Fa4e Sm Ch02

Chapter 2 Constructing Financial Statements Learning Objectives – coverage by question MiniExercises LO1 – Describe and construct the balance sheet and understand how it can be used for analysis.

Exercises

Problems

Cases and Projects

14 - 17, 19, 21 - 23, 25 - 27,

32 - 46

47 - 60, 62, 64, 65, 67

69

29 - 31

LO2 – Use the financial statement effects template (FSET) to analyze transactions. LO3 – Describe and construct the income statement and discuss how it can be used to evaluate management performance. LO4 – Explain revenue recognition, accrual accounting, and their effects on retained earnings. LO5 – Illustrate equity transactions and the statement of stockholders’ equity. LO6 – Use journal entries and Taccounts to analyze and record transactions. LO7 – Compute net working capital, the current ratio, and the quick ratio, and explain how they reflect liquidity.

20, 29

33, 42, 45

19 - 23,

33 - 35,

28, 29

37 - 41

20, 22 - 24, 29

37, 38

29 - 31

47 - 55, 57 - 60,

69, 70

62 - 65, 67

58, 60, 64,

69

65, 67

33, 39, 41

27, 29 25, 26,

65, 67

53, 55, 57,

18, 19, 21 - 23,

55, 60,

43, 44, 46

32, 34, 36, 38, 40, 44

51, 64, 65, 67

53, 56 - 58, 61, 66, 68

69

69

50, 53, 54, 57, 58

©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 2

2-1

DISCUSSION QUESTIONS Q2-1.

An asset is something that we own that is expected to provide future benefits. A liability is a current obligation that will require a future sacrifice. Equity is the difference between assets and liabilities. It represents the claims of the company’s owners to its income and assets. The following are some examples of each: Assets

Liabilities

Equity

           

Cash Receivables Inventories Plant, property and equipment Accounts payable Accrued liabilities Notes payable Long-term debt Contributed capital (common and preferred stock) Additional paid-in capital Earned capital (retained earnings) Treasury stock

Q2-2.

The revenue recognition principle requires that revenues be recognized when earned. Revenues are earned when the product has been delivered to the buyer and is usually signified by a formal transfer of title. A good test of whether revenue has been earned is whether the rights, risks and obligations of ownership have been transferred to the buyer. If a service is involved, revenues are not earned until the service has been provided. The matching principle prescribes that the expenses incurred in providing the service or product be matched against the revenues recognized from the sale or the provision of the service. When these two principles are followed, income can be properly measured in a given accounting reporting period.

Q2-3.

Accrual accounting entails the recognition of revenue under the revenue recognition principle (record revenues when earned), and the recognition of expenses using the matching principle (record expenses when incurred). The recognition of revenues or the expenses does not require that cash be received or disbursed. For example the recognition of revenues on sale can lead to an account receivable, and wage expense can be accrued using a wages payable (accrued) liability account.

©Cambridge Business Publishers, 2014 2-2

Financial Accounting, 4th Edition

Q2-4.

The statement of stockholders’ equity provides information relating to all events that impact stockholders’ equity during the period. It contains information relating to stock sales and repurchases, net income, dividends, and the use of stock for other purposes including occasional acquisition of assets. This statement, also referred to as the statement of owners’ equity, also includes the effects of some transactions that are not captured in the determination of net income. These items are included in what is called ―other comprehensive income.‖ One example of such an item is the loss or gain on the translation of the assets and liabilities of foreign owned subsidiaries into United States currency.

Q2-5.

An asset must be ―owned‖ and it must provide ―future benefits.‖ Owning means we have title to the asset (some leased assets are also recorded on the balance sheet as we will discuss in Chapter 10). Future benefits can mean the future inflows of cash. Or, it could relate to some other benefit, such as the reduction of expenditures, an increase in another asset, or the reduction of a liability.

Q2-6.

Liquidity generally refers to cash. That is, how much cash do we have, how much cash is being generated, and how much cash can we raise quickly. Liquidity is essential to the survival of the business. After all, we can only pay our loans with cash, and our employees will only accept cash for their wages. Some assets are more liquid than others in the sense that they can be converted more easily to cash. Money market accounts and accounts receivable, which can be sold, provide examples. Inventories are considered more liquid than plant assets. We will address liquidity issues more formally in Chapters 4 and 9.

Q2-7.

Current means that the asset will be liquidated (converted to cash) within the next year (or the operating cycle if longer than 1 year).

Q2-8.

Historical costs are used by accountants because they are less subjective and, therefore, more reliable than using market values. Market values can be biased for two reasons: first, we may not be able to measure them accurately (consider our inability to accurately measure the market value of a production facility, for example), and second, managers may intervene in the reporting process to intentionally bias the results in order to achieve a particular objective (i.e. enhancing the stock price). The use of historical costs in accounting records does not negate the importance of market values. For example, a firm offering to pledge land as collateral for a loan will be expected to use the market value of that land rather than its historic cost. The same would be true if a corporation were considering the sale of the land. Finally, we shall see that certain assets are reported at market value in the balance sheet; securities that are available to be sold provide an example.


2-3

Q2-9.

An intangible asset is an asset that we cannot touch. To be included on the balance sheet, it has to meet the tests of an asset (e.g., we own it, and it will provide future benefits). Intangible assets are always acquired. Internally generated intangible assets are not recorded on the balance sheet. Some examples are goodwill, patents and trademarks, contractual agreements like royalties, leases, and franchise agreements. All of the intangible assets, though not recorded if internally generated, are recorded if purchased, as in an acquisition of another company, for example.

Q2-10. Both the current ratio and quick ratio are measures of a firm’s ability to pay its obligations as they come due; measures of a firm’s liquidity. The current ratio is computed by dividing the firm’s current assets by its current liabilities. Current ratios that exceed 1.0 are deemed to represent a strong current liquidity position. The quick ratio is an even more conservative measure of a firm’s liquidity. The quick ratio is computed by dividing the firm’s cash and cash equivalents by its current liabilities. Q2-11. The three conditions necessary to recognize a liability are: 1. The liability reflects a probable future sacrifice on the part of the organization. 2. The amount of the obligation is known or can be reasonably estimated. 3. The transaction that caused the obligation has occurred. Q2-12. Net working capital = current assets – current liabilities. Increasing the amount of trade credit (e.g., accounts payable to suppliers) increases current liabilities and reduces net working capital. As trade credit increases, we are using someone else’s cash rather than our own. As a business grows, its net working capital grows, as the growth of inventories and receivables are generally greater than that of accounts payable and accrued liabilities. Net working capital is an asset category that must be financed just like fixed assets. Q2-13. $700,000 Assets - $220,000 Liabilities = $480,000 Stockholders' equity $480,000 – $300,000 Common stock = $180,000 Retained earnings



MINI EXERCISES M2-14. (10 minutes) Use the accounting equation. a. Cash Accounts receivable Supplies Equipment Accounts payable Common stock Retained earnings b. Retained Earnings: December 31, 2013 January 1, 2013 Increase Add: Dividends Net Income

$ 8,000 23,000 9,000 138,000 178,000 $ 11,000 110,000

121,000 $ 57,000

$ 57,000 30,000 27,000 12,000 $ 39,000

M2-15. (5 minutes) a. $200,000 - $85,000 = $115,000 equity b. $32,000 + $28,000 = $60,000 assets c. $93,000 - $52,000 = $41,000 liabilities

M2-16. (5 minutes) a. $375,000 - $105,000 = $270,000 equity b. $43,000 + $11,000 = $54,000 assets c. $878,000 - $422,000 = $456,000 liabilities


2-5

M2-17. (5 minutes) a. $450,000 - $326,000 = $124,000 equity b. $618,000 - $165,000 = $453,000 liabilities. c. $400,000 + $200,000 + $185,000 = $785,000 assets.

M2-18. (10 minutes) a. no effect

e. increase

b. decrease

f. increase

c. decrease

g. increase

d. no effect

M2-19. (15 minutes) a. Balance sheet

g. Balance sheet

b. Income statement

h. Balance sheet

c. Balance sheet

i.

Income statement

d. Income statement

j.

Income statement

e. Balance sheet

k. Balance sheet

f. Balance sheet

l.

Balance sheet

M2-20. (20 minutes) a. Net income computation Service revenue (record when earned) …………… Wage expense …………………………………………. Net income ………………………………………………

$100,000 (60,000) $ 40,000

b. Yes, recognizing the wage liability would cause wage expense to increase by $10,000 and income would go down by the same amount (before taxes).



M2-21. (10 minutes) a. Balance sheet b. Income statement, Statement of stockholders’ equity c. Balance sheet d. Income statement e. Statement of stockholders’ equity f. Statement of stockholders’ equity g. Balance sheet h. Income statement i.

