SMChap002 solutions

March 29, 2018 | Author: soej1004 | Category: Debits And Credits, Balance Sheet, Financial Accounting, Stocks, Equity (Finance)
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Chapter 02 - Investing and Financing Decisions and the Accounting SystemChapter 2 Investing and Financing Decisions and the Accounting System ANSWERS TO QUESTIONS 1. The primary objective of financial reporting for external users is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. These users are expected to have a reasonable understanding of accounting concepts and procedures. Usually, they are interested in information to assist them in projecting future cash inflows and outflows of a business. 2. (a) An asset is a probable future economic benefit owned or controlled by the entity as a result of past transactions. (b) A current asset is an asset that will be used or turned into cash within one year; inventory is always considered a current asset regardless of how long it takes to produce and sell the inventory. (c) A liability is a probable future sacrifice of economic benefits of the entity arising from preset obligations as a result of a past transaction. (d) A current liability is a liability that will be settled by providing cash, goods, or other services within the coming year. (e) Additional paid-in capital is the owner-provided financing to the business that represents the excess of the amount received when the common stock was issued over the par value of the common stock. (f) Retained earnings are the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business. Financial Accounting, 8/e 2-1 © 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 02 - Investing and Financing Decisions and the Accounting System 3. (a) The separate-entity assumption requires that business transactions are separate from the transactions of the owners. For example, the purchase of a truck by the owner for personal use is not recorded as an asset of the business. (b) The stable monetary unit assumption requires information to be reported in the national monetary unit without any adjustment for changes in purchasing power. That means that each business will account for and report its financial results primarily in terms of the national monetary unit, such as Yen in Japan and Australian dollars in Australia. (c) Under the continuity or going-concern assumption, businesses are assumed to operate into the foreseeable future. That is, they are not expected to liquidate. (d) The historical cost principle requires assets to be recorded at the cashequivalent cost on the date of the transaction. Cash-equivalent cost is the cash paid plus the dollar value of all noncash considerations. 4. Accounting assumptions are necessary because they reflect the scope of accounting and the expectations that set certain limits on the way accounting information is reported. 5. An account is a standardized format used by organizations to accumulate the dollar effects of transactions on each financial statement item. Accounts are necessary to keep track of all increases and decreases in the fundamental accounting model. 6. The fundamental accounting model is provided by the equation: Assets = Liabilities + Stockholders' Equity 7. A business transaction is (a) an exchange of resources (assets) and obligations (debts) between a business and one or more outside parties, and (b) certain events that directly affect the entity such as the use over time of rent that was paid prior to occupying space and the wearing out of equipment used to operate the business. An example of the first situation is (a) the sale of goods or services. An example of the second situation is (b) the use of insurance paid prior to coverage. 8. Debit is the left side of a T-account and credit is the right side of a T-account. A debit is an increase in assets and a decrease in liabilities and stockholders' equity. A credit is the opposite -- a decrease in assets and an increase in liabilities and stockholders' equity. 2-2 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 02 - Investing and Financing Decisions and the Accounting System 9. Transaction analysis is the process of studying a transaction to determine its economic effect on the entity in terms of the accounting equation: Assets = Liabilities + Stockholders' Equity The two principles underlying the process are: * every transaction affects at least two accounts. * the accounting equation must remain in balance after each transaction. The two steps in transaction analysis are: (1) identify and classify accounts and the direction and amount of the effects. (2) determine that the accounting equation (A = L + SE) remains in balance. 10. The equalities in accounting are: (a) Assets = Liabilities + Stockholders' Equity (b) Debits = Credits 11. The journal entry is a method for expressing the effects of a transaction on accounts in a debits-equal-credits format. The title of the account(s) to be debited is (are) listed first and the title of the account(s) to be credited is (are) listed underneath the debited accounts. The debited amounts are placed in a left-hand column and the credited amounts are placed in a right-hand column. 12. The T-account is a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities. It is a simplified representation of a ledger account with a debit column on the left and a credit column on the right. 13. The current ratio is computed as current assets divided by current liabilities. It measures the ability of the company to pay its short-term obligations with current assets. A ratio above 1.0 normally suggests good liquidity (that is, the company has sufficient current assets to settle short-term obligations). Sophisticated cash management systems allow many companies to minimize funds invested in current assets and have a current ratio below 1.0. However, a ratio that is too high in relation to other competitors in the industry may indicate inefficient use of resources. 14. Investing activities on the statement of cash flows include the buying and selling of productive assets and investments. Financing activities include borrowing and repaying debt, issuing and repurchasing stock, and paying dividends. Financial Accounting, 8/e 2-3 © 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 02 - Investing and Financing Decisions and the Accounting System MULTIPLE CHOICE 1. 2. 3. 4. 5. d d a a d 6. 7. 8. 9. 10. c a d b a (Time in minutes) Mini-exercises No. Time 1 3 2 3 3 4 4 4 5 5 6 3 7 3 8 6 9 6 10 6 11 6 12 4 13 4 Exercises No. Time 1 8 2 15 3 8 4 10 5 10 6 10 7 10 8 15 9 20 10 20 11 15 12 20 13 20 14 20 15 20 16 15 17 10 18 10 19 10 20 10 Problems No. Time 1 20 2 25 3 40 4 15 5 40 6 20 Alternate Problems No. Time 1 20 2 25 3 40 4 15 Cases and Projects No. Time 1 15 2 15 3 15 4 20 5 15 6 20 7 30 8 20 9 * Continuing Case 1 40 * Due to the nature of these cases and projects, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any openended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sharpen research skills, we devote class time discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries. 2-4 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 02 - Investing and Financing Decisions and the Accounting System MINI-EXERCISES M2–1. F (1) Continuity assumption H (2) Historical cost principle G (3) Credits A (4) Assets I (5) Account M2–2. D (1) Journal entry C (2) A = L + SE, and Debits = Credits A (3) Assets = Liabilities + Stockholders’ Equity I (4) Liabilities B (5) Income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows M2–3. (1) N (2) N (3) Y (4) Y (5) Y (6) N Financial Accounting, 8/e 2-5 © 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Cash 2-6 –5. forwarded.000 –2. Cash Liabilities + Stockholders’ Equity Notes payable +30. This is proprietary material solely for authorized instructor use. . duplicated. in whole or part. or posted on a website. Not authorized for sale or distribution in any manner.000 b. Assets = a.000 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. Cash Notes receivable –10.Investing and Financing Decisions and the Accounting System M2–4.000 c. distributed.000 +10.000 +15. Cash Equipment e.000 +490 Notes payable +10. scanned. CL (1) Accounts Payable CA (2) Accounts Receivable NCA (3) Buildings CA (4) Cash SE (5) Common Stock NCA (6) Land CA (7) Merchandise Inventory CL (8) Income Taxes Payable NCA (9) Long-Term Investments NCL (10) Notes Payable (due in three years) CA (11) Notes Receivable (due in six months) CA (12) Prepaid Rent SE (13) Retained Earnings CA (14) Supplies CL (15) Utilities Payable CL (16) Wages Payable M2–5. Cash +30. This document may not be copied.000 +500 Common stock +10 Additional paid-in capital d. LLC.Chapter 02 .000 Retained earnings –2. ...................... 500 Equipment (+A) ........................ M2–8............. .000 10.................000 2-7 © 2014 by McGraw-Hill Global Education Holdings.................................................................. a..................... Additional Paid-in Capital (+SE)…………………………..................................... d..........000 Cash (+A) ... 10...Investing and Financing Decisions and the Accounting System M2–6.......................... Debit Credit Assets Increases Decreases Liabilities Decreases Increases Stockholders’ equity Decreases Increases Increase Decrease Assets Debit Credit Liabilities Credit Debit Stockholders’ equity Credit Debit M2–7. Cash (A) ..........................000 2.... Cash (A) ................ Not authorized for sale or distribution in any manner.............000 Notes Receivable (+A)................. 8/e 30........................ LLC.............. in whole or part...........................000 Retained Earnings (SE) .......000 10 490 5......... This is proprietary material solely for authorized instructor use................. 2......................................000 10............................... Cash (A) ................... This document may not be copied..000 Financial Accounting........................... Notes Payable (+L) ................... Cash (+A) ............................................................ or posted on a website... b...... e.......... c.................... distributed........ Notes Payable (+L) . duplicated... 30....... forwarded.. 15. Common Stock (+SE) .....Chapter 02 .... scanned...................................................... 000 8.000 14.000 Beg. duplicated.Investing and Financing Decisions and the Accounting System M2–9. 1.000 1. Inc. distributed.000 Common Stock 1.010 3.490 8. This document may not be copied.000 (c) 500 5.000 (d) 43. LLC.000 (b) 10.000 Beg. Dennen. scanned.000 Beg.000 $55. in whole or part. 30. forwarded. 490 (c) 3.500 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.000 10. (e) 2. This is proprietary material solely for authorized instructor use.400 (b) (d) (e) Notes Receivable Beg. 10 (c) 1.100 Credit $43. 15.400 11. or posted on a website.000 11. 900 (a) 30. Not authorized for sale or distribution in any manner.010 Additional Paid-in Capital 3.490 Retained Earnings 10.000 30.000 2.500 $55.Chapter 02 .000 Beg.100 (d) 15.000 Equipment Beg.000 M2-10.100 Notes Payable 3.000 (a) 10.000 30. 2015 Cash Notes receivable Equipment Notes payable Common stock Additional paid-in capital Retained earnings Totals 2-8 Debit $14. Trial Balance January 31. Cash Beg. . 000 250.726 (40%).000 43.010 3.Investing and Financing Decisions and the Accounting System M2–11. Sal’s has less liquidity to withstand an economic downturn.500 Total Assets Liabilities Current liabilities: Notes payable Total current liabilities Stockholders’ Equity Common stock Additional paid-in capital Retained earnings Total stockholders’ equity Total Liabilities & Stockholders’ Equity $ 43. Current Ratio = Current Assets 280. .Chapter 02 .000 12. duplicated. M2–13.182).000 270.000 2011 2012 ÷ ÷ ÷ Current Liabilities 155.806 1.080 This ratio indicates that Sal’s Taco Company has sufficient current assets to settle current liabilities.100 $55. (a) F (b) I (c) F (d) I (e) F Financial Accounting. 8/e 2-9 © 2014 by McGraw-Hill Global Education Holdings. This is proprietary material solely for authorized instructor use.000 25. or posted on a website. This document may not be copied.490 8. 2015 Assets Current assets: Cash Notes receivable Total current assets Equipment $ 14. scanned. indicating that Sal’s Taco Company appears to have weaker liquidity than Chipotle. in whole or part. Balance Sheet At January 31.000 1. forwarded. Not authorized for sale or distribution in any manner.400 30.500 $55. but that the ratio has also decreased between 2011 and 2012 by . Dennen Inc.400 11.000 = = 1. distributed.500 M2–12. LLC. Sal’s Taco Company ratio is lower than Chipotle’s 2011 ratio (of 3. . 2-10 E (1) Transaction F (2) Continuity assumption B (3) Balance sheet P (4) Liabilities K (5) Assets = Liabilities + Stockholders’ Equity M (6) Notes payable L (7) Common stock H (8) Historical cost principle I (9) Account Q (10) Dual effects O (11) Retained earnings A (12) Current assets C (13) Separate-entity assumption X (14) Par value D (15) Debits J (16) Accounts receivable N (17) Stable monetary unit assumption W (18) Faithful representation T (19) Relevance R (20) Stockholders’ Equity Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. forwarded. duplicated.Investing and Financing Decisions and the Accounting System EXERCISES E2–1. This document may not be copied. or posted on a website. in whole or part.Chapter 02 . LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. scanned. distributed. The land in (h) would be recorded as an asset of $50. duplicated.Chapter 02 . 3 The agreement in (c) involves no exchange or receipt of cash. 8/e 2-11 © 2014 by McGraw-Hill Global Education Holdings. Not authorized for sale or distribution in any manner. 1 Received Given (a) Cash (A) Common stock and Additional paid-in capital (SE) (b) Equipment (A) (c) No exchange transaction — (d) Equipment (A) Notes payable (L) (e) Building (A) (f) Intangibles (A) (g) Retained earnings (SE) [Received a reduction Cash (A) in the amount available for payment to stockholders] (h) Land (A) (i) Intangibles (A) (j) No exchange transaction — (k) Investments (A) Cash (A) (l) Cash (A) Short-term notes payable (L) (m) Note payable (L) promise to pay] [or Delivery truck] [or Computer equipment] [or Construction in progress] [or Copyright] Cash (A) Cash (A) Cash (A) Cash (A) [or Patents] Cash (A) and Notes payable (L) [Received a reduction in its Cash (A) Req. This is proprietary material solely for authorized instructor use. scanned. Req. there is no effect on the business because of the separate-entity assumption. or services and thus is not a transaction.000. 2 The truck in (b) would be recorded as an asset of $18. Since transaction (j) occurs between the owner and others. or posted on a website. LLC. Req. in whole or part. forwarded.Investing and Financing Decisions and the Accounting System E2–2.000. distributed. This document may not be copied. goods. Financial Accounting. . These are applications of the historical cost principle. Balance Sheet Categorization Debit or Credit Balance (1) Accounts Receivable CA Debit (2) Retained Earnings SE Credit (3) Taxes Payable CL Credit (4) Prepaid Expenses CA Debit (5) Common Stock SE Credit (6) Long-Term Investments NCA Debit (7) Plant. duplicated. This is proprietary material solely for authorized instructor use. Equipment +15.000 Notes payable +10.000 d.000 Cash –4. or posted on a website. This document may not be copied.000 Cash –3. in whole or part. Not authorized for sale or distribution in any manner. LLC.000 +1. Assets Cash = + Stockholders’ Equity Liabilities +40.Investing and Financing Decisions and the Accounting System E2–3. scanned. Note receivable +800 Cash –800 Land +13. forwarded.000 Common stock Additional paid-in capital b.000 +39.Chapter 02 . and Equipment NCA Debit (8) Accounts Payable CL Credit (9) Short-Term Investments CA Debit NCL Credit Account (10) Long-Term Debt E2–4.000 Mortgage notes payable +9. . Event a.000 e.000 c. 2-12 Notes payable +12. distributed.000 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. Property. Cash +10. in whole or part.616 +4. LLC.313 Req. forwarded. Req. Dividends payable Short-term Investments Cash e. distributed. Financial Accounting.Chapter 02 . This document may not be copied. Cash Short-term Investments +145 Retained earnings –145 +7. Since transaction (e) occurs between the owners and others in the stock market. 8/e 2-13 © 2014 by McGraw-Hill Global Education Holdings. No effects f. scanned. duplicated. .313 –4. 1 Event Assets a. 2 The separate-entity assumption states that transactions of the business are separate from transactions of the owners. Buildings Equipment Cash b. Not authorized for sale or distribution in any manner. This is proprietary material solely for authorized instructor use. there is no effect on the business.616 -7.Investing and Financing Decisions and the Accounting System E2–5. Cash = +172 +270 – 432 Liabilities Notes payable (long-term) + Stockholders’ Equity +10 +345 Common stock Additional paid-in capital +200 +145 c. d. or posted on a website. ....... or posted on a website..... d.......000 1.................... forwarded......000 39....... .................................................................................. Cash (A) ............. Not authorized for sale or distribution in any manner........... a.................................................. Notes payable (+L) .............000 12......... Cash (A) ...........................Chapter 02 ...................... Cash (A) .................................................................. in whole or part................... e............................... duplicated.....................................000 10...... 15........ Mortgage notes payable (+L) ..................000 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings....... distributed..000 800 4.... This document may not be copied..............000 Equipment (+A) .......000 9.000 Cash (+A) ........ b...... scanned..................... This is proprietary material solely for authorized instructor use..... 800 Land (+A).......... LLC........................................................................................ Notes payable (+L) ... Additional paid-in capital (+SE)…………………………...........Investing and Financing Decisions and the Accounting System E2–6......................................... 10............. 40....................................................000 3..........000 Notes receivable (+A) ............... 2-14 Cash (+A) ... 13............. c.. Common stock (+SE) .... ...........616 e..................................................... Not authorized for sale or distribution in any manner......... Additional paid-in capital (+SE) 345 Retained earnings (SE) ..616 4.... This document may not be copied................................Chapter 02 ................................................................ f........ Financial Accounting.......... d..... 172 270 Cash (+A) . Since transaction (e) occurs between the owners and others in the stock market...... distributed................. scanned................ 145 Short-term investments (+A).......................................... 7... LLC........ in whole or part............................................. duplicated......... ......................... Cash (+A) .....Investing and Financing Decisions and the Accounting System E2–7........................ Buildings (+A) ............................................ 8/e 2-15 © 2014 by McGraw-Hill Global Education Holdings................ c.......... Equipment (+A) ................... b.... Short-term investments (A) ....313 4.................... 432 10 200 145 145 7........ Cash (A) ........... or posted on a website............ No journal entry required.................. Common stock (+SE) ..................................... there is no effect on the business... Cash (A) ..... Notes payable (+L) ..................................313 Req........ 2 The separate-entity assumption states that transactions of the business are separate from transactions of the owners.................. Dividends payable (+L) .......... forwarded................................ This is proprietary material solely for authorized instructor use.................... 1 a............... Req................ 000 13.000 Notes Receivable Beg. 0 (b) 18.040 for common stock Req. or services and thus is not a transaction. 3 The agreement in (c) involves no exchange or receipt of cash. forwarded. there is no effect on the business due to the separate-entity assumption. goods. 0 (d) 15.500 (b) (d) 3. 2-16 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.140 Additional Paid-in Capital 0 Beg.500 (b) 15. This document may not be copied. in whole or part.000 2.500 2. 13.000 Req. 0 (e) 2.500 18. 64. distributed.040 (a)* 100 (d) 5.400 shares issued x $0.000 4. duplicated. or posted on a website.500 (e) 66. Since transaction (f) occurs between the owner and others. Req.400 shares issued 50.860 *6 investors x 8. This is proprietary material solely for authorized instructor use. 0 (a) 70.500 = Liabilities $ 13. 5. 1 Cash Beg.000 Notes Payable 0 Beg.960 (a) 17.500 + Stockholders’ Equity $ 88. .Chapter 02 . 2 Assets $ 101. LLC.500 Common Stock 0 Beg. scanned.10 par value per share = $5.000 Equipment Beg.400 shares each = 50.900 (d) 82. Not authorized for sale or distribution in any manner.000 Land Beg.Investing and Financing Decisions and the Accounting System E2–8. 000 Financial Accounting.10 per share).500 common stock amount divided by 15.500 13.000 1. paid for by signing a short-term note.500 15. Balance Sheet At January 7. scanned.000 shares issued equals $0. 1 Transaction 1 Brief Explanation Issued common stock to shareholders for $15.Chapter 02 . 3 Purchased land for $16.500 4.000 cash and gave an $11.000. forwarded. distributed. This is proprietary material solely for authorized instructor use. 5 Purchased store fixtures for $9.000 Total Assets $105. (FastTrack Sports Inc. borrower signed a short-term note for this amount (Note Receivable).000 75.500 Store fixtures Land 9.000 $105. Not authorized for sale or distribution in any manner.500 cash. Par value of the stock was $0. This document may not be copied.000 90.10 per share because $1.Investing and Financing Decisions and the Accounting System E2–9. 4 Loaned $4.000 cash and signed a short-term note for this amount.000 2-17 © 2014 by McGraw-Hill Global Education Holdings.000 cash. paid $5.000 short-term note payable for the balance. 6 Purchased land for $4. in whole or part.500 20. . 2014 Assets Current Assets Cash Note receivable Total Current Assets $71.000 cash. is a corporation because it issues stock. LLC. 2 FastTrack Sports Inc.000. 2 Borrowed $75. or posted on a website. 8/e Liabilities Current Liabilities Note payable Total Current Liabilities Stockholders’ Equity Common stock Additional paid-in capital Total Stockholders’ Equity Total Liabilities & Stockholders’ Equity $90. Req. Req. duplicated. Req. This document may not be copied.000 shares issued equals $2.00 per share $6.000 $72.000 cash.Chapter 02 . borrower signed a short-term note for this amount. LLC.000 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. Inc.000 cash. (Volz Cleaning is a corporation because it issues stock.00 per share). in whole or part.000 4.000 39. 1 Transaction 1 Brief Explanation Issued common stock to shareholders for $45.000 cash.000 $72.000 33. forwarded. 3 Loaned $2.000 Stockholders’ Equity Common stock Additional paid-in capital Total Stockholders’ Equity Total Liabilities & Stockholders’ Equity 6. Req.000 common stock amount divided by 3. 4 Purchased short-term investments for $7.000 2.000 long-term note payable for the balance. 2014 Assets Current Assets Cash Investments Note receivable Total Current Assets Computer equipment Delivery truck Total Assets 2-18 $27. duplicated.000. 2 Volz Cleaning. This is proprietary material solely for authorized instructor use. or posted on a website. Not authorized for sale or distribution in any manner.Investing and Financing Decisions and the Accounting System E2–10. 2 Purchased a delivery truck for $35.000 45.000 4. Par value is $2. Balance Sheet At March 31. paid $8. distributed.000 35.000 cash. . 5 Sold short-term investments at cost for $3.000 Liabilities Notes payable Total Liabilities $27. 6 Purchased computer equipment for $4.000 cash and gave a $27.000 27.000 cash. scanned. ............ LLC.................. Notes payable (short-term) (+L) ............. Cash (+A) ........................... 15... Additional paid-in capital…………………………………. Notes payable (long-term) (+L) .......500 9.......... This document may not be copied.....................................000 1......................... in whole or part.......................000 Store fixtures (+A) .......... Not authorized for sale or distribution in any manner............ 11........000 b. 70........... Cash (A) ................000 15...................................... e............................... f............................. ....... Cash (+A) ....... 18......000 65... duplicated...... 8/e 18...... No transaction has occurred because there has been no exchange or receipt of cash...000 5.............500 2.........Investing and Financing Decisions and the Accounting System E2–11.......... This is proprietary material solely for authorized instructor use.............. or posted on a website................................................ distributed........ Common stock (+SE) ...................... scanned.......................... Cash (A) ....... goods........... forwarded............................... Cash (A) ....... or services.000 2-19 © 2014 by McGraw-Hill Global Education Holdings........ Financial Accounting....... a................. c....................000 Notes receivable (short-term) (+A) .................000 Equipment (+A) .......Chapter 02 .......000 d........................ 2............... . Dividends payable (L) ....................................................598 Investments (+A) ................ This document may not be copied................................250 348 2...........616 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings............................................ Cash (A) ...........Chapter 02 ............ 5..... or services.. No transaction has occurred because there has been no exchange or receipt of cash............................ f..899 Cash (+A) .......................................... Not authorized for sale or distribution in any manner...... Notes payable (+L) .............. ........ Notes payable (+L) . 852 Cash (+A) ..... 2............................................ Retained earnings (SE) ...................................... e. 1.....................................508 1............. This is proprietary material solely for authorized instructor use............. Cash (A) .............Investing and Financing Decisions and the Accounting System E2–12.........616 d........508 b...... 2-20 852 5.......... duplicated.. Cash (A) .................. forwarded...............899 53 2......................... Dividends payable (+L) ...................................... goods.... g. 53 Equipment (+A) ...... distributed. Equipment (A) .......................................................... in whole or part.................................... or posted on a website................................................................... 2........ LLC.. c................................... scanned............................... a................................ Not authorized for sale or distribution in any manner. 11. forwarded. Req.55 $2.000 + Stockholders’ Equity $ 7.500 Long-Term Notes Payable 800 Beg.200 This ratio indicates that. Increasing short-term obligations would lower Higgins’ current ratio. Short-Term Notes Payable 2. Higgins maintains $5. but this strategy alone would not help its efficiency.200 = $12.200 Short-Term Investments Beg. Higgins’ ratio is higher than the industry average of 1. 3. LLC.200 = 5. 500 Req. 8/e 2-21 © 2014 by McGraw-Hill Global Education Holdings.200 End. scanned.200+$1. Financial Accounting.000 = Liabilities $ 7. in whole or part. 4 Current Ratio = Current Assets Current Liabilities = $11.200 Beg.000 (a) 4.500 (b) Property & Equipment Beg.000 Beg.700 Req. for every $1 of current liabilities.Investing and Financing Decisions and the Accounting System E2–13. maintaining such a high current ratio also suggests that the company may not be using its resources efficiently.000 $2. This document may not be copied.55 of current assets. distributed. 