Cornerstones of financial accounting solution manual

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Sign in. Welcome, Login to your account. Forget password? Neither debit nor credit has direct positive or negative connotations. Only when the terms debit and credit are associated with a particular account can a debit or a credit be identified as an increase or a decrease.

For example, a debit increases an asset account but decreases a liability account. To debit an account means to add an amount to the left side of that account. A debit balance is a balance on the left side of an account. To credit an account means to add an amount to the right side of that account. A credit balance is a balance on the right side of an account. Debits and credits do not represent increases or decreases. The normal balance of each of the accounts is: a cash—debit b sales—credit c notes payable—credit d inventory—debit e retained earnings—credit f salary expense—debit g equipment—debit h unearned revenue—credit In each journal entry, the sum of the debits must equal the sum of the credits.

If transactions are recorded with debits equal to credits, then the equality of the accounting equation will be maintained. Accounting transactions are typically recorded initially in a journal on an event-by-event basis.

The recording of events in a journal allows the entire effect of a transaction to be contained in one place. The individual effects of a transaction are then posted to the general ledger. Potentially, a firm could put these transactions directly into the general ledger. However, if the transaction were recorded directly into the general ledger, there would be no evidence of the complete transaction in one place, which would make the use of the information very cumbersome.

The initial steps of the accounting cycle involve 1 analyzing transactions; 2 journalizing transactions; 3 posting to the general ledger; and 4 preparing a trial balance. In the first step, data is collected about business activities and analyzed to determine which activities meet the criteria for recognition in the accounting records.

If the data meet the recognition criteria, the effect on the fundamental accounting equation is determined. In the second step, the effects of the transaction on the fundamental accounting equation are recorded in the accounting system using debits and credits. In the third step, journal entries are posted to the general ledger, which. Finally, a trial balance is prepared from account balances in the ledger.

Trial balances help detect errors resulting from inequality of debits and credits. A trial balance usually will not help in the detection of omitted entries or errors of analysis, journalizing, or posting when those errors cause incorrect account balances with equal debits and credits.

Relevance; faithful representation b. Comparability c. Understandability d. Faithful representation e. Verifiable f. Timeliness BE a. Revenue recognition principle b. Economic entity assumption c.

Historical cost principle d. Expense recognition or matching principle e. Time period assumption BE a. Yes, the event qualifies for recognition. The conceptual framework flows logically from the fundamental objective of financial reporting—to provide information that is useful for making investment and credit decisions—and its purpose is to support the development of a consistent set of accounting standards and provide a consistent body of thought for financial reporting.

E 1. No, the agreement does not qualify for recognition because no financial statement element will be affected until at least one party to the contract performs its responsibility the service is performed or money is actually exchanged. No, this transaction does not qualify for recognition in the financial statements of the company because it does not affect the overall common stock of the company. This transaction is between two entities the individual investors that are separate from the company.

Does not qualify. The accounting equation has not been affected by ordering the product. When the cash register is delivered or paid for, one of the parties to the contract will have performed, and the transaction will qualify for recording.

The extension does not affect the accounting equation. Once one of the parties performs according to the contract the store is occupied in April or rent is paid , the transaction will be recorded. For Transaction d, supplies were recorded as an asset at their historical cost— the exchange price of the transaction.

Later, as the supplies are used, the matching principle will guide the amount of supplies that will be expensed. This application of the matching concept will be discussed more fully in Chapter 3. E a. This transaction is a result of purchasing land for cash. This transaction is a result of paying cash for an expense e. This transaction is a result of issuing common stock in exchange for cash. This transaction is a result of borrowing cash. This transaction is the result of purchasing equipment for cash.

This transaction is the result of performing services generating revenue in exchange for cash. This transaction is the result of purchasing supplies on account on credit. This transaction is the result of the use of supplies. Date Account and Explanation Nov. The recording of the November 10 transaction was based on the matching principle. Rosenthal Decorating Inc. The trial balance WILL balance but there is still an error. The transaction was recorded at an incorrect dollar amount.

The trial balance WILL balance; both accounts will be overstated. This transaction does not qualify for recognition because receiving a new price list does not affect the accounting equation.

Boatsman must enter into a sales contract with one if its customers and there must be performance under the contract e. This transaction does not qualify for recognition because the offer does not affect the accounting equation.

When there is performance under the contract property or money is exchanged , the transaction will be recorded. This transaction does qualify for recognition because the receipt of cash by Boatsman and the delivery of the deed constitute performance.

Assets cash and land have been affected by this transaction. This transaction does not qualify for recognition because the total of common stock of Boatsman has not changed as a result of this transaction. This transaction does not involve Boatsman but two other entities—two stockholders. The actual performance of the service by the dealer leads to recognition by Boatsman, regardless of whether Boatsman has paid the dealer for the maintenance.

Item d illustrates the economic entity assumption—the transactions of a company are accounted for separately from its owners. All Rights Reserved. Materials used to produce the motors—Direct d. Labor used to produce motors—Direct f. Depreciation on the plant—Indirect h. Depreciation on equipment used to produce the motors—Direct i.

Ordering costs for materials used in production—Indirect j. Engineering support—Indirect k. Cost of maintaining the plant and grounds—Indirect l. Property tax on the plant and land—Indirect E 1. Hannah might have elected to let its ending materials inventory drop in order to save cash for purchases other than buying materials inventory.

