STUDENT OWNERS MANUAL
User Manual: manual pdf -FilePursuit
Open the PDF directly: View PDF 
.
Page Count: 7
3
THE NAVIGATOR
• Understand Concepts for Review K
• Read Feature Story K
• Scan Study Objectives K
• Read Preview K
• Read text and answer Before You Go On
p. 74 Kp. 77 Kp. 87 Kp. 90 K
p. 91 K
• Work Demonstration Problem K
• Review Summary of Study Objectives K
• Complete Assignments K
Before studying this chapter, you should know or, if necessary, review:
a. What assets, liabilities, stockholders’ equity, retained earnings,
dividends, revenues, and expenses are. (Ch. 1, pp. 11–12)
b. Why assets equal liabilities plus stockholders’ equity. (Ch. 1, p. 11)
c. What transactions are and how they affect the basic accounting
equation. (Ch. 2, pp. 44–51)
THE RECORDING
PROCESS
C
ONCEPTS FOR REVIEW
THE
NAVIGATOR
xii
The Navigator is a learning
system designed to guide you
through each chapter and help
you succeed in learning the
material. It consists of (1) a
checklist at the beginning of
the chapter, which outlines text
features and study skills you will
need, and (2) a series of check
boxes that prompt you to use
the learning aids in the chapter
and set priorities as you study.
The Feature Story helps you picture
how the chapter topic relates to the
real world of accounting and business.
Throughout the chapter, references to
the Feature Story will help you put new
ideas in context, organize them, and
remember them. The problem called A
Look Back at Our Feature Story toward
the end of the chapter helps you pull
toget
h
er the ideas learned in the
chapter. Many Feature Stories end with
the URL of the company cited in the
story.
Concepts for Review, listed at the
beginning of each chapter, are the
accounting concepts you learned
in previous chapters that you will
need to know in order to understand
the topics you are about to learn.
Page references are provided if you
need to review before reading the
chapter.
Study Objectives at the beginning of
each chapter give you a framework
for learning the specific concepts and
procedures covered in the chapter.
Each study objective reappears in the
margin at the point where the
concept is discussed. Finally, you can
review all the study objectives in the
Summary at the end of the chapter.
STUDENT OWNER’S MANUAL
HOW TO USE THE STUDY AIDS IN THIS BOOK
After studying this chapter, you should be able to
1. Explain what an account is and how it helps in the recording process.
2. Define debits and credits and explain how they are used to record business transactions.
3. Identify the basic steps in the recording process.
4. Explain what a journal is and how it helps in the recording process.
5. Explain what a ledger is and how it helps in the recording process.
6. Explain what posting is and how it helps in the recording process.
7. Prepare a trial balance and explain its purposes.
8. Identify the advantages of manual and computerized accounting systems.
No Such Thing as a
Perfect World
When she got a job doing the
accounting for Forster’s Restau-
rants, Tanis Anderson had almost
finished her business administration
degree at Simon Fraser University.
But even after Tanis completed her
degree requirements, her education
still continued—this time, in the real
world.
Tanis’s responsibilities include
paying the bills, tracking food and
labor costs, and managing the pay-
roll for The Mug and Musket,
a popular destination restaurant in
Surrey, British Columbia. “My title
is Director of Finance,” she laughs,
“but really that means I take care of
whatever needs doing!”
The use of
judgment is a
big part of the
job. As Tanis
says, “I learned
all the funda-
mentals in my
business classes;
but school
prepares you for a
perfect world, and
there is no such thing.”
She feels fortunate that
her boss understands that her
job is a learning experience as well
as a responsibility. “Sometimes he’s
let me do something he knew
perfectly well was a mistake so I
can learn something through
experience,” she admits.
To help others gain the benefits
of her real-world learning, Tanis is
always happy to help students in the
area who want to use Forster’s as
the subject of a project or a report.
“It’s the least I can
do,” she says.
