Chapter 01 - Business Decisions and Financial Accounting

Chapter 1
Business Decisions and Financial Accounting

ANSWERS TO QUEST ONS 1. Accounting is a system of analyzing, recording, and summarizing the results of a businesss activities and then reporting them to decision makers.

2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy to establish. Another advantage is that income from a sole proprietorship is taxed only once in the hands of the individual proprietor (income from a corporation is taxed in the corporation and then again in the hands of the individual proprietor . A disadvantage of operating as a sole proprietorship, rather than a corporation, is that the individual proprietor can be held responsible for the debts of the business. !. "inancial accounting focuses on preparing and using the financial statements that are made available to o#ners and external users such as customers, creditors, and potential investors #ho are interested in reading them. $anagerial accounting focuses on other accounting reports that are not released to the general public, but instead are prepared and used by employees, supervisors, and managers #ho run the company. %. "inancial reports are used by both internal and external groups and individuals. &he internal groups are comprised of the various managers of the business. &he external groups include investors, creditors, governmental agencies, other interested parties, and the public at large. '. &he business itself, not the individual stockholders #ho o#n the business, is vie#ed as o#ning the assets and o#ing the liabilities on its balance sheet. A businesss balance sheet includes the assets, liabilities, and stockholders e(uity of only that business and not the personal assets, liabilities, and e(uity of the stockholders. &he financial statements of a company sho# the results of the business activities of only that company.

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Chapter 01 - Business Decisions and Financial Accounting

).

(a *perating + &hese activities are directly related to earning profits. &hey include buying supplies, making products, serving customers, cleaning the premises, advertising, renting a building, repairing e(uipment, and obtaining insurance coverage. (b ,nvesting + &hese activities involve buying and selling productive resources #ith long lives (such as buildings, land, e(uipment, and tools , purchasing investments, and lending to others. (c "inancing + Any borro#ing from banks, repaying bank loans, receiving contributions from stockholders, or paying dividends to stockholders are considered financing activities. &he heading of each of the four primary financial statements should include the follo#ing. (a /ame of the business (b /ame of the statement (c 0ate of the statement, or the period of time

-.

1. (a &he purpose of the balance sheet is to report the financial position (assets, liabilities and stockholders e(uity of a business at a point in time. (b &he purpose of the income statement is to present information about the revenues, expenses, and net income of a business for a specified period of time. (c &he statement of retained earnings reports the #ay that net income and the distribution of dividends affected the financial position of the company during the period. (d &he purpose of the statement of cash flo#s is to summarize ho# a businesss operating, investing, and financing activities caused its cash balance to change over a particular period of time. 2. &he income statement, statement of retained earnings, and statement of cash flo#s #ould be dated 3"or the 4ear 5nded 0ecember !1, 2662,7 because they report the inflo#s and outflo#s of resources during a period of time. ,n contrast, the balance sheet #ould be dated 3At 0ecember !1, 2662,7 because it represents the assets, liabilities and stockholders e(uity at a specific date. 16. /et income is the excess of total revenues over total expenses. A net loss occurs if total expenses exceed total revenues. 11. &he accounting e(uation for the balance sheet is. Assets 8 9iabilities : ;tockholders 5(uity. Assets are the economic resources controlled by the company. 9iabilities are amounts o#ed by the business. ;tockholders e(uity is the o#ners claims to the business. ,t includes amounts contributed to the business (by investors through purchasing the companys stock and the amounts earned and accumulated through profitable business operations.

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Chapter 01 - Business Decisions and Financial Accounting

12. &he e(uation for the income statement is <evenues + 5xpenses 8 /et ,ncome. <evenues are increases in a companys resources, arising primarily from its operating activities. 5xpenses are decreases in a companys resources, arising primarily from its operating activities. /et ,ncome is e(ual to revenues minus expenses. (,f expenses are greater than revenues, the company has a /et 9oss. 1!. &he e(uation for the statement of retained earnings is. =eginning <etained 5arnings : /et ,ncome > 0ividends 8 5nding <etained 5arnings. ,t begins #ith beginning>of>the>year retained earnings #hich is the prior years ending retained earnings reported on the prior years balance sheet. &he current year?s net income reported on the income statement is added and the current year?s dividends are subtracted from this amount. &he ending retained earnings amount is reported on the end>of>year balance sheet. 1%. &he e(uation for the statement of cash flo#s is. @ash flo#s from operating activities : @ash flo#s from investing activities : @ash flo#s from financing activities 8 @hange in cash for the period. @hange in cash for the period : =eginning cash balance 8 5nding cash balance. &he net cash flo#s for the period represent the increase or decrease in cash that occurred during the period. @ash flo#s from operating activities are cash flo#s directly related to earning income (normal business activity . @ash flo#s from investing activities include cash flo#s that are related to the ac(uisition or sale of the companys long>term assets. @ash flo#s from financing activities are directly related to the financing of the company. 1'. @urrently, the "inancial Accounting ;tandards =oard ("A;= is given the primary responsibility for setting the detailed rules that become Aenerally Accepted Accounting Brinciples (AAAB in the Cnited ;tates. (,nternationally, the ,nternational Accounting ;tandards =oard (,A;= has the responsibility for setting accounting rules kno#n as ,nternational "inancial <eporting ;tandards (,"<; . 1). &he main goal of accounting rules is to ensure that companies produce useful financial information for present and potential investors, lenders, and other creditors in making decisions in their capacity as capital providers. "inancial information must sho# relevance and faithful representation, as #ell as be comparable, verifiable, timely, and understandable. 1-. An ethical dilemma is a situation #here follo#ing one moral principle #ould result in violating another. &hree steps that should be considered #hen evaluating ethical dilemmas are. (a ,dentify #ho #ill benefit from the situation (often, the manager or employee and ho# others #ill be harmed (other employees, the companys reputation, o#ners, creditors, and the public in general . (b ,dentify the alternative courses of action. (c @hoose the alternative that is the most ethical + that #hich you #ould be proud to have reported in the ne#s media. *ften, there is no one right ans#er and hard choices #ill need to be made. "ollo#ing strong ethical practices is a key part of ensuring good financial reporting by businesses of all sizes.

