a.
Liabilities & Owner’s Equity
Cash 3,200$ Liabilities:
Notes receivable 3,400 Notes payable 72,500$
Accounts receivabl
e
3,000 Accounts payabl
e
30,000
Office furniture 16,300 Total liabilities 102,500$
* $9,600 + $7,500 – $800.
b. (1)
(
2
)
(3)
(
4
)
(5)
(
6
)
(
)
PROBLEM 2.10B
STAR SCRIPT
S
30 Minutes, Strong
STAR SCRIPTS
Balance Sheet
November 30, 2015
Assets
The $25,000 described as “Other assets” is not an asset, because there is no valid legal claim or
any reasonable expectation of recovering the income taxes paid. Also, the payment of federal
The cash in Joe’s personal savings account is not an asset of the business entity Star Scripts and
should not appear in the balance sheet of the business. The money on deposit in the business
The years-old IOU does not qualify as a business asset for two reasons. First, it does not belong
The total amount to be included in “Office furniture” for the rug is $10,000, the total cost,
regardless of whether this amount was paid in cash. Consequently, “Office furniture” should be
The computer is no longer owned by Star Scripts and therefore cannot be included in the assets.
amount must be reduced b
y
$800.
The proper valuation for the land is its historical cost of $15,000, the amount established by the
transaction in which the land was purchased. Although the land may have a current fair value in
excess of its cost, the offer by the friend to buy the land if Joe would move the building appears
CONTENT OF A BALANCE SHEE
T
This case requires students to prepare a hypothetical balance sheet for an entity to be specified by the
instructor. Therefore, we cannot provide a “solution.”
The purpose of the case is to challenge students to think about the types of assets necessary to the
operation of a specific type of business entity and also about the liabilities that are likely to exist. We
find this case is very useful, but it requires reasonably sophisticated students. The case also lends itself
well to classroom discussion.
SOLUTIONS TO CRITICAL THINKING CASE
S
We recommend assigning an entity that is either unusual in nature (such as a circus, a zoo, an airline, a
CASE 2.1
30 Minutes, Medium
CASE 2.2
30 Minutes, Strong
pp , p p
ready availability to students of annual reports. Some large libraries maintain a file of print copies of
annual
reports. Also, many companies’ financial statements are readily available on the Internet. In our
classes, we have handed out annual reports from our own collection but increasingly rely on the
internet for access to public company financial statements. After students have completed the case, we
discuss in class various features of the reports and the financial reporting process.
Our 30-minute time estimate is adequate for answering the questions raised in the case, but it does not
provide for time that a student may spend in locating an annual report.
This case is intended to acquaint students with using the financial statements and annual report of a
publicly held company of their (or your) choice. As students will select various reports, we cannot
USING FINANCIAL STATEMENT
S
a.
b.
CASE 2.3
30 Minutes, Medium
Bankers considering a loan application are particularly interested in the ability of the company to
pay its debts. They want to make loans that will be repaid promptly and in full at the agreed
maturity date, plus interest. Therefore, they give close attention to the amount of cash and other
assets (such as accounts receivable) that will soon become cash. They compare these assets with
the amount of existing liabilities of the company that become due in the near future. On this
Certainly Moon Corporation would appear to have greater debt-paying ability in the near future.
A banker is also interested in the amount of owners’ equity, since this ownership capital serves
as a protecting buffer between the banker and any losses that may befall the business. Although
Star Corporation has greater owners’ equity than Moon Corporation, the difference is relatively
balance, a banker would probably consider Moon Corporation to be the better prospect for a
loan.
USING A BALANCE SHEE
T
As an investor, you would probably be willing to pay a higher price to buy the capital stock of
Star Corporation. Since both companies are newly organized and the cost of assets shown on the
balance sheet approximates fair market value, we can assume in this case that total stockholders’
a.
b.
Look at the underlying details of financial statements, not just the final figures or bottom line.
c.
One possibility is that Walker Company ran out of financing in 2015. We do not know the source
General recommendations to John should include the following:
There are important differences in the various sources of cash. Generally, strong cash from
John’s preliminary evaluation is focusing too much on the “bottom line” and not looking at the
details of the cash flow information. The most important difference between the cash flows of the
two companies is the fact that Morris, Inc. has strong operating cash flows while Walker Company
Another important difference is that Morris, Inc. is building its investment in assets each year,
which probably bodes well for that company’s future. Walker Company, on the other hand,
invested in assets in 2013 and 2014, but in 2015, the company sold assets in order to maintain its
current level of cash.
30 Minutes, Medium
USING STATEMENTS OF CASH FLO
W
CASE 2.
4
1.
2.
3.
4.
ETHICS AND WINDOW DRESSIN
G
CASE 2.
5
35 Minutes, Medium
Postponing the cash purchase of WordMaster would indeed leave Omega Software with an
additional $8 million in cash at year-end, which would make the company appear more liquid.
There is nothing illegal or unethical about postponing this transaction. However, the fact that
The deliberate omission of liabilities from the balance sheet is unethical and illegal. This action
would be in direct violation of the federal securities laws, and the responsible officers would
There is nothing unethical or illegal about renegotiating the due date of a liability. In fact, as
Omega needs to borrow money anyway, extending this obligation to Delta at a 10% interest rate
may be a good idea. The due date of this liability may require disclosure in notes to the financial
The intentional violation of generally accepted accounting principles with the intent to mislead
financial statement users is both unethical and illegal. According to generally accepted accounting
a.
b.
Harris
c.
d.
CASE 2.
6
30 Minutes, Easy
The mission of the PCAOB is stated as follows: The PCAOB is a private-sector non-profit corporation
reports.”
ETHICS
,
FRAUD & CORPORATE GOVERNANC
E
James R. Doty, chair
PUBLIC COMPANY ACCOUNTING OVERSIGHT BOAR
D
The Sarbanes-Oxley Act of 2002 directs the PCAOB to establish auditing and related professional
practice standards for registered public accounting firms to follow in the preparation and issuance of
audit reports.
Lewis H. Ferguson
The enforcement authority of the PCAOB is a broad investigative and disciplinary authority over
registered public accounting firms and persons associated with such firms for noncompliance with the
Sarbanes-Oxley Act of 2002. The PCAOB is directed to implement this authority by establishing by
rule fair procedures for the investigation and discipline of registered public accounting firms and
to those reports.
The members of the PCAOB are:
b.
c.
d.
San Jose, CA 95134
INTERNE
T
GATHERING FINANCIAL INFORMATIO
N
The most recent figure is in the far left column. The next column to the right shows income for the same
Cash provided by operations for the year to date appears in the left column of the Condensed Consolidated
Note: We cannot supply quantitative answers to parts b through e, because they vary from quarter to quarter.
Our answers indicate only where the data are found in Cisco System’s latest financial statements.
CASE 2.7
25 Minutes, Easy
Cash and Cash Equivalents is the first item in the balance sheet. The end-of-quarter balance appears in the
a. The business address of Cisco Systems is:
170 West Tasman Drive