S
TUDY OBJECTIVES
THE
NAVIGATOR
THE
NAVIGATOR
F
EATURE STORY
15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xii
Student Owner’s Manual xiii
68
PREVIEW OF CHAPTER 1
In Chapter 2 we analyzed business transactions in terms of the accounting equation. The cumulative
effects of these transactions were presented in tabular form. Imagine a restaurant and gift shop such
as The Mug and Musket using the same tabular format as Best Caterers, Inc., to keep track of every
one of its transactions. In a single day, this restaurant and gift shop engages in hundreds of business
transactions. To record each transaction this way would be impractical, expensive, and unnecessary. In-
stead, procedures and records are used to keep track of transaction data more easily.
This chapter introduces and illustrates these basic procedures and records. The content and organ-
ization of Chapter 3 are as follows:
PREVIEW OF CHAPTER 3
THE
NAVIGATOR
THE RECORDING PROCESS
The Account
Steps in the
Recording Process
Debits and credits
Debit and credit
procedure
Stockholders’ equity
relationships
Expansion of basic
equation
Journal
Ledger
Electronic Data
Processing
Comparative
advantages of
manual versus
computerized systems
The Future
The Recording
Process Illustrated
Summary illustration
of journalizing and
posting
The Trial Balance
Limitations of a
trial balance
Locating errors
Use of dollar signs
T
HE ACCOUNT
An account is an individual accounting record of increases and decreases in a spe-
cific asset, liability, or stockholders’ equity item. For example, Best Caterers, Inc.
(the company discussed in Chapter 2), would have separate accounts for Cash,
Accounts Receivable, Accounts Payable, Service Revenue, Salaries Expense, and
so on. In its simplest form, an account consists of three parts: (1) the title of the
account, (2) a left, or debit, side, and (3) a right, or credit, side. Because the align-
ment of these parts of an account resembles the letter T, it is referred to as a
T account. The basic form of an account is shown in Illustration 3-1.
STUDY OBJECTIVE 1
Explain what an account is
and how it helps in the
recording process.
Illustration 3-1
Basic form of account
Left, or debit, side
Debit balance
Right, or credit, side
Credit balance
Title of Account
T Account
D
e
b
i
t
C
r
e
d
i
t
The basic steps in the recording process occur repeatedly. The analysis of trans-
actions was illustrated in Chapter 1. Further examples will be given in this and
later chapters. The other steps in the recording process are explained in the next
sections.
Steps in the Recording Process 75
Computerized and manual accounting systems basically parallel one another.
Most of the procedures are handled by electronic circuitry in computerized
systems. They seem to occur invisibly. But, to fully comprehend how comput-
erized systems operate, you need to understand manual approaches for processing
accounting data.
T
ECHNOLOGY IN ACTION
Technology in Action exam-
ples show how computer
technology is used in
accounting and business.
THE JOURNAL
Transactions are recorded initially in chronological order in a journal before be-
ing transferred to the accounts. Thus the journal is referred to as the book of orig-
inal entry. For each transaction, the journal shows the debit and credit effects on
specific accounts. Companies may use various kinds of journals, but every com-
pany has the most basic form of journal, a general journal. Typically, a general
journal has spaces for dates, account titles and explanations, references, and two
amount columns. Whenever we use the term journal in this textbook without a
modifying adjective, we mean the general journal.
The journal makes several significant contributions to the recording process:
1. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts for
each entry can be readily compared.
Entering transaction data in the journal is known as journalizing. Separate jour-
nal entries are made for each transaction. A complete entry consists of (1) the
date of the transaction, (2) the accounts and amounts to be debited and credited,
and (3) a brief explanation of the transaction.
Illustration 3-14 shows the technique of journalizing, using the first two trans-
actions of Best Caterers, Inc. These transactions were: September 1, stockholders
invested $15,000 cash in the corporation in exchange for shares of stock, and
STUDY OBJECTIVE 4
Explain what a journal is
and how it helps in the
recording process.
The Preview begins by linking the
Feature Story with the major topics of
the chapter. It is followed by a graphic
outline of major topics and subtopics
that will be discussed. This narrative
and visual preview gives you a mental
framework upon which to arrange the
new information you are learning.
Study Objectives reappear in the
margins at the point where the topic is
discussed. End-of-chapter assignments
are keyed to study objectives.
Technology in Action boxes show how
computers are used by accountants
and by users of accounting
information.
Key terms and concepts are printed in
blue where they are first explained in
the text, and they are defined again
in the end-of-chapter glossary.