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Chapter 01 - Business Decisions and Financial Accounting

11. Accounting frauds and cases involving academic dishonesty are similar in many respects. =oth involve deceiving others in an attempt to influence their actions or decisions, often resulting in temporary personal gain for the deceiver. "or example, #hen an accounting fraud is committed, financial statement users may be misled into making decisions they #ouldnt have made had the fraud not occurred (e.g., creditors might loan money to the company, investors might invest in the company, or stockholders might re#ard top managers #ith big bonuses . Dhen academic dishonesty is committed, instructors might assign a higher grade than is #arranted by the students individual contribution. Another similarity is that, as a conse(uence of the deception, innocent bystanders may be adversely affected by fraud and academic dishonesty. "raud may re(uire the company to charge higher prices to customers to cover costs incurred as a result of the fraud. Academic dishonesty may lead to stricter grading standards, #ith significant deductions taken for inade(uate documentation of sources referenced. A final similarity is that if fraud and academic dishonesty are ultimately uncovered, both are likely to lead to adverse long>term conse(uences for the perpetrator. "raudsters may be fined, imprisoned, and encounter an abrupt end to their careers. ;tudents #ho cheat may be penalized through lo#er course grades or expulsion, and might find it impossible to obtain academic references for employment applications.

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Chapter 01 - Business Decisions and Financial Accounting

Authors! Reco""ended Solution Ti"e #Ti"e in "inutes$

Mini-exercises No. 1 2 ! % ' ) 1 2 16 11 12 1! 1% Time ! 12 12 ) % ) ) ) % % ! ! ) 12

Exercises No. 1 2 ! % ' ) 1 2 16 11 12 Time 16 16 1' 2' 2' 16 1' 16 26 16 ! !

Problems No. @B1>1 @B1>2 @B1>! BA1>1 BA1>2 BA1>! B=1>1 B=1>2 B=1>! Time %' 16 )6 %' 16 '6 %' 16 '6

Skills Development Cases* No. Time 1 26 2 26 ! !6 % !6 ' 26 ) !6 %'

Continuing Case No. 1 Time %'

E 0ue to the nature of cases, it is very difficult to estimate the amount of time students #ill need to complete them. As #ith any open>ended proFect, it is possible for students to devote a large amount of time to these assignments. Dhile students often benefit from the extra effort, #e find that some become frustrated by the perceived difficulty of the task. 4ou can reduce student frustration and anxiety by making your expectations clear, and by offering suggestions (about ho# to research topics or #hat companies to select . &he skills developed by these cases are indicated belo#. @ase "inancial Analysis <esearch 5thical <easoning @ritical &hinkin g &echnolog y Driting &eam#ork

1 2 ! % ' ) -

x x x x x x x

x x x x x

x x x

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Chapter 01 - Business Decisions and Financial Accounting

ANSWERS TO % N &E'ERC SES %1&1 A((re)iation (1 (2 (! (% (' %1&* , " 0 5 A @ G A = 9 H I Ter" or A((re)iation (1 ;5@ (2 ,nvesting activities (! Brivate company (% @orporation (' Accounting () Bartnership (- "A;= (1 "inancing activities (2 Cnit of measure (16 AAAB (11 Bublic company (12 *perating activities A. =. @. 0. 5. ". A. I. ,. G. H. 9. De+inition A system that collects and processes financial information about an organization and reports that information to decision makers. $easurement of information about a business in the monetary unit (dollars or other national currency . An unincorporated business o#ned by t#o or more persons. A company that sells shares of its stock privately and is not re(uired to release its financial statements to the public. An incorporated business that issues shares of stock as evidence of o#nership. =uying and selling productive resources #ith long lives. &ransactions #ith lenders (borro#ing and repaying cash and stockholders (selling company stock and paying dividends . Activities directly related to running the business to earn profit. ;ecurities and 5xchange @ommission. "inancial Accounting ;tandards =oard. A company that has its stock bought and sold by investors on established stock exchanges . Aenerally accepted accounting principles. @BA AAAB "A;= ;5@ ,"<; Full Designation @ertified Bublic Accountant Aenerally Accepted Accounting Brinciples "inancial Accounting ;tandards =oard ;ecurities and 5xchange @ommission ,nternational "inancial <eporting ;tandards

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Chapter 01 - Business Decisions and Financial Accounting

%1&, " , @ A = I 0 A 5 G (1 (2 (! (% (' () ((1 (2 (16 Ter" <elevance "aithful <epresentation @omparability ;eparate 5ntity Assets 9iabilities ;tockholders 5(uity <evenues 5xpenses Cnit of $easure De+inition A. &he financial reports of a business are assumed to include the results of only that businesss activities. =. &he resources o#ned by a business. @. "inancial information that can be compared across businesses because similar accounting methods have been applied. 0. &he total amounts invested and reinvested in the business by its o#ners. 5. &he costs of business necessary to earn revenues. ". A feature of financial information that allo#s it to influence a decision. A. 5arned by selling goods or services to customers. I. &he amounts o#ed by the business. ,. "inancial information that depicts the economic substance of business activities. G. &he assumption that states that results of business activities should be reported in an appropriate monetary unit.

%1&9 A A 5 5 < 9 ;5 %1&. A < A 5 A 5 9 ;5 (1 (2 (! (% (' () ((1 Accounts <eceivable ;ales <evenue 5(uipment ;upplies 5xpense @ash Advertising 5xpense Accounts Bayable <etained 5arnings (1 (2 (! (% (' () ((1 Accounts Bayable Accounts <eceivable @ash ,ncome &ax 5xpense ;elling and Administrative 5xpenses ;ales <evenue /otes Bayable <etained 5arnings

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Chapter 01 - Business Decisions and Financial Accounting

%1&/ A 5 A A 5 < 9 ;5 9 %1&0 9 ;5 A A 9 A ;5 5 < A %1&1 9 A ;5 A 9 ;5 A < 5 5 (1 Accounts Bayable (2 @ash (! <etained 5arnings (% Broperty and 5(uipment (' /otes Bayable () @ontributed @apital (- Accounts <eceivable (1 ;ales <evenue (2 ;elling and Administrative 5xpenses (16 Bromotion 5xpense (1 Accounts Bayable (2 @ontributed @apital (! 5(uipment (% Accounts <eceivable (' /otes Bayable () @ash (- <etained 5arnings (1 ;elling and Administrative 5xpenses (2 ;ales <evenue (16 ;upplies (1 (2 (! (% (' () ((1 (2 Accounts <eceivable ;elling and Administrative 5xpenses @ash $achinery Bromotion and Advertising 5xpenses ;ales <evenue /otes Bayable <etained 5arnings Accounts Bayable

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Chapter 01 - Business Decisions and Financial Accounting

%1&2 0 = 0 A @ = 0 A %1&13 ;<5E =J; ,J; =J; ;@" =J; ,J;, ;<5 ;@" (1 (2 (! (% (' () ((1 0ividends &otal ;tockholders 5(uity ;ales <evenue &otal Assets @ash "lo#s from *perating Activities &otal 9iabilities /et ,ncome @ash "lo#s from "inancing Activities (1 (2 (! (% (' () ((1 Ele"ent @ash "lo#s from "inancing Activities 5xpenses @ash "lo#s from ,nvesting Activities Assets 0ividends <evenues @ash "lo#s from *perating Activities 9iabilities A. =. @. 0. Financial State"ent =alance ;heet ,ncome ;tatement ;tatement of <etained 5arnings ;tatement of @ash "lo#s

