Chapter 2: Financial Statements and the Annual Report
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-06 – LO: 02-06
KEYWORDS:
Bloom’s: Analyzing
233. Read the information about Burke Company
Required:
Prepare a single-step income statement for the year ended December 31, 2016.
ANSWER:
BURKE COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
Revenues:
Sales
$50,300
Interest revenue
2,340
Rent revenue
7,700
Total Revenues
$60,340
Expenses:
Advertising
$ 2,600
Commissions
3,515
Cost of goods sold
29,200
Depreciation—office building
4,000
Income tax expense
190
Insurance—salesperson’s auto
3,350
Interest expense
1,400
Salaries and wages—office
13,660
Supplies—office
1,990
Total expenses
59,905
Net income
$ 435
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-05 – LO: 02-05
KEYWORDS:
Bloom’s: Analyzing
234. The 2016 income statement of Kellyson Enterprises shows operating revenues of $120,500, selling expenses of
$35,200, general and administrative expenses of $29,900, interest expense of $1,500, and income tax expense of $10,520.
Kellyson’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The
company has 20,000 shares of stock outstanding at December 31, 2016.
Required: Compute Kellyson’s profit margin. What other information would you need in order to comment on whether
this ratio is favorable?
KEYWORDS:
Bloom’s: Analyzing
235. The 2016 income statement of Nasir Inc. shows operating revenues of $135,800, selling expenses of $40,310, general
and administrative expenses of $33,990, interest expense of $880, and income tax expense of $13,090. Nasir’s
stockholders’ equity was $250,000 at the beginning of the year and $345,000 at the end of the year. The company has
10,000 shares of stock outstanding at December 31, 2016.
Required: Compute Nasir’s profit margin. What other information would you need in order to comment on whether this
ratio is favorable?
ANSWER:
Profit margin:
Net Income/Revenues = $47,530*/$135,800 = 35.0%
*$135,800 – $40,310 – $33,990 – $880 – $13,090 = $47,530
A profit margin of 35% indicates that for every dollar of sales, Nasir Inc. has $0.35 in net
income. It would be beneficial to compare the company’s profit margin with some of its
competitors and with previous years.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-06 – LO: 02-06
KEYWORDS:
Bloom’s: Analyzing
236. Hammar Corporation’s partial income statement is as follows:
Sales
$2,400,000
Cost of sales
900,000
Selling expenses
121,600
General and admin. expenses
150,000
Required:
Determine the profit margin. Would you invest in Hammar Corporation? Explain your answer.
ANSWER:
Profit margin:
Net Income/Sales = $1,228,400*/$2,400,000 = 51.2%
*$2,400,000 – $900,000 – $121,600 – $150,000 = $1,228,400*
Sales
$ 2,400,000
– Cost of sales
900,000
= Gross profit
$ 1,500,000
– Total operating expenses
271,600**
= Net income
$ 1,228,400*
51.2%. Before making an investment, however, you would want to consider how this ratio
compares with that of prior years and with that of other companies in the same line of
business.
DIFFICULTY:
Moderate
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
237. Vance Corporation’s partial income statement is as follows:
Sales
$1,300,000
Cost of sales
300,000
Selling expenses
210,000
General and admin. expenses
150,000
Required:
Determine the profit margin. Would you invest in Vance Corporation? Explain your answer.
ANSWER:
Profit margin:
Net Income/Sales = $640,000*/$1,300,000 = 49.2%
*$1,300,000 – $300,000 – $210,000 – $150,000 = $640,000*
Sales
$1,300,000
– Cost of sales
300,000
= Gross profit
$1,000,000
– Total operating expenses
360,000**
= Net income
$ 640,000*
**Total Operating Expenses = Selling Expenses ($210,000) + General and Administrative
Expenses ($150,000) = $360,000
Vance Corporation has been very profitable on the basis of its very high profit margin of
49.2%. Before making an investment, however, you would want to consider how this ratio
compares with that of prior years and with that of other companies in the same line of
business.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-05 – LO: 02-05
FACC.PONO.13.02-06 – LO: 02-06
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
238. Powder Corporation began operations on January 2, 2015, with a total investment of $150,000 by its stockholders.
Net income for its first year of business was $90,000. During 2016 and 2017, net income increased to $188,000 and to
$217,000, respectively. Powder paid $85,000 in dividends to its shareholders in each of the three years.
