fa4e sm ch02

Chapter 2

Constructing Financial Statements

Learning Objectives – coverage by questionMini-

ExercisesExercises Problems

Cases and Projects

LO1 – Describe and construct the balance sheet and understand how it can be used for analysis.

14 - 17,

19, 21 - 23,

25 - 27,

29 - 31

32 - 4647 - 60, 62,

64, 65, 6769

LO2 – Use the financial statement effects template (FSET) to analyze transactions.

20, 29 33, 42, 4555, 60,

65, 67

LO3 – Describe and construct the income statement and discuss how it can be used to evaluate management performance.

19 - 23,

28, 29

33 - 35,

37 - 41

47 - 55,

57 - 60,

62 - 65, 67

69, 70

LO4 – Explain revenue recognition, accrual accounting, and their effects on retained earnings.

20, 22 - 24,

2937, 38

53, 55, 57,

58, 60, 64,

65, 67

69

LO5 – Illustrate equity transactions and the statement of stockholders’ equity.

18, 19,

21 - 23,

27, 29

33, 39, 4151, 64,

65, 6769

LO6 – Use journal entries and T-accounts to analyze and record transactions.

25, 26,

29 - 3143, 44, 46

53, 56 - 58,

61, 66, 6869

LO7 – Compute net working capital, the current ratio, and the quick ratio, and explain how they reflect liquidity.

32, 34, 36, 38, 40, 44

50, 53, 54, 57, 58

©Cambridge Business Publishers, 2014

Solutions Manual, Chapter 2 2-1

DISCUSSION QUESTIONSQ2-1. 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 Cash Receivables Inventories Plant, property and equipment

Liabilities Accounts payable Accrued liabilities Notes payable Long-term debt

Equity 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.


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.



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 $ 8,000Accounts receivable 23,000Supplies 9,000Equipment 138,000

178,000Accounts payable $ 11,000Common stock 110,000 121,000Retained earnings $ 57,000

b. Retained Earnings:December 31, 2013 $ 57,000January 1, 2013 30,000

Increase 27,000Add: Dividends 12,000 Net Income $ 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



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) …………… $100,000Wage expense …………………………………………. (60,000 )Net income ……………………………………………… $ 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



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 January 29, 2011 January 28, 2012

Beginning retained earnings (deficit) $ 2,037 $ 1,354Net income (loss) 805 850Dividends paid 1,488 1,144Increases (decreases) from other retained earnings changes - (1,036)Ending retained earnings (deficit) $ 1,354 $ 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 & JOHNSONStatement of Retained EarningsFor Year Ended January 2, 2011

Retained earnings, December 30, 2010 $77,773

Add: Net income 9,672

Less: Dividends (6,156)

Other retained earnings changes 38

Retained earnings, January 2, 2011 $81,251



M2-28. (10 minutes)

2012 2013

Revenues $350,000 $ 0

Expenses 200,000 0

Net income $150,000 $ 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 Income Statement

TransactionCash Asset + Noncash

Assets = Liabil-ities + Contrib.

Capital + Earned Capital Revenues - Expenses = Net

Income

a. Issue stock for $1,000 cash.

+1,000Cash =

+1,000Common

Stock- =

b. Purchase inventory for $500 cash.

-500Cash

+500Inventory = - =

c. Sell inventory for $2,000 on credit.

+2,000Accts Rec =

+2,000Retained Earnings

+2,000Sales - =

+2,000

d. Record $500 for cost of inventory sold in c.

-500Inventory =

-500Retained Earnings

-+500COGS

Expense=

-500

e. Receive $2,000 cash on receivable from c.

