Accounting – What the Numbers Mean 10th Edition Marshall, McManus, Viele Solution Manual

CHAPTER
2		Financial Statements and  Accounting Concepts/Principles

                   

  

 

CHAPTER OUTLINE: 

I. Financial Statements

A. From Transactions to Financial Statements

B. Financial Statements Illustrated

1. Explanations and Definitions

a. Balance Sheet

b. Income Statement

c. Statement of Changes in Stockholders' Equity

d. Statement of Cash Flows

2. Comparative Statements in Subsequent Years

3. Illustration of Financial Statement Relationships

II. Accounting Concepts and Principles

A. Schematic Model of Concepts and Principles

B. Concepts/Principles Related to the Entire Model

C. Concepts/Principles Related to Transactions

D. Concepts/Principles Related to Bookkeeping Procedures and the Accounting Process

E. Concepts/Principles Related to Financial Statements

F. Limitations of Financial Statements

III. The Corporation’s Annual Report

TEACHING/LEARNING OBJECTIVES:

Principal:

1.    To illustrate the four principal financial statements and their basic form.

2.    To introduce students to the terminology of financial statements.

3.    To present the accounting equation.

4.   To explain several of the concepts of financial accounting and financial statement presentation.

Supporting:

5.   To explain that financial statements are the product of financial accounting and that the statements represent a historical summary of transactions.

6.    To explain some of the limitations of financial statements.

7.    To illustrate that the financial statements are included in the corporation’s annual report.

8.    To introduce and explain several business procedures and their terminology.

TEACHING OBSERVATIONS:

1.   This is the keystone chapter of the text, and the material presented here becomes a foundation for all subsequent financial accounting topics.  The instructor must resist trying to teach the entire course from this one chapter!   Instead, try to help students sort out the key ideas that must be learned now from those that they should be acquainted with, but that will really be learned when subsequent material is covered.  Items to be learned now include:

a.     What a transaction is.

b.     The name of each financial statement and what it shows.

c.     The accounting equation.

d.     Financial statement relationships.

e.     Limitations of financial statements.

2.   A significant amount of time should be spent illustrating and explaining the purpose and content—by account category (asset, liability, stockholders' equity, revenue, expense)—of each financial statement, and how the financial statements tie together.  Some instructors may wish to discuss gains and losses at this point, but the key is to keep it as simple as possible!

3.    It is recommended that the following models be emphasized:

a.     Balance Sheet:

Assets            =     Liabilities       +         Stockholders' Equity

Beginning of Period       $                              $                                         $

Changes During Period         +/-                        +/-                                     +/-

                                                                                                                                                       

End of Period                  $                           $                                         $                   

b.     Income Statement:          Revenues

 -     Expenses   

=      Net Income

c.     Statement of Changes in Stockholders’ Equity:

Beginning Balance of Stockholders' Equity

       +     Owners' Investment

+       Net Income

 -    Dividends                                                     

=       Ending Balance of Stockholders' Equity

(As with the discussion of gains and losses, some instructors may wish to acknowledge “other” sources of changes in stockholders’ equity such as treasury stock, accumulated other comprehensive income, prior period adjustments, etc.  This is a function of instructor preference and the extent to which students have been previously exposed to real world financial statements.  An early dose of “reality” can be refreshing for graduate students, but might be distracting to a younger, less experienced audience.)

4.   It is helpful to spend time with the concepts and principles model, explaining what each concept/principle means and showing how it relates to the "Transactions to Financial Statements" process. 

5.   It is appropriate to emphasize the limitations of financial statements now, because they can create a mindset that helps students understand more specific accounting principles when they are covered later.

6.   The Business In Practice boxes are designed to enhance student understanding by removing some jargon and explanation from the flow of the text material, while providing a context for that material.  These provide good class discussion topics.

7.   You may wish to encourage students to self-study this material by using the PowerPoint presentations available on the website.