A)
In good form, prepare a statement of retained earnings for the year ended December 31, 2016.
B)
How much is total retained earnings on December 31, 2017?
C)
Explain the link between the statement of retained earnings and the balance sheet.
ANSWER:
A)
Powder Corporation
Statement of Retained Earnings
for the Year Ended December 31, 2016
Beginning balance, January 1, 2016
$ 5,000*
Add: Net income for 2016
188,000
Less: Dividends paid during the year
(85,000)
Ending balance, December 31, 2016
$108,000
*
$90,000 Net Income for 2015 – $85,000 Dividends paid = $5,000 Balance,
January 1, 2016
B)
Retained earnings at December 31, 2017 = $240,000
($108,000 Beginning Balance, January 1, 2017 + $217,000 Net Income for
2017 – $85,000
Dividends paid during the year =$240,000)
C)
The ending balance of the retained earnings statement represents the
cumulative earnings less all the dividends declared and paid for the life of the
business. This amount appears on the balance sheet as a component of owners’
equity.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-07 – LO: 02-07
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
239. The following information is taken from Harvey Company’s balance sheet at December 31, 2016:
Cash
$ 14,000
Retained earnings
14,000
Inventory
8,000
Equipment
38,000
Accounts payable
7,000
Bonds payable
23,000
Capital stock
26,000
Required: Using the information provided for Harvey Company, answer the following questions:
A)
How much did creditors provide to Harvey Company?
B)
On which financial statement would an investor look to see if any stock was issued during the year?
ANSWER:
A)
$30,000
($7,000 Accounts Payable + $23,000 Bond Payable)
B)
The primary source for seeing whether any stock was issued during the year would be
the Statement of Stockholders’ Equity. While the Balance Sheet may show an amount
for “Capital Stock,” this amount is an ending balance, and would not show the results
of any transactions involving new issuances of stock during the period.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-07 – LO: 02-07
KEYWORDS:
Bloom’s: Analyzing
240. Coglin, Inc. incurred a net loss of $20,000 for 2016. The balance sheet at December 31, 2016, for Coglin, Inc.,
includes the following items:
Cash
$ 23,000
Accounts receivable
13,000
Inventory
45,000
Prepaid insurance
1,000
Land
14,000
Building
80,000
Accounts payable
55,000
Salaries payable
2,000
Capital stock
100,000
Retained earnings
25,000
A)
Determine Coglin’s current ratio and working capital.
B)
Beyond the information provided in your answers to “A,” what does the composition of Coglin’s
current assets tell you about its liquidity.
C)
What other information would one need to fully access Coglin’s liquidity?
ANSWER:
A)
Current ratio: 1.44 to 1
($23,000 Cash + $13,000 Accounts receivable + $45,000 Inventory + $1,000
Prepaid insurance) / ($55,000 Accounts payable + $2,000 Salaries payable)
= 1.44 to 1
Working capital: $25,000
($82,000 Total Current Assets – $57,000 Total Current Liabilities = $25,000)
B)
The closer an asset is to being converted to cash, the more liquid the asset is. Some
assets, like inventory, take much longer to turn into cash because they must be sold
before collection of the cash can be made. Prepaid insurance is not as liquid as
accounts receivable since it will be consumed as time passes. Receivables are more
liquid than inventory because a sale has already occurred
C)
The statement of cash flows would be helpful to determine the cash inflows and
outflows that occurred during the year. The balance sheet represents only the ending
balance of the cash account. The statement of cash flows also identifies the sources
and uses of cash by business activity and the nature of each particular cash flow
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-04 – LO: 02-04
FACC.PONO.13.02-08 – LO: 02-08
241. During 2016, Wimbrow Images reported $60,000 of net income and generated $80,000 of cash from operations.
During the year, Wimbrow Images paid $15,000 to purchase a new delivery truck and also paid dividends in the amount
of $30,000. Wimbrow Images borrowed $40,000 cash from the bank. At the beginning of the year, cash amounted to
$50,000.