+2,000Cash

-2,000Accts Rec = - =

Totals 2,500 + 0 = = + 1,000 + 1,500 2,000 - 500 = 1,500



M2-30. (10 minutes)

a. Cash (+A) 1,000Common stock (+SE) 1,000

b. Inventory (+A) 500Cash (-A) 500

c. Accounts receivable (+A) 2,000Sales (+R, +SE) 2,000

d. Cost of goods sold (+E, -SE) 500Inventory (-A) 500

e. Cash (+A) 2,000Accounts receivable (-A) 2,000

M2-31. (10 minutes)

+ Cash (A) - + Accounts Receivable (A) -

(a) 1,000 (b) 500 (c) 2,000 (e) 2,000

(e) 2,000

- Sales (R) +

(c) 2,000

+ Inventory (A) - + Cost of Goods Sold (E) -

(b) 500 (d) 500 (d) 500

- Common Stock (SE) +

(a) 1,000



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 $ 12,200 $ 3,200Accounts receivable 18,300 18,300Supplies 16,400 16,400Equipment 55,000 70,000 Total assets $101,900 $107,900

Liabilities Notes payable $ 20,000 $ 33,000Accounts payable 5,200 5,200 Total liabilities 25,200 38,200

Stockholders' Equity Common stock 42,500 42,500Retained earnings 34,200 27,200 Total stockholders' equity 76,700 69,700 Total liabilities and stockholders' equity $101,900 $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) $ 9,400Equity, Ending ($30,000 - $17,300) 12,700

Increase 3,300Add: Net Capital Withdrawn ($5,000 - $2,000) 3,000

Net Income 6,300Add: Expenses 8,500

Revenues $14,800

b. Equity, Beginning ($12,000 - $5,000) $ 7,000Add: Net Capital Contributed ($4,500 - $1,500) 3,000

10,000Add: Net Income ($28,000 - $21,000) 7,000

Equity, Ending $17,000

Assets, Ending $26,000Equity, Ending 17,000

Liabilities, Ending, $ 9,000

c. Equity, Beginning ($28,000 - $19,000) $ 9,000Add: Net Income ($18,000 - $11,000) 7,000

16,000Less: Dividends 1,000

15,000Equity, Ending ($34,000 - $15,000) 19,000

Common Stock Issued $ 4,000

d. Common Stock Issued $ 3,500Net Income ($24,000 - $17,000) 7,000

10,500Cash Dividends 6,500

Increase in Equity 4,000Equity, Ending ($40,000 - $19,000) 21,000Equity, Beginning 17,000Add: Liabilities, Beginning 9,000

Total Assets, Beginning $26,000



E2-34(30 minutes)

Use the accounting equation to determine stockholders’ equity balances.

a.LANG SERVICESBalance Sheets

December 31, 2013 2012

Assets Cash $10,000 $ 8,000Accounts receivable 22,800 17,500Supplies 4,700 4.200Equipment 32,000 27,000 Total assets $69,500 $56,700

LiabilitiesAccounts payable $25,000 $25,000Notes payable 1,800 1,600

Total liabilities 26,800 26,600

Stockholders’ equityEquity 42,700 30,100Total liabilities and stockholders’ equity $69,500 $56,700

b. Equity, December 31, 2013 $42,700Equity, December 31, 2012 30,100Increase 12,600Add: Dividends 17,000

29,600Less: Common Stock issued 5,000Net Income for 2013 $24,600

c. Current ratio = ($10,000 + $22,800 + $4,700)/$25,000 = 1.5Quick 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 $ 23,000 $ 20,000Accounts receivable 42,000 33,000Supplies 20,000 18,000Land 40,000 40,000Building 250,000 260,000Equipment 43,000 45,000 Total assets $418,000 $416,000

LiabilitiesAccounts payable $ 6,000 $ 9,000Mortgage payable 90,000 100,000


Stockholders’ equityCommon stock 220,000 220,000Retained earnings 102,000 87,000

Total stockholders' equity 322,000 307,000 Total liabilities and stockholders’ equity $418,000 $416,000

b.Retained Earnings, December 31, 2013 $102,000Retained Earnings, December 31, 2012 87,000

Increase during 2013 15,000Add: Dividend for 2013 10,000Net Income for 2013 $ 25,000



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 SheetsSeptember 30, October 1,

2013 2013Assets Cash $10,000 $ 4,000Accounts receivable 17,000 17,000Supplies inventory 9,000 9,000Equipment 34,000 45,000 Total assets $70,000 $75,000

LiabilitiesAccounts payable $24,000 $24,000Notes payable 12,000 20,000



Total stockholders' equity 34,000 31,000 Total liabilities and stockholders’ equity $70,000 $75,000

c.

