Accounting Tools for Business Decision Making 4th edition

Paul D. KimmelJerry J. Weygandt and Donald E. Kieso

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Accounting : Tools for Business Decision Making (ISBN10: 0470534788; ISBN13: 9780470534786)   

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Questions

1.
What is meant by the term operating cycle?
2.
Define current assets. What basis is used for ordering individual items within the current assets section?
3.
Distinguish between long-term investments and property, plant, and equipment.
4.
How do current liabilities differ from long-term liabilities?
5.
Identify the two parts of stockholders’ equity in a corporation and indicate the purpose of each.
6.
(a) Julia Alter believes that the analysis of financial statements is directed at two characteristics of a company: liquidity and profitability. Is Julia correct? Explain.
(b) Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain.

7.
Name ratios useful in assessing (a) liquidity,
(b) solvency, and (c) profitability.

8.
Jon Baird, the founder of Waterboots Inc., needs to raise $500,000 to expand his company’s operations. He has been told that raising the money through debt will increase the riskiness of his company much more than issuing stock. He doesn’t understand why this is true. Explain it to him.
9.
What do these classes of ratios measure?
(a) Liquidity ratios.
(b) Profitability ratios.
(c) Solvency ratios.

10.
Holding all other factors constant, indicate whether each of the following signals generally good or bad news about a company.
(a) Increase in earnings per share.
(b) Increase in the current ratio.
(c) Increase in the debt to total assets ratio.
(d) Decrease in free cash flow.

11.
Which ratio or ratios from this chapter do you think should be of greatest interest to:
(a) a pension fund considering investing in a corporation’s 20-year bonds?
(b) a bank contemplating a short-term loan?
(c) an investor in common stock?

12.
(a) What are generally accepted accounting principles (GAAP)?
(b) What body provides authoritative support for GAAP?

13.
(a) What is the primary objective of financial reporting?
(b) Identify the characteristics of useful accounting information.

14.
Dan Fineman, the president of King Company, is pleased. King substantially increased its net income in 2012 while keeping its unit inventory relatively the same. Howard Gross, chief accountant, cautions Dan, however. Gross says that since King changed its method of inventory valuation, there is a consistency problem and it is difficult to determine whether King is better off. Is Gross correct? Why or why not?
15.
What is the distinction between comparability and consistency?
16.
Describe the two constraints inherent in the presentation of accounting information.
17.
Your roommate believes that international accounting standards are uniform throughout the world. Is your roommate correct? Explain.
18.
Laurie Belk is president of Better Books. She has no accounting background. Belk cannot understand why fair value is not used as the basis for all accounting measurement and reporting. Discuss.
19.
What is the economic entity assumption? Give an example of its violation.
20.
What was Tootsie Roll’s largest current asset, largest current liability, and largest item under “Other assets” at December 31, 2009?
 

Brief Exercises
BE2-1
The following are the major balance sheet classifications:
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Common stock (CS)
Intangible assets (IA) Retained earnings (RE)
Match each of the following accounts to its proper balance sheet classification.
_____ Accounts payable _____ Income taxes payable
_____ Accounts receivable _____ Investment in long-term bonds
_____ Accumulated depreciation _____ Land
_____ Buildings _____ Inventory
_____ Cash _____ Patent
_____ Goodwill _____ Supplies

BE2-2
A list of financial statement items for Georges Company includes the following: accounts receivable $14,000; prepaid insurance $2,600; cash $10,400; supplies $3,800, and short-term investments $8,200. Prepare the current assets section of the balance sheet listing the items in the proper sequence.
BE2-3
The following information (in millions of dollars) is available for Limited Brands for 2008: Sales revenue $9,043; net income $220; preferred stock dividend $0; average shares outstanding 333 million. Compute the earnings per share for Limited Brands for 2008.
BE2-4
For each of the following events affecting the stockholders’ equity of Willis, indicate whether the event would: increase retained earnings (IRE), decrease retained earnings (DRE), increase common stock (ICS), or decrease common stock (DCS).
_____ (a) Issued new shares of common stock.
_____ (b) Paid a cash dividend.
_____ (c) Reported net income of $75,000.
_____ (d) Reported a net loss of $20,000.

BE2-5
These selected condensed data are taken from a recent balance sheet of Bob Evans Farms (in millions of dollars).
Cash $ 29.3
Accounts receivable 20.5
Inventory 28.7

Other current assets 24.0
Total current assets $102.5
Total current liabilities $201.2
Compute working capital and the current ratio.