15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xiii
xiv Student Owner’s Manual
The ledger provides management with the balances in various accounts. For
example, the Cash account shows the amount of cash that is available to meet
current obligations. Amounts due from customers can be found by examining
Accounts Receivable, and amounts owed to creditors can be found by examining
Accounts Payable.
In his autobiography, Sam Walton described the double-entry accounting
system with which he began the Wal-Mart empire: “We kept a little pigeonhole
on the wall for the cash receipts and paperwork of each [Wal-Mart] store. I had
a blue binder ledger book for each store. When we added a store, we added a
pigeonhole. We did this at least up to twenty stores. Then once a month, the bookkeeper
and I would enter the merchandise, enter the sales, enter the cash, and balance it.”
Why did Sam Walton keep separate pigeonholes and blue binders for each store?
Why bother to keep separate records for each store?
SOURCE: Sam Walton, Made in America (New York: Doubleday, 1992), p. 53.
A
CCOUNTING IN ACTION
Business Insight
December 31. Hargrove has legal title to both the units sold and the units pur-
chased. If units in transit are ignored, inventory quantities would be understated
by 4,000 units (1,500 ⫹2,500).
Inventory Basics 265
Illustration 9-1
Terms of sale.
FOB Shipping Point FOB Destination
Public
Carrier
Co.
Seller Buyer
Ownership
passes to
buyer here
Public
Carrier
Co.
Seller Buyer
Ownership
passes to
buyer here
Dividends.
When a company is successful, it generates net income. Net income
represents an increase in net assets, which are then available to distribute to stock-
holders. The distribution of cash or other assets to stockholders is called a dividend.
Dividends reduce retained earnings. However, dividends are not an expense of a
corporation. A corporation first determines its revenues and expenses and then
computes net income or net loss. At this point, a corporation may decide to dis-
tribute a dividend.
In summary, the principal sources (increases) of stockholders’ equity are
(1) investments by stockholders and (2) revenues from business operations. In
contrast, reductions (decreases) in stockholders’ equity are a result of (1) expenses
and (2) dividends. These relationships are shown in Illustration 1-6.
Illustration 1-6
Increases and decreases in
stockholders’ equity
Investments by stockholders
Revenues
Dividends to stockholders
Expenses
Stockholders'
Equity
DECREASESINCREASES
M
M
BEFORE YOU GO ON...
REVIEW IT
1.
Why is ethics a fundamental business concept?
2.
What are generally accepted accounting principles? Give an example.
3.
Explain the monetary unit and the economic entity assumptions.
4.
The accounting equation is: Assets ⫽Liabilities ⫹Stockholders’ equity. Replacing the
words in that equation with dollar amounts, what is PepsiCo’s accounting equation on
December 31, 2006?
5.
What are assets, liabilities, and stockholders’ equity?
DO IT
Classify the following items as issuance of stock (I), dividends (D), revenues (R), or ex-
penses (E). Then indicate whether the following items increase or decrease stockholders’
equity: (1) rent expense, (2) service revenue, (3) dividends, and (4) salaries expense.
ACTION PLAN
•Review the rules for changes in stockholders’ equity: Investments and revenues in-
crease stockholders’ equity. Expenses and dividends decrease stockholders’ equity.
•Understand the sources of revenue: the sale of merchandise, performance of serv-
ices, rental of property, and lending of money.
•Understand what causes expenses: the consumption of assets or services.
•Recognize that dividends are distributions of cash or other assets to stockholders.
SOLUTION
1.
Rent expense is classified as an expense (E); it decreases stockholders’ equity.
2.
Service revenue is classified as revenue (R); it increases stockholders’ equity.
3.
Dividends is classified as dividends (D); it decreases stockholders’ equity.
4.
Salaries expense is classified as an expense (E); it decreases stockholders’ equity.
M
M
THE
NAVIGATOR
Review It questions marked
with this icon require that you
use the PepsiCo 2006 Annual
Report.
Do It exercises give you
immediate practice of the
material just covered.
Color illustrations visually reinforce
important concepts and therefore
often contain material that may
appear on exams.