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

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

Quick ratio (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 Cash $ 8,000

Wages expense 12,000 Accounts receivable 30,000

Net income (loss) $18,000 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 262 I

b. Total assets = Total liabilities + stockholders’ equityTotal 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



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


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’ investmentTotal 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


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’ investmentTotal assets = $928 + $738 = $1,666

Total revenue – Total expenses = Net income$2,110 – Total expenses = $24


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



E2-41. (15 minutes)

a.

Kimberly-Clark ($ millions) Amount Classification

Net sales $20,846 I

Cost of goods sold 14,694 I


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’ equityTotal assets = $13,844 + $5,529 = $19,373

Total revenue – Total expenses = Net income$20,846 – Total expenses = $1,684


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


Transaction Cash Asset + Noncash

Assets = Liabil-ities + Contrib. Capital + Earned

Capital Revenues - Expenses = Net Income

(1) Receive €50,000 in exchange for common stock.

+50,000Cash

=+50,000Common

Stock- =

(2) Borrow €10,000 from bank.

+10,000Cash

=+10,000

Notes Payable

- =

(3) Purchase €2,000 of supplies inventory on credit.

+2,000Inventory =

+2,000Accounts Payable

- =

(4) Receive €15,000 cash from customers for services provided.

+15,000Cash

=+15,000Retained Earnings

+15,000Revenue

- =+15,000

(5) Pay €2,000 cash to supplier in part (c).

- 2,000Cash

=- 2,000

AccountsPayable

- =

(6) Receive order for future services with €3,500 advance payment.

+3,500Cash

=+3,500

UnearnedRevenue

- =

(7) Pay €5,000 cash dividend to shareholders.

- 5,000Cash

=- 5,000RetainedEarnings

- =

(8) Pay employees €6,000 cash for compensation earned.

- 6,000Cash

=- 6,000RetainedEarnings

-+6,000Wages

Expense=

- 6,000

(9) Pay €500 cash for interest on loan in (2).

- 500Cash

=- 500

RetainedEarnings

-+500

InterestExpense

=- 500

Totals +65,000 + 2,000 = 13,500 + 50,000 + 3,500 15,000 - 6,500 = 8,500



E2-43. (20 minutes)

a.1. Cash (+A) 50,000

Common stock (+SE) 50,000Receive €50,000 in exchange for common stock.

2. Cash (+A) 10,000Notes payable (+L) 10,000

Borrow €10,000 from bank.

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

Purchase €2,000 supplies inventory on account.

4. Cash (+A) 15,000Revenue (+R, +SE) 15,000

Recognize €15,000 revenue for services provided.

5. Accounts payable (-L) 2,000Cash (-A) 2,000

Pay supplier €2,000 cash.

6. Cash (+A) 3,500Unearned revenue (+L) 3,500

Receive €3,500 advance from customer.

7. Retained earnings (-SE) 5,000Cash (-A) 5,000

Pay €5,000 cash dividend to shareholders.

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

Pay employees €6,000

9. Interest expense (+E, -SE) 500Cash (-A) 500

Pay €500 interest on note.

continued next page



E2-43. concluded

b.

+ Cash (A) - - Accounts Payable (L) +(1) 50,000 2,000 (5) (5) 2,000 2,000 (3)(2) 10,000 5,000 (7) 0 Bal.(4) 15,000 6,000 (8)(6) 3,500 500 (9) - Unearned Revenue (L) +Bal. 65,000 3,500 (6)

3,500 Bal.

