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Sherman Lawn Service has been open for one year, and Hannah Sherman, the owner, wants to know whether business earned net income or a net loss for the year. First, she must identify the revenues earned and the expenses incurred during the year.

Requirements:
1. What are revenues and expenses?
1. Decrease owner’s equity (capital) by using up assets or increasing liabilities in order to deliver goods or services to customers.

a. Assets
b. Expenses
c. Liabilities
d. Net income
e. Net loss
f. Revenues

2. Increase owner’s equity (capital) by delivering goods or services to customers.

a. Assets
b. Expenses
c. Liabilities
d. Net income
e. Net loss
f. Revenues

Scenario:
Wendy Craven is the sole proprietor of a property management company near the campus of Pensacola Junior College. The business has cash of $9,000 and furniture that cost $6,000 and has a market value of $10,000. Debts include accounts payable of $5,000. Wendy’s personal home is valued at $350,000 and her personal bank account has $1,400.

Requirements:
1. Consider the accounting principles in the chapter and define the principle that best matches the situation.
a. Wendy’s personal assets are not recorded on the property management company’s balance sheet.
b. Wendy records furniture at its cost of $6,000, not its market value of $10,000.
c. Wendy does not make adjustments for inflations.
d. The account payable of $5,000 is documented by a statement from the furniture company showing the business still owes $5,000 on the furniture. Wendy’s friend thinks she should only owe about $4,000. The account payable is recorded at $5,000.

2. How much equity is in the business?

Requirements 1
Select the principle that best matches each situation.

A. Wendy’s personal assets are not recorded on the company’s balance sheet.
1. The cost principle
2. The entity concept
3. The going- concern concept
4. The reliability principle
5. The stable – monetary – unit concept

B. Wendy records furniture at its cost of $6,000, not its market value of $10,000.
1. The cost principle
2. The entity concept
3. The going- concern concept
4. The reliability principle
5. The stable – monetary – unit concept

C. Wendy does not make adjustments for inflation.
1. The cost principle
2. The entity concept
3. The going- concern concept
4. The reliability principle
5. The stable – monetary – unit concept

D. The account payable is recorded at $5,000 rather than at $4,000
1. The cost principle
2. The entity concept
3. The going- concern concept
4. The reliability principle
5. The stable – monetary – unit concept

Requirement 2
1. Wendy Craven has $10,000 of equity in the business