Reporting in Action — BTN 3-1 (Concluded)
6. The balance of Income Summary before it is closed as of December 31,
7. Solution depends on the financial statements accessed.
Financial & Managerial Accounting, 5th Edition
224
Comparative Analysis — BTN 3-2
($ in thousands)
1. Polaris
Current year, profit margin = $227,575 / $2,656,949 = 8.6%
2. Polaris is more successful on the basis of profit margin in both the
current and prior years relative to Arctic Cat. Both companies
3. Polaris’s current ratios: ($ in thousands)
Current year …………………………. $878,676 / $615,531 = 1.43
4. In both years, Arctic Cat has the higher current ratio (2.65 vs 1.43 for
5. Polaris’s current ratio improved, increasing from 1.38 to 1.43. Arctic
6. Arctic Cat’s current ratio is above (better than) the industry average for
Ethics Challenge — BTN 3-3
1. GAAP requires that annual deprecation be accumulated in a contra–
asset account, called Accumulated Depreciation. While property, plant,
2. One strength of Smith’s method would be the ease of preparing the
balance sheet. The property, plant, and equipment balance in the
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Boland’s approach. As a professional,
Boland is required to uphold the standards of her profession and, thus,
the decision is an ethical one for her.
Financial & Managerial Accounting, 5th Edition
226
Communicating in Practice — BTN 3-4
TO: _____________________
FROM: _____________________
DATE: ______________________
SUBJECT: CLARIFICATIONS—OBJECTIVE OF THE CLOSING PROCESS
[Following is a sample of what the memorandum’s contents might include.]
When we speak of “closing the books” or the closing process we are not
talking about ending or closing the business nor doing anything that reflects
this thinking in the financial statements. Let me use an analogy to explain the
concept of the closing process and then you will see the distinction more
clearly.
Scoreboards are used to temporarily hold information that will allow us to
determine who won or lost in an athletic game or event. When the athletic
event is over, the result of the game is permanently recorded elsewhere—
probably in the team’s record book. If the scoreboard was not cleared before
The revenue and expense accounts temporarily hold the information to
determine if the owner(s) won or lost in the game of business. Each fiscal
period should be viewed as a separate game. After the data in these accounts
has allowed us to determine if the owner(s) won or lost, in other words, the net
[Note: The memorandum need not discuss the income summary account since the assignment
requires explaining the concept, not the procedure.]
Taking It to the Net — BTN 3-5
1. The Gap’s main brands (stores) are The Gap, Old Navy, and Banana
Republic. It also has Piperlime and Athleta brands.
2. The Gap’s fiscal year-end is January 28, 2012. It appears that The Gap’s
fiscal year-end is consistently set as of the Saturday closest to January
31 – meaning it falls in the last week of January or first week of
February.
Teamwork in Action — BTN 3-6
Note that there is no specific solution to this activity. Still, the presentation
of each expert team should reflect the following summary points:
Before Adjusting
Balance Sheet Income Statement
Type Account Account Adjusting Entry
Prepaid Expenses Asset overstated Expense understated Dr. Expense
Cr. Asset*
Unearned Revenues Liability overstated Revenue understated Dr. Liability
Cr. Revenue
Accrued Expenses Liability understated Expense understated Dr. Expense
Cr. Liability
Accrued Revenues Asset understated Revenue understated Dr. Asset
Cr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
Some implementation notes: This activity allows all students to be actively
involved in the learning process. Encourage students to take the opportunity
Entrepreneurial Decision — BTN 3-7
1. a. To record the collection of cash from sale of the gift certificate in
advance of delivery of merchandise to the customer:
2. Carrying less inventory would allows ash&dans to save the costs of
carrying that added inventory; such as warehousing costs, insurance,
3. If it carries additional inventory, ash&dans can potentially sell more
merchandise and increase its profits. This might further fuel increased
sales as additional customers might be attracted to its products. On
Hitting the Road — BTN 3-8
There is no formal solution to this field activity. The instructor may wish to
Global Decision — BTN 3-9
1. Piaggio’s Note 2.2 (Accounting Policies — Recognition of revenues)
reports that:
“According to IFRS, sales of goods are recognised when the goods are
dispatched and the company has transferred the significant risks and
accrual basis.”
2. (Euro in thousands)
Profit margin = 47,023 EUR / 1,516,483 EUR = 3.1%
3. Current ratio (in thousands Euro)
4. Analysis: Piaggio’s current ratio declined (is worse) for the current year.
This puts Piaggio in a worse liquidity position (meaning it is less able to