1 1 The Financial Statements 1SPOTLIGHT The Walt Disney CompanyWhere is the happiest place on earth? Walt Disney World or Disneyland, of course! The Disney theme parks in Orlando, Florida, and Anaheim, California, are famous for providing the ultimate family entertainment experience. However, these two theme parks are actually only a small part of the worldwide entertainment empire that is The Walt Disney Company. From rather humble beginnings in the American Midwest, Walt Disney first began to display his extraordinary talents as an animation artist in the 1920s. Walt and his brother Roy pooled their resources and set up a cartoon studio in Hollywood, California, in 1923. Their early work focused on animated short cartoon films featuring animal characters. The best known of these is Mickey Mouse, invented in the early 1930s. Mickey became an instant success in the first cartoon ※short§ with sound called Steamboat Willie, earning Disney his first Academy Award in 1932. The studio soon launched spin-offs for supporting characters: Mickey*s friends Donald Duck and Goofy, and Mickey*s beloved hound Pluto. Thankfully, Walt Disney*s dreams didn*t end with the short animated cartoon. In 1937, the studio released its first-ever full-length feature animated film, Snow White and the Seven Dwarfs. Considered quite a risky venture at the time, the film became the most successful motion picture of 1938, earning over $8 million on its initial release, the equivalent of over $134 million today. This led to numerous other animated features such as Pinocchio, Fantasia, Bambi, Cinderella, Peter Pan, and Dumbo. Fueled by imagination, the empire continued to grow. The opening of Disneyland in 1955 signaled a new era in development for the Disney name, which has become synonymous with family entertainment worldwide. Sixty years later, among The Walt Disney Company*s assets are sole ownership or interests in 5 vacation resorts, 11 theme parks, 2 water parks, 39 hotels, 8 motion picture studios, 6 record labels, and 11 cable television networks (including ESPN and ABC). The company also sells billions of dollars of branded merchandise through its retail, online, and wholesale distribution channels (Disney Stores and DisneyStore.com). As shown in The 1 The Financial Statements 1SPOTLIGHT The Walt Disney CompanyWhere is the happiest place on earth? Walt Disney World or Disneyland, of course! The Disney theme parks in Orlando, Florida, and Anaheim, California, are famous for providing the ultimate family entertainment experience. However, these two theme parks are actually only a small part of the worldwide entertainment empire that is The Walt Disney Company. From rather humble beginnings in the American Midwest, Walt Disney first began to display his extraordinary talents as an animation artist in the 1920s. Walt and his brother Roy pooled their resources and set up a cartoon studio in Hollywood, California, in 1923. Their early work focused on animated short cartoon films featuring animal characters. The best known of these is Mickey Mouse, invented in the early 1930s. Mickey became an instant success in the first cartoon ※short§ with sound called Steamboat Willie, earning Disney his first Academy Award in 1932. The studio soon launched spin-offs for supporting characters: Mickey*s friends Donald Duck and Goofy, and Mickey*s beloved hound Pluto. Thankfully, Walt Disney*s dreams didn*t end with the short animated cartoon. In 1937, the studio released its first-ever full-length feature animated film, Snow White and the Seven Dwarfs. Considered quite a risky venture at the time, the film became the most successful motion picture of 1938, earning over $8 million on its initial release, the equivalent of over $134 million today. This led to numerous other animated features such as Pinocchio, Fantasia, Bambi, Cinderella, Peter Pan, and Dumbo. Fueled by imagination, the empire continued to grow. The opening of Disneyland in 1955 signaled a new era in development for the Disney name, which has become synonymous with family entertainment worldwide. Sixty years later, among The Walt Disney Company*s assets are sole ownership or interests in 5 vacation resorts, 11 theme parks, 2 water parks, 39 hotels, 8 motion picture studios, 6 record labels, and 11 cable television networks (including ESPN and ABC). The company also sells billions of dollars of branded merchandise through its retail, online, and wholesale distribution channels (Disney Stores and DisneyStore.com). As shown in The The Financial Statements 1SPOTLIGHT The Walt Disney CompanyWhere is the happiest place on earth? Walt Disney World or Disneyland, of course! The Disney theme parks in Orlando, Florida, and Anaheim, California, are famous for providing the ultimate family entertainment experience. However, these two theme parks are actually only a small part of the worldwide entertainment empire that is The Walt Disney Company. From rather humble beginnings in the American Midwest, Walt Disney first began to display his extraordinary talents as an animation artist in the 1920s. Walt and his brother Roy pooled their resources and set up a cartoon studio in Hollywood, California, in 1923. Their early work focused on animated short cartoon films featuring animal characters. The best known of these is Mickey Mouse, invented in the early 1930s. Mickey became an instant success in the first cartoon ※short§ with sound called Steamboat Willie, earning Disney his first Academy Award in 1932. The studio soon launched spin-offs for supporting characters: Mickey*s friends Donald Duck and Goofy, and Mickey*s beloved hound Pluto. Thankfully, Walt Disney*s dreams didn*t end with the short animated cartoon. In 1937, the studio released its first-ever full-length feature animated film, Snow White and the Seven Dwarfs. Considered quite a risky venture at the time, the film became the most successful motion picture of 1938, earning over $8 million on its initial release, the equivalent of over $134 million today. This led to numerous other animated features such as Pinocchio, Fantasia, Bambi, Cinderella, Peter Pan, and Dumbo. Fueled by imagination, the empire continued to grow. The opening of Disneyland in 1955 signaled a new era in development for the Disney name, which has become synonymous with family entertainment worldwide. Sixty years later, among The Walt Disney Company*s assets are sole ownership or interests in 5 vacation resorts, 11 theme parks, 2 water parks, 39 hotels, 8 motion picture studios, 6 record labels, and 11 cable television networks (including ESPN and ABC). The company also sells billions of dollars of branded merchandise through its retail, online, and wholesale distribution Where is the happiest place on earth? Walt Disney World or Disneyland, of course! The Disney theme parks in Orlando, Florida, and Anaheim, California, are famous for providing the ultimate family entertainment experience. However, these two theme parks are actually only a small part of the worldwide entertainment empire that is The Walt Disney Company. From rather humble beginnings in the American Midwest, Walt Disney first began to display his extraordinary talents as an animation artist in the 1920s. Walt and his brother Roy pooled their resources and set up a cartoon studio in Hollywood, California, in 1923. Their early work focused on animated short cartoon films featuring animal characters. The best known of these is Mickey Mouse, invented in the early 1930s. Mickey became an instant success in the first cartoon ※short§ with sound called Steamboat Willie, earning Disney his first Academy Award in 1932. The studio soon launched spin-offs for supporting characters: Mickey*s friends Donald Duck and Goofy, and Mickey*s beloved hound Pluto. Thankfully, Walt Disney*s dreams didn*t end with the short animated cartoon. In 1937, the studio released its first-ever full-length feature animated film, Snow White and the Seven Dwarfs. Considered quite a risky venture at the time, the film became the most successful motion picture of 1938, earning over $8 million on its initial release, the equivalent of over $134 million today. This led to numerous other animated features such as Pinocchio, Fantasia, Bambi, Cinderella, Peter Pan, and Dumbo. Fueled by imagination, the empire continued to grow. The opening of Disneyland in 1955 signaled a new era in development for the Disney name, which has become synonymous with family entertainment worldwide. Sixty years later, among The Walt Disney Company*s assets are sole ownership or interests in 5 vacation resorts, 11 theme parks, 2 water parks, 39 hotels, 8 motion picture studios, 6 record labels, and 11 cable television networks ( including ESPN and ABC). The company also sells billions of dollars of branded merchandise through its retail, online, and wholesale distribution channels (Disney Stores and DisneyStore.com). As shown in The 2 2 Chapter 1 A1123456789101112131415161718123456789101112131415161718A CDEBServices revenueProducts revenueTotal revenuesCost of services (exclusive of depreciation and amortization) Cost of products (exclusive of depreciation and amortization) Selling, general, administrative, and otherDepreciation and amortizationTotal costs and expensesIncome from operationsOther income (expense), netIncome before income taxesIncome taxesNet incomeLess: Net income attributable to noncontrolling interestsNet income attributable to The Walt Disney Company (Disney) 12 Months EndedSep. 27, 2014Sep. 28, 2013$ 40,2468,567$ 37,280$ 7,501$ 6,13648,81345,041(21,356)(20,090) (5,064)(4,944) (8,565)(8,365) (2,288)(2,192) (37,273)(35,591) (4,242)(2,984) 8,0046,636 (503)(500) 11,5409,45012,2469,6207061707,761The Walt Disney CompanyConsolidated Statements of IncomeAdapted, in millions of $ Walt Disney Company Consolidated Statement of Income for the year ended September 27, 2014, the company had annual revenues of $48.8 billion (line 5) and net income attributable to The Walt Disney Company of $7.5 billion (line 17). The Walt Disney Company today stands as an example of just how far a dream and a little imagination can take you! The terms revenue and net income may be unfamiliar to you now, but after you read this chapter, you*ll be able to use these and other business terms. Welcome to the world of accounting! ♂ Most chapters of this book begin with an actual financial statement. In Chapters 1每3, our reference is the Consolidated Financial Statements of The Walt Disney Company, for the two years ended September 27, 2014, and September 28, 2013. The core of financial accounting revolves around these basic financial statements: ← Income statement (sometimes known as the statement of operations) ← Statement of retained earnings (usually included in the statement of stockholders* equity) ← Balance sheet (sometimes known as the statement of financial position) ← Statement of cash flowsFinancial statements are the business documents that companies use to report the results of their activities to various user groups, which can include managers, investors, creditors, and regulatory agencies. In turn, these parties use the reported information to make a variety of decisions, such as whether to invest in or loan money to the company. To learn accounting, you must learn to focus on decisions. In this chapter, we explain generally accepted accounting principles, their underlying assumptions and concepts, and the bodies responsible for issuing accounting standards. We discuss the judgment process that is necessary for making good accounting decisions. We also discuss the contents of the four basic financial statements that report the results of those decisions. In later 3 4 Chapter 1Explain Why accounting is thE languagE of BusinEssAccounting is an information system. It measures business activities, processes data into reports, and communicates results to decision makers. Accounting is ※the language of business.§ The bet- ter you understand the language, the better you can manage your finances, as well as those of your business. Accounting produces financial statements, which report information about a business. The financial statements measure performance and communicate where a business stands in financial terms. In this chapter, as well as Chapters 2 and 3, we focus on The Walt Disney Company. After completing this chapter, you*ll begin to understand the nature of financial statements and the relationships between them. By the end of Chapter 3, you*ll understand the process by which a company*s financial statements are prepared, called the accounting cycle. Don*t confuse bookkeeping and accounting. Bookkeeping is a mechanical part of accounting, just as arithmetic is a part of mathematics. Exhibit 1-1 below illustrates the flow of accounting information and helps illustrate accounting*s role in business. The accounting process begins and ends with people making decisions. Who Uses Accounting Information? Decision makers use many types of information; a banker needs information to decide who gets a loan or The Walt Disney Company uses accounting information, along with designs and plans from its ※imagineers§ (designers and engineers) to decide the size and location of a new theme park attraction. Let*s see how decision makers use accounting information. ← Individuals. People like you manage their personal bank accounts, decide whether to rent an apartment or buy a house, and budget the monthly income and expenditures of their businesses. Accounting provides the necessary information to allow individuals to make these decisions. ← Investors and creditors. Investors and creditors provide the money to finance The Walt Disney Company. Investors want to know how much income they can expect to earn on an investment. Creditors want to know when and how The Walt Disney Company is going to pay them back. These decisions also require accounting information. ← Regulatory bodies. All kinds of regulatory bodies use accounting information. For exam- ple, the Internal Revenue Service (IRS) and various state and local governments require businesses, individuals, and other types of organizations to pay income, property, excise, 1 Explain why accounting is the language of businessExhibit 1-1 | The Flow of Accounting Information3. Companies report their results.1. People make decisions.2. Business transactions occur. 6 Chapter 1Partnership. A partnership has two or more parties as co-owners, and each owner is a partner. Individuals, corporations, partnerships, or other types of entities can be partners. In- come and losses of the partnership ※flow through§ to the partners, and they recognize them based on their agreed-upon percentage interest in the business. The partnership is not a tax- paying entity. Instead, each partner takes a proportionate share of the entity*s taxable income and pays tax according to that partner*s individual or corporate rate. Many retail establish- ments, professional service firms (law, accounting, etc.), real estate, and oil and gas explora- tion companies operate as partnerships. Many partnerships are small or medium-sized, but some are gigantic, with thousands of partners. Partnerships are governed by agreement, usu- ally spelled out in writing in the form of a contract between the partners. General partnerships have mutual agency and unlimited liability, meaning that each partner may conduct business in the name of the entity and can make agreements that legally bind all partners without limit for the partnership*s debts. Partnerships are therefore quite risky because an irresponsible partner can create large debts for the other general partners without their knowledge or per- mission. This feature of general partnerships has spawned the creation of limited-liability partnerships (LLPs). A limited-liability partnership is one in which a wayward partner cannot create a large liability for the other partners. In LLPs, each partner is liable for partnership debts only up to the extent of his or her investment in the partnership. Each LLP, however, must have one gen- eral partner with unlimited liability for all partnership debts. Limited-Liability Company. A limited-liability company (LLC) is one in which the busi- ness (and not the owner) is liable for the company*s debts. An LLC may have one owner or many owners, called members. Unlike a proprietorship or a general partnership, the members of an LLC do not have unlimited liability for the LLC*s debts. An LLC pays no business income tax. Instead, the LLC*s income ※flows through§ to the members, and they pay income tax at their own tax rates, just as they would if they were partners. Today, many multiple-owner businesses are organized as LLCs, because members of an LLC effectively enjoy limited liability while still be- ing taxed like members of a partnership. Corporation. A corporation is a business owned by the stockholders, or shareholders, who own stock representing shares of ownership in the corporation. One of the major advantages of doing business in the corporate form is the ability to raise large sums of capital from the issu- ance of stock to the public. All types of entities (individuals, partnerships, corporations, or other types) may be shareholders in a corporation. Even though proprietorships and partnerships are more numerous, corporations transact much more business and are larger in terms of assets, income, and number of employees. Most well-known companies, such as The Walt Disney Company, Amazon.com, Inc., Google, Inc., General Motors Company, Toyota Motor Corpora- tion, and Apple Inc., are corporations. Their full names include Corporation or Incorporated (abbreviated as Corp. and Inc.) to indicate that they are corporations〞for example, Starbucks Corporation. A few bear the name Company, such as Ford Motor Company or The Walt Disney Company. A corporation is formed under state law. Unlike proprietorships and partnerships, a corpora- tion is legally distinct from its owners. The corporation is like an artificial person and possesses many of the same rights that a person has. The stockholders have no personal obligation for the corporation*s debts. So, stockholders of a corporation have limited liability, as do limited partners and members of an LLC. However, unlike partnerships or LLCs, a corporation pays a business income tax as well as many other types of taxes. Furthermore, the shareholders of a corporation are effectively taxed twice on distributions received from the corporation (called dividends). Thus, one of the major disadvantages of the corporate form of business is double taxation of distributed profits. Ultimate control of a corporation rests with the stockholders, who generally get one vote for each share of stock they own. Stockholders elect the board of directors, which sets policy and appoints officers. The board elects a chairperson, who holds the most power in the corporation and often carries the title chief executive officer (CEO); it also appoints the president as chief operating officer (COO). Corporations have vice presidents in charge of sales, accounting, fi- nance (the chief financial officer or CFO), and other key areas. 