ANSWERS TO DISCUSSION QUESTIONS AND

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ANSWERS TO DISCUSSION QUESTIONS AND

CRITICAL THINKING/ETHICAL CASE

• The functions of accounting are to analyze, record, classify, summarize, report, and

interpret financial information.

• Sole proprietorship—1 owner; unlimited liability; easy to form; limited life

Partnership—2 or more owners; unlimited liability; easy to form; limited life Corporation—Stockholders; limited liability; difficult to form; unlimited life

• Businesses are classified as service, merchandise, or manufacturing.
• Computer technology has greatly reduced the time required for performing the

bookkeeping function.

• The three elements of the basic accounting equation are assets, liabilities, and

owner's equity.

• Capital is the owner's current investment or equity in the assets of a business. It is

one subdivision of owner's equity.

• True. The sum of the left side of the equation (assets) must equal the sum of the

right side of the equation (liabilities and owner's equity).

• False. That is the income statement.
• False. Revenue is a subdivision of owner's equity.
• Owner's equity is subdivided into Capital, Withdrawals, Revenue, and Expenses.
• False. It is non-business expense of the owner; a subdivision of owner's equity. It is

not a business expense.

• False. As expenses increase, owner's equity decreases.
• Revenue less Expenses; an income statement shows performance over time.
• False. It calculates ending capital.
• The question in this case is whether Paul should be allowed to "pad" his expense

account with an additional $100 of expenses. I feel that Paul should only be allowed to expense those items that are business related. Paul's argument that he is entitled to an additional $100 is not a valid assumption. However, he should be reimbursed for any business expenses during the weekend.

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SOLUTIONS TO CONCEPT CHECKS

• A
• A
• L
• A
• OE
• A

• Liabilities
• Total Assets
• Accounts Payable

• I
• S

4.Total assets = Cash $31,000 + Warehouse equipment $3,000 = $34,000

• J. Penny, Capital
• J. Penny, Withdrawals
• Advertising Expense
• Taxi Fees Earned

• Accounts Payable
• Grooming Fees Earned

• a,b,d

• IS
• BS
• BS
• BS
• IS
• IS
• OE
• BS

• OE
• BS
• BS
• IS

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SOLUTIONS TO SET A EXERCISES

1A-1. a. $30,000 =$8,000 + $22,000

• $105,000 =$7,000 + $98,000
• $25,000 =$11,000 + OE

OE should be $14,000

1A-2.

Assets = Liabilities + Owner’s Equity Cash + Equipment = Accounts + Payable Matty, Capital

• +130,000 +130,000
• (1,100) +1,100
• +950 +950

1A-3.

RIDEOUT COMPANY CLEANERS

BALANCE SHEET

NOVEMBER 30, 201X

Assets Liabilities and Owner’s Equity Cash $71 0 0 0 Liabilities Equipment 12 0 0 0 Accounts Payable $15 1 0 0 15 1 0 0 Total Liabilities

Owner's Equity

• Rideout, Capital 67 9 0 0

Total Liabilities and Total Assets $83 0 0 0 Owner's Equity $83 0 0 0

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EXERCISES(CONTINUED)

1A-4.

ASSETS = LIABILITIES + OWNER'S EQUITY

B. B.

Accounts Computer Accounts Black, Black, Cash + Rec. + Equip. = Payable + Capital – Withd. + Revenues – Expenses

• +60,000 +60,000
• +7,000 +7,000
• (100) +100

d.

+14,300 +14,300

• +30,600 +30,600
• (3,600) +3,600
• (1,470) +1,470

Remember, as withdrawals or expenses increase, the end result is to reduce owner's equity.