Chapter 1: DO IT!
Exercises
DO IT! Exercises
DO IT! 1.1 Indicate whether each of the five statements presented below is true
or false. If false, indicate how to correct the statement.
1. The three steps in the accounting process are identification, recording,
and examination.
2. The accounting process includes the bookkeeping function.
3. Managerial accounting provides reports to help investors and creditors
evaluate a company.
4. The two most common types of external users are investors and
creditors.
5. Internal users include human resources managers.
Solution: (1) False, the correct statement should be as follows: The three steps
in the accounting process are identification, recording, and communication.
(2) True,
(3) True,
(4) True,
(5) True.
DO IT! 1.2 Indicate whether each of the five statements presented below is true
or false. If false, indicate how to correct the statement.
1. Congress passed the Sarbanes-Oxley Act to ensure that investors invest
only in companies that will be profitable.
2. The standards of conduct by which actions are judged as loyal or
disloyal are ethics.
3. The primary accounting standard-setting body in the United States is
the Securities and Exchange Commission (SEC).
4. The historical cost principle dictates that companies record assets at
their cost and continue to report them at their cost over the time the
assets are held.
5. The monetary unit assumption requires that companies record only
transactions that can be measured in money.
Solution: (1) False. The correct statement is as follows:
The Sarbanes-Oxley Act was not passed to ensure that investors
invest only in companies that will be profitable.
(2) False, The correct statement is as follows:
Ethics refers to the standards of conduct by which people judge
the loyalty or disloyalty of actions (Carroll, 2016).
(3) False, The correct statement is as follows:
The FASB is recognized by the U.S. Securities and Exchange
Commission as the designated accounting standard setter for public companies.
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Accounting Principles Manual
(4) True,
(5) True.
DO IT! 1.3 Classify the following items as investment by owner (I), owner’s
drawings (D), revenues (R), or expenses (E). Then indicate whether each item
increases or decreases owner’s equity.
(1) Drawings (3) Advertising Expense
(2) Rent Revenue (4) Owner puts personal assets into the business
Solution: (1) D. It decreases owner’s equity.
(2) R. It increases owner’s equity.
(3) E. It decreases owner’s equity.
(4) I. It increases owner’s equity.
DO IT! 1.4 Transactions made by A. Marti and Co., a law firm, for the month
of March are shown as follows. Prepare a tabular analysis which shows the
effects of these transactions on the expanded accounting equation, similar to that
shown in Illustration 1.9 (in the textbook).
1. The company performed $20000 of services for customers, on credit.
2. The company received $20000 in cash from customers who had been
billed for services (in transaction 1).
3. The company received a bill for $3200 of advertising, but will not pay
it until a later date.
4. A. Marti withdrew $2500 cash from the business for personal use.
Solution: A. Marti and Co.
Tabular Analysis of Transactions
Assets = Liabilities + Owner’s Equity
Accounts Accounts
Cash Receivable Payable Capital Drawing Revenues Expenses
1. + 20000 + 20000
2. + 20000 – 20000
3. + 3200 – 3200
4. – 2500 – 2500
17500 0 3200 0 – 2500 20000 – 3200
17500 17500
DO IT! 1.5 Presented below is selected information related to Kirby Company
at December 31, 2022. Kirby reports financial information monthly.
Accounts Payable $ 3000 Salaries & Wages Expense $16500
Cash 6500 Note Payable 25000
Advertising Expense 6000 Rent Expense 10500
Service Revenue 53500 Accounts Receivable 13500
Equipment 29000 Owner’s Drawings 7500
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Chapter 1: DO IT! Exercises
(a) Determine the total assets of Kirby Company at December 31, 2022.
(b) Determine the net income that Kirby Company reported for December 2022.
(c) Determine the owner’s equity of Kirby Company at December 31, 2022.
Solution:
(a) Kirby Company
Statement of Total Assets
Cash $6500
Equipment 29000
Accounts Receivable 13500
Total Assets 49000
(b) Kirby Company
Income Statement
Amount
Revenues:
Service Revenue $53500
Expenses:
Advertising Expense 6000
Salaries & Wages Exp. 16500
Rent Expense 10500
Total expenses (33000)
Net income $20500
(c) Kirby Company
Balance Sheet
December 31, 2022
Amount
Total assets $49000
Less: Liabilities
Notes payable (25000)
Accounts payable (3000)
Owner’s equity $21000
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