Accounting in Action boxes give you more
glimpses into the real world of business. These
high-interest boxes are classified by three types
of issues—business, ethics, and international—
each identified by its own icon. New in this
edition, e-Business Insights describe how
e-business technology is expanding the services
provided by accountants.
Before You Go On sections follow each key
topic. Review It questions prompt you to stop
and review the key points you have just studied.
If you cannot answer these questions, you
should go back and read the section again.
Review It questions marked with the PepsiCo
icon ask you to find information in the PepsiCo
2006 Annual Report, which is excerpted in the
Appendix at the end of the text.
Brief Do It exercises ask you to put your newly
acquired knowledge to work. They outline an
Action Plan necessary to complete the exercise,
and the accompanying Solution helps you see
how the problem should be solved. (The Do It
exercises are keyed to similar homework
exercises.)
Infographics, a special type of
illustration, pictorially link concepts to
the real world and provide visual
reminders of key concepts.
15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xiv
Student Owner’s Manual xv
Adjustments for accrued expenses are needed for two purposes: (1) to record
the obligations that exist at the balance sheet date and (2) to recognize the ex-
penses that apply to the current accounting period. Prior to adjustment, both lia-
bilities and expenses are understated. Therefore, as shown in Illustration 4-13, the
adjusting entry for accrued expenses results in a debit (increase) to an expense
account and a credit (increase) to a liability account.
The Basics of Adjusting Entries 117
Face Value
of Note
Annual
Interest
Rate
Interest
xx =
xx =$5,000 12% 1/12 $50
Time
in Terms of
One Year
Illustration 4-14
Formula for computing
interest
HELPFUL HINT
Interest is a cost of borrowing
money that accumulates with
the passage of time.
A=L+SE
+50 –50
Illustration 4-15
Interest accounts after
adjustment
ACCRUED INTEREST.
Premier Staffing Agency, Inc., signed a $5,000, three-month note
payable on October 1. The note requires interest at an annual rate of 12 percent.
The amount of the interest accumulation is determined by three factors: (1) the face
value of the note; (2) the interest rate, which is always expressed as an annual rate;
and (3) the length of time the note is outstanding. In this instance, the total interest
due on the $5,000 note at its due date three months hence is $150 ($5,000 ⫻12%
⫻3/12); the interest for one month is $50. The formula for computing interest
2
and
its application to Premier Staffing Agency, Inc., for the month of October is shown
in Illustration 4-14. Note that the time period is expressed as a fraction of a year.
2
The computation of interest will be considered in more depth in later chapters.
Accrued Expenses
Expense Liability
Debit
Adjusting
Entry (+)
Credit
Adjusting
Entry (+)
Illustration 4-13
Adjusting entries for
accrued expenses.
The accrued expense adjusting entry at October 31 is
After this adjusting entry is posted, the accounts look like Illustration 4-15.
Oct. 31 Interest Expense 50
Interest Payable 50
(To record interest on notes payable)
Interest Expense Interest Payable
10/31 Adj. 50 10/31 Adj. 50
I
n a serv
i
ce enterpr
i
se,
i
t
i
s customary to recogn
i
ze
f
our types o
f
current as-
sets: (1) cash, (2) short-term investments, such as U.S. government bonds, (3) re-
ceivables (notes receivable, accounts receivable, and interest receivable), and
(4) prepaid expenses (insurance and supplies). These items are listed in the order
of liquidity; that is, they are listed in the order in which they are expected to be
converted into cash. This arrangement is illustrated in Illustration 5-17 in the pre-
sentation of UAL, Inc. (United Airlines).
UAL, INC.(UNITED AIRLINES)
Balance Sheet (partial)
(in millions)
Current assets
Cash $1,348
Short-term investments 388
Receivables 788
Aircraft fuel, spare parts, and supplies 310
Prepaid expenses 219
Other current assets 254
Total current assets $3,307
Illustration 5-17
Current assets section
Helpful Hints in the margins are like
having an instructor with you as you
read. They further clarify concepts
being discussed.
Accounting equation analyses have
been inserted in the margin next to
key journal entries. They help you
understand the impact of an
accounting transaction on the financial
statements.
Financial statements appear
throughout the book. Often, numbers
or categories are highlighted in
colored type to draw your attention to
key information.
