Assumption violated
1. Periodicity
2. Monetary unit
3. Going concern
4. Economic entity
1. h.
2. g.
3. f.
4. a.
5. d.
6. e.
7. i.
8. b.
9. c.
The three primary forms of
business organizations
include sole proprietorship,
partnership, and corporation.
The major advantage of a
corporation is limited
liability. Stockholders of a corporation are not held personally responsible for the financial
obligations of the corporation. Owners of sole proprietorships or partnerships remain personally
Typical financing activities include issuing common stock, borrowing, and
repayment of borrowing. Typical investing activities include the purchase of
Assets – cash, accounts receivable, supplies, and equipment.
Problem 1-6B (LO 1-7)
Problem 1-7B (LO 1-7)
ADDITIONAL PERSPECTIVES
Additional Perspective 1-1
Requirement 1
Requirement 2
Requirement 3
Liabilities – accounts payable, salaries payable, and notes payable.
Income statement – revenues less expenses equal net income during an interval
of time.
Statement of stockholders’ equity – changes in common stock and retained earnings during an
Additional Perspective 1-2
Requirement 1
Total assets = $1,756,053 ($ in thousands)
Total liabilities = $534,866
Requirement 2
Consolidated Statements of Operations
Requirement 3
Net sales = $3,475,802 ($ in thousands)
Requirement 4
Inflows Outflows
Investing activities Sale of available-for-sale
securities
Purchase of
available-for-sale securities
Financing activities Net proceeds from stock
Cash dividends paid
Requirement 5
The company’s auditor is Ernst & Young LLP. The auditor states, “In our opinion, the
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of American Eagle Outfitters, Inc. at February 2, 2013
and January 28, 2012, and the consolidated results of their operations and their cash
Requirement 4
Additional Perspective 1-3
Requirement 1
Total assets = $477,974 ($ in thousands)
Assets = Liabilities + Stockholders’ Equity
Requirement 2
Statements of Income
Requirement 3
Net sales = $1,124,007 ($ in thousands)
Requirement 4
Inflows Outflows
Investing activities Proceeds from the sale of
Purchases of property and
Financing activities Excess tax benefit from
Payment of dividends
Requirement 5
The company’s auditor is Deloitte & Touche LLP. The auditor states, “In our opinion,
such financial statements present fairly, in all material respects, the financial position
Additional Perspective 1-4
Requirement 1
The total assets of American Eagle are higher than the total assets of Buckle.
Requirement 2
The total liabilities of American Eagle are higher than the total liabilities of Buckle. A
higher amount of liabilities does not necessarily mean a higher chance of bankruptcy.
Requirement 3
The ratio of total liabilities to total assets can be used as one measure of a company’s
Requirement 4
The net income of American Eagle is higher than the net income of Buckle. When one
company has a higher net income than another company does, this does not always
Requirement 5
Net income provides a measure of a company’s ability to generate profit for its
owners. In the case of American Eagle and Buckle, the owners are the stockholders of
Additional Perspective 1-5
It is the responsibility of auditors to act independently of a company when providing a
professional opinion as to the conformity of the company’s financial statements with
GAAP. An auditor’s ethics might be challenged because of the need to retain the client
This problem is further worsened by the company offering an additional $700,000 in
client revenue for consulting and tax preparation services. If the auditor upsets the
Additional Perspective 1-6
Requirement 1
The mission of the U.S. Securities and Exchange Commission is to protect investors,
The SEC was created to restore investor confidence in our capital markets by
The Securities Act of 1933 has two basic objectives:
require that investors receive financial and other significant information
prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The Securities Exchange Act of 1934 created the Securities and Exchange
Additional Perspective 1-6 (continued)
Requirement 2
The four main financial statements discussed by the SEC are: (1) balance sheets;
A balance sheet provides detailed information about a company’s assets, liabilities and
An income statement is a report that shows how much revenue a company earned over
a specific time period (usually for a year or some portion of a year). An income
Cash flow statements report a company’s inflows and outflows of cash from three
The statement of shareholders’ equity shows changes in the interests of the company’s
The disclosure notes provide additional information beyond that reported in the
financial statements. This information includes items such as significant accounting
MD&A is management’s opportunity to provide investors with its view of the
financial performance and condition of the company. It’s management’s opportunity to
Additional Perspective 1-6 (concluded)
Requirement 3
The mission of the FASB is to establish and improve standards of financial accounting
The Securities and Exchange Commission (SEC) has statutory authority to establish
financial accounting and reporting standards for publicly held companies under the
Requirement 4
(a) Yes; ConocoPhillips properly prepared the four financial statements.
(b) ConocoPhillips is an international, integrated energy company. The business is
(c) In the segment disclosure note, the company reports amounts for items such as
The functions of financial accounting are to measure business activities of a company
The four financial statements include:
1. Income statement, which shows revenues and expenses during the reporting period.
Additional Perspective 1-7
2. Statement of stockholders’ equity, which shows the change in stockholders’ equity
3. Balance sheet, which shows a company’s resources (assets), creditors’ claims to
4. Statement of cash flows, which shows a company’s inflows and outflows of cash
The role of auditors is to help ensure that management has in fact appropriately
applied Generally Accepted Accounting Principles in preparing the company’s