BE2-6
Kalb’s Books & Music Inc. reported the following selected information at March 31. 2012
Total current assets $262,787
Total assets 439,832
Total current liabilities 293,625
Total liabilities 376,002
Cash provided by operating activities 62,300 Calculate (a) the current ratio, (b) the debt to total assets ratio, and (c) free cash flow for March 31, 2012. The company paid dividends of $12,000 and spent $24,787 on capital expenditures.
BE2-7 Indicate whether each statement is true or false. (a) GAAP is a set of rules and practices established by accounting standard-setting bodies to serve as a general guide for financial reporting purposes. (b) Substantial authoritative support for GAAP usually comes from two standards-setting bodies: the FASB and the IRS.
BE2-9
Given the characteristics of useful accounting information, complete each of the following statements.
(a) For information to be _____, it should have predictive and confirmatory value.
(b) _____ is the quality of information that gives assurance that it is free from error and bias.
(c) _____ means using the same accounting principles and methods from year to year within a company.

BE2-10
Here are some qualitative characteristics of useful accounting information:
1. Predictive value 3. Verifiable
2. Neutral 4. Timely
Match each qualitative characteristic to one of the following statements.
——— (a) Accounting information should help provide accurate expectations about future events.
——— (b) Accounting information cannot be selected, prepared, or presented to favor one set of interested users over another.
——— (c) Accounting information must be proved to be free of error.
——— (d) Accounting information must be available to decision makers before it loses its capacity to influence their decisions.

BE2-11
The full disclosure principle dictates that:
(a) financial statements should disclose all assets at their cost.
(b) financial statements should disclose only those events that can be measured in dollars.
(c) financial statements should disclose all events and circumstances that would matter to users of financial statements.
(d) financial statements should not be relied on unless an auditor has expressed an unqualified opinion on them.

2-1 Heather Corporation has collected the following information related to its December 31, 2012, balance sheet.
Accounts receivable $22,000 Equipment $180,000
Accumulated depreciation—equipment 50,000 Inventory 58,000
Cash 13,000 Supplies 7,000
Prepare the assets section of Heather Corporation’s balance sheet.
Do it!

Review
2-2 The following financial statement items were taken from the financial statements of Jing Corp.
____ Trademarks ____ Inventory
____ Current maturities of long-term debt ____ Accumulated depreciation
____ Interest revenue ____ Land improvements
____ Income taxes payable ____ Common stock
____ Long-term marketable debt securities ____ Advertising expense
____ Unearned consulting fees ____ Mortgage payable (due in 3 years)
Match each of the financial statement items to its proper balance sheet classification. (See E2-1, on page 79, for a list of the balance sheet classifications.) If the item would not appear on a balance sheet, use “NA.”


2-3
The following information is available for Gerard Corporation. 2012 2011
Current assets $ 54,000 $ 36,000
Total assets 240,000 205,000
Current liabilities 22,000 30,000
Total liabilities 72,000 100,000
Net income 80,000 40,000

Cash provided by operating activities 90,000 56,000
Preferred stock dividends 6,000 6,000
Common stock dividends 3,000 1,500
Expenditures on property, plant, and equipment 27,000 12,000
Shares outstanding at beginning of year 40,000 30,000
Shares outstanding at end of year 75,000 40,000
(a) Compute earnings per share for 2012 and 2011 for Gerard, and comment on the change. Gerard’s primary competitor, Thorpe Corporation, had earnings per share of $1 per share in 2012. Comment on the difference in the ratios of the two companies.
(b) Compute the current ratio and debt to total assets ratio for each year, and comment on the changes.
(c) Compute free cash flow for each year, and comment on the changes.

2-4
The following are characteristics, assumptions, principles, or constraints that guide the FASB when it creates accounting standards.
Relevance Periodicity assumption
Faithful representation Going concern assumption
Comparability Cost principle
Consistency Full disclosure principle
Monetary unit assumption Materiality constraint
Economic entity assumption Cost constraint
Match each item above with a description below.
1. __________ Items not easily quantified in dollar terms are not reported in the financial statements.
2. __________ Accounting information must be complete, neutral, and free from error.
3. __________ Personal transactions are not mixed with the company’s transactions.
4. __________ The cost to provide information should be weighed against the benefit that users will gain from having the information available.
5. __________ A company’s use of the same accounting principles from year to year.
6. __________ Assets are recorded and reported at original purchase price.
7. __________ Accounting information should help users predict future events, and should confirm or correct prior expectations.
8. __________ The life of a business can be divided into artificial segments of time.
9. __________ The reporting of all information that would make a difference to financial statement users.
10. __________ The judgment concerning whether an item’s size makes it likely to influence a decision maker.
11. __________ Assumes a business will remain in operation for the foreseeable future.
12. __________ Different companies use the same accounting principles.



