a customer, revenue is earned. The amount of revenue earned is equal to the
amount of resources received from the customer in exchange for the goods. In this ex-
ample, Cash is received from the customer and merchandise is delivered to the customer.


Exhibit 8
Operating Activities:
Selling Goods to
Money
Customers




Customers
Mom’s Cookie
Company

Mo
m’s
Mo
okies
m’s s Co
Mo
Cookie
m’s
Mo ies
m’s Cook
ies
Cook




Merchandise



Exhibit 9 describes how this type of transaction can be recorded. Assume Mom’s
Cookie Company sells 380 boxes of cookies to grocery stores during January in ex-
change for cash. Each box, which contains several bags of cookies, costs Mom’s Cookie
Company $20, the amount the company pays the bakery for producing and packag-
ing the cookies. Mom’s Cookie Company sells each box to the store for $30. There-
fore, 380 boxes cost the company $7,600 (380 boxes $20) and are sold for $11,400
(380 boxes $30).


Exhibit 9 Accounting Representation of Operating Activities

ASSETS LIABILITIES OWNERS’ EQUITY
Other Contributed Retained
Date Accounts Cash Assets Capital Earnings
Beginning Amounts 0 40,000 30,000 10,000 0
Jan. 31 Cash 11,400
Sales Revenue 11,400
Jan. 31 Cost of Goods Sold 7,600
Merchandise Inventory 7,600
Ending Amounts 11,400 32,400 30,000 10,000 3,800




Because revenues and expenses occurred in this transaction, we expand the ac-
counting equation to include them. Retained Earnings, a subcategory of Owners’
Equity, are the accumulated profits of a business that have been reinvested in the
business. Revenues increase Retained Earnings and expenses decrease Retained
F52 SECTION F1: The Accounting Information System
51
Business Activities - The Source of Accounting Information

Earnings. Amounts paid to owners from a company’s profits also decrease Retained
Earnings. We distinguish Retained Earnings from Contributed Capital because this
subcategory identifies the profits earned by a company rather than amounts con-
tributed directly by owners.
Also, notice in Exhibit 9 that Assets have been divided into two categories: Cash
(beginning amount is $0) and Other Assets (beginning amount is $40,000). They still
total to $40,000, the ending amount in Exhibit 7. Because many transactions involve
Cash, separating it from Other Assets makes it easier to keep track of the cash received
and paid by a company.
In Exhibit 9, the sale of goods is recorded in two transactions. One records the rev-
enue earned from the sale. The other records the cost of the goods sold. These trans-
actions are central to business operations and should be examined closely.
Sales Revenue identifies the amount a com-
pany earns from selling its products. Revenue or-
LEARNING NOTE dinarily is measured by the amount of cash received
or expected from a customer in exchange for the
The sales transaction in Exhibit 9 is a summary transaction for
goods or services transferred. Revenue normally is
all sales during January. In reality, sales occur throughout the
month, and each sale should be recorded as it occurs. Each trans- recorded at the time goods are transferred to cus-
action would follow the same pattern shown in Exhibit 9. There- tomers. A company earns revenue for its owners.
fore, to avoid repeating the same transaction several times, we Remember that owners have a claim to profits
record one summary transaction. earned by a company. Accordingly, revenue is part
of owners’ equity. It is an increase in the value of a
company for its owners.
Cost of Goods Sold identifies the cost to the company of the goods transferred
to customers. It is an example of an expense. Expense normally is measured by the
cost of resources consumed and is recorded at the time the resources are consumed.
Thus, when merchandise is sold to customers, it is consumed from the seller’s view-
point. The seller no longer has control of the resource. Consequently, merchandise
has been “used up.” An expense reduces owners’ equity because it identifies the use
of resources for which owners have a claim. It is a decrease in the value of a com-
pany for its owners. Thus, revenues increase owners’ equity and expenses decrease
owners’ equity.
Revenue minus expense equals profit. Profit results from operating activities and
is the difference between revenues earned from selling goods and services and expenses
incurred in acquiring and selling those goods and services. Note that in Exhibit 9 the
sale resulted in profit of $3,800 ($11,400 $7,600). The company’s assets and owners’
equity each increased by $3,800 as a result of the sale.
Remember, Owners’ Equity represents the claims of owners to a business. Those
claims include contributions made by the owners (Contributed Capital) plus profits
earned by the business minus amounts paid by the business to its owners (Retained
Earnings).
Other common expenses for a company like Mom’s Cookie Company include
wages paid to employees, plus the cost of supplies, rent, and utilities. To illustrate, as-
sume the following activities for Mom’s Cookie Company during January:

January 6 Paid $300 for supplies used during January
8 Paid $600 for rent for January
31 Paid $1,000 for wages for January
31 Paid $200 for utilities for January

Exhibit 10 illustrates how these activities are recorded. An expense is recorded for
the amount of resources used in each transaction. Because these resources were paid
for at the time they were consumed, Cash decreases in each transaction.
F53
CHAPTER F2: Business Activities—The Source of Accounting Information
52 Business Activities - The Source of Accounting Information

Exhibit 10 Accounting Representation of Expenses

ASSETS LIABILITIES OWNERS’ EQUITY
Other Contributed Retained
Date Accounts Cash Assets Capital Earnings
Beginning Amounts 11,400 32,400 30,000 10,000 3,800
Jan. 6 Supplies Expense 300
Cash 300
Jan. 8 Rent Expense 600
Cash 600
Jan. 31 Wages Expense 1,000
Cash 1,000
Jan. 31 Utilities Expense 200
Cash 200
Ending Amounts 9,300 32,400 30,000 10,000 1,700




2 SELF-STUDY PROBLEM The following events occurred for Mega Co. during January, its
first month of business:

Jan. 3 Owners contributed $40,000 to the business.
5 The company received $25,000 from a bank in exchange for a note
payable.
8 The company paid $35,000 for equipment.
10 The company paid $20,000 for merchandise.
11 The company paid $2,000 for supplies used in January.
15 The company received $12,000 from customers for the sale of
merchandise. The merchandise cost Mega Co. $8,000.
22 The company received $9,000 from customers for the sale of
merchandise. The merchandise cost Mega Co. $6,000.
31 The company paid $3,000 to employees for wages earned in January.
31 The company paid $800 for utilities used in January.