A)
Prepare a statement of cash flows for the year ended December 31, 2016.
B)
How much more cash does Wimbrow Images have available at the end of the year than at the beginning?
C)
Why is there a difference between net income and cash flows from operations?
ANSWER:
A)
Wimbrow Images
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash flows from operating activities
$ 80,000
Cash flows from investing activities:
Purchase of new truck
(15,000)
Cash flows from financing activities:
Proceeds from loan made by bank
40,000
Cash dividends paid
(30,000)
Increase (Decrease) in cash
$ 75,000
Cash at the beginning of the year
50,000
Cash at the end of the year
$125,000
B)
The company has $75,000 more at the end of the year compared to the beginning
of the year
C)
Net income is calculated using the accrual basis of accounting, whereas cash
flows from operating activities represent the net amount of cash flows from
operations of the business
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-08 – LO: 02-08
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
242. Tradewinds Corporation was organized on January 1, 2016, with the investment of $500,000 in cash by its
stockholders. Tradewinds signed a ten-year, $300,000 promissory note at a local bank during 2016 and received cash in
the same amount. The company immediately purchased an office building for $800,000, paying in cash. During its first
year, Tradewinds generated $35,000 in cash from operations and paid $30,000 in cash dividends.
A) In good form, prepare a statement of cash flows for the year ended December 31, 2016.
B) What does this statement tell you that an income statement does not?
ANSWER:
A)
Tradewinds Corporation
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash flows from operating activities
$ 35,000
Cash flows from investing activities
Purchase office building
(800,000)
Cash flows from financing activities
Investment by owners
500,000
Loan from bank
300,000
Payment of dividends
(30,000)
Net cash provided by financing activities
770,000
Net increase in cash for the year
$ 5,000
Cash at the beginning of the year
—0—
Cash at the end of the year
$ 5,000
B) This statement provides information on the cash inflows and outflows by activity:
operating, investing, and financing. The income statement is prepared on the accrual basis
that provides information on the revenues earned and the expenses incurred during the
period, which may or may not involve cash. The income statement shows the profitability of
a company for a period of time. Furthermore, the income statement does not present
information regarding all the sources and uses of cash.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-08 – LO: 02-08
KEYWORDS:
Bloom’s: Analyzing
243. Hindsville Company reported revenues of $165,000 and net income of $20,000 for 2016. Cash generated by
operations was $40,000. In addition, Hindsville Company borrowed $14,000 from a bank. During 2017, Hindsville
purchased new equipment for $30,000 cash and paid cash dividends of $15,000 to stockholders. Hindsville’s cash balance
at the beginning of 2016 was $22,000.
A)
Identify the amount of cash flows for financing, investing, and operating activities for
2016 by filling in the amounts below.
Financing Cash Flows:
Investing Cash Flows:
Operating Cash Flows:
B)
Did Hindsville Company’s operating activities generate enough cash to cover its
investing and financing activities? Explain.
C)
How much did Hindsville Company’s cash balance increase or decrease during 2016?
ANSWER:
A)
Financing Cash Flows = $9,000
($14,000 Cash borrowed from bank – $15,000 Cash dividends paid = $9,000)
Investing Cash Flows = ($30,000)
(Purchase of new equipment)
Operating Cash Flows = $40,000
(Cash generated by operations)
B)
Yes. The total of investing and financing activities is an outflow of $14,000. The
$40,000 generated from operating activities is sufficient
C)
$19,000 Increase
($40,000 Cash flow from operations – $30,000 Cash flow from investing + $9,000
Cash flow from financing = $19,000)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-08 – LO: 02-08
KEYWORDS:
Bloom’s: Analyzing
244. Presented below are items from Joplin Shoes statement of cash flows for 2016.
Cash flows provided by operating activities
$ 75,000
Cash flows provided by financing activities
115,000
Cash at the beginning of the year
60,000
Cash flows used by investing activities
(100,000)
A) Determine whether Joplin Shoes’ cash increased or decreased during the year.