8 Chapter 1Accounting information must also have a number of enhancing or supplementary qualitative characteristics. These include ← comparability, ← verifiability, ← timeliness, and ← understandability. Comparability means that the accounting information for a company must be prepared in such a way as to be capable of being compared with information from other companies in the same period; it should also be consistent with similar information for that company in previous periods. Verifiability means that the information must be capable of being checked for accuracy, completeness, and reliability. The process of verifying information is often done by internal as well as external auditors. Verifiability enhances the reliability of information and thus makes the information more representative of economic reality. Timeliness means that the information must be made available to users early enough to help them make decisions, thus making the informa- tion more relevant to their needs. Understandability means the information must be sufficiently transparent so that it makes sense to reasonably informed users of the information (investors, creditors, regulatory agencies, and managers). Accounting information is costly to produce. A primary constraint in the decision to disclose accounting information is that the cost of disclosure should not exceed the expected benefits to users. The management of an entity is primarily responsible for preparing accounting informa- tion. Managers must exercise judgment in determining whether the information is necessary for a complete understanding of economic facts and is not excessively costly to provide. This course will expose you to GAAP as well as to relevant IFRS. We summarize GAAP in Appendix D and IFRS in Appendix E. In the following section, we briefly summarize some of the basic assumptions and principles that underlie the application of these standards. The Entity AssumptionThe most basic accounting assumption (underlying idea) is the entity, which is any organization (or person) that stands apart as a separate economic unit. Sharp boundaries are drawn around each entity so as not to confuse its affairs with those of others. Consider Robert A. Iger, chairman and CEO of The Walt Disney Company. Iger likely owns sev- eral homes, automobiles, and other personal assets. In addition, he may owe money on some personal loans. All these assets and liabilities belong to Iger and have nothing to do with The Walt Disney Com- pany. Likewise, The Walt Disney Company*s cash, computers, and inventories belong to the company and not to Iger. Why? Because the entity assumption draws a sharp boundary around each entity; in this case, The Walt Disney Company is one entity, and Robert A. Iger is a second, separate entity. Let*s consider the various types of businesses that make up The Walt Disney Company. The company operates five types of businesses, called segments: media networks, parks and resorts, studio entertainment, consumer products, and interactive media (games, online services). Top managers evaluate the results of the parks and resorts businesses separately from those of media networks. If theme park revenues were falling, The Walt Disney Company should identify the reason. But if revenue figures from all the businesses were combined in a single total, managers couldn*t tell how differently each business segment was performing. To correct the problem, managers need accounting information for each business segment (entity) in the company. They also need separate information for each geographic region (such as country). Thus, each type of business and each region keeps its own records in order to be evaluated separately. The Continuity (Going-Concern) AssumptionIn measuring and reporting accounting information, we assume that the entity will continue to operate long enough to sell its inventories, convert any receivables to cash, use other existing assets (such as land, buildings, equipment, and supplies) for their intended purposes, and settle its obligations in the normal course of business. This is called the continuity (or going-concern) assumption. Consider the alternative to the going-concern assumption: the quitting concern, or going out of business assumption. An entity that is not continuing would have to sell all of its assets in the 10 Chapter 1Unlike a liter or a mile, the value of a dollar changes over time. A rise in the general price level is called inflation. During inflation, a dollar will purchase less food, less toothpaste, and less of other goods and services. When prices are stable〞there is little inflation〞a dollar*s pur- chasing power is also stable. Under the stable-monetary-unit assumption, accountants assume that the dollar*s purchas- ing power is stable over time. We ignore inflation, and this allows us to add and subtract dollar amounts as though the dollar over successive years has a consistent amount of purchasing power. This is important because businesses that report their financial information publicly usually re- port comparative financial information (that is, the current year along with one or more prior years). If we could not assume a stable monetary unit, assets and liabilities denominated in prior years* dollars would have to be adjusted to current year price levels. Inflation has been at very low levels in developed countries for several decades and is expected to remain so for the foresee- able future. Thus, inflation adjustments to accounting information to make it comparable over time are not considered necessary. International Financial Reporting Standards We live in a global economy! Investors in the United States can easily trade stocks on the Hong Kong, London, and Brussels stock exchanges over the Internet. Each year, American companies such as Starbucks Corpora- tion, The Gap, Inc., McDonalds Corp., Microsoft Corp., and The Walt Disney Company conduct billions of dollars of business around the globe. Conversely, foreign companies such as Nokia, Samsung, Toyota, and Nestl谷 conduct billions of dollars of business in the United States. American companies have merged with foreign companies to create interna- tional conglomerates such as Pearson (the publisher of this textbook) and Anheuser-Busch InBev (producers of alcoholic beverages). No matter where your career starts, it is very likely that it will eventually take you into global markets. Until recently, one of the major challenges of conducting global business has been the fact that different countries have adopted different accounting standards for business trans- actions. Historically, the major developed countries in the world (United States, United Kingdom, Japan, Germany, etc.) have all had their own versions of GAAP. As investors seek to compare financial results across entities from different countries, they have had to restate and convert accounting data from one country to the next in order to make them comparable. This takes time and can be expensive. The solution to this problem lies with the IASB, which has developed the International Financial Reporting Standards (IFRS). These standards are now being used by most coun- tries around the world. For years, accountants in the United States did not pay much attention to IFRS because our GAAP was considered to be the strongest single set of accounting stan- dards in the world. In addition, the application of GAAP for public companies in the United States is overseen carefully by the SEC, a body that at present has no global counterpart. Nevertheless, in order to promote consistency in global financial reporting, the SEC is studying whether and how to require all U.S. public companies to adopt some version of IFRS within the next decade. The advantage to adopting a uniform set of high-quality global accounting standards is that financial statements from a U.S. company (say, Her- shey Corporation in Pennsylvania) will be comparable to those of a foreign company (say, Nestl谷 in Switzerland). Using these standards, it will be easier for investors and business- people to evaluate information of various companies in the same industries from across the globe, and companies will have to prepare only one set of financial statements instead of multiple versions. Thus, in the long run, a uniform set of high-quality global accounting standards should significantly reduce costs of doing business globally. Does this mean that the accounting information you are studying in this textbook will eventually become outdated? Fortunately, no. For one thing, the vast majority of the introduc- tory material you learn from this textbook, including the underlying conceptual framework outlined in this section, is already part of IFRS as well. The most commonly used accounting practices are essentially the same under both U.S. GAAP and IFRS. Additionally, the FASB is working hand-in-hand with the IASB toward the convergence of standards, that is, gradually GlobAl ViewM01_ 12 Chapter 1What are some of The Walt Disney Company*s assets? The first asset is cash and cash equiv- alents, the liquid assets that are the medium of exchange. Another important asset is merchandise inventory (often called inventories)〞the consumer products〞that The Walt Disney Company*s stores sell. The Walt Disney Company also has assets in the form of parks, resorts, and equip- ment, or fixed assets. These are the long-lived assets the company uses to do business〞theme park attractions (rides), buildings, computers, and other equipment. The Walt Disney Company*s liabilities include a number of payables, such as accounts payable and accrued liabilities. The word payable always signifies a liability. An account payable is a liability for goods or services purchased on credit and supported by the credit standing of the purchaser. Accounts payable typically have to be paid within 30 to 60 days. Long-term debt (borrowings) is a liability that*s payable beyond one year from the date of the financial statements. The current portion of long-term debt (borrowings) is the amount due within the next year, and it has to be disclosed separately in current liabilities. Owners* EquityThe owners* equity of any business is its assets minus its liabilities. We can write the accounting equation to show that owners* equity is what*s left over when we subtract liabilities from assets. Assets - Liabilities = Owners* EquityA corporation*s equity〞called stockholders* equity〞has two main subparts: ← Paid-in capital ← Retained earningsThe accounting equation can be written asAssets = Liabilities + Stockholders* EquityAssets = Liabilities + Paid-in Capital + Retained EarningsExhibit 1-4 | The Accounting EquationAssetsLiabilitiesOwners*EquityLiabilities+ Owners* EquityAssets = $600$1,000$1,000$400= Assets = Liabilities + Owners* Equity$600+ $400The accounting equation shows the relationship among assets, liabilities, and owners* equity. Assets appear on the left side and liabilities and owners* equity on the right. As Exhibit 1-4 shows, the two sides must be equal: 14 Chapter 1The owners* equity of proprietorships and partnerships is different from that of corporations. Proprietorships and partnerships don*t identify paid-in capital and retained earnings separately. Instead, they use a single heading: Capital. Examples include ※Randall Waller, Capital§ (for a proprietorship) and ※Powers, Capital§ and ※Salazar, Capital§ (for a partnership). 4 Evaluate business operations through the financial statementsEvaluatE BusinEss OpEratiOns thrOugh thE Financial statEmEntsThe financial statements present a company to the public in financial terms. Each financial state- ment relates to a specific date or time period. What would investors want to know about The Walt Disney Company at the end of its fiscal year? Exhibit 1-6 lists four questions that decision makers may ask. Each answer comes from one of the financial statements. QuestionFinancial StatementAnswer1.How well did thecompany performduring the year? 2.Why did the company*sretained earningschange during theyear? 3.What is the company*sfinancial position atfiscal year end? 4.How much cash did thecompany generateIncome statement(also called theStatement of operations) Statement of retained earningsBalance sheet (alsocalled the Statementof financial position) Statement of cashflowsand spend duringthe year? Revenues- ExpensesNet income (or Net loss) Beginning retained earnings+ Net income (or - Net loss) - Dividends declaredEnding retained earningsAssets = Liabilities + Owners*EquityNet Operating cash flows; Net Investing cash flows; Net Financing cash flowsIncrease (decrease) in cashExhibit 1-6 | Information Reported in the Financial Statements (1) If the assets of a business are $480,000 and the liabilities are $160,000, how much is the owners* equity? (2) If the owners* equity in a business is $160,000 and the liabilities are $100,000, how much are the assets? (3) A company reported monthly revenues of $365,000 and monthly expenses of $225,000. What is the result of operations for the month? (4) If the beginning balance of retained earnings is $180,000, revenue is $85,000, expenses total $35,000, and the company declares and pays a $20,000 dividend, what is the ending balance of retained earnings? Answers: (1) $320,000 ($480,000 2 $160,000) (2) $260,000 ($160,000 1 $100,000) (3) Net income of $140,000 ($365,000 2 $225,000); revenues minus expenses(4) $210,000 [$180,000 beginning balance 1 net income $50,000 ($85,000 2 $35,000) 2 dividends $20,000] Try ItM01_A1123456789101112131415161718123456789101112131415161718A 16 Chapter 1net income. To avoid clutter, The Walt Disney Company reports its results in millions of dollars. Some relatively simple analysis of the company*s consolidated statements of income will help us evaluate how well the company performed in fiscal 2014 in comparison with fiscal 2013. An income statement reports two main categories: ← Revenues and gains ← Expenses and lossesWe measure net income as follows: Net Income = Total Revenues and Gains - Total Expenses and LossesIn accounting, the word net refers to an amount after a subtraction. Net income is the profit left over after subtracting expenses and losses from revenues and gains. Net income is the single most important item in the financial statements. Overall, during the fiscal year ended September 27, 2014, The Walt Disney Company earned total revenues of $48,813 million (line 5). The company earned net income attributable to The Walt Disney Company (line 17) of $7,501 million. Revenues. The Walt Disney Company earns significant revenues from performing services as well as selling products. Services revenue is generated in its media networks, parks and resorts, studio entertainment, and interactive divisions. Product sales revenue is generated in its consumer products division. In order to present a clearer picture of its results of operations, the company reports each of these revenue streams separately. For the fiscal year ended September 27, 2014, services