E An argument could be made for also including ;@" as a plausible ans#er because the ;@" reports 30ividends paid in cash.7 &he ans#er ;@" has been excluded here because (technically the caption #ould have to read 30ividends paid in cash7 if it #ere to be reported on the ;@". %1&11 (" * " (* (, " %1&1* (, * , (" (* " (1 (2 (! (% (' () @ash paid to purchase e(uipment @ash collected from customers @ash received from selling e(uipment @ash paid for dividends @ash paid to suppliers and employees @ash received from issuing stock (1 (2 (! (% (' () @ash paid for dividends @ash collected from customers @ash received #hen signing a note @ash paid to suppliers and employees @ash paid to purchase e(uipment @ash received from issuing stock

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Chapter 01 - Business Decisions and Financial Accounting

%1&1, ;&*/5 @C9&C<5 @*<B*<A&,*/ ;tatement of <etained 5arnings "or the 4ear 5nded 0ecember !1, 2662 <etained 5arnings, Ganuary 1, 2662 Add. /et ,ncome ;ubtract. 0ividends <etained 5arnings, 0ecember !1, 2662 K 6 !),666 (1',666 K *14333

;&*/5 @C9&C<5 @*<B*<&A&,*/ ;tatement of <etained 5arnings "or the 4ear 5nded 0ecember !1, 2616 <etained 5arnings, Ganuary 1, 2616 Add. /et ,ncome ;ubtract. 0ividends <etained 5arnings, 0ecember !1, 2616 K 21,666 %',666 (26,666 K %)4333

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Chapter 01 - Business Decisions and Financial Accounting

%1&1<e(. 1
;*C&ID5;& A,<9,/5;, ,/@. ,ncome ;tatement "or the 4ear 5nded 0ecember !1, 266( mounts in millions!

<evenues &icket <evenues *ther <evenue &otal <evenue 5xpenses ;alaries 5xpense Aircraft "uel 5xpense *ther *perating 5xpenses <epairs and $aintenance 5xpense 9anding "ees 5xpense ,nterest 5xpense ,ncome &ax 5xpense &otal 5xpenses /et ,ncome <e(. 2
;*C&ID5;& A,<9,/5;, ,/@.

K 2,1)1 !!) 16,12!,21! 2,'!) 2,1%' )1) ')6 )2 %1! 2,''2 K )%'

;tatement of <etained 5arnings "or the 4ear 5nded 0ecember !1, 266( mounts in millions! <etained 5arnings, Ganuary 1, 266Add. /et ,ncome ;ubtract. 0ividends <etained 5arnings, 0ecember !1, 266K %,1')%' (1% K -4011

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Chapter 01 - Business Decisions and Financial Accounting

%1&1- #continued$ <e(. !

;*C&ID5;& A,<9,/5;, ,/@. =alance ;heet At 0ecember !1, 266( mounts in millions!

Assets @ash Accounts <eceivable ;upplies Broperty and 5(uipment *ther Assets &otal Assets 9iabilities Accounts Bayable /otes Bayable *ther 9iabilities &otal 9iabilities ;tockholders 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders 5(uity &otal 9iabilities and ;tockholders 5(uity <e(. %

K 2,21! 1%' 2'2 16,1-% 2,'11 K 1),--2 K 1,-!1 %,22! !,162,1!1 2,1'! %,-11 ),2%1 K 1),--2

;outh#est Airlines financed its assets primarily #ith liabilities (K2,1!1 as opposed to stockholders e(uity (K),2%1 .

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Chapter 01 - Business Decisions and Financial Accounting

ANSWERS TO E'ERC SES E1&1 a Assets 8 9iabilities : ;tockholders 5(uity 8 K1!,-'6 : K%,%'6 8 K11,266 8 Assets reported on the balance sheet b /et ,ncome 8 <evenue + 5xpenses 8 K16,'66 > K2,266 8 K1,!66 8 /et income reported on the income statement c =eginning <etained 5arnings (<J5 : /et ,ncome + 0ividends 8 5nding <J5 K!,'66 : K1,!66 > K'66 8 K%,!66

d =eginning @ash : @ash "lo#s from *perating Activities : @ash "lo#s from ,nvesting Activities : @ash "lo#s from "inancing Activities 8 5nding @ash K1,666 : K1,)66 : (K1,666 : (K266 8 K-66 E1&* a Assets 8 9iabilities : ;tockholders 5(uity 8 K11,'66 : K)1,666 8 K-2,'66 8 Assets reported on the balance sheet b /et ,ncome 8 <evenue + 5xpenses 8 K!2,166 + K11,2'6 8 K1!,1'6 8 /et income reported on the income statement c =eginning <etained 5arnings (<J5 : /et ,ncome + 0ividends 8 5nding <J5 K26,'66 : K1!,1'6 + K%,266 8 K21,-'6

d =eginning @ash : @ash "lo#s from *perating Activities : @ash "lo#s from ,nvesting Activities : @ash "lo#s from "inancing Activities 8 5nding @ash K!,266 : K1',-66 : (K-,266 : (K',!66 8 K),%66

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Chapter 01 - Business Decisions and Financial Accounting

E1&, <e(. 1 0;D, ,nc. =alance ;heet At /ovember 1, 2661 (in thousands Assets @ash Accounts <eceivable Broperty, Blant, and 5(uipment *ther Assets &otal Assets 9iabilities Accounts Bayable /otes Bayable *ther 9iabilities &otal 9iabilities ;tockholders 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders 5(uity &otal 9iabilities and ;tockholders 5(uity <e(. 2 $ost of the financing as of /ovember 1 came from stockholders. &he stockholders have financed K%-6,-1) of the total assets and creditors have financed only K!1%,'2of the total assets of the company. K %','-6 11,111 2!!,)!1 %2%,22% K-1',!1! K1!),%6' 22,6%% -2,1%1 !1%,'2221,2%1 1-2,'!1 %-6,-1) K-1',!1!

