ANSWERS TO QUESTIONS

Chapter 2 The Balance Sheet

ANSWERS TO QUESTIONS

• (a) An asset is a resource owned by a company that has measurable value

and is expected to provide future benefits.

(b) A current asset is an asset that will be used up or turned into cash within the next 12 months.

(c) A liability is a debt or obligation arising from past transactions or events, which the company is likely to pay, settle, or fulfill by sacrificing resources in the future.

(d) A current liability is a debt or obligation that will be paid, settled, or fulfilled within one year.

(e) Contributed Capital includes the amount of financing (cash and sometimes other assets) provided to the company by shareholders in exchange for shares.

(f) Retained earnings are the cumulative earnings of a company that are not distributed to the owners and instead are reinvested in the business.

• A transaction is an exchange or event that has a direct and measurable financial

effect on the assets, liabilities, or shareholders’ equity of a business.

Transactions include two different types of events: (1) external exchanges and

(2) internal events. The first situation (1) is exemplified by the sale of goods or services to customers. The second situation (2) is exemplified by the company using up the benefits of assets owned by the company such as equipment.

• Accounts are used to accumulate and report the effects of different business

activities. Accounts are necessary to keep track of all increases and decreases in the basic accounting equation.

• The basic accounting equation is: Assets = Liabilities + Shareholders’ Equity.

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Chapter 02 - The Balance Sheet

Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual Copyright McGraw-Hill Ryerson, 2015 Page 2-2

• Debit is the left side of a T-account and credit is the right side of a T-account. A

debit is an increase in assets or a decrease in liabilities or shareholders’ equity.A credit is the opposite – a decrease in assets or an increase in liabilities or shareholders’ equity.

• Transaction analysis is the process of studying a transaction to determine its

financial effect on the business in terms of the basic accounting equation:

Assets = Liabilities + Shareholders’ Equity

The two principles underlying the process are:

* Duality of effects: every transaction affects at least two accounts.

• A=L+SE; the accounting equation must remain in balance after each

transaction.

7. The accounting equalities in transaction analysis are:

(a) Assets = Liabilities + Shareholders’ Equity (b) Debits = Credits

• A journal entry is a method for expressing the effects of a transaction on

accounts in a debits equal credits format. The title of the account(s) to be debited is (are) listed first. The title of the account(s) to be credited is (are) listed underneath the debited accounts and both account title(s) and amount(s) are indented to the right.

• T-accounts are a simplified version of the ledger, which summarizes transaction

effects for each account. T-accounts show increases on the left (debit) side for assets, which are on the left side of the accounting equation. T-accounts show increases on the right (credit) side for liabilities and shareholders’ equity, which are on the right side of the accounting equation. The T-account is a tool for summarizing transaction effects for each account and determining balances.

• The cost principle requires that assets and liabilities be recorded at their original

cost to the company.

• Because the customer list was not purchased by her salon (it was developed

internally), her salon does not report it on the balance sheet. Knowing this, she should be sure to advise her banker that the salon has established a loyal group of customers that holds considerable value for generating future revenues (but is excluded from the balance sheet for accounting reasons).

• Transaction analysis is expected to be relatively more important under IFRS than

ASPE. IFRS have fewer detailed rules, which increases the importance of analyzing transactions to determine their appropriate treatment. However ASPE is also principle based and therefore transaction analysis should not be ignored when using ASPE.

Chapter 02 - The Balance Sheet

Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual Copyright McGraw-Hill Ryerson, 2015 Page 2-3 Authors' Recommended Solution Time (Time in minutes)

Mini-exercises

Exercises Problems Skills Development Cases* Continuing Case No. Time No. Time No. Time No. Time No. Time

1 3 1 6 CP2-1 45 1 15 1 30

2 3 2 10 CP2-2 50 2 15

3 3 3 5 CP2-3 50 3 45

4 3 4 5 PA2-1 45 4 20

5 4 5 3 PA2-2 50 5 20

6 4 6 5 PA2-3 45 6 10

7 3 7 3 PA2-4 50 7 35

8 3 8 10 PA2-5 50

9 5 9 20 PB2-1 45

10 6 10 15 PB2-2 50

11 6 11 25 PB2-3 45

12 6 12 15 PB2-4 50

13 6 13 25 PB2-5 50

14 6 14 10

15 6 15 15

16 6 16 25

17 6 18 6 19 6 20 6 21 15 22 10 23 3 24 8

• Due to the nature of cases, it is very difficult to estimate the amount of time students will need to

complete them. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear, and by offering suggestions (about how to research topics or what companies to select). The skills developed by these cases are indicated below.

Case Financial Analysis Research Ethical Reasoning Critical Thinking Technology Writing Teamwork

• x
• x
• x x x x x
• x x x
• x x x x
• x x
• x x

Chapter 02 - The Balance Sheet

Phillips et al. Fundamentals of Financial Accounting, 4Ce Solutions Manual Copyright McGraw-Hill Ryerson, 2015 Page 2-4

ANSWERS TO MINI-EXERCISES

M2-1

Debit Credit Assets Increases Decreases Liabilities Decreases Increases Stockholders’ Equity Decreases Increases

M2-2

Increase Decrease Assets Debit Credit Liabilities Credit Debit Stockholders’ Equity Credit Debit

M2-3 1. Journal Entry D

• A = L + SE; Debit = Credits C
• Transaction A
• Liabilities I
• Assets F
• Income statement, balance sheet,

statement of retained earnings, and statement of cash flows B

M2-4 1. Wages payable CL

• Accounts Payable CL
• Accounts Receivable CA
• Buildings NCA
• Cash CA
• Contributed Capital SE
• Land NCA
• Income taxes payable CL
• Equipment NCA
• Notes Payable (due in 6 months) CL
• Retained Earnings SE
• Supplies CA
• Utilities Payable CL