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Principles of Accounting

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Questions 1 - 6, Two points each (no partial credit)

For each situation below, indicate its effects on the accounting elements shown on the accompanying chart. Use the following letters to indicate your answer (you do not need to enter amounts):

Increase = I Decrease = D No effect = N

1. Derek Co. acquired cash from the owners to begin business operations.

Assets Liabilities Equity Revenues Expenses Net Income Cash
I I

Cash (asset) will increase and the equity will increase as it is investment by the owners

2. Ergo Co. provided services to its customers for cash.

Assets Liabilities Equity Revenues Expenses Net Income Cash
I I I I I

Cash will increase, revenues will increase, increase in revenue will increase the net income and equity

3. Freight Co. borrowed cash from the Local Bank.

Assets Liabilities Equity Revenues Expenses Net Income Cash
I I I

Cash will increase and the borrowing will increase the liability

4. Galaxy Co. incurred operating expenses and paid cash.

Assets Liabilities Equity Revenues Expenses Net Income Cash
D D I D D

Cash will decrease, expense will increase, this will reduce net income and reduce equity

5. Halley Co. purchased land for cash.

Assets Liabilities Equity Revenues Expenses Net Income Cash
N D

Cash will decrease, Land will increase and so the total assets will remain the same

6. Iris Co. made a cash distribution to its owners

Assets Liabilities Equity Revenues Expenses Net Income Cash
D D D

Cash will decrease and the distribution will decrease equity

Multiple-Choice Problems
Questions 1 - 19, Two points each (no partial credit) Place your answer in the box provided next to each question.

1. The Jersey Company provided services to a customer for $1,000 cash. Which of the following statements related to this transaction are false?
a. Total assets would increase.
b. Total liabilities would not be affected.
c. Retained earnings would not be affected.
d. Cash flow from operating activities would increase.

The revenues will increase and that will increase the retained earnings

2. The following amounts were drawn from the records of Kansas Co.: Total Assets = $1,100; Common stock = $300; Retained Earnings = $200. Based on this information, total liabilities must be equal to:
a. $300
b. $600
c. $800
d. $900

Total assets = Total Liabilities + Common Stock + Retained Earnings
1,100 = Total Liabilities + 300 + 200
Total liabilities = 1,100-500=600

3. During 2005, the following events occurred at Lance Co.: owners invested $10,000 of cash; revenue of $20,000 was earned; the company borrowed $4,000 from the bank; expenses of $13,000 were incurred; and $2,000 cash was distributed to the owners. What was Lance's net income for 2005?
a. $ 1,000
b. $ 5,000
c. $ ...

$2.19