CHAPTER 2
FINANCIAL REPORTING MECHANICS
SOLUTIONS
1. C is correct. Sales of products, a primary business activity, are classified as an operating activity. Issuance of debt would be a financing activity. Acquisition of a competitor and the sale of surplus equipment would both be classified as investing activities.
2. A is correct. Issuance of debt would be classified as a financing activity. B is incorrect because payment of income taxes would be classified as an operating activity. C is incorrect because the receipt of dividends and investments in common stock would be generally classified as investing activities.
3. A is correct. An asset is an economic resource of an entity that will either be converted into cash or consumed.
4. C is correct. Owners’ equity is a residual claim on the resources of a business.
5. A is correct. Assets must equal liabilities plus owners’ equity and, therefore, €2,000 = €1,200 + Owners’ equity. Owners’ equity must be €800.
6. B is correct.
| Beginning retained earnings | $1,400 |
| + Net income | 200 |
| − Distributions to owners | (100) |
| = Ending retained earnings | $1,500 |
7. C is correct.
Assets = Liabilities + Contributed capital + Beginning retained earnings − Distributions to owners + Revenues − Expenses
| Liabilities | €1,000 |
| + Contributed capital | 500 |
| + Beginning retained earnings | 600 |
| − Distributions to owners | (0) |
| + Revenues | 5,000 |
| − Expenses | (4,300) |
| = Assets | €2,800 |
8. C is correct. This is a contribution of capital by the owners. Assets ...
