A S S I G N M E N T M A T E R I A L S

Concept Self-check

1. What is the difference between managerial and financial

accounting?
2. What is the difference between a business organization and a non-
business organization?
3. What are the three types of business organizations?
4. What is a publicly accountable enterprise? A private enterprise?
5. What does the term limited liability mean?
6. Describe what GAAP refers to.
7. Identify and explain the six qualitative characteristics of GAAP.
8. What is the general purpose of financial statements? What are the
four types of financial statements?
9. What is the purpose of an income statement? a balance sheet? How
do they interrelate?
10. Define the terms “revenue” and “expense”.
11. What is net income? What information does it convey?
12. What is the purpose of a statement of changes in equity?
13. Shareholders’ equity consists of what two components?
14. Explain how retained earnings and dividends are related.
15. What are the three primary components of the balance sheet?
16. What are assets?
17. To what do the terms “liability” and “shareholders’ equity” refer?
18. What information is provided in the statement of cash flows?
19. What are notes to the financial statements?
20. Illustrate how the double-entry accounting system works.
21. Why are financial statements prepared at regular intervals? Who
are the users of these statements?
22. What is the basic accounting equation? How does it work?
23. Explain what is meant by the term “financial transaction”. Give an
example of a financial transaction.

CHAPTER ONE / Introduction to Financial Accounting 21

Comprehension Problems
CP 1–1

The following list covers many of the types of financial transactions.

Notice that each transaction has an equal and offsetting effect on the
accounting equation.

Types of Accounting Transactions

SHAREHOLDERS’
ASSETS = LIABILITIES + EQUITY
1. (+) (+)
2. (+) (+)
3. (+)(-)
4. (-) (-)
5. (-) (-)
6. (+) (-)
7. (-) (+)
8. (+)(-)
9. (+)(-)

Required: Using the appropriate accounting equation, study the

following transactions and identify the effect of each on
assets, liabilities and shareholders’ equity, as applicable. Use
a (+) to denote an increase and a (–) to denote a decrease, if
any.

A = L+E
Example:
(+) (+) Issued share capital for cash
Purchased a truck for cash
Received a bank loan to pay for equipment
Made a deposit for electricity service to be provided in the
future
Paid rent for the month just ended
Signed a new union contract that provides for increased
wages in the future
Hired a messenger service to deliver letters during a mail
strike
Received a parcel; paid the delivery service
Billed customers for services performed
Made a cash payment to satisfy an outstanding obligation
Received a payment of cash in satisfaction of an amount
owed by a customer

22 CHAPTER ONE / Introduction to Financial Accounting

 Collected cash from a customer for services rendered
Paid cash for truck operating expenses (gas, oil, etc.)
Made a monthly payment on the bank loan; this payment
included a payment on part of the loan and also an amount of
interest expense. (Hint: This transaction affects more than two
parts of the accounting equation.)
Issued shares in the company to pay off a loan
Paid a dividend.

CP 1–2

Refer to the list of accounting transactions in Comprehension Problem

1–1.

Required: Study the following transactions and identify, by number (1

to 9), the type of transaction. Some transactions may not
require an accounting entry.

Example:
1 Issued share capital for cash
Paid an account payable
Borrowed money from a bank
Collected an account receivable
Collected a commission on a sale made today
Paid for advertizing in a newspaper
Repaid money borrowed from a bank
Signed a contract to purchase a computer
Received a bill for supplies used during the month
Received a payment of cash in satisfaction of an amount owed
by a customer
Sent a bill to a customer for repairs made today
Sold equipment for cash
Purchased a truck on credit, to be paid in six months
Requested payment from a customer of an account receivable
that is overdue
Increased employee vacations from four to six weeks
Recorded the amount due to the landlord as rent
Received the monthly telephone answering service bill

CHAPTER ONE / Introduction to Financial Accounting 23

 CP 1–3

Required: Calculate the missing amounts for companies A to E.

A B C D E
Cash $3,000 $1,000 $ ? $6,000 $2,500
Equipment 8,000 6,000 4,000 7,000 ?
Accounts payable 4,000 ? 1,500 3,000 4,500
Share capital 2,000 3,000 3,000 4,000 500
Retained earnings ? 1,000 500 ? 1,000

CP 1–4

Required: Calculate the net income earned during the year. Assume
that the change to shareholders’ equity results only from net
income earned during the year.

