SOME BASIC QUESTIONS:

What are the three basic forms of business organizations?

The three basic forms of business organizations are (1) Sole proprietorship, (2) Partnership, and(3) Corporation.

What are the advantages to a business of being formed as a corporation? What are the disadvantages?

Advantages of a corporation are limited liability (stockholders not being personally liable for cor-porate debts), easy transferability of ownership, and easier to raise funds. Disadvantages of a corporation are increased taxation and government regulations.

What are the advantages to a business of being formed as a partnership or sole proprietorship? What are the disadvantages?

Proprietorships and partnerships receive favorable tax treatment compared to corporations and are easier to form than corporations. They are also owner controlled. Disadvantages of propri-etorships and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and difficulty in obtaining financing compared to corporations.

Who are the internal users of accounting data? How does accounting provide relevant data to the internal users?

Internal users are managers who plan, organize, and run a business. To assist management, accounting provides timely internal reports. Examples include financial comparisons of operat-ing alternatives, projections of income from new sales campaigns, forecasts of cash needs for the next year, and financial statements.

Who are the external users of accounting data? Give examples.

External users are those outside the business who have either a present or potential direct fi-nancial interest (investors and creditors) or an indirect financial interest (taxing authorities, regu-latory agencies, labor unions, customers, and economic planners).

What are the three main types of business activity? Give examples of each activity.

The three types of business activity are financing activities, investing activities, and operating activities. Financing activities include borrowing money and selling shares of stock. Investing ac-tivities include the purchase and sale of property, plant, and equipment. Operating activities in-clude selling goods, performing services, and purchasing inventory.

What is the basic accounting equation?The basic accounting equation is Assets = Liabilities + Stockholders’/Owners’ Equity.

Define the terms assets, liabilities, and Owners’ equity.

Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more simply, liabilities are existing debts and obligations. Owners’ equity is the ownership claim on net assets.

Which of these items are liabilities of ABC Cleaning Service?(a) Cash. (b) Dividends.(c) Accounts payable. (d) Accounts receivable.(e) Supplies. (f) Service revenue.(g ) Equipment. (h) Rent expense.(i) Salaries and wages payable.

The liabilities are (c) Accounts payable and (i) Salaries and wages payable.

Example of Common business transac-tions:Owner’s Investment to Form the BusinessJuly 1: Joan Miller invests $40,000 in cash to form Miller Design Studio.

Economic Event That Is Not a Business TransactionJuly 2: Orders office supplies, $5,200.

Prepayment of Expenses in CashJuly 3: Rents an office; pays two months’ rent in advance, $3,200.

Purchase of an Asset on CreditJuly 5: Receives office supplies ordered on July 2 and an invoice for $5,200.

Purchase of an Asset Partly in Cash and Partly on CreditJuly 6: Purchases office equipment, $16,320; pays $13,320 in cash and agrees to pay the rest next month.

Payment of a LiabilityJuly 9: Makes a partial payment of the amount owed for the office supplies received on July 5, $2,600.

Revenue in CashJuly 10: Performs a service for an investment advisor by designing a series of brochures and collects a fee in cash, $2,800.

Revenue on CreditJuly 15: Performs a service for a department store by designing a TV commercial; bills for the fee now but will collect the fee later, $9,600.

Revenue Collected in AdvanceJuly 19: Accepts an advance fee as a deposit on a series of brochures to be designed, $1,400.

Collection on AccountJuly 22: Receives cash from customer previously billed on July 15, $5,000.

Expense Paid in CashJuly 26: Pays employees four weeks’ wages, $4,800.

Expense to Be Paid LaterJuly 30: Receives, but does not pay, the utility bill that is due next month, $680.

WithdrawalsJuly 31: Withdraws $2,800 in cash.

