1-1 Solutions
CHAPTER 1
INTRODUCTION TO BUSINESS ACTIVITIES AND
OVERVIEW OF FINANCIAL STATEMENTS
AND THE REPORTING PROCESS
Questions, Exercises, and Problems: Answers and Solutions
1.1 The first question at the end of each chapter asks the student to review the
1.2
Setting Goals and Strategies
: Although a charitable organization must obtain
sufficient resources to fund its operations, it would not pursue profits or
wealth increases as goals. A charitable organization would direct its efforts
1.3 The balance sheet shows assets, liabilities and shareholders’ equity as of a
Solutions 1-2
1.4 The auditor evaluates the accounting system, including its ability to record
transactions properly and its operational effectiveness, and also determines
1-3 Solutions
1.4 continued.
1.5 Management, under the oversight of the firm’s governing board, prepares the
1.7 Accounts receivable represent amounts owed by customers for goods and
services they have already received. The customer, therefore, has the
1.8 Both kinds of capacity represent investments in long-lived assets, with useful
1.9 A calendar year ends on December 31. A fiscal year ends on a date that is
determined by the firm, perhaps based on its business model (for example,
1.10 Most firms report the amounts in their financial statements using the currency
1.11 A current item is expected to result in a cash receipt (assets such as
accounts receivable) or a cash payment (liabilities such as accounts payable)
within approximately one year or less. A noncurrent item is expected to
Solutions 1-4
1-5 Solutions
1.12 Historical amounts reflect the amounts at which items entered the firm’s
balance sheet, for example, the acquisition cost of inventory. Historical
1.13 An income statement connects two successive balance sheets through its
effect on retained earnings. Net income that is not paid to shareholders as
1.14 The U.S. Securities and Exchange Commission (SEC) is the government
agency that enforces the securities laws of the U.S., including those that
1.15 U.S. GAAP must be used by U.S. SEC registrants and may be used by other
1.16 The purpose of the conceptual framework developed by the Financial
Accounting Standards Board (FASB) is to guide the standard setting
1.17 The accrual basis of accounting is based on assets and liabilities, not on cash
receipts and disbursements. It provides a better basis for measuring
Solutions 1-6
performance because it is based on revenues (inflows of assets from
1-7 Solutions
1.18 (Colgate Palmolive Company; understanding the balance sheet.)
a. Property, plant and equipment, net = $3,015.2 million.
1.19 (Mayr Melnhof Karton; understanding the income statement.)
a. Cost of Goods Sold = 1,331,292.1 thousand.
e. Effective tax rate = 54,289.9/170,863.9 = 31.8%.
Solutions 1-8
1.20 (Bed, Bath and Beyond, Inc.; understanding the statement of cash flows.)
1-9 Solutions
1.20 continued.
1.21 (Alcatel-Lucent; balance sheet relations.) (Amounts in Millions)
Share-
Current Noncurrent Current Noncurrent holders’
Assets + Assets = Liabilities + Liabilities + Equity
1.22 (Gold Fields Limited; balance sheet relations.) (Amount in Millions of Rand)
Share-
1.23 (Rolls Royce Group Plc.; income statement relations.)
Sales …………………………………………………………………………………. £ 7,435
Less Cost of Sales ………………………………………………………………. (6,003)
Solutions 1-10
1.24 (General Motors Corporation; income statement relations.)
Sales ……………………………………………………………………………….. $ 207,349
1-11 Solutions
1.25 (Gold Fields; retained earnings relations) (Amounts in Millions of Rand)
1.26 (Sterlite Industries; retained earnings relations.) (Amounts in Millions of
Rupees)
1.27 (Target Corporation; cash flow relations.) (Amounts in Millions)
1.28 (Edeneor S.A.; cash flow relations.) (Amounts in Millions)
Solutions 1-12
1-13 Solutions
1.29 (Kenton Limited; preparation of simple balance sheet; current and noncurrent
classifications.)
January 31,
2008
Assets
Cash …………………………………………………………………………………. £ 2,000
Inventory ………………………………………………………………………….. 12,000
Prepaid Rent ………………………………………………………………………. 24,000
Total Current Assets ………………………………………………………… £ 38,000
1.30 (Heckle Group; preparation of simple balance sheet; current and noncurrent
classifications.)
June 30,
2008
Assets
Cash ………………………………………………………………………………. 720,000
Total Current Assets ……………………………………………………… 720,000
Property, Plant and Equipment …………………………………………… 600,000
Solutions 1-14
1-15 Solutions
1.31 Boeing Company; accrual versus cash basis of accounting.)
a. Net Income = Sales Revenue – Expenses
= $66,387 million – $62,313 million = $4,074 million.
b. Cash collections may exceed revenues for at least two reasons. First,
c. Cash payments may be less than expenses for at least two reasons.
First, Boeing may have received goods and services from suppliers, but
1.32 (Fonterra Cooperative Group Limited; accrual versus cash basis of
accounting.)
Calculation of net income for the year ended May 31, 2007:
May 31,
2007
Calculation of net cash flow for the year ended May 31, 2007:
May 31,
2007
Cash Receipts from Customers …………………………………………… $ 13,882
Solutions 1-16
Miscellaneous Cash Receipts ……………………………………………… 102
Total Cash Receipts …………………………………………………….. $ 13,996
1-17 Solutions
1.33 (Dragon Group International Limited; balance sheet relations.) (Amounts in
Millions)
The missing items appear in boldface type below.
2007 2006
Assets
1.34 (Lenovo Group, Inc.; balance sheet relations.)
The missing items appear in boldface type below.
2008 2007
1.35 (Colgate Palmolive Company; income statement relations.)
The missing items appear in boldface type below.
2007 2006 2005