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Chapter 01 - Business Decisions and Financial Accounting

E1&<e(. 1 <5A05< 0,<5@& =alance ;heet At 0ecember !1, 2662 Assets @ash Accounts <eceivable Broperty and 5(uipment K %-,'66 2),266 %1,666 9iabilities Accounts Bayable /ote Bayable &otal 9iabilities ;tockholders 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders 5(uity &otal 9iabilities and K122,%66 ;tockholders? 5(uity 21,666 1!,''6 111,''6 K122,%66 K 1,666 2,1'6 16,1'6

&otal Assets

<e(. 2 =eginning <etained 5arnings (<J5 : /et ,ncome + 0ividends 8 5nding <J5, so /et ,ncome8 5nding <J5 : 0ividends > =eginning <J5 8 K1!,''6 : 6 + 6 8 K1!,''6 /et income for the year #as K1!,''6. &his is the first year of operations and no dividends #ere declared or paid to stockholdersL therefore, retained earnings is K1!,''6 (#hich represents income for one year . <e(. ! $ost of the financing as of 0ecember !1, 2662 came from stockholders. &he stockholders have financed K111,''6 of the total assets and creditors have financed only K16,1'6 of the total assets of the company. <e(.% =eginning <etained 5arnings (<J5 : /et ,ncome + 0ividends 8 5nding <J5, so 5nding <J5 8 K1!,''6 : !,666 + 2,666 8 K1%,''6 <etained 5arnings at 0ecember !1, 2616 #ould be K1%,''6.

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Chapter 01 - Business Decisions and Financial Accounting

E1&. Re56 1 9abel a . b . c. d . e . f. g . h . i. F. @oins and currency Amounts HM;#iss o#es to suppliers of #atches Amounts HM;#iss can collect from customers Amounts o#ed to bank for loan to buy building Broperty on #hich buildings #ill be built Amounts paid from profits to stockholders 5arned by HM;#iss by selling #atches Cnused paper in HM;#iss head office @ost of paper used up during month Amounts contributed to HM;#iss by stockholders @ash Accounts Bayable Accounts <eceivable /otes Bayable 9and 0ividends Datch <evenue ;upplies ;upplies 5xpense @ontributed @apital Re56 * &ype A 9 A 9 A ;5 < A 5 ;5

E1&/ <e(. 1 <5AA9 5/&5<&A,/$5/& A<*CB ,ncome ;tatement "or the Nuarter 5nded Gune 2), 2661 (in thousands <evenues Admissions <evenues @oncessions <evenues *ther <evenues &otal <evenues 5xpenses "ilm <ental 5xpenses <ent 5xpense Aeneral and Administrative 5xpenses @oncessions 5xpenses *ther 5xpenses &otal 5xpenses /et ,ncome

K%'',-66 111,266 !1,266 )-',166 2%-,666 26,666 )',-66 2','66 2!!,166 ))2,666 K 1!,166

&he (uestion marks in the exercise correspond to &otal 5xpenses of K))2,666 and /et ,ncome of K1!,166, as determined above.

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Chapter 01 - Business Decisions and Financial Accounting

<e(. 2 <egals main source of revenue is theater admissions and its biggest expense is its film rental expense.

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Chapter 01 - Business Decisions and Financial Accounting

E1&0 I*$5 <5A9&4, ,/@*<B*<A&50 ,ncome ;tatement "or the 4ear 5nded 0ecember !1, 2662 <evenue. ;ales <evenue 5xpenses. ;elling 5xpenses Bromotion and Advertising 5xpenses ,nterest 5xpense ,ncome &ax 5xpense &otal 5xpenses /et ,ncome K1)),666 2-,666 2,62' ),!66 11,'66 1!6,12' K !',1-'

/ote that dividends declared are not an expense. As a distribution of the companys prior profits, they #ill be deducted from <etained 5arnings. E1&1 A = @ 0 5 /et ,ncome 8 K166,666 > K12,666 8 K11,666 ;tockholders 5(uity 8 K1'6,666 > K-6,666 8 K16,666 &otal <evenues 8 K16,666 : K12,666 8 K22,666 &otal 9iabilities 8 K112,666 > K)6,666 8 K'2,666 /et ,ncome (9oss 8 K16,666 > K1),666 8 K(),666 ;tockholders 5(uity 8 K16%,666 > K2),666 8 K-1,666 &otal 5xpenses 8 K'6,666 > K1!,666 8 K!-,666 &otal Assets 8 K22,666 : K--,666 8 K22,666 &otal <evenues 8 K11,666 > K),666 8 K-',666 &otal Assets 8 K-!,666 : K21,666 8 K161,666

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Chapter 01 - Business Decisions and Financial Accounting

E1&2 <e(. 1 $,A$, @9A4 @*<B*<A&,*/ ,ncome ;tatement "or the $onth 5nded Ganuary !1, 2662 &otal <evenues *perating 5xpenses /et ,ncome $,A$, @9A4 @*<B*<A&,*/ =alance ;heet At Ganuary !1, 2662 Assets. @ash Accounts <eceivable ;upplies &otal Assets 9iabilities. Accounts Bayable &otal 9iabilities ;tockholders? 5(uity. @ontributed @apital (2,)66 shares <etained 5arnings (from the income statement above) &otal ;tockholders 5(uity &otal 9iabilities and ;tockholders? 5(uity <e(. 2 $iami @lay @orporation should have no problem paying its liabilities since it has more total assets than total liabilities. ,n fact, it has over three times as many total assets as liabilities (K2),166JK2',-66 8 !.-- times . &his means that $iami @lay @orporation could pay its liabilities more than three times over if all assets on hand at Ganuary !1, 2662, #ere converted to cash. *f course, not all assets #ill be converted into cash right a#ay. 5ven so, looking only at the amount of cash at the end of Ganuary, #e see that $iami @lay has enough cash to cover all its liabilities. &his is a very strong financial position. K!6,166 2',!66 %6,-66 K2),166 K2',-66 2',-66 !6,)66 %6,'66 -1,166 K2),166 K1!1,666 26,'66 K %6,'66

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Chapter 01 - Business Decisions and Financial Accounting

E1&13 <e(. 1 Average monthly revenue, K21),666 12 8 K11,666 <e(. 2 Average monthly salaries and #ages expense, K!!,666 12 8 K2,-'6 <e(. ! Advertising is an expense because it represents the cost of ads that #ere run during the period to generate revenue. <e(. % &he dividends are not reported as an expense because they represent a distribution of prior profits to stockholders. @onse(uently, they appear only on the statement of retained earnings, not the income statement. <e(. ' ;tanding alone, the income statement does not report, or make it possible to determine, the ending cash balance. ;ome revenues might not have been collected, and some expenses might not have been paid by the end of the year. &he amount of cash on 0ecember !1, 2662, #ould be reported on the balance sheet under assets and on the cash flo# statement as the final amount sho#n. E1&11 (* * " " (, E1&1* (, * " (* (" , (1 (2 (! (% (' () Burchases of e(uipment @ash received from customers @ash received from issuing stock @ash paid to suppliers and employees @ash paid on notes payable @ash received from selling e(uipment (1 (2 (! (% (' @ash paid to suppliers and employees @ash received from customers @ash received from borro#ing long>term debt @ash received from issuing stock @ash paid to purchase e(uipment

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Chapter 01 - Business Decisions and Financial Accounting