revenue (line 3) accounts for 82.4% of the company*s total revenue ($40,246 million 4 $48,813 million, on line 5). Products revenue (line 4) comprises 17.6% of total revenue for the year ($8,567 million 4 $48,813 million). During the fiscal year ended September 27, 2014, ser- vices revenue increased about 8% over fiscal 2013, from $37,280 million to $40,246 million. Products revenue increased about 10.4% over fiscal 2013, from $7,761 million to $8,567 million. From these computations you can tell that services revenue dominates the total revenue stream of the company, but products revenue has grown faster over the last year than services revenue. Expenses. Not all expenses have the word expense in their titles. For example, The Walt Disney Company*s largest expenses are for cost of services and cost of products (lines 6 and 7, respectively). In line 6, The Walt Disney Company includes the direct cost of providing services (exclusive of depreciation and amortization) through its media networks, parks and resorts, studio entertainment, and interactive business segments. Examples of cost of services include labor and materials directly related to each service segment*s revenue. Line 6 reports that cost of services in fiscal 2014 was $21,356 million (up 6.3% from the 2013 cost of services of $20,090 million). Comparing the year-to-year increase in services revenue discussed in the preceding paragraph, we see that service revenue in fiscal 2014 increased at a faster pace (about 8%) than the cost of those services (about 6.3%). This means that the services business segments of The Walt Disney Company were more profitable in 2014 than they were in 2013. Although not shown separately in Exhibit 1-7, you can measure the gross profit from services by subtracting cost of services from services revenue. In fiscal 2014, the gross profit from services was $18,890 million ($40,246 million 2 $21,356 million). In fiscal 2013, the gross profit from services was $17,190 million ($37,280 million 2 $20,090 million). Thus, gross profit of the services segment rose by $1,700 million or 9.9%. Line 7 reports that the cost of products in fiscal 2014 was $5,064 million (up $120 million, or 2.4%) from $4,944 million in fiscal 2013. Comparing this small increase of 2.4% in costs with the 10.4% increase in product revenue, we can see why the company*s profits from the sale of products increased more dramatically than those from services during the year. Gross profit from sale of products (products revenue minus related cost of products) increased from $2,817 million ($7,761 million 2 $4,944 million) in fiscal 2013 to $3,503 million ($8,567 million 2 $5,064 mil- lion) in fiscal 2014, an increase of $686 million, or 24.4%. From this analysis, we can conclude that, although the services segments of the business dominated in terms of the company*s total revenue (82.4% vs. 17.6%), gross profits from the products segments grew at a much faster pace during 2014 than those from the services segment (24.4% vs. 9.9%). 18 Chapter 1 ← Net income attributable to The Walt Disney Company (line 17). The ※bottom line§ of the Consolidated Statements of Income (all revenues less all expenses) is net income attributable to The Walt Disney Company. Those amounts are $7,501 million in fiscal 2014 and $6,136 million in fiscal 2013. Now let*s examine the Statement of Retained Earnings in Exhibit 1-8. The Statement of Retained Earnings Shows What a Company Did with Its Net IncomeRetained earnings means exactly what the term implies, which is that portion of net income the company has kept over a period of years. If, historically, revenues exceed expenses, the result will be a positive balance in retained earnings. On the other hand, if, historically, expenses have exceeded sales revenues, the accumulation of these losses will result in an accumulated deficit in retained earnings (usually shown in parentheses). Net income attributable to The Walt Disney Company (lines 4 and 8 in Exhibit 1-8) flows from the income statement (line 17 of Exhibit 1-7) to the statement of retained earnings. Exhibit 1-8 | The Walt Disney Company, Consolidated Statements of Retained Earnings A112345678910111234567891011A BAdapted, in millions of $ Retained earnings, Sep. 29, 2012Net income attributable to The Walt Disney Company, year ended Sep. 28, 2013Dividends declared, year ended Sep. 28, 2013Other reductions, year ended Sep. 28, 2013Retained earnings, Sep. 28, 2013Net income attributable to The Walt Disney Company, year ended Sep. 27, 2014Dividends declared, year ended Sep. 27, 2014Retained earnings, Sep. 27, 2014The Walt Disney Company Consolidated Statements of Retained Earnings For the Two Years Ending September 27, 2014 $ 42,965 6,136 (1,342) (1) 47,758 7,501 (1,525) $ 53,734 Net income increases retained earnings, and net losses and dividends decrease retained earn- ings. A positive balance in retained earnings indicates that a corporation has been able to accu- mulate earnings over its lifetime in order to expand, as well as to return a portion of its assets in the form of dividends to shareholders, if the corporation distributes dividends. Let*s review The Walt Disney Company*s Consolidated Statements of Retained Earnings for the two-year period ending September 27, 2014. This statement was excerpted from the company*s Consolidated Statements of Stockholders* Equity, which analyze all of the increases and decreases in every account in the stockholders* equity section of the balance sheet. At the beginning of fiscal 2013 (September 29, 2012), The Walt Disney Company had $42,965 million in retained earnings (line 3). During fiscal 2013, the company earned net income attributable to The Walt Disney Company of $6,136 million (line 4) and declared dividends of $1,342 million ($1,324 million in cash and $18 million in stock) to shareholders (line 5). It made another small negative adjustment to retained earnings of $1 million (line 6). It ended the 2013 fiscal year with a retained earnings balance of $47,758 million, which carried over and became the beginning balance of retained earnings in fiscal 2014 (line 7). During fiscal 2014, the company earned net income attributable to The Walt Disney Com- pany of $7,501 million (line 8). As shown on line 9, it then declared dividends to shareholders in the amount of $1,525 million. Of this amount, $1,508 million was distributed in cash, and another $17 million was distributed in the form of the company*s common stock. We will discuss cash and stock dividends in greater depth in Chapter 10. The company ended the 2014 fiscal year with a retained earnings balance of $53,734 million (line 10). A112345678910111213141516171819202122232425262728293031321234567891011121314151617181920212223242526272829303132A 20 Chapter 1and cash equivalents, short-term investments, accounts and notes receivable, merchandise inven- tory, and other current assets like prepaid expenses. The Walt Disney Company*s current assets at September 27, 2014, total $15,176 million (line 8). Let*s examine each current asset that The Walt Disney Company holds. ← Cash and cash equivalents (line 4). All companies have cash. Cash is the liquid asset that*s the medium of exchange, and cash equivalents include U.S. Treasury securities or other financial instruments that are easily convertible to cash. The Walt Disney Company owns $3,421 million in cash and cash equivalents at September 27, 2014. This is down from $3,931 million at September 28, 2013. We will explain this further when we discuss the statement of cash flows later. ← Receivables (line 5) are monetary claims that a company has against outsiders (custom- ers), acquired mainly by performing services for them, selling goods to them, or loaning money to them. In the case of The Walt Disney Company, these claims include amounts receivable from advertisers on Disney-owned television networks, travel agencies that book vacations at Disney-owned resorts, and retailers who sell Disney trademark mer- chandise, among many other things. Receivables account for the largest single current asset of The Walt Disney Company as of September 27, 2014 ($7,822 million), up from $6,967 million the year before. The company expects to convert these receivables to cash within the next fiscal year. ← Inventories (line 6) are a merchandising company*s most important, and often its largest, current asset. As we emphasized earlier, The Walt Disney Company*s revenue comes mostly from services rather than sales of merchandise, so inventories are not the company*s largest current asset. However, inventories are still significant, totaling $1,574 million at September 27, 2014, up from $1,487 million at September 28, 2013. The company expects to sell these inventories and convert them to cash within the next fiscal year. ← Other current assets (line 7) may include prepaid expenses, which represent amounts paid in advance for advertising, rent, insurance, taxes, and supplies. These are current assets because the company will benefit from these expenditures within the next year. The Walt Disney Company owns $2,359 million in other current assets as of September 27, 2014, up from $1,724 million the previous year. ← An asset always represents a future benefit. Long-term (non-current) assets are expected to benefit the company for long periods of time, beyond just the next fiscal year. Let*s look at The Walt Disney Company*s long-term assets. ← Film and television costs (line 9) include production costs such as labor, materials, and overhead for Disney*s movies, television, and stage programs. As an example, consider the costs that the company incurred to produce the feature film Frozen. Many of these costs are initially recorded (※capitalized§) as assets of the company and are transferred over time to expenses through the process of amortization, to be matched against the revenue recognized from the film in the same periods those revenues are earned. The amount of these unamortized costs was $5,325 million as of September 27, 2014, and $4,783 million as of September 28, 2013. ← Investments (line 10) represent mostly the amounts that The Walt Disney Company has invested in equity method investments of other media companies. These include A&E Television Networks, LLC; Seven TV, CTV Specialty Television; Hulu, LLC; and Fusion. As mentioned previously in the discussion of the income statement, these investments comprise 20% to 50% of the voting stock of other companies. The equity method requires the investor company to record the initial investment at cost and, in subsequent periods, increase (or decrease) its investment by its proportionate share of the investee company*s earnings (losses), and also to decrease the investment by its proportionate share of the investees* dividends. The amount of The Walt Disney Company*s equity investment in these companies was $2,696 million as of September 27, 2014, and $2,849 million as of September 28, 2013. These types of investments are discussed in greater depth in Chapter 8. 22 Chapter 1$12,676 million in long-term borrowings (line 20) and $10,040 million in other long-term liabilities. These liabilities are due one year or more after the balance sheet date. ← At September 27, 2014, total liabilities are $36,008 million (line 23). This represents about 42.8% of total assets and indicates a very strong financial position from a debt standpoint. The previous year*s debt ratio (total liabilities/total assets) of 40.7% was slightly stronger. Equity (Stockholders* Equity). The accounting equation states thatAssets - Liabilities = Owners* EquityThe assets (resources) and the liabilities (debts) of The Walt Disney Company are fairly easy to understand. Owners* equity is harder to pin down. Owners* (stockholders*) equity is simple to calculate, but what does it mean? The Walt Disney Company, calls its owners* equity merely Equity (line 24) and this title is ap- propriately descriptive. Remember that a corporation*s owners* equity represents the stockholders* ownership of the business*s assets. The Walt Disney Company*s equity consists of the following: ← Common stock and additional paid-in capital (line 25), represented by shares issued to stock- holders for about $34,301 million at September 27, 2014, and $33,440 million at September 28, 2013. This account represents the face amount (par value) of the stock issued to share- holders, plus additional amounts paid in excess of the stock*s par value. We discuss this topic in greater depth in Chapter 10. ← Retained earnings (line 26) are $53,734 million and $47,758 million at September 27, 2014, and September 28, 2013, respectively. We saw these figures on the statement of re- tained earnings in Exhibit 1-8 (lines 7 and 10). Retained earnings* final resting place is the stockholders* equity section of the balance sheet. ← The Walt Disney Company*s equity holds three other items. Treasury stock at cost (line 28) represents amounts paid by the company to repurchase its own stock. Accumulated other comprehensive income (loss) (line 27) represents items of gain or loss that are allowed by the FASB to bypass the income statement and be recorded directly into stockholders* eq- uity. We will discuss the reasons for this in Chapters 8 and 11. Noncontrolling interests (line 29) represent the amount of consolidated earnings attributable to noncontrolling inter- ests (see line 16 of Exhibit 1-7) that have accumulated over time. The amounts of $3,220 million as of September 27, 2014, and $2,721 million as of September 28, 2013, represent the portion of The Walt Disney Company*s consolidated net assets that are not owned by The Walt Disney Company. This topic is also discussed in Chapter 8. ← At September 27, 2014, The Walt Disney Company has total equity of $48,178 million (line 30). We can now prove that The Walt Disney Company*s total assets equal total li- abilities and equity at September 27, 2014 (amounts in millions): Total assets (line 14)............................................................ Total liabilities (line 23)....................................................... Total equity (line 30)............................................................ Total liabilities and equity (line 31)...................................... + $84,186$36,008$48,178$84,186Must equalThe statement of cash flows is the fourth required financial statement. The Statement of Cash Flows Measures Cash Receipts and PaymentsCompanies engage in three basic types of activities: ← Operating activities ← Investing activities ← Financing activitiesCash Flow .. A1123456789101112131415161718192021222326123456789101112131415161718192021222326A 24 Chapter 1construct financial statEmEnts and analyzE thE rElationships among thEmExhibit 1-11 summarizes the relationships among the financial statements of The Walt Disney Company for the fiscal year ending September 27, 2014. These statements are condensed, so the details of Exhibits 1-7 through 1-10 are omitted. Study the exhibit carefully because these rela- tionships apply to all organizations. Specifically, note the following: 1. The income statement for the 12 months ended September 27, 2014 a. Reports total revenues and expenses of the year. Revenues and expenses are reported only on the income statement. b. Reports net income if total revenues exceed total expenses. If total expenses exceed total revenues, there is a net loss. 2. The statement of retained earnings for the 12 months ended September 27, 2014 a. Opens with the beginning retained earnings balance. b. Adds net income (or subtracts net loss). Net income comes directly from the income statement (arrow 1 in Exhibit 1-11). c. Subtracts dividends declared. d. Reports the retained earnings balance at the end of the year. 3. The balance sheet at September 27, 2014, end of the accounting year a. Reports assets, liabilities, and stockholders* equity at the end of the year. Only the balance sheet reports assets and liabilities. b. Reports that assets equal the sum of liabilities plus stockholders* equity. This balanc- ing feature follows the accounting equation and gives the balance sheet its name. c. Reports retained earnings, which comes from the statement of retained earnings (arrow 2 in Exhibit 1-11). 4. The statement of cash flows for the 12 months ended September 27, 2014 a. Reports cash flows from operating, investing, and financing activities. Each category results in net cash provided (an increase) or used (a decrease). b. Reports whether cash and cash equivalents increased (or decreased) during the year. The statement shows the ending cash and cash equivalents balance, as reported on the balance sheet (arrow 3 in Exhibit 1-11). Financing activities used another $6,710 million (line 19). Examining the details, we find that The Walt Disney Company used a whopping $6,527 million in cash to repurchase its com- mon stock from existing shareholders during the year (line 16). This represents the largest single transaction reflected on the cash flow statement, besides net income. In addition, the company paid another $1,508 million in cash dividends to shareholders (line 17). We will discuss the rea- sons why companies repurchase stock from their shareholders and pay dividends in Chapter 10. Overall, The Walt Disney Company*s cash and cash equivalents decreased by $510 million dur- ing the 12 months ended September 27, 2014 (line 21) and ended the year at $3,421 million (line 23). Trace ending cash and cash equivalents back to the balance sheet in Exhibit 1-9 (line 4). Cash and cash equivalents links the statement of cash flows to the balance sheet. You*ve just performed more financial statement analysis! .. 