Chapter 1
The Financial Statements
Ethics Check
(5-10 min.) EC 1-1
a. Objectivity and independence
b. Due care
c. Integrity
d. Integrity
Copyright © 2019 Pearson Education Inc. Chapter 1 The Financial Statements 1-1
, Short Exercises
(10 min.) S 1-1
a. Corporation, limited partners of a Limited-liability partnership (LLP)
and Limited-liability company (LLC). If any of these businesses
fails and cannot pay its liabilities, creditors cannot force the
owners to pay the business’s debts from the owners’ personal
assets. Creditors can go after the general partner of a limited
liability partnership.
b. Proprietorship. There is a single owner of the business, so the
owner is answerable to no other owner.
c. Partnership. If the partnership fails and cannot pay its liabilities,
creditors can force the partners to pay the business’s debts from
their personal assets. A partnership affords more protection for
creditors than a proprietorship because there are two or more
owners to share this liability.
(5 min.) S 1-2
1. The entity assumption applies.
2. Application of the entity assumption will separate Osmond’s
personal assets from the assets of Simple Treats, Inc. This will help
Osmond, investors, and lenders know how much assets, liabilities
and equity the business has, and this knowledge will help all
parties evaluate the business realistically.
1-2 Financial Accounting 12/e Solutions Manual Copyright © 2019 Pearson Education Inc.
, (5-10 min.) S 1-3
a. Stable-monetary-unit assumption
b. Historical cost principle; $300 is the accounting value of the
laptop
c. Historical cost principle; the sale price is the amount actually
received from the sale
d. Entity assumption
(10 min.) S 1-4
Computed amounts in boxes
Total Assets = Total Liabilities + Stockholders’ Equity
a. $660,000 = $300,000 + $360,000
b. 85,000 = 50,000 + 35,000
c. 350,000 = 75,000 + 275,000
(5 min.) S 1-5
1. Liabilities = Assets − Owners’ Equity
2. Owners’ Equity = Assets − Liabilities
This way of determining the amount of owners’ equity applies to
any company or your household.
Copyright © 2019 Pearson Education Inc. Chapter 1 The Financial Statements 1-3
, (5-10 min.) S 1-6
a. Land A g. Retained earnings S
b. Accrued expenses payable L h. Prepaid expenses A
c. Supplies A i. Accounts payable L
d. Equipment A j. Accounts receivable A
e. Notes payable L k. Merchandise inventory A
f. Long-term debt L l. Common stock S
(5-10 min.) S 1-7
1. Assets are the economic resources of a business that are expected
to produce a benefit in the future.
Owners’ (stockholders’) equity represents the insider claims of a
business, the owners’ interest in its assets.
Assets and owners’ equity differ in that assets are resources and
owners’ equity is a claim to assets.
Assets must be at least as large as owners’ equity, so equity can
be smaller than assets.
2. Both liabilities and owners’ (stockholders’) equity are claims to
assets.
Liabilities are the outsider claims to the assets of a business; they
are obligations to pay creditors.
Owners’ equity represents the insider claims to the assets of the
business; they are the owners’ interest in its assets.
1-4 Financial Accounting 12/e Solutions Manual Copyright © 2019 Pearson Education Inc.
The Financial Statements
Ethics Check
(5-10 min.) EC 1-1
a. Objectivity and independence
b. Due care
c. Integrity
d. Integrity
Copyright © 2019 Pearson Education Inc. Chapter 1 The Financial Statements 1-1
, Short Exercises
(10 min.) S 1-1
a. Corporation, limited partners of a Limited-liability partnership (LLP)
and Limited-liability company (LLC). If any of these businesses
fails and cannot pay its liabilities, creditors cannot force the
owners to pay the business’s debts from the owners’ personal
assets. Creditors can go after the general partner of a limited
liability partnership.
b. Proprietorship. There is a single owner of the business, so the
owner is answerable to no other owner.
c. Partnership. If the partnership fails and cannot pay its liabilities,
creditors can force the partners to pay the business’s debts from
their personal assets. A partnership affords more protection for
creditors than a proprietorship because there are two or more
owners to share this liability.
(5 min.) S 1-2
1. The entity assumption applies.
2. Application of the entity assumption will separate Osmond’s
personal assets from the assets of Simple Treats, Inc. This will help
Osmond, investors, and lenders know how much assets, liabilities
and equity the business has, and this knowledge will help all
parties evaluate the business realistically.
1-2 Financial Accounting 12/e Solutions Manual Copyright © 2019 Pearson Education Inc.
, (5-10 min.) S 1-3
a. Stable-monetary-unit assumption
b. Historical cost principle; $300 is the accounting value of the
laptop
c. Historical cost principle; the sale price is the amount actually
received from the sale
d. Entity assumption
(10 min.) S 1-4
Computed amounts in boxes
Total Assets = Total Liabilities + Stockholders’ Equity
a. $660,000 = $300,000 + $360,000
b. 85,000 = 50,000 + 35,000
c. 350,000 = 75,000 + 275,000
(5 min.) S 1-5
1. Liabilities = Assets − Owners’ Equity
2. Owners’ Equity = Assets − Liabilities
This way of determining the amount of owners’ equity applies to
any company or your household.
Copyright © 2019 Pearson Education Inc. Chapter 1 The Financial Statements 1-3
, (5-10 min.) S 1-6
a. Land A g. Retained earnings S
b. Accrued expenses payable L h. Prepaid expenses A
c. Supplies A i. Accounts payable L
d. Equipment A j. Accounts receivable A
e. Notes payable L k. Merchandise inventory A
f. Long-term debt L l. Common stock S
(5-10 min.) S 1-7
1. Assets are the economic resources of a business that are expected
to produce a benefit in the future.
Owners’ (stockholders’) equity represents the insider claims of a
business, the owners’ interest in its assets.
Assets and owners’ equity differ in that assets are resources and
owners’ equity is a claim to assets.
Assets must be at least as large as owners’ equity, so equity can
be smaller than assets.
2. Both liabilities and owners’ (stockholders’) equity are claims to
assets.
Liabilities are the outsider claims to the assets of a business; they
are obligations to pay creditors.
Owners’ equity represents the insider claims to the assets of the
business; they are the owners’ interest in its assets.
1-4 Financial Accounting 12/e Solutions Manual Copyright © 2019 Pearson Education Inc.