Assets Liabilities
Balance Jan. 1, 2015 $50,000 $40,000
Balance Dec. 31, 2015 40,000 20,000

CP 1–5

Required: Indicate whether each of the following is an asset (A),

liability (L), or a shareholders’ equity (E) item.

1. Accounts payable
2. Accounts receivable
3. Bank loan
4. Cash
5. Equipment
6. Insurance expense
7. Loan payable
8. Prepaid insurance
9. Rent expense
10. Repair revenue
11. Share capital
12. Truck operating expense
13. Unused office supplies
14. Dividends

24 CHAPTER ONE / Introduction to Financial Accounting

 CP 1–6

The following accounts are taken from the records of Jasper Inc. at
January 31, 2015, its first month of operations.

Cash $33,000
Accounts receivable 82,000
Unused supplies 2,000
Land 25,000
Building 70,000
Equipment 30,000
Bank loan 15,000
Accounts payable 27,000
Share capital ?
Net income 40,000
Dividends 1,000

Required:

1. Calculate the amount of total assets.

2. Calculate the amount of total liabilities.
3. Calculate the amount of share capital.

CP 1–7

Required: From the financial information below, complete an income

statement, statement of changes in shareholders’ equity, and
balance sheet.

Accounts receivable $ 4,000

Accounts payable 5,000
Cash 1,000
Share capital ?
Equipment 8,000
Insurance expense 1,500
Miscellaneous expense 2,500
Office supplies expense 1,000
Service revenue 20,000
Wages expense 9,000
Dividends 2,000

CHAPTER ONE / Introduction to Financial Accounting 25

 Income Statement

Service revenue $
Expenses
Insurance $
Miscellaneous
Office supplies
Wages
Net income $

Statement of Changes in Equity

Share Retained Total

capital earnings equity
Opening balance $ -0- $ -0- $ -0-
Shares Issued
Net income
Ending balance

Balance Sheet

Liabilities and Shareholder’s

Assets Equity
Cash $ Accounts payable $
Accounts receivable Share capital
Equipment Retained earnings
$ $

26 CHAPTER ONE / Introduction to Financial Accounting

 CP 1–8

A junior bookkeeper of Adams Ltd. prepared the following financial

statements at the end of its first month of operations.

Adams Ltd.
Income Statement
For the Month Ended January 31, 2015

Revenue $3,335
Expenses
Accounts payable $ 300
Land 1,000
Dividends 500 1,635
Miscellaneous expenses 335
Net income $1,200

Balance Sheet

Liabilities and Shareholder’s

Assets Equity
Cash $1,000 Rent expense $ 300
Repairs expense 500 Share capital 3,000
Salaries expense 1,000 Retained earnings 1,200
Building 2,000
$4,500 $4,500

Required: Prepare a revised income statement and balance sheet.

CHAPTER ONE / Introduction to Financial Accounting 27

 CP 1–9

Financial statements are prepared according to a number of accounting

principles, some of which are listed below:

1. Business entity 6. Consistency

2. Going concern 7. Full disclosure
3. Monetary unit 8. Matching
4. Historical cost 9. Materiality
5. Recognition

Required: Identify the principle that would apply in each of the

following situations. Explain your choice.

___________ a. An accountant for Caldwell Corporation records a $25 stapler with

a five–year life as an expense. Caldwell has total assets of
$1,000,000.

___________ b. Fred Rozak, an independent consultant, must keep a set of books

for his consulting firm and a separate set of books for his personal
records.

___________ c. A machine is recorded at its purchase price of $9,000 and is not

revalued at the end of the accounting period to reflect its market
value of $10,000.

___________ d. An asset purchased in 1985 for $10,000 is not revalued even

though it would take $30,000 in equivalent money to purchase the
land today.

