Exercise 1-2

(a) The following are users of financial statements.

Identify the users as being either external users or internal users.

External-Customers
External -Internal Revenue Service

External - Labor unions

Internal -Marketing manager
Internal-Production supervisor
External-Securities and Exchange Commission

Internal-Store manager
External-Suppliers
Internal-Vice president of finance

(b) The following questions could be asked by an internal user or an external user.

Identify each of the questions as being more likely asked by an internal user or an external user.

Internal-Can we afford to give our employees a pay raise?

External - Did the company earn a satisfactory income?

Internal-Do we need to borrow in the near future?

External-How does the company's profitability compare to other companies?

Internal-What does it cost us to manufacture each unit produced?

Internal -Which product should we emphasize?

External-Will the company be able to pay its short-term debts?

Exercise 1-4

Correct answer. Your answer is correct.

The following situations involve accounting principles and assumptions.

For each of the three situations, state if the accounting method used is correct or incorrect. If
correct, identify which principle or assumption supports the method used. If incorrect, identify
which principle or assumption has been violated.
Accounting method
Principle/Assumption
1. Tina Company owns buildings that are worth substantially more than they originally cost. In
an effort to provide more relevant information, Tina reports the buildings at fair value in its
accounting reports.

2. Fayette Company includes in its accounting records only transaction data that can be
expressed in terms of money

3. Omar Shariff, president of Omar's Oasis, records his personal living costs as expenses of
Oasis. 1. Incorrect, cost principle
2. correct, Monetary
3. Economic entity assumption

Exercise 1-5

Bailey Cleaners has the following balance sheet items.

Classify each item as an asset, liability, or stockholders' equity.

Accounts payable-Liability

Cash-Asset

Equipment-Asset

Supplies-Asset

Accounts receivable-Asset

Notes payable- Liability

Salaries and wages payable-Liability

Common stock-Stockholders' Equity

Exercise 1-6

Selected transactions for Verdent Lawn Care Company are as follows.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity.

1. Sold common stock for cash to start business.

2. Paid monthly rent.

3. Purchased equipment on account.

4. Billed customers for services performed.

5. Paid dividends.

6. Received cash from customers billed in (4).

7. Incurred advertising expense on account.

8. Purchased additional equipment for cash.

9. Received cash from customers when service was performed. 1. Increase in assets and
increase in stockholders' equity.

2. Increase in assets and decrease in liabilities

3. Increase in assets and increase in stockholders' equity.

4.increase in assets and increase in stockholders' equity.

5. decrease in assets and decrease in stockholders' equity.

6. Increase in assets and decrease in asset

7. Increase in liabilities and decrease in stockholders' equity.

8. Increase in assets and decrease in assets.

9.Increase in assets and increase in stockholders' equity.

Exercise 1-7

Keystone Computer Timeshare Company entered into the following transactions during May
2017.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity.

1. Purchased computers for $20,000 from Data Equipment on account.

2. Paid $3,000 cash for May rent on storage space.

3. Received $15,000 cash from customers for contracts billed in April.

4. Performed computer services for Ryan Construction Company for $2,700 cash.
Entry field with correct answer
5. Paid Midland Power Co. $11,000 cash for energy usage in May.

6. Stockholders invested an additional $32,000 in the business.

7. Paid Data Equipment for the computers purchased in (1) above.

8. Incurred advertising expense for May of $840 on account. 1. Increase in assets and
increase in liabilities

2. decrease in assets and decrease in stockholders' equity.

3. Increase in assets and decrease in assets

4. Increase in assets and increase in stockholders' equity.

5. decrease in assets and decrease in stockholders' equity.

6. Increase in assets and increase in stockholders' equity.

7. decrease in assets and decrease in liabilites.

8. Increase in liabilities and decrease in stockholders' equity.