8.   Remind students that the fully worked-out solutions to all odd-numbered exercises and problems are provided on the website.  The student study guide (previously a printed volume that students were required to purchase separately) is also available on the website for free.

ASSIGNMENT OVERVIEW:

This chapter provides a wide variety of assignments to choose from—ranging from the basic association-type mini-exercises and exercises, to the more challenging, analytical-type problems.  Be careful not to over-assign or under-assign homework from this chapter. 

No.	Learning ObjectiveS	Difficulty & Time Estimate	other Comments
M2.1.	2, 3	Easy, 3-5 min.	Similar to E2.9.-E2.14.
M2.2.	2, 3	Easy, 3-5 min.	See M2.1.  Good in-class demo exercise.
M2.3.	2, 3	Med., 7-10 min.	Challenging mini-exercise.  Requires clear-cut understanding of income statement relationships.  Encourage use of Exhibit 2-2 as a solution model.
M2.4.	2, 3	Med., 7-10 min.	See M2.3.  Good way to review and reinforce the structure of the income statement in class.
M2.5.	2, 4	Easy, 2-3 min.	Basic identification of asset accounts.
M2.6.	2, 4	Easy, 2-3 min.	Basic identification of income statement accounts.
E2.7.	2, 4	Easy, 3-5 min.	Simple account identification exercise.
E2.8.	2, 4	Easy, 3-5 min.	See E2.7.
E2.9.	2, 3	Med., 5-8 min.	Reinforces the balance sheet equation, and stresses the distinction between PIC and RE.
E2.10.	2, 3	Med., 5-8 min.	See E2.9.  Good homework assignment.
E2.11.	2, 3	Easy, 3-5 min.	“RE is affected only by net income (loss) and dividends.”  This is a bit of a fiction, but it works effectively in the Chapter 2.  Other effects on retained earnings (i.e., stock dividends and prior period adjustments) are not discussed until Chapter 8.
E2.12.	2, 3	Easy, 3-5 min.	See E2.11.  Good homework assignment.
E2.13.	2, 3	Med., 5-10 min.	The worksheet format is used to help students understand financial statement relationships.  Explain that “net assets” = A-L = SE.
E2.14.	2, 3	Med., 5-10 min.	See E2.13.  Good in-class demonstration exercise.
P2.15.	2, 3, 6	Med., 7-10 min.	Most instructors omit this problem.  Can be used to illustrate the sale of assets at gains/losses, and to emphasize the difference between cash and stockholders’ equity.
P2.16.	2, 3, 6	Med., 10-12 min.	See P2.15.
P2.17.	2, 3, 4	Med., 15-20 min.	Straight-forward problem emphasizing financial statement relationships.  Students respond well.
P2.18.	2, 3, 4	Med., 15-20 min.	See P2.17.
P2.19.	2, 3, 4	Med., 20-25 min.	Similar to P2.15., P2.16., but requires the preparation of financial statements.  Good for in-class demonstration.
P2.20.	2, 3, 4	Med., 20-25 min.	Excel problem.  See P2.19.  Good homework assignment.
P2.21.	2, 3	Med., 5-8 min.	Can use later as a Chapter 4 assignment.
P2.22.	2, 3, 6	Med.-Hard, 15-20.	Group learning problem.  Good in-class demonstration problem.
P2.23.	2, 3, 5	Med., 7-10 min.	Stress the importance of the historical cost principle.
P2.24.	2, 3, 5, 6	Med., 10-12 min.	Group learning problem.  See P2.23.
P2.25.	2, 4	Med., 10-12 min.	Group learning problem.  Emphasizes the structure of the income statement.
P2.26.	2, 4	Med., 10-12 min.	Explain why “Other Income, net” is excluded from operating income.
C2.27.	2, 4, 6, 7	Med., 15-20 min.	Excellent conceptual case, but be sure to relate student responses back to the terminology introduced in the chapter.

