Additional Perspective 3-3
Requirement 1
Current assets equal $276,873 thousand. Current assets include cash and cash
Requirement 2
Current liabilities equal $128,956 thousand. Current liabilities include accounts
payable, accrued employee compensation, accrued store operating expenses, gift
Requirement 3
Prepaid expenses and accrued liabilities likely relate to adjusting entries.
Requirement 4
The change in retained earnings is -$90,328 thousand (= $172,711 − $263,039).
Requirement 5
The amount of net income is $164,305 thousand.
Requirement 6
The change in retained earnings represents net income for the year less dividends. If
the change in retained earnings is -$90,328 thousand and net income equals
Additional Perspective 3-4
Requirement 1
For American Eagle, the ratio of current assets to total assets is 0.65 (= $1,141,800 /
$1,756,053). For Buckle, the ratio of current assets to total assets is 0.58 (=
Requirement 2
For American Eagle, the ratio of current liabilities to total liabilities is 0.81 (=
$435,902 / $534,866). For Buckle, the ratio of current liabilities to total liabilities is
Requirement 3
For American Eagle, the dividend payout ratio is 1.78 (= $414,301 / $232,108). For
What is the issue?
By reporting the $80,000 as Service Revenue instead of Unearned Revenue, before-tax
profit will increase from $280,000 to $360,000. This adjustment would make it appear
Who are the parties affected?
As the assistant controller (accountant), you should understand that your
responsibilities include accurately recording and reporting the company’s activities. By
What factors should you consider in making your decision?
Because you are new to the position, you might not be sure that it’s right for you to
question any decision of the company’s president. You have just been assigned and
don’t want to lose your job. If you do make the adjustment, then the company’s
Additional Perspective 3-6
(Note to instructor: Answers are based off McDonald’s December 2012 annual report,
and dollar amounts are in millions.)
Requirement 1
Revenues exceed expenses because the company reports net income of $5,464.8.
Requirement 2
Net income decreased from $5,503.1 to $5,464.8.
Requirement 3
Current assets include cash and equivalents, accounts and notes receivable, inventories,
Requirement 4
Current liabilities include accounts payable, income taxes, other taxes, accrued
Requirement 5
Retained earnings increased $2,570.5, from $39,278.0 to $36,707.5.
Requirement 6
The amount of dividends paid equals $2,896.6.
Requirement 7
In most instances, the change in retained earnings equals net income less dividends.
For McDonald’s, net income in requirement 1 ($5,464.8) less dividends in requirement
Additional Perspective 3-7
Requirement 1
Prepaid revenues occur when cash is received before the related revenues are reported.
Prepaid expenses occur when cash (or an obligation to pay cash) is paid before the
Requirement 2
The adjusting entry for prepaid expenses includes a debit to an expense and a credit to
an asset. The adjusting entry for unearned revenue includes a debit to unearned
Requirement 3
The adjusting entry for accrued expenses includes a debit to an expense and a credit to
a liability. The adjusting entry for accrued revenues includes a debit to an asset and a