Exercises

E2-1
The following are the major balance sheet classifications.
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Stockholders’ equity (SE)
Intangible assets (IA)

Instructions

Classify each of the following financial statement items taken from Inshore Corporation’s balance sheet.
____ Accounts payable ____ Income taxes payable
____ Accounts receivable ____ Inventory
____ Accumulated depreciation— ____ Investments equipment ____ Land
____ Buildings ____ Mortgage payable
____ Cash ____ Supplies
____ Interest payable ____ Equipment
____ Goodwill ____ Prepaid rent


E2-2
The major balance sheet classifications are listed in E2-1 above.
Instructions

Classify each of the following financial statement items based upon the major balance sheet classifications listed in E2-1.
____ Prepaid advertising ____ Patents
____ Equipment ____ Bonds payable
____ Trademarks ____ Common stock
____ Salaries and wages payable ____ Accumulated depreciation—
____ Income taxes payable equipment
____ Retained earnings ____ Unearned sales revenue
____ Accounts receivable ____ Inventory
____ Land held for future use

E2-3
The following items were taken from the December 31, 2009, assets section of the Boeing Company balance sheet. (All dollars are in millions.)
Inventories $16,933 Other current assets $ 966
Notes receivable—due after Property, plant, and
December 31, 2010 5,466 equipment 21,579
Notes receivable—due before Cash and cash equivalents 9,215
December 31, 2010 368 Accounts receivable 5,785
Accumulated depreciation 12,795 Short-term investments 2,008
Intangible and other assets 12,528

Instructions

Prepare the assets section of a classified balance sheet, listing the current assets in order of their liquidity.


E2-4
The following information (in thousands of dollars) is available for H.J. Heinz Company—famous for ketchup and other fine food products—for the year ended April 29, 2009. / Prepaid expenses $ 125,765 Inventories $1,237,613
Land 76,193 Buildings and equipment 4,033,369
Other current assets 36,701 Cash and cash equivalents 373,145
Intangible assets 3,982,954 Accounts receivable 1,171,797
Other noncurrent assets 757,907 Accumulated depreciation 2,131,260

Instructions

Prepare the assets section of a classified balance sheet, listing the items in proper sequence and including a statement heading.

E2-5 These items are taken from the financial statements of Victory Co. at December 31, 2012.
Buildings $105,800
Accounts receivable 12,600
Prepaid insurance 3,200
Cash 11,840
Equipment 82,400
Land 61,200
Insurance expense 780
Depreciation expense 5,300
Interest expense 2,600
Common stock 60,000
Retained earnings (January 1, 2012) 40,000
Accumulated depreciation—buildings 45,600
Accounts payable 9,500
Notes payable 93,600
Accumulated depreciation—equipment 18,720
Interest payable 3,600
Service revenue 14,700

Instructions

Prepare a classified balance sheet. Assume that $13,600 of the note payable will be paid in 2013.

E2-6
The following items were taken from the 2009 financial statements of Texas Instruments, Inc. (All dollars are in millions.)
Common stock $2,826 Cash and cash equivalents $1,182
Prepaid expenses 164 Accumulated depreciation 3,547
Property, plant, and equipment 6,705 Accounts payable 1,344
Other current assets 546 Other noncurrent assets 2,210
Other current liabilities 115 Noncurrent liabilities 810
Long-term investments 637 Retained earnings 6,896
Short-term investments 1,743 Accounts receivable 1,277
Income taxes payable 128 Inventories 1,202

Instructions

Prepare a classified balance sheet in good form as of December 31, 2009.

E2-7
The following information is available for Callaway Golf Company for the years 2008 and 2007. (Dollars are in thousands, except share information.)
2008 2007

Net sales $ 1,117,204 $ 1,124,591
Net income (loss) 66,176 54,587
Total assets 855,338 838,078

Share information

Shares outstanding at year-end 64,507,000 66,282,000
Preferred dividends –0– –0–
There were 73,139,000 shares outstanding at the end of 2006.

Instructions

(a) What was the company’s earnings per share for each year?
(b) Based on your findings above, how did the company’s profitability change from 2007 to 2008?
(c) Suppose the company had paid dividends on preferred stock and on common stock during the year. How would this affect your calculation in part (a)?

