CHAPTER 2
THE FINANCIAL STATEMENTS
BRIEF EXERCISES
BE2–1
2012
2012 2012
Beginning Ending
Retained 2012 2012 2012 Retained
Earnings + Revenues – Expenses – Dividends = Earnings
BE2–2
(2) Long-term debt financed $38 billion of the assets.
Long-term debt divided by total assets = $38/$89 = 42.7%
BE2–3
(a) Working capital = current assets – current liabilities. Boeing’s current assets total $57 billion, less
$45 billion of current liabilities, gives the company working capital of $12 billion. Another measure
BE2-4
2012 2011 2010
Net cash flow from operating activities ……………………. $ 36,100 $ 34,743 $ 35,222
Net cash flow from investing activities …………………….. (19,680) (21,250) (21,449)
Net cash flow from financing activities …………………….. (17,673) (11,649) (15,849)
BE2–5
IFRS Format
Non-current assets 154,073
Current assets 115,397
GAAP Format
Non-current assets 154,073
Current assets 115,397
Total 269,470
EXERCISES
E2–1
Operating,
Investing, or
Financing
Balance Sheet
Income
Statement
Statement of
Cash Flows
Statement of
Stockholders
Equity
1
Financing
Yes
No
Yes
Yes
2
Operating
Yes
Yes
Cannot tell
Yes
3
Operating
Yes
Yes
Yes
Yes
4
Investing
Yes
No
Cannot tell
No
5
Financing
Yes
No
Yes
No
6
Financing
Yes
No
Yes
Yes
7
Investing
Yes
No
Yes
No
8
Operating
Yes
No
Yes
No
E2–2
Operating,
Investing, or
Financing
Balance Sheet
Income
Statement
Statement of
Cash Flows
Statement of
Shareholders
Equity
1
Financing
Yes
No
Yes
No
2
Operating
Yes
No
No
No
3
Operating
Yes
Yes
Yes
Yes
4
Operating
Yes
Yes
No
Yes
5
Investing
Yes
No
Yes
No
6
Investing
Yes
Cannot tell
Yes
Cannot tell
7
Financing
Yes
No
Yes
No
8
Operating
Yes
No
Yes
No
E2–3
a. Balance sheet g. Balance sheet m. Balance sheet
E2–4
2. Income Statement
4. Statement of Cash Flow, Balance Sheet
6. Income Statement, Balance Sheet
8. Balance Sheet, Income Statement
E2–5
2010
2010 2010
Beginning Ending
Retained 2010 2010 2010 Retained
2012
2012 2012
Beginning Ending
Retained 2012 2012 2012 Retained
Earnings + Revenues – Expenses – Dividends = Earnings
E2–6
2010
2010 Ending Retained Earnings 2010 Beginning Retained Earnings
or = + Revenues for 2010
2011Beginning Retained Earnings – Expenses for 2010
– Dividends for 2010
Revenue for 2012 is $1,717.
2010 2011 2012
Sales growth (%) …………………………………………………. N/A 10.0% 12.8%
Profits …………………………………………………………………. ($24) ($86) $ 167
Profits as a percentage of sales ……………………………….. (1.7%) (5.7%) 9.7%
E2–7
Solvency primarily indicates a company’s ability to meet its debt payments as they come due. Current
liabilities are obligations that will be settled within one year or the company’s operating cycle, whichever is
longer, through the use of current assets or the creation of new current liabilities. Current assets are those
assets that will be consumed or converted to cash within one year or the company’s operating cycle,
E2–8
Method 1 Method 2
Working capital as of 12/31/2012
($500 – $150) ……………………………………………………….. $ 350 $ 350
compliance with the minimum working capital covenant.
E2–9
2012 2011 2010
Beginning cash balance ………………………………………….. $ 7,662 $ Y* $ 5,718
Net cash flow from operating activities ……………………. 11,491 X 10,173
E2–10
2012 2011 2010
Beginning cash balance ………………………………………….. $ 829** $ 1,261 $ X
Net cash flow from operating activities ……………………. 2,064 1,356 1,561
Net cash flow from investing activities …………………….. X (1,022) (1,265)
E2–11
Lana & Sons
Statement of Cash Flows
For the Year Ended
Cash flows from operating activities:
Cash collection from services provided ………………………………………….. $4,000
Cash payment for expenses …………………………………………………………. (3,000)
Net cash increase (decrease) from operating activities ……………… $1,000
Cash flows from investing activities:
Purchase of machinery ………………………………………………………………… $(3,000)
Net cash increase (decrease) from investing activities ………………. (3,000)
E2–12
Emory Inc.