ANSWERS TO COAC7ED 8ROB9E%S C81&1 <e(. 1 /C@95A< @*$BA/4 ,ncome ;tatement "or the 4ear 5nded 0ecember !1, 2662 ;ales <evenue 5xpenses *perating 5xpenses *ther 5xpenses &otal 5xpenses /et ,ncome <e(.2 /C@95A< @*$BA/4 ;tatement of <etained 5arnings "or the 4ear 5nded 0ecember !1, 2662 <etained 5arnings, Ganuary 1, 2662 Add. /et ,ncome ;ubtract. 0ividends <etained 5arnings, 0ecember !1, 2662 <e(. ! /C@95A< @*$BA/4 =alance ;heet At 0ecember !1, 2662 Assets @ash Accounts <eceivable ;upplies 5(uipment &otal Assets 9iabilities Accounts Bayable /otes Bayable &otal 9iabilities ;tockholders 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders 5(uity &otal 9iabilities and ;tockholders 5(uity K 12,666 '2,'66 1,666 !),666 K11','66 K !6,221,%-6 !1,-))1,21! 21,-'6 1!,-!! K11','66 6 21,2'6 (266 K 21,-'3 K K 11,666 '-,266 1,1'6 )),6'6 K 21,2'6

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Chapter 01 - Business Decisions and Financial Accounting

C81&* <e(. 1 /uclear @ompanys income statement reported net income of K21,2'6, suggesting that the company #as profitable because revenues exceeded expenses. <e(. 2 /uclear @ompanys statement of retained earnings reported a retained earnings balance of K21,-'6, after dividends of K266 had been subtracted. &his suggests the company could have sustained additional dividends of K21,-'6, if sufficient cash #ere available to pay them. As it turns out, the companys balance sheet reports cash of K12,666, suggesting that only K12,666 in additional dividends could be paid (#ithout borro#ing additional cash . <e(. ! /uclear @ompanys balance sheet reports total liabilities of K!1,-)- and stockholders e(uity of K1!,-!!, indicating that the company is financed mainly by stockholders. <e(. % /uclear @ompany #as founded at the beginning of the year, so it began #ith no cash. &he balance sheet reports a cash balance of K12,666 at the end of the year. &he reasons for this increase of K12,666 #ould be sho#n in the statement of cash flo#s.

C81&, <e(. 1 9,"5 &,$5 ",&/5;;, ,/@. ,ncome ;tatement "or the /ine $onths 5nded ;eptember !6, 2661 (in thousands K'-',))!'6,1!' 1!,262!,)61 26,!1) !1,12' '1),1)1 K '1,16)

Aym <evenues 5xpenses Aym *perating 5xpenses Aeneral and Administrative 5xpense Advertising and $arketing 5xpense ,nterest and *ther 5xpenses ,ncome &ax 5xpense &otal 5xpenses /et ,ncome

1-22

Chapter 01 - Business Decisions and Financial Accounting

C81&, #continued$ <e(. 2 9,"5 &,$5 ",&/5;;, ,/@. ;tatement of <etained 5arnings "or the /ine $onths 5nded ;eptember !6, 2661 (in thousands <etained 5arnings, Ganuary 1, 2661 K122,126 Add. /et ,ncome '1,16) ;ubtract. 0ividends 6 <etained 5arnings, ;eptember !6, 2661 K2'1,)2) <e(. ! 9,"5 &,$5 ",&/5;;, ,/@. =alance ;heet At ;eptember !6, 2661 (in thousands Assets @ash Accounts <eceivable ;upplies Broperty and 5(uipment *ther Assets &otal Assets 9iabilities Accounts Bayable <ent and *ther 5xpenses Bayable /otes Bayable *ther 9iabilities &otal 9iabilities ;tockholders? 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders? 5(uity &otal 9iabilities and ;tockholders? 5(uity K -,112 ',!11 1%,-!2 1,%'1,)%1 11-,161 K1,'2',22'

K 162,))' 112,%12 )%-,126 1),2!% 2'','61 !11,-21 2'1,)2) )%6,%2% K1,'2',22'

1-23

Chapter 01 - Business Decisions and Financial Accounting

C81&, #continued$ <e(. % 9,"5 &,$5 ",&/5;;, ,/@. ;tatement of @ash "lo#s "or the /ine $onths 5nded ;eptember !6, 2661 (in thousands @ash "lo#s from *perating Activities. @ash received from customers K'-%,12% @ash paid to suppliers and employees (%-2,2)' @ash Brovided by *perating Activities 162,''2 @ash "lo#s from ,nvesting Activities. @ash paid to purchase e(uipment @ash received from sale of long>term assets @ash Csed in ,nvesting Activities @ash "lo#s from "inancing Activities. @ash received from issuing common stock <epayments o+ (orro:ings @ash received from borro#ings @ash Brovided by "inancing Activities @hange in @ash =eginning @ash =alance, Ganuary 1, 2661 5nding @ash =alance, ;eptember !6, 2661 (!'%,2'' 1)1,11' (122,!-6 2,6)1 #1,43-,$ 2',''1 21,'-) 1,-)' ',!'% -,112

ANSWERS TO ;ROU8 A 8ROB9E%S 8A1&1 <e(. 1 I,AI B*D5< @*<B*<A&,*/ ,ncome ;tatement "or the 4ear 5nded 0ecember !1, 2616 ;ales <evenue 5xpenses *perating 5xpenses *ther 5xpenses &otal 5xpenses /et ,ncome K21,666 '1,-66 1,1'6 )-,''6 K2!,%'6

1-24

Chapter 01 - Business Decisions and Financial Accounting

8A1&1 #continued$ <e(.2 I,AI B*D5< @*<B*<A&,*/ ;tatement of <etained 5arnings "or the 4ear 5nded 0ecember !1, 2616 <etained 5arnings, Ganuary 1, 2616 Add. /et ,ncome ;ubtract. 0ividends <etained 5arnings, 0ecember !1, 2616 <e(. ! I,AI B*D5< @*<B*<A&,*/ =alance ;heet At 0ecember !1, 2616 Assets @ash Accounts <eceivable ;upplies 5(uipment &otal Assets 9iabilities Accounts Bayable /otes Bayable &otal 9iabilities ;tockholders? 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders? 5(uity &otal 9iabilities and ;tockholders? 5(uity K 1!,!66 2,''6 ',666 1),666 K11!,1'6 K !2,611,1)6 !!,2%'2,16! 21,'66 16,)6! K11!,1'6 6 2!,%'6 (1,2'6 K 21,'63 K