5 Construct financial statements and analyze the relationships among themM01_A114567143322567A 2014A1123456123456A A112345678910111213141234567891011121314A A1123456789123456789A 26 Chapter 1dEcision guidElinEsIN EvALUATING A COMPANy, WHAT DO DECISION MAKERS LOOK FOR? These Decision Guidelines illustrate how people use financial statements. Decision Guidelines appear throughout the book to show how accounting information aids decision making. Suppose you are considering an investment in The Walt Disney Company stock. How do you proceed? Where do you get the information you need? What do you look for? decisionguidelines1. Can the company sell its services or products? 2. What are the main income measures to watch for trends? 3. What percentage of revenue ends up as profit? 4. Can the company collect its receivables? 5. Can the company pay its a. current liabilities? b. current and long-term liabilities? 6. Where is the company*s cash coming from? How is cash being used? 1. Net revenue on the income statement. Are revenues growing or falling? 2. a. Gross profit (sales 每 cost of goods sold) b. Operating income (gross profit 每 operating expenses) c. Net income (bottom line of the income statement) All three income measures should be increasing over time. 3. Divide net income by sales revenue. Examine the trend of the net income percentage from year to year. 4. From the balance sheet, compare the percentage increase in accounts receivable to the percentage in- crease in sales. If receivables are growing much faster than sales, collections may be too slow, and a cash shortage may result. 5. From the balance sheet, compare a. current assets to current liabilities. Current assets should be somewhat greater than current liabilities. b. total assets to total liabilities. Total assets must be somewhat greater than total liabilities. 6. On the cash flows statement, operating activities should provide the bulk of the company*s cash during most years. Otherwise, the business will fail. Examine investing cash flows to see if the company is pur- chasing long-term assets〞property, plant, and equipment and intangibles (this signals growth). EvaluatE BusinEss dEcisions EthicallyGood business requires decision making, which in turn requires the exercise of good judgment, both at the individual and corporate levels. For example, you may work for or eventually run a company like Starbucks Corp. that has decided to plow back a portion of its profits to support social development projects in the communities that produce its coffee, tea, and cocoa. Can that be profitable in the long run? Perhaps as an accountant, you may have to decide whether to report a $50,000 expenditure for a piece of equipment as an asset on the balance sheet or an expense on the income statement. Alter- natively, as a sales manager for a company like IBM, you may have to decide whether $25 million 6 Evaluate business decisions ethicallyM01_ 28 Chapter 1American Institute of Certified Public Accountants Code of Professional ConductThe decision framework for making ethical judgments provides general guidance for everyone, regard- less of profession or industry. Many professional organizations, businesses, and other entities adopt their own ethical guidelines or codes of conduct so that their members have more specific guidance. The American Institute of Certified Public Accountants (AICPA) is one such organization. The AICPA has a code of professional conduct that applies to all of its members. This code provides guidance to all members in the performance of their professional duties and is composed of several principles that form the basic building blocks of ethical and professional conduct. The code also contains extensive interpretations and other guidance; the actual code is almost 200 pages in length. Even though you may not be an accounting major and may never be a member of the AICPA and covered by the AICPA Code of Professional Conduct, the basic principles contained in its code can be applied to a wide range of professions and organizations. In addition, you may in your future career have interactions with CPAs, and it is helpful to understand the code of con- duct to which CPAs adhere if they are members of the AICPA. dEcision guidElinEsDECISION FRAMEWORK FOR MAKING ETHICAL JUDGMENTSWeighing tough ethical judgments in business and accounting requires a decision framework. Answering the following four questions will guide you through tough decisions: decisionguidelines1. What is the issue?1. The issue will usually deal with making a judgment about an accounting measurement or disclosure that results in economic consequences, often to numerous parties. 2. Who are the stakeholders, and what are the consequences of the decision to each? 2. Stakeholders are anyone who might be impacted by the decision〞you, your company, and potential users of the information (investors, creditors, and regulatory agencies). Consequences can be economic, legal, or ethical in nature. 3. Weigh the alternatives.3. Analyze the impact of the decision on all stakeholders, using economic, legal, and ethical criteria. Ask ※Who will be helped or hurt, whose rights will be exercised or denied, and in what way?§ 4. Make the decision and be prepared to deal with the consequences. 4. Exercise the courage to either defend the decision or to change it, depending on its positive or negative impact. How does your decision make you feel afterward? To simplify, we might ask three questions: 1. Is the action legal? If not, steer clear, unless you want to go to jail or pay monetary damages to injured parties. If the action is legal, go on to questions 2 and 3.2. Who will be affected by the decision and how? Be as thorough about this analysis as possible, and analyze it from all three standpoints (economic, legal, and ethical). 3. How will this decision make me feel afterward? How would it make me feel if my family reads about it in the newspaper? In later chapters throughout the book, we will apply this model to different accounting decisions. 30 30 Chapter 1best interest of those for whom the services are performed, and consistent with the profes- sion*s responsibility to the public. Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional im- provement that must continue throughout a member*s professional life. It is a member*s indi- vidual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member*s services meets the high level of professionalism required by these Principles. Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also es- tablishes the limitations of a member*s capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member*s firm. Each member is responsible for assessing his or her own competence of evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed. ← Scope and nature of services. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. Alladin Travel, Inc., began operations on April 1, 2016. During April, the business provided services for customers. It is now April 30 and Starr Williams, majority shareholder and manager, is trying to determine how well Alladin Travel, Inc., performed during its first month. Ms. Williams also wants to know the company*s financial position at the end of April and its cash flows during the month. The following data are listed in alphabetical order. Accounts payable...............................Land...................................................$18,000Accounts receivable............................ Adjustments to reconcile netincome to net cash providedby operating activities.................... Cash balance at beginning of April..... Cash balance at end of April.............. Cash receipts: Issuance (sale) of stock to owners... Sale of land.................................... Payments of cash: Acquisition of land.........................40,000Dividends.......................................2,100Rent expense......................................1,100Retained earnings at beginningof April.......................................... Retained earnings at end of April....... Salary expense....................................1,200Common stock................................... Utilities expense.................................400$ 1,8002,000(3,900) ? 50,00022,00050,0000Supplies..............................................3,700Service revenue...................................10,0000? Requirements1. Prepare the income statement, the statement of retained earnings, and the statement of cash flows for the month ended April 30, 2016, and the balance sheet at April 30, 2016. Draw ar- rows linking the statements. 2. Answer the following questions: a. How well did Alladin Travel, Inc., perform during its first month of operations? b. Where does Alladin Travel, Inc., stand financially at the end of April? AnswersRequirement 1Financial Statements of Alladin Travel, Inc. End-of-Chapter Summary ProblemM01_30 Chapter 1best interest of those for whom the services are performed, and consistent with the profes- sion*s responsibility to the public. Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional im- provement that must continue throughout a member*s professional life. It is a member*s indi- vidual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member*s services meets the high level of professionalism required by these Principles. Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also es- tablishes the limitations of a member*s capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member*s firm. Each member is responsible for assessing his or her own competence of evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed. ← Scope and nature of services. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. Alladin Travel, Inc., began operations on April 1, 2016. During April, the business provided services for customers. It is now April 30 and Starr Williams, majority shareholder and manager, is trying to determine how well Alladin Travel, Inc., performed during its first month. Ms. Williams also wants to know the company*s financial position at the end of April and its cash flows during the month. The following data are listed in alphabetical order. Accounts payable...............................Land...................................................$18,000Accounts receivable............................ Adjustments to reconcile netincome to net cash providedby operating activities.................... Cash balance at beginning of April..... Cash balance at end of April.............. Cash receipts: Issuance (sale) of stock to owners... Sale of land.................................... Payments of cash: Acquisition of land.........................40,000Dividends.......................................2,100Rent expense......................................1,100Retained earnings at beginningof April.......................................... Retained earnings at end of April....... Salary expense....................................1,200Common stock................................... Utilities expense.................................400$ 1,8002,000(3,900) ? 50,00022,00050,0000Supplies..............................................3,700Service revenue...................................10,0000? Requirements1. Prepare the income statement, the statement of retained earnings, and the statement of cash flows for the month ended April 30, 2016, and the balance sheet at April 30, 2016. Draw ar- rows linking the statements. 2. Answer the following questions: a. How well did Alladin Travel, Inc., perform during its first month of operations? b. Where does Alladin Travel, Inc., stand financially at the end of April? AnswersRequirement 1Financial Statements of Alladin Travel, Inc. End-of-Chapter Summary ProblemM01_30 Chapter 1best interest of those for whom the services are performed, and consistent with the profes- sion*s responsibility to the public. Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional im- provement that must continue throughout a member*s professional life. It is a member*s indi- vidual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member*s services meets the high level of professionalism required by these Principles. Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also es- tablishes the limitations of a member*s capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member*s firm. Each member is responsible for assessing his or her own competence of evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed. ← Scope and nature of services. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. Alladin Travel, Inc., began operations on April 1, 2016. During April, the business provided services for customers. It is now April 30 and Starr Williams, majority shareholder and manager, is trying to determine how well Alladin Travel, Inc., performed during its first month. Ms. Williams also wants to know the company*s financial position at the end of April and its cash flows during the month. The following data are listed in alphabetical order. Accounts payable...............................Land...................................................$18,000Accounts receivable............................ Adjustments to reconcile netincome to net cash providedby operating activities.................... Cash balance at beginning of April..... Cash balance at end of April.............. Cash receipts: Issuance (sale) of stock to owners... Sale of land.................................... Payments of cash: Acquisition of land.........................40,000Dividends.......................................2,100Rent expense......................................1,100Retained earnings at beginningof April.......................................... Retained earnings at end of April....... Salary expense....................................1,200Common stock................................... Utilities expense.................................400$ 1,8002,000(3,900) ? 50,00022,00050,0000Supplies..............................................3,700Service revenue...................................10,0000? Requirements1. Prepare the income statement, the statement of retained earnings, and the statement of cash flows for the month ended April 30, 2016, and the balance sheet at April 30, 2016. Draw ar- rows linking the statements. 2. Answer the following questions: a. How well did Alladin Travel, Inc., perform during its first month of operations? b. Where does Alladin Travel, Inc., stand financially at the end of April? AnswersRequirement 1Financial Statements of Alladin Travel, Inc. End-of-Chapter Summary ProblemM01_2016A112345678910111213141516171234567891011121314151617A 2016A11234567891012345678910A 2016A112345671234567A 31 Requirement 2a. Alladin Travel, Inc., performed rather well in April. Net income was $7,300〞very good in relation to service revenue of $10,000. The company was able to pay cash dividends of $2,100. b. Alladin Travel, Inc., ended April with cash of $33,300. Total assets of $57,000 far exceed total liabilities of $1,800. Stockholders* equity of $55,200 provides a good cushion for borrowing. The business*s financial position at April 30, 2016, is strong. If you*ve had a basic course in Excel, you can prepare financial state- ments easily using an Excel spreadsheet! In this chapter, you learned the accounting equation (see Exhibit 1-4 on page 12). In Exhibit 1-5 you learned the for- mulas for net income as well as how to compute the ending balance of retained earnings. Using the balance sheet for Alladin Travel, Inc., in the End-of-Chapter Summary Problem, it is easy to prepare an Excel template for a balance sheet by programming cells for total assets (cell B9) and total liabilities and stockholders* equity (cell D9). Then, as long as you know what accounts belong in each category, you can use the insert function to insert in- dividual assets, liabilities, and stockholders* equity accounts from a list into various cells of the spreadsheet (don*t forget to include both description and amounts). You can insert sub- totals for current assets, non-current assets, current liabilities, non-current liabilities, and stockholders* equity. You can also build a basic Excel template for the income statement for Alladin Travel, Inc., by listing and totaling revenues and listing and totaling expenses, then subtracting total expenses from total revenues to compute net income (cell C9). You can build an Excel template for the statement of retained earnings by programming a cell for the ending balance of retained earnings (beginning balance 1 net income (loss) 2 dividends) (cell C6). Then merely insert the individual amounts, and bingo, your spreadsheet does all the math for you. Don*t forget the proper order of financial statement preparation: (1) income statement, (2) statement of retained earnings, (3) balance sheet, and (4) statement of cash flows. If you have to prepare all four statements, it*s best to follow that order so that you can link the income statement cell containing net income to the corresponding cell in the statement of retained earnings; link the value of the ending balance of retained earnings to the cell containing the retained earnings amount in the balance sheet; and link the ending balance of cash on the statement of cash flows to the balance of cash on the balance sheet as of the year-end. These links correspond to the amounts connected by arrows (1, 2, and 3) on page 31. The beauty of this approach is that once you build a set of basic templates, you can save and use them over and over again as you progress through the course. Try It in Excel. b. $122,000. d. $142,000. 