Required Use the format of Exhibit 10 to record the transactions of Mega Co. for Jan-
uary. The beginning account balances will all be zero.
The solution to Self-Study Problem 2 appears at the end of the chapter.



FINANCIAL REPORTING ANALYSIS
AND
The purpose of measuring and recording business activities is to provide useful infor-
OBJECTIVE 5
mation to those who need to make decisions. Accounting reports information to deci-
Describe how financial sion makers in the form of financial statements. Financial statements are reports that
reports summarize summarize the results of a company’s accounting transactions for a fiscal period. Ex-
business activities and hibit 11 lists all of Mom’s Cookie Company’s transactions for January using the ex-
provide information for panded format.
business decisions.
To prepare financial statements, a company needs to identify the balances in its ac-
counts at the end of the fiscal period being reported. Exhibit 12 provides a summary
of account balances for Mom’s Cookie Company at January 31. Balances for expenses,
which reduce owners’ equity, are shown in parentheses. All of the summary balances
shown in this exhibit are the results of the transactions recorded for the company in
Exhibit 11.
F54 SECTION F1: The Accounting Information System
53
Business Activities - The Source of Accounting Information

Exhibit 11 Transactions for Mom’s Cookie Company for January

ASSETS LIABILITIES OWNERS’ EQUITY
Other Contributed Retained
Date Accounts Cash Assets Capital Earnings
Beginning Amounts 0 0 0 0 0
Jan. 2 Cash 10,000
Contributed Capital 10,000
Jan. 3 Cash 8,000
Notes Payable 8,000
Jan. 5 Equipment 6,000
Cash 6,000
Jan. 6 Equipment 25,000
Cash 3,000
Notes Payable 22,000
Jan. 6 Supplies Expense 300
Cash 300
Jan. 7 Merchandise Inventory 9,000
Cash 9,000
Jan. 8 Rent Expense 600
Cash 600
Jan. 31 Cash 11,400
Sales Revenue 11,400
Jan. 31 Cost of Goods Sold 7,600
Merchandise Inventory 7,600
Jan. 31 Wages Expense 1,000
Cash 1,000
Jan. 31 Utilities Expense 200
Cash 200
Ending Amounts 9,300 32,400 30,000 10,000 1,700




Exhibit 12 January 31
Summary of Account Account Balance Explanation
Balances for Mom’s
Assets:
Cookie Company at
Cash 9,300 column total
January 31
Merchandise Inventory 1,400 $9,000 $7,600
Equipment 31,000 $6,000 $25,000
Liabilities:
Notes Payable 30,000 $8,000 $22,000
Owners’ Equity:
Contributed Capital 10,000
Sales Revenue 11,400
Cost of Goods Sold (7,600)
Wages Expense (1,000)
Rent Expense (600)
Supplies Expense (300)
Utilities Expense (200)




The Income Statement
The income statement reports revenues and expenses for a fiscal period as a means
of determining how well a company has performed in creating profit for its own-
ers. An income statement reports revenues, expenses, and profit for a fiscal period.
F55
CHAPTER F2: Business Activities—The Source of Accounting Information
54 Business Activities - The Source of Accounting Information

A fiscal period is any time period for which a company wants to report its financial
activities. Typical periods are months, quarters (three months), and years. Fiscal months
usually correspond with calendar months (January, February, etc.). Fiscal years do not
have to correspond with calendar years, however. For example, a company may pre-
pare an income statement for the year ended June 30 that would report operating ac-
tivities for July 1 through June 30 of the following year. Some companies choose months
that end on particular days of the week, such as Sunday. Thus, a company might pre-
pare an income statement for the month ended January 29 if the 29th were the last Sun-
day in the month. For example, General Mills’ fiscal year always ends on the last Sunday
of May. Therefore, fiscal year 2002 ended on May 26, 2002 and included all operating
activities since the previous year ended on May 27, 2001. General Mills’ 2002 income
statement is shown on page 24 of Appendix B at the end of this book.
Exhibit 13 provides an example of an income statement for Mom’s Cookie Com-
pany for the month ended January 31, 2004. The statement includes all the revenues
and expenses recorded for January. Net income is the amount of profit earned by a
business during a fiscal period. It is a measure of the value created for the owners of
a business by the operating activities of the business during a fiscal period. Net income
(revenue minus expense) increases owners’ equity as we observed in the transactions
in Exhibit 9. Information in financial statements is summarized from the transactions
recorded for a fiscal period. All the sales revenue transactions are added together, for
example, to calculate the total sales revenue for January.


Exhibit 13
Mom’s Cookie Company
Income Statement
Income Statement
For the Month Ended January 31, 2004

Sales revenue $11,400
Cost of goods sold (7,600)
Wages expense (1,000)
Rent expense (600)
Supplies expense (300)
Utilities expense (200)
Net income $ 1,700




An income statement provides information about the results of a company’s op-
erating activities for a fiscal period. Owners and other decision makers can use the state-
ment to evaluate how well a company has performed.