Statement of stockholders’ equity, Balance sheet

M2-22. (10 minutes) a. Balance sheet b. Balance sheet c. Income statement, Statement of stockholders’ equity d. Statement of stockholders’ equity, Balance sheet e. Balance sheet f. Income statement g. Balance sheet h. Balance sheet

M2-23. (10 minutes) a. Balance sheet b. Income statement c. Statement of stockholders’ equity, Balance sheet d. Income statement e. Statement of stockholders’ equity f. Balance sheet g. Balance sheet h. Balance sheet


2-7

M2-24. (15 minutes) Ending retained earnings = Beginning retained earnings + Net income – Dividends + the effects of other adjustments. And, the ending retained earnings for one period is the beginning retained earnings for the following period. For the year ended January 29, 2011: $2,037 + Net income 1,488 = $1,354, so Net income = $805 Ending retained earnings for the year ended January 29, 2011 equals $1,354, the beginning retained earnings for the following year. For the year ended January 28, 2012: $1,354 + $850 – Dividends – $1,036 = $24 so Dividends = $1,144 Fiscal year ending Beginning retained earnings (deficit) Net income (loss) Dividends paid Increases (decreases) from other retained earnings changes Ending retained earnings (deficit)

January 29, 2011 $ 2,037 805 1,488 $ 1,354

January 28, 2012 $ 1,354 850 1,144 (1,036) $ 24

M2-25. (10 minutes) a. Increase assets (Cash) Increase equity (Service Revenues) b. Increase assets (Office Supplies) Increase liabilities (Accounts Payable) c. Increase assets (Cash) Increase equity (Contributed Capital or Common Stock) d. Decrease liabilities (Accounts Payable) Decrease assets (Cash) e. Increase assets (Cash) Increase liabilities (Notes Payable) f. Increase assets (Accounts Receivable) Increase equity (Service Revenues) g. Increase assets (Office Equipment) Decrease assets (Cash) h. Decrease equity (Interest Expense) Decrease assets (Cash) i.

Decrease equity (Utilities Expense) Increase liabilities (Accounts Payable)



M2-26. (10 minutes) a. Increase assets (Office Equipment) Decrease assets (Cash) b. Increase assets (Accounts Receivable) Increase equity (Service Revenue) c. Decrease assets (Cash) Decrease equity (Rent Expense) d. Increase assets (Cash) Increase equity (Service Revenue) e. Increase assets (Cash) Decrease assets (Accounts Receivable) f. Increase assets (Office Equipment) Increase liabilities (Accounts Payable) g. Decrease assets (Cash) Decrease equity (Salaries Expense) h. Decrease assets (Cash) Decrease liabilities (Accounts Payable) i.

Decrease assets (Cash) Decrease equity (Retained Earnings)

M2-27. (10 minutes) JOHNSON & JOHNSON Statement of Retained Earnings For Year Ended January 2, 2011 Retained earnings, December 30, 2010 ........................................... Add:

Net income............................................................................

Less: Dividends ..............................................................................

$77,773 9,672 (6,156)

Other retained earnings changes ..........................................

38

Retained earnings, January 2, 2011 .................................................

$81,251


2-9

M2-28. (10 minutes) 2012 $350,000 200,000 $150,000

Revenues .................................................................... Expenses ..................................................................... Net income ..................................................................

2013 $ 0 0 $ 0

Explanation: All of the revenue is reported in 2012 when it is earned—per the revenue recognition principle. Likewise, the expense is reported in 2012 when it is incurred—per application of the matching principle. The receipt or payment of cash does not affect the recording of revenues, expenses, and net income.

M2-29. (15 minutes) Balance Sheet Transaction a. Issue stock for $1,000 cash. b. Purchase inventory for $500 cash. c. Sell inventory for $2,000 on credit. d. Record $500 for cost of inventory sold in c. e. Receive $2,000 cash on receivable from c. Totals

Cash Asset

Noncash Liabil+ = Assets ities

+1,000 -500

+500

Cash

Inventory

+2,000 Accts Rec

= =

+2,000

+2,000

Retained Earnings

Sales

=

Retained Earnings

-2,000

Cash

Accts Rec

=

0

=

+

-

=

-

=

-

=

-500

+2,000

2,500

Net Revenues - Expenses = Income

Common Stock

-500 Inventory

Income Statement Earned Capital

+1,000

=

Cash

Contrib. + + Capital

+500

-

COGS Expense

-

=

+ 1,000 +

1,500

2,000

-

-500 =

= 500

=


+2,000


1,500

M2-30. (10 minutes) a. Cash (+A)................................................................................. Common stock (+SE) ........................................................

1,000

b. Inventory (+A) .......................................................................... Cash (-A)............................................................................

500

c. Accounts receivable (+A) ......................................................... Sales (+R, +SE) .................................................................

2,000

d. Cost of goods sold (+E, -SE) ................................................... Inventory (-A) .....................................................................

500

e. Cash (+A)................................................................................. Accounts receivable (-A) ....................................................

2,000

1,000

500

2,000

500

2,000

M2-31. (10 minutes) +

Cash (A)

(a)

1,000 (b)

(e)

2,000

-

+ 500

(c)

Accounts Receivable (A) 2,000 (e)

-

Sales (R) (c)

+ (b)

Inventory (A) 500 (d)

-

+ 500

2,000 + 2,000

Cost of Goods Sold (E)

(d)

-

500 -

Common Stock (SE) (a)

+ 1,000


2-11

EXERCISES E2-32. (25 minutes) Use the accounting equation to determine Retained Earnings as of May 31, 2013. a. and b. BEAVER, INC. Balance Sheets May 31, 2013

June 1, 2013

Assets Cash Accounts receivable Supplies Equipment Total assets

$ 12,200 18,300 16,400 55,000 $101,900

3,200 18,300 16,400 70,000 $107,900

Liabilities Notes payable Accounts payable Total liabilities

$ 20,000 5,200 25,200

$ 33,000 5,200 38,200

Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

42,500 34,200 76,700 $101,900

42,500 27,200 69,700 $107,900

$

c. Net working capital = current assets – current liabilities $32,700 = ($3,200 + $18,300 + $16,400) – $5,200



E2-33. (30 minutes) Use the accounting equation and the information on changes in contributed capital and retained earnings. Beginning retained earnings (= Beginning assets – Beginning liabilities) + Net income (= Revenues – Expenses) – Dividends Ending retained earnings (= Ending assets – Ending liabilities) a. Equity, Beginning ($28,000 - $18,600) Equity, Ending ($30,000 - $17,300) Increase Add: Net Capital Withdrawn ($5,000 - $2,000) Net Income Add: Expenses Revenues

$ 9,400 12,700 3,300 3,000 6,300 8,500 $14,800

b. Equity, Beginning ($12,000 - $5,000) Add: Net Capital Contributed ($4,500 - $1,500) Add: Net Income ($28,000 - $21,000) Equity, Ending

$ 7,000 3,000 10,000 7,000 $17,000

Assets, Ending Equity, Ending Liabilities, Ending,

$26,000 17,000 $ 9,000

c. Equity, Beginning ($28,000 - $19,000) Add: Net Income ($18,000 - $11,000) Less: Dividends Equity, Ending ($34,000 - $15,000) Common Stock Issued d. Common Stock Issued Net Income ($24,000 - $17,000) Cash Dividends Increase in Equity Equity, Ending ($40,000 - $19,000) Equity, Beginning Add: Liabilities, Beginning Total Assets, Beginning

$ 9,000 7,000 16,000 1,000 15,000 19,000 $ 4,000 $ 3,500 7,000 10,500 6,500 4,000 21,000 17,000 9,000 $26,000


2-13

E2-34(30 minutes) Use the accounting equation to determine stockholders’ equity balances. a. LANG SERVICES Balance Sheets December 31, 2013 2012 Assets Cash Accounts receivable Supplies Equipment Total assets

$10,000 22,800 4,700 32,000 $69,500

$ 8,000 17,500 4.200 27,000 $56,700

Liabilities Accounts payable Notes payable Total liabilities

$25,000 1,800 26,800

$25,000 1,600 26,600

Stockholders’ equity Equity Total liabilities and stockholders’ equity

42,700 $69,500

30,100 $56,700

b. Equity, December 31, 2013 Equity, December 31, 2012 Increase Add: Dividends Less: Common Stock issued Net Income for 2013

$42,700 30,100 12,600 17,000 29,600 5,000 $24,600

c. Current ratio = ($10,000 + $22,800 + $4,700)/$25,000 = 1.5 Quick ratio = ($10,000 + $22,800)/$25,000 = 1.31 d. Lang’s liquidity position is satisfactory as it meets the industry norm, and its quick ratio is also above the industry average. The firm appears to have invested about the ―right‖ amount in liquid assets—neither too much, nor too little.



