Page 53 - Accounting Principles (A Business Perspective)

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➢ Increase one asset and decrease another asset.

➢ Decrease both a liability and an asset.
➢ Increase both an asset and retained earnings.
➢ Decrease both an asset and retained earnings.
➢ Increase a liability and decrease retained earnings.
➢ Decrease both an asset and retained earnings.
➢ Identify the causes of increases and decreases in stockholders’ equity

➢ Real world question: Refer to the 2000 financial statements of The Limited in the Annual Report
Appendix at the back of the text. What were the net income or loss amounts in the latest three years?

Discuss the meaning of the changes after reading management’s discussion and analysis of financial
condition and results of operations.
➢ Real world question: Refer to the financial statements of The Limited in the Annual Report
Appendix. Has the solvency of the company improved from one year to the next? Discuss.
Exercises
Exercise A Match the descriptions in Column B with the appropriate terms in Column A.

Column A Column B
1. Corporation. a. An unincorporated business owned by an individual.
2. Merchandising company. b. The form of organization used by most large businesses.
3. Partnership. c. Buys raw materials and converts them into finished products.
4. Manufacturing company. d. Buys goods in their finished form and sells them to
5. Service company. customers in that same form.
6. Single proprietorship. e. An unincorporated business with more than one owner.
f. Performs services for a fee.
Exercise B Assume that retained earnings increased by USD 3,600 from 2010 June 30, to 2011 June 30. A cash
dividend of USD 300 was declared and paid during the year.
a. Compute the net income for the year.
b. Assume expenses for the year were USD 9,000. Compute the revenue for the year.
Exercise C On 2010 December 31, Perez Company had assets of USD 150,000, liabilities of USD 97,500, and
capital stock of USD 30,000. During 2011, Perez earned revenues of USD 45,000 and incurred expenses of USD
33,750. Dividends declared and paid amounted to USD 3,000.

a. Compute the company’s retained earnings on 2010 December 31.
b. Compute the company’s retained earnings on 2011 December 31.
Exercise D At the start of the year, a company had liabilities of USD 50,000 and capital stock of USD 150,000.
At the end of the year, retained earnings amounted to USD 135,000. Net income for the year was USD 45,000, and
USD 15,000 of dividends were declared and paid. Compute retained earnings and total assets at the beginning of
the year.
Exercise E For each of the following events, determine if it has an effect on the specific items (such as cash) in

the accounting equation. For the events that do have an effect, present an analysis of the transaction showing its
two sides or dual nature.
a. Purchased equipment for cash, USD 12,000.
b. Purchased a truck for USD 40,000, signed a note (with no interest) promising payment in 10 days.
c. Paid USD 1,600 for the current month’s utilities.

Accounting Principles: A Business Perspective 54 A Global Text