15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xv
xvi Student Owner’s Manual
THE
NAVIGATOR
M
M
BEFORE YOU GO ON...
REVIEW IT
1.
What are the income statement, retained earnings statement, balance sheet, and state-
ment of cash flows?
2.
How are the financial statements interrelated?
AALOOK BACK AT OUR FEATURE STORY
Refer back to the Feature Story about
PepsiCo
at the beginning of Chapter 1, and
answer the following questions.
1.
If you were interested in investing in
PepsiCo
, what would the balance sheet and
income statement tell you?
2.
Would you request audited financial statements? Explain.
3.
Will the financial statements show the market value of the company? Explain.
SOLUTION
1.
The balance sheet reports the assets, liabilities, and stockholders’ equity of the com-
pany. The income statement presents the revenues and expenses and resulting net
income (or net loss) for a specific period of time. The balance sheet is like a snap-
shot of the company’s financial condition at a point in time. The income statement
indicates the profitability of the company. Also, the sources of the company’s rev-
enues and its expenses are provided in the income statement.
2.
You should request audited financial statements—statements that a CPA has exam-
ined and expressed an opinion as to the fairness of presentation. You should not
make decisions without having audited financial statements.
3.
The financial statements will not show the market value of the company. One
important principle of accounting is the cost principle, which states that assets
should be recorded at cost. Cost has an important advantage over other valuations:
It is reliable.
A Look Back exercises refer
to the chapter-opening Fea-
ture Story. These exercises
help you to analyze that real-
world situation in terms of the
accounting topic of the
chapter.
56 CHAPTER 2 Accounting Principles
DEMONSTRATION PROBLEM
Hospitality Legal Services, Inc., which provides contract services for caterers and their clients,
was incorporated on July 1, 2008. During the first month of operations, the following
transactions occurred:
1. Stockholders invested $10,000 in cash in exchange for shares of stock.
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 (use Service Revenue).
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 $500; utilities $300; and telephone $100.
Instructions
(a) Prepare a tabular summary of the transactions.
(b) Prepare the income statement, retained earnings statement, and balance sheet at July
31 for Hospitality Legal Services, Inc.
SOLUTION TO DEMONSTRATION PROBLEM
(a) Assets ⴝLiabilities ⴙStockholders’ Equity
Trans- Accounts Notes Accounts Common Retained
action Cash ⴙReceivable ⴙEquipment ⴝPayable ⴙPayable ⴙStock ⴙEarnings
(1) ⫹$10,000 ⫹$10,000
(2) ⫺800 ⫺$800 Rent Expense
9,200 ⫽10,000 ⫹⫺800
(3) ⫹$3,000 ⫹$3,000
9,200 ⫹3,000 ⫽3,000 ⫹10,000 ⫹⫺800
(4) ⫹1,500 ⫹1,500 Service Revenue
10,700 ⫹3,000 ⫽3,000 ⫹10,000 ⫹700
(5) ⫹700 ⫹$700
11,400 ⫹3,000 ⫽700 ⫹3,000 ⫹10,000 ⫹700
(6) ⫹$2,000 ⫹2,000 Service Revenue
⫹11,400 ⫹2,000 ⫹3,000 ⫽700 ⫹3,000 ⫹10,000 ⫹2,700
(7) ⫺900 ⫺500 Salaries Expense
⫺300 Utilities Expense
⫺100 Telephone Expense
$10,500 ⫹$2,000 ⫹$3,000 ⫽$700 ⫹$3,000 ⫹$10,000 ⫹$1,800
$15,500 $15,500
(b)
HOSPITALITY LEGAL SERVICES, INC.
Income Statement
For the Month Ended July 31, 2008
Revenues
Service revenue $3,500
Expenses
Rent expense $800
Salaries expense 500
Utilities expense 300
Telephone expense 100
Total expenses 1,700
Net income $1,800
⎫
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎬
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎭
⎫
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎬
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎪
⎭
ACTION PLAN
•Remember that assets
must equal liabilities plus
stockholders’ equity after
each transaction.
•Investments and revenues
increase stockholders’
equity.
•Dividends and expenses
decrease stockholders’
equity.
•The income statement
shows revenues and
expenses for a period
of time.