The Balance Sheet
A balance sheet identifies a company’s assets and claims to those assets by creditors
and owners at a specific date. It is a summary of the accounting equation and, like the
equation, the total of assets reported on the balance sheet must equal the combined to-
tal of liabilities and owners’ equity. Exhibit 14 provides a balance sheet for Mom’s
Cookie Company at January 31, 2004. It reports dollar amounts associated with a com-
pany’s assets and the sources of financing for those assets. It reports resources and claims
at a particular point in time rather than results of activities over a period of time.
A balance sheet usually is prepared at the end of each fiscal period. It reports
amounts of assets, liabilities, and owners’ equity at that time. We examine the proce-
dure for determining these amounts in more detail in Chapter F3.
Profit is earned by a business for its owners. It may be paid to the owners as a re-
turn on their investments, or it may be retained in the business as a means of acquir-
ing additional assets. Thus, retained earnings is the total amount of net income earned
F56 SECTION F1: The Accounting Information System
55
Business Activities - The Source of Accounting Information

Exhibit 14
Mom’s Cookie Company
Balance Sheet
Balance Sheet
At January 31, 2004

Assets
Cash $ 9,300
Merchandise inventory 1,400
Equipment 31,000
Total assets $41,700
Liabilities and Owners’ Equity
Notes payable $30,000
Contributed capital 10,000
Retained earnings 1,700
Total liabilities and owners’ equity $41,700




over the life of a company minus the portion of net income paid out to owners. Janu-
ary is the first month of operations of Mom’s Cookie Company, so the company has
earned net income for only one month. The income statement reported net income for
January of $1,700. None of the net income was paid out to owners. Consequently, re-
tained earnings at the end of January is $1,700.



Retained earnings, January 1 $ 0
Net income for January 1,700
Less: Payment to owners in January 0
Retained earnings, January 31 $1,700




Retained earnings is separated from contributed capital in Exhibit 14 to distinguish
between the amount paid into the company by Maria and Stan from the amount of
profit earned and retained by the company. Amounts paid to owners normally should
come from the company’s profits. If a company pays its owners more than the com-
pany has earned, it is returning a portion of their investment to them. Owners need to
know whether amounts paid to them are a return on their investments, from profits,
or a return of their investments, from amounts invested directly by the owners. Thus,
Mom’s Cookie Company could pay Maria and Stan up to $1,700 from profits earned
in January as a return on their investment. Any amount paid in excess of $1,700 would
be a return of their investment.


The Statement of Cash Flows
A third financial statement prepared by businesses is the statement of cash flows. The
statement of cash flows reports events that affected a company’s cash account during
a fiscal period. The statement contains three sections corresponding to operating, in-
vesting, and financing activities. The operating activities section reports cash from sell-
ing goods and services and cash paid for expense-related activities. The investing
activities section reports cash paid for equipment and other long-term assets and cash
received from selling these assets. The financing activities section reports cash received
from creditors and owners, cash paid to creditors as a repayment of amounts borrowed
by the company, and cash paid to owners.
Exhibit 15 provides a statement of cash flows for Mom’s Cookie Company for Jan-
uary 2004. The source of data for the statement is the cash column for the transactions
recorded in Exhibit 11. The results of these transactions are organized into the sections
contained in the statement of cash flows.
F57
CHAPTER F2: Business Activities—The Source of Accounting Information
56 Business Activities - The Source of Accounting Information

Exhibit 15
Mom’s Cookie Company
Statement of Cash
Statement of Cash Flows
Flows
For the Month Ended January 31, 2004

Operating Activities
Received from customers $11,400
Paid for merchandise (9,000)
Paid for wages (1,000)
Paid for rent (600)
Paid for supplies (300)
Paid for utilities (200)
Net cash flow from operating activities $ 300
Investing Activities
Paid for equipment* (31,000)
Financing Activities
Received from creditors** 30,000
Received from owners 10,000
Net cash flow from financing activities 40,000
Net cash flow for January 9,300
Cash balance, January 1 0
Cash balance, January 31 $ 9,300

*Office Equipment of $6,000 Delivery Van of $25,000
**Notes Payable of $8,000 Notes Payable of $22,000




The statement of cash flows describes the events
that affected a company’s cash account during a fis-
LEARNING NOTE cal period. The amount reported as net cash flow for
the period is the change in the cash balance. The fi-
As noted in the discussion of Exhibit 5, the purchase of the de-
nal line of the statement reports the cash balance at
livery van involved both investing and financing activities. On the
the end of the month and corresponds with the
statement of cash flows these are treated as two events. The fi-
amount reported on the company’s balance sheet (see
nancing transaction is treated as though the company received
cash from borrowing money, and the investing transaction is Exhibit 14). Thus, the statement of cash flows is use-
treated as though the company paid cash for the delivery van. ful for identifying how much cash a company has,
where that cash came from, and how the company
used its cash during a fiscal period.


The Transformation Process
LEARNING NOTE
Businesses transform resources into goods and ser-
The statement of cash flows often is prepared using a format dif-
vices for sale to customers. Accounting measures and
ferent than that described in Exhibit 15. We examine the alter-
reports the results of that transformation process.
nate format in a later chapter.
Financing activities describe how a company obtains
financial resources from owners and creditors. In-
vesting activities describe how a company uses financial resources to acquire long-term
assets to be used by the company. Operating activities describe how a company uses its
financial resources and long-term assets to acquire and sell its products.
Exhibit 16 illustrates the relationship among these activities as they are described
in the income statement and balance sheet. The balance sheet describes a company’s
assets. Financial resources to acquire these assets are obtained from (1) financing ac-
tivities (liabilities and owners’ equity) and from (2) revenues earned by the company.
When assets are consumed (3), expenses are created that reduce a company’s profits.
The profits earned during a period (4) increase owners’ equity, as reported in retained
earnings. The total amount of assets is equal to the total amount of liabilities and own-
ers’ equity (5).
F58 SECTION F1: The Accounting Information System
57
Business Activities - The Source of Accounting Information

Exhibit 16
Assets
Reporting the
Profits
$40,000
Transformation Process 2
$11,400
Revenues
+11,400
9,700
Expenses
9,700
3 $ 1,700
Net Income
$41,700
1



