12

Chapter 1: A(countlng: The Language of Business

Biwheels can prepare a balance sheet at any point in time, even after every transaction.

The balance sheet for January 3, after the first three transactions, would look like this:

Blwheels Company

Balance Sheet January 3. 20X2

Assets

Llabilltl as and Owners' Equity

Cash $485.000 Liabilities (note payable) $100.000

Store equipment 15.000 Lopez. capital 400.000

.:.:TO:..:t.:::.81~a::..:s~s.:.et:.:s ...:$:5:00=.0=0=0:...... "~0.:ta.:::.I.:li.:::.ab:..i:.:_lit:.:_ie:.:S:..8:.:.:.n:f owners' equity $500,000

Transaction Analysis

account

A summary record of Ine changes in 8 particular asset. liability. or owners' eqUity.

Accountants record transactions in an organization's accounts, An account is a summary record of the changes in a particular asset, liability, or owners' equity, and the account balance is the total of all entries to the account to date. For example, Biwheels' cash account through January 3 shows increases of $400,000 and $100,000 and a decrease of$15,000, leaving an account balance of $485,000. The analysis of transactions is the heart of accounting. For each transaction, the accountant determines (1) which specific accounts the transaction affects, (2) whether it increases or decreases each account balance, and (3) the amount of the change in each account balance. After recording all the transactions for some period, the accountant will summarize these transactions into financial statements that managers, investors, and others use in their decision-making process.

Exhibit 1-2 shows how to analyze a series of transac .ions using the balance sheet equation. We number the transactions for easy reference. E xamine the first three transactions in Exhibit 1-2, the analysis of the transactions that we discussed earlier.

"'"' .::'·'·.\~.::::';::i:·.·":;'.' " ,: ~ -, ",-".-;;' ~~), '.~ ;:.,
Description of
Transactions Assets Uabilities + Owners' Equity
Merchandise Store Note Accounts Lopez,
Cash + Inventory + Equipment '" Payable t Payable + Capital
(1) Initial investment +400,000 +400,000
(2) Loan from bank +100.000 = +100.000
(3) Acquire store
equipment for cash -15,000 +15.000
(4) Acquire Inventory
for cash -120.000 +120,000
(5) Acquire inventory
on credit +10,000 +10,000
(6) Acquire inventory for
cash plus credit -10,000 +30.000 +20,000
(7) Sale of equipment +1.000 -1,000
(8) Return of
inventory acquired on
January 6 -800 -800
(9) Payments to creditors -4,000 -4,000
Balance, January 12,
20X2 352,000 + ~ + 14.000 100.000 + ~ + 400,000
==
~
525,200 525.200 Exhibit 1-2 Biwheels Company

Analysis of Transactions for January 2 - January 12. 20X2

Assignment Material

of each item in the company's accounting equation are given next for June I and for each of th" next 9 business days.

Fumiture Store Accounts Ow~el'$'
Cash Inventory Fixtures Payable Ecuity
June 1 $ 6,000 $18,000 $2,000 $ 4,000 $2~:,000
2 12,000 18,000 2,000 4,000 2f:,000
3 12,000 18,000 6,000 4,000 3::,000
4 9,000 21,000 6,000 4,000 3:~,000
5 9,000 26,000 6,000 9,000 3:~,000
6 12,000 26,000 3,000 9,000 3:~,000
7 7,000 26,000 9,000 10,000 3::,000
8 5,000 26,000 9,000 8,000 3::,000
9 5,000 25,600 9,000 7,600 3::,000
10 2,000 25,600 9,000 7,600 2~1,000
State briefly what you think took place on each of the 9 days beginning June 2 .. assuming that on y one
transaction occurred each day.
:i..~~.j' Describing Underlying Transactions
The balances of each item in laPaz Company's accounting equation are given next for September I
and for each of the next 7 business days.
Computer Store Accounts Owners'
Cash Inventory Fixtures Payable E(uity
Sept. 1 $5.000 $ 9,000 $ 7,500 $5,500 $lE,OOO
2 5,000 9,000 10,000 8,000 lE,OOO
3 2,000 9,000 10,000 8.000 1~,000
4 2,000 4,000 10,000 3,000 12,000
5 2,000 11,000 10,000 3.000 2C,OOO
8 1,500 11,000 10,000 2,500 2C,OOO
9 1,000 11,000 13,000 5.000 2C,OOO
10 1.000 11,000 12.700 4.700 2(.000 State briefly what you think took place on each of the 7 days beginning September 2, asswning that only one transaction occurred each day.

