Book 1 - Chapter 1

LG	1-3, continued
	f. No. The repairs to the damaged equipment caused by poor training did not add value. Also, I have some doubts about the wages of the poorly trained employee adding much value in the future. g. The wealth of the business increased by $12,000 during the month ($40,700 − $28,700). Because the business had this $12,000 net income, I would say that last month was successful. Note: Using the $10,000 cash to purchase equipment does not diminish wealth; it simply changes form from cash into equipment. The merchandise, which is a resource purchased at some previous time, is now “consumed” because it was sold to customers.

LG	1-4
	a. An account receivable is a legal right to collect money that the business owns as the result of making a sale. Even though you cannot touch it (like a desk or a computer) a legal right is property. Property that does not have physical substance, such as a legal right, is called “intangible property.” We discuss this more in Volume 2. Cash is not the same as accounts receivable. They are different kinds of property. b. This is a tricky question because it is not clear that any wealth (only services) is actually being received. However, each business is still accumulating wealth as a result of being in business! Example: suppose that Business A provides consulting service to Business B. Then Business B provides advertising service to Business A. Business B has now received consulting services without paying. Business A has now received advertising service without paying. Obtaining any valuable resource without paying for it (money saved) has exactly the same effect on total wealth as receiving the same amount of money from a sale. Note: This concept assumes that the exchange of services is a genuine transaction in which each company is consuming resources as it provides real services—that no fraud or fake transactions are involved.

Learning Goal 1, continued

SOLUTIONS

Learning Goal 1: Explain What a Business Is and What It Does

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Worthy & James Publishing is a provider of basic accounting books covering fundamental accounting principles, business accounting, and business math. Topics in financial accounting and business accounting covered include the balance sheet, the income statement, financial ratios, and bank reconciliation.