+ Supplies Inventory (A) - - Notes Payable (L) +(3) 2,000 10,000 (2)Bal. 2,000 10,000 Bal.

- Common Stock (SE) +50,000 (1)50,000 Bal.

- Retained Earnings (SE) +(7) 5,000Bal. 5,000 - Revenue (R) +

15,000 (4)15,000 Bal.

+ Wages Expense (E) -(8) 6,000Bal. 6,000

+ Interest Expense (E) -(9) 500Bal. 500



E2-44. (20 minutes)

a. and b.BETTIS CONTRACTORS

Balance SheetsJune 30, July 2,

2013 2013Assets Cash $ 14,700 $ 2,200Accounts receivable 9,200 9,200Supplies 30,500 30,500

Current assets 54,400 41,900Land 25,000 25,000Equipment 98,000 108,000Total assets $177,400 $174,900

LiabilitiesAccounts payable 8,900 8,900

Current liabilities 8,900 8,900Notes payable $ 30,000 $ 33,000



Total stockholders' equity 138,500 133,000Total liabilities and stockholders’ equity $177,400 $174,900

c. CR = $54,400/$8,900 = 6.1QR = ($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

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

+20,000Cash

=+20,000Common

Stock- =

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

+2,000Inventory

=+2,000

Accounts Payable

- =

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

+3,000Accounts

Receivable =


+3,000Sales - =

+3,000

4. Record cost of goods sold in 3.

-2,000Inventory

=

-2,000Retained Earnings

-+ 2,000COGS

Expense=

- 2,000

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

+3,000Cash

-3,000Accounts

Receivable= - =

6. Acquire $5,000 of equipment by signing a note.

+5,000Equipment

=+5,000Notes

Payable- =

7. Pay wages of $1,000 in cash.

-1,000Cash

=


-+ 1,000Wages

Expense=

- 1,000

8. Pay $5,000 cash on a note payable.

-5,000Cash

=-5,000Notes

Payable- =

9. Pay $2,000 cash dividend. -2,000

Cash=


- =

TOTALS 15,000 + 5,000 = 2,000 + 20,000 + -2,000 3,000 - 3,000 = 0



E2-46. (20 minutes)

a.1. Cash (+A) 20,000

Common stock (+SE) 20,000

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

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

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

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

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


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


continued next page



E2-46. concluded

b.

+ Cash (A) - - Common Stock (SE) +(1) 20,000 1,000 (7) 20,000 (1)(5) 3,000 5,000 (8)

2,000 (9) - Sales Revenue (R) +

3,000 (3)

+ Inventory (A) - + Cost of Goods Sold (E) -(2) 2,000 2,000 (4) (4) 2,000

+ Wages Expense (E) -(7) 1,000

+ Accounts Receivable (A) - - Accounts Payable (L) +(3) 3,000 3,000 (5) 2,000 (2)

- Retained Earnings (SE) +(9) 2,000

+ Equipment (A) - (6) 5,000

- Notes Payable (L) +(8) 5,000 5,000 (6)



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 COMPANYBalance Sheet

December 31, 2013Assets Liabilities

Cash $ 8,800 Accounts payable $ 7,500Accounts receivable 18,400Equipment 9,000Land 50,000 Equity

Stockholders’ equity 78,700Total assets $86,200 Total liabilities & equity $86,200

continued next page



P2-51. concluded

b.. Increase in Equity ($78,700-$67,500) $11,200Add: Dividends 12,000Net Income for 2013 23,200

c. Increase in Equity ($78,700-$67,500) $11,200Add: Dividends 21,000

32,200Less: Additional Investment 13,500Net Income for 2013 $18,700

P2-52. (20 minutes)a.