$30,000
Liabilities 4
Owners’ Equity:
5 10,000
Contributed Capital
1,700
Retained Earnings
$41,700




Financial Analysis
Many business decisions rely on accounting information. Decision makers use ac-
counting information to evaluate a company’s performance. A variety of analysis tools
are available for this purpose. We examine these in later chapters. Financial statement
numbers themselves provide useful information. For example, managers need to know
how much cash or merchandise inventory a company has available so they can deter-
mine whether purchases can or should be made. Creditors need to know about a com-
pany’s liabilities and profits to determine whether to make additional loans. Analysis
often involves a comparison of accounting numbers, such as net income, with other
numbers. Sometimes comparisons are made among fiscal periods or among compa-
nies. Comparisons are also made among different divisions of a company. For exam-
ple, a decision maker may be interested in how the East division of a company compares
with the West division, or how the U.S. division compares with the European division.
A common analytical tool involves the calculation of ratios. Most ratios compare
one financial statement number with another. One example is return on assets. Return
on assets (ROA) is the ratio of net income to total assets. Because total assets are equal
to the total investment in a company from creditors and owners, return on assets mea-
sures return on total investment in a company. We can calculate return on assets for
Mom’s Cookie Company at January 31, 2004, as:

Net Income $1,700
Return on Assets 4.1%
Total Assets $41,700

We can interpret the ratio as the amount a company earned for each dollar of to-
tal investment. Thus, Mom’s Cookie Company earned 4.1 cents for each dollar of in-
vestment in January. It is common to report many ratios, especially those expected to
be less than one, as percentages, as shown above. Whether 4.1% is a good return or not
can be assessed by comparing the amount with expectations of owners, with returns
for similar companies, and with returns for other periods. A good return for one com-
pany is not necessarily good for another, particularly if the companies operate in dif-
ferent industries, countries, or geographic regions.
Owners, creditors, and other decision makers can examine return on assets for
Mom’s Cookie Company to decide whether the company is earning a reasonable profit.
If the return is not satisfactory, Maria and Stan can make changes in the business. We
examine various means of analyzing a company’s performance in this book.
Business analysis relies on accounting and other information to understand how a
business is performing and to determine future business activities. Exhibit 17 describes
the role of accounting in business organizations. Accounting measures and records busi-
F59
CHAPTER F2: Business Activities—The Source of Accounting Information
58 Business Activities - The Source of Accounting Information

ness activities. It converts data about business activities into useful information that is
reported to decision makers. The information is analyzed to evaluate the performance
of a company. Then, decisions are made that affect the company’s future business ac-
tivities. A primary purpose of accounting is to help people make decisions about busi-
ness activities. Accounting is the link between business activities and business
decisions.


Exhibit 17
A Model of the Accounting
Business
Measuring
Activities
Accounting Process
Business
Recording
Operating
Decisions
Reporting
Investing
Analyzing
Financing



Actions Based on Business Decisions




3 SELF-STUDY PROBLEM Philistine Co. reported the following information for its first
month of operations ended August 31, 2004:

Cash $ 25,000
Merchandise inventory 200,000
Equipment 425,000
Notes payable 350,000
Investment by owners 250,000
Sales revenue 520,000
Cost of goods sold 300,000
Other expenses 140,000
Payments to owners 30,000

Required
A. Prepare an income statement using the format of Exhibit 13.
B. Determine how much retained earnings the company should report at the end of
August.
C. Prepare a balance sheet using the format of Exhibit 14.
D. Calculate return on assets for the company for August.
The solution to Self-Study Problem 3 appears at the end of the chapter.




DEBITS AND CREDITS: ANOTHER WAY RECORD
TO
Appendix
TRANSACTIONS
For most of its history, accounting has recorded transactions using debits and credits.
They were particularly useful to facilitate the calculation of account balances prior to
the advent of computers. Though the accounting process is largely computerized to-
day, debits and credits remain part of the language of accounting. To understand this
method, begin with the accounting equation, including revenues and expenses as sub-
categories of owners’ equity, as described in Exhibit 18.
Debits are increases in elements on the left (assets) side of the accounting equa-
tion and decreases in elements on the right (liabilities and owners’ equity) side. Cred-
its are decreases in elements on the left (assets) side of the accounting equation and
F60 SECTION F1: The Accounting Information System
59
Business Activities - The Source of Accounting Information

Exhibit 18
Assets Liabilities Owners’ Equity
Defining Debits and
Resources Claims to Resources
Credits

Debits Credits Debits Credits
Increases Decreases Decreases, Increases,
including including
Expenses Revenues



increases in elements on the right (liabilities and owners’ equity) side. Because ex-
penses decrease owners’ equity, they are recorded as debits (unless expense amounts
are being eliminated or offset). Because revenues increase owners’ equity, they are
recorded as credits (unless revenue amounts are being eliminated or offset).
Each account can be divided into a debit side (on the left) and a credit side (on the
right). Transactions are recorded as debits and credits to the appropriate accounts. For
example, (a) an owner’s contribution of $10,000 to a company could be recorded as in
Exhibit 19.


Exhibit 19
Recording a Transaction Assets Liabilities Owners’ Equity
with Debits and Credits

Cash Contributed Capital
(a) 10,000 10,000 (a)



Cash is increased, and because it is an asset account, the increase is represented by a
debit to the cash account. Contributed Capital is increased, and because it is an owners’
equity account, the increase is represented by a credit to the contributed capital account.
For the accounting equation to balance, every transaction must have an equal
amount of debits and credits. Therefore, total debits must always equal total credits for
a company’s transactions or accounts taken as a whole. Consequently, debits and cred-
its provide a useful control to help ensure integrity of the accounting process. If debits
do not equal credits, an error has been made.
The T-account format illustrated in Exhibit 19 often is used to describe transac-
tions. This format makes it easy to observe the debit and credit effects of a transaction.
If several transactions involve the same account, this format also makes it easy to ob-
serve the cumulative effect of the transactions. For example, (b) assume that the com-
pany borrowed $8,000 from a bank. Exhibit 20 includes the effect of this transaction,
in addition to the transaction shown in Exhibit 19.