E2-35. (30 minutes) Use the accounting equation to determine Retained Earnings balances. a. LYNCH SERVICES Balance Sheets December 31, 2013 2012 Assets Cash Accounts receivable Supplies Land Building Equipment Total assets Liabilities Accounts payable Mortgage payable Total liabilities Stockholders’ equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders’ equity

$ 23,000 42,000 20,000 40,000 250,000 43,000 $418,000

$ 20,000 33,000 18,000 40,000 260,000 45,000 $416,000

$

$

6,000 90,000 96,000

220,000 102,000 322,000 $418,000

9,000 100,000 109,000

220,000 87,000 307,000 $416,000

b. Retained Earnings, December 31, 2013 Retained Earnings, December 31, 2012 Increase during 2013 Add: Dividend for 2013 Net Income for 2013

$102,000 87,000 15,000 10,000 $ 25,000


2-15

E2-36. (30 minutes) Use the accounting equation to determine Retained Earnings as of September 30, 2013. The two transactions have the following effects:  

Equipment purchase increases the equipment asset by $11,000, decreases the cash asset by $3,000, and increases the notes payable liability by $8,000. Dividend payment decreases the cash asset by $3,000 and decreases the retained earnings equity by $3,000.

a. and b. BROWNLEE CATERING SERVICE Balance Sheets September 30, 2013

October 1, 2013

Assets Cash Accounts receivable Supplies inventory Equipment Total assets

$10,000 17,000 9,000 34,000 $70,000

$ 4,000 17,000 9,000 45,000 $75,000

Liabilities Accounts payable Notes payable Total liabilities

$24,000 12,000 36,000

$24,000 20,000 44,000

Stockholders’ equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders’ equity

27,500 6,500 34,000 $70,000

27,500 3,500 31,000 $75,000

c. Current ratio

Quick ratio

(10,000 + 17,000 + 9,000) ÷ 24,000 = 1.50

(4,000 + 17,000 + 9,000) ÷ 24,000 = 1.25

(10,000 + 17,000) ÷ 24,000 = 1.13

(4,000 + 17,000) ÷ 24,000 = 0.88

d. Quite a few possibilities exist, from increasing long-term borrowing to issuing new stock to selling unneeded equipment.



E2-37. (15 minutes) Income statement

Balance sheet

Sales................................. $30,000 Wages expense ................ 12,000 Net income (loss) .............. $18,000

Cash....................................................... $ 8,000 Accounts receivable ...............................30,000 Total assets............................................ $38,000 Wages payable ...................................... $12,000 Common stock ...................................... 8,000 Retained earnings ..................................18,000 Total liabilities and equity ....................... $38,000

E2-38. (15 minutes) a. Procter & Gamble ($ millions)

Amount

Classification

Net sales ...................................................................... $ 83,680

I

Income tax expense ..................................................... 3,468

I

Retained earnings ........................................................75,349

B

Net earnings .................................................................10,904

I

Property, plant and equipment (net) .............................20,377

B

Selling, general and admin expense ............................26,421

I

Accounts receivable ..................................................... 6,068

B

Total liabilities ...............................................................68,209

B

Stockholders' equity .....................................................64,035

B

Other non-operating income, net

I

262

b. Total assets = Total liabilities + stockholders’ equity Total assets = $68,209 + $64,035 = $132,244 Total Revenue – Total Expenses = Net Income $83,680 – Total Expenses = $10,904; Thus, Total Expenses = $72,776 continued next page


2-17

E2-38. concluded c. Return on equity

= Net income/Stockholders’ equity = $11,797/$68,001 = 0.173 or 17.3% ROE is an estimate because we have only this year’s equity for the denominator. Debt-to-equity ratio = Total liabilities/Stockholders’ equity = $70,383/$68,001 = 1.04

d. Interest, investment income and divestiture gains and losses.

E2-39. (15 minutes) a. Target Corp ($ millions)

Amount

Classification

Sales ............................................................................ $ 67,390

I

Depreciation and amortization expense ....................... 2,084

I

Retained earnings ........................................................ 12,698

B

Net earnings ................................................................. 2,920

I

Property, plant & equipment, net .................................. 25,493

B

Selling, general admin. expense & other (net) ............. 13,469

I

Accounts payable ......................................................... 6,625

B

Total liabilities and shareholders’ investment ............... 43,705

B

Total shareholders’ investment .................................... 15,487

B

b. Total assets = Total liabilities and shareholders’ investment Total assets = $43,705 Total revenue – Total expenses = Net income $67,390 – Total expenses = $2,920 Thus, Total expenses = $64,470 c. Return on equity = Net income/Stockholders’ equity = $2,920 / $15,487 = 18.9% ROE is an estimate because we have only this year’s equity for the denominator.



E2-40. (15 minutes) a. Briggs & Stratton ($ millions)

Amount

Classification

Net sales ......................................................................$ 2,110

I

Interest expense ...........................................................

23

I


B

Net income ...................................................................

24

I

Property, plant & equipment, net ..................................

329

B

Eng. selling, general & admin. expense .......................

301

I

Accounts receivable, net ..............................................

249

B

Total liabilities ...............................................................

928

B

Shareholders’ investment .............................................

738

B

b. Total assets = Total liabilities + Shareholders’ investment Total assets = $928 + $738 = $1,666 Total revenue – Total expenses = Net income $2,110 – Total expenses = $24 Thus, Total expenses = $2,086 c. Return on equity = Net income/Stockholders’ equity = $24 / $738 = 3.25% ROE is an estimate because we have only this year’s equity for the denominator. Debt-to-equity ratio = Total liabilities / Stockholders’ equity = $928 / $738 = 1.26


2-19

E2-41. (15 minutes) a. Kimberly-Clark ($ millions)

Amount

Classification

Net sales ...................................................................... $20,846

I

Cost of goods sold........................................................14,694

I


B

Net income ................................................................... 1,684

I

Property, plant & equipment, net .................................. 8,049

B

Mktg. res., selling, general expense ............................. 3,761

I

Accounts receivable, net .............................................. 2,602

B

Total liabilities ...............................................................13,844

B

Total stockholders' equity ............................................. 5,529

B

b. Total assets = Total liabilities + Stockholders’ equity Total assets = $13,844 + $5,529 = $19,373 Total revenue – Total expenses = Net income $20,846 – Total expenses = $1,684 Thus, Total expenses = $19,162 c. Debt-to-equity ratio = Total liabilities / Stockholders’ equity = $13,844 / $5,529 = 2.50 d. If these extraordinary losses persist, they are likely to be normal and not unusual or infrequent. Rather they, or similar losses, should be expected in the future. In this case, it would be misleading to report the losses separate from the expenses of normal operations. Management’s current reporting is consistent with the assumption that these same or similar types of losses will not reoccur in the foreseeable future.



E2-42. (15 minutes) Transaction Income Statement

Balance Sheet Transaction

Cash Asset

+

(1) Receive €50,000 in +50,000 exchange for Cash common stock. (2) Borrow €10,000 from bank.

=

Cash

+2,000 Inventory

Revenues - Expenses =

-

=

-

=

-

=

-

=

-

=

-

=

-

=

+10,000 Notes Payable

+2,000 = Accounts +15,000 =

Retained Earnings

+15,000 Revenue

- 2,000 = Accounts

Cash

+15,000

Payable

+3,500 = Unearned Revenue

2,000

- 5,000

=

Retained Earnings

=

Retained Earnings

=

Retained Earnings

=

- 6,000

- 500 13,500

+ 50,000 +

3,500

15,000

+6,000

-

Wages Expense

-

Interest Expense

=

-

6,500

=

=

+500


Net Income

Payable

- 2,000

(6) Receive order for future services with +3,500 Cash €3,500 advance payment. (7) Pay €5,000 cash - 5,000 dividend to Cash shareholders. (8) Pay employees €6,000 cash for - 6,000 Cash compensation earned. (9) Pay €500 cash for - 500 interest on loan in Cash (2). Totals +65,000 +

Earned Capital

Stock

+10,000

(3) Purchase €2,000 of supplies inventory on credit. (4) Receive €15,000 cash from +15,000 Cash customers for services provided. (5) Pay €2,000 cash to supplier in part (c).

Noncash Contrib. = Liabil-ities + + Assets Capital +50,000 = Common

2-21

- 6,000

- 500 8,500

E2-43. (20 minutes) a. 1. Cash (+A) ...............................................................................50,000 Common stock (+SE) ......................................................... Receive €50,000 in exchange for common stock.