E2-8
These financial statement items are for Whitnall Corporation at year-end, July 31, 2012.
Salaries and wages payable $ 2,080
Salaries and wages expense 57,500
Supplies expense 15,600

Equipment $18,500
Accounts payable 4,100
Service revenue 66,100
Rent revenue 8,500
Notes payable (due in 2015) 1,800
Common stock 16,000
Cash 29,200
Accounts receivable 9,780
Accumulated depreciation—equipment 6,000
Dividends 4,000
Depreciation expense 4,000
Retained earnings (beginning of the year) 34,000

Instructions

(a) Prepare an income statement and a retained earnings statement for the year. Whitnall Corporation did not issue any new stock during the year.
(b) Prepare a classified balance sheet at July 31.
(c) Compute the current ratio and debt to total assets ratio.
(d) Suppose that you are the president of Crescent Equipment. Your sales manager has approached you with a proposal to sell $20,000 of equipment to Whitnall. He would like to provide a loan to Whitnall in the form of a 10%, 5-year note payable. Evaluate how this loan would change Whitnall’s current ratio and debt to total assets ratio, and discuss whether you would make the sale.

E2-9
Nordstrom, Inc. operates department stores in numerous states. Selected financial statement data (in millions of dollars) for the year ended January 31, 2009, follow.
End of Year Beginning of Year

Cash and cash equivalents $ 72 $ 358
Receivables (net) 1,942 1,788
Merchandise inventory 900 956
Other current assets 303 259
Total current assets $3,217 $3,361
Total current liabilities $1,601 $1,635

Instructions

(a) Compute working capital and the current ratio at the beginning of the year and at the end of the current year.
(b) Did Nordstrom’s liquidity improve or worsen during the year?
(c) Using the data in the chapter, compare Nordstrom’s liquidity with
Best Buy’s.
E2-10
The chief financial officer (CFO) of Padilla Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2012, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1.
The preliminary balance sheet is as follows.

PADILLA CORP. Balance Sheet December 30, 2012

Current assets Current liabilities
Cash $25,000 Accounts payable $ 20,000
Accounts receivable 30,000 Salaries and wages payable 10,000 $ 30,000
Prepaid insurance 5,000 $ 60,000 Long-term liabilities
Equipment (net) 200,000 Notes payable 80,000
Total assets $260,000 Total liabilities 110,000
Stockholders’ equity
Common stock 100,000
Retained earnings 50,000 150,000
Total liabilities and
stockholders’ equity $260,000

Instructions
(a) Calculate the current ratio and working capital based on the preliminary balance sheet.
(b) Based on the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2012. Calculate the new current ratio and working capital after the company takes these actions.
(c) Discuss the pros and cons of the current ratio and working capital as measures of liquidity.
(d) Was it unethical for the CFO to take these steps?


E2-11
The following data were taken from the 2009 and 2008 financial statements of American Eagle Outfitters. (All dollars are in thousands.)
2009 2008

Current assets $ 925,359 $1,020,834
Total assets 1,963,676 1,867,680
Current liabilities 401,763 376,178
Total liabilities 554,645 527,216
Total stockholders’ equity 1,409,031 1,340,464
Cash provided by operating activities 302,193 464,270
Capital expenditures 265,335 250,407
Dividends paid 82,394 80,796

Instructions

Perform each of the following.
(a) Calculate the debt to total assets ratio for each year.
(b) Calculate the free cash flow for each year.
(c) Discuss American Eagle’s solvency in 2009 versus 2008.
(d) Discuss American Eagle’s ability to finance its investment activities with cash provided by operating activities, and how any deficiency would be met.


E2-12
Presented below are the assumptions and principles discussed in this chapter.
1. Full disclosure principle. 4. Periodicity assumption.
2. Going concern assumption. 5. Cost principle.
3. Monetary unit assumption. 6. Economic entity assumption.

Instructions

Identify by number the accounting assumption or principle that is described below. Do not use a number more than once.
——— (a) Is the rationale for why plant assets are not reported at liquidation value. (
Note: Do not use the cost principle.)
——— (b) Indicates that personal and business record-keeping should be separately maintained.
——— (c) Assumes that the dollar is the “measuring stick” used to report on financial performance.
——— (d) Separates financial information into time periods for reporting purposes.
——— (e) Measurement basis used when a reliable estimate of fair value is not available.
——— (f ) Dictates that companies should disclose all circumstances and events that make a difference to financial statement users.