1. Common Stock 500 Beg.200 + Stockholders’ Equity $ 6.000 Retained Earnings 3. . 1 Assets $ 10. or posted on a website.000 4.000 Beg.000 (b) 1. End.50.500 = Liabilities $ 3.500 Req. 3 Assets $ 13. 2.500 1.000 1. 5.500 (c) 1. However. This is proprietary material solely for authorized instructor use. 2 Cash Beg.500 800 (d) End. indicating that Higgins maintains a lower level of short-term debt and has higher liquidity. (d) 800 2. Additional Paid-in Capital 4.Chapter 02 . duplicated. Higgins should consider investing more of its cash in order to generate future returns.000 (a) 4. 4. 2.800 End.500 (c) End.700 1. or posted on a website. in whole or part.700 Total Assets Liabilities Current Liabilities Short-term notes payable Total Current Liabilities Long-term notes payable Total Liabilities Stockholders’ Equity Common stock Additional paid-in capital Retained earnings Total Stockholders’ Equity Total Liabilities & Stockholders’ Equity $ 2. 16.000 (c) 16.000 Long-Term Notes Payable 0 Beg. LLC.200 6.200 2.Chapter 02 .000 12. 16. 30. 0 (c) 20.700 $13. 0 (a) 40.700 E2–15.000 (d) 1.200 4.000 Short-Term Notes Payable 0 Beg. Req.000 (d) 35.Investing and Financing Decisions and the Accounting System E2–14. This is proprietary material solely for authorized instructor use. This document may not be copied.000 (c) 1. 2015 Assets Current Assets Cash Short-term investments Total Current Assets Property and equipment $ 11. duplicated.000 Equipment Beg.000 2-22 Short-Term Notes Receivable Beg. distributed.500 $13.000 (e) 12.000 (a) 30.000 (a) 10. 1 Cash Beg.000 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.000 21. forwarded. Higgins Company Balance Sheet At December 31.000 (b) 16. 0 (e) 4.000 4.000 Additional Paid-in Capital 0 Beg.200 1. . 0 (b) 16.000 4. 10.000 Common Stock 0 Beg.000 2. Not authorized for sale or distribution in any manner.200 1.000 Land Beg. scanned.000 4.800 7.000 500 4. Inc. . scanned.000 4.000 30. (continued) Req. 8/e Debit $35. duplicated. 2 Strauderman Delivery Company. This document may not be copied.000 10. 2014 Cash Short-term notes receivable Land Equipment Short-term notes payable Long-term notes payable Common stock Additional paid-in capital Totals Financial Accounting.000 16.000 $72.Chapter 02 . This is proprietary material solely for authorized instructor use.000 21.000 $72.Investing and Financing Decisions and the Accounting System E2–15. LLC. distributed. Not authorized for sale or distribution in any manner.000 2-23 © 2014 by McGraw-Hill Global Education Holdings.000 12. in whole or part. or posted on a website. Trial Balance December 31. forwarded.000 Credit $16. 000 = 2. 3 Strauderman Delivery Company. 5 The management of Strauderman Delivery Company has already been financing the company’s development through additional short-term debt. This document may not be copied. distributed. This is proprietary material solely for authorized instructor use. forwarded.26 2016 47.000 in 2016. duplicated.000 Total Assets Liabilities Current Liabilities Short-term notes payable Total Current Liabilities Long-term notes payable Total Liabilities Stockholders’ Equity Common stock Additional paid-in capital Total Stockholders’ Equity Total Liabilities & Stockholders’ Equity $16.000 = 1.000 $72. scanned.000 = = Current Ratio 2. LLC.000 in 2014 to $40. additional analysis would provide better information for making a sound decision.000 ÷ 40.000 30. in whole or part. Req. suggesting that the company’s liquidity is decreasing.000 32. Balance Sheet At December 31.000 $72.000 10.44 2015 52.000 16.18 The current ratio has decreased over the years.Investing and Financing Decisions and the Accounting System E2–15.Chapter 02 . 2-24 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. to the company may be too much risk for the bank to absorb.000 39. 4 2014 Current Assets $39.000 40. Based solely on the current ratio. (continued) Req.000 ÷ ÷ Current Liabilities $16. .000 16. Additional lending.000 21. Of course.000 ÷ 23. 2014 Assets Current Assets Cash Short-term note receivable Total Current Assets $35. this steep decline in the ratio may be of concern – it may be indicative of more efficient use of resources or it may suggest the company is having cash flow problems. Although the company still maintains sufficient current assets to settle the short-term obligations.000 Req. Inc.000 Land Equipment 12. or posted on a website. Not authorized for sale or distribution in any manner.000 4. This suggests the company is taking on increasing risk. the bank’s vice president should consider not providing the loan to the company as it currently stands. particularly short-term. from $16. This is proprietary material solely for authorized instructor use. 1 Increases with… Decreases with… Equipment Purchases of equipment Sales of equipment Notes receivable Additional loans to others Collection of loans Notes payable Additional borrowings Payments of debt Req. This document may not be copied.000 cash and signed a $30.000 tools and equipment.800 cash. (b) Loaned $1. paid $10. scanned.Chapter 02 . . distributed. 8/e 2-25 © 2014 by McGraw-Hill Global Education Holdings. Req.000 note payable for the balance. (d) Sold tools and equipment for $900 cash (their original cost). Transaction Brief Explanation (a) Issued 100. (c) Purchased a building for $40. 2 Equipment 1/1 500 250 12/31 Notes Receivable 1/1 150 650 245 100 Notes Payable 12/31 100 1/1 225 170 110 170 160 12/31 Beginning balance $500 + “+”  “” = + 250  ? ? = = Ending balance $100 650 Notes receivable 150 + ?  225 ? = = 170 245 Notes payable 100 + 170  ? ? = = 160 110 Equipment Financial Accounting. forwarded. or posted on a website.000.02 per share) to shareholders in exchange for $20. in whole or part. Not authorized for sale or distribution in any manner. borrower signed a note receivable for this amount. LLC.000 cash and $5. E2–17. duplicated.Investing and Financing Decisions and the Accounting System E2–16.000 shares of common stock (par value $0. Activity (a) (b) (c) (d) (e) Reduction of long-term debt Sale of short-term investments Issuance of common stock Capital expenditures (for property. 3. Dividends paid In the financing activities section of the statement of cash flows. Debt principal repaid In the financing activities section of the statement of cash flows. 2. 7. Date of the statement of financial position.Chapter 02 . distributed. Cash received on sale of noncurrent assets In the investing activities section of the statement of cash flows. in whole or part. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. forwarded.Investing and Financing Decisions and the Accounting System E2–18. 2-26 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. LLC. plant. 1. Type of Activity F I F I F Effect on Cash  + +   Type of Activity F I I F I F I Effect on Cash +  + +   + E2–19. duplicated. 5. Current assets In the asset section of a classified balance sheet. 6. or posted on a website. Short-term obligations In the current liabilities section of a classified balance sheet. and equipment) Dividends paid on common stock. 4. In the heading of the balance sheet. . This document may not be copied. Activity (a) (b) (c) (d) (e) (f) (g) Additional borrowing from banks Purchase of investments Sale of assets and investments (assume sold at cost) Issuance of stock Purchase and renovation of properties Payment of debt principal Receipt of principal payment on a note receivable E2–20. scanned. Significant accounting policies Usually the first note after the financial statements. Plant. duplicated. Not authorized for sale or distribution in any manner.Investing and Financing Decisions and the Accounting System PROBLEMS P2–1. in whole or part. forwarded. scanned. 8/e 2-27 © 2014 by McGraw-Hill Global Education Holdings. . distributed.Chapter 02 . or posted on a website. This document may not be copied. This is proprietary material solely for authorized instructor use. LLC. and Equipment NCA Debit (9) Retained Earnings SE Credit (10) Notes and Accounts Receivable (short-term) CA Debit (11) Investments (long-term) NCA Debit (12) Cash and Cash Equivalents CA Debit (13) Accounts Payable CL Credit (14) Crude Oil Products and Merchandise CA Debit (15) Additional Paid-in Capital SE Credit Financial Accounting. Balance Sheet Classification Debit or Credit Balance (1) Notes and Loans Payable (short-term) CL Credit (2) Materials and Supplies CA Debit (3) Common Stock SE Credit (4) Patents (an intangible asset) NCA Debit (5) Income Taxes Payable CL Credit (6) Long-Term Debt NCL Credit (7) Marketable Securities (short-term) CA Debit (8) Property. 500 + Short-Term Investments $18.35 in current assets.000 + $5.000 = $134. East Hill maintains $1. 3 The transaction between the two stockholders (Event e) was not included in the tabulation.000 = $134.000 + Notes Receivable $5.000 = $280.000 – $280. The ratio suggests that East Hill is likely maintaining adequate liquidity and using resources efficiently. as in transaction (a). LLC. or posted on a website. 2-28 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.500+$18. 2 (On next page) Req. forwarded.000 + $180.500 = 1. Req. scanned.000 (d) Cash balance = $50.500 + $18.500 Req.500 (e) Total current assets = Cash $111.000 = $870.000 + $65.000 – $9.000 = $590.000 + $90. 