50,000

2. Cash (+A) ...............................................................................10,000 Notes payable (+L)............................................................. Borrow €10,000 from bank.

10,000

3. Inventory (+A) ......................................................................... 2,000 Accounts payable (+L) ....................................................... Purchase €2,000 supplies inventory on account.

2,000

4. Cash (+A) ...............................................................................15,000 Revenue (+R, +SE) ............................................................ Recognize €15,000 revenue for services provided.

15,000

5. Accounts payable (-L) ............................................................ 2,000 Cash (-A)............................................................................ Pay supplier €2,000 cash.

2,000

6. Cash (+A) ............................................................................... 3,500 Unearned revenue (+L) ...................................................... Receive €3,500 advance from customer.

3,500

7. Retained earnings (-SE) ......................................................... 5,000 Cash (-A)............................................................................ Pay €5,000 cash dividend to shareholders.

5,000

8. Wages expense (+E, -SE) ...................................................... 6,000 Cash (-A)............................................................................ Pay employees €6,000

6,000

9. Interest expense (+E, -SE) ..................................................... Cash (-A)............................................................................ Pay €500 interest on note.

500 500

continued next page



E2-43. concluded b. + (1) (2) (4) (6) Bal.

+ (3) Bal.

Cash (A) 50,000 2,000 10,000 5,000 15,000 6,000 3,500 500 65,000

Supplies Inventory (A) 2,000 2,000

(5) (7) (8) (9)

-

-

Accounts Payable (L) 2,000 2,000 0

+ (3) Bal.

-

Unearned Revenue (L) 3,500 3,500

+ (6) Bal.

-

Notes Payable (L) 10,000 10,000 Common Stock (SE) 50,000 50,000 Retained Earnings (SE) 5,000 5,000 Revenue (R) 15,000 15,000 Wages Expense (E) 6,000 6,000 Interest Expense (E) 500 500

+ (2) Bal. + (1) Bal. +

(5)

-

(7) Bal. -

+ (8) Bal. + (9) Bal.

+ (4) Bal. -

-


2-23

E2-44. (20 minutes) a. and b. BETTIS CONTRACTORS Balance Sheets June 30, 2013

July 2, 2013

Assets Cash Accounts receivable Supplies Current assets Land Equipment Total assets

$ 14,700 9,200 30,500 54,400 25,000 98,000 $177,400

$

Liabilities Accounts payable Current liabilities Notes payable Total liabilities

8,900 8,900 $ 30,000 38,900

8,900 8,900 $ 33,000 41,900

Stockholders’ equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders’ equity

100,000 38,500 138,500 $177,400

100,000 33,000 133,000 $174,900

2,200 9,200 30,500 41,900 25,000 108,000 $174,900

c. CR = $54,400/$8,900 = 6.1 QR = ($14,700 +$9,200)/$8,900 = 2.69 d. Bettis’ current ratio indicates a strong liquidity position. The firm might want to consider investing some of its cash in assets that contribute to the firm’s earning power. The quick ratio is reasonable as a company does not want to tie up too much of its assets in a nonearning asset (cash). A quick glance at the data indicates that the firm's liquidity position has weakened since June.



E2-45. (15 minutes) Income Statement

Balance Sheet Transaction

Cash Asset

1. Receive $20,000 cash in exchange for common stock.

+20,000 Cash

+

Noncash Liabil= Assets ities

3. Sell inventory for $3,000 on credit.

+3,000 Accounts Receivable

4. Record cost of goods sold in 3.

-2,000 Inventory

=

-3,000 Accounts Receivable

=

+5,000 Equipment

=

6. Acquire $5,000 of equipment by signing a note. 7. Pay wages of $1,000 in cash. 8. Pay $5,000 cash on a note payable. 9. Pay $2,000 cash dividend. TOTALS

=

-5,000 Cash

=

15,000

+3,000 Retained Earnings

=

-1,000 Cash

-2,000 Cash 5,000


=

+3,000 Sales

-2,000 Retained Earnings


-2,000 Retained Earnings +

20,000

+

-2,000

=

-

=

-

=

3,000

+ 2,000 COGS Expense

=

-

=

-

=

-

-5,000 Notes Payable

2,000

-

-

+5,000 Notes Payable

= +

Earned Capital

+2,000 = Accounts Payable

+2,000 Inventory

+3,000 Cash

Contrib. + Capital +20,000 Common Stock

=

2. Purchase $2,000 of inventory on credit.

5. Collect $3,000 cash from transaction 3.

+

+ 1,000 Wages Expense

=

-

=

-

=

-

3,000

=


2-25

+3,000

- 2,000

- 1,000

0

E2-46. (20 minutes) a. 1. Cash (+A) ............................................................................... 20,000 Common stock (+SE) .........................................................

20,000

2. Inventory (+A) ......................................................................... 2,000 Accounts payable (+L)........................................................

2,000

3. Accounts receivable (+A) ........................................................ 3,000 Sales (+R, +SE) .................................................................

3,000

4. Cost of goods sold (+E, -SE) .................................................. 2,000 Inventory (-A)......................................................................

2,000

5. Cash (+A) ............................................................................... 3,000 Accounts receivable (-A) ....................................................

3,000

6. Equipment (+A)....................................................................... 5,000 Notes payable (+L) .............................................................

5,000

7. Wages expense (+E, -SE) ...................................................... 1,000 Cash (-A) ............................................................................

1,000

8. Notes payable (-L) .................................................................. 5,000 Cash (-A) ............................................................................

5,000

9. Retained earnings (-SE) ......................................................... 2,000 Cash (-A) ............................................................................

2,000 continued next page



E2-46. concluded b. + (1) (5)

Cash (A) 20,000 1,000 3,000 5,000 2,000

-

-

Common Stock (SE) 20,000

(7) (8) (9) -

+ (2)

Inventory (A) 2,000 2,000

(4)

+ (4)

(7) Accounts Receivable (A) 3,000 3,000

(5)

-

(9) + (6) (8)

Equipment (A) 5,000 Notes Payable (L) 5,000 5,000

Sales Revenue (R) 3,000

+ (3)

Cost of Goods Sold (E) 2,000 +

+ (3)

+ (1)

Wages Expense (E) 1,000 Accounts Payable (L) 2,000 Retained Earnings (SE) 2,000

-

-

+ (2) +

-

+ (6)


2-27

PROBLEMS P2-47. (30 minutes) a. Comcast, Target and Harley-Davidson are financed primarily by debt (between 65% and 75% of total assets). Apple and Nike are 2/3 financed by equity and only 1/3 by debt. b. Apple and Nike both earned over 10% on assets. Possible reasons include the firms’ ability to command a premium price for their brands and the ability to outsource a significant amount of their production (and avoid investments in productive capacity). c. Apple has the highest estimated ROE at 34%. (The ROE is estimated because we have only this year’s equity.) Nike has the second highest ROE at 22%. Both Apple and Nike are able to reduce expenses through outsourcing production to Asia. Both also have strong brands suggesting marketing and pricing advantages.

P2-48. (30 minutes) a. Dell is 80% debt financed while Apple is 67% equity financed. We describe Dell as the more heavily leveraged firm. b. Dell's net income to asset ratio is 6.8% while Apple’s is 22%. The ratios are not close, which might not be expected given the similarities of their activities. On the other hand, more heavily leveraged firms are open to greater risk and for this reason, we might expect a greater return to be earned on Dell’s assets to compensate for the higher risk. But that turns out not to be the case. Apple’s return exceeds Dell’s, suggesting that Apple has superior products or is more efficient in its operations. c. Dell’s gross profit as a percent of sales is 18.5% while Apple’s is 40.5%. The implication is that Apple does have the more efficient production operation and/or product designs that allow it to command a premium price from consumers.



P2-49. (30 minutes) a. Verizon and Comcast are both 63% financed with debt. Such similar financing is not unusual for companies in the same industry. b. Verizon has the slightly higher net income to total asset ratio at 4.4% compared to 3.1% for Comcast, but neither company is doing very well. The cost of raising operating funds is probably larger than either firm’s current return. Certainly one reason is the highly competitive market in which these two firms operate. c. Verizon has a slightly higher return on total assets while reporting essentially identical leverage (debt), so it is hard to conclude which firm would have more difficulty raising additional capital. The decision would likely turn on other factors including trends in these numbers and others like cash flows.