Transaction Analysis Problem and Solution:

Joan Robinson opens her own law office on July 1, 2012. During the first month of operations, the following transactions occurred.1. Joan invested $11,000 in cash in the law practice.2. Paid $800 for July rent on office space.3. Purchased office equipment on account $3,000.4. Provided legal services to clients for cash $1,500.5. Borrowed $700 cash from a bank on a note payable.6. Performed legal services for client on account $2,000.7. Paid monthly expenses: salaries and wages $500, utilities $300, and supplies $100.8. Joan withdraws $1,000 cash for personal use.Instructions(a) Prepare a tabular summary of the transactions.

EXERCISE 1

The following situations involve accounting principles and assumptions.

1. Rex Company owns buildings that are worth substantially more than they originally cost. In an effort to provide more relevant information, Rex reports the buildings at fair value in its accounting reports.2. Levi Company includes in its accounting records only transaction data that can be expressed in terms of money.3. Josh Borke, owner of Josh’s Photography, records his personal living costs as expenses of the business.InstructionsFor each of the three situations, say if the accounting method used is correct or incorrect. If correct, identify which principle or assumption supports the method used. If incorrect, identify which principle or assumption has been vi-olated.

EXERCISE 2Thornton Computer Timeshare Company entered into the following transac-tions during May 2012.1. Purchased computer terminals for $20,000 from Digital Equipment on ac-count.2. Paid $4,000 cash for May rent on storage space.3. Received $17,000 cash from customers for contracts billed in April.4. Provided computer services to Fisher Construction Company for $3,000 cash.5. Paid Northern States Power Co. $11,000 cash for energy usage in May.6. Thornton invested an additional $29,000 in the business.7. Paid Digital Equipment for the terminals purchased in (1) above.8. Incurred advertising expense for May of $1,200 on account.

Instructions

Indicate with the appropriate letter whether each of the transactions above results in:(a) An increase in assets and a decrease in assets.(b) An increase in assets and an increase in owner’s equity.(c) An increase in assets and an increase in liabilities.

(d) A decrease in assets and a decrease in owner’s equity.(e) A decrease in assets and a decrease in liabilities.(f) An increase in liabilities and a decrease in owner’s equity.(g) An increase in owner’s equity and a decrease in liabilities.

EXERCISE 3Natalie Koebel spent much of her childhood learning the art of cookie-making from her grandmother. They passed many happy hours mastering every type of cookie imaginable and later creating new recipes that were both healthy and delicious. Now at the start of her second year in college, Natalie is inves-tigating various possibilities for starting her own business as part of the re-quirements of the entrepreneurship program in which she is enrolled. A long-time friend insists that Natalie has to somehow include cookies in her busi-ness plan. After a series of brainstorming sessions, Natalie settles on the idea of operating a cookie-making school. She will start on a part-time basis and offer her services in people’s homes. Now that she has started thinking about it, the possibilities seem endless. During the fall, she will concentrate on holiday cookies. She will offer individual lessons and group sessions (which will probably be more entertainment than education for the partici-pants). Natalie also decides to include children in her target market. The first difficult decision is coming up with the perfect name for her business. In the end, she settles on “Cookie Creations” and then moves on to more important issues.

EXERCISE 4

Carla Quentin started her own consulting firm, Quentin Consulting, on May 1, 2012. The following transactions occurred during the month of May.May 1 Carla invested $7,000 cash in the business.2 Paid $900 for office rent for the month.3 Purchased $600 of supplies on account.5 Paid $125 to advertise in the County News.9 Received $4,000 cash for services provided.12 Withdrew $1,000 cash for personal use.15 Performed $5,400 of services on account.17 Paid $2,500 for employee salaries.20 Paid for the supplies purchased on account on May 3.23 Received a cash payment of $4,000 for services provided on account on May 15.26 Borrowed $5,000 from the bank on a note payable.29 Purchased office equipment for $4,200 on account.30 Paid $275 for utilities.

InstructionsShow the effects of the previous transactions on the accounting equation using the following format.

Exercise 5