Exhibit 20
Recording Additional Assets Liabilities Owners’ Equity
Transactions with Debits
and Credits
Cash Contributed Capital
(a) 10,000 10,000 (a)
(b) 8,000
18,000
Notes Payable

8,000 (b)
F61
CHAPTER F2: Business Activities—The Source of Accounting Information
60 Business Activities - The Source of Accounting Information

The addition of $8,000 to the cash account is represented by an additional debit
entry. The combined effect of the two transactions is apparent after adding the two
debit entries.
A third transaction (c), payment of $12,000 for equipment, is illustrated in Exhibit
21. The payment decreases Cash and is recorded as a credit to the cash account. The
balance of the account decreases to a debit balance of $6,000. Equipment increases by
$12,000, as represented by the debit to that account. Asset accounts normally have debit
balances. Liability and owners’ equity accounts normally have credit balances. Keep in
mind that expenses are decreases in owners’ equity and normally have debit balances.



Exhibit 21
Recording a Decrease in Assets Liabilities Owners’ Equity
an Asset Account

Cash Contributed Capital
(a) 10,000 12,000 (c) 10,000 (a)
(b) 8,000
6,000
Notes Payable

8,000 (b)
Equipment

(c) 12,000



Exhibit 21 illustrates the advantages of a debit and credit system of recording trans-
actions when transactions are recorded manually. Because increases in accounts are sep-
arated from decreases, it is simpler to calculate balances than if increases and decreases
are recorded in one column. Remember that for most of our history, computers, cal-
culators, and other electronic devices were not available. Account balances had to be
determined using basic rules of math. Debits and credits facilitated that process.
Observe from Exhibit 21 that each transaction involves recording debits and cred-
its of equal magnitude. Also note that the accounting equation remains in balance af-
ter each transaction. In Exhibit 21, total assets of $18,000 ($6,000 $12,000) equals
total liabilities and owners’ equity ($10,000 $8,000).
An alternative to the T-account approach is the traditional journal format. The
journal is a book (or computer file) in which transactions are recorded individually.
The journal provides for each transaction to be recorded using debits and credits with-
out having to set up T-accounts. T-accounts are useful for simple transactions but be-
come unwieldy when many transactions are being recorded.
Transactions considered in this chapter can be recorded using the traditional jour-
nal format as shown in Exhibit 22. The first transaction records cash received by Mom’s
Cookie Company from the owners. Observe that the total amount of debits equals the
total amount of credits. Debits are listed first, and credits are indented to the right.
Cash is debited because assets have increased. Contributed Capital is credited because
owners’ equity has increased. The cells to the right side of the transaction (labeled Ef-
fect on Accounting Equation) are not part of the journal entry. We include them as a
reminder of the effect the transaction has on the equation. We abbreviate the elements
of the accounting equation as follows: A Assets, L Liabilities, OE Owners’ Eq-
uity, CC Contributed Capital, and RE Retained Earnings. Refer to Exhibit 5 for
comparison.
The purchase of a delivery van on January 6 by Mom’s Cookie Company is shown
in Exhibit 23. The purchase increased Equipment, decreased Cash, and increased Notes
Payable. Observe that negative signs are not used with debits and credits because the
credit to an asset or expense or the debit to a liability, owners’ equity, or revenue iden-
tifies the amount as a decrease in the account balance.
F62 SECTION F1: The Accounting Information System
61
Business Activities - The Source of Accounting Information

Exhibit 22 Journal Representation of Financing Transaction

Journal Effect on Accounting Equation

A L OE
Date Accounts Debits Credits CC RE
Jan. 2 Cash 10,000 10,000
Contributed Capital 10,000 10,000




Exhibit 23 Journal Representation of Investing Transaction

Journal Effect on Accounting Equation

A L OE
Date Accounts Debits Credits CC RE
Jan. 6 Equipment 25,000 25,000
Cash 3,000 3,000
Notes Payable 22,000 22,000




As a final example, Exhibit 24 provides the journal entries for the sale of goods
from Exhibit 9. Cash and Sales Revenue increase, thus increasing both assets and own-
ers’ equity. Cost of Goods Sold and Merchandise Inventory decrease when goods are
sold. Since Cost of Goods Sold is an expense, owners’ equity decreases. The decrease in
inventory reduces assets.


Exhibit 24 Journal Representation of Sales Transaction

Journal Effect on Accounting Equation

A L OE
Date Accounts Debits Credits CC RE
Jan. 31 Cash 11,400 11,400
Sales Revenue 11,400 11,400
Jan. 31 Cost of Goods Sold 7,600 7,600
Merchandise Inventory 7,600 7,600




REVIEW SUMMARY of IMPORTANT CONCEPTS


1. Accounting provides information about business activities
a. Accounting is an information system for measuring, recording, reporting, and ana-
lyzing business activities.
b. Financing activities provide financial resources for a company from creditors and
owners. Claims to resources by creditors and owners are recorded in liability and
owners’ equity accounts.
c. The accounting equation, Assets Liabilities Owners’ Equity, provides a basis
for recording transactions.
d. Accounting measures business activities by the cash value of resources transferred or
consumed in a transaction.
F63
CHAPTER F2: Business Activities—The Source of Accounting Information
62 Business Activities - The Source of Accounting Information

e. Investing activities involve acquiring and disposing of long-term assets.
f. Operating activities involve acquiring and selling goods and services. Revenues iden-
tify the amount of goods and services sold to customers. Expenses identify the
amount of resources consumed in acquiring and selling goods and services. Profit
or net income for a fiscal period is the revenue earned during the period minus ex-
penses incurred during the period.