1-25

Chapter 01 - Business Decisions and Financial Accounting

8A1&* <e(. 1 Iigh Bo#er @orporations income statement reported net income of K2!,%'6, suggesting that the company #as profitable because revenues exceeded expenses. <e(. 2 Iigh Bo#er @orporations statement of retained earnings reported a retained earnings balance of K21,'66, after dividends of K1,2'6 had been subtracted. &his suggests the company could have sustained additional dividends of K21,'66, if sufficient cash #ere available to pay them. As it turns out, the companys balance sheet reports cash of K1!,!66, suggesting that only K1!,!66 in additional dividends could be paid (#ithout borro#ing additional cash . <e(. ! Iigh Bo#er @orporations balance sheet reports total liabilities of K!!,2%- and stockholders e(uity of K16,)6!, indicating that the company is financed mainly by stockholders. <e(. % Iigh Bo#er @orporation #as founded at the beginning of the year, so it began #ith no cash. &he balance sheet reports a cash balance of K1!,!66 at the end of the year. &he reasons for this increase of K1!,!66 #ould be sho#n in the statement of cash flo#s. 8A1&, <e(. 1 *;, <5;&AC<A/& BA<&/5<;, ,/@. ,ncome ;tatement "or the 4ear 5nded 0ecember !1, 266) (in millions <evenues. <estaurant ;ales <evenue *ther <evenues &otal <evenues 5xpenses. "ood and ;upplies 5xpenses Ctilities and *ther 5xpenses Dages 5xpense Aeneral and Administrative 5xpenses &otal 5xpenses /et ,ncome K !,226 21 !,2%1 1,%1' 1,16% 1,612!' !,1%1 K 166

1-26

Chapter 01 - Business Decisions and Financial Accounting

8A1&, #continued$ <e(. 2 *;, <5;&AC<A/& BA<&/5<;, ,/@. ;tatement of <etained 5arnings "or the 4ear 5nded 0ecember !1, 266) (in millions <etained 5arnings, Ganuary 1, 266) Add. /et ,ncome 9ess. 0ividends <etained 5arnings, 0ecember !1, 266) <e(. ! *;, <5;&AC<A/& BA<&/5<;, ,/@. =alance ;heet At 0ecember !1, 266) (in millions Assets @ash "ood and ;upply ,nventories Broperty, "ixtures, and 5(uipment *ther Assets &otal Assets 9iabilities and *#ners 5(uity 9iabilities Accounts Bayable /otes Bayable Dages and &axes Bayable *ther 9iabilities &otal 9iabilities ;tockholders 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders 5(uity &otal 9iabilities and ;tockholders 5(uity K 2% 11,'%2 '22 K 2,2'2 K 1,6-% 166 (!2 K 1,1!'

1)) 2!' 126 '11,6!1

1) 1,1!' 1,221 K 2,2'2

1-27

Chapter 01 - Business Decisions and Financial Accounting

8A1&, #continued$ <e(. % *;, <5;&AC<A/& BA<&/5<;, ,/@. ;tatement of @ash "lo#s "or the 4ear 5nded 0ecember !1, 266) (in millions @ash "lo#s from *perating Activities @ash received from customers @ash paid to suppliers and employees @ash Brovided by *perating Activities @ash "lo#s from ,nvesting Activities @ash paid to purchase e(uipment @ash received from sale of fixtures and e(uipment *ther cash outflo#s used for investing activities @ash Csed in ,nvesting Activities @ash "lo#s from "inancing Activities @ash received from bank borro#ings @ommon stock issued to o#ners <epayments of bank borro#ings 0ividends paid in cash *ther cash outflo#s used for financing activities @ash Csed in "inancing Activities @hange in @ash @ash at Ganuary 1, 266) @ash at 0ecember !1, 266)

K 2,2%) (2,'-1 !)1 (!1% !2 (2 (!'% !-' 1) (22% (!2 ()2 (% 16 1% 2%

1-28

Chapter 01 - Business Decisions and Financial Accounting

ANSWERS TO ;ROU8 B 8ROB9E%S 8B1&1 <e(. 1 AB5@ A5<*;BA@5 @*<B*<A&,*/ ,ncome ;tatement "or the 4ear 5nded 0ecember !1, 2662 ;ales <evenue 5xpenses *perating 5xpenses *ther 5xpenses &otal 5xpenses /et ,ncome <e(. 2 AB5@ A5<*;BA@5 @*<B*<A&,*/ ;tatement of <etained 5arnings "or the 4ear 5nded 0ecember !1, 2662 <etained 5arnings, Ganuary 1, 2662 Add. /et ,ncome ;ubtract. 0ividends <etained 5arnings, 0ecember !1, 2662 <e(. ! AB5@ A5<*;BA@5 @*<B*<A&,*/ =alance ;heet At 0ecember !1, 2662 Assets @ash Accounts <eceivable ;upplies 5(uipment &otal Assets 9iabilities Accounts Bayable /otes Bayable &otal 9iabilities ;tockholders? 5(uity @ontributed @apital <etained 5arnings &otal ;tockholders? 5(uity &otal 9iabilities and ;tockholders? 5(uity K 1!,266 2,'66 2,666 1),666 K111,%66 K !6,2-1,226 !1,%2)2,1'! 2%,6'6 1),26! K111,%66 K 6 2',1'6 (1,166 K 2%,6'3 K 2%,666 )6,666 1,1'6 )1,1'6 K 2',1'6

1-2

Chapter 01 - Business Decisions and Financial Accounting

8B1&* <e(. 1 AB5@ Aerospace @orporations income statement reported net income of K2',1'6, suggesting that the company #as profitable because revenues exceeded expenses. <e(. 2 AB5@ Aerospace @orporations statement of retained earnings reported a retained earnings balance of K2%,6'6, after dividends of K1,166 had been subtracted. &his suggests the company could have sustained additional dividends of K2%,6'6, if sufficient cash #ere available to pay them. As it turns out, the companys balance sheet reports cash of K1!,266, suggesting that only K1!,266 in additional dividends could be paid (#ithout borro#ing additional cash . <e(. ! AB5@ Aerospace @orporations balance sheet reports total liabilities of K!1,%2- and stockholders e(uity of K1),26!, indicating that the company is financed mainly by stockholders. <e(. % AB5@ Aerospace @orporation #as founded at the beginning of the year, so it began #ith no cash. &he balance sheet reports a cash balance of K1!,266 at the end of the year. &he reasons for this increase of K1!,266 #ould be sho#n in the statement of cash flo#s.