ANF JWN

Total assets (Total liabilities and equity) $3,048 $8,491

Total expenses (Sales – Net income) 4030 10,194

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

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

b.ANF JWN

Return on average equity…

$128= 6.82%

$683= 14.5%[($3,048-$1,186)+$1,890]/2 [($8,491-$6,535)+$7,462]/2

P2-53. (30 minutes)

a.

3MCurrent Assets

Long-term Assets

Total Assets

Current Liabilities

Long-term Liabilities

Total Liabilities

Stockholders' Equity

2006 8,946 12,348 21,294 7,323 4,012 11,335 9,959

2007 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



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

& FitchCurrent Assets

Long-term Assets

Total Assets

Current Liabilities


Total Liabilities


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.



P2-55. (30 minutes)

a. Balance Sheet Income Statement




Income1. Issued common

stock $7,000.+7,000

Cash =+7,000 Common

Stock- =

2. Paid rent $750. -750Cash =


-+750

Rent Expense =-750

3. Received $500 invoice for advertising expense.

=

+500 Accounts Payable

-500Retained Earnings -

+500Advertising Expense =

-500

4. Borrowed $15,000 cash from bank.

+15,000Cash =

+15,000 Notes

Payable- =

5. $1,200 Cash received for services.

+1,200Cash =

+1,200 Retained Earnings

+1,200 Counseling

Services Revenue

- =

+1,200

6. Billed clients $6,800 for services.

+6,800 Accounts

Receivable=

+6,800 Retained Earnings

+6,800 Services Revenue

- =+6,800

7. Paid $2,200 cash for salary.

-2,200Cash =

-2,200 Retained Earnings

-+2,200 Salary

Expense=

-2,200

8. Paid $370 cash for utilities.

-370Cash =

-370 Retained Earnings

-+370Utilities

Expense=

-370

9. Paid $900 cash dividend.

-900Cash =


- =

10. Acquired land for $13,000.

-13,000Cash

+13,000 Land = - =

11. Paid $100 interest in cash.

-100Cash =


-+100 Interest

Expense=

-100

Totals $5,880 + $19,800 = $15,500 + $7,000 + $3,180 $8,000 - $3,920 = $4,080

b. LAMBERT SERVICESIncome Statement

For the Month of December 2013Counseling services revenue $8,000Expenses

Rent expense $ 750Advertising expense 500Salary expense 2,200Utilities expense 370Interest expense 100Total expenses 3,920

Net income $4,080



P2-56. (30 minutes)

a.1. Cash (+A) 7,000


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

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


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

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

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

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

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

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

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

continued next page



P2-56. concluded

b.

+ Cash (A) - - Accounts Payable (L) +(1) 7,000 750 (2) 500 (3)(4) 15,000 2,200 (7)(5) 1,200 370 (8)

900 (9)13,000 (10) 100 (11)

- Notes Payable (L) +15,000 (4)

+ Accounts Receivable (A) - - Common Stock (SE) +(6) 6,800 7,000 (1)

+ Land (A) - - Retained Earnings (SE) +(10) 13,000 (9) 900

- Counseling Services Rev. (R) +1,200 (5)6,800 (6)

+ Rent Expense (E) - + Advertising Expense (E) -(2) 750 (3) 500

+ Salary Expense (E) - + Utilities Expense (E) -(7) 2,200 (8) 370

+ Interest Expense (E) -(11) 100



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.



P2-58. (30 minutes)

a.Harley-Davidson

Current Assets

Long-term Assets

Total Assets

Current Liabilities


Total Liabilities


2006 3,551 1,981 5,532 1,596 1,179 2,775 2,757

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) RevenuesCost of

Goods SoldGross 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 ProfitPercentage

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.