5 Current Ratio = Current Assets Current Liabilities = $111.000 – $5. Req.500 + $160. duplicated.Chapter 02 .000+$5.000 This suggests that for every $1 in current liabilities. This document may not be copied. 4 (a) Total assets = $111.500 – $18.000 + $3. Not authorized for sale or distribution in any manner. there is no effect on the business due to the separate-entity assumption.000 (c) Total stockholders’ equity = Total assets – Total liabilities = $870. 1 East Hill Home Healthcare Services was organized as a corporation.Investing and Financing Decisions and the Accounting System P2–2.35 $100.000 + $510.000 100. Since the transaction in (e) occurs between the owners. distributed.000 = $111.000 (b) Total liabilities = $100. . Req. This is proprietary material solely for authorized instructor use. in whole or part. Only a corporation issues shares of capital stock to its owners in exchange for their investment. 000 $590.000 + Stockholders' Equity Additional Common Paid-in Retained Capital Earnings Stock 20.000 +15. 50.000 +111. 2 Assets Cash Short-Term Notes Investments Receivable = Liabilities ST Notes LT Notes Land Buildings Equipment Payable Payable 500.000 Beg.000 2-29 © 2014 by McGraw-Hill Global Education Holdings.000 = +100.000 100.000 +510. scanned.000 +80. forwarded.000 +29.Chapter 02 .000 +5.000 +161.000 100.000 = 100.000 +18.000 = +60.000 +18.500 +5. or posted on a website. duplicated.000 400. LLC. This document may not be copied.000 $280.500 +160.500 –3.000 80.000 (b) –9. 8/e = +65.000 (c) +3. distributed. in whole or part. This is proprietary material solely for authorized instructor use.000 +180.000 $870.000 +14.000 +9.500 (d) –18.000 Financial Accounting. Not authorized for sale or distribution in any manner.000 +400.000 = = (e) No effect (f) –5.Investing and Financing Decisions and the Accounting System P2–2.000 50.000 = +81. .000 (a) +90. (continued) Req. 000 18. 12.000 (e) 11. (c) Equipment 50.000 Accrued Liabilities Payable 4.000 Beg.000 2-30 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.Investing and Financing Decisions and the Accounting System P2–3.000 Beg. 90. 1.000 End.Chapter 02 .000 Long-Term Notes Payable 47.000 3. 3. 3. (g) Intangibles 5.000 Beg. 15. This document may not be copied. distributed.000 Beg.000 20. duplicated.000 5.000 (c) 9.000 8.000 10.000 Beg.000 (b) 5.000 (i) Factory Building Beg.000 13.000 1.000 Beg.000 Beg.000 (a) 10. 13. Not authorized for sale or distribution in any manner.000 3. 1.000 1.000 5.000 Common Stock 10. (e) (f) (i) Cash 22. Notes Payable (short-term) 7.000 Beg. in whole or part. 16.000 11.000 End. . 114.000 Inventory 20.000 6.000 Accounts Payable 15. 8. LLC.000 (f) 29.000 4. scanned. 1 and 2 Beg.000 Beg.000 (h) 63. 67.000 (h) 24. or posted on a website. Req. forwarded. This is proprietary material solely for authorized instructor use.000 Retained Earnings 31.000 9.000 End.000 Notes Receivable (long-term) Beg.000 (a) (b) (c) (g) (h) Investments (short-term) Beg.000 (e) 90. 31.000 Accounts Receivable Beg. 10.000 Additional Paid-in Capital 80.000 3.000 Beg. 000 2-31 © 2014 by McGraw-Hill Global Education Holdings. forwarded.000 $243. goods. or services and thus is not a transaction. 4 Cougar Plastics Company Trial Balance At December 31.000 8.000 6.000 4. LLC.000 63.000 3.000 $243. or posted on a website. . 8/e Debit $ 12. This is proprietary material solely for authorized instructor use. (continued) Req. Not authorized for sale or distribution in any manner. 2015 Cash Investments (short-term) Accounts receivable Inventory Notes receivable (long-term) Equipment Factory building Intangibles Accounts payable Accrued liabilities payable Notes payable (short-term) Notes payable (long-term) Common stock Additional paid-in capital Retained earnings Totals Financial Accounting.000 67.000 20. The agreement in (d) involves no exchange or receipt of cash. scanned.000 114. Req.Investing and Financing Decisions and the Accounting System P2–3. in whole or part. duplicated.000 11.Chapter 02 . 3 No effect was recorded for (d). distributed.000 13.000 31.000 90.000 Credit $ 15.000 29. This document may not be copied. Cougar Plastics maintains only $1 of current assets.000 114. forwarded. .000 31.000 29. 2015 Assets Current Assets Cash Investments Accounts receivable Inventory Total Current Assets $ 12. (continued) Req.000 4. This document may not be copied.000 67. 5 Cougar Plastics Company Balance Sheet At December 31.000 20.000 111.000 $243. This is proprietary material solely for authorized instructor use.Chapter 02 .000 This ratio indicates that Cougar Plastics has relatively low liquidity.000 Total Assets Liabilities Current Liabilities Accounts payable Accrued liabilities payable Notes payable Total Current Liabilities Long-term notes payable Total Liabilities Stockholders’ Equity Common stock Additional paid-in capital Retained earnings Total Stockholders’ Equity Total Liabilities & Stockholders’ Equity $ 15.000 Req.000 3.000 Notes receivable Equipment Factory building Intangibles 6.000 = 1. scanned. in whole or part. or posted on a website.000 13. Not authorized for sale or distribution in any manner. duplicated. 2-32 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. distributed.00 $48.000 48.000 11.000 $243.000 63.000 90.000 8. for every $1 of current liabilities.000 48. LLC.Investing and Financing Decisions and the Accounting System P2–3. 6 Current Ratio = Current Assets Current Liabilities = $48.000 132. ........................................ Cash (A) . or posted on a website.. Cash (A) .................... Additional paid-in capital (+SE) .................... 2...... 2......................................... duplicated............... Not authorized for sale or distribution in any manner.. This is proprietary material solely for authorized instructor use.................................................................................. e.......................................000 875 1...410 10 390 11.............285 Cash (+A) ...................... 60 Financial Accounting....... in whole or part................. Req..... Transaction Type of Activity Effect on Cash (a) (b) (c) (d) (e) (f) (g) (h) (i) I I I NE F F I I I – – – NE + + – – + P2–5......................................................................Chapter 02 ....................................................................................................................... 1 a........................... 300 Long-term investments (+A) ........... ... Common stock (+SE) ................................ distributed.......................................000 Retained earnings (SE) .....400 Property......... 8/e 50 300 13...... Short-term investments (A) .... Cash (+A) ........................... Long-term liabilities (+L) ...... 50 Receivables and other assets (+A)... 400 Cash (+A) . Short-term investments (+A) ............. 11..600 10............... plant.................... f.000 60 2-33 © 2014 by McGraw-Hill Global Education Holdings..... d......... Long-term liabilities (+L) ........................................................... c............................................Investing and Financing Decisions and the Accounting System P2–4...................... LLC........ and equipment (+A)........ g......... Cash (A) ........ This document may not be copied........................ Cash (A) . forwarded........ scanned........................................... b.. duplicated. in whole or part.345 Beg.543 (g) Retained Earnings 28. 9. 60 28.423 Long-Term Investments 3.557 9. forwarded.236 Beg. (c) Short-Term Investments 966 10.176 Other Stockholders’ Equity Items Beg. .285 4. (c) Beg.506 2-34 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.Investing and Financing Decisions and the Accounting System P2–5. This document may not be copied.345 Additional Paid-in Capital 12. or posted on a website. This is proprietary material solely for authorized instructor use. and Equipment Beg. 390 (e) 12. distributed.103 Inventories 1.409 Accounts Payable 11. scanned. Plant. Not authorized for sale or distribution in any manner. 31. Long-Term Liabilities 13.000 875 60 (b) (c) (d) (g) Beg. LLC. (continued) Req.423 3.000 (f) 366 Receivables and Other Assets Beg.557 Other Short-term Obligations 10.410 (d) 15.506 31.124 (d) 2.803 (b) 300 10. 11.000 11. (a) (e) (f) Cash 13. 11.075 10. 2.656 Beg. 9. 2 Beg.404 2.Chapter 02 . 50 (a) 1.404 1.153 Beg.067 Property.852 50 300 400 13.404 Other Current Assets Beg.004 Other Noncurrent Assets Beg.600 6.400 11. 3.656 Common Stock 34 10 (e) 44 Beg.615 Beg. This document may not be copied.345 22. forwarded. Inc.656 10.404 3. Dell has $1. 3 Dell.423 26.257 $46. or posted on a website.004 9. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.20 For every $1 of short-term liabilities.103 1.Chapter 02 . (continued) Req.543 28.506) 9. distributed.409 6. plant and equipment Long-term investments Other noncurrent assets Total assets $11. This low current ratio suggests that Dell is using its resources efficiently and has sufficient liquidity.075 37. in whole or part. 2013 (in millions) ASSETS Current Assets: Cash Short-term investments Receivables and other assets Inventories Other current assets Total current assets Property.001 = 1. Financial Accounting.076 44 12.363 4.001 15. .Investing and Financing Decisions and the Accounting System P2–5. duplicated.363 $22. LLC.176 (31.333 Req. scanned. 