___________ e. Accountants of Hull Corporation do not record the value of its

equipment at the much lower amount for which it could be sold in
the near future.
___________ f. Investors of Spellman Corporation note that the accounting policy
for valuing inventory has not changed from the prior fiscal year.

g. Looten Corporation senior managers decide to disclose a recent $2

___________
million lawsuit in a note to the financial statements even though
the case will not likely be settled for two years.

28 CHAPTER ONE / Introduction to Financial Accounting

Problems

P 1–1

The following balances appeared on the transactions worksheet of Hill

Chairs Inc. on April 1, 2015.

ASSETS = LIABILITY + EQUITY

Accounts Prepaid Unused Accounts Share Retained
Cash + Receivable + Expense + Supplies = Payable + Capital + Earnings
1,400 3,600 1,000 350 2,000 4,350
The following transactions occurred during April:
a. Collected $2,000 cash in satisfaction of an amount owed by a
customer
b. Billed $3,000 to customers for chairs rented to date
c. Paid the following expenses: advertizing, $300; salaries, $2,000;
telephone, $100
d. Paid half of the accounts payable
e. Received a $500 bill for April truck operating expenses
f. Collected $2,500 in satisfaction of an amount owed by a customer
g. Billed $1,500 to customers for chairs rented to date
h. Transferred $500 of prepaid expenses to rent expense
i. Counted $200 of supplies still on hand (recorded the amount used as
an expense)
j. Issued additional share capital and received $1,000 cash
k. Paid $200 dividend in cash.

Required: Record the opening balances and the above transactions on a

transactions worksheet and calculate the total of each
column at the end of April. (Use the headings above on your
worksheet.)

CHAPTER ONE / Introduction to Financial Accounting 29

 P 1–2

The following transactions occurred in Larson Services Inc. during

August 2015, its first month of operations.

Aug. 1 Issued share capital for $3,000 cash

1 Borrowed $10,000 cash from the bank
1 Paid $8,000 cash for a used truck
4 Paid $600 for a one–year truck insurance policy effective
August 1 (recorded as prepaid expense since it will benefit
more than one month)
5 Collected $2,000 fees from a client for work to be performed
at a later date
7 Billed $5,000 fees to clients for services performed to date
9 Paid $250 for supplies used to date
12 Purchased $500 supplies on credit (record supplies as an
asset)
15 Collected $1,000 of the amount billed August 7
16 Paid $200 for advertizing in The News during the first two
weeks of August
20 Paid half of the amount owing for the supplies purchased
August 12
25 Paid the following expenses: rent for August, $350; salaries,
$2,150; telephone, $50; truck operating, $250
28 Called clients for payment of the balances owing from August
7
29 Billed $6,000 fees to clients for services performed to date,
including $1,500 related to cash received August 5
31 Transferred $50 of August’s prepaid expenses to insurance
expense
31 Counted $100 of supplies still on hand (recorded the amount
used as an expense).

Required:
1. Record the above transactions on a transactions worksheet and
calculate the total of each column at the end of August. Use the
following headings on your worksheet.
ASSETS = LIABILITIES + EQUITY
Acct. Ppd. Un. Bank Acct. Share Ret.
Cash + Rec. + Exp. + Supp. + Truck = Loan + Pay. + Capital + Earn.

30 CHAPTER ONE / Introduction to Financial Accounting

 2. Prepare an income statement and statement of changes in equity
for the month ended August 31, 2015, and a balance sheet at
August 31, 2015. Identify the revenue earned as Fees. Record the
expenses in alphabetical order.

P 1–3

Following are the asset, liability, and shareholders’ equity balances of

Dumont Inc. at January 31, 2015, after its first month of operations.

ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY

Cash $1,300 Bank loan $8,000 Share capital $2,000
Accounts rec. 2,400 Accounts pay. 1,000 Service revenue 7,500
Prepaid exp. 550 Advertizing expense 500
Unused supp. 750 Commissions expense 720
Truck 9,000 Insurance expense 50
Interest expense 80
Rent expense 400
Supplies expense 100
Telephone expense 150
Wages expense 2,300
Dividend paid 200

Required:
1. Prepare an income statement and statement of changes in equity
for the month ending January 31, 2015. Record the expenses in
alphabetical order. Assume no share capital was issued during the
month.
2. Prepare a balance sheet at January 31.