2. Accounting reports business activities in the form of financial statements.
a. An income statement reports revenues, expenses, and net income for a fiscal period
as a measure of operating results.
b. A balance sheet reports the assets controlled by a company and the claims to those
assets by creditors and owners at a particular time, usually the end of a fiscal period.
c. A statement of cash flows reports the events that resulted in cash being received or
paid by a company during a fiscal period.
d. Accounting measures and reports the results of the company’s transformation of re-
sources into goods and services for sale to customers.

3. Financial analysis involves the interpretation and use of accounting information to
make business decisions.
a. Analysis involves the comparison of accounting numbers with other numbers and
comparison among companies or time periods.
b. Financial ratios compare one financial statement number with another. Return on
assets is one ratio used to evaluate a company’s performance.



DEFINE TERMS and CONCEPTS DEFINED in this CHAPTER


account (F46) investing activities (F48)
assets (F46) liabilities (F46)
balance sheet (F55) merchandise inventory (F50)
business activities (F45) net income (F55)
cash (F47) notes payable (F47)
contributed capital (F47) operating activities (F50)
cost of goods sold (F52) owners’ equity (F45)
credits (F59) principal (F45)
debits (F59) retained earnings (F51)
expense (F50) return on assets (ROA) (F58)
financial statements (F53) revenue (F50)
financing activities (F45) sales revenue (F52)
fiscal period (F55) statement of cash flows (F56)
income statement (F54) transactions (F46)
interest (F45)
F64 SECTION F1: The Accounting Information System
63
Business Activities - The Source of Accounting Information



SELF-STUDY PROBLEM SOLUTIONS
SSP2-1
OWNERS’
ASSETS LIABILITIES EQUITY
Accounts
Beginning Amounts 0 0 0
Cash 220,000
Notes Payable 120,000
Contributed Capital 100,000
Equipment 160,000
Cash 160,000
Building 400,000
Cash 40,000
Notes Payable 360,000
Ending Amounts 580,000 480,000 100,000



SSP2-2
ASSETS LIABILITIES OWNERS’ EQUITY
Other Contributed Retained
Date Accounts Cash Assets Capital Earnings
Beginning Amounts 0 0 0 0 0
Jan. 3 Cash 40,000
Contributed Capital 40,000
Jan. 5 Cash 25,000
Notes Payable 25,000
Jan. 8 Equipment 35,000
Cash 35,000
Jan. 10 Merchandise Inventory 20,000
Cash 20,000
Jan. 11 Supplies Expense 2,000
Cash 2,000
Jan. 15 Cash 12,000
Sales Revenue 12,000
Jan. 15 Cost of Goods Sold 8,000
Merchandise Inventory 8,000
Jan. 22 Cash 9,000
Sales Revenue 9,000
Jan. 22 Cost of Goods Sold 6,000
Merchandise Inventory 6,000
Jan. 31 Wages Expense 3,000
Cash 3,000
Jan. 31 Utilities Expense 800
Cash 800
Ending Amounts 25,200 41,000 25,000 40,000 1,200
F65
CHAPTER F2: Business Activities—The Source of Accounting Information
64 Business Activities - The Source of Accounting Information


A.
SSP2-3 Philistine Co.
Income Statement
For the Month Ended August 31, 2004

Sales revenue $ 520,000
Cost of goods sold (300,000)
Other expenses (140,000)
Net income $ 80,000




B. Retained earnings, August 1 $ 0
Net income 80,000
Less: Payment to owners 30,000
Retained earnings, August 31 $50,000




C. Philistine Co.
Balance Sheet
At August 31, 2004

Assets
Cash $ 25,000
Merchandise inventory 200,000
Equipment 425,000
Total assets $650,000
Liabilities and Owners’ Equity
Notes payable $350,000
Investment by owners 250,000
Retained earnings 50,000
Total liabilities and owners’ equity $650,000




D. Return on Assets $80,000 $650,000 12.3%




Thinking Beyond the Question
How do we know how well our business is doing?


At the beginning of the chapter we asked how a business can determine how
well it is performing. This chapter has described the key elements of a basic ac-
counting system. Accounts are used to record business activities. Account bal-
ances are summarized at the end of a fiscal period, and those balances are used
to prepare financial statements. Those statements help owners, creditors, and
other stakeholders understand the resources available to a company, how the
resources were financed, how they were used in the business, how much profit
the business earned, and the events that affected the company’s cash during
the period.
The procedures described in this chapter may appear mechanical. Some of
them are. However, sometimes judgments have to be made about when certain
F66 SECTION F1: The Accounting Information System
65
Business Activities - The Source of Accounting Information


events should be recorded. Assuming you are making the accounting decisions
for a company, what information do you think would tell you when revenues
have been earned and expenses have been incurred? What events would be
important for determining when to recognize revenues and expenses?




QUESTIONS
Joan Hoyt is considering opening a small retail store to sell knives and other kitchen utensils.
Q2-1
She has a small amount of money to invest and wants to maintain as much control over the
Obj. 1
business as she can. She has asked you to help her decide how to finance her business. De-
scribe the primary issues you would suggest Joan to consider.
Hardly Moving and Storage Corporation needs an additional $1,000,000 in financing to build
Q2-2
new facilities. How might Hardly get the money? What issues should company management
Obj. 1
consider in deciding on the type of financing to use?
Jerrilyn has invested $5,000 in shares of the stock of Ambitious Enterprises, Inc. From the cor-
Q2-3
poration’s perspective, was this a financing activity, an investing activity, or an operating ac-
Obj. 1
tivity? Why?
Discuss the effect on the accounting equation if a company accurately reports its assets, yet
Q2-4
understates its liabilities.
Obj. 2

How are liabilities and owners’ equity similar?
Q2-5
Obj. 2

Q2-6 Explain why the accounting equation must balance after each transaction.
Obj. 3