4 Current Ratio = Current Assets Current Liabilities = $26. Balance Sheet At February 1. 8/e 2-35 © 2014 by McGraw-Hill Global Education Holdings.20 of current assets.333 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable Other short-term obligations Total current liabilities Long-term Liabilities Total liabilities Stockholders’ Equity: Common stock Additional paid-in capital Retained earnings Other stockholders’ equity items Total stockholders’ equity Total liabilities and stockholders’ equity $11.557 $46.067 366 10. Activity (a) (b) (c) (d) (e) (f) (g) Type of Activity F I I I F I F Borrowed from banks Lent to affiliates Purchased investments Purchased property.000  875 + 400 + 11. Balance Sheet Classification Debit or Credit Balance (1) Prepaid Expenses CA Debit (2) Inventories CA Debit (3) Accounts Receivable CA Debit (4) Long-Term Debt NCL Credit (5) Cash and Equivalents CA Debit (6) Goodwill (an intangible asset) NCA Debit (7) Accounts Payable CL Credit (8) Income Taxes Payable CL Credit (9) Property. plant. Not authorized for sale or distribution in any manner. distributed. . duplicated. and Equipment NCA Debit (10) Retained Earnings SE Credit (11) Additional Paid-in Capital SE Credit (12) Short-Term Borrowings CL Credit (13) Accrued Liabilities CL Credit (14) Common Stock SE Credit 2-36 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. forwarded. or posted on a website. This is proprietary material solely for authorized instructor use.000  60 ALTERNATE PROBLEMS AP2–1. Plant.Investing and Financing Decisions and the Accounting System P2–6. in whole or part. This document may not be copied.Chapter 02 . scanned. and equipment Issued additional stock Sold short-term investments Paid dividends Effect on Cash + 50  300  13. LLC. 000 = $400. 3 Since the transaction in (i) occurs between the owners and others outside the company.000 – $200. 2 (On next page) Req. This document may not be copied. forwarded.000 – $339.000 Req.Investing and Financing Decisions and the Accounting System AP2–2. or posted on a website.000 $169.000 + $170. Only a corporation issues shares of capital stock to its owners in exchange for their investment.000 + $107.000 + $110.000 = $339. Adamson should consider increasing its current assets or seeking to convert some of its short-term debt to long-term debt.000 (c) Total stockholders’ equity = Total assets – Total liabilities = $739. in whole or part.000 – $3.000 + $85. distributed.000 = 0. .000 = $37.000 + $100. LLC. Req. 8/e 2-37 © 2014 by McGraw-Hill Global Education Holdings.000 (d) Cash balance = $120. 4 (a) Total assets = $35.000 – $2. as Adamson did in transaction (c). 5 Current Ratio = Current Assets Current Liabilities = $35.22 $169.Chapter 02 . Req. Not authorized for sale or distribution in any manner. duplicated. scanned.000 + $2.000 + $2. Financial Accounting. This is proprietary material solely for authorized instructor use.000 This suggests that Adamson may not have sufficient liquidity to cover its current obligations.000 = $739.000 – $5.000 (b) Total liabilities = $169.000 = $35.000 + $2.000 – $85. Req.000 (e) Total current assets = $35. there is no effect on the business due to the separate-entity assumption. 1 Adamson Incorporated was organized as a corporation.000 + $510.000 = $37. 000 +110.000 (d) –5.000 +10.000 Additional Paid-in Common Capital Stock 20.000 +35.000 +85.000 = +169.000 140. duplicated.000 +90.000 (e) –2.000 +170. LLC.000 +85.000 $739. = 70.000 = +2.000 + Short-Term Long-Term Notes Notes Payable Payable Notes Long-Term Receivable Investments Equipment Building 120.000 $339.000 $400.000 = +2.000 (g) = = –3.000 +5.000 Liabilities +107.000 (b) +30.000 310.000 +30. Not authorized for sale or distribution in any manner.000 +290. (continued) Req. forwarded.000 (h) (i) No effect = –3.000 = = –3.000 2-38 60.000 Retained Earnings 80. or posted on a website.000 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.000 –85.000 = (f) –200. This document may not be copied.000 200.Investing and Financing Decisions and the Accounting System AP2–2.000 Stockholders' Equity = +200.000 +80.000 +27. in whole or part. distributed. . scanned.000 +10.000 = (c) +100. 2 Assets Cash Beg. This is proprietary material solely for authorized instructor use.000 (a) +110.Chapter 02 .000 +510. 400 (f) 174. 9. Accounts Receivable 15. 20.732 Retained Earnings 501. Additional Paid-in Capital 359. 141.063 Other Assets 19. This is proprietary material solely for authorized instructor use.230 4. (e) Short-Term Investments 12.908 Beg.433 * Current portion is $19.Chapter 02 . 580.400 48. Ordering goods involves no exchange or receipt of cash.020 2.958 Beg. duplicated. 78.958 Long-Term Debt* 165.853 (f) 11.816 Accounts Payable 26.020 (d) 302. or services and thus is not a transaction.372 Beg.036 Property. Financial Accounting. or posted on a website.009 (h) Other Stockholders’ Equity Items Beg.980 15. in whole or part. 1.400 (d) 4. 3 No effect was recorded for (c). 15.639 Common Stock 484 Beg.009 Beg. 16 (a) 500 27. 310 (g) 19.Investing and Financing Decisions and the Accounting System AP2–3.639 Beg. 294. Req.020 3.372 Beg. (b) Intangibles 45.433 580.432 Other Long-Term Liabilities 27. LLC.004 (a) 360. . Plant. Req. Not authorized for sale or distribution in any manner.980 (g) 310 1. distributed. goods.528 Accrued Expenses Payable 127. scanned.830 300 (b) (e) (f) (h) Beg.506 26.036 Inventories Beg.519 (a) 1. forwarded. 8/e 2-39 © 2014 by McGraw-Hill Global Education Holdings.692 141.359 Prepaid Expenses and Other Current Assets Beg.728 Beg.889 20. Beg. 300 501. and Equipment Beg.032 Beg. 1 and 2 Cash and Cash Equivalents Beg.909 2.608 127.692 75. This document may not be copied.128 3. 732 501.506 Credit $ 26.639 174.889 15. plant. LLC. scanned.433 $1.528 19. Trial Balance At September 30.Chapter 02 . distributed. .063 48.692 20. and equipment Intangibles Other assets Accounts payable Accrued expenses payable Long-term debt (current portion. Inc. duplicated.009 500 360. Not authorized for sale or distribution in any manner. This document may not be copied.878 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. 4 Ethan Allen Interiors. (continued) Req. or posted on a website. This is proprietary material solely for authorized instructor use.218.958 127.359 15.Investing and Financing Decisions and the Accounting System AP2–3. 2011 (in thousands of dollars) Cash and cash equivalents Short-term investments Accounts receivable Inventories Prepaid expenses and other current assets Property.608 580.218. in whole or part.432 27.878 $1.372 302.036 141. $19) Other long-term liabilities Common stock Additional paid-in capital Retained earnings Other stockholders’ equity items Totals 2-40 Debit $ 75. forwarded. 372 268.639 19 154. scanned.Investing and Financing Decisions and the Accounting System AP2–3. 2011 (in thousands of dollars) Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Prepaid expenses and other current assets Total current assets Property. .348 302. a closer look reveals that a significant portion of their current assets are invested in inventory. 8/e 2-41 © 2014 by McGraw-Hill Global Education Holdings. This is proprietary material solely for authorized instructor use. and equipment Intangibles Other assets Total Assets Liabilities Current liabilities Accounts payable Accrued expenses payable Current portion of long-term debt Total current liabilities Long-term debt Other long-term liabilities Total Liabilities Stockholders’ Equity Common stock ($0. which often necessitates a higher current ratio. This document may not be copied. However.958 127. Balance Sheet At September 30. forwarded.413 27.608 (580.036 141. Not authorized for sale or distribution in any manner. or posted on a website. this seems to suggest that they are not investing their resources efficiently.063 48. 5 Ethan Allen Interiors. Financial Accounting. plant. distributed.445 $ 26.506 $638.407 $638. 6 Current Ratio = Total Current Assets = $268.Chapter 02 .616 174. Initially.732 501.01 par value) Additional paid-in capital Retained earnings Other stockholders’ equity items Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 75.009 356.445 Req. (continued) Req. indicating that they are highly liquid. in whole or part.528 19.038 500 360.616 Ethan Allen maintains a relatively high current ratio.692 20.348 = 1.889 15.359 15.433) 282.74 Total Current Liabilities $154. Inc. duplicated. LLC. The company is a corporation since it maintains share capital and its owners are referred to as “shareholders.980 1. as required by the cost principle. .020 (c) (d) (e) NE I I (f) I (g) (h) I F 3. accrued rent. This is proprietary material solely for authorized instructor use.Investing and Financing Decisions and the Accounting System AP2–4. The amount listed on the balance sheet for inventories does not represent the expected selling price. American Eagle Outfitters’ current ratio of 3.Chapter 02 . 1. maintaining a cash position may be an investing strategy.287. It represents the historical cost of acquiring the inventory.18 suggests strong liquidity with $3. LLC. This document may not be copied. in whole or part. accrued compensation and payroll taxes. Not authorized for sale or distribution in any manner.488 = 3.18 $405. the company had a significant amount of cash primarily from selling short-term investments. 4 Current Ratio = Current Assets Current Liabilities = $1. forwarded. unredeemed gift cards and gift certificates. 