The document provides an introduction to basic financial statements that companies prepare, including the income statement, balance sheet, and statement of cash flows. It explains that the balance sheet describes a company's financial position at a point in time by listing assets, liabilities, and owners' equity. The income statement depicts revenues and expenses over a period of time to arrive at net income or loss. The statement of cash flows shows how cash levels have changed during a period from operating, investing, and financing activities. Sample financial statements are presented for a travel agency to illustrate the accounting equation and components of the balance sheet.

1. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
BASIC FINANCIAL
STATEMENTS
Chapter
2

2. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Introduction to Financial Statements
Companies prepare interim
financial statements and annual
financial statements.
2000
X

3. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Introduction to Financial Statements
Three primary
financial
statements.
Income Statement
Balance Sheet
Statement of Cash Flows
We will use a corporation
to describe these
statements.

4. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Introduction to Financial Statements
Describes
where the
enterprise
stands at a
specific date.
Income Statement
Balance Sheet
Statement of Cash Flows

5. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Introduction to Financial Statements
Depicts the
revenue and
expenses for a
designated
period of time.
Income Statement
Balance Sheet
Statement of Cash Flows

6. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Introduction to Financial Statements
Revenues
result in
positive
cash flow.
Expenses
result in
negative
cash flow.
Either in the past, present, or future.

7. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Introduction to Financial Statements
Net income (or
net loss) is
simply the
difference
between
revenues and
expenses.
Income Statement
Balance Sheet
Statement of Cash Flows

8. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Introduction to Financial Statements
Depicts the
ways cash has
changed during
a designated
period of time.
Income Statement
Balance Sheet
Statement of Cash Flows

9. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The Concept of the Business Entity
Vagabond
Travel
Agency
A business
entity is
separate from
the personal
affairs of its
owner.

10. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500
$ Liabilities:
Notes receivable 10,000 Notes payable 41,000
$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000
$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000
$ Total 300,000
$
A Starting Point: Statement of
Financial Position

11. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500
$ Liabilities:
Notes receivable 10,000 Notes payable 41,000
$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000
$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000
$ Total 300,000
$
Assets
Assets are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows.

12. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Assets
Cost Principle
Going-Concern
Assumption
Objectivity
Principle
Stable-Dollar
Assumption
These accounting
principles support
cost as the basis
for asset valuation.

13. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500
$ Liabilities:
Notes receivable 10,000 Notes payable 41,000
$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000
$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000
$ Total 300,000
$
Liabilities
Liabilities are
debts that
represent negative
future cash flows
for the enterprise.

14. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500
$ Liabilities:
Notes receivable 10,000 Notes payable 41,000
$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000
$
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000
$ Total 300,000
$
Owners’ Equity
Owners’ equity
represents the
owner’s claim to
the assets of the
business.

15. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Owners’ Equity
Changes in Owners’
Equity
•Owners’
Investments
•Business
Earnings
•Payments
to Owners
•Business
Losses

16. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500
$ Liabilities:
Notes receivable 10,000 Notes payable 41,000
$
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000
$
Building 90,000 Owners' Equity
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000
$ Total 300,000
$
The Accounting Equation
Assets = Liabilities + Owners’ Equity
$300,000 = $80,000 + $220,000

17. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Let’s analyze
some
transactions for
JJ’s Lawn Care
Service.

18. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 1, 2003
Assets
Cash 8,000
$ Capital Stock 8,000
$
Total 8,000
$ Total 8,000
$
Owners' Equity
On May 1, 2003, Jill Jones and her family
invested $8,000 in JJ’s Lawn Care Service and
received 800 shares of stock.

19. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 2, 2003
Assets
Cash 5,500
$ Capital Stock 8,000
$
Tools & Equipment 2,500
Total 8,000
$ Total 8,000
$
Owners' Equity
On May 2, JJ’s purchased a riding lawn
mower for $2,500 cash.

20. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
On May 8, JJ’s purchased a $15,000 truck.
JJ’s paid $2,000 down in cash and issued a note payable
for the remaining $13,000.
JJ's Lawn Care Service
Balance Sheet
May 8, 2003
Assets
Cash 3,500
$ Liabilities:
Tools & Equipment 2,500 Notes Payable 13,000
$
Truck 15,000 Owners' Equity:
Capital Stock 8,000
Total 21,000
$ Total 21,000
$
Liabilities and Owners' Equity

21. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
On May 11, JJ’s purchased some repair parts for
$300 on account.

22. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 11, 2003
Assets
Cash 3,500
$ Liabilities:
Tools & Equipment 2,800 Notes Payable 13,000
$
Truck 15,000 Accounts Payable 300
Total Liabilities 13,300
$
Owners' Equity:
Capital Stock 8,000
Total 21,300
$ Total 21,300
$
Liabilities and Owners' Equity
On May 11, JJ’s purchased some repair
parts for $300 on account.

23. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 18, 2003
Assets
Cash 3,500
$ Liabilities:
Accounts Receivable 150 Notes Payable 13,000
$
Tools & Equipment 2,650 Accounts Payable 300
Truck 15,000 Total Liabilities 13,300
$
Owners' Equity:
Capital Stock 8,000
Total 21,300
$ Total 21,300
$
Liabilities and Owners' Equity
Jill realized she had purchased more repair parts than needed.
On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for
$150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days.

24. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 25, 2003
Assets
Cash 3,575
$ Liabilities:
Accounts Receivable 75 Notes Payable 13,000
$
Tools & Equipment 2,650 Accounts Payable 300
Truck 15,000 Total Liabilities 13,300
$
Owners' Equity:
Capital Stock 8,000
Total 21,300
$ Total 21,300
$
Liabilities and Owners' Equity
On May 25, ABC Lawns pays JJ’s $75 as a partial
settlement of its accounts receivable.

25. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 28, 2003
Assets
Cash 3,425
$ Liabilities:
Accounts Receivable 75 Notes Payable 13,000
$
Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150
Owners' Equity:
Capital Stock 8,000
Total 21,150
$ Total 21,150
$
Liabilities and Owners' Equity
On May 28, JJ’s pays $150 of its accounts
payable.

26. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 29, 2003
Assets
Cash 4,175
$ Liabilities:
Accounts Receivable 75 Notes Payable 13,000
$
Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150
Owners' Equity:
Capital Stock 8,000
Retained Earnings 750
Total 21,900
$ Total 21,900
$
Liabilities and Owners' Equity
On May 29, JJ’s recorded lawn care services
provided during May of $750. All clients paid in
cash.

27. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 31, 2003
Assets
Cash 4,125
$ Liabilities:
Accounts Receivable 75 Notes Payable 13,000
$
Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150
Owners' Equity:
Capital Stock 8,000
Retained Earnings 700
Total 21,850
$ Total 21,850
$
Liabilities and Owners' Equity
Now, let’s review how JJ’s transactions
affected the accounting equation.
On May 31, JJ’s purchased gasoline for the
lawn mower and the truck for $50 cash.

28. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Assets = Liabilities +
Cash +
Accts.
Rec. +
Tools &
Equip. + Truck =
Notes
Payable +
Accts.
Pay. +
Capital
Stock +
Retained
Earnings
May 1 8,000
$ 8,000
$
Balances 8,000
$ 8,000
$
May 2 (2,500) 2,500
$
Balances 5,500
$ 2,500
$ 8,000
$
May 8 (2,000) 15,000
$ 13,000
$
Balances 3,500
$ 2,500
$ 15,000
$ 13,000
$ 8,000
$
May 11 300 300
$
Balances 3,500
$ 2,800
$ 15,000
$ 13,000
$ 300
$ 8,000
$
May 18 150
$ (150)
Balances 3,500
$ 150
$ 2,650
$ 15,000
$ 13,000
$ 300
$ 8,000
$
May 25 75 (75)
Balances 3,575
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 300
$ 8,000
$
May 28 (150) (150)
Balances 3,425
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$
May 29 750 750
Balances 4,175
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 750
$
May 31 (50) (50)
Balances 4,125
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 700
$
Owners' Equity

29. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Assets = Liabilities +
Cash +
Accts.
Rec. +
Tools &
Equip. + Truck =
Notes
Payable +
Accts.
Pay. +
Capital
Stock +
Retained
Earnings
May 1 8,000
$ 8,000
$
Balances 8,000
$ 8,000
$
May 2 (2,500) 2,500
$
Balances 5,500
$ 2,500
$ 8,000
$
May 8 (2,000) 15,000
$ 13,000
$
Balances 3,500
$ 2,500
$ 15,000
$ 13,000
$ 8,000
$
May 11 300 300
$
Balances 3,500
$ 2,800
$ 15,000
$ 13,000
$ 300
$ 8,000
$
May 18 150
$ (150)
Balances 3,500
$ 150
$ 2,650
$ 15,000
$ 13,000
$ 300
$ 8,000
$
May 25 75 (75)
Balances 3,575
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 300
$ 8,000
$
May 28 (150) (150)
Balances 3,425
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$
May 29 750 750
Balances 4,175
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 750
$
May 31 (50) (50)
Balances 4,125
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 700
$
Owners' Equity
These transactions
impact the
Statement of Cash
Flows.
These transactions
impact the Income
Statement.
Let’s prepare the Income Statement and
Statement of Cash Flows for JJ’s Lawn Care
Service for the month ending May 31, 2003.

30. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Income Statement
For the Month Ended May 31, 2003
Sales Revenue 750
$
Operating Expense:
Gasoline Expense 50
Net Income 700
$
Investments by and payments to the owners
are not included on the Income Statement.

31. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750
$
Cash paid for expenses (50)
Net cash provided by operating activities 700
$
Cash flows from investing activities:
Purchase of lawn mower (2,500)
$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125
$
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 4,125
$

32. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750
$
Cash paid for expenses (50)
Net cash provided by operating activities 700
$
Cash flows from investing activities:
Purchase of lawn mower (2,500)
$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125
$
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 4,125
$
Operating activities include the cash
effects of revenue and expense
transactions.

33. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750
$
Cash paid for expenses (50)
Net cash provided by operating activities 700
$
Cash flows from investing activities:
Purchase of lawn mower (2,500)
$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125
$
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 4,125
$
Investing activities include the cash
effects of purchasing and selling
assets.

34. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750
$
Cash paid for expenses (50)
Net cash provided by operating activities 700
$
Cash flows from investing activities:
Purchase of lawn mower (2,500)
$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125
$
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 4,125
$
Financing activities include the cash
effects of transactions with the owners
and creditors.

35. © The McGraw-Hill Companies, Inc., 2002
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Relationships Among Financial
Statements
Beginning
of period
End of
period
Balance
Sheet
Balance
Sheet
Time
Income Statement
Statement of Cash Flows

36. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Practice Qs.
1)Foster, Inc., purchased a truck by paying $5,000 and borrowing
the remaining $25,000 required to complete the transaction. Briefly
state how this transaction affects the company’s basic accounting
equation.
2)Wiley Company had total revenues of $300,000 for a recent
month. During the month the company incurred operating expenses
of $205,000 and purchased land for $45,000. Compute the amount
of Wiley’s net income for the month.

37. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Solution-1: Cash decrease by 5000
Truck increase 30000---- Overall Assets will
increase by 25000
Liability- Accounts Payable increase by 25000

38. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Practice Qs.
3)Xavier Company had the following transactions during the
current year:
• Earned revenues of $100,000 and incurred expenses of $56,000,
all in cash.
• Purchased a truck for $20,000.
• Sold land for $10,000.
• Borrowed $15,000 from a local bank.
What was the total change in cash during the year?

39. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Forms of Business Organizations
Sole
Proprietorship
Partnership Corporation

40. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Sole Proprietorship –
A business form for which there is one owner.
This single owner has unlimited liability for all
debts of the firm.
• Oldest form of business organization.
• Business income is accounted for on your
personal income tax form.

41. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Advantages
• Simplicity
• Low setup cost
• Quick setup
Disadvantages
• Unlimited liability
• Hard to raise
additional capital
• Transfer of
ownership
difficulties

42. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Partnership – A business form in which two or
more individuals act as owners.
Business income is accounted for on each
partner’s personal income tax form.
All partners have unlimited liability and are
liable for all obligations of the partnership.

43. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Advantages
• Can be simple
• Low setup cost, higher
than sole proprietorship
• Relatively quick setup
Disadvantages
• Unlimited liability
• Difficult to raise
additional capital, but
easier than sole
proprietorship
• Transfer of ownership
difficulties

44. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Corporation - (Company)
A business form legally separate from its
owners
• An artificial entity that can own assets and incur
liabilities.
• Business income is accounted for on the income
tax form of the corporation.

45. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Advantages
• Limited liability
• Easy transfer of
ownership
• Unlimited life
• Easier to raise large
quantities of capital
Disadvantages
• Double taxation
• More difficult to
establish
• More expensive to set up
and maintain

46. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reporting Ownership Equity in the
Balance Sheet
Owner's equity:
Jill Jones, capital 8,000
$
Partners' equity
Jill Jones, capital 4,000
$
Bill Jones, capital 4,000
Total partners' equity 8,000
$
Sole
Proprietorship
Partnership
Owners' equity
Capital stock 7,000
$
Retained earnings 1,000
Total stockholders' equity 8,000
$
Corporation

47. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The Use of Financial Statements by
Outsiders
Creditors
Investors
Two concerns:
Solvency
Profitability

48. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The Need for Adequate Disclosure
Notes to the
financial
statements often
provide facts
necessary for the
proper
interpretation of
the statements.
Income Statement
Balance Sheet
Statement of Cash Flows

49. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Examples:
 Unsettled Lawsuits against the company
 Due dates of major liabilities
 Assets pledged as collateral to secure loans
 Contractual commitments requiring large future cash
outlays.

50. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Window Dressing:
 Measures taken by management to make the company
appear as strong as possible in its financial statements.
The more frequently financial statements are presented,
the less able management is to window-dress and make
a company look financially stronger than it actually is.

51. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
End of Chapter 2

52. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Quiz of Ch 1
1. Discuss accounting as the language of business and the role of
accounting information in making economic decisions.
2. Explain the importance of financial accounting information for
external parties- primarily investors and creditors – in terms of
the objectives and the characteristics of that information.
3. What are the three primary financial statements with which we
communicate financial accounting information ?
4. What is the IASB and what is its role in external financial
reporting ?
5. List four users of accounting information.

53. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Practice Qs.
Account balances for Crystal Auto Wash at September 30, 2011, are shown below. The figure for
retained earnings is not given, but it can be determined when all the available information is
assembled in the form of a balance sheet.
Accounts Payable. . . . . . . $14,000 Accounts Receivable . . . . . . . . 800
Buildings . . . . . . . . . . . . . . . . 52,000 Cash . . .. . . . . . . . . . . . . . . . 9,200
Capital Stock . . . . . . . . . . . . 100,000 Retained Earnings . . . . . . . . . . ?
Land . . . . . . . . . . . . . . . . . $68,000 Machinery & Equipment . .. . . 65,000
Notes Payable (due in
30 days) . . . . . . . . . . . . . . . 29,000 Salaries Payable . . . . . . . . . . . . . 3,000
Supplies . . . . . . . . . . . . . . . . . . . . 400
Required:
Prepare a balance sheet at September 30, 2011.

54. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Practice Qs.
Compute the missing amounts in the following table:
Assets Liabilities Owners’ Equity
a. $578,000 $342,000 ?
b. ? 562,500 $570,000
c. 307,500 ? 187,200

55. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Assignment 2 Deadline:14-12-2021
Demonstration Problem
Brief Exercises: All
Exercises: 2.1, 2.2, 2.3, 2.5, 2.7, 2.8, 2.9, 2.11,
2.12, 2.13.
Problems: 2.1A, 2.3(A), 2.4(A)

56. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Practice Qs.
A number of business transactions carried out by Smooth Manufacturing Company are as follows:
a. Borrowed money from a bank.
b. Sold land for cash at a price equal to its cost.
c. Paid a liability.
d. Returned for credit some of the office equipment previously purchased on credit but not yet paid
for. (Treat this the opposite of a transaction in which you purchased office equipment on credit.)
e. Sold land for cash at a price in excess of cost. (Hint: The difference between cost and sales price
represents a gain that will be in the company’s income statement.)
f. Purchased a computer on credit.
g. The owner invested cash in the business.
h. Purchased office equipment for cash.
i. Collected an account receivable.
Indicate the effects of each of these transactions on the total amounts of the company’s assets,
liabilities, and owners’ equity. Organize your answer in tabular form, using the following column
headings and the code letters I for increase, D for decrease, and NE for no effect. The answer for
transaction a is provided as an example:
Transaction Assets Liabilities Owners’ Equity
(a) I I NE

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