13. Which of the following is a true statement about International Financial Reporting Standards? a. They are not needed for U.S. businesses since the United States already has the strongest accounting standards in the world. b. They are more exact (contain more rules) than U.S. generally accepted accounting prin- ciples. c. They are converging gradually with U.S. standards. d. They are not being applied anywhere in the world yet, but soon they will be. 14. Which of the following is the most accurate statement regarding ethics as applied to decision making in accounting? a. Ethics has no place in accounting, since accounting deals purely with numbers. b. It is impossible to learn ethical decision making, since it is just something you decide to do or not to do. c. Ethics is becoming less and less important as a field of study in business. d. Ethics involves making difficult choices under pressure and should be kept in mind in making every decision, including those involving accounting. Accounting Vocabularyaccounting (p. 4) The information system that measures busi- ness activities, processes that information into reports and finan- cial statements, and communicates the results to decision makers. accounting cycle (p. 4) The process by which financial statements are prepared. accounting equation (p. 11) The most basic tool of accounting: Assets 5 Liabilities 1 Owners* equity. amortization (p. 17) Allocation of the cost of an intangible asset to expense over its useful life. asset (p. 11) An economic resource that is expected to be of benefit in the future. balance sheet (p. 19) List of an entity*s assets, liabilities, and owners* equity as of a specific date. Also called the statement of financial position. board of directors (p. 6) Group elected by the stockholders to set policy for a corporation and to appoint its officers. capital (p. 11) Another name for the owners* equity of a business. M01_HARR7620_11_SE_C01_001-059.indd 3411/13/15 REVIEW | The Financial StatementsQuick Check (Answers are given on page 59.) 1. Suppose you are starting a medical data analytics firm. Which form of business will limit your liability for the business to the amount you have invested? a. Proprietorshipb. Partnershipc. Corporationd. None of the above. 2. Rosenbaum Enterprises buys a warehouse for $500,000 to use for its East Coast distribu- tion operations. On the date of the purchase, a professional appraisal shows a value of $550,000 for the warehouse. The seller had originally purchased the building for $475,000. Rosenbaum has a similar warehouse on the West Coast that has a book value of $510,000. Under the historical cost principle, Rosenbaum should record the building fora. $475,000. b. $500,000. c. $510,000. d. $550,000. 3. The accounting equation can be expressed asa. Assets 2 Liabilities 5 Owners* equity. b. Owners* equity 2 Assets 5 Liabilities. c. Assets 5 Liabilities 2 Owners* equity. d. Assets 1 Liabilities 5 Owners* equity. 4. The nature of an asset is best described asa. something with physical form that*s valued at cost in the accounting records. b. an economic resource that*s expected to benefit future operations. c. an economic resource representing cash or the right to receive cash in the future. d. something owned by a business that has a ready market value. 5. Sarah Zocki is interviewing next week for a job at Rainbow Inks Corporation. Which financial statement should she examine to evaluate how well Rainbow Inks Corporation performed last year? a. Balance sheetb. Income statementc. Statement of cash flowsd. Statement of retained earnings 6. How would net income be most likely to affect the accounting equation? a. Increase assets and increase liabilitiesb. Decrease assets and decrease liabilitiesc. Increase assets and increase stockholders* equityd. Increase liabilities and decrease stockholders* equity 7. During the year, Snowtown Corporation has $320,000 in revenues, $115,000 in expenses, and $8,000 in dividend declarations and payments. Stockholders* equity changed bya. 1$205,000. b. 2$197,000. c. 1$213,000. d. 1$197,000. 8. Snowtown Corporation in question 7 hada. net income of $123,000. b. net income of $205,000. c. net income of $435,000. d. net loss of $135,000. accounting The information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decision makers. accounting cycle The process by which financial statements are prepared. accounting equation The most basic tool of accounting: Assets = Liabilities + Owners* equity. amortization Allocation of the cost of an intangible asset to expense over its useful life. asset An economic resource that is expected to be of benefit in the future. balance sheet List of an entity*s assets, liabilities, and owners* equity as of a specific date. Also called the statement of financial position. board of directors Group elected by the stockholders to set policy for a corporation and to appoint its officers. capital Another name for the owners* equity of a business. common stock The most basic form of capital stock. consolidation The method of accounting used for multiple entities that are under common ownership (more than 50% of the voting interests are owned by the same parties). continuity assumption See going-concern assumption. corporation A business owned by stockholders. A corporation is a legal entity, an ※artificial person§ in the eyes of the law. current asset An asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business*s normal operating cycle if longer than a year. current liability A debt due to be paid within one year or within the entity*s operating cycle if the cycle is longer than a year. deficit Negative balance in retained earnings caused by net losses over a period of years. depreciation Allocation of the cost of a plant asset to expense over its useful life. dividends Distributions (usually cash) by a corporation to its stockholders. entity An organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit. equity See owners* equity and stockholders* equity. equity method Method of accounting required for investments where 20% to 50% of voting interest is owned. ethics Standards of right and wrong that transcend economic and legal boundaries. Ethical standards deal with the way we treat others and restrain our own actions because of the desires, expectations, or rights of others, or because of our obligations to them. expenses Decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues. fair value The amount that a business could sell an asset for, or the amount that a business could pay to settle a liability. financial accounting The branch of accounting that provides information to people outside the firm. Financial Accounting Standards Board (FASB) The regulatory body in the United States that formulates generally accepted accounting principles (GAAP). financial statements Business documents that report financial information about a business entity to decision makers. financing activities Activities that obtain from investors and creditors the cash needed to launch and sustain the business; a section of the statement of cash flows. generally accepted accounting principles (GAAP) Accounting guidelines, formulated by the Financial Accounting Standards Board, that govern how accounting is practiced. going-concern assumption Holds that the entity will remain in operation for the foreseeable future. goodwill The excess of cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities). gross profit Revenue from a particular activity minus the direct costs associated with earning that revenue. historical cost principle Principle that states that assets should be recorded at their actual cost. income statement A financial statement listing an entity*s revenues, expenses, and net income or net loss for a specific period. Also called the statement of operations. intangible assets Assets with no tangible form that represent resources that have a value and future benefit. International Financial Reporting Standards (IFRS) Accounting guidelines, formulated by the International Accounting Standards Board (IASB). investing activities Activities that increase or decrease the long-term assets available to the business; a section of the statement of cash flows. liability An economic obligation (a debt) payable to an individual or an organization outside the business. limited-liability company A business organization in which the business (not the owner) is liable for the company*s debts. long-term assets Assets that are expected to benefit the entity for long periods of time, beyond the end of the next fiscal year. These usually include investments, property and equipment (plant assets), and intangible assets. long-term debt A liability that falls due beyond one year from the date of the financial statements. management accounting The branch of accounting that generates information for the internal decision makers of a business, such as top executives. net earnings Another name for net income. net income Excess of total revenues over total expenses. Also called net earnings or net profit. net loss Excess of total expenses over total revenues. net profit Another name for net income. noncontrolling interests Interests in consolidated entities that are more than 50% but less than 100% owned. operating activities Activities that create revenue or expense in the statement of cash flows. Operating activities affect the income statement. owners* equity The claim of the owners of a business to the assets of the business. Also called capital, stockholders* equity, or net assets. paid-in capital The amount of stockholders* equity that stockholders have contributed to the corporation. Also called contributed capital. partnership An association of two or more persons who co-own a business for profit. proprietorship A business with a single owner. retained earnings The amount of stockholders* equity that the corporation has earned through profitable operations and has not given back to stockholders. revenues Increase in retained earnings from delivering goods or services to customers or clients. segment A division or subset of a business*s operations. shareholder Another name for stockholder. stable-monetary-unit assumption The reason for ignoring the effect of inflation in the accounting records, based on the assumption that the dollar*s purchasing power is relatively stable. statement of cash flows Reports cash receipts and cash payments classified according to the entity*s major activities: operating, investing, and financing. statement of financial position Another name for the balance sheet. statement of operations Another name for the income statement. statement of retained earnings Summary of the changes in the retained earnings of a corporation during a specific period. stock Shares into which the owners* equity of a corporation is divided. stockholder A person who owns stock in a corporation. Also called a shareholder. stockholders* equity The stockholders* ownership interest in the assets of a corporation. owners* equity (p. 11) The claim of the owners of a business to the assets of the business. Also called capital, stockholders* equity, or net assets. paid-in capital (p. 13) The amount of stockholders* equity that stockholders have contributed to the corporation. Also called contributed capital. partnership (p. 6) An association of two or more persons who co-own a business for profit. proprietorship (p. 5) A business with a single owner. retained earnings (p. 13) The amount of stockholders* equity that the corporation has earned through profitable operations and has not given back to stockholders. revenues (p. 13) Increase in retained earnings from delivering goods or services to customers or clients. segment (p. 8) A division or subset of a business*s operations. shareholder (p. 6) Another name for stockholder. stable-monetary-unit assumption (p. 10) The reason for ignoring the effect of inflation in the accounting records, based on the assumption that the dollar*s purchasing power is relatively stable. statement of cash flows (p. 23) Reports cash receipts and cash payments classified according to the entity*s major activities: operating, investing, and financing. statement of financial position (p. 19) Another name for the balance sheet. statement of operations (p. 15) Another name for the income statement. statement of retained earnings (p. 18) Summary of the changes in the retained earnings of a corporation during a specific period. stock (p. 6) Shares into which the owners* equity of a corporation is divided. stockholder (p. 6) A person who owns stock in a corpora- tion. Also called a shareholder. stockholders* equity (p. 11) The stockholders* ownership interest in the assets of a corporation. Assess Your ProgressSome of the following exercises and problems are available as Excel questions in MyAccountingLab.. ethics CheckEC1-1. (Learning Objective 6: Identify ethical principle violated) For each of the situations listed, identify which of three principles (integrity, objectivity and independence, or due care) from the AICPA Code of Professional Conduct is violated. Assume all persons listed in the situations are members of the AICPA. (Note: Refer to the AICPA Code of Professional Conduct contained on pages 29每30 in Chapter 1 for descrip- tions of the principles.) a. This year Marcus*s company incurred higher cost of goods sold than expected, which resulted in an overall net loss for the company. Marcus does not want the company to lose investors due to the net loss so he adjusts cost of goods sold so that the company has a positive net income. b. Bethany is eager to please her supervisor and wants to earn a promotion. When Bethany LO6M01_owners* equity (p. 11) The claim of the owners of a business to the assets of the business. Also called capital, stockholders* equity, or net assets. paid-in capital (p. 13) The amount of stockholders* equity that stockholders have contributed to the corporation. Also called contributed capital. partnership (p. 6) An association of two or more persons who co-own a business for profit. proprietorship (p. 5) A business with a single owner. retained earnings (p. 13) The amount of stockholders* equity that the corporation has earned through profitable operations and has not given back to stockholders. revenues (p. 13) Increase in retained earnings from delivering goods or services to customers or clients. segment (p. 8) A division or subset of a business*s operations. shareholder (p. 6) Another name for stockholder. stable-monetary-unit assumption (p. 10) The reason for ignoring the effect of inflation in the accounting records, based on the assumption that the dollar*s purchasing power is relatively stable. statement of cash flows (p. 23) Reports cash receipts and cash payments classified according to the entity*s major activities: operating, investing, and financing. statement of financial position (p. 19) Another name for the balance sheet. statement of operations (p. 15) Another name for the income statement. statement of retained earnings (p. 18) Summary of the changes in the retained earnings of a corporation during a specific period. stock (p. 6) Shares into which the owners* equity of a corporation is divided. stockholder (p. 6) A person who owns stock in a corpora- tion. Also called a shareholder. stockholders* equity (p. 11) The stockholders* ownership interest in the assets of a corporation. Assess Your ProgressSome of the following exercises and problems are available as Excel questions in MyAccountingLab.. ethics CheckEC1-1. (Learning Objective 6: Identify ethical principle violated) For each of the situations listed, identify which of three principles (integrity, objectivity and independence, or due care) from the AICPA Code of Professional Conduct is violated. Assume all persons listed in the situations are members of the AICPA. (Note: Refer to the AICPA Code of Professional Conduct contained on pages 29每30 in Chapter 1 for descrip- tions of the principles.) a. This year Marcus*s company incurred higher cost of goods sold than expected, which resulted in an overall net loss for the company. Marcus does not want the company to lose investors due to the net loss so he adjusts cost of goods sold so that the company LO6M01_ 1. (Learning Objective 6: Identify ethical principle violated) For each of the situations listed, identify which of three principles (integrity, objectivity and independence, or due care) from the AICPA Code of Professional Conduct is violated. Assume all persons listed in the situations are members of the AICPA. (Note: Refer to the AICPA Code of Professional Conduct contained on pages 29每30 in Chapter 1 for descrip- tions of the principles.) a. This year Marcus*s company incurred higher cost of goods sold than expected, which resulted in an overall net loss for the company. Marcus does not want the company to lose investors due to the net loss so he adjusts cost of goods sold so that the company has a positive net income. b. Bethany is eager to please her supervisor and wants to earn a promotion. When Bethany puts together the financial statements and related information for the past year, she bur- ies unfavorable results deep in the report and presents the good news prominently. She figures that by making the company look good, it will make her case for promotion stronger. c. Jennelle receives a large year-end bonus if her company*s sales grow by 8% this year. Sales only grew by 7.5% so Jennelle created false sales documentation to make it appear that the sales growth goal was met. d. Andrew is in charge of putting together his company*s financial statements, but does not understand the newest financial reporting standard that went into effect last year. He decides to do the best he can with interpreting and applying the new standard, since he does not have time right now to learn about the new standard in depth. LO6M01_SE_C01_001-059.indd 3611/24/15 10:00 AM Short ExercisesS1-1. (Learning Objective 1: Explain accounting language) Accounting definitions are precise, and you must understand the vocabulary to properly use accounting. Sharpen your understanding of key terms by answering the following questions: 1. How do the assets and owners* equity of Nike, Inc., differ from each other? Which one (assets or owners* equity) must be at least as large as the other? Which one can be smaller than the other? 