Smchap 002

Chapter 02 - Investing and Financing Decisions and the Accounting System
Chapter 2
Investing and Financing Decisions and
the Accounting System
ANSWERS TO !ESTIONS
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! "n asset is a probable future economic benefit owned or controlled by the
entity as a result of past transactions.
b! " 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! " liability is a probable future sacrifice of economic benefits of the entity
arising from preset obligations as a result of a past transaction.
d! " current liability is a liability that will be settled by providing cash, goods,
or other services within the coming year.
e! "dditional 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! %etained 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. Tis is !ro!ri"tary #at"rial sol"ly $or autori%"d instructor
us". &ot autori%"d $or sal" or distribution in any #ann"r. Tis docu#"nt #ay not b" co!i"d, scann"d, du!licat"d,
$orward"d, distribut"d, or !ost"d on a w"bsit", in wol" or !art.
&. a! The separate$entity assumption re'uires that business transactions are
separate from the transactions of the owners. (or 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 re'uires 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 )en in *apan and "ustralian dollars in "ustralia.
c! Under the continuity or going$concern assumption, businesses are
assumed to operate into the foreseeable future. That is, they are not
expected to li'uidate.
d! The historical cost principle re'uires assets to be recorded at the cash$
e'uivalent cost on the date of the transaction. +ash$e'uivalent cost is
the cash paid plus the dollar value of all noncash considerations.
,. "ccounting assumptions are necessary because they reflect the scope of
accounting and the expectations that set certain limits on the way accounting
information is reported.
-. "n account is a standardi.ed format used by organi.ations to accumulate the
dollar effects of transactions on each financial statement item. "ccounts are
necessary to keep track of all increases and decreases in the fundamental
accounting model.
/. The fundamental accounting model is provided by the e'uation0
"ssets 1 2iabilities 3 4tockholders5 6'uity
7. " business transaction is a! an exchange of resources assets! and obligations
debts! between a business and one or more outside parties, and b! certain
events that directly affect the entity such as the use over time of rent that was
paid prior to occupying space and the wearing out of e'uipment used to operate
the business. "n example of the first situation is a! the sale of goods or
services. "n example of the second situation is b! the use of insurance paid
prior to coverage.
8. 9ebit is the left side of a T$account and credit is the right side of a T$account. "
debit is an increase in assets and a decrease in liabilities and stockholders5
e'uity. " credit is the opposite $$ a decrease in assets and an increase in
liabilities and stockholders5 e'uity.
2- 2 Solutions Manual
:. Transaction analysis is the process of studying a transaction to determine its
economic effect on the entity in terms of the accounting e'uation0
"ssets 1 2iabilities 3 4tockholders5 6'uity
The two principles underlying the process are0
; every transaction affects at least two accounts.
; the accounting e'uation must remain in balance after each
transaction.
The two steps in transaction analysis are0
1! identify and classify accounts and the direction and amount of the
effects.
2! determine that the accounting e'uation " 1 2 3 46! remains in
balance.
1<. The e'ualities in accounting are0
a! "ssets 1 2iabilities 3 4tockholders5 6'uity
b! 9ebits 1 +redits
11. The journal entry is a method for expressing the effects of a transaction on accounts
in a debits$e'ual$credits format. The title of the accounts! to be debited is are!
listed first and the title of the accounts! 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$account is a tool for summari.ing transaction effects for each account,
determining balances, and drawing inferences about a company5s activities. =t is
a simplified representation of a ledger account with a debit column on the left
and a credit column on the right.
1&. The current ratio is computed as current assets divided by current liabilities. =t
measures the ability of the company to pay its short$term obligations with current
assets. " ratio above 1.< normally suggests good li'uidity that is, the company
has sufficient current assets to settle short$term obligations!. 4ophisticated cash
management systems allow many companies to minimi.e funds invested in
current assets and have a current ratio below 1.<. >owever, a ratio that is too
high in relation to other competitors in the industry may indicate inefficient use of
resources.
1,. =nvesting activities on the statement of cash flows include the buying and selling
of productive assets and investments. (inancing activities include borrowing
and repaying debt, issuing and repurchasing stock, and paying dividends.
"!#TI$#E C%OICE
1. d /. c
2. d 7. a
&. a 8. d
,. a :. b
-. d 1<. a
&Time in minutes'
Mini-exercises Exercises Problems
Alternate
Problems
Cases and
Projects
No. Time No. Time No. Time No. Time No. Time
1 & 1 8 1 2< 1 2< 1 1-
2 & 2 1- 2 2- 2 2- 2 1-
& , & 8 & ,< & ,< & 1-
, , , 1< , 1- , 1- , 2<
- - - 1< - ,< - 1-
/ & / 1< / 2< / 2<
7 & 7 1< 7 &<
8 / 8 1- 8 2<
: / : 2< : ;
1< / 1< 2<
11 / 11 1-
12 , 12 2<
1& , 1& 2<
1, 2< 1 ,<
1- 2<
1/ 1-
17 1<
18 1<
1: 1<
2< 1<
; 9ue 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. "s with any open$ended
project, it is possible for students to devote a large amount of time to these
assignments. ?hile students often benefit from the extra effort, we find that some
become frustrated by the perceived difficulty of the task. )ou can reduce student
frustration and anxiety by making your expectations clear. (or example, when our goal
is to sharpen research skills, we devote class time discussing research strategies.
?hen we want the students to focus on a real accounting issue, we offer suggestions
about possible companies or industries.
Continuing
Case
"INI(E)ERCISES
"2*+,
( 1! +ontinuity assumption
> 2! >istorical cost principle
@ &! +redits
" ,! "ssets
= -! "ccount
"2*2,
9 1! *ournal entry
+ 2! " 1 2 3 46, and 9ebits 1 +redits
" &! "ssets 1 2iabilities 3 4tockholdersA 6'uity
= ,! 2iabilities
B -! =ncome statement, balance sheet, statement of stockholdersA e'uity, and
statement of cash flows
"2*-,
1! C
2! C
&! )
,! )
-! )
/! C
"2*.,
+2 1! "ccounts Dayable
+" 2! "ccounts %eceivable
C+" &! Buildings
+" ,! +ash
46 -! +ommon 4tock
C+" /! 2and
+" 7! Eerchandise =nventory
+2 8! =ncome Taxes Dayable
C+" :! 2ong$Term =nvestments
C+2 1<! Cotes Dayable due in three years!
+" 11! Cotes %eceivable due in six months!
+" 12! Drepaid %ent
46 1&! %etained 6arnings
+" 1,! 4upplies
+2 1-! Utilities Dayable
+2 1/! ?ages Dayable
"2*/,
Assets 0 #ia1i2ities 3 Stoc4ho2ders5 E6uity
a. +ash 3&<,<<< Cotes payable 3&<,<<<
b. +ash F1<,<<<
Cotes
receivable
31<,<<<
c. +ash 3-<< +ommon stock
"dditional
paid$in
capital
31<
3,:<
d. +ash
6'uipment
F-,<<<
31-,<<<
Cotes payable 31<,<<<
e. +ash F2,<<< %etained
earnings
F2,<<<
"2*7.
De1it Credit
Assets Increases Decreases
#ia1i2ities Decreases Increases
Stoc4ho2ders5 e6uity Decreases Increases
"2*8.
Increase Decrease
Assets Debit Credit
#ia1i2ities Credit Debit
Stoc4ho2ders5 e6uity Credit Debit
"2*9,
a. +ash 3"!.............................................................................. &<,<<<
Cotes Dayable 32!......................................................... &<,<<<
b. Cotes %eceivable 3"!......................................................... 1<,<<<
+ash "!........................................................................
1<,<<<
c. +ash 3"!.............................................................................. -<<
+ommon 4tock 346!......................................................
"dditional Daid$in +apital 346!GGGGGGGGGG.
1<
,:<
d. 6'uipment 3"!..................................................................... 1-,<<<
+ash "!........................................................................
-,<<<
Cotes Dayable 32!......................................................... 1<,<<<
e.
%etained 6arnings 46!......................................................
2,<<<
+ash "!........................................................................
2,<<<
"2*:,
Cash Notes Receiva12e E6uipment
Beg. :<< Beg. 1,<<< Beg. 1-,1<<
a! &<,<<< 1<,<<< b! b! 1<,<<< d! 1-,<<<
c! -<< -,<<< d!
2,<<< e!
1,,,<< 11,<<< &<,1<<
Notes $aya12e
&,<<< Beg.
&<,<<< a!
1<,<<< d!
,&,<<<
Common Stoc4 Additiona2 $aid(in Capita2 Retained Earnings
1,<<< Beg. &,<<< Beg. 1<,<<< Beg.
1< c! ,:< c! e! 2,<<<
1,<1< &,,:< 8,<<<
"2(+;,
Dennen< Inc,
Tria2 =a2ance
>anuary -+< 2;+/
De1it Credit
+ash H1,,,<<
Cotes receivable 11,<<<
6'uipment &<,1<<
Cotes payable H,&,<<<
+ommon stock 1,<1<
"dditional paid$in capital &,,:<
%etained earnings 8,<<<
Totals H--,-<< H--,-<<
"2*++,
Dennen Inc,
=a2ance Sheet
At >anuary -+< 2;+/
Assets Liabilities
Current assets: Current liabilities:
+ash H 1,,,<< Cotes payable H ,&,<<<
Cotes receivable 11,<<< Total current liabilities ,&,<<<
Total current assets 2-,,<< Stockholders Equity
+ommon stock 1,<1<
6'uipment &<,1<< "dditional paid$in capital
%etained earnings
&,,:<
8,<<<
Total stockholdersA e'uity 12,-<<
Total Assets H--,-<<
Total Liabilities &
Stockholders Equity H--,-<<
"2*+2,
Current Ratio 0
+urrent "ssets I +urrent 2iabilities
2<11 28<,<<< I 1--,<<< 1 1.8</
2<12 27<,<<< I 2-<,<<< 1 1.<8<
This ratio indicates that 4alAs Taco +ompany has sufficient current assets to settle
current liabilities, but that the ratio has also decreased between 2<11 and 2<12 by .72/
,<J!. 4alAs Taco +ompany ratio is lower than +hipotleAs 2<11 ratio of &.182!,
indicating that 4alAs Taco +ompany appears to have weaker li'uidity than +hipotle#
4alAs has less li'uidity to withstand an economic downturn.