SOLUTIONS:

Matching
1.	s		9.	g
2.	h		10.	d
3.	b		11.	t
4.	aa		12.	n
5.	u		13.	i
6.	v		14.	w
7.	p		15.	m
8.	f

Multiple Choice
1.	b		6.	d
2.	b		7.	b
3.	b		8.	d
4.	c		9.	d
5.	a		10.	e

Multiple Choice Annotations:

1.    Review Exhibit 2-3.

2.    Balance sheets are presented at a point in time, rather than for a period of time.

3.   Calculate total stockholders’ equity at the beginning of the year, and then add net income to get the answer. $21,000 - $12,000 = $9,000 beginning + $5,000 net income = $14,000 ending.

4.    $119,000 beginning + $35,000 net income - $29,000 dividends = $125,000 ending balance.

5.   Internal auditors are employees of the corporation, and thus lack the independence required to express an opinion about the fairness of the firm’s financial statements; external CPA auditors (public accounting firms) must be engaged to provide such services.

M2.1.
	A      =        L        +      SE
	Beginning:   $48,000   =   $27,000   +        ?
	Changes:                      =                        +8,000 net income (increase to retained earnings)
	-2,000 dividends (decrease to retained earnings)
	Ending:                        =                   +        ?     .
	Solution approach:
	Beginning stockholders’ equity = $48,000 - $27,000 = $21,000.  Net income increases retained earnings and dividends decrease retained earnings.  Retained earnings are part of stockholders’ equity, so assuming no other changes occurred during the year, ending stockholders’ equity = $21,000 + $8,000 - $2,000 = $27,000.

M2.2.
	SE
	Beginning:     $82,000
	Changes:       +10,000 common stock issued at par value (increase to paid-in capital)                        +12,000 net income (increase to retained earnings)
	-3,000 dividends (decrease to retained earnings)
	Ending:               ?      .
	Solution approach:
	No information is given about assets or liabilities, so the focus is entirely on stockholders’ equity.  Beginning stockholders’ equity +/- changes during the year = ending stockholders’ equity.  $82,000 + $10,000 + $12,000 - $3,000 = $101,000.

M2.3.	Net sales................................................................ ...........    $125,000   Cost of goods sold................................................. ...........           ?       .= 75,000   Gross profit ........................................................... ...........    $  50,000   Selling, general, and administrative expenses..... ...........        22,000   Income from operations....................................................           ?        = 28,000   Interest expense................. ................................... ...........           ?       .=   3,000   Income before taxes.......................................................... ...........    $     ?        = 25,000   Income tax expense........................................................... ...........          5,000   Net income............................................................ ...........    $  20,000              Solution approach:   Set up an income statement using the structure and format as shown in Exhibit 2-2, then      solve for missing amounts.    One possible calculation sequence: (1) $125,000 - $50,000 = $75,000 cost of goods   sold. (2) $50,000 - $22,000 = $28,000 income from operations.  (3) $20,000 + $5,000 =   $25,000 income before taxes.  (4) $28,000 - $25,000 = $3,000 interest expense.

M2.4.

Net sales............................................................................    $     ?        = 100,000   Cost of goods sold.............................................................        40,000.   Gross profit........................................................... ...........    $     ?        =   60,000   Selling, general, and administrative expenses..... ...........       22,000   Income from operations........................................ ...........        38,000   Interest expense..................................................... ...........          6,000.   Income before taxes.......................................................... ...........    $     ?        =   32,000   Income tax expense........................................................... ...........          8,000   Net income............................................................ ...........    $     ?      . =   24,000              Solution approach:   Set up an income statement using the structure and format as shown in Exhibit 2-2, then      solve for missing amounts.    Calculation sequence: (1) $38,000 - $6,000 = $32,000 income before taxes.     (2) $32,000 - $8,000 = $24,000 net income.  (3) $38,000 + $22,000 = $60,000 gross         profit.  (4) $60,000 + $40,000 = $100,000 net sales.   An alternative calculation sequence would have been to solve for gross profit and net   sales first, and to then solve for income before taxes and net income.