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
companys 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.

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 firms ability to pay its
obligations as they come due; measures of a firms liquidity. The current ratio is
computed by dividing the firms 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 firms
liquidity. The quick ratio is computed by dividing the firms 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 elses 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

2-4
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).

2-6
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)
h. Decrease equity (Interest Expense)
i.
Decrease equity (Utilities Expense)


2-8
M2-26. (10 minutes)

a. Increase assets (Office Equipment)
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)
g. Decrease assets (Cash)
Decrease equity (Salaries Expense)
h. Decrease assets (Cash)
Decrease liabilities (Accounts Payable)
i.

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 earnedper the revenue
recognition principle. Likewise, the expense is reported in 2012 when it is incurredper
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
-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

2-10
+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

2-12
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. Langs 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 assetsneither too much, nor too little.

2-14
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
$ 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
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.

2-16
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
Income tax expense ..................................................... 3,468
Retained earnings ........................................................75,349
Net earnings .................................................................10,904
Property, plant and equipment (net) .............................20,377
Selling, general and admin expense ............................26,421
Accounts receivable ..................................................... 6,068
Total liabilities ...............................................................68,209
Stockholders' equity .....................................................64,035
Other non-operating income, net
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 years 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
Depreciation and amortization expense ....................... 2,084
Retained earnings ........................................................ 12,698
Net earnings ................................................................. 2,920
Property, plant & equipment, net .................................. 25,493
Selling, general admin. expense & other (net) ............. 13,469
Accounts payable ......................................................... 6,625
Total liabilities and shareholders investment ............... 43,705
Total shareholders investment .................................... 15,487
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%

2-18
E2-40. (15 minutes)

a.
Briggs & Stratton ($ millions)
Amount
Classification
Net sales ......................................................................$ 2,110
Interest expense ...........................................................
23
Net income ...................................................................
24
Property, plant & equipment, net ..................................
329
Eng. selling, general & admin. expense .......................
301
Accounts receivable, net ..............................................
249
Total liabilities ...............................................................
928
Shareholders investment .............................................
738
b. Total assets = Total liabilities + Shareholders investment

Total assets = $928 + $738 = $1,666
$2,110 Total expenses = $24
c. Return on equity = Net income/Stockholders equity
= $24 / $738 = 3.25%
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
Cost of goods sold........................................................14,694
Net income ................................................................... 1,684
Property, plant & equipment, net .................................. 8,049
Mktg. res., selling, general expense ............................. 3,761
Accounts receivable, net .............................................. 2,602
Total liabilities ...............................................................13,844
Total stockholders' equity ............................................. 5,529
b. Total assets = Total liabilities + Stockholders equity

Total assets = $13,844 + $5,529 = $19,373
$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. Managements current reporting is consistent with the
assumption that these same or similar types of losses will not reoccur in the
foreseeable future.

2-20
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
+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

2-22
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
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 firms 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.

2-24
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
Net
Income
+3,000
Sales
-2,000
Retained
Earnings
-1,000
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
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
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

2-26
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)
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
2,000
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 years 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 Apples 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 Dells assets to
compensate for the higher risk. But that turns out not to be the case. Apples return
exceeds Dells, suggesting that Apple has superior products or is more efficient in its
operations.
c. Dells gross profit as a percent of sales is 18.5% while Apples 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.

2-28
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 firms 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 firms 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. 3Ms 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
2-30
P2-53. concluded
c. 2006: $8,946/$7,323 = 1.22
2011: $12,240/$5,441 = 2.25.
d. 3Ms 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 3Ms 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, ANFs 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, ANFs 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 firms 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 firms advantage as more of its assets are
deployed in productive activities. The change, however, suggests a more
conservative financing of the company.
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.
Net
Income
+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

2-32
+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
500
4. Cash (+A) ...............................................................................

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

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

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)

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)
Common Stock (SE)

7,000
+
(1)
(9)

900

500
Counseling Services Rev. (R)

1,200
6,800
+
(3)
Utilities Expense (E)

370

100
(8)
(11)
Advertising Expense (E)

500
+
(5)
(6)

2-34
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 companys business model
depends on high inventory turnoverthat is, it works diligently to minimize the
quantity of inventory to avoid product obsolescence. The surprise is that 58% of
Apples 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 Apples 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. Apples 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. Harleys 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.

2-36
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%
Nikes 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
-
Common
Stock
+1,600
= Accounts
Payable
-900
-1,800
+1,800
Cash
Prepaid
Insurance
+15,900
Accounts
Receivable
-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
-1,600
Retained
Earnings
-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

2-38
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
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

15,900
Flight services revenue (+R,+SE).......................................
15,900
continued next page

2-39
P2-61. concluded
8. Accounts payable (-L) .............................................................
1,500
Cash (-A) ............................................................................
1,500
9. Cash (+A) ...............................................................................