"2*+-,
a! (
b! =
c! (
d! =
e! (
E)ERCISES
E2*+,
6
1!
Tr
an
sa
cti
on
( 2! +ontinuity assumption
B &! Balance sheet
D ,! 2iabilities
K -! "ssets 1 2iabilities 3 4tockholdersA 6'uity
E /! Cotes payable
2 7! +ommon stock
> 8! >istorical cost principle
= :! "ccount
L 1<! 9ual effects
M 11! %etained earnings
" 12! +urrent assets
+ 1&! 4eparate$entity assumption
N 1,! Dar value
9 1-! 9ebits
* 1/! "ccounts receivable
C 17! 4table monetary unit assumption
? 18! (aithful representation
T 1:! %elevance
% 2<! 4tockholdersA 6'uity


E2*2,
%e'. 1
Received ?iven
a! +ash "! +ommon stock and "dditional
paid$in capital 46!
b! 6'uipment "! [or Delier! truc"# +ash "!
c! No exc$ange transaction O
d! 6'uipment "! [or Com%uter e&ui%ment# Cotes payable 2!
e! Building "! [or Construction in %rogress# +ash "!
f! =ntangibles "! [or Co%!rig$t# +ash "!
g! %etained earnings 46! ['eceied a reduction
in t$e amount aailable (or %a!ment to
stoc"$olders#
+ash "!
h! 2and "! +ash "!
i! =ntangibles "! [or Patents# +ash "! and Cotes payable 2!
j! No exc$ange transaction O
k! =nvestments "! +ash "!
l! +ash "! 4hort$term notes payable 2!
m! Cote payable 2! ['eceied a reduction in its
%romise to %a!#
+ash "!
%e'. 2
The truck in b! would be recorded as an asset of H18,<<<. The land in h! would be
recorded as an asset of H-<,<<<. These are applications of the historical cost principle.
%e'. &
The agreement in c! involves no exchange or receipt of cash, goods, or services and
thus is not a transaction. 4ince transaction j! occurs between the owner and others,
there is no effect on the business because of the separate$entity assumption.
E2*-,
Account
Balance Sheet
Categorization
Debit or Credit
Balance
1! "ccounts %eceivable +" 9ebit
2! %etained 6arnings 46 +redit
&! Taxes Dayable +2 +redit
,! Drepaid 6xpenses +" 9ebit
-! +ommon 4tock 46 +redit
/! 2ong$Term =nvestments C+" 9ebit
7! Dlant, Droperty, and 6'uipment C+" 9ebit
8! "ccounts Dayable +2 +redit
:! 4hort$Term =nvestments +" 9ebit
1<! 2ong$Term 9ebt C+2 +redit
E2*.,
Event Assets 0 #ia1i2ities 3 Stoc4ho2ders5 E6uity
a. +ash 3,<,<<< +ommon
stock
"dditional
paid$in
capital
31,<<<
3&:,<<<
b. 6'uipment
+ash
31-,<<<
F&,<<<
Cotes payable 312,<<<
c. +ash 31<,<<< Cotes payable 31<,<<<
d. Cote
receivable
+ash
38<<
F8<<
e. 2and
+ash
31&,<<<
F,,<<<
Eortgage notes
payable 3:,<<<
E2*/,
%e'. 1
Event Assets 0 #ia1i2ities 3 Stoc4ho2ders5 E6uity
a. Buildings
6'uipment
+ash
3172
327<
F ,&2
Cotes payable
long$term!
31
<
b. +ash 3&,- +ommon stock
"dditional paid$in
capital
32<
<
31,-
c. 9ividends
payable 31,-
%etained
earnings F1,-
d. 4hort$term
=nvestments
+ash
37,/1/
$7,/1/
e. Co effects
f. +ash
4hort$term
=nvestments
3,,&1&