Also, it might have elected to do so to reduce its materials inventory holding costs e. Furthermore, Hannah might have reduced its ending materials inventory because it foresaw that demand in July would be lower than in June and did not want to be left holding additional inventory at the end of July. Alternately, Hannah might have experienced stronger than expected sales in June and used more direct materials in production than it had anticipated when purchasing materials.

Regardless of the reason, it is helpful for students to understand the relationship between the cost of materials purchased versus the cost of materials used in production in a given period. Finished goods inventory, January 1…………………………………… 6, Units completed during the year………………………………………… 94, Finished goods inventory, December 31……………………………… 7, Units sold………………………………………………………………… 93, 2. The income statement showing each account as a percentage of sales helps focus managerial attention on those expenses that are relatively high.

For Jasper, it appears as though administrative expense is twice as large as selling expense. Perhaps management could explain ways to reduce certain administrative expenses, such as research and development or fees incurred for general counsel e. Direct Direct Manufact. They are direct materials but could also be classified as overhead because of cost and convenience. Direct labor consists of the part-time employees who cook food and fill orders. Manufacturing overhead consists of all indirect costs associated with the production process.

These are the utilities, rent for the building, depreciation on the equipment and register, and cost of janitorial fees and supplies. The result is that she does not have to perform studies of the time spent by each employee on producing versus selling burger bags. In addition, it is likely that John Peterson pitches in to help fry burgers or assemble burger bags when things get hectic. Of course, during those times, he is engaged in production—not selling or administration.

Remember, accountants charge by the number of hours spent—the more time Elena spends separating costs into categories, the higher her fees. Outside use of the statements is confined to government taxing authorities and a bank if a loan or line of credit is necessary. Laworld Inc. As a result, total manufacturing cost is equal to the cost of goods manufactured. The FIFO assumption says that beginning inventory is sold before current year production.

Therefore, the cost of goods sold will be lower than it would be if there were no beginning inventory. This can be seen in the following statement of cost of goods sold. These costs include direct materials, direct labor, and manufacturing overhead.

The total of these three types of costs equals product cost. If Linda returns to school, she will need to quit her job. The lost salary is the opportunity cost of returning to school. If Randy were engaged in manufacturing a product, his salary would be a product cost. Instead, the product has been manufactured. It is in the finished goods warehouse waiting to be sold.

This is a period cost. Jamie is working at company headquarters, and her salary is part of administrative cost. All factory costs other than direct materials and direct labor are, by definition, overhead. The design engineer is estimating the total number of labor hours required to complete the manufacturing of a product. This total will be used to compute direct labor cost.

This is direct materials cost. The sum of direct materials and direct labor is, by definition, prime cost. The cost of converting direct materials into finished product is the sum of direct labor and manufacturing overhead. This is conversion cost. The depreciation on the delivery trucks is part of selling cost, the cost of selling and delivering product.

The materials used to create building plans are relatively inexpensive. P 1. It is an opportunity cost because it is the cost of the next best alternative to dog walking. Note: The price is charged by Luisa to her clients; it is not her cost. This is also monthly labor hours as machine labor only operates the presses. The other overhead costs are traced according to their usage. Setups are assigned according to the time required.

However, since she is responsible for coordinating and managing all business functions, an administrative classification is more convincing. The costs of the tent sales are accounted for as selling expense.

The tent sales are designed to sell outdated or remanufactured products. They are not the main reason that Kicker is in business. In fact, an important objective is simply to increase awareness of the Kicker brand. As a result, these related costs are selling expense. First, it could look for a more appropriate venue. The outer parking lot of a shopping center, or even a large grocery store, would enable Kicker employees to easily load purchased product into customer cars.

Second, the disc jockey could be dispensed with; instead, music could be played from CDs over the audio system in the truck. Third, Kicker could spend a year or so raising brand awareness in the Austin market before attempting another tent sale.

One can also argue that required is also a function of equipment hours and so the salaries of mechanics can assigned using equipment hours. Pipe and other direct labor can be assigned using equipment hours because their usage should be highly correlated with equipment That is, equipment hours increase because there is more pipe being laid. As hours increase, so does the pipe usage. A similar argument can be made for other direct labor. Actually, it is not necessary to use equipment hours to assign pipe or other direct labor because these two costs are directly traceable to jobs.

Leroy should politely and firmly decline the offer. The offer includes an implicit request to use confidential information to help Jean win the bid. Use of such information for personal advantage is wrong. Leroy has a professional and personal obligation to his current employer.

This obligation must take precedence over the opportunity for personal financial gain. Corporate codes of conduct emphasize honesty and integrity. Leroy has a responsibility to act on behalf of his company, and clearly, disclosing confidential information acquired in the course of his work to a competitor would be prohibited.

In addition, codes of corporate conduct also require employees to avoid conflicts of interest and to refuse any gift, favor, or hospitality that would influence employee actions inappropriately. In fact, agreement to help probably would reflect a desire for the bonus and new job with the associated salary increase.

Helping would likely ensure that Jean would win the bid. There is a real possibility that Leroy could be implicated. Whether this would lead to any legal difficulties is another issue. At the very least, some tarnishing of his professional reputation and personal character is possible. Some risk to Leroy exists. What is right should be the central issue, not the likelihood of getting caught. Accounting is sometimes called the language of business and learning accounting terminology is similar to learning a foreign language.