Is purchasing merchandise inventory considered an investing or operating activity? Explain.
Q2-7
Objs. 3, 4

If owners contribute resources to a company, Owners’ Equity increases. If a company records
Q2-8
Sales Revenue, Owner’s Equity also increases. How are Contributed Capital and Sales Rev-
Obj. 4
enue dissimilar?
While reviewing a company’s balance sheet, John observed the Retained Earnings account with
Q2-9
a balance of $850,000. “Wow,” he thought. “That’s a lot of cash!” Has John correctly inter-
Obj. 4
preted the company’s financial information? Explain.
Think of a company that operates in the same city as the college you are attending. With that
Q2-10
company in mind, identify two examples each of assets, liabilities, owners’ equity, revenues,
Obj. 5
and expenses that the company is likely to report on its financial statements.
Assume you are reviewing a balance sheet that has assets listed on the left side and liabilities
Q2-11
and owners’ equity on the right side. What question or questions can you answer by looking
Obj. 5
at the information on the left side of the balance sheet? What question or questions can you
answer by looking at the information on the right side of the balance sheet?
What types of information are reported, respectively, on the balance sheet, income statement,
Q2-12
and the statement of cash flows? Be specific.
Obj. 5

A balance sheet identifies assets and claims to assets. Typically, who has claims on a company’s
Q2-13
assets?
Obj. 3

Both the income statement and the statement of cash flows provide information about oper-
Q2-14
ating activities during a fiscal period. Why are both statements included in a company’s fi-
Obj. 5
nancial report? How can decision makers use information in each statement?
Why are account balances summarized into financial statements? Why don’t companies sim-
Q2-15
ply distribute a list of year-end account balances?
Obj. 5
F67
CHAPTER F2: Business Activities—The Source of Accounting Information
66 Business Activities - The Source of Accounting Information


If your instructor is using Personal Trainer in this course, you may complete online the assign-
EXERCISES ments identified by .
Write a short definition for each of the terms listed in the Terms and Concepts Defined in this
E2-1
Chapter section.

Leonetta Garcetti owns and manages a large construction company. This morning she is faced
E2-2
with the following issues.
Objs. 1, 3, 4

1. The office manager just submitted his resignation and the search for a replacement
must be organized.
2. A loan officer from the company’s bank just phoned saying that the company’s appli-
cation for a $400,000 loan has been approved.
3. Bids from several vendors have been received regarding installation of a new computer-
ized information system. One proposal must be selected.
4. Because the new bank loan has been approved, two short-term loans can be paid off.
5. Old office furniture is awaiting disposal.
6. A long-time customer is unhappy with the firm’s latest architectural drawings for a
new shopping center complex.
7. A new construction crane is being purchased.
8. An investor has approached Leonetta offering to purchase 20% of her company in ex-
change for cash.
9. The firm is considering the purchase of exclusive regional rights to a patented con-
struction process.
10. One of the company’s customers is behind on scheduled payments. The amounts are
large and Leonetta must decide whether to suspend construction on the project in-
volved.
Identify each of the issues above as involving a financing activity, an investing activity, or an
operating activity.

For each of the following items, identify which part of the transformation process is involved.
E2-3
Use F to indicate a financing activity, I to indicate an investing activity, or O to indicate an
Objs. 1, 3, 4
operating activity.
a. ____ New manufacturing equipment was purchased for installation in the factory.
b. ____ Three new salespersons were hired.
c. ____ A loan was obtained from a local bank.
d. ____ A $500 down payment was received from a customer on goods sold.
e. ____ The Human Resources department hired three new employees.
f. ____ The company’s worn-out delivery truck was sold to the junk yard for $400.
g. ____ The owner contributed more cash to the business.
h. ____ Refunds totaling $450 were given to several customers.
i. ____ Goods were shipped to a customer in a neighboring state.
j. ____ The remaining balance of a loan was repaid in full.

Popovich Company had the following transactions during June.
E2-4
Obj. 2
June 1 $20,000 of merchandise inventory was purchased with cash.
15 Sold merchandise for $60,000 cash. The merchandise had cost Popovich $28,000.
23 Borrowed $200,000 from a bank.
25 Paid $2,000 for supplies used in June.
28 June wages of $6,000 were paid.
30 $100,000 of equipment was purchased using cash.
30 Paid $4,000 for utilities consumed in June.

Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would re-
sult from each transaction by completing the table provided on the next page.
(Continued)
F68 SECTION F1: The Accounting Information System
67
Business Activities - The Source of Accounting Information


ASSETS LIABILITIES OWNERS’ EQUITY
Other Contributed Retained
Date Accounts Cash Assets Capital Earnings
June 1 Beginning Amounts $40,000 60,000 30,000 50,000 20,000




Ending Amounts



E2-5 Identify each transaction in E2-4 as financing, investing, or operating.
Obj. 1, 3, 4


Perez Company had the following selected transactions during the month of May. Show how
E2-6
the financial effects of each transaction would be recorded using the following format. The
Obj. 2
first transaction has been completed as an example.
Juanita Perez invested $10,000 in the company on May 1.


ASSETS LIABILITIES OWNERS’ EQUITY
Other Contributed Retained
Date Accounts Cash Assets Capital Earnings
Beginning Amounts 70,000 90,000 60,000 60,000 40,000
May 1 Cash 10,000
Contributed Capital 10,000



May 5 Sold goods for $30,000 cash. The goods had cost $14,000.
10 Purchased merchandise inventory for $45,000 cash.
15 Paid back part of a bank loan, $1,500 (decrease Notes Payable).
22 Purchased equipment for $4,000 using cash.
31 Paid the utility company for services consumed, $600.
31 Paid $7,500 wages for labor services consumed.
E2-7 Identify each transaction in E2-6 as financing, investing, or operating.
Objs. 1, 3, 4

Rosy Cheeks Company distributes perfumes and cosmetics. The following account changes
E2-8
were made in the company’s accounting records during March. For each item, describe the
Obj. 2
transaction that caused the changes. The first item has been completed as an example.
a. Cash increased $18,000; Contributed Capital increased $18,000.
The owners invested $18,000 in the company.
b. Equipment increased $10,500; Cash decreased $10,500.
c. Cash increased $8,500; Notes Payable increased $8,500.
d. Supplies inventory increased $13,500; Cash decreased $13,500.
e. Merchandise Inventory decreased $9,500; Cost of Goods Sold increased $9,500.
f. Cash increased $23,500; Sales Revenue increased $23,500.
g. Supplies Expense increased $2,250; Supplies inventory decreased $2,250.

