INTRODUCTION TO ACCOUNTING AND BUSINESS Waren Buffet 21 edition

1. The objective of most businesses is to maximize profits. Profit is the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide those goods or services.

2. A manufacturing business changes basic inputs into products that are then sold to customers. A service business provides services rather than products to customers. A restaurant such as Applebee’s has characteristics of both a manufacturing and a service business in that Applebee’s takes raw inputs such as cheese, fish, and beef and processes them into products for consumption by their customers. At the same time, Applebee’s provides services of waiting on their customers as they dine.

3. The corporate form allows the company to obtain large amounts of resources by issuing stock. For this reason, most companies that require large investments in property, plant, and equipment are organized as corporations.

4. The business strategy of KIA is a low-cost strategy. In contrast, the business strategy of Porche is a differentiation strategy. The difference in strategies is directly reflected in the prices of the autos. For example, you can purchase a KIA for under $10,000 while the entry level Porche begins at over $40,000.

5. Super Wal-Mart will compete for customers using a low-cost strategy. The size and buying power of Wal-Mart Corporation provides Wal-Mart a competitive advantage over your friend in the ability to offer low prices. Thus, your friend should attempt to compete using a differentiation strategy. For example, your friend could offer personalized service to customers such as knowing customers’ names, friendly atmosphere, home delivery of medicines, help in filing insurance forms, 24-hour call service, etc.

6. eBay offers value to its customers by developing a Web-based community in which buyers and sellers are brought together in an efficient format to browse, buy, and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics, and a host of practical and miscellaneous items.

7. The stakeholders of a business normally include owners, managers, employees, customers, creditors, and the government.

8. Simply put, the role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.

9. No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $3,600 is a personal transaction of Deana Moran and should not be recorded by First Delivery Service.

10. The land should be recorded at its cost of $112,000 to Elrod Repair Service. This is consistent with the cost concept.

11. a. No. The offer of $600,000 and the increase in the assessed value should not be recognized in the accounting records.

b. Cash would increase by $600,000, land would decrease by $500,000, and owner’s equity would increase by $100,000.

12. An account receivable is a claim against a customer for goods or services sold. An account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the records of the seller is an account payable in the records of the purchaser.

13. The business incurred a net loss of $35,000.

14. The business realized net income of $80,000.

15. Net income or net loss

Owner’s equity at the end of the period

Cash at the end of the period

exercises

Ex. 1–1

1. manufacturing

2. service

3. merchandise

4. service

5. service

6. manufacturing

7. service

8. manufacturing

9. merchandise

10. manufacturing

11. service

12. manufacturing

13. merchandise

14. service

15. manufacturing

Ex. 1–2

1. a—low cost

2. a—low cost

3. b—differentiation

4. b—differentiation

5. c—combination

6. b—differentiation

7. b—differentiation

8. c—combination

9. a—low cost

10. b—differentiation

11. a—low cost

12. b—differentiation

13. a—low cost

14. a—low cost

15. c—combination

Ex. 1–3

As in many ethics issues, there is no one right answer. The local newspaper reported on this issue in these terms: "The company covered up the first report, and the local newspaper uncovered the company's secret. The company was forced to not locate here (Collier County). It became patently clear that doing the least that is legally allowed is not enough."

Ex. 1–4

1. B

2. B

3. E

4. F

5. B

6. F

7. X

8. E

9. X

10. B

Ex. 1–5

Coca-Cola owners’ equity: $24,501 – $12,701 = $11,800

PepsiCo owners’ equity: $23,474 – $14,183 = $9,291

Ex. 1–6

Toys “R” Us $9,397 – $5,367 = $4,030

Estée Lauder $3,417 – $1,955 = $1,462

Ex. 1–7

a. $96,500 ($25,000 + $71,500)

b. $67,750 ($82,750 – $15,000)

c. $19,500 ($37,000 – $17,500)

Ex. 1–8

a. $275,000 ($475,000 – $200,000)

b. $310,000 ($275,000 + $75,000 – $40,000)

c. $233,000 ($275,000 – $15,000 – $27,000)

d. $465,000 ($275,000 + $125,000 + $65,000)

e. Net income: $45,000 ($425,000 – $105,000 – $275,000)

Ex. 1–9

a. owner's equity

b. liability

c. asset

d. asset

e. owner's equity

f. asset

Ex. 1–10

a. Increases assets and increases owner’s equity.

b. Increases assets and increases owner’s equity.

c. Decreases assets and decreases owner’s equity.

d. Increases assets and increases liabilities.

e. Increases assets and decreases assets.

Ex. 1–11

a. (1) Total assets increased $80,000.

(2) No change in liabilities.

(3) Owner’s equity increased $80,000.

b. (1) Total assets decreased $30,000.

(2) Total liabilities decreased $30,000.

(3) No change in owner’s equity.

Ex. 1–12

1. increase

2. decrease

3. increase

4. decrease

Ex. 1–13

1. c

2. c

3. d

4. c

5. e

6. a

7. e

8. a

9. e

10. e

Ex. 1–14

a. (1) Sale of catering services for cash, $25,000.

(2) Purchase of land for cash, $10,000.

(3) Payment of expenses, $16,000.

(4) Purchase of supplies on account, $800.

(5) Withdrawal of cash by owner, $2,000.

(6) Payment of cash to creditors, $10,600.

(7) Recognition of cost of supplies used, $1,400.

b. $13,600 ($18,000 – $4,400)

c. $5,600 ($64,100 – $58,500)

d. $7,600 ($25,000 – $16,000 – $1,400)

e. $5,600 ($7,600 – $2,000)

Ex. 1–15

It would be incorrect to say that the business had incurred a net loss of $21,750. The excess of the withdrawals over the net income for the period is a decrease in the amount of owner’s equity in the business.