1-30

Chapter 01 - Business Decisions and Financial Accounting

8B1&, <e(. 1 &I5 @I55;5@AH5 "A@&*<4 ,/@*<B*<A&50 ,ncome ;tatement "or the 4ear 5nded Ganuary 2, 266(in thousands <evenues. <estaurant ;ales <evenue *ther <evenues &otal <evenues 5xpenses. Dages 5xpenses Ctilities and *ther 5xpenses "ood and ;upplies 5xpense Aeneral and Administrative 5xpenses &otal 5xpenses /et ,ncome <e(. 2 &I5 @I55;5@AH5 "A@&*<4 ,/@*<B*<A&50 ;tatement of <etained 5arnings "or the 4ear 5nded Ganuary 2, 266(in thousands <etained 5arnings, =eginning Add. /et ,ncome 9ess. 0ividends <etained 5arnings, 5nding K %%6,'16 11,212 (%2,22% K %-1,-21

K1,!1',!2' 1,1-1 1,!2!,%2) %26,2'%1%,2-1 !!!,'21 -2,-'1 1,2%2,21% K 11,212

1-31

Chapter 01 - Business Decisions and Financial Accounting

8B1&, #continued$ <e(. ! &I5 @I55;5@AH5 "A@&*<4 ,/@*<B*<A&50 =alance ;heet At Ganuary 2, 266(in thousands Assets. @ash Accounts <eceivable "ood and ;upply ,nventories Brepaid <ent Broperty and 5(uipment *ther Assets &otal Assets 9iabilities and ;tockholders 5(uity. 9iabilities. Accounts Bayable /otes Bayable Dages and *ther 5xpenses Bayable *ther 9iabilities &otal 9iabilities ;tockholders 5(uity. @ontributed @apital <etained 5arnings &otal ;tockholders 5(uity &otal 9iabilities and ;tockholders 5(uity

%%,-26 11,)!2 26,--' %!,1-6 -!2,26% 11),%'! K1,6!2,-!1

%','-6 !2,!11 11-,22) 12),612 !21,112

2!2,-%% %-1,-21 -11,'%2 K1,6!2,-!1

1-32

Chapter 01 - Business Decisions and Financial Accounting

8B1&, #continued$ <e(. % &I5 @I55;5@AH5 "A@&*<4 ,/@*<B*<A&50 ;tatement of @ash "lo#s "or the 4ear 5nded Ganuary 2, 266(in thousands @ash "lo#s from *perating Activities @ash received from customers @ash paid to suppliers and employees @ash Brovided by *perating Activities @ash "lo#s from ,nvesting Activities @ash paid to purchase e(uipment @ash received from sale of long>term assets @ash Csed in ,nvesting Activities @ash "lo#s from "inancing Activities Additional investments by stockholders @ash received from borro#ings <epayments of borro#ings 0ividends paid to stockholders @ash Csed in "inancing Activities @hange in @ash @ash at Ganuary !, 266) @ash at Ganuary 2, 266-

K 1,2-),661 (1,12!,!'! 1'2,)''

(2%!,211 11',2-' (12-,2!)

!!,''' 1-',666 (1-6,2%2 (%2,22% (11,)11 1!,-!1 !1,6'2 %%,-26

1-33

Chapter 01 - Business Decisions and Financial Accounting

ANSWERS TO S< 99S DE=E9O8%ENT CASES S1&1 <e(. 1 &he Iome 0epots income statement sho#s net income of K2,2)6 (million , #hich is labeled net earnings. /ote that the amounts on the financial statements are rounded to the nearest million, so this is actually K2,2)6,666,666. <e(. 2 &he income statement sho#s that the amount of sales #as K-1,211 (million for the year ended "ebruary 1, 2662. <e(. ! &he balance sheet sho#s that inventory (merchandise inventories costing K16,)-! (million #as on hand at "ebruary 1, 2662. <e(. % &he balance sheet and statement of cash flo#s sho# @ash (and @ash 5(uivalents totaling K'12 (million at "ebruary 1, 2662. <e(. ' =ecause Iome 0epots stock is traded on the /e# 4ork ;tock 5xchange, Iome 0epot must be a public company.

1-34

Chapter 01 - Business Decisions and Financial Accounting

S1&* <e(. 1 9o#es net income for the year ended Ganuary !6, 2662 #as K2,12' (million . &his is slightly lo#er than the K2,2)6 (million earned by Iome 0epot for the year ended "ebruary 1, 2662. <e(. 2 9o#es reported sales revenue of K%1,2!6 (million for the year ended Ganuary !6, 2662. &his is lo#er than the K-1,211 (million reported by Iome 0epot for the year ended "ebruary 1, 2662. <e(. ! 9o#es inventory as of Ganuary !6, 2662 #as K1,262 (million . &his is lo#er than the K16,)-! (million reported by Iome 0epot as of "ebruary 1, 2662. <e(. % 9o#es @ash (and @ash 5(uivalents on Ganuary !6, 2662 #as K2%' (million . &his is lo#er than the K'12 (million reported by Iome 0epot at "ebruary 1, 2662. <e(. ' 9ike Iome 0epot, 9o#es is a public company. ,ts stock trades on the /e# 4ork ;tock 5xchange under the symbol 9*D. <e(. ) &#o measures of financial success are the companys /et ,ncome and ;ales <evenues. As noted for re(uirements 1 and 2, Iome 0epot reported greater amounts for both of these measures, suggesting that the company #as more successful during the 2661 fiscal year. ,t is important to note, though, that Iome 0epot is a slightly bigger company than 9o#es, #ith more locations, more inventory (see re(uirement ! , and more total assets. Aiven these differences, it is reasonable to expect that Iome 0epot #ould produce more sales and net income than 9o#es. &o truly determine #hether Iome 0epot is run more successfully than 9o#es, a complete analysis is re(uired. ;uch an analysis #ould take into account size differences bet#een the t#o companies. (4oull learn about this kind of analysis in later chapters .

1-35

Chapter 01 - Business Decisions and Financial Accounting

S1&, &he solutions to this case #ill depend on the company andJor accounting period selected for analysis. S1&<e(. 1 &he accounting concept that the <igas family is accused of violating is the separate entity assumption. <e(. 2 =ased on the limited information available, it is difficult to categorize particular dealings as appropriate or inappropriate. 0ealings #ould clearly be inappropriate if they involved Adelphia paying for items for the o#ners personal use or to unfairly transfer some of the resources of Adelphia (and its stockholders to the <igas family. Io#ever, #e cannot determine the propriety of the payments from the limited information available. <e(. ! ;tockholders should take at least t#o actions to ensure this kind of behavior does not occur or does not occur #ithout their kno#ledge. "irst, stockholders should ensure that the managers of the business are accountable for their actions. &he most common #ay of doing this is to appoint a board of directors #ho are independent of top management. &hese directors should revie# and challenge the actions taken by management and re(uire that the financial statements disclose significant transactions #ith related parties. ;econd, stockholders should read the financial statements, including any notes describing related party transactions. Any (uestionable dealings should be raised #ith top management at the companys annual meeting. ,f stockholders dont receive satisfactory ans#ers to their concerns, they should sell their investment in the companys stock. <e(. % *ther parties that might be harmed by the actions committed by the <igas family are creditors (such as suppliers and banks , the companys auditors, governmental agencies (such as the ,<; and ;5@ , and the public at large.