F,,&1&
%e'. 2
The separate$entity assumption states that transactions of the business are separate
from transactions of the owners. 4ince transaction )e* occurs between the owners and
others in the stock market, there is no effect on the business.
E2*7,
a. +ash 3"!.............................................................................. ,<,<<<
+ommon stock 346!......................................................
"dditional paid$in capital 346!GGGGGGGGGG...
1,<<<
&:,<<<
b. 6'uipment 3"!..................................................................... 1-,<<<
+ash "!........................................................................
&,<<<
Cotes payable 32! ......................................................... 12,<<<
c. +ash 3"!.............................................................................. 1<,<<<
Cotes payable 32!.......................................................... 1<,<<<
d.
e.
Cotes receivable 3"! ..........................................................
+ash "! ........................................................................
2and 3"!..............................................................................
8<<
1&,<<<
8<<
+ash "!........................................................................
,,<<<
Eortgage notes payable 32! ......................................... :,<<<
E2*8,
%e'. 1
a. Buildings 3"!....................................................................... 172
6'uipment 3"! .................................................................... 27<
+ash "!........................................................................
,&2
Cotes payable 32! ......................................................... 1<
b. +ash 3"!.............................................................................. &,-
+ommon stock 346!......................................................
"dditional paid$in capital 346!
2<<
1,-
c.
%etained earnings 46!......................................................
1,-
9ividends payable 32!................................................... 1,-
d. 4hort$term investments 3"!................................................ 7,/1/
+ash "!........................................................................
7,/1/
e. Co journal entry re'uired.
f. +ash 3"!.............................................................................. ,,&1&
4hort$term investments "!...........................................
,,&1&
%e'. 2
The separate$entity assumption states that transactions of the business are separate
from transactions of the owners. 4ince transaction )e* occurs between the owners and
others in the stock market, there is no effect on the business.
E2*9,
%e'. 1
Cash Notes Receiva12e E6uipment
Beg. < Beg. < Beg. <
a! 7<,<<< ,,-<< b! e! 2,-<< b! 18,<<<
d! &,<<< 2,-<< e!
//,<<< 2,-<< 18,<<<
#and Notes $aya12e Common Stoc4
Beg. < < Beg. < Beg.
d! 1-,<<< 1&,-<< b! -,<,< a!;
1<< d!
1-,<<< 1&,-<< -,1,<
Additiona2 $aid(in Capita2
< Beg.
/,,:/< a!
17,:<< d!
82,8/<
;/ investors x 8,,<< shares each 1 -<,,<< shares issued
-<,,<< shares issued x H<.1< par value per share 1 H-,<,< for common stock
%e'. 2
"ssets H 1<1,-<< 1 2iabilities H 1&,-<< 3 4tockholdersA 6'uity H 88,<<<
%e'. &
The agreement in c! involves no exchange or receipt of cash, goods, or services and
thus is not a transaction. 4ince transaction f! occurs between the owner and others,
there is no effect on the business due to the separate$entity assumption.
E2*:,
%e'. 1
Transaction Brief E!lanation
1 =ssued common stock to shareholders for H1-,<<< cash. (astTrack
4ports =nc. is a corporation because it issues stock. Dar value of the
stock was H<.1< per share because H1,-<< common stock amount
divided by 1-,<<< shares issued e'uals H<.1< per share!.
2 Borrowed H7-,<<< cash and signed a short$term note for this amount.
& Durchased land for H1/,<<<# paid H-,<<< cash and gave an H11,<<<
short$term note payable for the balance.
, 2oaned H,,<<< cash# borrower signed a short$term note for this amount
Cote %eceivable!.
- Durchased store fixtures for H:,-<< cash.
/ Durchased land for H,,<<<, paid for by signing a short$term note.
%e'. 2
FastTrac4 Sports Inc,
=a2ance Sheet
At >anuary 8< 2;+.
Assets Liabilities
Current Assets Current +iabilities
+ash H71,-<< Cote payable H:<,<<<
Cote receivable ,,<<< Total Current +iabilities :<,<<<
Total Current Assets 7-,-<<
Stockholders Equity
4tore fixtures
2and
:,-<<
2<,<<<
+ommon stock
"dditional paid$in capital
1,-<<
1&,-<<
Total ,toc"$olders- E&uit! 1-,<<<
Total Assets H1<-,<<<
Total Liabilities &
Stockholders Equity H1<-,<<<
E2*+;,
%e'. 1
1 =ssued common stock to shareholders for H,-,<<< cash. Pol.
+leaning is a corporation because it issues stock. Dar value is H2.<<
per share H/,<<< common stock amount divided by &,<<< shares
issued e'uals H2.<< per share!.
2 Durchased a delivery truck for H&-,<<<# paid H8,<<< cash and gave a
H27,<<< long$term note payable for the balance.
& 2oaned H2,<<< cash# borrower signed a short$term note for this
amount.
, Durchased short$term investments for H7,<<< cash.
- 4old short$term investments at cost for H&,<<< cash.
/ Durchased computer e'uipment for H,,<<< cash.
%e'. 2
@o2A C2eaning< Inc,
=a2ance Sheet
At "arch -+< 2;+.
Assets Liabilities
Current Assets Cotes payable H27,<<<
+ash H27,<<< Total +iabilities 27,<<<
=nvestments ,,<<<
Cote receivable 2,<<<
Total Current Assets &&,<<< Stockholders Equity
+omputer e'uipment ,,<<<
+ommon stock
/,<<<
&:,<<<
9elivery truck &-,<<< Total ,toc"$olders- E&uit! ,-,<<<
Total Assets H72,<<<
Total Liabilities &
Stockholders Equity H72,<<<
E2*++,
a. +ash 3"!.............................................................................. 7<,<<<
+ommon stock 346!......................................................
"dditional paid$in capitalGGGGGGGGGGGGG..
-,<<<
/-,<<<
b. Co transaction has occurred because there has been no
exchange or receipt of cash, goods, or services.
c. +ash 3"!.............................................................................. 18,<<<
Cotes payable long$term! 32!....................................... 18,<<<
d. 6'uipment 3"!..................................................................... 11,<<<
+ash "!........................................................................
1,-<<
Cotes payable short$term! 32!..................................... :,-<<