•The retained earnings
statement shows the
changes in retained earn-
ings for a period of time.
•The balance sheet reports
assets, liabilities, and
stockholders’ equity at a
specific date.
Demonstration Problems are
a final review of the chapter.
The Action Plan gives tips
about how to approach the
problem, and the Solution
demonstrates both the form
and the content of complete
answers.
Many of the last Before You Go On
exercises take you back for a critical
look at the chapter-opening Feature
Story.
Demonstration Problems review the
chapter material. These sample
problems provide you with Action
Plans, which that list the strategies
needed to solve the problem, and with
Solutions.
15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xvi
Student Owner’s Manual xvii
1. Explain what accounting is. Accounting is an information
system that identifies, records, and communicates the eco-
nomic events of an organization to interested users.
2. Identify the users and uses of accounting. (a) Management
uses accounting information in planning, controlling, and
evaluating business operations. (b) Investors (owners) decide
whether to buy, hold, or sell their financial interests on the
basis of accounting data. (c) Creditors (suppliers and
bankers) evaluate the risks of granting credit or lending
money on the basis of accounting information. Other groups
that use accounting information are taxing authorities, regu-
latory agencies, customers, labor unions, and economic
planners.
3. Understand why ethics is a fundamental business concept.
Ethics is the standards of conduct by which actions are judged
as right or wrong. If you cannot depend on the honesty of
the individuals you deal with, effective communication and
economic activity would be impossible, and information would
have no credibility.
4. Explain the meaning of generally accepted accounting
principles and the cost principle. Generally accepted ac-
counting principles are a common set of standards used by ac-
countants. The cost principle states that assets should be
recorded at their cost.
5. Explain the meaning of the monetary unit assumption and
the economic entity assumption. The monetary unit assump-
tion requires that only transaction data capable of being ex-
pressed in terms of money be included in the accounting
records. The economic entity assumption requires that the ac-
tivities of each economic entity be kept separate from the ac-
tivities of its owners and other economic entities.
6. State the basic accounting equation; and explain the mean-
ing of assets, liabilities, and stockholders’ equity. The basic
accounting equation is:
Assets Liabilities Stockholders’ Equity
Assets are resources owned by a business. Liabilities are cred-
itorship claims on total assets. Stockholders’ equity is the own-
ership claim on total assets.
7. Explain the accounting cycle and flow of information. The
nine steps of the accounting cycle are transaction analysis, jour-
nalizing, posting, trial balance, adjustments, adjusted trial bal-
ance, closing, postclosing trial balance, and financial state-
ments. Information flows from both the front and the back of
the house, through point-of-sales systems, property manage-
ment systems, and other means, to the accounting office.
8. Identify the various systems of accounting procedures used
in the hospitality industry. There are currently three systems:
The Uniform System of Accounts for the Lodging Industry,
The Uniform System of Accounts for Restaurants, and The
Uniform System of Financial Reporting for Clubs. Each has
a long history, and their purpose is to provide users of finan-
cial information with comparable data and meaningful
analyses.
9. Understand accounting and financial management in a
hotel. Proper accounting and financial management of a ho-
tel is crucial to its success. The chief accounting officer is
known as the controller. The controller is part of the hotel’s
executive committee, which includes the general manager and
all department heads. The controller interacts with all the de-
partment heads, assisting and consulting with them on all
financial matters so each department head makes sound
decisions.
10. Understand accounting and financial management in a
foodservice operation and a club. The controller of a food-
service operation focuses on food, beverage, and labor costs.
Food and beverage cost analyses are of particular importance
due to the amount of money spent and the perishable nature
of the products. The club industry is unique in that its cus-
tomers are all members of the club. Members pay dues to the
club and in return have a decision-making role in club oper-
ations. Members also spend money on food and beverage,
merchandising, and other amenities. Therefore, a club con-
troller must account for revenues by looking at different cost
centers such as golf, tennis, spa, and food and beverages to
provide solid information for management.
S
UMMARY OF STUDY OBJECTIVES
THE
NAVIGATOR
Exercises 163
G
LOSSARY
Classified balance sheet A balance sheet that contains a
number of standard classifications or sections (p. 154).