P 1–4

The following is an alphabetical list of data from the records of Kenyon

Services Corporation at March 31, 2015.

Accounts payable $9,000 Equipment rental expense $ 500

Accounts receivable 3,900 Fees earned 4,500
Advertizing expense 300 Insurance expense 400
Cash 3,100 Interest expense 100
Share capital 2,000 Truck operating expense 700
Equipment 5,000 Wages expense 1,500

CHAPTER ONE / Introduction to Financial Accounting 31

 Required:
1. Prepare an income statement and statement of changes in equity
for the month ended March 31, 2015. Record the expenses in
alphabetical order. Assume no share capital was issued during the
month.
2. Prepare a balance sheet at March 31.

P 1–5

The following “financial statement” was prepared from the records of

Laberge Sheathing Inc. for the eight-month period ended August 31,
2015.

Laberge Sheathing Inc.

Financial Statement
For the Eight Month Period Ended August 31, 2015

Cash $ 400 Accounts payable $ 7,800

Accounts receivable 3,800 Share capital 3,200
Unused supplies 100 Service revenue 6,000
Equipment 8,700
Advertizing expense 300
Interest expense 500
Maintenance expense 475
Supplies expense 125
Wages expense 2,000
Dividends 600
$17,000 $17,000

Required:
1. When is the corporation’s likely fiscal year-end?
2. Prepare an income statement and statement of changes in equity
for the eight-month period ended August 31, 2015.
3. Prepare a balance sheet at August 31.

32 CHAPTER ONE / Introduction to Financial Accounting

 P 1–6

The following transactions took place in McIntyre Builders Corporation

during June 2015, its first month of operations.

Jun. 1 Issued share capital for $8,000 cash

1 Purchased $5,000 equipment on credit
2 Collected $600 cash for renovations completed today
3 Paid $20 for supplies used June 2
4 Purchased $1,000 supplies on credit (record supplies as an
asset)
5 Billed customers $2,500 for renovations completed to date
8 Collected $500 of the amount billed June 5
10 Paid half of the amount owing for equipment purchased June 1
15 Sold excess equipment for a promise from the buyer to pay
$1,000 in the future. The same amount is the same as the
original cost of this equipment. Record as a loan payable.
18 Paid for the supplies purchased June 4
20 Received a bill for $100 for electricity used to date (record as
utilities expense)
22 Paid $600 to the landlord for June and July rent (record as
prepaid expense)
23 Signed a union contract
25 Collected $1,000 of the amount billed June 5
27 Paid the following expenses: advertizing, $150; telephone, $50;
truck operating expense (repairs, gas), $1,000; wages, $2,500
30 Billed $2,000 for repairs completed to date
30 Transferred the amount for June rent to rent expense
30 Counted $150 of supplies still on hand (recorded the amount
used as an expense)
30 Paid $30 dividend in cash.

Required:
1. Record the above transactions on a transactions worksheet and
calculate the total of each column at the end of June. Use the
following headings on your worksheet.
ASSETS = LIABILITY + S/H EQUITY
Acct. Ppd. Un. Acct. Share Ret.
Cash + Rec. + Exp. + Supp. + Equip. = Pay. + Capital + Earn.

CHAPTER ONE / Introduction to Financial Accounting 33

 2. Prepare an income statement and statement of changes in equity
for the one-month period ended June 30, 2015 and a balance sheet
at June 30. Identify the revenue earned as “Renovations”. Record
the expenses on the income statement in alphabetical order.

P 1–7

Clarke Limited had the following balances in its accounting equation at

the end of September 30, 2015:

ASSETS = LIABILITIES + S/H EQUITY

Cash $14,215 Accounts payable $ 3,853 Share capital $ ?
Accounts receivable 11,785 Loan payable 25,000
Unused supplies 1,220
Land ?
Building ?
Furniture 8,000
Equipment 60,000
Truck 3,210
$ ? $28,853 $ ?