Amelio has operated a one-person law firm for many years. During the first week of Febru-
E2-9
ary, the following events occurred in his business.
Obj. 2
F69
CHAPTER F2: Business Activities—The Source of Accounting Information
68 Business Activities - The Source of Accounting Information

Feb. 2 Collected $1,800 from a client for legal work performed.
3 February’s office rent of $1,200 was paid to the landlord.
4 A $300 payment was made on a loan previously obtained from a local bank.
4 The monthly subscription to Lawyer’s Monthly magazine (a Miscellaneous Expense)
was paid: $35.
5 Collected $4,250 for legal services performed.
5 Purchased a computer for $3,200 using cash.
6 Wages were paid to the office staff totaling $525.
6 Office supplies of $128 were purchased for cash and were consumed.

Show how the events above would be recorded using the format demonstrated in the chap-
ter. Beginning account balances were as follows: Cash $5,000, Liabilities $1,500, Contributed
Capital $3,000, and Retained Earnings $500. Prepare an income statement for the first week
of February.

E2-10 Identify each transaction in E2-9 as financing, investing, or operating.
Objs. 1, 3, 4

Balance sheet accounts for Dale’s Delightful Florist Shoppe at the end of a recent fiscal year
E2-11
are listed below. Prepare a schedule demonstrating that assets liabilities owner’s equity
Obj. 2
for the company.

Supplies Inventory $ 4,150
Buildings 79,500
Cash 1,200
Equipment 12,750
Flowers and Plants 24,780
Notes Payable 58,000
Proprietor’s Capital 64,380

Harmony Cabot opened a music store in a local mall, selling CDs and tapes. She invested
E2-12
$80,000 in the business and borrowed $140,000 from a local bank. The following additional
Obj. 2
events occurred during April, the first month of operations:
a. Paid cash for equipment costing $45,150.
b. Purchased an inventory of CDs and tapes for $129,600 in cash.
c. Sold one-third of the CDs and tapes for a cash sales price of $85,000.
d. Paid expenses as follows:

Employee wages $12,300
Rent 15,500
Utilities 4,800
Postage 650
Insurance 1,290

Record the transactions using the format shown in the chapter.

E2-13 Chang Pottery Works began November with a Retained Earnings balance of $95,000. Dur-
ing November the company earned $15,000 and returned $4,000 to the owners. Prepare
Obj. 4
a schedule that reports the beginning balance, changes, and ending balance of retained
earnings.

The following events occurred during December for Christmas Cookie Company:
E2-14
Obj. 5
a. Purchased and consumed $60,000 of flour, sugar, and other ingredients for cookies
sold.
b. Paid $97,500 for December wages.
c. Paid $24,000 for utilities consumed in December.
d. Sold $234,000 of cookies and received cash.
Prepare an income statement for Christmas Cookie Company.
F70 SECTION F1: The Accounting Information System
69
Business Activities - The Source of Accounting Information

E2-15 Wheatgerm Healthfoods reported the following information:
Obj. 5
Proceeds from issuance of notes payable $13,057
Additions to plant and equipment 5,379
Proceeds from owners 30,957
Proceeds from sales of plant and equipment 1,986
Payments of debt 80,323

Calculate the net cash flow from (a) financing and (b) investing activities for Wheatgerm.


Darden Bottling Company has the following information available for the first six months of
E2-16
2004:
Obj. 5

Cash collected from customers $268,000
Cash paid merchandise inventory 83,500
Cash paid for utilities 20,000
Cash paid for insurance 23,000
Cash paid for equipment 76,500
Cash paid to employees 57,500
Cash paid for postage 7,500
Cash paid to owners 5,000
Cash received from sale of old equipment 18,500

Determine the cash flow from operating activities for the six-month period.
Listed below are typical accounts or titles that appear on financial statements. For each item,
E2-17
identify the financial statement(s) on which it appears.
Obj. 5

Wages expense
Cost of goods sold
Sales revenue
Merchandise inventory
Net income
Retained earnings
Contributed capital
Rent expense
Cash
Notes payable
After six months of operation, Brother’s Lawn Service had the following revenue and expense
E2-18
account balances:
Obj. 5

Supplies expense $ 4,000
Wages expense 6,000
Service revenue 12,300
Utilities expense 500
Rent expense 1,000

Prepare an income statement for Brother’s Lawn Service for the first six months of operation
that ended June 30, 2004.
On June 30, 2004, Brothers’ Lawn Service had the following account balances:
E2-19
Obj. 5
Cash $3,000
Notes payable 1,000
Contributed capital 6,700
Retained earnings 800
Supplies inventory 500
Equipment 5,000

Prepare a balance sheet for Brother’s Lawn Service.
F71
CHAPTER F2: Business Activities—The Source of Accounting Information
70 Business Activities - The Source of Accounting Information

E2-20 Record each transaction described in E2-4, using the debit and credit format illustrated in the
appendix.
Obj. 2, appendix

Record each transaction described in E2-6, using the debit and credit format illustrated in the
E2-21
appendix.
Obj. 2, appendix



If your instructor is using Personal Trainer in this course, you may complete online the assign-

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