Closing entries Entries made at the end of an accounting period
to transfer the balances of temporary accounts to a permanent
stockholders’ equity account, Retained Earnings (p. 145).
Correcting entries Entries to correct errors made in record-
ing transactions (p. 151).
Current assets Cash and other resources that are reasonably
expected to be realized in cash or to be sold or consumed in
the business within one year or the operating cycle, whichever
is longer (p. 154).
Current liabilities Obligations reasonably expected to be
paid from existing current assets or through the creation of
other current liabilities within the next year or operating cy-
cle, whichever is longer (p. 156).
Income summary A temporary account used in closing rev-
enue and expense accounts (p. 145).
Intangible assets Noncurrent resources that do not have
physical substance (p. 156).
Liquidity The ability of a company to pay obligations that
are expected to become due within the next year or operat-
ing cycle (p. 157).
Long-term investments Resources not expected to be real-
ized in cash within the next year or operating cycle (p. 155).
Long-term liabilities (long-term debt) Obligations expected
to be paid after more than one year (p. 157).
Operating cycle The average time required to go from cash
to cash in producing revenues (p. 155).
Permanent (real) accounts Balance sheet accounts whose bal-
ances are carried forward to the next accounting period (p. 144).
Postclosing trial balance A list of permanent accounts and
their balances after closing entries have been journalized and
posted (p. 149).
Property, plant, and equipment Assets of a relatively per-
manent nature that are being used in the business and not
intended for resale (p. 156).
Stockholders’ equity The ownership claim of shareholders
on total assets (p. 158).
Temporary (nominal) accounts Revenue, expense, and div-
idends accounts whose balances are transferred to Retained
Earnings at the end of an accounting period (p. 144).
Work sheet A multiple-column form that may be used in the
adjustment process and in preparing financial statements
(p. 138).
5-1 Indicate which of the following statements are true or false regarding the work sheet.
_____ The work sheet is essentially a working tool of the accounting.
_____ The work sheet cannot be used as a basis for posting to ledgers.
_____ The work sheet is distributed to management and other interested parties.
_____ Financial statements can be prepared directly from the work sheet before jour-
nalizing and posting the adjusting entries.
5-2 The ledger of W. S. Juice Bar includes the following unadjusted balances: Service Rev-
enue $60,000; Salaries Expense $28,950; and Prepaid Rent $6,000. Adjusting entries are required
for (a) services provided for $1,000 but not yet billed and collected; (b) accrued salaries payable
of $1,350; and (c) expired rent of $2,000. Enter the unadjusted balances and adjustments into
a work sheet, and complete the work sheet for all accounts. (Hint: You will need to add the fol-
lowing accounts: Accounts Receivable, Salaries Payable, and Rent Expense.)
5-3 The income statement of Health 24 City Club for the month ending August 31 shows Mem-
bership Dues Revenues of $25,000; Salaries Expense of $9,300; Repairs and Maintenance Expense
of $2,400; and Net Income of $6,950. Prepare the entries to close the revenue and expense accounts,
and complete the closing process for these accounts using the three-column form of account.
5-4 Using the data in Exercise 5-3, identify the accounts that would be included in a post-
closing trial balance.
5-5 Sam Perroni, owner of Perroni’s Harbor Cruise, found the following errors that his book-
keeper made after the transactions had been journalized and posted. Prepare the correcting entries.
1. A collection on account from a customer for $1,280 was recorded as a debit to Accounts
Receivable of $1,280 and a credit to Service Revenue of $1,280.
2. The purchase of supplies for the boats on account for $3,570 was recorded as a debit to
Supplies of $3,750 and credit to Accounts Payable of $3,750.
5-6 At Fred’s Fish Chips, the following errors were discovered after the transactions had been
journalized and posted. Prepare the correcting entries.
1. A collection on account from a customer for $850 was recorded as a debit to Cash of $850
and a credit to Service Revenue of $850.
E
XERCISES
Use of a work sheet.
(SO 1)
Prepare partial work sheet.
(SO 1)
Journalize and post closing
entries using the three-column
form of account.
(SO 2)
Identify postclosing trial
balance accounts.
(SO 3)
Prepare correcting entries.
(SO 5)
Prepare correcting entries.