e. Cotes receivable short$term! 3"!....................................... 2,<<<
+ash "!........................................................................
2,<<<
f. 4tore fixtures 3"!................................................................. 1-,<<<
+ash "!........................................................................
1-,<<<
E2*+2,
a.
1,-<8
9ividends payable 32!................................................... 1,-<8
b. Co transaction has occurred because there has been no exchange or receipt of
cash, goods, or services.
c.
9ividends payable 2!.........................................................
8-2
+ash "!........................................................................
8-2
d. +ash 3"!.............................................................................. -,8::
Cotes payable 32!.......................................................... -,8::
e. +ash 3"!.............................................................................. -&
6'uipment "!...............................................................
-&
f. 6'uipment 3"!..................................................................... 2,-:8
+ash "!........................................................................
2,2-<
Cotes payable 32! ......................................................... &,8
g. =nvestments 3"!.................................................................. 2,/1/
+ash "!........................................................................
2,/1/
E2*+-,
%e'. 1
"ssets H 1<,-<< 1 2iabilities H &,<<< 3 4tockholdersA 6'uity H 7,-<<
%e'. 2
Cash Short(Term Investments $roperty B E6uipment
Beg. -,<<< Beg. 2,-<< Beg. &,<<<
a! ,,<<< 1,-<< b! 1,-<< c!
b! 1,-<<
c! 1,-<< 8<< d!
6nd. 11,2<< 6nd. 1,<<< 6nd. 1,-<<
Short(Term
Notes $aya12e
#ong(Term
Notes $aya12e
2,2<< Beg. 8<< Beg.
,,<<< a!
2,2<< 6nd. ,,8<< 6nd.
Common Stoc4 Additiona2 $aid(in Capita2 Retained Earnings
-<< Beg. ,,<<< Beg. &,<<< Beg.
d! 8<<
-<< ,,<<< 2,2<<
%e'. &
"ssets H 1&,7<< 1 2iabilities H 7,<<< 3 4tockholdersA 6'uity H /,7<<
%e'. ,
+urrent 1 +urrent "ssets 1 H11,2<<3H1,<<< 1 H12,2<< 1 -.--
%atio +urrent 2iabilities H2,2<< H2,2<<
This ratio indicates that, for every H1 of current liabilities, >iggins maintains H-.-- of
current assets. >igginsA ratio is higher than the industry average of 1.-<, indicating that
>iggins maintains a lower level of short$term debt and has higher li'uidity. >owever,
maintaining such a high current ratio also suggests that the company may not be using
its resources efficiently. =ncreasing short$term obligations would lower >igginsA current
ratio, but this strategy alone would not help its efficiency. >iggins should consider
investing more of its cash in order to generate future returns.
E2*+.,
%iggins Company
=a2ance Sheet
At Decem1er -+< 2;+/
Assets Liabilities
+ash H 11,2<< 4hort$term notes payable H 2,2<<
4hort$term investments 1,<<< Total Current +iabilities 2,2<<
Total Current Assets 12,2<< 2ong$term notes payable ,,8<<
Total +iabilities 7,<<<
Stockholders Equity
+ommon stock -<<
"dditional paid$in capital ,,<<<
Droperty and e'uipment 1,-<< %etained earnings 2,2<<
Total ,toc"$olders- E&uit! /,7<<
Total Assets H1&,7<<
Total Liabilities &
Stockholders Equity H1&,7<<
E2*+/,
%e'. 1
Cash
Short(Term
Notes Receiva12e #and
a! ,<,<<< ,,<<< c! e! ,,<<< b! 1/,<<< ,,<<< e!
1,<<< d!
&-,<<< ,,<<< 12,<<<
E6uipment
Short(Term
Notes $aya12e
#ong(Term
Notes $aya12e
Beg. < < Beg. < Beg.
c! 2<,<<< 1/,<<< b! 1/,<<< c!
d! 1,<<<
21,<<< 1/,<<< 1/,<<<
Common Stoc4
< Beg.
1<,<<< a!
1<,<<<
E2*+/, &continued'
Additiona2 $aid(in Capita2
< Beg.
&<,<<< a!
&<,<<<
%e'. 2
Strauderman De2ivery Company< Inc,
Tria2 =a2ance
Decem1er -+< 2;+.
De1it Credit
+ash H&-,<<<
4hort$term notes receivable ,,<<<
2and 12,<<<
6'uipment 21,<<<
4hort$term notes payable H1/,<<<
2ong$term notes payable 1/,<<<
+ommon stock 1<,<<<
"dditional paid$in capital &<,<<<
Totals H72,<<< H72,<<<
E2*+/, &continued'
%e'. &
Strauderman De2ivery Company< Inc,
=a2ance Sheet
At Decem1er -+< 2;+.
Assets Liabilities
+ash H&-,<<< 4hort$term notes payable H1/,<<<
4hort$term note receivable ,,<<< Total Current +iabilities 1/,<<<
Total Current Assets &:,<<< 2ong$term notes payable 1/,<<<
Total +iabilities &2,<<<
2and 12,<<<
6'uipment 21,<<< Stockholders Equity
+ommon stock
1<,<<<
&<,<<<
Total ,toc"$olders- E&uit! ,<,<<<
Total Assets H72,<<<
Total Liabilities &
Stockholders Equity H72,<<<
%e'. ,
Current Assets C Current #ia1i2ities 0 Current Ratio
2;+. H&:,<<< I H1/,<<< 1 2.,,
2;+/ -2,<<< I 2&,<<< 1 2.2/
2;+7 ,7,<<< I ,<,<<< 1 1.18
The current ratio has decreased over the years, suggesting that the companyAs li'uidity
is decreasing. "lthough the company still maintains sufficient current assets to settle
the short$term obligations, this steep decline in the ratio may be of concern F it may be
indicative of more efficient use of resources or it may suggest the company is having
cash flow problems.
%e'. -
The management of 4trauderman 9elivery +ompany has already been financing the
companyAs development through additional short$term debt, from H1/,<<< in 2<1, to
H,<,<<< in 2<1/. This suggests the company is taking on increasing risk. "dditional
lending, particularly short$term, to the company may be too much risk for the bank to
absorb. Based solely on the current ratio, the bankAs vice president should consider
not providing the loan to the company as it currently stands. Mf course, additional
analysis would provide better information for making a sound decision.
E2*+7,
a! =ssued 1<<,<<< shares of common stock par value H<.<2 per share! to
shareholders in exchange for H2<,<<< cash and H-,<<< tools and
e'uipment.
b! 2oaned H1,8<< cash# borrower signed a note receivable for this
amount.
c! Durchased a building for H,<,<<<# paid H1<,<<< cash and signed a
H&<,<<< note payable for the balance.
d! 4old tools and e'uipment for H:<< cash their original cost!.
E2*+8,
%e'. 1
Increases DithE Decreases DithE
6'uipment Durchases of e'uipment 4ales of e'uipment
Cotes receivable "dditional loans to others +ollection of loans
Cotes payable "dditional borrowings Dayments of debt
%e'. 2
E6uipment Notes Receiva12e Notes $aya12e
1Q1 -<< 1Q1 1-< 1<< 1Q1
2-< /-< 2,- 22- 11< 17<
12Q&1 1<< 12Q&1 17< 1/< 12Q&1
Beginning
balance
3 R3S
RS
1 6nding
balance
6'uipment H-<< 3 2-<