13,200
13,200
10. Wages expense (+E,-SE) .......................................................

16,000
Cash (-A) ............................................................................
16,000
11. Fuel expense (+E,-SE) ...........................................................

3,500
3,500
12. Retained earnings (dividend paid) (-SE) .................................

3,000
Cash (-A) ............................................................................
3,000
b.
+
(1)
(6)
(9)
(2)
(4)
(5)
(8)
(10)
(12)

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

900
(8)

1,500 1,600
3,500
Common Stock (SE)

50,000
(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)

3,000
+
(3)
(11)
Fuel Expense (E)

3,500

2-40
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
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. Targets credit card
revenue and costs are netted and included in operating expenses.
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%
Targets 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.

2-42
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
-
= Accounts
Cash
Net
Income
Payable
2. Paid rent in cash:

$3,600
-3,600
Cash
3. Billed clients $11,500
+11,500
Accounts
Receivable
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

interest on note
+3,600
- Rent Expense =
-500
= Accounts
Payable
5. Cash collected on
account: $10,000
-3,600
Retained
Earnings
$4,080
+ $5,500 +
$4,600
$11,500
$7,200
continued next page

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.
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
2-45
P2-66. (30 minutes)

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

3,600
Cash (-A) ............................................................................
3,600

11,500
Services revenue (+R,+SE) ................................................
11,500
4. Advertising expense (+E, -SE)................................................

500
500
5. Cash (+A) ...............................................................................

10,000
10,000
6. Wages expense (+E, -SE) ......................................................

2,400
Cash (-A) ............................................................................
2,400
7. Utilities expense (+E, -SE) ......................................................

680
680
8. Interest expense (+E, -SE) .....................................................20

Cash (-A) ............................................................................
20

900
Cash (-A) ............................................................................
900
10. Equipment (+A).......................................................................

4,000
Cash (-A) ............................................................................
4,000
continued next page

2-46
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)
+
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
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.
-

+
600
1,000 Beg. Bal.
500
(4)
680
(7)
1,580 End Bal.
Notes Payable (L)
+
2,500 Beg. Bal.
+
(8)
End Bal.

680
680
20
20
500
Wages Expense (E)
2,400
2,400

2-47
P2-67. (45 minutes)

a & b.
Balance Sheet
Transaction
Beginning Balances
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
+8,100
Accounts
Receivable
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
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

2-48
-$950
Payable
8. Received invoice for

utilities: $410.
TOTALS
Net
Income
-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.
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
2. Cash (+A) ...............................................................................

8,800
8,800

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

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
410

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

2-50
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

410

50

500 600
410
(8)
(11)
(2)
(3)
(1)
Rent Expense (E)

950
+
(7)
Salary Expense (E)

4,000
Common Stock (SE)

6,000
(8)
+
Beg. Bal.
(5)
+
Beg. Bal.

+
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

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

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.

2-52
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 Andreas ethical requirements.

2-53

Fa4e SM Ch02

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Fa4e SM Ch02

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Chapter 2

Constructing Financial Statements

LO2 Use the financial statement

58, 60, 64,

53, 55, 57,

32, 34, 36,

50, 53, 54,

Cambridge Business Publishers, 2014

An asset is something that we own that is expected to provide future benefits. A

The revenue recognition principle requires that revenues be recognized when

Accrual accounting entails the recognition of revenue under the revenue

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

The statement of stockholders equity provides information relating to all events

Cambridge Business Publishers, 2014

An intangible asset is an asset that we cannot touch. To be included on the

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

Cambridge Business Publishers, 2014

M2-18. (10 minutes)

M2-19. (15 minutes)

M2-20. (20 minutes)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M2-21. (10 minutes)

Statement of stockholders equity, Balance sheet

M2-22. (10 minutes)

M2-23. (10 minutes)

Cambridge Business Publishers, 2014

M2-24. (15 minutes)

January 29, 2011

January 28, 2012

M2-25. (10 minutes)

Decrease equity (Utilities Expense)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M2-26. (10 minutes)

Decrease assets (Cash)

M2-27. (10 minutes)

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

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

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

Cambridge Business Publishers, 2014

M2-28. (10 minutes)

M2-29. (15 minutes)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M2-30. (10 minutes)

b. Inventory (+A) ..........................................................................

c. Accounts receivable (+A) .........................................................

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

M2-31. (10 minutes)

Accounts Receivable (A)

Cost of Goods Sold (E)

Common Stock (SE)

Cambridge Business Publishers, 2014

c. Net working capital = current assets current liabilities

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

E2-33. (30 minutes)

b. Equity, Beginning ($12,000 - $5,000)

c. Equity, Beginning ($28,000 - $19,000)

Cambridge Business Publishers, 2014