:V~B Prepare Balance Sheet

Atlanta Corporation's'balance sheet at March 30. 20X4, contained only the following items (arr mged here in random order):

Cash $10,000 Accounts payable $ B.OOO

Notes payable 10,000 Furniture and fixtures a.ooo

Merchandise inventory 40,000 Long-term debt payable l:!,OOO

Paid·in capital 80,000 Building 2H,000

_La_n_d l_4..,;._00_O M_8C_h_ln_e..;ry:,_a_n_d_e .... Q:..;.u.;.lpm_e ... nt ........ l!i.OOO

On March 31, 20X4, these transactions and events took place:

I. Purchased merchandise on account, $4,000.

2. Sold at cost for SI,OOO cash some furniture that was not needed.

3. Issued additional capital stock for machinery and equipment valued at $12,000.

4. Purchased land for $25,000, of which $5,000 was paid in cash, the remaining being repres ented by a 5·year note (long-term debt).

5. The building was valued by professional appraisers at $47.000.

Prepare in good form a balance sheet for March 31, 20X4, showing supporting computations 'or all new amounts.

37

38

Chapter i: Accounting: The Language of Business

1-29 Prepare Balance Sheet

Soho Corporation's balance sheet at November 29, 20XI, contained only the following items (arranged here in random order):

Pald-in capltat $189,000 Machlr,ery and equipment $ 20,000
Notes payable 21,000 FurnitLre and fixtures 8,000
Cash 22,000 Land 41,000
Accounts payable 16,000 Buildirg 230,000
Merchandise inventory 29,000 Long-term debt payable 124,000 On the following day, November 30, these transactions and eve.its occurred:

I. Purchased machinery and equipment for $13,000, paying $3,000 in cash and signing a 90·day note for the balance.

2. Paid $6,000 on accounts payable.

3. Sold some land that was not needed for cash of $6,000, which was the Soho Corporation's acquisition cost of the land.

4. The remaining land was valued at $240,000 by professions I appraisers.

5. Issued capital stock as payment for $23,000 of the long-term debt, that is, debt due beyond I year.

Prepare in good form a balance sheet for November 30, 20XI, showing supporting computations for all new amounts.

:1-30 Balance Sheet

General l!:i~tI·lc (OE) is One of'the largest companies in the wo:ld with sales of more than $130 billion. The company's balance sheet on January I, 2003, had total assets of $575 billion and stockholders' equity (called share owners' equity by GE) of $64 billion.

I. Compute GE's total liabilities on January 1,2003.

2. As of January 1,2003, GE had issued 9,969,894,000 shares of common stock. The par value was $.0671 per share. Compute the balance in the account, "Common stock, par value" on GE's balance sheet.

Prrob!ems

1,-3:1. Analysis of Transactions

Use the format of Exhibit 1-2 to analyze the following transactions for April of Corner Cleaners. Then prepare a balance sheet as of April 30, 20XI. Comer Cleaners was founded on Aprill.

I. Issued 1,000 shares of common stock for cash, $40,000.

2. Issued 500 shares of common stock for equipment, $20,0')0.

3. Borrowed cash, signing a note payable for $35,000.

4. Purchased equipment for cash, $30,000.

5. Purchased office furniture on account, $10,000.

6. Disbursed cash on account (to reduce the account payable), $4,000.

7. Sold equipment for cash, $8,000.

8. Discovered that the most prominent competitor in the ares. was bankrupt and was closing its doors on April 30.

:1.-32 Analysis of Transactions Consider the following January transactions:

1. On January I, 20X4, three persons, Xiao, Yergen, and Zimbel, formed XYZ Corporation. XYZ will be a wholesale distributor of PC software. The company issued 10,000 shares of common stock ($1 par value) to each of the three investors for $1) cash per share. Use two stockholders' equity accounts: Capital Stock (at par) and Additional Paid-in Capital.