P2-60. (30 minutes)

a. Balance Sheet Income Statement




Income1. Issued common

stock for cash.+$50,000

Cash =+$50,000

Common Stock

- =

2. Rent paid in cash $4,800.

-4,800Cash =


-+4,800

Rent Expense =-4,800

3. Invoice for entertainment expense: $1,600.

=+1,600 Accounts Payable


-+1,600

Entertainment Expense

=-1,600

4. Cash paid for advertising: $900.

-900Cash =


-+900

Advertising Expense

=-900

5. July insurance premium prepaid in cash: $1,800.

-1,800Cash

+1,800Prepaid

Insurance= - =

6. Flight services collected in cash $22,700.

+22,700Cash =


+22,700 Flight

Services Revenue

- =+22,700

7. Billed for flight services $15,900.

+15,900Accounts

Receivable=


+15,900 Flight

Services Revenue

- =+15,900

8. Paid $1,500 on accounts.

-1,500Cash =

-1,500Accounts Payable

- =

9. Received $13,200 on account.

+13,200Cash

-13,200Accounts

Receivable= - =

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

-16,000Cash =


-+16,000

Wages expense

=-16,000

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

+3,500 Accounts Payable


-+3,500

Fuel Expense =-3,500

12. Cash dividend paid: $3,000.

-3,000Cash =


- =

TOTALS $57,900 + $4,500 = $3,600 + $50,000 + $8,800 $38,600 - $26,800 = $11,800

continued next page



P2-60. concluded

b. OUTBACK FLIGHTSIncome Statement

For the Month of June 2013Revenue

Services fees earned $38,600Expenses

Rent expense $4,800Entertainment expense 1,600Advertising expense 900Wages expense 16,000Fuel expense 3,500 Total expenses 26,800

Net income $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


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

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

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

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

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

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

continued next page



P2-61. concluded

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


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

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

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

b.+ Cash (A) - - Accounts Payable (L) +

(1) 50,000 4,800 (2) (8) 1,500 1,600 (3)(6) 22,700 900 (4) 3,500 (11)(9) 13,200 1,800 (5)

1,500 (8)16,000 (10) - Common Stock (SE) + 3,000 (12) 50,000 (1)

+ Accounts Receivable (A) - - Retained Earnings (SE) +(7) 15,900 (9) 13,200 (12) 3,000

+ Prepaid Insurance (A) - - Flight Services Revenue (R) +(5) 1,800 22,700 (6)

15,900 (7)

+ Rent Expense (E) - + Entertainment Expense (E) -(2) 4,800 (3) 1,600

+ Advertising Expense (E) - + Wages Expense (E) -(4) 900 (10) 16,000

+ Fuel Expense (E) -(11) 3,500



P2-62. (30 minutes)

a.

Starbucks SalesCost of


Operating Expenses

Operating Income

Other Expenses

Net Income

2005 6,369 2,605 3,764 2,983 781 287 494

2006 7,787 3,179 4,608 3,715 893 329 564

2007 9,412 3,999 5,413 4,359 1,054 381 673

2008 10,383 4,645 5,738 5,278 460 144 316

2009 9,775 4,325 5,450 4,888 562 171 391

2010 10,707 4,459 6,248 4,829 1,419 473 946

2011 11,700 4,949 6,751 5,023 1,728 482 1,246


Starbucks, Inc.Gross ProfitPercentage

2005 59.1%2006 59.2%2007 57.5%2008 55.3%2009 55.8%2010 58.4%2011 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.



P2-63. (30 minutes)

a.

($ millions) RevenuesCost of


Operating Expenses

Operating Income

Other Expenses

Net 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

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.


Target CorporationGross ProfitPercentage

2005 33.6%2006 33.8%2007 33.9%2008 32.0%2009 32.6%2010 32.2%2011 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 StatementFor 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’ EquityFor Year Ended December 31, 2013

Common Stock

Retained Earnings

Total Stockholders’ Equity

Balance at December 31, 2012 $4,000 $6,200 $10,200

Stock issuance 1,400 1,400

Dividends (13,500) (13,500)

Net income _____ 17,000 17,000

Balance at December 31, 2013 $5,400 $9,700 $15,100

continued next page



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.Balance Sheet Income Statement