T 1 H1<<
T 1 /-<
Cotes receivable 1-< 3 T

22- 1 17<
T 1 2,-
Cotes payable 1<< 3 17<

T 1 1/<
T 1 11<
E2*+9,
Activity Type oF
Activity
EFFect on
Cash
a! %eduction of long$term debt (

b! 4ale of short$term investments = 3
c! =ssuance of common stock ( 3
d! +apital expenditures for property, plant, and e'uipment! =

e! 9ividends paid on common stock. (

E2*+:,
Activity Type oF
Activity
EFFect on
Cash
a! "dditional borrowing from banks ( 3
b! Durchase of investments =

c! 4ale of assets and investments assume sold at cost! = 3
d! =ssuance of stock ( 3
e! Durchase and renovation of properties
f! Dayment of debt principal
g! %eceipt of principal payment on a note
receivable
=
(
=
3
E2F2;,
1. +urrent assets =n the asset section of a classified balance sheet.
2. 9ebt principal repaid =n the financing activities section of the statement of
cash flows.
&. 4ignificant accounting policies Usually the first note after the financial statements.
,. +ash received on sale of
noncurrent assets
=n the investing activities section of the statement of
cash flows.
-. 9ividends paid =n the financing activities section of the statement of
cash flows.
/. 4hort$term obligations =n the current liabilities section of a classified
balance sheet.
7. 9ate of the statement of
financial position.
=n the heading of the balance sheet.
$RO=#E"S
$2*+,
=a2ance
Sheet
C2assiFication
De1it or
Credit
=a2ance
1! Cotes and 2oans Dayable short$term! +2 +redit
2! Eaterials and 4upplies +" 9ebit
&! +ommon 4tock 46 +redit
,! Datents an intangible asset! C+" 9ebit
-! =ncome Taxes Dayable +2 +redit
/! 2ong$Term 9ebt C+2 +redit
7! Earketable 4ecurities short$term! +" 9ebit
8! Droperty, Dlant, and 6'uipment C+" 9ebit
:! %etained 6arnings 46 +redit
1<! Cotes and "ccounts %eceivable short$term! +" 9ebit
11! =nvestments long$term! C+" 9ebit
12! +ash and +ash 6'uivalents +" 9ebit
1&! "ccounts Dayable +2 +redit
1,! +rude Mil Droducts and Eerchandise +" 9ebit
1-! "dditional Daid$in +apital 46 +redit
$2*2,
%e'. 1
6ast >ill >ome >ealthcare 4ervices was organi.ed as a corporation. Mnly a
corporation issues shares of capital stock to its owners in exchange for their
investment, as in transaction a!.
%e'. 2 Mn next page!
%e'. &
The transaction between the two stockholders 6vent e! was not included in the
tabulation. 4ince the transaction in )e* occurs between the owners, there is no effect
on the business due to the separate$entity assumption.
%e'. ,
a! Total assets 1 H111,-<< 3 H18,<<< 3 H-,<<< 3 H-1<,-<< 3 H1/<,<<< 3 H/-,<<<
1 H87<,<<<
b! Total liabilities 1 H1<<,<<< 3 H18<,<<<
1 H28<,<<<
c! Total stockholdersA e'uity 1 Total assets F Total liabilities
1 H87<,<<< F H28<,<<< 1 H-:<,<<<
d! +ash balance 1 H-<,<<< 3 H:<,<<< F H:,<<< 3 H&,-<< F H18,<<< F H-,<<<
1 H111,-<<
e! Total current assets 1 +ash H111,-<< 3 4hort$Term =nvestments H18,<<< 3 Cotes
%eceivable H-,<<< 1 H1&,,-<<
%e'. -
+urrent 1 +urrent "ssets 1 H111,-<<3H18,<<<3H-,<<< 1 H1&,,-<< 1 1.&-
%atio +urrent 2iabilities H1<<,<<< 1<<,<<<
This suggests that for every H1 in current liabilities, 6ast >ill maintains H1.&- in current
assets. The ratio suggests that 6ast >ill is likely maintaining ade'uate li'uidity and
using resources efficiently.
$2*2, &continued'
%e'. 2
Assets 0 #ia1i2ities 3 Stoc4ho2dersG E6uity
Cash
Short(Term
Investments
Notes
Receiva12e #and =ui2dings E6uipment
ST Notes #T Notes
$aya12e $aya12e
Common
Stoc4
Additiona2
$aid(in
Capita2
Retained
Earnings
Beg. -<,<<< -<<,<<< 1<<,<<< -<,<<< 1 1<<,<<<
1<<,<<<
2<,<<< 8<,<<< ,<<,<<<
a! 3:<,<<< 1 3:,<<< 381,<<<
b! F:,<<< 31,,<<< 3/<,<<< 31-,<<< 1 38<,<<<
c! 3&,-<< F&,-<< 1
d! F18,<<< 318,<<< 1
e! Co effect
f! F-,<<< 3-,<<< 1
3111,-<< 318,<<< 3-,<<< 3-1<,-<< 31/<,<<< 3/-,<<< 1 31<<,<<< 318<,<<< 32:,<<< 31/1,<<< 3,<<,<<<
H87<,<<< H28<,<<< H-:<,<<<
2014 by McGraw-Hill Global Education Holdings, LLC. Tis is !ro!ri"tary #at"rial sol"ly $or autori%"d instructor us". &ot autori%"d $or sal" or distribution in any
#ann"r. Tis docu#"nt #ay not b" co!i"d, scann"d, du!licat"d, $orward"d, distribut"d, or !ost"d on a w"bsit", in wol" or !art.
$2*-,
%e'. 1 and 2
Cash Investments &short(term' Accounts Receiva12e
Beg. 22,<<< Beg. &,<<< Beg. &,<<<
e! 11,<<< 1<,<<< a! a! 1<,<<<
f! :,<<< -,<<< b!
i! 1,<<< -,<<< c! 1&,<<< &,<<<
&,<<< g!
8,<<< h! Inventory Notes Receiva12e &2ong(term'
Beg. 2<,<<< Beg. 1,<<<
b! -,<<<
12,<<< 2<,<<< /,<<<
E6uipment Factory =ui2ding Intangi12es
Beg. -<,<<< Beg. :<,<<< Beg. -,<<<
c! 18,<<< 1,<<< i! h! 2,,<<< g! &,<<<
6nd. /7,<<< 6nd. 11,,<<< 6nd. 8,<<<
Accounts $aya12e Accrued #ia1i2ities $aya12e Notes $aya12e &short(term'
1-,<<< Beg. ,,<<< Beg. 7,<<< Beg.
1&,<<< c!
:,<<< f!
1-,<<< ,,<<< 2:,<<<
#ong(Term Notes $aya12e Common Stoc4 Additiona2 $aid(in Capita2
,7,<<< Beg. 1<,<<< Beg. 8<,<<< Beg.
1/,<<< h! 1,<<< e! 1<,<<< e!
/&,<<< 11,<<< :<,<<<
Retained Earnings
&1,<<< Beg.
&1,<<<
$2*-, &continued'
%e'. &
Co effect was recorded for )d*. The agreement in )d* involves no exchange or receipt
of cash, goods, or services and thus is not a transaction.
%e'. ,
Cougar $2astics Company
Tria2 =a2ance
De1it Credit
+ash H 12,<<<
=nvestments short$term! 1&,<<<
"ccounts receivable &,<<<
=nventory 2<,<<<
Cotes receivable long$term! /,<<<
6'uipment /7,<<<
(actory building 11,,<<<
=ntangibles 8,<<<
"ccounts payable H 1-,<<<
"ccrued liabilities payable ,,<<<
Cotes payable short$term! 2:,<<<
Cotes payable long$term! /&,<<<
+ommon stock 11,<<<
"dditional paid$in capital :<,<<<
%etained earnings &1,<<<
Totals H2,&,<<< H2,&,<<<
$2*-, &continued'
%e'. -
Cougar $2astics Company
=a2ance Sheet
Assets Liabilities
+ash H 12,<<< "ccounts payable H 1-,<<<
=nvestments 1&,<<< "ccrued liabilities payable ,,<<<
"ccounts receivable &,<<< Cotes payable 2:,<<<
=nventory 2<,<<< Total Current +iabilities ,8,<<<
Total Current Assets ,8,<<< 2ong$term notes payable /&,<<<
Total +iabilities 111,<<<
Cotes receivable /,<<<
6'uipment /7,<<< Stockholders Equity
(actory building 11,,<<< +ommon stock 11,<<<
=ntangibles 8,<<< "dditional paid$in capital :<,<<<
%etained earnings &1,<<<
Total ,toc"$olders- E&uit! 1&2,<<<
Total Assets H2,&,<<<
Total Liabilities &
Stockholders Equity H2,&,<<<
%e'. /
+urrent 1 +urrent "ssets 1 H,8,<<< 1 1.<<
%atio +urrent 2iabilities H,8,<<<
This ratio indicates that +ougar Dlastics has relatively low li'uidity# for every H1 of
current liabilities, +ougar Dlastics maintains only H1 of current assets.
$2*.,
Transaction Type oF Activity EFFect on Cash
)a* = F
)b* = F
)c* = F
)d* C6 C6
)e* ( 3
)(* ( 3
)g* = F
)$* = F
)i* = 3
$2*/,
%e'. 1
a. +ash 3"!.............................................................................. -<
2ong$term liabilities 32!................................................. -<
b. %eceivables and other assets 3"!...................................... &<<
+ash "!........................................................................
&<<
c. 2ong$term investments 3"!................................................. 2,/<<
4hort$term investments 3"! ............................................... 1<,,<<
+ash "!........................................................................
1&,<<<
d. Droperty, plant, and e'uipment 3"!.................................... 2,28-
+ash "!........................................................................
87-
2ong$term liabilities 32!................................................. 1,,1<
e. +ash 3"!.............................................................................. ,<<
+ommon stock 346!...................................................... 1<
"dditional paid$in capital 346!...................................... &:<
f. +ash 3"!.............................................................................. 11,<<<
4hort$term investments "!...........................................
11,<<<
g.
/<
+ash "!........................................................................
/<
$2*/, &continued'
%e'. 2
Cash
Short(Term
Investments
Receiva12es and
Other Assets
Beg. 1&,8-2 Beg. :// Beg. :,8<&
a! -< &<< b! c! 1<,,<< 11,<<< f! b! &<<
e! ,<< 1&,<<< c! &// 1<,1<&
f! 11,<<< 87- d!
/< g!
Inventories Other Current Assets
Beg. 1,,<, Beg. &,,2&
11,</7 1,,<, &,,2&
$roperty< $2ant< and
E6uipment
#ong(Term
Investments
Other
Noncurrent Assets
Beg. 2,12, Beg. &,,<, Beg. :,--7
d! 2,28- c! 2,/<<
,,,<: /,<<, :,--7
Accounts
$aya12e
Other Short(term
O12igations
#ong(Term #ia1i2ities
11,/-/ Beg. 1<,&,- Beg. 1&,/1- Beg.
-< a!
1,,1< d!
11,/-/ 1<,&,- 1-,<7-
Common
Stoc4
Additiona2
$aid(in Capita2
Retained
Earnings
&, 12,1-& Beg. 28,2&/ Beg.
1< e! &:< e! g! /<
,, 12,-,& 28,17/
Other Stoc4ho2ders5
E6uity Items
Beg. &1,-</
&1,-</
$2*/, &continued'
%e'. &
De22< Inc,
=a2ance Sheet
At Fe1ruary +< 2;+-
&in mi22ions'
ASSETS
Current AssetsH
+ash H11,</7
4hort$term investments &//
%eceivables and other assets 1<,1<&
=nventories 1,,<,
Mther current assets &,,2&
Total current assets 27<-7-
Droperty, plant and e'uipment ,,,<:
2ong$term investments /,<<,
Mther noncurrent assets :,--7
Tota2 assets I.7<---
#IA=I#ITIES AND STOCJ%O#DERS5 E!ITK
Current #ia1i2itiesH
"ccounts payable H11,/-/
Mther short$term obligations 1<,&,-
Total current liabilities 22<;;+
2ong$term 2iabilities 1-,<7-
Total liabilities &7,<7/
Stoc4ho2ders5 E6uityH
+ommon stock ,,
"dditional paid$in capital 12,-,&
%etained earnings 28,17/
Mther stockholdersA e'uity items &1,-</
!
Total stockholdersA e'uity :,2-7
Tota2 2ia1i2ities and stoc4ho2ders5 e6uity I.7<---
%e'. ,