2. XYZ acquired merchandise inventory of $80,000 for casr.

3. XYZ acquired merchandise inventory of $85 ,000 on ope] account.

4. XYZ returned for full credit unsatisfactory merchandise that cost S[I,OOO in transaction 3.

Assignment Material

5. XYZ acquired equipment of $40,000 for a cash down payment of Sl 0,000, plus a 3-month promissory note ofS30,OOO.

6. As a favor, xYZ sells equipment of $4,000 to a business neighbor for cash. The equiprner thad cost $4,000.

7. XYZ pays $20,000 on the account described in transaction 3.

8. XYZ buys merchandise inventory of S)OO,OOO. The company pays one-half of the amount in cash, and owes one-half on open account.

9. Zimbel sells one-half of his cornmon stock to Quigley for $12 per share.

Required

I. By using a format similar to Exhibit 1-2, prepare an analysis showing the effects of January ransactions on the financial position of XYZ Corporation.

2. Prepare a balance sheet as of January 31, 20X4.

j.-3:3 Analysis of Transactions

You began a business as a wholesaler of woolen goods. The following events have occurred:

I. On March I, 20X I, you invested $60,000 cash in your new sole proprietorship, which you c,1I Be

Products.

2. You acquired $9,000 inventory for cash.

3. YOl, acquired $8,000 inventory on open account.

4. You acquired equipment for $IS,OOO in exchange for a $S,ooO cash down payment and a $1 0,000

promissory note. .

5. A large retail store, which you had hoped would be a big customer, discontinued operations.

6. You take gloves home for your family. BC's inventory carried the gloves at $600. (Regard this as taking pari of your capital out of BC Products.)

7. Gloves that cost $300 in transaction 2 were of the wrong style. You returned them and obtained a full cash refund.

8. Gloves that cost $800 in transaction 3 were of the wrong color. You returned them and obtained gloves of the correct color in exchange.

9. Caps that cost $500 in transaction 3 had an unacceptable quality. You returned them and obtained full credit on your account.

10. You paid SI,OOO on the promissory note.

II. You use your personal cash savings of $5,000 to acquire some equipment for Be. You consider this to be an additional investment in your business.

12: You paid S3,000 on open account

13. Two scarf manufacturers who are suppliers for BC announced a 7 percent rise in prices, effeclive in 60 days.

14. You use your personal cash savings ofSl,OOO to acquire a new TV set for your family.

15. You exchange equipment that COSI $4,000 in transaction 4 with another wholesaler. However, the equipment received, which is almost new, is smaller and is worth only $1,SOO. Therefore, the other wholesaler also pays you $2,500 in cash. (You recognize no gain or loss 01 this transaction.)

Required

I. By using Exhibit 1-2 (p. 12) as a guide, prepare an analysis of BC's transactions for March.

Confine your analysis to the effects on the financial position of BC Products.

2. Prepare a balance sheet for BC Products as of March 31, 20XI.

:.l·34 Analysis of Transactions

Eduardo Gomez, a recent graduate of a law school, was penniless on December 25, 20X3.

I. On December 26, Gomez inherited an enormous sum of money.

2. On December 27, he placed S50,OOO in a business checking account for his unincorporated law practice.

3. On December 28, he purchased a home for a down payment of $1 00,000 plus a home mortgage payable of $2S0,000.

4. On December 28, Gomez agreed to rent a law office. He provided a SI,OOO cash damage deposit (from his business cash), which will be fully refundable when he vacates the premises. This deposit is a business asset. He will make rental payments in advance on the first business day of each month. (The first payment oU7oo is not to be made until January 2, 20X4.)

5. On December 28, Gomez purchased a computer for his law practice for $2,000 cash, alus a $2,000 promissory note due in 90 days.

39

Assignment Material

:1 .. I%~ Presenting Paid-In Capital

Consider excerpts from two balance sheets (amounts in millions):

Citlgroup

Common stock ($.01 par value; authorized

. shares: 6.0 billion), Issued shares 5,477,416,254 Additional. paid-in capital

$ 55 23,196

IBM

Common stock, par value $.20 per share-shares authorized: 4,687,500,000; shares issued: 1,913,513,218 shares (Includes capital in excess of par value)

$14,248

I. How would the presentation of Ciligj'oull stockholders' equity accounts be affected if the company issued 500 million more shares for $30 cash per share?