Land and building were acquired at a cost of $30,000. It was estimated

that one-third of the total cost should be applied to the cost of land.
The following transactions were completed during the month of
October:
Oct. 2 Paid $110 to satisfy an account payable
3 Collected in full an account receivable of $670
4 Purchased office supplies for $400 for credit (record supplies
as an asset)
8 Issued additional share capital for $16,000 cash
10 Collected $1,000 cash owed by a customer
11 Purchased equipment for $22,000; made a cash payment of
$2,000, the balance to be paid within 30 days
15 Paid $400 cash to satisfy an account payable
20 Paid $10,000 in cash in partial settlement of the liability of
October 11; took out a long-term loan for the balance
31 Collected in full an account receivable of $300.

Required:
1. Calculate the missing figures in the September 30 accounting
equation.

34 CHAPTER ONE / Introduction to Financial Accounting

 2. Record the September 30 balances on a transactions worksheet and
record the October transactions. Total the columns and ensure that
the accounting equation balances.
3. Calculate net income for the month of October.

Alternate Problems

AP 1–1

The following amounts appeared on the transactions worksheet of

Snider Truck Rentals Corporation on May 1, 2015.

ASSETS = LIABILITY + S/H EQUITY

Prepaid Unused Accounts Share Retained
Cash + Expense + Supplies + Equip. + Truck = Payable + Capital + Earnings
1,600 400 3,000 7,000 4,000 8,000
The following transactions occurred during May:
a. Collected $5,000 cash for tool rental during the month
b. Paid $500 rent expense
c. Paid $1,500 cash to satisfy an account payable
d. Paid $600 for a one-year insurance policy effective May 1 (record the
asset as prepaid expense)
e. Purchased used truck for $5,000 on credit
f. Paid the following expenses: advertizing, $300; salaries, $2,500;
telephone, $150; truck operating, $550
g. Transferred the amount of May’s insurance ($50) to insurance
expense
h. Estimated $200 of supplies to have been used during May
i. Issued additional share capital and received $1,000 cash
j. Paid $300 dividend in cash.

Required: Record the above transactions on a transactions worksheet

and calculate the total of each column at the end of May.

CHAPTER ONE / Introduction to Financial Accounting 35

 AP 1–2

Jewell Contractors Corporation was incorporated on May 1, 2015 and

had the following transactions during its first month of operations.

May 1 Issued share capital for $5,000 cash

1 Paid $1,500 rent in advance for three months: May, June, and
July (recorded as prepaid expense)
2 Purchased $1,000 of supplies on credit (record the asset as
unused supplies)
2 Received $1,000 cash from a customer for work to be
performed at a later date
3 Billed a customer $1,500 for repairs performed
4 Paid $50 for an advertizement in The News
5 Received $250 cash for work completed today
10 Collected the amount billed on May 3
15 Paid $500 cash to a creditor
18 Borrowed $2,000 cash from the bank
20 Signed a major contract for work to be done in June
22 Purchased for cash $3,000 of equipment
25 Billed customers $3,500 for work completed to date
27 Paid the following expenses: electricity, $75; telephone, $25;
and wages, $2,000
31 Transferred the amount of May’s rent ($500) from prepaid
expense to rent expense
31 Counted $200 of supplies still on hand: the rest had been
used during May
31 Completed $600 of work that had been paid on May2 and
billed the customer.

Required:
1. Record the above transactions on a transactions worksheet and
calculate the total of each column at the end of May. Use the
following headings on your worksheet.
ASSETS = LIABILITIES + S/H EQUITY
Acct. Ppd Un. Bank Acct. Un. Share Ret.
Cash + Rec. + Exp. + Supp. + Equip. = Loan + Pay. + Rev. + Capital + Earn.

2. Prepare an income statement for the month of May. Identify the

revenue earned as “Repairs”. Record the expenses in alphabetical
order.

36 CHAPTER ONE / Introduction to Financial Accounting

 AP 1–3

The following asset, liability, and shareholders’ equity accounts are

taken from the transactions worksheet of Arthur Products Corporation
at December 31, 2015, its first month of operations.