+urrent 1 +urrent "ssets 1 H2/,&/& 1 1.2<
%atio +urrent 2iabilities H22,<<1
(or every H1 of short$term liabilities, 9ell has H1.2< of current assets. This low current
ratio suggests that 9ell is using its resources efficiently and has sufficient li'uidity.
$2*7,
Activity Type oF
Activity
EFFect on
Cash
a! Borrowed from banks ( 3 -<
b! 2ent to affiliates =
&<<
c! Durchased investments =
1&,<<<
d! Durchased property, plant, and e'uipment =
87-
e! =ssued additional stock
f! 4old short$term investments
g! Daid dividends
(
=
(
3 ,<<
3 11,<<<
/<
A#TERNATE $RO=#E"S
A$2*+,
=a2ance
Sheet
C2assiFication
De1it or
Credit
=a2ance
1! Drepaid 6xpenses +" 9ebit
2! =nventories +" 9ebit
&! "ccounts %eceivable +" 9ebit
,! 2ong$Term 9ebt C+2 +redit
-! +ash and 6'uivalents +" 9ebit
/! @oodwill an intangible asset! C+" 9ebit
7! "ccounts Dayable +2 +redit
8! =ncome Taxes Dayable +2 +redit
:! Droperty, Dlant, and 6'uipment C+" 9ebit
1<! %etained 6arnings 46 +redit
11! "dditional Daid$in +apital 46 +redit
12! 4hort$Term Borrowings +2 +redit
1&! "ccrued 2iabilities +2 +redit
1,! +ommon 4tock 46 +redit
A$2*2,
%e'. 1
"damson =ncorporated was organi.ed as a corporation. Mnly a corporation issues
shares of capital stock to its owners in exchange for their investment, as "damson did
in transaction c!.
%e'. 2 Mn next page!
%e'. &
4ince the transaction in )i* occurs between the owners and others outside the company,
there is no effect on the business due to the separate$entity assumption.
%e'. ,
a! Total assets 1 H&-,<<< 3 H2,<<< 3 H8-,<<< 3 H1<7,<<< 3 H-1<,<<< 1 H7&:,<<<
b! Total liabilities 1 H1/:,<<< 3 H17<,<<< 1 H&&:,<<<
c! Total stockholdersA e'uity 1 Total assets F Total liabilities
1 H7&:,<<< F H&&:,<<< 1 H,<<,<<<
d! +ash balance 1 H12<,<<< 3 H11<,<<< F H&,<<< 3 H1<<,<<< F H-,<<< F H2,<<<
F H2<<,<<< F H8-,<<< 1 H&-,<<<
e! Total current assets 1 H&-,<<< 3 H2,<<< 1 H&7,<<<
%e'. -
+urrent 1 +urrent "ssets 1 H&-,<<< 3 H2,<<< 1 H&7,<<< 1 <.22
%atio +urrent 2iabilities H1/:,<<< H1/:,<<<
This suggests that "damson may not have sufficient li'uidity to cover its current
obligations. "damson should consider increasing its current assets or seeking to
convert some of its short$term debt to long$term debt.
A$22, &continued'

%e'. 2
Assets 0 #ia1i2ities 3 Stoc4ho2dersG E6uity
Cash
Notes
Receiva12e
#ong(Term
Investments E6uipment =ui2ding
Short(Term
Notes
$aya12e
#ong(Term
Notes
$aya12e
Common
Stoc4
Additiona2
$aid(in
Capita2
Retained
Earnings
Beg. 12<,<<< 7<,<<< &1<,<<< 1 1,<,<<< /<,<<< 2<,<<< 2<<,<<< 8<,<<<
a! 311<,<<< 1 311<,<<<
b! F&,<<< 3&<,<<< 1 327,<<<
c! 31<<,<<< 1 31<,<<< 3:<,<<<
d! F-,<<< 31<,<<< 1 3-,<<<
e! F2,<<< 32,<<< 1
f! F2<<,<<< 32<<,<<< 1
g! F8-,<<< 38-,<<< 1
h! F&,<<< 1 F&,<<<
i! Co effect 1
3&-,<<< 32,<<< 38-,<<< 31<7,<<< 3-1<,<<< 1 31/:,<<< 317<,<<< 3&<,<<< 32:<,<<< 38<,<<<
H7&:,<<< H&&:,<<< H,<<,<<<
2014 by McGraw-Hill Global Education Holdings, LLC. Tis is !ro!ri"tary #at"rial sol"ly $or autori%"d instructor us". &ot autori%"d $or sal" or distribution in any
#ann"r. Tis docu#"nt #ay not b" co!i"d, scann"d, du!licat"d, $orward"d, distribut"d, or !ost"d on a w"bsit", in wol" or !art.
A$2*-,
%e'. 1 and 2
Cash and Cash
E6uiva2ents
Short(Term
Investments
Accounts
Receiva12e
Beg. 78,-1: Beg. 12,:<: Beg. 1-,<&/
a! 1,<2< &,,<< b! e! 2,:8<
d! ,,<2< 2,:8< e! 1-,88: 1-,<&/
g! &1< 1,8&< f!
&<< h! Inventories
Beg. 1,1,/:2
7-,&-: 1,1,/:2
$repaid ELpenses and
Other Current Assets
$roperty< $2ant<
and E6uipment
Intangi12e
s
Beg. 2<,&72 Beg. 2:,,8-& Beg. ,-,128
f! 11,2&< ,,<2< d! b! &,,<<
2<,&72 &<2,</& ,8,-28
Other Assets Accounts
$aya12e
Accrued ELpenses
$aya12e
Beg. 1:,81/ 2/,:-8 Beg. 127,/&: Beg.
&1< g!
1:,-</ 2/,:-8 127,/&:
#ong(Term
De1tM
Other #ong(Term
#ia1i2ities
Common
Stoc4
1/-,<&2 Beg. 27,<<: Beg. ,8, Beg.
:,,<< f! 1/ a!
17,,,&2 27,<<: -<<
Additiona2
$aid(in Capita2
&-:,728 Beg.
1,<<, a!
&/<,7&2
; +urrent portion is H1:.
%e'. &
Co effect was recorded for )c*. Mrdering goods involves no exchange or receipt of
cash, goods, or services and thus is not a transaction.
A$2*-, &continued'
Retained
Earnings
-<1,:<8 Beg.
h! &<<
-<1,/<8
Other
Stoc4ho2ders5 E6uity Items
Beg. -8<,,&&
-8<,,&&
%e'. ,
Ethan A22en Interiors< Inc,
Tria2 =a2ance
At Septem1er -;< 2;++
&in thousands oF do22ars'
De1it Credit
+ash and cash e'uivalents H 7-,&-:
4hort$term investments 1-,88:
"ccounts receivable 1-,<&/
=nventories 1,1,/:2
Drepaid expenses and other current assets 2<,&72
Droperty, plant, and e'uipment &<2,</&
=ntangibles ,8,-28
Mther assets 1:,-</
"ccounts payable H 2/,:-8
"ccrued expenses payable 127,/&:
2ong$term debt current portion, H1:! 17,,,&2
Mther long$term liabilities 27,<<:
+ommon stock -<<
"dditional paid$in capital &/<,7&2
%etained earnings -<1,/<8
Mther stockholdersA e'uity items -8<,,&&
Totals H1,218,878 H1,218,878
A$2*-, &continued'
%e'. -
Ethan A22en Interiors< Inc,
=a2ance Sheet
At Septem1er -;< 2;++
&in thousands oF do22ars'
Assets
Current assets
+ash and cash e'uivalents H 7-,&-:
4hort$term investments 1-,88:
"ccounts receivable 1-,<&/
=nventories 1,1,/:2
Drepaid expenses and other current assets 2<,&72
Total current assets 2/8,&,8
Droperty, plant, and e'uipment &<2,</&
=ntangibles ,8,-28
Mther assets 1:,-</
Tota2 Assets H/&8,,,-
#ia1i2ities
Current liabilities
"ccounts payable H 2/,:-8
"ccrued expenses payable 127,/&:
+urrent portion of long$term debt 1:
Total current liabilities 1-,,/1/
2ong$term debt 17,,,1&
Mther long$term liabilities 27,<<:
Tota2 #ia1i2ities &-/,<&8
Stoc4ho2ders5 E6uity
+ommon stock H<.<1 par value! -<<
"dditional paid$in capital &/<,7&2
%etained earnings -<1,/<8
Mther stockholdersA e'uity items -8<,,&&!
Tota2 Stoc4ho2ders5 E6uity 282,,<7
Tota2 #ia1i2ities and Stoc4ho2ders5 E6uity H/&8,,,-
%e'. /
+urrent 1 Total +urrent "ssets 1 H2/8,&,8 1 1.7,
%atio Total +urrent 2iabilities H1-,,/1/
6than "llen maintains a relatively high current ratio, indicating that they are highly
li'uid. =nitially, this seems to suggest that they are not investing their resources
efficiently. >owever, a closer look reveals that a significant portion of their current
assets are invested in inventory, which often necessitates a higher current ratio.
A$2*.,
Transaction Type oF Activity EFFect on Cash
)a* ( 31,<2<
)b* =
&,,<<
)c* C6 C6
)d* = 3,,<2<
)e* =
2,:8<
)(* =
1,8&<
)g* = 3&1<
)$* (
&<<
CASES AND $RO>ECTS
ANN.A+ 'EP/'T CA,E,
C$2*+,
1. The company is a corporation since it maintains share capital and its owners are
referred to as Rshareholders.S %efer to the stockholdersA e'uity section of the
balance sheet!.
2. The amount listed on the balance sheet for inventories does not represent the
expected selling price. =t represents the historical cost of ac'uiring the inventory, as
re'uired by the cost principle.
&. The companyAs current obligations include0 accounts payable, accrued
compensation and payroll taxes, accrued rent, accrued income and other taxes,
unredeemed gift cards and gift certificates, current portion of deferred lease credits,
and other liabilities and accrued expenses.
, +urrent 1 +urrent "ssets 1 H1,287,,88 1&.18
%atio +urrent 2iabilities H,<-,,<1
The current ratio measures the ability of the company to settle short$term
obligations with current assets. "merican 6agle MutfittersA current ratio of &.18
suggests strong li'uidity with H&.18 in current assets for every H1 in current
liabilities. =n the most recent year presented, the company had a significant amount
of cash primarily from selling short$term investments. @iven the poor economic
environment continuing into 2<11 with a downturn in the financial markets,
maintaining a cash position may be an investing strategy.
-. The company spent H1<<,1&-,<<< on purchasing property and e'uipment in the
year ended 1Q28Q12# H8,,2-:,<<< in the year ended 1Q2:Q11# and H127,<8<,<<< in
the year ended 1Q&<Q1<. This information is listed as +apital 6xpenditures on the
4tatement of +ash (lows in the investing activities section.
C$2*2,
1. "ssets 1 2iabilities 3 4hareholdersA 6'uity
H1,,8&,7<8,<<< 1 H,17,,,<,<<< 3 H1,<//,2/8,<<<