IncomeBeginning Balances +5,000 +5,200 = +3,500 +5,500 +1,200 -1. Paid $600 cash toward

accounts payable-600Cash =

-600Accounts Payable

- =

2. Paid rent in cash: $3,600

-3,600Cash =


-+3,600

Rent Expense =-3,600

3. Billed clients $11,500 +11,500 Accounts

Receivable=



- =+11,500

4. $500 invoice received for advertising =



-+500

Advertising Expense

=-500

5. Cash collected on account: $10,000

+10,000Cash

-10,000 Accounts

Receivable= - =

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

-2,400Cash =


-+2,400 Wages

Expense=

-2,400

7. Invoiced for utility expense: $680 =



-+680

Utilities Expense

=-680

8. Paid $20 cash for interest on note

-20Cash =


-+20

Interest Expense

=-20

9. Paid $900 cash dividend

-900Cash =


- =

10. Paid $4,000 cash for sound equipment

-4,000Cash

+4,000 Equipment = - =

TOTALS $3,480 + $10,700 = $4,080 + $5,500 + $4,600 $11,500 - $7,200 = $4,300continued next page



P2-65. concluded

c.

SCHRAND AEROBICS, INC.Income Statement

For Month Ended January 31, 2013

Sales revenue $11,500

Expenses

Rent expense 3,600

Advertising expense 500

Wages expense 2,400

Interest expense 20

Utilities expense 680


Net income $4,300

d.Schrand Aerobics, Inc.

Statement of Stockholders’ EquityFor Month Ended January 31, 2013

Common Stock

Retained Earnings


Balance at January 1, 2013 $5,500 $1,200 $6,700

Stock issuance

Dividends (900) (900)

Net income _____ 4,300 4,300


e.Schrand Aerobics, Inc.

Balance SheetJanuary 31, 2013

Cash $ 3,480 Accounts payable $ 1,580

Accounts receivable 6,700 Notes payable 2,500

Equipment 4,000 Total liabilities 4,080

Total assets ……………. $14,180 Common stock 5,500





P2-66. (30 minutes)

a.

1. Accounts payable (-L) 600Cash (+A) 600

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

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

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



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

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

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

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

continued next page



P2-66. concluded

b.

+ Cash (A) - - Accounts Payable (L) +Beg. Bal. 5,000 600 (1) (1) 600 1,000 Beg. Bal.(5) 10,000 3,600 (2) 500 (4)

2,400 (6) 680 (7)20 (8) 1,580 End Bal.

900 (9) - Notes Payable (L) + 4,000 (10) 2,500 Beg. Bal.

End Bal. 3,4802,500 End Bal.

+ Accounts Receivable (A) - - Common Stock (SE) +Beg. Bal. 5,200 10,000 (5) 5,500 Beg. Bal.(3) 11,500End Bal. 6,700 5,500 End Bal.

+ Equipment (A) - - Retained Earnings (SE) +(10) 4,000 (9) 900 1,200 Beg. Bal.End Bal. 4,000 300 End Bal.

- Services Revenue (R) +11,500 (3)11,500 End Bal.

+ Rent Expense (E) - + Utilities Expense (E) -(2) 3,600 (7) 680End Bal. 3,600 End Bal. 680

+ Advertising Expense (E) - + Interest Expense (E) -(4) 500 (8) 20

End Bal. 20End Bal. 500

+ Wages Expense (E) -(6) 2,400End Bal. 2,400



P2-67. (45 minutes)

a & b.Balance Sheet Income Statement




IncomeBeginning Balances +6,700 +14,800 +3,100 +6,000 +12,4001. Paid $950 cash for

rent.-950Cash =

-950RetainedEarnings

-+950

Rent Expense =-$950

2. Received $8,800 cash on account.

+8,800Cash

-8,800Accounts

Receivable= - =

3. $500 paid on accts. payable.

