2-1
PROBLEM 2-38. (cont.)
Alabama Service Company
Accounting Equation for 2015
Assets
=
Liabilities
+
Event
Type of
Event
Cash
Accts.
Rec.
Supp.
Prepd.
Rent
Int.
Rec.
Land
=
Accts.
Pay.
Salaries
Payable
Unearn.
Revenue
+
Com.
Stock
Retained
Earnings
Bal.
58,200
4,000
200
-0–
18,000
400
3,200
-0-
60,000
16,800
1.
AS
20,000
20,000
2.
AU
(3,200)
(3,200)
3.
AE
(3,600)
3,600
4.
AE
15,000
(15,000)
5.
AS
4,800
4,800
6.
AS
1,000
1,000
7.
AS
32,000
32,000
8.
AE
33,000
(33,000)
9.
AU
(5,000)
(5,000)
10.
AU
(19,500)
(19,500)
11.
AU
(3,000)1
(3,000)
12.
CE
(1,200)2
1,200
13.
AU
(900)
(900)
14.
CE
3,900
(3,900)
15.
AS
400
400
Totals
99,700
3,000
300
600
400
3,000
=
1,400
3,900
3,600
+
80,000
18,100
1$3,600 x 10/12 = $3,000
2$4,800 x 3/12 = $1,200
2-2
PROBLEM 2-38 (cont.)
b.
Alabama Service Company
Financial Statements
For the Years Ended December 31, 2014 and 2015
Income Statements
2014
2015
Service Revenue
$ 42,000
$ 33,200
Interest Revenue
-0-
400
42,000
33,600
Expenses
Operating Expenses
(21,000)
(19,500)
Supplies Expense
(1,000)
(900)
Salaries Expense
(3,200)
(3,900)
Rent Expense
-0-
(3,000)
Total Expenses
(25,200)
(27,300)
Net Income
$16,800
$ 6,300
Statements of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
$60,000
Plus: Stock Issued
60,000
20,000
Ending Common Stock
60,000
80,000
Beginning Retained Earnings
-0-
16,800
Plus: Net Income
16,800
6,300
Less: Dividends
-0-
(5,000)
Ending Retained Earnings
16,800
18,100
Total Stockholders’ Equity
$76,800
$98,100
PROBLEM 2-38 b. (cont.)
Alabama Service Company
Balance Sheets
As of December 31, 2014 and 2015
2014
2015
Assets
Cash
$58,200
$99,700
2-3
Accounts Receivable
4,000
3,000
Interest Receivable
-0-
400
Supplies
200
300
Prepaid Rent
-0-
600
Land
18,000
3,000
Total Assets
$80,400
$107,000
Liabilities
Accounts Payable
$ 400
$ 1,400
Salaries Payable
3,200
3,900
Unearned Revenue
-0-
3,600
Total Liabilities
3,600
8,900
Stockholders’ Equity
Common Stock
60,000
80,000
Retained Earnings
16,800
18,100
Total Stockholders’ Equity
76,800
98,100
Total Liab. and Stockholders’ Equity
$80,400
$107,000
PROBLEM 2-38 b. (cont.)
Alabama Service Company
Statements of Cash Flows
For the Years Ended December 31, 2014 and 2015
2014
2015
Cash Flows From Operating Activities:
Cash Received from Customers
$38,000
$37,800
Cash Payment for Expenses1
(21,800)
(26,300)
Net Cash Flow from Operating Activities
16,200
11,500
Cash Flows From Investing Activities:
Cash Payment for Land
(18,000)
-0-
Cash Proceeds from Sale of Land
15,000
Net Cash Flow From Investing Activities
(18,000)
15,000
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue
60,000
20,000
Cash Payment for Dividends
-0-
(5,000)
Net Cash Flow From Financing Activities
60,000
15,000
Net Change in Cash
58,200
41,500
Plus: Beginning Cash Balance
-0-
58,200
2-4
Ending Cash Balance
$58,200
$99,700
12014: $800 + $21,000 = $21,800
2015: $3,200 + $3,600 + $19,500 = $26,300
SOLUTIONS TO ANALYZE, THINK, COMMUNICATE – CHAPTER 2
ATC 2-1 (All dollar amounts are in millions.)
account shown under Liabilities is probably best classified as an accrual account, but
students will probably think it is a deferral account.
2. Target’s deferral accounts are: Inventories, Buildings and Improvements, Fixtures and
3. Net income for 2012 was $2,999
Cash provided by operating activities for 2012 was $5,325
Group Task (1)
Exxon
%
Apple
%
Computation of Expenses
Revenue (in billions)
$482.3
100.0
$156.5
100.0
Less, Net Income
44.9
9.3
41.7
26.7
Expenses (in billions)
$437.4
90.7
$114.8
73.3
Group Task (2)
The conservatism principle guides accountants to select the alternative that produces the lowest
amount of net income. The conservatism principle holds that it is better to understate income
operates than there is in the petroleum field, where Exxon Mobil operates. Additionally, Apple’s
net income, as a percentage of sales, is higher.ATC 2-3
This solution is based on Netflix’s 2012 financial report.
a. Netflix’s accrual accounts are:
Accounts payable
Accrued expenses
Current content liabilities*
*Students probably will miss this one, as a careful reading of the Note 3 is needed to
understand it..
b. Netflix’s deferral accounts are:
Deferred revenuesATC 2-4
a.
Income Statement
Balance Sheet
Service Revenue
$120,000
Assets:
$167,000
Operating Exp.
(40,000)
Net Income
$ 80,000
Liabilities:
$ 5,000
Stockholders’ Equity:
Common Stock
82,000
Retained Earnings
80,000
Total Stk. Equity
162,000
Total Liab. and
Stk. Equity
$167,000
Computations for Income Statement Items:
2-6
a. The conservatism principal requires that revenue not be recognized before it is actually
earned. Glenn actually recorded an amount that not only had not been earned, but the
contract had not been finalized. Glenn has overstated his income by the $82,000.
b. The accrued salaries are an expense that has already been accrued and is owed and these
salary expense should be matched against the respective year’s revenue. By removing these
expenses from net income computation, Glenn is overstating net income.