2. Co F shareholdersA e'uity is a residual balance, meaning that the shareholders will
receive what remains in cash and assets after the creditors have been satisfied. =t
is likely that shareholders would receive less than H1,<//,2/8,<<<. =n addition,
nearly all assets on the balance sheet are stated at historical cost, not at market
value the amount that could be received if the assets are sold at the end of the
year!.
&. The companyAs only noncurrent liability is 9eferred %ent and Mther 2iabilities.
,. +urrent 1 +urrent "ssets 1 H-:/,::2,<<< 12.-/
%atio +urrent 2iabilities H2&&,,//,<<<
-. The company had a net cash inflow from investing activities of H--,2:2,<<<,
primarily because the company sold investments sold marketable securities for
H,1,,7/:,<<<!. The company also purchased property and e'uipment for
H1:<,<1<,<<<, nearly e'uivalent to the amount of marketable securities that were
purchased during the year H1/:,,/7,<<<!.
C$2*-,
1. =ndustry "verage "merican 6agle
Mutfitters
Urban
Mutfitters
+urrent %atio 1
2.67
&.18 2.-/
"merican 6agle MutfittersA current ratio of &.18 is higher than the industry average,
but Urban MutfittersA current ratio of 2.-/ is slightly below the industry average of
2./7. (or the year ended *anuary &1, 2<12, Urban Mutfitters reduced its amount of
current assets from the prior year while increasing its current liabilities.
Eany retailers, such as "merican 6agle Mutfitters, choose to rent space rather than
purchase buildings for stores. "c'uiring buildings often re'uires borrowing long$
term mortgages!. Thus, the choice of renting or purchasing buildings does not
have an effect on the numerator or denominator of the current ratio.
2. "s indicated in the financing activities section of each companyAs statement of cash
flows, during the most recent year, "merican 6agle Mutfitters spent H2,18:,<<<
repurchasing common stock from employees and H1-,1/<,<<< repurchasing
common stock from investors. Urban Mutfitters spent H-,-,,78,<<< repurchasing
shares.
&. "s indicated in the statement of cash flows, "merican 6agle Mutfitters paid
H8-,-:2,<<< in dividends. Urban Mutfitters did not pay any dividends during the
year. %efer to the financing activities section of the statement of cash flows.
,. "merican 6agle reports RDroperty and e'uipment, at cost, net of accumulated
depreciationS and Urban Mutfitters reports RDroperty and e'uipment, net.S 9etails of
the amount of land, building, and e'uipment are reported by each in the notes to the
financial statements. Mther companies sometimes choose to report these assets
separately on the balance sheet, for example in accounts such as0 R2and,S
RBuildings and building improvements,S (urniture, fixtures and e'uipment,S and
R%ental property and e'uipment.S
0INANCIA+ 'EP/'TIN1 AND ANA+2,I, CA,E,
C$2*.,
9ollars are in thousands0
1. a! +hipotleAs total assets reported for the 'uarter ended *une &<, 2<12 are
H1,/,8,,<:.
b! +urrent liabilities decreased over six months from H1-7,,-& at 9ecember &1,
2<11, to H1-<,1<: on *une &<, 2<12.
c! +urrent 1 +urrent "ssets 1 H/2<,,,2 1 ,.1&&
%atio at
/Q&<Q12
+urrent 2iabilities H1-<,1<:
+hipotleAs current ratio increased from the level of &.182 as discussed in the
chapter. This indicates that, between 9ecember &1, 2<11, and *une &1, 2<12,
+hipotle increased its li'uidity. +urrent assets increased by approximately H11:
million while current liabilities decreased by about H7 million. 4hort$term
investments increased the most over H/: million!.
2. a! (or the three months ended *une &<, 2<12, +hipotle spent H:<,&&2 on the
purchase of leasehold improvements, property, and e'uipment. =ts largest use
of cash for investing activities was for the purchase of investments H11<,87<!.
b! The total cash flows provided by financing activities was H&,,1-7, mostly from
the S6xcess tax benefit on stock$based compensationS of H7&,/-2.
C$2*/,
The major deficiency in this balance sheet is the inclusion of the ownerAs personal
residence as a business asset. Under the separate$entity assumption, each business
must be accounted for as an individual organi.ation, separate and apart from its
owners. The improper inclusion of this asset as part of (rances 4abatierAs business0
overstates total assets by H&<<,<<<# total assets should be H1<-,<<< rather
than H,<-,<<<, and
Mverstates stockholdersA e'uity that should be only H-,<<<, rather than
H&<-,<<<.
4ince current assets and current liabilities were not affected, the current ratio remains
the same. >owever, other ratios involving long$term assets andQor stockholdersA e'uity
will be affected.
C$2*7,
9ollars are in millions0
1. The company is a corporation because its owners are referred to as Rstockholders.S
2. "ssets 1 2iabilities 3 4tockholdersA 6'uity
H,,,-&& 1 H&-,/1/ 3 H8,:17
&. +urrent 1 +urrent "ssets 1 H2:,,,8 1 1.&,
%atio +urrent 2iabilities H22,<<1
(or every H1 of current liabilities, 9ell maintains H1.&, of current assets, suggesting
that 9ell has the ability to pay its short$term obligations with current assets in the
upcoming year. The interpretation of this ratio would be more useful given
information on the companyAs current ratio over time and on the typical current ratio
for the computer industry.
,.
"ccounts Dayable 2!.........................................................
11,/-/
+ash "!........................................................................
11,/-/
-. Mver its years in business, it appears that 9ell has been profitable, based on a
positive amount in %etained 6arnings of H28,2&/ million. The %etained 6arnings
account represents the cumulative earnings of the firm less any dividends paid to
the shareholders since the business began.
=n addition, 9ell appears profitable in the most recent year because %etained
6arnings increased. =t is possible to determine the amount of net income by using
the following e'uation, assuming no dividends were declared0
in millions!
Beg. (or the )ear 6nd.
%etained 6arnings 3 Cet =ncome F 9ividends declared 1 %etained 6arnings
H2,,7,, 3 T F H < 1 H28,2&/
Thus, net income for the most recent year was H&,,:2 million.