-500Cash =

-500Accounts Payable

- =

4. Received $1,600 cash for services.

+1,600Cash =

+1,600RetainedEarnings


- =+1,600

5. Borrowed $5,000 signed note.

+5,000Cash =

+5,000 Notes

Payable- =

6. Billed $8,100 for services.

+8,100 Accounts

Receivable=

+8,100RetainedEarnings


- =+8,100

7. Paid $4,000 for cash salary.

-4,000Cash =

-4,000RetainedEarnings

-+4,000 Salary

Expense=

-4,000

8. Received invoice for utilities: $410. =


-410RetainedEarnings

-+410 Utilities

Expense=

-410

9. Paid $6,000 dividend.

-6,000Cash =

-6,000RetainedEarnings

- =

10. Paid $9,800 cash for vehicle.

-9,800Cash

+9,800 Vehicles = - =

11. Paid $50 cash interest on note.

-50Cash =

-50RetainedEarnings

-+50

Interest Expense

=-50

TOTALS $800 + $23,900 = $8,010 + $6,000 + $10,690 $9,700 - $5,410 = $4,290

c.KROSS, INC.

Income StatementFor Month Ended January 31, 2013

Services revenue $9,700

Rent expense………………………………………………... $ 950

Utilities expense……………………………………………. 410

Salary expense………………………………………….… 4,000

Interest expense………………………………………….… 50


Net income $4,290

continued next page



P2-67. concluded

d.KROSS, INC.

Statement of Stockholders’ EquityFor Month Ended January 31, 2013

Common Stock

Retained Earnings



Stock issuance

Dividends (6,000) (6,000)

Net income _____ 4,290 4,290


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





P2-68. (30 minutes)

a.1. Rent expense (+E,-SE) 950

Cash (-A) 950


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

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


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

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

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


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

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

continued next page



P2-68. concluded

b.

+ Cash (A) - + Utilities Expense (E) -Beg. Bal. 6,700 950 (1) (8) 410(2) 8,800 500 (3)(4) 1,600 4,000 (7)(5) 5,000 6,000 (9)

9,800 (10) + Interest Expense (E) - 50 (11) (11) 50

+ Accounts Receivable (A) - - Accounts Payable (L) +Beg. Bal. 14,800 8,800 (2) (3) 500 600 Beg. Bal.

(6) 8,100 410 (8)

+ Vehicles (A) - - Notes Payable (L) +(10) 9,800 2,500 Beg. Bal.

5,000 (5)

- Common Stock (SE) +6,000 Beg. Bal.

+ Rent Expense (E) - - Retained Earnings (SE) +(1) 950 (9) 6,000 12,400 Beg. Bal.

+ Salary Expense (E) - - Services Revenue (R) +(7) 4,000 1,600 (4)

8,100 (6)



CASES and PROJECTS

C2-69. (30 minutes)

a. WILDLIFE PICTURE GALLERYIncome Statement

For the month of March 2013Revenues

Commissions earned $28,500Expenses

Rent expense $ 900Wages expense 4,900Utilities expense 350Delivery expense 1,700

Total expenses 7,850 Net income $20,650

b. WILDLIFE PICTURE GALLERYStatement of Stockholders’ Equity

For the month of March 2013Common

StockRetained Earnings

Stockholders’ Equity

Balance at March 1, 2013 $0 $0 $0Stock issuance 6,500 6,500DividendsNet income _____ 20,650 20,650

Balance at March 31, 2013 $6,500 $20,650 $27,150

c. WILDLIFE PICTURE GALLERYBalance Sheet

March 2013Assets LiabilitiesCash $51,200 Payable to artists** $12,500Advance receivable* 500 Notes payable 10,000

Accounts payable 2,050 Total liabilities 24,550Stockholders’ equity 27,150Total liabilities and

Total assets $51,700 stockholders’ equity $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.



fa4e sm ch02

Documents

recognition of revenues

recognition of expenses

equity transactions

income statement

record transactions

payable longterm debt

capital common

accrual accounting