B) How much cash does Joplin Shoes have at the end of 2016?
C) What is the purpose of the statement of cash flows?
ANSWER:
A)
$90,000 increase
($75,000 Cash flows provided by operating activities – $100,000 Cash flows
used by investing activities + $115,000 Cash flows provided by financing activities
= $90,000 increase)
B)
$150,000
($60,000 Cash at the beginning of the year + $90,000 increase = $150,000)
C)
A statement of cash flows summarizes the operating, financing, and investing
activities of a company for a period of time
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-08 – LO: 02-08
KEYWORDS:
Bloom’s: Analyzing
Net increase in cash
Cash at beginning of year
Cash at end of year
Moderate
FACC.PONO.13.02-08 – LO: 02-08
Bloom’s: Analyzing
245. Unideno Corporation was organized on January 1, 2016, with the investment of $225,000 in cash by its stockholders.
The company immediately purchased an office building for $300,000, paying $201,000 in cash and signing a three-year
promissory note for the balance. Unideno signed a five-year, $50,000 promissory note at a local bank during 2016 and
received cash in the same amount. During its first year, Unideno collected $93,000 from its customers. It paid $60,600 for
inventory, $22,400 in salaries and wages, and another $5,100 in taxes. Unideno paid $5,300 in cash dividends.
Required:
1. Prepare a statement of cash flows for the year ended December 31, 2016.
2. What does this statement tell you that an income statement does not?
ANSWER:
Unideno Corporation
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash flows from operating activities:
Cash collected from customers
$ 93,000
Cash paid for inventory
(60,600)
Cash paid in salaries and wages
(22,400)
Cash paid in taxes
(5,100)
Net cash provided by operating activities
$ 4,900
Cash flows from investing activities:
Payment on office building
(201,000)
Cash flows from financing activities
Proceeds from issuance of stock
$225,000
Proceeds from long-term note
50,000
Dividends declared and paid
(5,300)
Net cash provided by financing activities
269,700
Accountants
fairly
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-09 – LO: 02-09
KEYWORDS:
Bloom’s: Analyzing
246. Identify each of the following items as operating (O), investing (I), or financing (F) activities on the statement of
cash flows(assuming the indirect method). If an item is not on the statement, please mark it as none of these (N). If the
item is an inflow, please indicate by a (+), (e.g. O+, I+ or F+). If the item is an outflow, please indicate by brackets, (e.g.,
<O> for operating outflow, <I> for investing outflow, and <F> for financing outflow:
____ (a) Paid an account payable for inventory purchased in the previous accounting period.
____ (b) Amortization of debt issuance costs
____ (c) Paid a dividend to stockholders.
____ (d) Paid the interest on a note payable to National Street Bank.
____ (e) Paid the principal amount due on the note payable to National Street Bank.
____ (f) Transferred cash from a checking account into a money market fund.
____ (g) Purchased equipment for cash.
ANSWER:
a. <O> b. O+ c. <F> d. <O> e. <F> f. N g. <I>
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-08 – LO: 02-08
KEYWORDS:
Bloom’s: Analyzing
247. Most financial reports contain the following list of basic elements. For each element identify the person(s) who
prepared the element and describe the information a user would expect to find in each element.
Elements
Prepared By
Information Provided
Management
Discussion &
Analysis
Financial Statements
Notes to Financial
Statements
Report of
Independent
Accountants
ANSWER:
Elements
Prepared By
Information
Provided
Management
Discussion &
Analysis
Mgmt.
Discussion of financial statements
and explanations
Financial Statements
Mgmt.
Income statement, balance sheet,
statement of cash flows, statement of
retained earnings
Notes to Financial
Statements
Mgmt.
Accounting policies and other disclosures
Report of Independent
CPA firm.
Opinion that statements are presented
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-01 – LO: 03-01
KEYWORDS:
Bloom’s: Applying
248. Comparative income statements for Jameson Inc. are as follows:
2017
2016
Sales
$2,000,000
$600,000
Cost of sales
800,000
400,000
Gross profit
$1,200,000
$200,000
Operating expenses
520,000
120,000
Operating income
$ 680,000
$ 80,000
Loss on sale of subsidiary
(800,000)
0
Net income (loss)
$(120,000)
$ 80,000
Required:
The president and management believe that the company performed better in 2017 than it did in 2016. Write the
president’s letter to be included in the 2017 annual report. Explain why the company is financially sound and why
shareholders should not be alarmed by the $120,000 loss in a year when gross profit increased significantly.