E2-13
Rosman Co. had three major business transactions during 2012.
(a) Reported at its fair value of $260,000 merchandise inventory with a cost of $208,000.
(b) The president of Rosman Co., Jay Rosman, purchased a truck for personal use and charged it to his expense account.
(c) Rosman Co. wanted to make its 2012 income look better, so it added 2 more weeks to the year (a 54-week year). Previous years were 52 weeks.

Instructions

In each situation, identify the assumption or principle that has been violated, if any, and discuss what the company should have done.


Problems: Set A
P2-1A
The following items are taken from the 2008 balance sheet of Yahoo! Inc. (All dollars are in thousands.)
Intangible assets $3,926,749
Common stock 6,282,504
Property and equipment, net 1,536,181
Accounts payable 151,897
Other assets 233,989
Long-term investments 3,247,431
Accounts receivable 1,060,450
Prepaid expenses and other current assets 233,061
Short-term investments 1,159,691
Retained earnings 4,968,438
Cash and cash equivalents 2,292,296
Long-term debt 733,891
Accrued expenses and other current liabilities 1,139,894
Unearned revenue—current 413,224

Instructions

Prepare a classified balance sheet for Yahoo! Inc. as of December 31, 2008.

P2-2A
These items are taken from the financial statements of Xenox Corporation for 2012.
Retained earnings (beginning of year) $31,000
Utilities expense 2,000
Equipment 66,000
Accounts payable 18,300
Cash 10,100
Salaries and wages payable 3,000
Common stock 12,000
Dividends 12,000
Service revenue 68,000
Prepaid insurance 3,500
Maintenance and repairs expense 1,800
Depreciation expense 3,600
Accounts receivable 11,700
Insurance expense 2,200
Salaries and wages expense 37,000
Accumulated depreciation—equipment 17,600

Instructions

Prepare an income statement, a retained earnings statement, and a classified balance sheet as of December 31, 2012.

P2-3A
You are provided with the following information for Merrell Enterprises, effective as of its April 30, 2012, year-end.
Accounts payable $ 834
Accounts receivable 810
Accumulated depreciation—equipment 670
Cash 1,270
Common stock 900
Cost of goods sold 1,060


 Exercises: Set B and Challenge Exercises
Visit the book’s companion website, at
www.wiley.com/college/kimmel, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
Depreciation expense $ 335
Dividends 325
Equipment 2,420
Income tax expense 165
Income taxes payable 135
Insurance expense 210
Interest expense 400
Inventory 967
Land 3,100
Mortgage payable 3,500
Notes payable 61
Prepaid insurance 60
Retained earnings (beginning) 1,600
Sales revenue 5,100
Short-term investments 1,200
Salaries and wages expense 700
Salaries and wages payable 222

Instructions

(a) Prepare an income statement and a retained earnings statement for Merrell Enterprises for the year ended April 30, 2012.
(b) Prepare a classified balance sheet for Merrell Enterprises as of April 30, 2012.


P2-4A
Comparative financial statement data for Duran Corporation and Kiepert Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2012.
Duran Corporation Kiepert Corporation
2012 2012

Net sales $1,800,000 $620,000
Cost of goods sold 1,175,000 340,000
Operating expenses 283,000 98,000
Interest expense 9,000 3,800
Income tax expense 85,000 36,000
Current assets 407,200 190,336
Plant assets (net) 532,000 139,728
Current liabilities 66,325 33,716
Long-term liabilities 108,500 40,684
Cash from operating activities 138,000 36,000
Capital expenditures 90,000 20,000
Dividends paid on common stock 36,000 15,000
Average number of shares outstanding 80,000 50,000

Instructions

(a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2012.
(b) Comment on the relative liquidity of the companies by computing working capital and the current ratios for each company for 2012.
(c) Comment on the relative solvency of the companies by computing the debt to total assets ratio and the free cash flow for each company for 2012.

P2-5A
Here and on page 85 are financial statements of Batcha Company.
BATCHA COMPANY
Income Statement
For the Year Ended December 31, 2012

Net sales $2,218,500
Cost of goods sold 1,012,400
Selling and administrative expenses 906,000
Interest expense 78,000
Income tax expense 69,000
Net income $ 153,100

BATCHA COMPANY
Balance Sheet
December 31, 2012
Assets

Current assets
Cash $ 60,100
Short-term investments 84,000
Accounts receivable (net) 169,800
Inventory 145,000
Total current assets 458,900
Plant assets (net) 575,300
Total assets $1,034,200

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable $ 160,000
Income taxes payable 35,500
Total current liabilities 195,500
Bonds payable 200,000
Total liabilities 395,500
Stockholders’ equity
Common stock 350,000
Retained earnings 288,700
Total stockholders’ equity 638,700
Total liabilities and stockholders’ equity $1,034,200
Additional information: The cash provided by operating activities for 2012 was $190,800.
The cash used for capital expenditures was $92,000. The cash used for dividends was $31,000. The average number of shares outstanding during the year was 50,000.

