Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chico Urgent Care is owned and operated by Dr. Janet Scanlon, the sole stockholder. During

July 2007, Chico Urgent Care entered into the following transactions:

a. Dr. Scanlon invested $10,000 in Chico Urgent Care in exchange for capital stock.

b. Paid $3,600 for an insurance premium on a one-year policy.

c. Purchased supplies on account, $500.

d. Received fees of $18,650 during July.

e. Paid expenses as follows: wages, $5,240; rent, $2,500; utilities, $1,100; and miscellaneous, $880.

f. Paid dividends of $1,000.

Record the preceding transactions using the integrated financial statement framework. After

each transaction, you should enter a balance for each item.

Using the data from Exercise 3-1, record the adjusting entries at the end of July to record the in-

surance expense and supplies expense. There were $280 of supplies on hand as of July 31.

Identify the adjusting entry for insurance as (a1) and supplies as (a2).

Using the data from Exercises 3-1 and 3-2, prepare financial statements for July, including income

statement, retained earnings statement, balance sheet, and statement of cash flows.

Using the income statement and statement of cash flows you prepared in Exercise 3-3, reconcile

net income with the net cash flows from operations.

130 Chapter 3 Accrual Accounting Concepts

EXERCISES

Exercise 3-1

Transactions using accrual

accounting

Goal 2

Exercise 3-2

Adjustment process

Goal 3

Exercise 3-3

Financial statements

Goal 4

Exercise 3-4

Reconcile net income and net

cash flows from operations.

Appendix

4. Employees performed services in 2006, but the wages
   were not paid until 2007. During which year would the
   wages expense be reported on the income statement
   under (a) the cash basis? (b) the accrual basis?


5. Which of the following accounts would appear only in an
   accrual basis accounting system, and which could
   appear in either a cash basis or an accrual basis account-
   ing system? (a) Capital Stock, (b) Fees Earned, (c)
   Accounts Payable, (d) Land, (e) Utilities Expense, and (f)
   Accounts Receivable.


6. Is the land balance before the accounts have been ad-
   justed the amount that should normally be reported on
   the balance sheet? Explain.


7. Is the supplies balance before the accounts have been ad-
   justed the amount that should normally be reported on
   the balance sheet? Explain.


8. Why are adjustments needed at the end of an accounting
   period?


9. Identify the four different categories of adjustments
   frequently required at the end of an accounting period.


10. If the effect of an adjustment is to increase the balance of
    a liability account, which of the following statements de-
    scribes the effect of the adjustment on the other account?

a. Increases the balance of a revenue account.

b. Increases the balance of an expense account.

c. Increases the balance of an asset account.

11. If the effect of an adjustment is to increase the balance
    of an asset account, which of the following statements
    describes the effect of the adjustment on the other
    account?
    a. Increases the balance of a revenue account.
    b. Increases the balance of a liability account.
    c. Increases the balance of an expense account.


12. Does every adjustment have an effect on determining the
    amount of net income for a period? Explain.


13. (a) Explain the purpose of the two accounts: Depreciation
    Expense and Accumulated Depreciation. (b) Is it custom-
    ary for the balances of the two accounts to be equal? (c)
    In what financial statements, if any, will each account ap-
    pear?


14. Describe the nature of the assets that compose the
    following sections of a balance sheet: (a) current assets,
    (b) property, plant, and equipment.


15. (a) What are common-sized financial statements?
    (b) Why are common-sized financial statements useful in
    interpreting and analyzing financial statements?