ANSWER:
Letter from the President to Stockholders of Jameson Inc.:
On the surface, 2016 does not appear to have been a successful year for Jameson Inc.
However, it was primarily one specific event that caused the net loss we experienced for the
year. The sale of a subsidiary resulted in a loss of $800,000. We believe that the sale of this
unprofitable unit of the business will allow us to concentrate our future attention on our
successful businesses and clear the way for a return to overall profitability in 2017.
Aside from the loss experienced on the sale of the subsidiary, 2016 was a really great year for
the company. We were able to control our operating expenses, resulting in operating income
as a percentage of sales that increased from 13% to 34%. These are clear signals that
Jameson Inc. is moving in the right direction and should have a very solid year of operations
in 2017.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-09 – LO: 02-09
KEYWORDS:
Bloom’s: Analyzing
Essay
249. What financial statement items are investors and creditors most interested in and why?
ANSWER:
Investors are most interested in cash receipts from dividends and the cash they can receive
upon selling their stock. Creditors are most interested in cash to be received for interest
payments and the repayment of the principal. If a company does not have sufficient cash
flows, investors and creditors could suffer as a result. The financial position, shown on the
balance sheet, is also a concern for both investors and creditors because even though a
company may have what appears to be sufficient cash flows for the current period, the long-
run solvency picture could be weak.
250. Cory Harper, a newly hired accountant, wanted to impress his boss, so he stayed late one night to analyze the office
supplies expense account. He determined the cost by month, for the past 12 months, of each of the following: computer
paper, copy paper, fax paper, pencils and pens, note pads, postage, corrections supplies, stationery, and miscellaneous
items. Why do companies not include information of this nature in published financial statements?
ANSWER:
Companies provide information to users to make decisions. The primary decision makers
external to the business are creditors, bankers, stockholders, and potential stockholders.
These users need to know that the company can repay its debts, earn a profit, and pay
dividends. The cost by month for each item of office supplies does not provide any additional
information that would be helpful for any external users. In addition, the time and expense
necessary to create the additional detail would outweigh the benefits of the final product. The
amounts involved are probably immaterial.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-01 – LO: 03-01
KEYWORDS:
Bloom’s: Applying
251. Service-oriented companies have different needs than product-oriented companies when analyzing financial
statements.
REQUIRED: Why is this true? Give an example of a financial ratio that is meaningless to a service business.
ANSWER:
Because service-oriented companies do not sell a tangible product, they instead must sell
their professional expertise and rely on alternative measures of their efficiency in marketing
their services. For example, an law firm would keep detailed records of the hours worked on
each client’s case, monthly billings to each client, and the ratio of these billings to the
average costs incurred on each case. Therefore, ratios like inventory turnover would be
meaningless to a service business, like a law firm or a public accounting firm.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-01 – LO: 03-01
FACC.PONO.13.02-04 – LO: 02-04
KEYWORDS:
Bloom’s: Applying
252. Ginger Company claims its financial information is useful. What two qualities must be present in order to have
“useful” accounting information? Explain these two qualities.
ANSWER:
To be useful, accounting information must be relevant and reliable. Relevant information has
the capacity to make a difference in a decision. Reliable information can be depended on to
represent the economic events that it purports to represent.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-02 – LO: 02-02
KEYWORDS:
Bloom’s: Applying
253. What is the difference between comparability and consistency?
ANSWER:
Comparability allows comparisons to be made between or among companies. Even though a
certain amount of freedom exists in selecting accounting principles, when this information is
disclosed in the financial statements, users can still compare the information when they know
what principle is used. Consistency involves the relationship between a set of numbers over
several periods, but within one company only, unlike comparability that can be between or
among companies.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-02 – LO: 02-02
KEYWORDS:
Bloom’s: Applying
254. What is conservatism and why is it important in accounting?
ANSWER:
Conservatism is taking the route that will be least likely to overstate assets or income. It is
used in situations in which there is uncertainty about how to account for a particular item. In
accounting, it is used in the balance sheet and income statement in an effort to provide the
least optimistic amount.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-02 – LO: 02-02
KEYWORDS:
Bloom’s: Applying
255. How is a classified balance sheet useful to decision makers?
ANSWER:
A classified balance sheet helps evaluate the liquidity of a company by separating the current
assets from long-term assets and current liabilities from long-term liabilities. The user can
then determine the amount of working capital and the current ratio, which are both useful
measures of liquidity.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-03 – LO: 02-03
KEYWORDS:
Bloom’s: Applying
256. What is the operating cycle of a business? How does this impact the classification of assets into current and
noncurrent categories?
ANSWER:
The operating cycle depends on the nature of a company’s business. It encompasses the
period of time from the investment of cash in inventory to the collection of account
receivables from the sale of products. This can take a long time, like the production of a
cruise ship, or a very short time, like the preparation of restaurant food. Current assets are
realized in cash, or sold, or consumed during the operating cycle or within one year if the
cycle is shorter than one year.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-03 – LO: 02-03
KEYWORDS:
Bloom’s: Applying
257. How does the definition of a current liability relate to that of a current asset?
ANSWER:
Current assets will be realized in cash, or sold, or consumed during the operating cycle or
within one year if the cycle is shorter than one year. Current liabilities are obligations that
will be satisfied within the operating cycle or within one year if the cycle is shorter. For most
companies, both current assets and liabilities are reported on the balance sheet using a one-
year time period
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-03 – LO: 02-03
KEYWORDS:
Bloom’s: Applying
258. Potential stockholders and lenders are interested in a company’s financial statements. Several financial statement
items appear below. Answer the questions that follow.
Accounts receivable
Accounts payable
Advertising expense
Cash
Depreciation expense
Income taxes
Common stock
Land held for future expansion
Dividends
Retained earnings
Loss on the sale of equipment
Service revenue
Office supplies
Patent amortization expense
Sales
Unearned revenue
Utilities expense
A)
Which two items would stockholders be most interested in that can either be computed from the
above data or are included in the items listed above? Explain why the two you selected are
important to stockholders.
B)
In which one item would lenders be most interested? Explain why this item is important.
ANSWER:
A)
Stockholders are interested in net income and dividends. They want to make sure the
company is profitable. If a company is incurring losses, it may not pay dividends.
B)
Lenders are most interested in the company’s ability to pay bills when they become due.
Cash can be a big problem if a company does not have enough to pay its bills. This
includes the company’s ability to repay the lender.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-03 – LO: 02-03
FACC.PONO.13.02-04 – LO: 02-04
KEYWORDS:
Bloom’s: Applying
259. What is the purpose of a statement of stockholders‘ equity? How does it differ from the statement of retained
earnings? Which statement is required?
ANSWER:
A statement of stockholders’ equity summarizes the changes in all owners’ equity amounts
during the period. If there are no changes in capital stock during the period, a company can
prepare a statement of retained earnings that explains only the changes in the retained
earnings account. A company has an option to present either statement.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.02-07 – LO: 02-07
260. What is the purpose of a statement of cash flows? Give an example of one of each of the three activities.
ANSWER:
A statement of cash flows summarizes the operating, financing, and investing activities of a
company for a period of time. Some examples are:
Operating: Collections of cash from customers; Payments to suppliers; Payments for wages
Investing: Purchases or sales of plant assets; Purchases or sales of investments
Financing: Payment of dividends; Issuance of stock to investors
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.02-08 – LO: 02-08
KEYWORDS:
Bloom’s: Applying
261. What information is provided in an annual report in addition to the financial statements?
ANSWER:
An annual report contains the reports of management, the auditor’s report, management’s
discussion and analysis of the amounts appearing in the statements, footnotes to the financial
statements, and a summary of selected financial data over a period of years.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.02-09 – LO: 02-09
KEYWORDS:
Bloom’s: Applying