Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 2 Basic Accounting Concepts 75

DISCUSSION QUESTIONS

1. What are the basic elements of a financial accounting
   system? Do these elements apply to all businesses from
   a local restaurant to General Motors? Explain.


2. Provide an example of a transaction that affects (a) only
   one element of the accounting equation, (b) two
   elements of the accounting equation, (c) three elements
   of the accounting equation.


3. Indicate whether the following error would cause the
   accounting equation to be out of balance and, if so, in-
   dicate how it would be out of balance. The payment of
   wages of $6,750 was recorded as a decrease in cash of
   $6,750 and a decrease in retained earnings (wages
   expense) of $6,570.


4. For each of the following errors, indicate whether the
   error would cause the accounting equation to be out
   of balance, and if so, indicate how it would be out of
   balance. (a) The purchase of land for $50,000 cash was
   recorded as an increase in land of $50,000 and a de-
   crease in cash of $5,000. (b) The receipt of $7,500
   for fees earned was recorded as an increase in cash of
   $7,500 and an increase in liabilities of $7,500.


5. What is a primary control for determining the accuracy
   of a business’s record keeping?


6. Fathom Consulting Services acquired land three years
   ago for $25,000. Fathom recently signed an agreement
   to sell the land for $80,000. In accordance with the sales
   agreement, the buyer transferred $80,000 to Fathom’s
   bank account on October 6. How would elements of the
   accounting equation be affected by the sale?


7. (a) How does the payment of dividends of $30,000 affect
   the three elements of the accounting equation? (b) Is
   net income affected by the payment of dividends?
   Explain.
   8. Assume that Donahue Consulting erroneously recorded
   the payment of $11,500 of dividends as salary expense.
   (a) How would this error affect the equality of
   the accounting equation? (b) How would this
   error affect the income statement, retained earnings
   statement, balance sheet, and statement of cash
   flows?
   9. Assume that Kilgore Realty, Inc., borrowed $80,000
   from First City Bank and Trust. In recording the
   transaction,Kilgore erroneously recorded the receipt
   of $80,000 as an increase in cash, $80,000, and an
   increase in fees earned, $80,000. (a) How would this
   error affect the equality of the accounting equation?
   (b) How would this error affect the income statement,
   retained earnings statement, balance sheet, and
   statement of cash flows?


8. Assume that as of January 1, 2007, Milliken Consulting
   has total assets of $562,500 and total liabilities of
   $350,000. As of December 31, 2007, Milliken has total
   liabilities of $375,000 and total stockholders’ equity of
   $281,250. (a) What was Milliken’s stockholders’ equity
   as of December 31, 2006? (b) Assume that Milliken did
   not pay any dividends during 2007. What was the
   amount of net income for 2007?


9. Using the January 1 and December 31, 2007, data given
   in Question 10, answer the following question. If
   Milliken paid $22,500 of dividends during 2007, what
   was the amount of net income for 2007?


10. In Chapter 1, we described and illustrated
    horizontal analysis. (a) What is the difference between
    horizontal and vertical analysis? (b) Can horizontal
    and vertical analysis be used together in analyzing a
    company?

EXERCISES

Determine the missing amount for each of the following:

Assets  Liabilities  Stockholders’ Equity

a. X  $50,000  $143,000

b. $165,500  X  $30,000

c. $74,000  $35,000  X

The Walt Disney Companyhad the following assets and liabilities (in millions) as of September

30, 2003.

Assets $49,988

Liabilities 26,197

Exercise 2-1

Accounting equation

Goal 1

a. $193,000

Exercise 2-2

Accounting equation

Goal 1

a. $23,791