P2-50. (30 minutes) a. 3M at 50% is the more heavily debt-financed firm. Apple is the lowest debt financed. Abercrombie and Fitch is 39% financed by debt. b. Apple has more working capital, but it is also the larger firm. A better measure of the comparative differences in working capital is the ratio of the firm’s current assets to its current liabilities. This ratio is greatest for Abercrombie & Fitch at 2.1

P2-51. (30 minutes) a.

BARTH COMPANY Balance Sheet December 31, 2013 Assets Cash Accounts receivable Equipment Land Total assets

$ 8,800 18,400 9,000 50,000 $86,200

Liabilities Accounts payable

$ 7,500

Equity Stockholders’ equity Total liabilities & equity

78,700 $86,200

continued next page


2-29

P2-51. concluded b.. Increase in Equity Add: Dividends Net Income for 2013

($78,700-$67,500)

$11,200 12,000 23,200

c. Increase in Equity Add: Dividends

($78,700-$67,500)

$11,200 21,000 32,200 13,500 $18,700

Less: Additional Investment Net Income for 2013

P2-52. (20 minutes) a. Total assets (Total liabilities and equity) ....

ANF

JWN

$3,048

$8,491

Total expenses (Sales – Net income).........

4030 97% Total expenses as percent of sales ............ ($4,030/$4,158)

10,194 94% ($10,194/$10,877)

b. ANF Return on average equity…

JWN

$128 [($3,048-$1,186)+$1,890]/2

= 6.82%

$683 [($8,491-$6,535)+$7,462]/2 = 14.5%

P2-53. (30 minutes) a. 3M 2006

Current Assets 8,946

Long-term Assets 12,348

Total Assets 21,294

Current Liabilities 7,323

2007

Long-term Liabilities 4,012

Total Liabilities 11,335

Stockholders' Equity 9,959

9,838

14,856

24,694

5,362

7,585

12,947

11,747

2008

9,598

15,949

25,547

5,839

9,829

15,668

9,879

2009

10,795

16,455

27,250

4,897

9,051

13,948

13,302

2010

12,215

17,941

30,156

6,089

8,050

14,139

16,017

2011

12,240

19,376

31,616

5,441

10,313

15,754

15,862

b. 3M’s current assets most likely include cash, accounts receivable, inventories, and prepaid assets. Its long-term assets most likely include property, plant and equipment (PPE), goodwill, and other intangible assets that have arisen from acquisitions. continued next page ©Cambridge Business Publishers, 2014 2-30


P2-53. concluded c. 2006: $8,946/$7,323 = 1.22

2011: $12,240/$5,441 = 2.25.

d. 3M’s current ratio is strong and has increased appreciably over the last 5 years. The average is now above the industry average. Increases in demand during 2010 and 2011 necessitated an increase in funds. Furthermore 3M’s operating strategy has been to conserve funds under the contracting global economy.

P2-54. (30 minutes) a. Abercrombie & Fitch

Current Assets

Long-term Assets

Total Assets

Current Liabilities

Long-term Liabilities

Total Liabilities

Stockholders' Equity

2006

947

843

1,790

492

303

795

995

2007

1,092

1,156

2,248

511

332

843

1,405

2008

1,140

1,428

2,568

543

406

949

1,619

2009

1,084

1,764

2,848

450

553

1,003

1845

2010

1,236

1,586

2,822

449

545

994

1,828

2011

1,427

1,514

2,941

552

498

1,050

1,891

2012

1,489

1,559

3,048

705

480

1,185

1,863

b. We might reasonably predict inventories to comprise the bulk of its current assets. In reality, ANF’s largest current asset is cash and short-term investments— suggesting that the company is very liquid. c. In fiscal year 2006, current assets comprised 53% ($947/$1,790) of total assets. In fiscal year 2012, current assets comprised 494% ($1,489/$3,048). Thus, the company has fewer current assets as a percentage of total assets in 2012 than it did six years ago. d. Yes, but the company is more conservatively financed in 2012 [61%: $1,863/$3,048]. In 2012, stockholders’ equity comprises 56% ($995/$1,790) of its total capitalization. The average publicly traded firm is about 50% equity financed. e. In fiscal 2006, ANF’s current ratio is 1.92 ($947/$492). In fiscal 2012 the ratio is 2.11 ($1,489/$705). f. While less than 2.25, the ratio is reasonable for ANF. The firm’s current ratio has increased relative to what it was in 20062. Despite the current less liquid position of the firm, this ratio is likely to be to the firm’s advantage as more of its assets are deployed in productive activities. The change, however, suggests a more conservative financing of the company. ©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 2

2-31

P2-55. (30 minutes) a. Income Statement

Balance Sheet

Transaction 1. Issued common stock $7,000. 2. Paid rent $750.

Cash Noncash Liabil+ = Asset Assets ities +7,000 = Cash -750

5. $1,200 Cash received for services.

= +15,000

=

Cash

Earned Capital

-

Common Stock

-750 Retained Earnings

+500 Advertising Expense

+15,000

-

Notes Payable

+1,200

=

=

+6,800

+6,800

Retained Earnings

Services Revenue

=

Retained Earnings

=

Retained Earnings

=

Retained Earnings

-2,200 -370

-2,200

9. Paid $900 cash dividend.

-900

-370

Cash

Cash

-900

10. Acquired land for $13,000. 11. Paid $100 interest in cash.

-13,000

+13,000

Cash

Land

=

Retained Earnings

Totals

$5,880 + $19,800 = $15,500 + $7,000 +

$3,180

=

-100 Cash

-

-500

Counseling Services Revenue

Cash

Rent Expense

Retained Earnings

+1,200

+6,800

+750

-

+500

Retained Earnings

Accounts Receivable

=

Accounts Payable

Cash

8. Paid $370 cash for utilities.

b.


+1,200

6. Billed clients $6,800 for services. 7. Paid $2,200 cash for salary.

Contrib. + Capital +7,000

=

Cash

3. Received $500 invoice for advertising expense. 4. Borrowed $15,000 cash from bank.

+

-500 =

=

-

=

-

= +2,200

-

Salary Expense

-

Utilities Expense

-2,200

+370

-370 =

-

=

-

= -100

-

Interest Expense

=

-

$3,920

= $4,080

$8,000

3,920 $4,080


+6,800

=

+100 $8,000

-750

+1,200

-100

LAMBERT SERVICES Income Statement For the Month of December 2013 Counseling services revenue Expenses Rent expense $ 750 Advertising expense 500 Salary expense 2,200 Utilities expense 370 Interest expense 100 Total expenses Net income

=


P2-56. (30 minutes) a. 1. Cash (+A) ............................................................................... 7,000 Common stock (+SE) .........................................................

7,000

2. Rent expense (+E,-SE)........................................................... 750 Cash (-A) ............................................................................

750

3. Advertising expense (+E, -SE)................................................ 500 Accounts payable (+L)........................................................

500

4. Cash (+A) ............................................................................... 15,000 Notes payable (+L) .............................................................

15,000

5. Cash (+A) ............................................................................... 1,200 Counseling services revenue (+R,+SE) .............................

1,200

6. Accounts receivable (+A) ........................................................ 6,800 Counseling services revenue (+R,+SE) .............................

6,800

7. Salary expense (+E,-SE) ........................................................ 2,200 Cash (-A) ............................................................................

2,200

8. Utilities expense (+E,-SE) ....................................................... 370 Cash (-A) ............................................................................

370

9. Retained earnings (dividend paid) (-SE) ................................. 900 Cash (-A) ............................................................................

900

10. Land (+A) ................................................................................ 13,000 Cash (-A) ............................................................................

