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P1-55, cont.
Requirement 3
P1-55, cont.
Requirement 5
Critical Thinking
Tying It All Together Case 1-1
Before you begin this assignment, review the Tying It All Together feature in the chapter.
Starbucks Corporation is the premier roaster, marketer, and retailer of specialty coffee in the world,
operating in 68 countries. Starbucks generates revenues through company-operated stores, licensed
stores, and consumer packaged goods. In 2015, revenues from company-operated stores accounted for
79% of total revenues. Starbucks states that its retail objective is to be the leading retailer and brand of
coffee and tea by selling the finest quality coffee, tea, and related products. In addition, the company
strives to provide the Starbucks Experience by exemplifying superior customer service and providing
clean and well-maintained stores. Part of this experience involves providing free internet service to
customers while they are enjoying their food and beverages.
Requirements
1. How would the cost of internet service be reported by Starbucks and on which financial statement?
2. Suppose Starbucks receives a bill from its internet service provider but has not yet paid the bill.
What would be the effect on assets, liabilities, and equity when Starbucks receives this bill?
3. What would be the effect on assets, liabilities, and equity when Starbucks pays its internet service
bill?
4. Suppose Starbucks expects that the cost of internet service will increase by 4% in the coming year.
What would be the impact on Starbucks’ net income? How might Starbucks overcome this impact?
SOLUTION
Requirement 4
Decision Case 1-1
Let’s examine a case using Greg’s Tunes and Sal’s Silly Songs. It is now the end of the first year of
operations, and the stockholders want to know how well each business came out at the end of the year.
Neither business kept complete accounting records, and no dividends were paid. The businesses throw
together the data shown on the next page at year-end:
To gain information for evaluating the businesses, the stockholders ask you several questions. For each
answer, you must show your work to convince the stockholders that you know what you are talking
about.
Requirements
1. Which business has more assets?
2. Which business owes more to creditors?
3. Which business has more stockholders’ equity at the end of the year?
4. Which business brought in more revenue?
5. Which business is more profitable?
6. Which of the foregoing questions do you think is most important for evaluating these two
businesses? Why?
7. Which business looks better from a financial standpoint?
SOLUTION
Requirements
1. Suppose you are the chief financial officer (CFO) responsible for the financial statements of Philip
Morris. What ethical issue would you face as you consider what to report in your company’s annual
report about the cash payments? What is the ethical course of action for you to take in this situation?
2. What are some of the negative consequences to Philip Morris for not telling the truth? What are some
of the negative consequences to Philip Morris for telling the truth?
SOLUTION
Fraud Case 1-1
Exeter is a building contractor on the Gulf Coast. After losing a number of big lawsuits, it was facing its
first annual net loss as the end of the year approached. The owner, Hank Snow, was under intense
pressure from the company’s creditors to report positive net income for the year. However, he knew that
the controller, Alice Li, had arranged a short-term bank loan of $10,000 to cover a temporary shortfall of
cash. He told Li to record the incoming cash as “construction revenue” instead of a loan. That would
nudge the company’s income into positive territory for the year, and then, he said, the entry could be
corrected in January when the loan was repaid.
Requirements
1. How would this action affect the year-end income statement? How would it affect the year-end
balance sheet?
2. If you were one of the company’s creditors, how would this fraudulent action affect you?
SOLUTION
Financial Statement Case 1-1
This and similar cases in later chapters focus on the financial statements of a real company—Target
Corporation, a discount merchandiser that sells a wide assortment of general merchandise and food.
Target sells both national and private and exclusive brands, with approximately one-third of its 2015
sales related to private and exclusive brands. As you work each case, you will gain confidence in your
ability to use the financial statements of real companies.
Requirements
1. How much in cash (including cash equivalents) did Target Corporation have on January 30, 2016?
2. What were the company’s total assets at January 30, 2016? At January 31, 2015?
3. Write the company’s accounting equation at January 30, 2016, by filling in the dollar amounts:
Assets Liabilities Equity= +
4. Identify total sales (revenues) for the year ended January 30, 2016. How much did total revenue
increase or decrease from fiscal year 2014 to fiscal year 2015? (Because Target’s fiscal year end of
January 30, 2016 ends at the beginning of 2016, the majority of Target’s financial results were obtained
in the calendar year of 2015. As a result, Target calls the fiscal year 2015 even though the year reported
on the annual report ends on January 30, 2016.)
5. How much net income (net earnings) or net loss did Target earn for 2015 and for 2014? Based on net
income, was 2015 better or worse than 2014?
6. Calculate Target Corporation’s return on assets for the year ending January 30, 2015.
7. How did Target Corporation’s return on assets compare to Kohl’s Corporation return on assets?
SOLUTION