(SO 5)
The Summary of Study Objectives
relates the study objectives to the key
points in the chapter. It gives you
another opportunity to review as well
as to see how all the key topics within
the chapter are related.
Exercises range in difficulty, helping
you focus on one study objective at a
time. This will help you build
confidence in your basic skills and
knowledge to use the material learned
in the chapter. More difficult exercises
help you pull together several concepts
from the chapter.
The Glossary defines all the key terms
and concepts introduced in the
chapter. Page references help you find
any terms you need to study further.
15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xvii
Working
Months Number Days per Month
January–March 2 20
April–May 3 25
June–October 2 18
November–December 3 23
Instructions
With the class divided into groups, answer the following:
(a) Prepare a report showing the comparative payroll expense of continuing to employ per-
manent workers compared to adopting the Harrington Services, Inc., plan.
(b) What other factors should Martha consider before finalizing her decision?
ETHICS CASE
11-13 Harry Smith owns and manages Harry’s Restaurant, a twenty-four-hour restaurant near
the city’s medical complex. Harry employs nine full-time employees and sixteen part-time
Remember to go back to the Navigator box on the chapter-opening page and
check off your completed work.
I
I
FINANCIAL REPORTING PROBLEM: PepsiCo
6-14 Refer to the financial statements of PepsiCo, presented in Appendix A, and answer
the following questions:
(a) What was the amount of net cash provided by operating activities for the year ended De-
cember 30, 2006? For the year ended December 31, 2005?
(b) What was the amount of increase or decrease in cash and cash equivalents for the year
ended December 30 2006? For the year ended December 31, 2005?
(c) Which method of computing net cash provided by operating activities does PepsiCo use?
(d) F l i f th 2006 t t t f h fl did th h i t d
EXPLORING THE WEB
9-11 A company’s annual report usually will identify the inventory method used. Knowing
that, you can analyze the effects of the inventory method on the income statement and the bal-
ance sheet.
Address: www. darden.com
Steps
1. From Darden Restaurants’ home page, choose Investor Relations.
2. Choose Annual Report & Financials.
3. Choose Annual Report 2006—HTML version.
4. Click on Financial Renew under the Table of Contents.
5. Click on Consolidated Balance Sheets.
Instructions
Answer the following questions based on the 2006 Annual Report.
(a) At Darden’s fiscal year-end, what was the net inventory on the balance sheet?
(b) How has this changed from the previous fiscal year-end?
(c) What inventory method does Darden use (See notes to Consolidated Financial Statements)?
ETHICS CASE
9-12 J. K. Leask Wholesale Corp. uses the LIFO method of inventory costing. In the current
year, profit at J. K. Leask is running unusually high. The corporate tax rate is also high this
year, but it is scheduled to decline significantly next year. In an effort to lower the current year’s
net income and to take advantage of the changing income tax rate, the president of J. K. Leask
Wholesale instructs the accountant to recommend to the purchasing department a large purchase
of inventory for delivery three days before the end of the year. The price of the inventory to
be purchased has doubled during the year, and the purchase will represent a major portion of the
ending inventory value.
Instructions
(a) What is the effect of this transaction on this year’s and next year’s income statement and
income tax expense? Why?
(b) If J. K. Leask Wholesale had been using the FIFO method of inventory costing, would the
president give the same directive?
(c) Should the plant accountant order the inventory purchase to lower income? What are the
ethical implications of this order?
After you complete your homework
assignments, it’s a good idea to go
back to The Navigator checklist at the
start of the chapter to see if you have
used all the study aids of the chapter.
Group Decision Cases require teams of
students to evaluate a manager’s
decision or choose from among
alternative courses of action. They help
prepare you for the business world by
giving you practice in solving problems
with colleagues.
Exploring the Web exercises guide you
to Internet sites where you can find
and analyze information related to the
chapter topic.
Financial Reporting Exercises direct you
to study various aspects of the financial
statements in the PepsiCo 2006 Annual
Report, which is excerpted in the
Appendix at the end of the text.
Through the Ethics Cases, you will
reflect on typical ethical dilemmas,
learn how to analyze such situations,
and decide on an appropriate course
of action.
xviii Student Owner’s Manual
15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xviii