13,000

11. Interest expense (+E,-SE) 100 Cash (-A) ............................................................................

100

continued next page


2-33

P2-56. concluded b. + (1) (4) (5)

Cash (A) 7,000 750 15,000 2,200 1,200 370 900 13,000 100

+ (6)

Accounts Receivable (A) 6,800

+ (10)

Land (A) 13,000

-

(2) (7) (8) (9) (10) (11)

-

-

(2)

+ (7)

Rent Expense (E) 750

-

Salary Expense (E) 2,200

-

+ (3)

-

Notes Payable (L) 15,000

+ (4)

-


+ (1)

(9)

Retained Earnings (SE) 900

-

+

Accounts Payable (L) 500

+

Counseling Services Rev. (R) 1,200 6,800 +

(3)

-

+

Utilities Expense (E) 370

-

+

Interest Expense (E) 100

-

(8)

(11)

Advertising Expense (E) 500

+ (5) (6)



P2-57. (30 minutes) a. CA

NCA

TA

CL

NCL

TL

SE

2006

14,509

2,696

17,205

6,443

778

7,221

9,984

2007

21,956

3,391

25,347

9,280

1,535

10,815

14,532

2008

34,690

4,882

39,572

14,092

4,450

18,542

21,030

2009

31,555

15,946

47,501

11,506

4,355

15,861

31,640

2010

41,678

33,505

75,183

20,722

6,670

27,392

47,791

2011

44,988

71,383

116,371

27,970

11,786

39,756

76,615

b. For a computer company we might reasonably expect inventories and cash to be the predominant items in current assets. The reality is that inventory is not a large dollar amount (less than 2% of total assets) because the company’s business model depends on high inventory turnover—that is, it works diligently to minimize the quantity of inventory to avoid product obsolescence. The surprise is that 58% of Apple’s current assets are cash and short-term marketable securities. Long-term assets are primarily concentrated in property, plant and equipment (PPE) and financial securities. The latter more than doubled in 2011. c. The percentage of Apple’s assets that is financed with liabilities has decreased considerably over this period (from 42% in 2006 to 34% in 2011). This decrease in the proportion of debt financing contrasts with an increase in the proportion of noncurrent assets to total assets (from 16% in 2006 to 61% in 2011). d. 2006: $14,509/$6,471 = 2.25; 2011: $44,988/$27,970 = 1.61 e. Apple’s current ratio has fallen below the industry average. A probable cause of this decrease is the increasing size of the company. Net working capital increased from $8,066 in 2006 to $17,018 in 2011. So, even though the ratio has declined, the monetary ―cushion‖ of current assets over current liabilities has increased substantially.


2-35

P2-58. (30 minutes) a. HarleyDavidson

Current Assets

Long-term Assets

Total Assets 5,532

Current Liabilities

Long-term Liabilities

Total Liabilities

Stockholders' Equity

1,596

1,179

2,775

2,757

2006

3,551

1,981

2007

3,467

2,190

5,657

1,905

1,377

3,282

2,375

2008

5,378

2,451

7,829

2,603

3,110

5,713

2,116

2009

4,342

4,814

9,156

2,268

4,780

7,048

2,108

2010

4,067

5,364

9,431

2,014

5,210

7,224

2,207

2011

4,542

5,132

9,674

2,699

4,555

7,254

2,420

b. Harley’s current assets are likely to be primarily comprised of cash, accounts receivable, inventories and prepaid expenses. Its long-term assets will likely be primarily comprised of property, plant and equipment (PPE) for its manufacturing operations and goodwill and other intangible assets arising from acquisitions. c. No, in 2011 stockholders’ equity represents only 25% ($2,420/$9,674) of total capitalization. However, this ratio was 50% in 2006. Harley Davidson became significantly more leveraged in 2008. The capitalization of the average publicly traded company is financed through about 50% of equity and about 50% nonowner financing. d. 2006: $3,551 - $1,596 = $1,955. 2011: $4,542 - $2,699 = $1,843.



P2-59. (30 minutes) a. ($ millions)

Revenues

Cost of Goods Sold

Gross Profit

Operating Expenses

Operating Income

Other Expenses

Net Income

2005

13,740

7,625

6,115

4,222

1,893

682

1,211

2006

14,955

8,368

6,587

4,478

2,109

717

1,392

2007

16,326

9,165

7,161

5,029

2,132

640

1,492

2008

18,627

10,240

8,387

5,954

2,433

550

1,883

2009

19,176

10,572

8,604

6,150

2,454

967

1,487

2010

19,014

10,214

8,800

6,326

2,474

567

1,907

2011

20,862

11,354

9,508

6,693

2,815

682

2,133

b. The gross profit percentage (also called gross profit margin) for each year follows:

Nike, Inc.

Gross Profit Percentage

2005 .......................

44.5%

2006 .......................

44.0%

2007 .......................

43.9%

2008 .......................

45.0%

2009 .......................

44.9%

2010 .......................

46.3%

2011 .......................

45.6%

Nike’s gross profit has remained quite constant over this period, and it is somewhat higher recently than it has been in earlier years reflecting continued strength and a possible upward trend. The company's operating expenses have remained substantially unchanged over this period, 31.0% of revenue in 2005 and 32.0% of revenue in 2011, but net income has increased steadily from 2005 to 2011 both in absolute terms and as a percentage of revenue (8.8% in 2005 to 10.2% in 2011). c. Wages, advertising and promotion, and general and administration expenses are likely to be the major cost categories for Nike.


2-37

P2-60. (30 minutes) a. Income Statement

Balance Sheet Transaction 1. Issued common stock for cash. 2. Rent paid in cash $4,800. 3. Invoice for entertainment expense: $1,600. 4. Cash paid for advertising: $900. 5. July insurance premium prepaid in cash: $1,800. 6. Flight services collected in cash $22,700.

Cash Noncash Liabil+ = Asset Assets ities +$50,000 = Cash

Revenues - Expenses = -

Common Stock

+1,600 = Accounts Payable

-900 -1,800

+1,800

Cash

Prepaid Insurance


-1,500

Expense

-

=

=

=

+22,700

+22,700

Retained Earnings

Flight Services Revenue

+15,900

+15,900

Retained Earnings

Flight Services Revenue

-1,500 = Accounts

Cash

=

+1,600 -1,600 - Entertainment =

Retained Earnings

+22,700 Cash


-900

=

Cash

+900 Advertising Expense

=

-

=

-

=

-

=

-

=

-

=

-900

+22,700

+15,900

Payable

-13,200 Accounts Receivable

= =

11. Invoice received for fuel; $3,500.

+3,500 = Accounts

-16,000

Payable

-3,000 Cash

$57,900 +

$4,500

+16,000

-16,000

Retained Earnings

-

-3,500

+3,500 -3,500 - Fuel Expense =

Retained Earnings

-3,000

=

Retained Earnings

= $3,600 + $50,000 +

$8,800

Wages expense

$38,600

-

=

= $26,800

= $11,800

continued next page


Net Income

+4,800 -4,800 - Rent Expense =

Retained Earnings

=

10. Paid wages in cash: -16,000 Cash $16,000.

TOTALS

Earned Capital

-4,800

Cash

9. Received $13,200 on +13,200 Cash account.

12. Cash dividend paid: $3,000.

Contrib. + Capital +$50,000

-4,800

7. Billed for flight services $15,900. 8. Paid $1,500 on accounts.

+


P2-60. concluded b.

OUTBACK FLIGHTS Income Statement For the Month of June 2013 Revenue Services fees earned Expenses Rent expense Entertainment expense Advertising expense Wages expense Fuel expense Total expenses Net income

$38,600 $4,800 1,600 900 16,000 3,500 26,800 $11,800

Note that the insurance premium paid is for the next month (July) and is not an expense at the end of June.

P2-61. (30 minutes) a. 1. Cash (+A) ............................................................................... 50,000 Common stock (+SE) .........................................................

50,000

2. Rent expense (+E,-SE)........................................................... 4,800 Cash (-A) ............................................................................

4,800

3. Entertainment expense (+E,-SE) ............................................ 1,600 Accounts payable (+L)........................................................

1,600

4. Advertising expense (+E,-SE) ................................................ 900 Cash (-A) ............................................................................

900

5. Prepaid insurance (+A) ........................................................... 1,800 Cash (-A) ............................................................................

1,800

6. Cash (+A) .............................................................................. 22,700 Flight services revenue (+R,+SE).......................................

22,700

7. Accounts receivable (+A) ........................................................ 15,900 Flight services revenue (+R,+SE).......................................



2-39

P2-61. concluded 8. Accounts payable (-L) ............................................................. 1,500 Cash (-A) ............................................................................

1,500


13,200

10. Wages expense (+E,-SE) ....................................................... 16,000 Cash (-A) ............................................................................

16,000

11. Fuel expense (+E,-SE) ........................................................... 3,500 Accounts payable (+L)........................................................

3,500

12. Retained earnings (dividend paid) (-SE) ................................. 3,000 Cash (-A) ............................................................................

3,000

b. + (1) (6) (9)

+

(2) (4) (5) (8) (10) (12)

Accounts Receivable (A) 15,900 (9) 13,200

(7)

+

Prepaid Insurance (A) 1,800

(5)

+ (2)

+ (4)

Cash (A) 50,000 4,800 22,700 900 13,200 1,800 1,500 16,000 3,000

Rent Expense (E) 4,800

Advertising Expense (E) 900

(8)

Accounts Payable (L) 1,500 1,600 3,500

-


(12)

-

+

Entertainment Expense (E) 1,600

(3)

+

-

Wages Expense (E) 16,000

(10) + (11)

(1)

Flight Services Revenue (R) + 22,700 (6) 15,900 (7)

+

-

+

Retained Earnings (SE) 3,000

-

-

+ (3) (11)

Fuel Expense (E) 3,500

-

-



P2-62. (30 minutes) a.