2. accrued income and other taxes.401 The current ratio measures the ability of the company to settle short-term obligations with current assets. 3. distributed.” (Refer to the stockholders’ equity section of the balance sheet). 2-42 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. and other liabilities and accrued expenses. or posted on a website.020 2.18 in current assets for every $1 in current liabilities.830 +310 300 CASES AND PROJECTS ANNUAL REPORT CASES CP2–1. Transaction Type of Activity Effect on Cash (a) (b) F I +1. The company’s current obligations include: accounts payable. scanned. Given the poor economic environment continuing into 2011 with a downturn in the financial markets.400 NE +4. current portion of deferred lease credits. In the most recent year presented. duplicated. forwarded.000.000 =2. This is proprietary material solely for authorized instructor use.769.000 = = Liabilities $417.292. scanned.000 on purchasing property and equipment in the year ended 1/28/12.467. CP2–2.000 5. nearly equivalent to the amount of marketable securities that were purchased during the year ($169. or posted on a website.708. The company had a net cash inflow from investing activities of $55.440.268.000.010.992.080. in whole or part. and $127.000). No – shareholders’ equity is a residual balance. 4. LLC.268. Financial Accounting. .483. It is likely that shareholders would receive less than $1.Chapter 02 . $84. This document may not be copied. The company spent $100. not at market value (the amount that could be received if the assets are sold at the end of the year).000 2. primarily because the company sold investments (sold marketable securities for $414. The company’s only noncurrent liability is Deferred Rent and Other Liabilities.066.135. nearly all assets on the balance sheet are stated at historical cost.000 in the year ended 1/29/11. meaning that the shareholders will receive what remains in cash and assets after the creditors have been satisfied. duplicated.56 $233.000.259.000 + + Shareholders’ Equity $1.066. The company also purchased property and equipment for $190. 8/e 2-43 © 2014 by McGraw-Hill Global Education Holdings. 1. Not authorized for sale or distribution in any manner.466. Current Ratio = Current Assets Current Liabilities = $596. In addition. Assets $1.000). 3.000 in the year ended 1/30/10.Investing and Financing Decisions and the Accounting System 5. This information is listed as Capital Expenditures on the Statement of Cash Flows in the investing activities section. distributed. This is proprietary material solely for authorized instructor use. Acquiring buildings often requires borrowing longterm (mortgages). scanned.” “Buildings and building improvements. As indicated in the financing activities section of each company’s statement of cash flows. the choice of renting or purchasing buildings does not have an effect on the numerator or denominator of the current ratio. American Eagle Outfitters paid $85.Chapter 02 . Urban Outfitters spent $545.” and “Rental property and equipment. net. duplicated. LLC. Refer to the financing activities section of the statement of cash flows.000 repurchasing common stock from employees and $15. This document may not be copied.” Furniture. 1. Other companies sometimes choose to report these assets separately on the balance sheet.000 in dividends.592. in whole or part.” 2-44 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. building. Urban Outfitters did not pay any dividends during the year. during the most recent year. 2. Urban Outfitters reduced its amount of current assets from the prior year while increasing its current liabilities. American Eagle reports “Property and equipment. Not authorized for sale or distribution in any manner.56 American Eagle Outfitters’ current ratio of 3. American Eagle Outfitters spent $2.18 is higher than the industry average. choose to rent space rather than purchase buildings for stores.189. For the year ended January 31.18 Urban Outfitters 2.67. or posted on a website.67 American Eagle Outfitters 3. Thus. 4. forwarded. net of accumulated depreciation” and Urban Outfitters reports “Property and equipment.478.000 repurchasing common stock from investors. 2012. for example in accounts such as: “Land. fixtures and equipment. Many retailers.Investing and Financing Decisions and the Accounting System CP2–3. .56 is slightly below the industry average of 2.000 repurchasing shares. but Urban Outfitters’ current ratio of 2. As indicated in the statement of cash flows. and equipment are reported by each in the notes to the financial statements. 3. Current Ratio = Industry Average 2. such as American Eagle Outfitters.” Details of the amount of land. distributed.160. at cost. 109 Chipotle’s current ratio increased from the level of 3. Current assets increased by approximately $119 million while current liabilities decreased by about $7 million. Its largest use of cash for investing activities was for the purchase of investments ($110.442 = 4.000.000.133 Current Liabilities $150. 8/e 2-45 © 2014 by McGraw-Hill Global Education Holdings. mostly from the ”Excess tax benefit on stock-based compensation” of $73.182 as discussed in the chapter.453 at December 31. in whole or part. (b) The total cash flows provided by financing activities was $34. duplicated. The major deficiency in this balance sheet is the inclusion of the owner’s personal residence as a business asset.157. Not authorized for sale or distribution in any manner. property. 2011. or posted on a website.000. other ratios involving long-term assets and/or stockholders’ equity will be affected. and June 31. This is proprietary material solely for authorized instructor use.Chapter 02 . CP2–5. 2011.409. separate and apart from its owners. to $150. between December 31. scanned. 2.870).000 rather than $405. Dollars are in thousands: 1. The improper inclusion of this asset as part of Frances Sabatier’s business:  overstates total assets by $300. total assets should be $105. Short-term investments increased the most (over $69 million). (a) Chipotle’s total assets reported for the quarter ended June 30. (b) Current liabilities decreased over six months from $157. Chipotle spent $90. Since current assets and current liabilities were not affected. rather than $305. 2012 are $1.109 on June 30. LLC. Chipotle increased its liquidity. This indicates that. and equipment. 2012. and  Overstates stockholders’ equity that should be only $5.Investing and Financing Decisions and the Accounting System FINANCIAL REPORTING AND ANALYSIS CASES CP2–4.000. 2012. .652. (a) For the three months ended June 30.332 on the purchase of leasehold improvements.648. the current ratio remains the same. Financial Accounting. distributed. forwarded. However. (c) Current Ratio at 6/30/12 = Current Assets = $620. 2012. each business must be accounted for as an individual organization. Under the separate-entity assumption. This document may not be copied. ....533 3. Not authorized for sale or distribution in any manner... Dell appears profitable in the most recent year because Retained Earnings increased.744 + ? – $ 0 = $28..917 Current Assets Current Liabilities = $29...... 2-46 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings.... it appears that Dell has been profitable..236 million.......236 Thus..34 For every $1 of current liabilities.. Assets $44....... Dollars are in millions: 1... Current Ratio = Liabilities = $35.448 $22......... In addition... in whole or part. This is proprietary material solely for authorized instructor use.Investing and Financing Decisions and the Accounting System CP2–6.492 million.. distributed. 11...656 5........ ......... Over its years in business.................. scanned...001 = 1... assuming no dividends were declared: (in millions) Beg........ This document may not be copied... It is possible to determine the amount of net income by using the following equation.... based on a positive amount in Retained Earnings of $28.. duplicated. 11. 4.. suggesting that Dell has the ability to pay its short-term obligations with current assets in the upcoming year.. or posted on a website..656 Cash (A) .....” 2.... LLC. Dell maintains $1.... The interpretation of this ratio would be more useful given information on the company’s current ratio over time and on the typical current ratio for the computer industry... For the Year End... The Retained Earnings account represents the cumulative earnings of the firm less any dividends paid to the shareholders since the business began.......Chapter 02 . The company is a corporation because its owners are referred to as “stockholders. Retained Earnings + Net Income – Dividends declared = Retained Earnings $24.616 = + Stockholders’ Equity + $8.. forwarded...34 of current assets... Accounts Payable (L) .. net income for the most recent year was $3.. 000 $141. forwarded.000 (33. scanned.Chapter 02 .000 94. or posted on a website. 1 Dewey. Inc. Req.000 8.000 Stockholders' Equity Contributed capital Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity 80. Not authorized for sale or distribution in any manner. distributed.000 17.000 15. 2015 Assets Current Assets: Cash Accounts receivable Inventory Total current assets Furniture and fixtures Delivery truck (net) Buildings (net) Total assets $ 1.Investing and Financing Decisions and the Accounting System CRITICAL THINKING CASES CP2–7.000 13.000) 47.000 Liabilities Current Liabilities: Accounts payable Payroll taxes payable Total current liabilities Notes payable (due in three years) Mortgage payable Total liabilities $ 16. duplicated. and Howe.000 52. .000 $141.000 60. 