C'ITICA+ T3IN4IN1 CA,E,
C$2*8,
%e'. 1
DeDey< Cheetum< and %oDe< Inc,
=a2ance Sheet
Decem1er -+< 2;+/
Assets
+urrent "ssets0
+ash H 1,<<<
"ccounts receivable 8,<<<
=nventory 8,<<<
Tota2 current assets 17,<<<
(urniture and fixtures -2,<<<
9elivery truck net! 12,<<<
Buildings net! /<,<<<
Tota2 assets H1,1,<<<
#ia1i2ities
+urrent 2iabilities0
"ccounts payable H 1/,<<<
Dayroll taxes payable 1&,<<<
Tota2 current 2ia1i2ities 2:,<<<
Cotes payable due in three years! 1-,<<<
Eortgage payable -<,<<<
Tota2 2ia1i2ities :,,<<<
Stoc4ho2dersG E6uity
+ontributed capital 8<,<<<
"ccumulated deficit &&,<<<!
Tota2 stoc4ho2dersG e6uity ,7,<<<
Tota2 2ia1i2ities and stoc4ho2dersG e6uity H1,1,<<<
C$2*8, &continued'
%e'. 2
9ear UUUUUUUUUUU,
= corrected the balance sheet for 9ewey, +heetum, and >owe, =nc. Drimarily, =
reduced the amount reported for buildings to H/<,<<< which is the historical cost less
any depreciation. 6stimated market value is not a generally accepted accounting
principle for recording property, plant, and e'uipment. The H&8,<<< difference
H:8,<<< F H/<,<<<! reduces total assets and reduces retained earnings. =n fact,
retained earnings becomes negative suggesting that there may have been several
years of operating losses.
Before making a final decision on investing in this company, you should examine
the past three years of audited income statements and the past two years of audited
balance sheets to identify positive and negative trends for this company. )ou can also
compare this company5s current ratio to that of the industry to assess trends in li'uidity,
and compare how this companyAs long$term debt as a proportion of stockholdersA e'uity
has changed over time. )ou 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.
C$2*9,
1. The most obvious parties harmed by the fraud at "holdAs U.4. (oodservice, =nc.,
were the stockholders and creditors. 4tockholders were purchasing shares of stock
that were inflated due to the fraud. +reditors were lending funds to the company
based on inflated income statement and balance sheet information. ?hen the fraud
was discovered, the stock price dropped causing the stockholders to lose money on
their investments. =n addition, the creditors have a lower probability of receiving full
payment on their loans. The vendors who assisted in verifying false promotional
allowances were also investigated.
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. The
46+ also charged two individuals with insider trading for trading on a tip illegally.
2. U.4. (oodservice set certain financial goals and tied the former executivesA bonuses
to meeting the goals. "dopting targets is a good tool for monitoring progress toward
goals and identifying problem areas, such as rising costs or sagging sales. Better
decision making can result by heading off potential problems before they grow too
large. >owever, setting unrealistic financial targets, especially in poor economic
times, can result in those responsible for meeting the targets circumventing
appropriate procedures and policies for their own benefit.
&. =n many cases of fraudulent activity, auditors are named in lawsuits along with the
company. =f the auditors are found to be negligent in performing their audit, then
they are liable. >owever, in many frauds, the management at multiple levels of the
organi.ation are so involved in covering the fraud that it becomes nearly impossible
for the auditors to detect the fraudulent activity. =n this case, 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. =n audits,
confirming balances or amounts with external parties usually provides evidence for
the auditors on potential problem areas. The auditors appropriately relied on this
external evidence in performing their audit, not knowing it to be tainted or
fraudulent.
0INANCIA+ 'EP/'TIN1 AND ANA+2,I, TEAM P'/5ECT
C$2*:,
The solution to this team project will depend on the companies andQor accounting
period selected for analysis.
2- !0 Solutions Manual
C/NTIN.IN1 CA,E
CC2*+,
%e'. 1
9ebit +redit
a. +ash 3"!
""""""""""""""""""".
2-,<<<
6'uipment 3"!
"""""""""""""""".
&/,<<<
+ommon stock 346!GGGGGGGG. 2<<
"dditional paid$in capital 346!GGGG /<,8<<
b. 2and 3"!GGGGGGGGGGGGGGGG 18,<<<
Building 3"!GGGGGGGGGGGGGG.. 72,<<<
+ash "!GGGGGGGGGGGGG.
1<,<<<
Eortgage notes payable 32!GGGGG 8<,<<<
c. 6'uipment 3"!GGGGGGGGGGGGG. /,-<<
+ash "!GGGGGGGGGGGGG
2,-<<
4hort$term notes payable 32!GGGG. ,,<<<
d. Co transaction
e.
Eortgage notes payable 2!GGGGGGG..
1,<<<
+ash "!GGGGGGGGGGGGG
1,<<<
f. 4hort$term investments 3"!GGGGGGGG -,<<<
+ash "!GGGGGGGGGGGGG.
-,<<<
g. Co transaction
CC2*+, &continued'
%e'. 2
Cash Short(term Investments E6uipment
a! 2-,<<< 1<,<<< b! f! -,<<< a! &/,<<<
2,-<< c! -,<<< c! /,-<<
1,<<< e! ,2,-<<
-,<<< f!
/,-<<
#and =ui2dings
Beg. < Beg. <
b! 18,<<< b! 72,<<<
18,<<< 72,<<<
Short(term Notes $aya12e "ortgage Notes $aya12e
< Beg. < Beg.
,,<<< c! e! 1,<<< 8<,<<< b!
,,<<< 7:,<<<
Common Stoc4 Additiona2 $aid(in Capita2
< Beg. < Beg.
2<< a! /<,8<< a!
2<< /<,8<<
CC2*+, &continued'
%e'. &
$enny5s $oo2 Service and Supp2y< Inc,
Tria2 =a2ance
"arch -+< 2;+-
De1it Credit
+ash H /,-<<
4hort$term investments -,<<<
6'uipment ,2,-<<
2and 18,<<<
Buildings 72,<<<
4hort$term notes payable H ,,<<<
Eortgage notes payable 7:,<<<
+ommon stock 2<<
"dditional paid$in capital /<,8<<
Totals H1,,,<<< H1,,,<<<
CC2*+, &continued'
%e'. ,
$enny5s $oo2 Service and Supp2y< Inc,
=a2ance Sheet
On "arch -+< 2;+-
Assets
Current Assets:
+ash H /,-<<
4hort$term investments -,<<<
Total current assets 11,-<<
6'uipment ,2,-<<
2and 18,<<<
Buildings 72,<<<
Total assets H1,,,<<<
#ia1i2ities and Stoc4ho2der5s E6uity
Current +iabilities:
4hort$term notes payable H,,<<<
Total current liabilities ,,<<<
Eortgage notes payable 7:,<<<
Total liabilities 8&,<<<
,toc"$older-s E&uit!:
+ommon stock H<.<- par value! 2<<
"dditional paid$in capital /<,8<<
Total stockholderAs e'uity /1,<<<
Total liabilities and stockholderAs e'uity H1,,,<<<
%e'. -
Type oF Activity
&I< F< or NE'
EFFect on Cash F2oDs
&3 or ( and amount'
a! ( 3 2-,<<<
b! = $ 1<,<<<
c! = $ 2,-<<
d! C6 C6
e! ( $ 1,<<<
f! = $ -,<<<
g! C6 C6
CC2*+, &continued'
%e'. /
Current Assets C Current #ia1i2ities 0 Current Ratio
Earch &1, 2<1& H11,-<< I H,,<<< 1 2.87-
?ith a current ratio of 2.87-, DD44 has li'uidity with sufficient current assets to settle
short$term obligations. >owever, this may change as the inventory is received in "pril
and operations begin re'uiring paying cash for inventory purchases from suppliers,
advertising, utilities, employee salary, and other operating needs, and paying notes
payable when due. Mne of the most significant problems for new small businesses is
generating sufficient cash from operations to pay obligations and maintain li'uidity.

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Chapter 02 - Investing and Financing Decisions and the Accounting System

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