Starbucks

Sales

Cost of Goods Sold

Gross Profit

Operating Expenses

2005

6,369

2,605

3,764

2,983

2006

7,787

3,179

4,608

3,715

2007

9,412

3,999

5,413

4,359

2008

10,383

4,645

5,738

2009

9,775

4,325

2010

10,707

2011

11,700

Operating Income

Other Expenses

Net Income

287

494

329

564

1,054

381

673

5,278

460

144

316

5,450

4,888

562

171

391

4,459

6,248

4,829

1,419

473

946

4,949

6,751

5,023

1,728

482

1,246

781 893

b. The gross profit percentage (also called gross profit margin) for each year follows:

Starbucks, Inc. 2005 2006 2007 2008 2009 2010 2011

Gross Profit Percentage 59.1% 59.2% 57.5% 55.3% 55.8% 58.4% 57.7%

SBUX gross profit percentage has improved in recent years after a decline from 2006 through 2009. c. Wages, store operating expenses, and advertising expenses are likely to be major cost categories for Starbucks.


2-41

P2-63. (30 minutes) a. Revenues

Cost of Goods Sold

Operating Expenses

Operating Income

2005

52,620

34,927

17,693

13,370

4,323

1,915

2,408

2006

59,490

39,399

20,091

15,022

5,069

2,282

2,787

2007

63,367

41,895

21,472

16,200

5,272

2,423

2,849

2008

64,948

44,157

20,791

16,389

4,402

2,188

2,214

2009

65,357

44,062

21,295

16,622

4,673

2,185

2,488

2010

67,390

45,725

21,665

16,413

5,252

2,332

2,920

2011

69,865

47,860

22,005

16,683

5,322

2,393

2,929

($ millions)

Gross Profit

Other Expenses

Net Income

Table note: 1. Sales and Cost of Goods Sold relate only to product sales. Target’s credit card revenue and costs are netted and included in operating expenses. b. The gross profit percentage (also called gross profit margin) for each year follows:

Target Corporation 2005 2006 2007 2008 2009 2010 2011

Gross Profit Percentage 33.6% 33.8% 33.9% 32.0% 32.6% 32.2% 31.5%

Target’s gross profit percentage has decreased over the past two years. The decline reflects the difficult economic conditions and declining consumer spending that occurred during the period. However, GPM remains above the pre-recession period. c. Wages, store operating expenses, and advertising expenses are likely to be the major cost categories for Target Corporation.



P2-64. (25 minutes) a. GEYER, INC. Income Statement For Year Ended December 31, 2013 Service fees ........................................................................................... $67,600 Supplies expense ................................................................................... $ 9,700 Insurance expense ................................................................................. 1,500 Salaries expense .................................................................................... 30,000 Advertising expense ............................................................................... 1,700 Rent expense ......................................................................................... 7,500 Miscellaneous expense .......................................................................... 200 Total expenses ................................................................................. 50,600 Net income ............................................................................................. $17,000 b. GEYER, INC. Statement of Stockholders’ Equity For Year Ended December 31, 2013 Common Stock

Balance at December 31, 2012 ..............$4,000 Stock issuance ..................................... 1,400 Dividends ............................................. Net income ..........................................._____ Balance at December 31, 2013 ..............$5,400

Retained Earnings

$6,200 (13,500) 17,000 $9,700

Total Stockholders’ Equity

$10,200 1,400 (13,500) 17,000 $15,100

continued next page


2-43

P2-64. concluded c. GEYER, INC. Balance Sheet December 31, 2013 Cash .....................................

$14,800

Accounts payable ................................. $ 1,800

Supplies ................................

6,100

Notes payable .....................................4,000

Total assets ..........................

$20,900

Total liabilities ………………

5,800

Common stock ……………….

5,400

Retained earnings* ………….

9,700

Total liabilities and equities ..

$20,900

* $6,200 beginning balance + $17,000 net income - $13,500 dividend

P2-65. (45 minutes) a & b. Income Statement

Balance Sheet

Transaction Beginning Balances 1. Paid $600 cash toward accounts payable

Cash Asset

+

+5,000 -600

Noncash = Assets +5,200

=

Liabil -ities +3,500 -600

+

Contrib. + Capital

Earned Capital

+5,500

+1,200

Revenues - Expenses = -

= Accounts

Cash

Net Income

-

=

Payable

2. Paid rent in cash: $3,600

-3,600

=

Cash

3. Billed clients $11,500


4. $500 invoice received for advertising

= +500

6. Paid wages expense in cash: $2,400

+10,000

-10,000

Cash

Accounts Receivable

Wages Expense

-

Utilities Expense

Retained Earnings

-

Interest Expense

=

Retained Earnings

-900

-2,400

=

+680

-20

=

-500

= =

-

-680

-20

-680

=

+20

-20

=

-900

-4,000

+4,000

Cash

Equipment

=

$10,700

=

$3,480

Advertising Expense

+2,400

Retained Earnings

Payable

10. Paid $4,000 cash for sound equipment TOTALS

= +500

-

Retained Earnings

+680

-3,600 +11,500

-

-

= Accounts

Cash

Services Revenue

-2,400

7. Invoiced for utility expense: $680

9. Paid $900 cash dividend

+11,500

Retained Earnings

= =

Cash

Cash

+11,500

Retained Earnings

-2,400

8. Paid $20 cash for interest on note

+3,600

- Rent Expense =

-500

= Accounts Payable

5. Cash collected on account: $10,000


+

$4,080

+ $5,500 +

$4,600

$11,500

-

=

-

=

-

$7,200

=

continued next page ©Cambridge Business Publishers, 2014 2-44


$4,300

P2-65. concluded c. SCHRAND AEROBICS, INC. Income Statement For Month Ended January 31, 2013 Sales revenue .........................................................................................$11,500 Expenses ................................................................................................ Rent expense ..................................................................................... 3,600 $3,600 Advertising expense ........................................................................... 500 Wages expense ................................................................................. 2,400 Interest expense ................................................................................. 20 Utilities expense ................................................................................. 680 Total expenses ........................................................................................ 7,200 Net income ......................................................................................... $4,300 d. Schrand Aerobics, Inc. Statement of Stockholders’ Equity For Month Ended January 31, 2013 Common Stock Balance at January 1, 2013 ....................$5,500 Stock issuance ..................................... Dividends ............................................. Net income ..........................................._____ Balance at January 31, 2013 ..................$5,500

Retained Earnings $1,200 (900) 4,300 $4,600

Total Stockholders’ Equity $6,700 (900) 4,300 $10,100

e. Schrand Aerobics, Inc. Balance Sheet January 31, 2013 Cash ...................................... $ 3,480 Accounts receivable .............. 6,700 Equipment ............................. 4,000 Total assets ……………. $14,180

Accounts payable ............................. $ 1,580 Notes payable .................................. 2,500 Total liabilities .................................... 4,080 Common stock .................................. 5,500 Retained earnings ............................ 4,600 Total liabilities and equity .................. $14,180 ©Cambridge Business Publishers, 2014

Solutions Manual, Chapter 2

2-45

P2-66. (30 minutes) a. 1. Accounts payable (-L) ............................................................. 600 Cash (+A) ...........................................................................

600

2. Rent expense (+E,-SE)........................................................... 3,600 Cash (-A) ............................................................................

3,600

3. Accounts receivable (+A) ........................................................ 11,500 Services revenue (+R,+SE) ................................................

11,500

4. Advertising expense (+E, -SE)................................................ 500 Accounts payable (+L)........................................................

500


10,000

6. Wages expense (+E, -SE) ...................................................... 2,400 Cash (-A) ............................................................................

2,400

7. Utilities expense (+E, -SE) ...................................................... 680 Accounts payable (+L)........................................................

680

8. Interest expense (+E, -SE) .....................................................20 Cash (-A) ............................................................................

20

9. Retained earnings (-SE) ......................................................... 900 Cash (-A) ............................................................................

900

10. Equipment (+A)....................................................................... 4,000 Cash (-A) ............................................................................




P2-66. concluded b. + Beg. Bal. (5)

End Bal.

Cash (A) 5,000 600 10,000 3,600 2,400 20 900 4,000 3,480

(1) (2) (6) (8) (9) (10)

+ Accounts Receivable (A) Beg. Bal. 5,200 10,000 (5) (3) 11,500 End Bal. 6,700 + Equipment (A) (10) 4,000 End Bal. 4,000

(1)

-

2,500 End Bal. Common Stock (SE) + 5,500 Beg. Bal.

-

(9)

-

+ (2) End Bal. + (4) End Bal. + (6) End Bal.

