Financial Accounting: An Integrated Statements Approach, 2nd Edition

Indicate the effect of each transaction on the accounting equation by listing the numbers

identifying the transactions, (1) through (10), in a vertical column, and inserting at the right of

each number the appropriate letter from the following list:

a. Increase in an asset, decrease in another asset.

b. Increase in an asset, increase in a liability.

c. Increase in an asset, increase in stockholders’ equity.

d. Decrease in an asset, decrease in a liability.

e. Decrease in an asset, decrease in stockholders’ equity.

Mike Renner operates his own catering service. Summary financial data for March are presented

in equation form as follows. Each line designated by a number indicates the effect of a transac-

tion on the balance sheet. Each increase and decrease in owners’ equity, except transaction (4),

affects net income.

Capital Retained

Cash  Land  Liabilities  Stock  Earnings

Bal. 18,000 54,000 5,000 10,000 57,000

1. 25,000 25,000


2. 10,000 10,000


3. 16,000 16,000


4. 3,000 3,000
   Bal. 14,000 64,000 5,000 10,000 63,000

a. Describe each transaction.

b. What is the amount of net decrease in cash during the month?

c. What is the amount of net increase in retained earnings during the month?

d. What is the amount of the net income for the month?

e. How much of the net income for the month was retained in the business?

f. What is the amount of net cash flows from operating activities?

g. What is the amount of net cash flows from investing activities?

h. What is the amount of net cash flows from financing activities?

The income statement of a corporation for the month of October indicates a net income of

$158,250. During the same period, $180,000 in cash dividends were paid.

Would it be correct to say that the business incurred a net loss of $21,750 during the month?

Discuss.

Four different corporations, E, F, G, and H, show the same balance sheet data at the beginning

and end of a year. These data, exclusive of the amount of stockholders’ equity, are summarized

as follows:

Total Total

Assets Liabilities

Beginning of the year $420,000 $176,000

End of the year 776,000 340,000

On the basis of the above data and the following additional information for the year, determine

the net income (or loss) of each company for the year. (Suggestion:First determine the amount

of increase or decrease in stockholders’ equity during the year.)

Company E: No additional capital stock was issued, and no dividends were paid.

Company F: No additional capital stock was issued, but dividends of $40,000 were paid.

78 Chapter 2 Basic Accounting Concepts

Exercise 2-11

Nature of transactions

Goals1, 2, 4

b. $4,000

Exercise 2-12

Net income and dividends

Goals3, 5

Exercise 2-13

Net income and stockholders’

equity for four businesses

Goals1, 3, 5

Company G: Net income,

$132,000