2. How are Nike, Inc.*s, liabilities and owners* equity similar? Different? S1-2. (Learning Objective 4: Evaluate business activity) Consider Walmart, a large retailer. Classify the following items as an asset (A), a liability (L), or stockholders* equity (S) for Walmart: a. Accounts receivableb. Long-term debtc. Merchandise inventoryd. Prepaid expensese. Accrued expenses payablef. Equipmentlo1lo4g. Notes payableh. Retained earningsi. Landj. Accounts payablek. Common stockl. SuppliesS1-3. (Learning Objective 5: Construct an income statement) 1. Identify the two basic categories of items on an income statement. 2. What do we call the bottom line of the income statement? S1-4. (Learning Objective 1: Explain and differentiate between business organizations) Regal Signs, Inc., needs funds, and Megan Regal, the president, has asked you to consider investing in the business. Answer the following questions about the different ways that Regal might organize the business. Explain each answer. a. What forms of organization will enable the owners of Regal Signs, Inc., to limit their risk of loss to the amounts they have invested in the business? b. What form of business organization will give Megan Regal the most freedom to manage the business as she wishes? c. What form of organization will give creditors the maximum protection in the event that Regal Signs, Inc., fails and cannot pay its debts? S1-5. (Learning Objective 2: Explain underlying accounting concepts, assumptions, and principles of accounting) Mason Olson is chairman of the board of Healthy Fast Foods, Inc. Suppose Olson has just founded Healthy Fast Foods, and assume that he treats his home and other personal assets as part of Healthy Fast Foods. Answer these questions about the evalua- tion of Healthy Fast Foods, Inc. 1. Which accounting assumption governs this situation? 2. How can the proper application of this accounting assumption give Olson and others a realistic view of Healthy Fast Foods, Inc.? Explain in detail. lo1lo2lo2lo5M01_ the business as she wishes? c. What form of organization will give creditors the maximum protection in the event that Regal Signs, Inc., fails and cannot pay its debts? S1-5. (Learning Objective 2: Explain underlying accounting concepts, assumptions, and principles of accounting) Mason Olson is chairman of the board of Healthy Fast Foods, Inc. Suppose Olson has just founded Healthy Fast Foods, and assume that he treats his home and other personal assets as part of Healthy Fast Foods. Answer these questions about the evalua- tion of Healthy Fast Foods, Inc. 1. Which accounting assumption governs this situation? 2. How can the proper application of this accounting assumption give Olson and others a realistic view of Healthy Fast Foods, Inc.? Explain in detail. S1-6. (Learning Objective 2: Apply underlying accounting concepts, assumptions, and principles) Identify the accounting concept, assumption, or principle that best applies to each of the following situations: a. Burger King, the restaurant chain, sold a store location to McDonald*s. How can Burger King determine the sale price of the store〞by a professional appraisal, Burger King*s original cost, or the amount actually received from the sale? b. General Motors wants to determine which division of the company〞Chevrolet or GMC〞is more profitable. c. Inflation has been around 5.5% for some time. Woodlake Realtors is considering measuring its land values in inflation-adjusted amounts. d. You get an especially good buy on a laptop, paying only $300 when it normally costs $800. What is your accounting value for this laptop? HARR7620_11_SE_C01_001-059.indd 3711/protection in the event that concepts, assumptions, and Healthy Fast Foods, Inc. he treats his home and questions about the evalua- give Olson and others a assumptions, and that best applies to each of McDonald*s. How can Burger appraisal, Burger King*s company〞Chevrolet or Realtors is considering when it normally costs 3711/13/15 5:15 PM S1-7. (Learning Objective 3: Apply the accounting equation) Suppose you manage a Thai restaurant. Identify the missing amount for each situation: Total Liabilities$270,000 70,000? =+Stockholders* Equity$340,000? 350,000a. b. c. Total Assets$ ? 95,000420,000S1-8. (Learning Objective 3: Apply the accounting equation) 1. If you know the assets and the owners* equity of a business, how can you measure its liabilities? Give the equation. 2. Use the accounting equation to show how to determine the amount of a company*s owners* equity. How would your answer change if you were analyzing your own household or a single IHOP restaurant? S1-9. (Learning Objective 4: Evaluate business activity) Suppose you are analyzing the financial statements of Bartelle, Inc. Identify each item with its appropriate financial statement, using the following abbreviations: Income statement (I), Statement of retained earnings (R), Balance sheet (B), and Statement of cash flows (C). Three items appear on two financial statements, and one item shows up on three statements. a. Accounts payableb. Inventoryc. Interest revenued. Long-term debte. Net cash used for financing activitiesf. Salary expenseg. Cashlo3lo3lo4h. Dividendsi. Increase or decrease in cashj. Net incomek. Net cash provided by operating activitiesl. Retained earningsm. Sales revenuen. Common stockS1-10. (Learning Objectives 2, 4: Apply accounting concepts; evaluate business activity) Apply your understanding of the relationships among the financial statements to answer these questions. a. How can a business earn large profits but have a small balance of retained earnings? b. Give two reasons why a business can have a steady stream of net income over a five-year period and still experience a cash shortage. c. If you could pick a single source of cash for your business, what would it be? Why? d. How can a business be unprofitable several years in a row and still have plenty of cash? S1-11. (Learning Objective 4: Evaluate business activity) For each of the following questions, indicate which financial statement would most likely be used to provide the information. Use the following abbreviations: Income statement (I), Statement of retained earnings (R), Balance sheet (B), and Statement of cash flows (C). a. How well did the company perform during the year? 4lo2lo4lo5M01_ questions. a. How can a business earn large profits but have a small balance of retained earnings? b. Give two reasons why a business can have a steady stream of net income over a five-year period and still experience a cash shortage. c. If you could pick a single source of cash for your business, what would it be? Why? d. How can a business be unprofitable several years in a row and still have plenty of cash? S1-11. (Learning Objective 4: Evaluate business activity) For each of the following questions, indicate which financial statement would most likely be used to provide the information. Use the following abbreviations: Income statement (I), Statement of retained earnings (R), Balance sheet (B), and Statement of cash flows (C). a. How well did the company perform during the year? b. Why did the company*s retained earnings change during the year? c. Did the company declare a dividend during the year? d. How much in total debt does the company have? e. How much cash did the company generate and spend during the year? f. What assets does the company have? g. How much cash was generated by operating activities? h. What were the company*s net sales for the year? i. What is the company*s financial position at the end of the year? S1-12. (Learning Objective 5: Construct an income statement) O*Conner Services, Inc., began 2016 with total assets of $235 million and ended 2016 with assets of $355 million. During 2016, O*Conner Services earned revenues of $397 million and had expenses of $164 million. O*Conner Services paid dividends of $29 million in 2016. Prepare the company*s income statement for the year ended December 31, 2016, complete with an appropriate heading. SE_C01_001-059.indd 3811/13/15 5:15 PM questions. a. How can a business b. Give two reasons five-year period and c. If you could pick d. How can a business S1-11. (Learning Objective indicate which financial statement the following abbreviations: sheet (B), and Statement a. How well did the b. Why did the company*s c. Did the company d. How much in total e. How much cash did f. What assets does g. How much cash was h. What were the company*s i. What is the company*s S1-12. (Learning Objective began 2016 with total assets 2016, O*Conner Services O*Conner Services paid dividends statement for the year ended HARR7620_11_SE_C01_001-059.indd 3811/S1-13. (Learning Objective 5: Construct a statement of retained earnings) Roam Corpora- tion began 2016 with retained earnings of $230 million. Revenues during the year were $490 million, and expenses totaled $340 million. Roam declared dividends of $54 million. What was the company*s ending balance of retained earnings? To answer this question, prepare Roam*s statement of retained earnings for the year ended December 31, 2016, complete with its proper heading. S1-14. (Learning Objective 5: Construct a balance sheet) At December 31, 2016, Aloha Enterprises has cash of $50 million, accounts receivable of $19 million, and long-term assets of $39 million. The company owes accounts payable of $13 million and has a long-term note payable of $25 million. Aloha Enterprises has common stock of $20 million and retained earnings of $50 million. Prepare Aloha Enterprises*s balance sheet at December 31, 2016, complete with its proper heading. S1-15. (Learning Objective 5: Solve for retained earnings and construct a balance sheet) Harmon Corporation ended its fiscal year on September 30, 2016, with cash of $75 million, accounts receivable of $22 million, property and equipment of $28 million, and other long-term assets of $17 million. The company*s liabilities consist of accounts payable of $33 million and long-term notes payable of $15 million. Harmon Corporation has total stockholders* equity of $94 million; of this total, common stock is $30 million. Solve for the company*s ending retained earnings and then prepare Harmon Corporation*s balance sheet at September 30, 2016. Use a proper heading on the balance sheet. S1-16. (Learning Objective 5: Construct a statement of cash flows) Avalon Legal Services, Inc., ended 2015 with cash of $18,000. During 2016, Avalon earned net income of $105,000 and had adjustments to reconcile net income to net cash provided by operations totaling $10,000 (this is a negative amount). Avalon paid $32,000 to purchase equipment during 2016. During 2016, the company paid dividends of $80,000. Prepare Avalon*s statement of cash flows for the year ended December 31, 2016, complete with its proper heading. S1-17. (Learning Objective 5: Construct an income statement, statement of retained earnings, and balance sheet) Following are partially completed financial statements (income statement, statement of retained earnings, and balance sheet) for Masterton Corporation. Complete the financial statements. All amounts are in millions. A11234512345A CD E B$ 184$ salesExpensesNet CorporationIncome Statementfor Year Ended December 31, 2016A1123456123456A During 2016, the company paid dividends of $80,000. Prepare Avalon*s statement of cash flows for the year ended December 31, 2016, complete with its proper heading. S1-17. (Learning Objective 5: Construct an income statement, statement of retained earnings, and balance sheet) Following are partially completed financial statements (income statement, statement of retained earnings, and balance sheet) for Masterton Corporation. Complete the financial statements. All amounts are in millions. A11234512345A CD E B$ 184$ a103Net salesExpensesNet incomeMasterton CorporationIncome Statementfor Year Ended December 31, 2016A1123456123456A CD E B$ 67(5) $ cbBeginning retained earningsNet incomeCash dividends declaredEnding retained earningsMasterton CorporationStatement of Retained Earningsfor Year Ended December 31, 2016A11234567891011121312345678910111213A CD E B$ 112$ e$ 40$ hdfg25Assets Cash All other assets Total assetsLiabilities Total liabilitiesStockholders' equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equityMasterton CorporationBalance SheetDecember 31, 2016lo5lo5lo5lo5lo5M01_HARR7620_11_SE_C01_001-059.indd 3911/2016A1123456123456A CD E B$ 67(5) $ cbBeginning retained earningsNet incomeCash dividends declaredEnding retained earningsMasterton CorporationStatement of Retained Earningsfor Year Ended December 31, 2016A11234567891011121312345678910111213A CD E B$ 112$ e$ 40$ hdfg25Assets Cash All other assets Total assetsLiabilities Total liabilitiesStockholders' equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equityMasterton CorporationBalance SheetDecember 31, 2016S1-18. (Learning Objective 6: Evaluate business decisions ethically) Good business and accounting practices require the exercise of good judgment. How should ethics be incorporated into making accounting judgments? Why is ethics important? Exercises Group AE1-19A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Compute the missing amount in the accounting equation for each company (amounts in billions): Presto DrycleanersFirst Street BankPam's FloralsAssets3626$ ? Liabilities10? $52Stockholders* Equity? 17$37Which company appears to have the strongest financial position? Explain your reasoning. E1-20A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Hooper, Inc., has current assets of $200 million; property, plant, and equipment of $350 million; and other assets totaling $160 million. Current liabilities are $170 million and long-term liabilities total $320 million. Requirements 1. Use these data to write Hooper*s accounting equation. 2. How much in resources does Hooper have to work with? 3. How much does Hooper owe creditors? 4. How much of the company*s assets do the Hooper stockholders actually own? lo64lo34lo3S1-17 (continued) A11234512345A CD E B$ 184$ a103Net salesExpensesNet incomeMasterton CorporationIncome Statementfor Year Ended December 31, 2016A1123456123456A CD E B$ 67(5) $ cbBeginning retained earningsNet incomeCash dividends declaredEnding retained earningsMasterton CorporationStatement of Retained Earningsfor Year Ended December 31, 2016A11234567891011121312345678910111213A CD E B$ 112$ e$ 40$ hdfg25Assets Cash All other assets Total assetsLiabilities Total liabilitiesStockholders' equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equityMasterton CorporationBalance SheetDecember 31, 2016S1-18. (Learning Objective 6: Evaluate business decisions ethically) Good business and accounting practices require the exercise of good judgment. How should ethics be incorporated into making accounting judgments? Why is ethics important? Exercises Group AE1-19A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Compute the missing amount in the accounting equation for each company (amounts in billions): Presto DrycleanersFirst Street BankPam's FloralsAssets3626$ ? Liabilities10? $52Stockholders* Equity? 