1-36

Chapter 01 - Business Decisions and Financial Accounting

S1&. <e(. 1 4ou should take the position that an in"epen"ent annual audit of the financial statements is an absolute must. &his is the best #ay to ensure that the financial statements are complete, are free from bias, and conform #ith AAAB. 4ou should be prepared to reFect the partners uncle as the auditor because there is no evidence about his competence as an accountant or auditor. Also, he does not appear independent because he is related to the partner #ho prepares the financial statements, resulting in a potential conflict of interest. <e(. 2 4ou should strongly recommend the selection of an independent @BA in public practice because the financial statements should be audited by a competent and independent professional #ho must follo# prescribed accounting and auditing standards on a strictly independent basis. An audit by an uncle #ould not meet these re(uirements. S1&/ <e(. 1 A balance sheet lists items o#ned (assets and o#ed (liabilities at a particular point in time, producing a 3net #orth7 that represents the excess of assets over liabilities. &#o balance sheets are presented belo#, one based on historical costs (similar to AAAB and one based on market values (similar to a personal financial planning approach . /otes for these balance sheets also are presented, along #ith a conclusion about #hich individual is better off. =ased on historical cost. Ashle> Assets @ash Ointage @ar &otal Assets 9iabilities @ar 9oan &otal 9iabilities /et Dorth K 1,666 166 1,166 2'6 2'6 K 1,''6 ?ason Assets @ash Blay;tation @onsole &otal Assets 9iabilities &uition Bayable ;tudent 9oan &otal 9iabilities /et Dorth

K ),666 !'6 ),!'6 166 %,166 ',)66 K -'6

1-37

Chapter 01 - Business Decisions and Financial Accounting

S1&/ #continued$@ <e(. 1 (continued =ased on market value. Ashle> Assets @ash Ointage @ar &otal Assets 9iabilities @ar 9oan &otal 9iabilities /et Dorth K 1,666 1,%66 2,%66 2'6 2'6 K 2,1'6 ?ason Assets @ash Blay;tation @onsole &otal Assets 9iabilities &uition Bayable ;tudent 9oan &otal 9iabilities /et Dorth

K ),666 216 ),216 166 %,166 ',)66 K )16

&he notes are an important part of these balance sheets. /otes. 1 &he goal in preparing these balance sheets is to estimate each individuals net #orth, represented as the excess of assets over liabilities. 2 Cse of historical cost is consistent #ith generally accepted accounting principles. /ote that these asset values have not been adFusted for 3value7 consumed through use, #hich is not consistent #ith generally accepted accounting principles. &he market value balance sheets are based on the estimated current values of assets, some of #hich are greater and others less than their cost. ! ;ome potential assets (e.g., Borsche are not recorded because their likelihood of occurrence is not certain. <e(. 2 =ased on the calculations of net #orth and underlying assumptions indicated above, Ashley is 3better off7 because her net #orth (K1,''6 or K2,1'6 is greater than Gasons (K-'6 or K)16 . As a creditor, it #ould be better to lend money to Ashley because she has a greater net #orth. /ote that choosing bet#een historical cost and market values inevitably re(uires trading off the reliability of accounting information (cost is not as subFective as market and the potential relevance of that information (market values may be more relevant #hen determining an individuals net #orth .

1-38

Chapter 01 - Business Decisions and Financial Accounting

S1&/ #continued$@ <e(. ! An income statement lists the amounts earned (revenues and costs incurred (expenses during a particular period of time, producing 3net income7 that represents the excess of revenues over expenses. An income statement is presented belo# for both Ashley and Gason. /otes for these income statements are presented belo#, along #ith a conclusion about #hich individual is more successful. Ashle> <evenue Bart &ime Gob (for *ctober 5xpenses <ent 5xpense (for *ctober 9iving 5xpenses (for *ctober &otal 5xpenses /et ,ncome K 1,'66 %-6 2'6 1, %26 K 16 ?ason <evenue 9ottery &icket Dinnings 5xpenses <ent 5xpense (for *ctober 9iving 5xpenses (for *ctober &otal 5xpenses /et ,ncome K 1,2'6 166 2'6 1,-'6 K 266

/otes. 1 Gasons lottery ticket #innings are not likely to recur in the future. 2 ,ncome taxes are not reported (although they #ould apply to both Ashley and Gason . <e(.% @onclusion. =ased on the net income numbers alone, Gason #as more successful in the current period. Io#ever, his revenues are likely to be non>recurring, #hereas Ashleys appear more stable and likely to recur in the future. "or this reason, one might conclude that Ashley actually #as more successful, but that the current periods net income does not yet reflect this greater success. As a long>term creditor, it #ould be better to lend money to Ashley as she has a more stable source of income to meet future expenses. /otice that you should not reach a conclusion based only on the numbers.

1-3

Chapter 01 - Business Decisions and Financial Accounting

S1&0

1-40

Chapter 01 - Business Decisions and Financial Accounting

S1&0 #continued$

ANSWERS TO CONT NU N; CASE CC1 <e(. 1 /,@*95; A5&ADA4 ;BA ,ncome ;tatement (forecasted "or the 4ear 5nded 0ecember !1, 2616 ;ales <evenue 5xpenses. Dages 5xpense ;upplies 5xpense ;elling and Administrative 5xpenses ,ncome &ax 5xpense &otal 5xpenses /et ,ncome K %6,666 2%,666 -,666 ',666 1,)66 !-,)66 K 2,%66

1-41

Chapter 01 - Business Decisions and Financial Accounting

CC1 #continued$ <e(. 2 /,@*95; A5&ADA4 ;BA ;tatement of <etained 5arnings (forecasted "or the 4ear 5nded 0ecember !1, 2616 <etained 5arnings, Ganuary 1, 2616 Add. /et ,ncome ;ubtract. 0ividends <etained 5arnings, 0ecember !1, 2616 <e(. ! /,@*95; A5&ADA4 ;BA =alance ;heet (forecasted At 0ecember !1, 2616 Assets. @ash Accounts <eceivable Broperty, Blant and 5(uipment &otal Assets 9iabilities. Accounts Bayable /otes Bayable &otal 9iabilities ;tockholders 5(uity. @ontributed @apital <etained 5arnings &otal ;tockholders 5(uity &otal 9iabilities and ;tockholders 5(uity K 2,1'6 1,-16 -6,666 K-!,2!6 K %,))6 !1,1-6 %!,'!6 !6,666 %66 !6,%66 K-!,2!6 K 6 2,%66 (2,666 K %66

<e(. % As of 0ecember !1, 2616, more financing is expected to come from creditors (K%!,'!6 than from stockholders (K!6,%66 .

1-42