ASSETS = LIABILITIES + S/H EQUITY

Cash $ 1,000 Accounts Pay. $17,000 Share Capital $25,000
Accounts Rec. 9,000 Salaries Pay. 2,000 Fees Earned 13,600
Prepaid Exp. 2,250 Advertizing Expense 500
Land 10,000 Insurance Expense 250
Building 25,000 Property Tax Expense 200
Equipment 5,800 Salaries Expense 3,000
Telephone Expense 100
Dividend 500

Required:
1. Prepare an income statement and statement of changes in equity
for the month ending December 31, 2015. Record the expenses in
alphabetical order.
2. Prepare a balance sheet at December 31, 2015.

AP 1–4

The following is an alphabetical list of data from the records of Slemko

Bookkeeping Corporation at September 30, 2015.

Accounts payable $2,200 Repair revenue $6,550

Accounts receivable 6,000 Rent expense 400
Advertizing expense 50 Salaries expense 2,350
Cash 700 Supplies expense 100
Share capital 5,000 Telephone expense 75
Equipment 2,000 Truck operating expense 325
Maintenance expense 250 Wages expense 1,100
Dividend 400

Required:
1. Prepare an income statement and statement of changes in equity
for the month ended September 30, 2015. Record the expenses on
the income statement in alphabetical order. Assume no share
capital was issued during the month.
2. Prepare a balance sheet at September 30.

CHAPTER ONE / Introduction to Financial Accounting 37

 AP 1–5

The following “financial statement” was prepared from the records of

Armfeld Industries Ltd:

Armfeld Industries Ltd.

Financial Statement
For the Three-Month Period Ended November 30, 2015

Cash $ 750 Bank loan $ 5,000

Accounts receivable 2,200 Accounts payable 3,000
Prepaid insurance 550 Share capital 1,000
Unused supplies 300 Repair revenue 5,000
Equipment 6,000
Advertizing expense 200
Commissions expense 1,500
Insurance expense 50
Rent expense 450
Wages expense 2,000
$14,000 $14,000

Required:
1. Prepare an income statement and statement of changes in equity
for the three-month period ended November 30, 2015. Record the
expenses on the income statement in alphabetical order. Assume no
share capital was issued during the month.
2. Prepare a balance sheet at November 30.

AP 1–6

Polarscape Snow Services Ltd. was incorporated on December 1, 2015

and had the following transactions during its first month of operations.

Dec. 1 Issued share capital for $6,000 cash

1 Purchased a used truck for $9,000: paid $4 ,000 cash, balance
due January 15
2 Purchased a $2,000 snowplough on credit to be attached to
the truck (record as an increase in the cost of the truck)
5 Purchased salt, sand, and gravel on credit for $500 (recorded
as an asset, unused supplies)
6 Paid truck operating expenses of $200
7 Paid $360 for a one-year truck insurance policy effective
December 1 (record as an asset, prepaid expense)

38 CHAPTER ONE / Introduction to Financial Accounting

 14 Paid $1,500 in wages for two weeks
16 Paid $40 traffic ticket (record as truck operating expense)
20 Received a bill for $350 of truck repairs
24 Purchased tire chains on credit for $100 (recorded as truck
operating expense)
24 Collected $3,500 of the amount billed December 3
27 Paid for the purchase made on December 5
28 Collected $400 for snow removal performed today for a new
customer
28 Paid $1,500 in wages for two weeks
30 Called customers owing $1,500 billed December 3
31 Transferred the amount of December’s truck insurance ($30)
to insurance expense
31 Counted $100 of salt, sand, and gravel still on hand (record the
amount used as supplies expense)
31 Recorded unpaid wages for three days applicable to December
in the amount of $450
31 Billed customers $5,000 for December snow removal
31 Paid $200 dividend in cash.

Required:
1. Record the above transactions on a transactions worksheet and
calculate the total of each column at the end of December. Use the
following headings on your worksheet.

ASSETS = LIABILITIES S/H EQUITY

Acct. Ppd. Unused Acct. Wages Share Ret.
Cash + Rec. + Exp. + Supp. + Truck = Pay. + Pay. + Capital + Earn.

2. Prepare an income statement and a statement of changes in equity

for the month-ended December 31, 2015, and a balance sheet at
December 31. Identify the revenue as “Service Revenue”. Record
the expenses in alphabetical order.

CHAPTER ONE / Introduction to Financial Accounting 39

40 CHAPTER ONE / Introduction to Financial Accounting