Instructions

(a) Compute the following values and ratios for 2012. (We provide the results from 2011 for comparative purposes.)
(i) Working capital. (2011: $160,500)
(ii) Current ratio. (2011: 1.65:1)
(iii) Free cash flow. (2011: $48,700)
(iv) Debt to total assets ratio. (2011: 31%)
(v) Earnings per share. (2011: $3.15)
(b) Using your calculations from part (a), discuss changes from 2011 in liquidity, solvency, and profitability.


P2-6A
Condensed balance sheet and income statement data for Sievert Corporation are presented here and on the next page.
SIEVERT CORPORATION
Balance Sheets
December 31
Assets 2012 2011

Cash $ 28,000 $ 20,000
Receivables (net) 70,000 62,000
Other current assets 90,000 73,000
Long-term investments 62,000 60,000
Plant and equipment (net) 510,000 470,000
Total assets $760,000 $685,000

Liabilities and Stockholders’ Equity

Current liabilities $ 75,000 $ 70,000
Long-term debt 80,000 90,000
Common stock 330,000 300,000
Retained earnings 275,000 225,000
Total liabilities and stockholders’ equity $760,000 $685,000

SIEVERT CORPORATION
Income Statements
For the Years Ended December 31
2012 2011

Sales $750,000 $680,000
Cost of goods sold 440,000 400,000
Operating expenses (including income taxes) 240,000 220,000
Net income $ 70,000 $ 60,000
Additional information:
Cash from operating activities $82,000 $56,000
Cash used for capital expenditures $45,000 $38,000
Dividends paid $20,000 $15,000
Average number of shares outstanding 33,000 30,000

Instructions

Compute these values and ratios for 2011 and 2012.
(a) Earnings per share.
(b) Working capital.
(c) Current ratio.
(d) Debt to total assets ratio.
(e) Free cash flow.
(f ) Based on the ratios calculated, discuss briefly the improvement or lack thereof in financial position and operating results from 2011 to 2012 of Sievert Corporation.


P2-7A
Selected financial data of two competitors, Target and Wal-Mart, are presented here. (All dollars are in millions.)
Target Wal-Mart
(1/31/09) (1/31/09)
Income Statement Data for Year
Net sales $64,948 $401,244
Cost of goods sold 44,157 306,158
Selling and administrative expenses 16,389 76,651
Interest expense 894 2,103
Other income 28 4,213
Income taxes 1,322 7,145
Net income $ 2,214 $ 13,400
Target Wal-Mart
Balance Sheet Data (End of Year)
Current assets $17,488 $ 48,949
 Noncurrent assets 26,618 114,480
Total assets $44,106 $163,429
Current liabilities $10,512 $ 55,390
Long-term debt 19,882 42,754
Total stockholders’ equity 13,712 65,285
Total liabilities and stockholders’ equity $44,106 $163,429
Cash from operating activities $4,430 $23,147
Cash paid for capital expenditures 3,547 11,499
Dividends declared and paid on common stock 465 3,746
Average shares outstanding (millions) 774 3,951
Instructions
For each company, compute these values and ratios.
(a) Working capital.
(b) Current ratio.
 (c) Debt to total assets ratio.
(d) Free cash flow.
(e) Earnings per share.
(f ) Compare the liquidity and solvency of the two companies.

P2-8A
A friend of yours, Ana Gehrig, recently completed an undergraduate degree in science and has just started working with a biotechnology company. Ana tells you that the owners of the business are trying to secure new sources of financing which are needed in order for the company to proceed with development of a new health care product. Ana said that her boss told her that the company must put together a report to present to potential investors.
Ana thought that the company should include in this package the detailed scientific findings related to the Phase I clinical trials for this product. She said, “I know that the biotech industry sometimes has only a 10% success rate with new products, but if we report all the scientific findings, everyone will see what a sure success this is going to be!
The president was talking about the importance of following some set of accounting principles.
Why do we need to look at some accounting rules? What they need to realize is that we have scientific results that are quite encouraging, some of the most talented employees around, and the start of some really great customer relationships. We haven’t made any sales yet, but we will. We just need the funds to get through all the clinical testing and get government approval for our product. Then these investors will be quite happy that they bought in to our company early!”