8/e 2-47 © 2014 by McGraw-Hill Global Education Holdings. in whole or part.000 Financial Accounting. Balance Sheet December 31. Cheetum. LLC.000 8.000 50. This is proprietary material solely for authorized instructor use.000 29.000 12. This document may not be copied. Cheetum. Not authorized for sale or distribution in any manner. in whole or part. LLC. you should examine the past three years of audited income statements and the past two years of audited balance sheets to identify positive and negative trends for this company. . scanned.Chapter 02 . (continued) Req. 2-48 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. In fact. Inc. You should also learn as much about the industry as you can by reviewing recent articles on economic and technological trends which may have an impact on this company.000) reduces total assets and reduces retained earnings. duplicated. I reduced the amount reported for buildings to $60. I corrected the balance sheet for Dewey. and Howe. This is proprietary material solely for authorized instructor use. plant. Before making a final decision on investing in this company. distributed. This document may not be copied. Primarily.000 which is the historical cost less any depreciation. forwarded.000 difference ($98. retained earnings becomes negative suggesting that there may have been several years of operating losses. or posted on a website. and equipment. 2 Dear ___________. Estimated market value is not a generally accepted accounting principle for recording property.Investing and Financing Decisions and the Accounting System CP2–7. The $38. You can also compare this company's current ratio to that of the industry to assess trends in liquidity.000 – $60. and compare how this company’s long-term debt as a proportion of stockholders’ equity has changed over time. 2. Inc. This document may not be copied. distributed. 8/e 2-49 © 2014 by McGraw-Hill Global Education Holdings.. the management at multiple levels of the organization are so involved in covering the fraud that it becomes nearly impossible for the auditors to detect the fraudulent activity. However. it appears that top executives concocted a scheme to induce vendors to confirm false promotional allowance income by signing audit letters agreeing to the false amounts. duplicated. The solution to this team project will depend on the companies and/or accounting period selected for analysis. In this case. Foodservice set certain financial goals and tied the former executives’ bonuses to meeting the goals. in many frauds. Financial Accounting. In audits. Not authorized for sale or distribution in any manner. the stock price dropped causing the stockholders to lose money on their investments. Those who were helped by the fraud included the former executives who were able to receive substantial bonuses based on the inflated results of operations.Investing and Financing Decisions and the Accounting System CP2–8.S. If the auditors are found to be negligent in performing their audit. In many cases of fraudulent activity. were the stockholders and creditors. in whole or part. confirming balances or amounts with external parties usually provides evidence for the auditors on potential problem areas. LLC. 3. forwarded. not knowing it to be tainted or fraudulent. U. However.Chapter 02 . scanned. then they are liable. Stockholders were purchasing shares of stock that were inflated due to the fraud. The most obvious parties harmed by the fraud at Ahold’s U. especially in poor economic times. the creditors have a lower probability of receiving full payment on their loans. . can result in those responsible for meeting the targets circumventing appropriate procedures and policies for their own benefit. In addition. setting unrealistic financial targets. The auditors appropriately relied on this external evidence in performing their audit. This is proprietary material solely for authorized instructor use. FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT CP2–9. Better decision making can result by heading off potential problems before they grow too large.S. The vendors who assisted in verifying false promotional allowances were also investigated. 1. Foodservice. auditors are named in lawsuits along with the company. such as rising costs or sagging sales. When the fraud was discovered. Creditors were lending funds to the company based on inflated income statement and balance sheet information. Adopting targets is a good tool for monitoring progress toward goals and identifying problem areas. The SEC also charged two individuals with insider trading for trading on a tip illegally. or posted on a website. Mortgage notes payable (L)…………………. 5. or posted on a website. forwarded.000 No transaction Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. Req. duplicated.000 36. Not authorized for sale or distribution in any manner. 1 a. in whole or part.500 10.. Common stock (+SE)……………………. . 6. Cash (A)………………………………… 1. Cash (+A) ………………………………………………….000 f. g. scanned. Mortgage notes payable (+L)…………… 18.000 Short-term investments (+A)…………………… Cash (A)…………………………………..000 d. Additional paid-in capital (+SE)………… Debit 25.500 4. c.000 200 60. This is proprietary material solely for authorized instructor use.Chapter 02 .Investing and Financing Decisions and the Accounting System CONTINUING CASE CC2–1.000 2.000 Equipment (+A)………………………………….000 72. 2-50 Credit 1. Cash (A)………………………………… Short-term notes payable (+L)…………. No transaction e. Equipment (+A) …………………………………………. This document may not be copied. b.000 80. LLC. distributed.800 Land (+A)………………………………………… Building (+A)……………………………………. Cash (A)………………………………….000 5. This is proprietary material solely for authorized instructor use. (a) (c) 2-51 © 2014 by McGraw-Hill Global Education Holdings.000 Beg. (b) Equipment 0 36.000 6. LLC.000 5.000 5. (b) Cash 0 25. 8/e Beg.000 Short-term Notes Payable 0 Beg.000 (b) 79.000 2. duplicated. 0 (f) 5. 200 (a) 200 Additional Paid-in Capital 0 Beg. distributed.000 10.500 42. 60.800 Financial Accounting. Not authorized for sale or distribution in any manner. scanned.000 72.500 Buildings 0 72.000 Mortgage Notes Payable 0 Beg.000 (c) 4.000 6.800 (a) 60.Chapter 02 .000 80. 2 Beg. forwarded. .500 (b) (c) (e) (f) Land 0 18.000 Short-term Investments Beg. or posted on a website.Investing and Financing Decisions and the Accounting System CC2–1.000 Common Stock 0 Beg. This document may not be copied. in whole or part. (a) Beg.500 1. (e) 1. (continued) Req. 4.000 18. Trial Balance March 31.000 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. LLC. 3 Penny’s Pool Service and Supply.000 200 60.Investing and Financing Decisions and the Accounting System CC2–1. This document may not be copied.000 42.000 4.Chapter 02 . duplicated.000 79.500 18. 2013 Cash Short-term investments Equipment Land Buildings Short-term notes payable Mortgage notes payable Common stock Additional paid-in capital Totals 2-52 Debit $ 6. scanned.000 72. .500 5. (continued) Req. or posted on a website. in whole or part.800 $144. distributed. Inc.000 Credit $ $144. This is proprietary material solely for authorized instructor use. forwarded. Not authorized for sale or distribution in any manner. or NE) F Effect on Cash Flows (+ or . in whole or part.1.000 (c) I .000 $144.000 4. Balance Sheet On March 31. 5 (a) Type of Activity (I.000 83. distributed.500 5.5.000 Liabilities and Stockholder’s Equity Current Liabilities: Short-term notes payable Total current liabilities Mortgage notes payable Total liabilities Stockholder’s Equity: Common stock ($0. (continued) Req. . 8/e NE NE 2-53 © 2014 by McGraw-Hill Global Education Holdings. Not authorized for sale or distribution in any manner.000 (g) NE Financial Accounting.000 $144. 2013 Assets Current Assets: Cash Short-term investments Total current assets Equipment Land Buildings Total assets $ 6.2.and amount) + 25.10.05 par value) Additional paid-in capital Total stockholder’s equity Total liabilities and stockholder’s equity $4. Inc. This document may not be copied.000 (f) I .500 42. scanned. forwarded. F. or posted on a website. LLC.000 72.000 11.500 18. duplicated.500 (d) NE (e) F . 4 Penny’s Pool Service and Supply.800 61.000 (b) I .000 200 60.000 Req.Chapter 02 .Investing and Financing Decisions and the Accounting System CC2–1.000 79. This is proprietary material solely for authorized instructor use. and other operating needs. This document may not be copied. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.000 = = Current Ratio 2. utilities. this may change as the inventory is received in April and operations begin requiring paying cash for inventory purchases from suppliers. employee salary. One of the most significant problems for new small businesses is generating sufficient cash from operations to pay obligations and maintain liquidity. in whole or part.875. . LLC. and paying notes payable when due. 2-54 Solutions Manual © 2014 by McGraw-Hill Global Education Holdings. (continued) Req. advertising.Chapter 02 .Investing and Financing Decisions and the Accounting System CC2–1. However. 6 March 31. duplicated. scanned. 2013 Current Assets $11. distributed. forwarded. or posted on a website.875 With a current ratio of 2. PPSS has liquidity with sufficient current assets to settle short-term obligations.500 ÷ ÷ Current Liabilities $4.
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