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Chapter 1: Problem 7

The Accounting Equation Determine the missing amount in each of the following cases: $$ \begin{array}{ccc} \text { Assets } & \text { Liabilities } & \text { Stockholders' Equity } \\ \$ 350,000 & ? & \$ 225,000 \\ \$ 155,000 & \$ 95,000 & ? \\ ? & \$ 40,000 & \$ 59,000 \\ \hline \end{array} $$

Short Answer

Expert verified
Liabilities: $125,000, Stockholders' Equity: $60,000, Assets: $99,000.

Step by step solution

01

Understanding the Accounting Equation

The accounting equation is the foundation of the double-entry bookkeeping system. It is represented as: \[ \text{Assets} = \text{Liabilities} + \text{Stockholders' Equity} \] This equation must always be balanced, meaning that the total assets must equal the sum of liabilities and stockholders' equity.
02

Case 1: Solving for Liabilities

For the first case:Assets = \(350,000Stockholders' Equity = \)225,000We need to find Liabilities. Using the accounting equation:\[ \text{Liabilities} = \text{Assets} - \text{Stockholders' Equity} = 350,000 - 225,000 = 125,000 \] Therefore, Liabilities = $125,000.
03

Case 2: Solving for Stockholders' Equity

For the second case:Assets = \(155,000Liabilities = \)95,000We need to find Stockholders' Equity. Using the accounting equation:\[ \text{Stockholders' Equity} = \text{Assets} - \text{Liabilities} = 155,000 - 95,000 = 60,000 \] Therefore, Stockholders' Equity = $60,000.
04

Case 3: Solving for Assets

For the third case:Liabilities = \(40,000Stockholders' Equity = \)59,000We need to find Assets. Using the accounting equation:\[ \text{Assets} = \text{Liabilities} + \text{Stockholders' Equity} = 40,000 + 59,000 = 99,000 \] Therefore, Assets = $99,000.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Assets
In accounting, assets are anything of value or a resource of value owned by a person or company. They can be converted into cash or other forms which benefit the owner. Generally, assets are split into two main categories: current and non-current assets.
  • **Current Assets**: These are assets that are expected to be converted into cash or used up within one year. Examples include cash, inventories, and accounts receivable.
  • **Non-current Assets**: These are long-term investments, and they are not expected to be turned into cash within the next year. Examples are property, equipment, and patents.
Understanding assets is crucial because they represent the resources the company uses to generate revenue. In the accounting equation, assets are always on the left side, equating to the sum of liabilities and stockholders' equity to show how they are financed and owned.
Liabilities
Liabilities in accounting refer to the company's financial debts or obligations that arise during business operations. They represent what the company owes to others, such as lenders, suppliers, or employees. Just like assets, liabilities are also categorized into current and long-term liabilities.
  • **Current Liabilities**: These are obligations the company expects to pay within one year, such as accounts payable, wages, or short-term loans.
  • **Long-term Liabilities**: These obligations are due over a period longer than one year, including mortgages, bonds payable, and leases.
The importance of liabilities is tied to the accounting equation: they are found on the right side of the equation. Liabilities show how much of the company's resources are financed through borrowing, affecting both the company's leverage and its overall financial health.
Stockholders' Equity
Stockholders' equity represents the owners' claim after all liabilities have been settled. It is essentially the net worth of the company from an ownership perspective. The concept of stockholders' equity is vital because it provides insight into the capital structure of a company and how effectively it manages its resources.
Two main components make up stockholders' equity:
  • **Contributed Capital**: This is the money that shareholders invest in the company by purchasing the company鈥檚 stock. It is the primary source of funding for many new businesses.
  • **Retained Earnings**: These are the accumulated profits left in the company after dividends are paid. A healthy retained earnings balance indicates a profitable company that reinvests its income for growth.
In the accounting equation, stockholders' equity is on the right side along with liabilities. It reflects how much assets are financed by the owners through activities other than borrowing.

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Most popular questions from this chapter

Generally accepted accounting principles are: a. A set of guidelines to aid in the financial reporting process b. A set of laws to prevent financial fraud c. A set of standards for ethical conduct d. A set of voluntary "best business practices"

International Accounting Principles The worldwide acceptance of a global set of international accounting principles will provide certain benefits. a. Which group has taken the lead in developing a set of international accounting principles? b. Identify and briefly discuss a benefit that would result from the adoption of a global set of international accounting principles.

Corporate Social Responsibility Which of the following is not part of the triple bottom line reporting framework? a. Social bottom line b. Environmental bottom line c. Economic bottom line d. Efficiency bottom line

Revenue Recognition Principle For each of the following situations, determine whether the criteria for revenue recognition have been met by December 31,2018 . a. A manufacturing company received \(\$ 85,000\) cash on December 31,2018 , as an advance payment on a special order for a piece of equipment. The equipment will be manufactured by March 31 , \(2019 .\) b. An appliance dealer acquired ten new washer/dryer sets for \(\$ 6,800\) cash on December 31,2018 , and advertised their availability, at \(\$ 1,000\) for each set, in that evening's newspaper. c. A yard maintenance service signed a contract on October 15,2018 , with an apartment complex to maintain its grounds during the months of November 2018 through June 2019 . The cost is \(\$ 750\) per month and payment is due in two \(\$ 3,000\) installments: December 15,2018 and March 15 , \(2019 .\)Revenue Recognition Principle For each of the following situations, determine whether the criteria for revenue recognition have been met by December 31,2018 . a. A manufacturing company received \(\$ 85,000\) cash on December 31,2018 , as an advance payment on a special order for a piece of equipment. The equipment will be manufactured by March 31 , \(2019 .\) b. An appliance dealer acquired ten new washer/dryer sets for \(\$ 6,800\) cash on December 31,2018 , and advertised their availability, at \(\$ 1,000\) for each set, in that evening's newspaper. c. A yard maintenance service signed a contract on October 15,2018 , with an apartment complex to maintain its grounds during the months of November 2018 through June 2019 . The cost is \(\$ 750\) per month and payment is due in two \(\$ 3,000\) installments: December 15,2018 and March 15 , \(2019 .\)

Using the Basic Accounting Equation Use the basic accounting equation to answer the following: a. Hawkins Company has total assets of \(\$ 150,000\) and total liabilities of \(\$ 110,000\). How much is the company's total stockholders' equity? b. Paul Company has total liabilities of \(\$ 170,000\) and total stockholders' equity of \(\$ 105,000\). How much total assets does the company have? c. If Black Company's total assets increased by \(\$ 35,000\) during the year, and its total liabilities decreased during the same year by \(\$ 20,000\), what was the change in the company's total stockholders' equity?
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