Instructions

(a) What is accounting information? Explain to Ana what is meant by generally accepted accounting principles.
(b) Comment on how Ana’s suggestions for what should be reported to prospective investors conforms to the qualitative characteristics of accounting information. Do you think that the things that Ana wants to include in the information for investors will conform to financial reporting guidelines?


Problems: Set B

P2-1B
The following items are from the 2009 balance sheet of Kellogg Company. (All dollars are in millions.)
Common stock $ 577
Other assets 5,632
Notes payable—current 44
Other current assets 221
Cash and cash equivalents 334
Other long-term liabilities 1,802
Retained earnings 1,698
Accounts payable 1,077
Other current liabilities 1,167
Accounts receivable, net 1,093
Property, net 3,010
Inventories 910
Long-term debt 4,835
Instructions
Prepare a classified balance sheet for Kellogg Company as of December 31, 2009.


P2-2B
These items are taken from the financial statements of Tilley, Inc.
Prepaid insurance $ 1,400
Equipment 31,000
Salaries and wages expense 36,000
Utilities expense 2,100
Accumulated depreciation—equipment 8,600
Accounts payable 8,200
Cash 5,100

Accounts receivable $ 4,900
Salaries and wages payable 2,000
Common stock 6,000
Depreciation expense 4,300
Retained earnings (beginning) 14,000
Dividends 2,600
Service revenue 53,000
Maintenance and repairs expense 2,600
Insurance expense 1,800
Instructions
Prepare an income statement, a retained earnings statement, and a classified balance
sheet as of December 31, 2012.


P2-3B
You are provided with the following information for Rapp Corporation, effective as of its April 30, 2012, year-end.
Accounts payable $ 2,100
Accounts receivable 9,150
Accumulated depreciation—equipment 6,600
Depreciation expense 2,200
Cash 21,955
Common stock 20,000
Dividends 2,800
Equipment 24,250
Sales revenue 21,450
Income tax expense 1,600
Income taxes payable 300
Interest expense 350

Interest payable 175
Notes payable (due in 2016) 5,700
Prepaid rent 380
Rent expense 760
Retained earnings, beginning 13,960
Salaries and wages expense 6,840

Instructions

(a) Prepare an income statement and a retained earnings statement for Rapp Corporation for the year ended April 30, 2012.
(b) Prepare a classified balance sheet for Rapp as of April 30, 2012.
(c) Explain how each financial statement interrelates with the others.


P2-4B
Comparative statement data for Al Sharif Company and Weber Company, two competitors, are presented below. All balance sheet data are as of December 31, 2012.
Al Sharif Company Weber Company
2012 2012

Net sales $450,000 $890,000
Cost of goods sold 260,000 620,000
Operating expenses 130,000 59,000
Interest expense 6,000 10,000
Income tax expense 10,000 65,000
Current assets 180,000 700,000
Plant assets (net) 600,000 800,000
Current liabilities 75,000 300,000
Long-term liabilities 190,000 200,000
Cash from operating activities 46,000 180,000
Capital expenditures 20,000 50,000
Dividends paid 4,000 15,000
Average number of shares outstanding 200,000 400,000

Instructions

(a) Compute the net income and earnings per share for each company for 2012.

(b) Comment on the relative liquidity of the companies by computing working capital and the current ratio for each company for 2012.
(c) Comment on the relative solvency of the companies by computing the debt to total assets ratio and the free cash flow for each company for 2012.

P2-5B
The financial statements of DeVoe Company are presented here.
DEVOE COMPANY
Income Statement
For the Year Ended December 31, 2012

Net sales $700,000
Cost of goods sold 400,000
Selling and administrative expenses 150,000
Interest expense 7,800
Income tax expense 43,000
Net income $ 99,200

DEVOE COMPANY
Balance Sheet December 31, 2012
Assets

Current assets
Cash $ 18,100
Short-term investments 34,800
Accounts receivable (net) 90,700
Inventory 155,000
Total current assets 298,600
Plant assets (net) 465,300
Total assets $763,900

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable $119,700
Income taxes payable 29,000
Total current liabilities 148,700
Bonds payable 110,000
Total liabilities 258,700
Stockholders’ equity
Common stock 170,000
Retained earnings 335,200
Total stockholders’ equity 505,200  Total liabilities and stockholders’ equity $763,900
Cash from operating activities $ 71,300
Capital expenditures $ 42,000
Dividends paid $ 10,000
Average number of shares outstanding 65,000

Instructions

(a) Compute the following values and ratios for 2012. (We provide the results from 2011 for comparative purposes.)
(i) Current ratio. (2011: 2.4:1)
(ii) Working capital. (2011: $178,000)
(iii) Debt to total assets ratio. (2011: 31%)
(iv) Free cash flow. (2011: $13,000)
(v) Earnings per share. (2011: $1.35)
(b) Using your calculations from part (a), discuss changes from 2011 in liquidity, solvency, and profitability.