17$37Which lo64lo34lo3S1-17 (continued) Exercises Group AE1-19A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Compute the missing amount in the accounting equation for each company (amounts in billions): Presto DrycleanersFirst Street BankPam's FloralsAssets3626$ ? Liabilities10? $52Stockholders* Equity? 17$37Which company appears to have the strongest financial position? Explain your reasoning. E1-20A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Hooper, Inc., has current assets of $200 million; property, plant, and equipment of $350 million; and other assets totaling $160 million. Current liabilities are $170 million and long-term liabilities total $320 million. Requirements 1. Use these data to write Hooper*s accounting equation. 2. How much in resources does Hooper have to work with? 3. How much does Hooper owe creditors? 4. How much of the company*s assets do the Hooper stockholders actually own? SE_C01_001-059.indd 4011/13/15 5:15 PM Exercises Group AE1-19A. (Learning Objectives operations) Compute (amounts in billions): Presto Street company appears E1-20A. (Learning Objectives operations) Hooper, Inc., $350 million; and other long-term liabilities total Requirements 1. Use these data to 2. How much in resources 3. How much does Hooper 4. How much of the M01_HARR7620_11_SE_C01_001-059.indd 4011/E1-21A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Franklin Company*s comparative balance sheet at January 31, 2017, and 2016, reports the following (in millions): 20172016Total assets$75$53Total liabilities2315RequirementsThree situations about Franklin Company*s issuance of stock and declaration and payment of dividends during the year ended January 31, 2017, follow. For each situation, use the accounting equation and the statement of retained earnings to compute the amount of Franklin*s net income or net loss during the year ended January 31, 2017. 1. Franklin issued $12 million of stock and declared no dividends. 2. Franklin issued no stock but declared dividends of $12 million. 3. Franklin issued $88 million of stock and declared dividends of $30 million. E1-22A. (Learning Objective 4: Identify financial statement by type of information) Assume Malcolm Tech, Inc., is expanding into China. The company must decide where to locate and how to finance the expansion. Identify the financial statement where these decision makers can find the following information about Malcolm Tech, Inc. In some cases, more than one state- ment will report the needed data. a. Revenueb. Dividendsc. Ending cash balanced. Total assetse. Selling, general, and administrative expensef. Adjustments to reconcile net income to net cash provided by operations4lo3lo4g. Cash spent to acquire the buildingh. Current liabilitiesi. Income tax expensej. Net incomek. Common stockl. Ending balance of retained earningsm. Income tax payablen. Long-term debtE1-23A. (Learning Objective 5: Construct a balance sheet) At December 31, 2016, Womack Products has cash of $23,000, receivables of $15,000, and inventory of $77,000. The company*s equipment totals $184,000. Womack owes accounts payable of $24,000 and long-term notes payable of $165,000. Common stock is $32,500. Prepare Womack*s balance sheet at December 31, 2016, complete with its proper heading. Use the accounting equation to compute retained earnings. E1-24A. (Learning Objectives 3, 5: Apply the accounting equation; construct a balance sheet) Amounts of the assets and liabilities of Ellen Samuel Realty Company, as of May 31, lo55lo3M01_ Adjustments to reconcile net income to net cash provided by operations4lo3lo4g. Income tax payablen. Long-term debtE1-23A. (Learning Objective 5: Construct a balance sheet) At December 31, 2016, Womack Products has cash of $23,000, receivables of $15,000, and inventory of $77,000. The company*s equipment totals $184,000. Womack owes accounts payable of $24,000 and long-term notes payable of $165,000. Common stock is $32,500. Prepare Womack*s balance sheet at December 31, 2016, complete with its proper heading. Use the accounting equation to compute retained earnings. E1-24A. (Learning Objectives 3, 5: Apply the accounting equation; construct a balance sheet) Amounts of the assets and liabilities of Ellen Samuel Realty Company, as of May 31, 2016, are given as follows. Also included are revenue, expense, and selected stockholders* equity figures for the year ended on that date (amounts in millions): Total revenue....................................... Receivables........................................... Current liabilities................................. Common stock..................................... Interest expense.................................... Salary and other employee expenses..... Long-term liabilities............................. $ 37.90.52.627.70.413.6102.8Investment assets (long-term)...... Property and equipment, net....... Other expenses............................ Retained earnings, beginning....... Retained earnings, ending........... Cash............................................ Other assets (long-term).............. $135.71.75.416.8? 1.610.5Requirement 1. Construct the balance sheet of Ellen Samuel Realty Company at May 31, 2016. Use the accounting equation to compute ending retained earnings. lo55lo3M01_HARR7620_11_SE_C01_001-059.indd 4111/payablen. December 31, 2016, Womack 77,000. The company*s and long-term notes balance sheet at December to compute retained construct a balance Company, as of May 31, selected stockholders* term)...... equipment, net....... expenses............................ beginning....... ending........... Cash............................................ term).............. $135.71.75.416.8? 1.610.5Requirement 31, 2016. Use the lo55lo3M01_4111/13/15 5:15 PM E1-25A. (Learning Objective 4: Construct an income statement and a statement of retained earnings) This exercise should be used with Exercise 1-24A. Refer to the data of Ellen Samuel Realty Company in Exercise 1-24A. Requirements 1. Prepare the income statement of Ellen Samuel Realty Company for the year ended May 31, 2016. 2. What amount of dividends did Ellen Samuel declare during the year ended May 31, 2016? (Hint: Prepare a statement of retained earnings.) E1-26A. (Learning Objective 5: Construct an income statement and a statement of retained earnings) Assume the Carson Coffee Roasters Corp. ended the month of August 2017 with these data: Cash balance, August 1, 2017.... Cash balance, August 31, 2017.. Cash receipts: Issuance (sale) of stockto owners........................... Rent expense.............................. Common stock........................... Equipment.................................. O-ce supplies............................ Accounts payable...................... Service revenue........................... 5,90013,2001,90013,200200,4007,5009,000279,600$ 0Payments of cash: Acquisition of equipment....... Dividends............................... Retained earningsRetained earningsAugust 31, 2017..................... Utilities expense......................... Adjustments to reconcilenet income to net cashSalary expense............................ 2,3000? 5,4001,50078,400$200,400August 1, 2017....................... provided by operations........... Requirement 1. Prepare the income statement and the statement of retained earnings of Carson Coffee Roasters Corp., for the month ended August 31, 2017. E1-27A. (Learning Objective 5: Construct a balance sheet) Refer to the data in Exercise 1-26A. Requirement 1. Prepare the balance sheet of Carson Coffee Roasters Corp., for August 31, 2017. E1-28A. (Learning Objective 5: Construct a statement of cash flows) Refer to the data in Exercises 1-26A and 1-27A. Requirement lo4lo5lo5lo5lo4lo5M01_ Requirement 1. Prepare the income statement and the statement of retained earnings of Carson Coffee Roasters Corp., for the month ended August 31, 2017. E1-27A. (Learning Objective 5: Construct a balance sheet) Refer to the data in Exercise 1-26A. Requirement 1. Prepare the balance sheet of Carson Coffee Roasters Corp., for August 31, 2017. E1-28A. (Learning Objective 5: Construct a statement of cash flows) Refer to the data in Exercises 1-26A and 1-27A. Requirement 1. Prepare the statement of cash flows of Carson Coffee Roasters Corp., for the month ended August 31, 2017. Using Exhibit 1-11 as a model, show with arrows the relationships among the income statement, statement of retained earnings, balance sheet, and statement of cash flows. E1-29A. (Learning Objective 4: Evaluate business operations through the financial state- ments) This exercise should be used in conjunction with Exercises 1-26A through 1-28A. The owner of Carson Coffee Roasters Corp. seeks your advice as to whether he should cease operations or continue the business. Complete the report, giving him your opinion of net income, dividends, financial position, and cash flows during his first month of operations. Cite specifics from the financial statements to support your opinion. Conclude your memo with advice on whether to stay in business or cease operations. E1-30A. (Learning Objective 5: Construct an income statement, statement of retained earnings, and balance sheet) During 2016, McFall Company earned revenues of $140 million. McFall incurred, during that same year, salary expense of $31 million, rent expense of $16 million, SE_C01_001-059.indd 4211/13/15 5:15 PM Requirement 1. Prepare the income statement Roasters Corp., for the E1-27A. (Learning Objective 1-26A. Requirement 1. Prepare the balance sheet E1-28A. (Learning Objective Exercises 1-26A and 1-27A. Requirement 1. Prepare the statement August 31, 2017. Using among the income statement, of cash flows. E1-29A. (Learning Objective ments) This exercise should The owner of Carson Coffee operations or continue the income, dividends, financial specifics from the financial advice on whether to stay E1-30A. (Learning Objective earnings, and balance sheet) McFall incurred, during that HARR7620_11_SE_C01_001-059.indd 4211/and utilities expense of $22 million. McFall declared and paid dividends of $12 million during the year. At December 31, 2016, McFall has cash of $150 million, accounts receivable of $55 million, property and equipment of $32 million, and other long-term assets of $17 million. At December 31, 2016, the company owes accounts payable of $60 million and has a long-term note payable of $27 million. McFall began 2016 with a balance in retained earnings of $68 million. At December 31, 2016, McFall has total stockholders* equity of $167 million, which consists of common stock and retained earnings. McFall has a year-end of December 31. Prepare the following financial statements (with proper headings) for 2016: 1. Income statement, 2. Statement of retained earnings, 3. Balance sheet. Group BM01_QuizTest your understanding of the financial statements by answering the following questions. Select the best choice from among the possible answers given. Q1-43. The primary objective of financial reporting is to provide informationa. on the cash flows of the company. b. to the federal government. c. useful for making investment and credit decisions. d. about the profitability of the enterprise. Q1-44. Which type of business organization provides the least amount of protection for bankers and other creditors of the company? a. Proprietorshipb. Corporationc. Partnershipd. Both a and cQ1-45. Assets are usually reported at theira. the best choice from among the possible answers given. Q1-43. The primary objective of financial reporting is to provide informationa. on the cash flows of the company. b. to the federal government. c. useful for making investment and credit decisions. d. about the profitability of the enterprise. Q1-44. Which type of business organization provides the least amount of protection for bankers and other creditors of the company? a. Proprietorshipb. Corporationc. Partnershipd. Both a and cQ1-45. Assets are usually reported at theira. current market value. b. historical cost. c. appraised value. d. none of the above (fill in the blank) . Q1-46. During February, assets increased by $87,000 and liabilities increased by $31,000. Stockholders* equity must havea. increased by $56,000. b. decreased by $56,000. c. increased by $118,000. d. decreased by $118,000. Q1-47. The amount a company expects to collect from customers appears on thea. balance sheet in the stockholders* equity section. b. income statement in the expenses section. c. balance sheet in the current assets section. d. statement of cash flows. Q1-48. All of the following are current assets excepta. accounts payable. b. inventory. c. accounts receivable. d. prepaid expenses. Q1-49. Revenues area. increases in paid-in capital resulting from the owners investing in the business. b. increases in retained earnings resulting from selling products or performing services. c. decreases in liabilities resulting from paying off loans. d. all of the above. Q1-50. The financial statement that reports revenues and expenses is called thea. income statement. b. balance sheet. c. statement of retained earnings. d. statement of cash flows. Q1-51. Another name for the balance sheet is thea. statement of financial position. b. statement of earnings. c. statement of operations. d. statement of profit and loss. Q1-52. Dobson Corporation began the year with cash of $143,000 and land that cost $41,000. During the year, Dobson earned service revenue of $230,000 and had the following expenses: salaries, $185,000; rent, $83,000; and utilities, $26,000. At year-end, Dobson*s cash balance was down to $56,000. How much net income (or net loss) did Dobson experience for the year? a. $45,000b. ($38,000) c. ($151,000) d. ($64,000) Q1-53. Thompson Instruments had retained earnings of $340,000 at December 31, 2015. Net income for 2016 totaled $185,000, and dividends declared for 2016 were $85,000. How much retained earnings should Thompson report at December 31, 2016? a. $425,000b. $340,000c. $525,000d. $440,000M01_HARR7620_11_SE_C01_001-059.indd 4611/13/15 5:15 PM Q1-54. Net income appears on which financial statement(s)? a. Balance sheetb. Statement of retained earningsc. Income statementd. Both b and cQ1-55. Cash paid to purchase a building appears on the statement of cash flows among thea. stockholders* equity. b. operating activities. c. financing activities. d. investing activities. Q1-56. The stockholders* equity of Voronsky Company at the beginning and end of 2016 totaled $119,000 and $138,000, respectively. Assets at the beginning of 2016 were $144,000. If the liabilities of Voronsky Company increased by $74,000 in 2016, how much were total assets at the end of 2016? Use the accounting equation. a. $218,000b. $51,000c. $237,000d. $208,000Q1- Q1-54. Net income appears on which financial statement(s)? a. Balance sheetb. Statement of retained earningsc. Income statementd. Both b and cQ1-55. Cash paid to purchase a building appears on the statement of cash flows among thea. stockholders* equity. b. operating activities. c. financing activities. d. investing activities. Q1-56. The stockholders* equity of Voronsky Company at the beginning and end of 2016 totaled $119,000 and $138,000, respectively. Assets at the beginning of 2016 were $144,000. If the liabilities of Voronsky Company increased by $74,000 in 2016, how much were total assets at the end of 2016? Use the accounting equation. a. $218,000b. $51,000c. $237,000d. $208,000Q1-57. Smith Company had the following on the dates indicated: 12/31/1612/31/15Total assetsTotal liabilities$ 560,000 35,000$ 330,000 25,000Smith had no stock transactions in 2016; thus, the change in stockholders* equity for 2016 was due to net income and dividends. If dividends were $70,000, how much was Smith*s net income for 2016? Use the accounting equation and the statement of retained earnings. a. $220,000b. $150,000c. $290,000d. $360,000Problems Group AP1-58A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Compute the missing amount (?) for each company〞amounts in millions. $ ? 771$18? 9? $22? $ 12(0) $ 3$83436? $ ? 45638$228222$ 34? (2) $ 38BeginningAssets................................. Liabilities........................... Common stock................... Retained earnings............... EndingAssets................................. Liabilities........................... Common stock................... Retained earnings............... Income statementRevenues............................ Expenses............................ Statement of retained earningsBeginning RE..................... Net income......................... Dividends declared............. Ending RE.......................... + - = $ 4314326$ 6126? ? ? 