Rent Expense (E) 3,600 3,600 Advertising Expense (E) 500

-

5,500 End Bal. Retained Earnings (SE) + 900 1,200 Beg. Bal. 300 End Bal. Services Revenue (R) + 11,500 (3) 11,500 End Bal.

+ (7) End Bal. -

Accounts Payable (L) + 600 1,000 Beg. Bal. 500 (4) 680 (7) 1,580 End Bal. Notes Payable (L) + 2,500 Beg. Bal.

+ (8) End Bal.

Utilities Expense (E) 680 680 Interest Expense (E) 20 20

-

-

500 Wages Expense (E) 2,400 2,400

-


2-47

P2-67. (45 minutes) a & b.

Balance Sheet Transaction Beginning Balances 1. Paid $950 cash for rent. 2. Received $8,800 cash on account.

Cash Noncash LiabilContrib. + = + + Asset Assets ities Capital +6,700 +14,800 +3,100 +6,000 -950 = Cash +8,800

-8,800

Cash

Accounts Receivable

3. $500 paid on accts. payable.

-500

4. Received $1,600 cash for services.

+1,600

5. Borrowed $5,000 signed note.

+5,000

+950 - Rent Expense =

Retained Earnings

=

-

=

-

=

-

=

-

=

-

=

=

Cash

=

Cash

+1,600 Services Revenue

Notes Payable

+8,100

+8,100

=

Retained Earnings

Services Revenue

=

Retained Earnings

-4,000

+1,600

+8,100

-4,000

Cash

+410 = Accounts Payable

-6,000

10. Paid $9,800 cash for vehicle. 11. Paid $50 cash interest on note.

-9,800

+9,800

Cash

Vehicles

+4,000

-410 Retained Earnings

-

Salary Expense

-

Utilities Expense

+410

-4,000 = =

-410

-6,000 =

Cash

Retained Earnings

=

-50

-

=

-

=

-50 =

Cash

$800

+1,600 Retained Earnings

+5,000


9. Paid $6,000 dividend.

+ $23,900 = $8,010 + $6,000 +

+50

Retained Earnings

$10,690

$9,700

-50

-

Interest Expense

=

-

$5,410

= $4,290

c. KROSS, INC. Income Statement For Month Ended January 31, 2013 Services revenue ................................................................... Rent expense………………………………………………... Utilities expense……………………………………………. Salary expense………………………………………….… Interest expense………………………………………….… Total expenses ...................................................................... Net income .......................................................................

$9,700 $ 950 410 4,000 50 5,410 $4,290 continued next page


-$950

Payable

8. Received invoice for utilities: $410.

TOTALS


-500 = Accounts

Cash

6. Billed $8,100 for services. 7. Paid $4,000 for cash salary.

Income Statement Earned Capital +12,400 -950


P2-67. concluded d. KROSS, INC. Statement of Stockholders’ Equity For Month Ended January 31, 2013 Common Stock Balance at January 1, 2013 ....................$6,000 Stock issuance ..................................... Dividends ............................................. Net income ..........................................._____ Balance at January 31, 2013 ..................$6,000

Retained Earnings $12,400

Total Stockholders’ Equity $18,400

(6,000) 4,290 $10,690

(6,000) 4,290 $16,690

e. KROSS, INC. Balance Sheet January 31, 2013 Cash ...................................... $

800

Accounts payable .............................. $ 510

Accounts receivable .............. 14,100

Notes payable ...................................7,500

Equipment ............................. 9,800

Total liabilities....................................8,010

Total assets ...........................$24,700 Common stock ..................................6,000 Retained earnings ............................. 10,690 Total liabilities and equity .................. $24,700


2-49

P2-68. (30 minutes) a. 1. Rent expense (+E,-SE)........................................................... 950 Cash (-A) ............................................................................

950


8,800

3. Accounts payable (-L) ............................................................. 500 Cash (-A) ............................................................................

500

4. Cash (+A) ............................................................................... 1,600 Services revenue (+R,+SE) ................................................

1,600

5. Cash (+A) ............................................................................... 5,000 Notes payable (+L) .............................................................

5,000

6. Accounts receivable (+A) ........................................................ 8,100 Services revenue (+R, +SE) ...............................................

8,100

7. Salary expense (+E,-SE) ........................................................ 4,000 Cash (-A) ............................................................................

4,000

8. Utilities expense (+E,-SE) ....................................................... 410 Accounts payable (+L)........................................................

410

9. Retained earnings (-SE) ......................................................... 6,000 Cash (-A) ............................................................................

6,000

10. Vehicles (+A) .......................................................................... 9,800 Cash (-A) ............................................................................

9,800

11. Interest expense (+E,-SE) ......................................................50 Cash (-A) ............................................................................

50

continued next page



P2-68. concluded b. + Beg. Bal. (2) (4) (5)

Cash (A) 6,700 950 8,800 500 1,600 4,000 5,000 6,000 9,800 50

(1) (3) (7) (9) (10) (11)

+ Accounts Receivable (A) Beg. Bal. 14,800 8,800 (6) 8,100

+ (10)

Vehicles (A) 9,800

Utilities Expense (E) 410

-

+

Interest Expense (E) 50

-

-

Accounts Payable (L) 500 600 410

(8)

(11)

(2)

+

(3)

-

-

-

(1)

+

Rent Expense (E) 950

+ (7)

Salary Expense (E) 4,000

-


(8)

+ Beg. Bal.

(5) + Beg. Bal.

-

Retained Earnings (SE) + Beg. Bal. 6,000 12,400

-

Services Revenue (R) 1,600 8,100

(9) -

Notes Payable (L) 2,500 5,000

+ Beg. Bal.

+ (4) (6)


2-51

CASES and PROJECTS C2-69. (30 minutes) WILDLIFE PICTURE GALLERY Income Statement For the month of March 2013

a. Revenues Commissions earned Expenses Rent expense Wages expense Utilities expense Delivery expense Total expenses Net income b.

$28,500 $ 900 4,900 350 1,700 7,850 $20,650

WILDLIFE PICTURE GALLERY Statement of Stockholders’ Equity For the month of March 2013 Common Retained Stock Earnings Balance at March 1, 2013 ...................... $0 $0 Stock issuance ..................................... 6,500 Dividends ............................................. Net income ..........................................._____ 20,650 Balance at March 31, 2013 ....................$6,500 $20,650

c.

Assets Cash Advance receivable*

Total assets

WILDLIFE PICTURE GALLERY Balance Sheet March 2013 Liabilities $51,200 Payable to artists** 500 Notes payable Accounts payable Total liabilities Stockholders’ equity Total liabilities and $51,700 stockholders’ equity

Stockholders’ Equity $0 6,500 20,650 $27,150

$12,500 10,000 2,050 24,550 27,150 $51,700

* It is important to recognize that the Wildlife Picture Gallery is a separate entity from its shareholder/operator, Sarah Penney. The $500 payment for airfare is not an expense of the business, but rather a payment on behalf of an employee. Sarah will have to reimburse the company or have the amount deducted in future compensation, as recognized in the advance receivable asset for Wildlife Picture Gallery. ** 70%($95,000) – $54,000 is owed to artists.



C2-70. (30 minutes) Andrea faces a dilemma when she prepares her expense reimbursement request. She has, in essence, been asked by her supervisor to join him in overcharging expenses to the company. Should Andrea not file a reimbursement request for the Luxury Inn lodging costs, the company should question why she and her supervisor stayed at different locations. Discussion of this case should focus on the options available to Andrea. The options include the following: 1.

File an expense reimbursement request for the Luxury Inn and, therefore, minimize the likelihood of jeopardizing her relationship with her supervisor.

2.

File an expense reimbursement request for the Spartan Inn and let future events take whatever course they follow.

3.

Report the situation to her supervisor's boss.

4.

Discuss the situation with her supervisor and indicate that she (Andrea) is not comfortable with filing the Luxury Inn receipt. Perhaps encourage the supervisor to seek a change in company policy to provide daily allowances for lodging and meal costs rather than reimbursing actual costs.

5.

Leave the employ of the company.

There is no single correct answer to the problem. The first choice is not a good solution for the long run as it starts a slippery slope for Andrea, which is likely to lead to further concessions to improper behavior and more serious problems. Additional and more serious situations increase the chances her behavior is likely to be discovered and she could be fired or even sent to jail. One would hope that sleepless nights would intervene long before this time. It is better to draw the line here. Talking to her supervisor is a good idea and perhaps instituting a policy that avoids any temptation. Leaving the company would be a fallback choice if discussion of the situation does not lead to a resolution of the situation that preserves Andrea’s ethical requirements.


2-53

Fa4e Sm Ch02

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