P2-6B Condensed balance sheet and income statement data for Fellenz Corporation are presented below.
FELLENZ CORPORATION
Balance Sheets
December 31
Assets 2012 2011

Cash $ 40,000 $ 24,000
Receivables (net) 90,000 55,000
Other current assets 74,000 73,000
Long-term investments 78,000 60,000
Plant and equipment (net) 520,000 407,000
Total assets $802,000 $619,000

Liabilities and Stockholders’ Equity 2012 2011

Current liabilities $ 88,000 $ 65,000
Long-term debt 90,000 70,000
Common stock 370,000 320,000
Retained earnings 254,000 164,000
Total liabilities and stockholders’ equity $802,000 $619,000

FELLENZ CORPORATION
Income Statements
For the Years Ended December 31
2012 2011

Sales $770,000 $800,000
Cost of goods sold 420,000 400,000
Operating expenses (including income taxes) 200,000 237,000
Net income $150,000 $163,000
Cash from operating activities $165,000 $178,000
Cash used for capital expenditures 85,000 45,000
Dividends paid 50,000 43,000
Average number of shares outstanding 370,000 320,000

Instructions

Compute the following values and ratios for 2011 and 2012.
(a) Earnings per share.
(b) Working capital.
(c) Current ratio.
(d) Debt to total assets ratio.
(e) Free cash flow.
(f ) Based on the ratios calculated, discuss briefly the improvement or lack thereof in the financial position and operating results of Fellenz from 2011 to 2012.

P2-7B
Selected financial data of two competitors, Blockbuster Inc. and Movie Gallery, Inc., in a recent year are presented below and on page 91. (All dollars are in millions.)
Blockbuster Inc. Movie Gallery, Inc.
Income Statement Data for Year

Net sales $ 5,524 $2,542
Cost of goods sold 2,476 1,012
Selling and administrative expenses 2,755 1,431
Interest expense 102 120
Other expense 212 3
Income tax expense (refund) (76) 2
Net income (loss) $ 55 $ (26)

Instructions
For each company, compute these values and ratios.
(a) Working capital.
(b) Current ratio. (Round to two decimal places.)
(c) Debt to total assets ratio.
(d) Free cash flow.
(e) Earnings per share.
(f ) Compare the liquidity, profitability, and solvency of the two companies.


P2-8B
Net Nanny Software International Inc., headquartered in Vancouver, specializes in Internet safety and computer security products for both the home and commercial markets. In a recent balance sheet, it reported a deficit (negative retained earnings) of US $5,678,288. It has reported only net losses since its inception. In spite of these losses, Net Nanny’s common shares have traded anywhere from a high of $3.70 to a low of $0.32 on the Canadian Venture Exchange.
Net Nanny’s financial statements have historically been prepared in Canadian dollars.
Recently, the company adopted the U.S. dollar as its reporting currency.

Instructions

(a) What is the objective of financial reporting? How does this objective meet or not meet Net Nanny’s investors’ needs?
(b) Why would investors want to buy Net Nanny’s shares if the company has consistently reported losses over the last few years? Include in your answer an assessment of the relevance of the information reported on Net Nanny’s financial statements.
(c) Comment on how the change in reporting information from Canadian dollars to U.S. dollars likely affected the readers of Net Nanny’s financial statements. Include in your answer an assessment of the comparability of the information.
 
Blockbuster Inc. Movie Gallery, Inc.
Balance Sheet Data (End of Year)

Current assets $ 1,566 $ 239
Property, plant, and equipment (net) 580 243
Intangible assets 835 297
Other assets 156 374
Total assets $ 3,137 $1,153
Current liabilities $ 1,395 $ 268
Long-term debt 851 1,122
Total stockholders’ equity 891 (237)
Total liabilities and stockholders’ equity $ 3,137 $1,153
Cash from operating activities $329 $(10)
Cash used for capital expenditures 79 20
Dividends paid 11 –0–
Average shares outstanding 189.0 31.8