2. How would the presentation of mM 's stockholders' equity accounts be affected if the company issued I million more shares for $60 cash per share? Be specific.

:iA3 Presenting Paid-In Capital

H()!Je)'~velllnternMiollal IIlC., maker of thermostats and a variety of complex control systems, presented the following in its January 1,2003 balance sheet (in millions).

common stock-$1.00 par value, 957,599,900 shares Issued

Additional paid·ln capital

? $3,409

What amount should be shown on the common stock line? What was the average price per share paid by the original investors for the Honeywell common stock? How do your answers compare with (16 $24 market price of the stock on January I, 2003? Comment briefly.

:! .,; 4 Presenting Paid-In Capital

Honda Motor Company is the largest producer of motorcycles in the world, as well as a major auto manufacturer. Honda included the following items in its 2003 balance sheet (in millions of Japanese Yen [V]):

Common stock-authorized 3,600,000,000 Shares; issued 974,414,215 shares Additional paid-in capital·

¥ 86.067 172,529

, ftornla actually used the term ·capital surplus" instead of the better term, pald.n capital.

1. What is the par value of Honda's common stock?

2. W uat was the average price per share paid by the original investors for the Honda common stock?

3. How do your answers compare with the ¥4,000 market price of the stock at the end of fiscal2003?

Comment briefly.

1·45 Board of Directors and Audit Committee

Examine the 2003 annual report of General Mills, maker of cereals such as Cheerios, Betty Crocl:er ~ake mixes, Progresso soups, and other foods (the Web site is http://media.corpora·:eir .• netlmedia_filesINYS/gis/reportsI2003_AR.pdf). Turn to the listing of General Mills' Board of Directors near the end of the annual report.

l. How many board members does General Mills have? How many of them are General Mills executives?

43

42

Chapter l.: Accounting: The Language of Business

1·39 Ai,line Balance Sheet

KLM Royal Dutch Alrtlnes is an international airline with a home base at Schiphol Airport in Amsterdam. It is the world's oldest scheduled airline still operating under its original name. It has more than 30,000 employees, 80 percent of them located in the Netherlands. On March 31, 2003, KLM's noncash assets were €7,557 million. Total assets were €8, t 65 million, and total liabilities were €6,688 million. The symbol € represents the euro, the Eu ropean currency.

1. Compute the following:

a. KLM's cash on March 31, 2003.

b. KLM's stockholders' equity on March 31, 2003,

2. Explain the easiest way to determine KLM's total liabilities and stockholders' equity from the

information given in this problem.

1·40 Prepare Balance Sheet

United Technologies Corperanon provides a broad range 0 f high-technology products and support services to the building systems and aerospace industries, Those products include Pratt & Whitney aircraft engines, Carrier heating and air conditlor.ing equipment, Otis elevators, and Sikorsky helicopters. United Technologies' September 30, 20(13 balance sheet included the following items ($ in millions):

./

Property, plant, and equipment Accounts payable

Common stock

Cash

Total stockhotders' equity Long-term debt

Total assets

Inventories

Other assets

Other stockholders' equity Other liabilities

$ 4,899 2,695 5,756 ?

? 4,650

34,062 3,963 23,779

?

16,598

Prepare a condensed balance sheet, including amounts for I, Cash.

2. Total stockholders' equity.

3. Other stockholders' equity.

;1.41 Prepare Balance Sheet

Mal' Department Stores, headquartered in St. Louis, operates Lord & Taylor, Filene's, and six other department store chains. Its balance sheet of February I, 2003 contained the following items ($ in millions):

tong-term debt Cash

Total shareholders' equity Total liabilities

Common stock Inventories

Accounts payable

Property, plant, and equipment Additional shareholders' equity Other assets

Other liabilities

Total assets

Prepare a condensed balance sheet, including amounts for (a) Cash. What do you think of its relative size?

(b) Total shareholders' equity

(c) Total liabilities.

$ 4,035 (a) (b) (e)

144 2,857 1,099 5,466 3,891 3,592 2,767

11,936

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