156$ 2610(13) $ 23Lowell, Inc.Broom Corp.Crystal Co. ???Net income......................... At the end of the year, which company has the ← highest net income?← highest percent of net income to revenues? 4lo3M01_HARR7620_11_SE_C01_001-059.indd 4711/13/15 5:15 PM Q1-54. Net income appears on which financial statement(s)? a. Balance sheetb. Statement of retained earningsc. Income statementd. Both b and cQ1-55. Cash paid to purchase a building appears on the statement of cash flows among thea. stockholders* equity. b. operating activities. c. financing activities. d. investing activities. Q1-56. The stockholders* equity of Voronsky Company at the beginning and end of 2016 totaled $119,000 and $138,000, respectively. Assets at the beginning of 2016 were $144,000. If the liabilities of Voronsky Company increased by $74,000 in 2016, how much were total assets at the end of 2016? Use the accounting equation. a. $218,000b. $51,000c. $237,000d. $208,000Q1-57. Smith Company had the following on the dates indicated: 12/31/1612/31/15Total assetsTotal liabilities$ 560,000 35,000$ 330,000 25,000Smith had no stock transactions in 2016; thus, the change in stockholders* equity for 2016 was due to net income and dividends. If dividends were $70,000, how much was Smith*s net income for 2016? Use the accounting equation and the statement of retained earnings. a. $220,000b. $150,000c. $290,000d. $360,000Problems Group AP1-58A. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) Compute the missing amount (?) for each company〞amounts in millions. $ ? 771$18? 9? $22? $ 12(0) $ 3$83436? $ ? 45638$228222$ 34? (2) $ 38BeginningAssets................................. Liabilities........................... Common stock................... Retained earnings............... EndingAssets................................. Liabilities........................... Common stock................... Retained earnings............... Income statementRevenues............................ Expenses............................ Statement of retained earningsBeginning RE..................... Net income......................... Dividends declared............. Ending RE.......................... + - = $ 4314326$ 6126? ? ? 156$ 2610(13) $ 23Lowell, Inc.Broom Corp.Crystal Co. ???Net income......................... At the end of the year, which company has the ← highest net income?← highest percent of net income to revenues? 4lo3M01_HARR7620_11_SE_C01_001-059.indd 4711/13/15 5:15 PM P1-59A. (Learning Objectives 1, 3, 4, 5: Explain accounting language; apply the accounting equation; evaluate business operations; construct a balance sheet) The manager of Salem News, Inc., prepared the company*s balance sheet as of October 31, 2016, while the accountant was ill. The balance sheet contains numerous errors. In particular, the manager knew that the balance sheet should balance, so she plugged in the stockholders* equity amount needed to achieve this balance. The stockholders* equity amount is not correct. All other amounts are accurate. A1123456789101112123456789101112A DCB $ 15,50055,00076,60062,4001,3002,8002,000 $ 139,000 $ 10,50035,0001,10090084,0002,5005,000 $ 139,000 AssetsCashEquipmentAccounts payableUtilities expenseAdvertising expenseLandSalary expenseTotal assets LiabilitiesNotes receivableInterest expenseOffice suppliesAccounts receivableNote payableTotal Stockholders* EquityStockholders* equityTotal liabilitiesSalem News, Inc. Balance SheetOctober 31, 2016Requirements 1. Prepare the correct balance sheet and date it properly. Compute total assets, total liabilities, and stockholders* equity. 2. Is Salem News actually in better (or worse) financial position than the erroneous balance sheet reports? Give the reason for your answer. 3. Identify the accounts listed on the incorrect balance sheet that should not be reported on the balance sheet. State why you excluded them from the correct balance sheet you prepared for Requirement 1. On which financial statement should these accounts appear? P1-60A. (Learning Objectives 2, 4, 5: Apply underlying accounting concepts; evaluate business operations; construct a balance sheet) Caden Healey is a realtor. He organized the business as a corporation on December 16, 2017. The business received $60,000 cash from Healey and issued common stock. Consider the following facts as of December 31, 2017: a. Healey has $12,000 in his personal bank account and $48,000 in the business bank account. b. Healey owes $6,800 on a personal charge account at a local department store. c. Healey acquired business furniture for $23,400 on December 24. Of this amount, the business owes $2,000 on accounts payable at December 31. d. Office supplies on hand at the real estate office total $2,000. e. Healey*s business owes $132,000 on a note payable for some land acquired for a total price of $168,000. f. Healey*s business spent $15,000 for a Realty First franchise, which entitles him to rep- resent himself as an agent. Realty First is a national affiliation of independent real estate agents. This franchise is a business asset. g. Healey owes $190,000 on a personal mortgage on his personal residence, which he acquired in 2012 for a total price of $405,000.3lo14lo2545M01_ Requirements 1. Prepare the balance sheet of the real estate business of Caden Healey Realtor, Inc., at December 31, 2017. 2. Does it appear that the realty business can pay its debts? How can you tell? 3. Identify the personal items given in the preceding facts that should not be reported on the balance sheet of the business. P1-61A. (Learning Objectives 4, 5: Evaluate business operations; construct and analyze an income statement, a statement of retained earnings, and a balance sheet) The assets and liabilities of Beckwith Garden Supply, Inc., as of December 31, 2016, and revenues and expenses for the year ended on that date follow: Equipment...........................$119,000Interest expense...................10,200Interest payable...................2,500Accounts payable................24,000Salary expense.....................108,500Building...............................401,000Cash....................................41,000Common stock....................12,700Land...................................$ 27,000Note payable......................99,500Property tax expense..........7,300Rent expense......................40,600Accounts receivable............84,600Service revenue...................457,600Supplies..............................6,800Utilities expense.................8,500Beginning retained earnings was $364,200, and dividends declared totaled $106,000 for the year. Requirements 1. Prepare the income statement of Beckwith Garden Supply, Inc., for the year ended December 31, 2016. 2. Prepare the company*s statement of retained earnings for the year. 3. Prepare the company*s balance sheet at December 31, 2016. 4. Analyze Beckwith Garden Supply, Inc., by answering these questions: a. Was Beckwith Garden Supply profitable during 2016? By how much? b. Did retained earnings increase or decrease? By how much? c. Which is greater, total liabilities or total stockholders* equity? Who has a greater claim to Beckwith Garden Supply*s assets, creditors of the company or the Beckwith Garden Supply stockholders? P1-62A. (Learning Objectives 4, 5: Evaluate business operations; construct a statement of cash flows) The following data come from the financial statements of Riley Company for the year ended March 31, 2017 (in millions): Purchases of property, plant, and equipment for cash....$ 3,505Net income.....................................3,040Adjustments to reconcile netincome to net cash providedby operating activities................2,410Revenues........................................60,000Cash, beginning of year..................210end of year...........................1,925Other investing cashpayments.......................................$ 170Accounts receivable...........................800Payment of dividends........................270Common stock..................................4,880Issuance of common stock.................165Cash proceeds on sale of property, plant, and equipment.....45Retained earnings..............................12,930Cost of goods sold..........................37,400Requirements 1. Prepare a cash flow statement for the year ended March 31, 2017. Not all items given appear on the cash flow statement. 2. What activities provided the largest source of cash? Is this a sign of financial strength or weakness? 5lo45lo4M01_ P1-63A. (Learning Objective 5: Construct financial statements) Summarized versions of Santos Corporation*s financial statements are given for two recent years. A112345678910111213141516171819202122232425262728293031323334351234567891011121314151617181920212223242526272829303132333435A CD BIncome StatementStatement of Retained Earnings $ k11,0001,210 $ 15,000 $ d $ $ ba1,1801,500Im $ p $ e1,346 $ q $ 14,465 $ s3,380 $ 5,650 1,120 $ f $ 275 g 2004,315 $ h 4,450 $ t 975 $ 9,050 $ 275 u 150 v $ w $ 975 $ x (375) (260) (540) (570) i(180) 1,260 y $ j$ z1,50711,799r $ no(90)(110) c$ 2,6502,000700(in Thousands) Revenues Cost of goods sold Other expenses Income before income taxes Income taxes (35%) Net income20162017Beginning balanceNet incomeDividends declaredEnding balanceCashProperty, plant, and equipmentOther assets Total assetsCurrent liabilitiesLong-term debtOther liabilities Total liabilitiesCommon stockRetained earningsOther stockholders* equity Total stockholders& equity Total liabilities and stockholders* equityNet cash provided by operating activitiesNet cash used in investing activitiesNet cash used in financing activities Increase (decrease) in cash Cash at beginning of year Cash at end of yearAssetsLiabilitiesStockholders* equity: Cash Flow StatementBalance Sheet3636373738383939Requirement 1. Complete Santos Corporation*s financial statements by determining the missing amounts denoted by the letters. lo5M01_ Group BM01_Decision CasesCase 1. (Learning Objectives 1, 4: Explain accounting language; evaluate business opera- tions through financial statements) Two businesses, Queens Service Corp. and Insley Sales Co., have sought business loans from you. To decide whether to make the loans, you have requested their balance sheets. A11234567891012345678910A DCB $ 50,00020,000130,00080,000 $ 150,000 $ 5,00010,00015,00045,00075,000 $ 150,000 AssetsCashAccounts receivableLandFurnitureEquipmentTotal assets LiabilitiesAccounts payableNote payableTotal liabilities Stockholders* EquityStockholders* equityTotal liabilities and stockholders* equityQueens Service Corp. Balance SheetAugust 31, 2017A11234567891012345678910A DCB $ 6,00050,000 15,0009,000 $ 65,000 $ 5,00010,00035,00015,000 $ 65,000 AssetsCashAccounts receivableMerchandise inventoryBuildingTotal assets LiabilitiesAccounts payableNote payableTotal liabilities Stockholders* EquityStockholders* equityTotal liabilities and stockholders* equityInsley Sales Co. Balance SheetAugust 31, 2017Requirement 1. Using only these balance sheets, to which entity would you be more comfortable lending money? Explain fully, citing specific items and amounts from the respective balance sheets. (Challenge) 4lo1APPlY YOuR KNOWlEDgEM01_ Case 2. (Learning Objectives 4, 5: Evaluate business operations through financial state- ments; correct errors; construct financial statements) A year out of college, you have $10,000 to invest. A friend has started Flowers Unlimited, Inc., and he asks you to invest in his company. You obtain the company*s financial statements, which are summarized at the end of the first year as follows: A11234512345A CB80,000$ 20,000$ 100,000RevenuesExpensesNet incomeFlowers Unlimited, Inc. Income StatementYear Ended December 31, 2016A11234512345A DCB46,000 $ 60,000$ 106,000100,000 $ 6,000$ 106,000CashOther assetsTotal assetsLiabilitiesStockholders* equityTotal liabilities and stockholders* equityFlowers Unlimited, Inc. Balance SheetDecember 31, 2016Visits with your friend turn up the following facts: a. Flowers Unlimited delivered $140,000 of services to customers during 2016 and collected $100,000 from customers for those services. b. Flowers Unlimited recorded a $50,000 cash payment for software as an asset. This cost should have been an expense. c. To get the business started, your friend borrowed $10,000 from his parents at the end of 2015. The proceeds of the loan were used to pay salaries for the first month of 2016. Since the loan was from his parents, your friend did not reflect the loan or the salaries in the accounting records. Requirements 1. Prepare corrected financial statements. 2. Use your corrected statements to evaluate Flowers Unlimited*s results of operations and financial position. (Challenge) 3. Will you invest in Flowers Unlimited? Give your reason. (Challenge) 5lo4Ethical Issue(Learning Objective 6: Evaluate ethical decisions) You are studying frantically for an account- ing exam tomorrow. You are having difficulty in this course, and the grade you make on this exam can make the difference between receiving a final grade of B or C. If you receive a C, it will lower your grade point average to the point that you could lose your academic scholarship. An hour ago, a friend, also enrolled in the course but in a different section under the same professor, called you with some unexpected news. In her sorority test files, she has just found a copy of an old exam from the previous year. In looking at the exam, it appears to contain questions that come right from the class notes you have taken, even the very same numbers. She offers to make a copy for you and bring it over. lo6M01_ Focus on Analysis | Under Armour, Inc. (Learning Objectives 3, 4: Apply the accounting equation; evaluate business operations) This and similar cases in each chapter are based on the consolidated financial statements of Under Armour, Inc., given in Appendix B and online in the filings section of http://www.sec .gov. As you work with Under Armour, Inc., you will develop the ability to analyze the financial statements of actual companies. Requirements 1. Go on the Internet and do some research on Under Armour, Inc., and its industry. Use one or more popular websites such as Yahoo! Finance or Google Finance. Write a paragraph (about 100 words) that describes the industry, some current developments, and a projection for where the industry is headed. 2. Read Note 1〞(Description of Business) of Under Armour, Inc.*s, annual report. What do you learn here and why is it important? 3. Name two of Under Armour, Inc.*s, competitors. Why is this information important in eval- uating Under Armour, Inc.*s, financial performance? 4. Write Under Armour, Inc.*s, accounting equation at December 31, 2014 (express all items in millions and round to the nearest $1 million). Does Under Armour, Inc.*s, financial con- dition look strong or weak? How can you tell? 5. What was the result of Under Armour, Inc.*s, operations during 2014? Identify both the name and the dollar amount of the result of operations for 2014. Does an increase (or decrease) signal good news or bad news for the company and its stockholders? 6. Examine retained earnings in the Consolidated Statements of Stockholders* Equity. What caused retained earnings to increase during 2014? (Note: Comprehensive income is based on net income and will be covered in Chapter 11.) 7. Which statement reports cash and cash equivalents as part of Under Armour, Inc.*s, finan- cial position? Which statement tells why cash and cash equivalents increased (or decreased) during the year? Which activities caused Under Armour, Inc.*s, cash and cash equivalents to change during 2014, and how much did each activity provide or use? Group ProjectsProject 1. As instructed by your professor, obtain the annual report of a well-known company. Requirements 1. Take the role of a loan committee of Bank of America Corporation, a large banking com- pany headquartered in Charlotte, North Carolina. Assume a company has requested a loan from Bank of America. Analyze the company*s financial statements and any other informa- tion you need to reach a decision regarding the largest amount of money you would be willing to lend. Go as deeply into the analysis and the related decision as you can. Specify the following: a. The length of the loan period〞that is, over what period will you allow the company to pay you back? b. The interest rate you will charge on the loan. Will you charge the prevailing interest rate, a lower rate, or a higher rate? Why? c. Any restrictions you will impose on the borrower as a condition for making the loan. Note: The long-term debt note to the financial statements gives details of the company*s exist- ing liabilities. 2. Write your group decision in a report addressed to the bank*s board of directors. Limit your report to two double-spaced typed pages (400 to 600 words). 3. If your professor directs, present your decision and your analysis to the class. Limit your presentation to 10 to 15 minutes. 4LO3M01_