Statement of Cash Flows
For the Year Ended
Cash flows from operating activities:
Cash collection from services provided ………………………………………….. $40,000
Cash payment for expenses …………………………………………………………. (23,000)
Net cash increase (decrease) from operating activities ……………… $17,000
Cash flows from investing activities:
Purchase of equipment …………………………..…………………………………… $(23,000)
Net cash increase (decrease) from investing activities ………………. (23,000)
Cash flows from financing activities:
E2–13
George’s Business
Income Statement
For the Year Ended
Lease revenue ……………………………………………………………………………………… $3,000
George’s Business
Statement of Stockholders’ Equity
For the Year Ended
Contributed Retained
Capital Earnings
Beginning Balance $ 0 $ 0
E2–13 Concluded
George’s Business
Balance Sheet
As of
Assets
Cash …………………………..…………………………………………………………………….. $ 2,700
Land …………………………..…………………………………………………………………….. 8,000
Total assets …………………………………………………………………………………………. $ 10,700
George’s Business
Statement of Cash Flows
For the Year Ended
Cash flows from operating activities:
Cash collections from customers ………………………………………….. $ 3,000
Cash payments for expenses ………………………………………………… (2,500)
Net cash flow from operating activities …………………………….. $ 500
Cash flows from investing activities:
Increase in cash ………………………………………………………………………. $ 2,700
Beginning cash balance ……………………………………………………………. 0
Ending cash balance ………………………………………………………………… $ 2,700
Upon examining George’s financial statements the bank would certainly be concerned because George paid
out more in dividends than the net income he realized during the year. George’s statement of retained
E2–14
Mary’s Business
Income Statement
For the Year Ended
Lease revenue ……………………………………………………………………………………… $ 12,000
Mary’s Business
Statement of Stockholders’ Equity
For the Year Ended
Contributed Retained
Capital Earnings
Beginning Balance $ 0 $ 0
Mary’s Business
Balance Sheet
As of
Assets
Cash …………………………..…………………………………………………………………….. $ 2,000
Land …………………………..…………………………………………………………………….. 40,000
Total assets …………………………………………………………………………………………. $ 42,000
Liabilities & Stockholders’ Equity
E2–14 Concluded
Mary’s Business
Statement of Cash Flows
For the Year Ended
Cash flows from operating activities:
Cash collections from customers ………………………………………….. $ 12,000
Cash payments for expenses ………………………………………………… (14,000)
Net cash flow from operating activities …………………………….. $ (2,000)
Cash flows from investing activities:
Beginning cash balance ……………………………………………………………. 0
Ending cash balance ………………………………………………………………… $ 2,000
Mary should not have paid a cash dividend of $1,000 because of her dwindling cash position and negative
earnings during the year. The dividend was a return of capital rather than a return on capital.
PROBLEMS
P2–1
1. e 9. a 17. c
3. a 11. c 19. d
5. g 13. c 21. e
X Company
Balance Sheet
(Date)
Assets
Current assets:
Cash ……………………………………………………………………….. $XX
Short-term investments ……………………………………………. XX
Accounts receivable …………………………………………………. $XX
Investment fund for plant expansion ………………………….. XX
Total long-term investments …………………………………. XX
Property, plant, & equipment:
Property …………………………..……………………………………… $XX
Building …………………………………………………………………… $XX
P2–1 Concluded
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable …………………………………………………….. $XX
Wages payable ………………………………………………………… XX
Dividend payable …………………………..…………………………. XX
Short-term notes payable …………………………………………. XX
Current portion due of long-term debt ………………………. XX
P2–2
1. e 6. e 11. e
3. e 8. f 13. f
P2–2 Concluded
X Company
Income Statement
For the Period Ended
Revenues:
Sales ……………………………………………………………………….. $XX
Fees earned ……………………………………………………….……. XX
Interest income ……………………………………………………….. XX
Dividend income …………………………..………………………….. XX
Salesmen commission expense ……………………………… XX
Depreciation expense…………………………………………… XX
Office supplies expense …………………………..……………. XX
Advertising expense …………………………………………….. XX
Total operating expenses …………………………………. XX
Other expenses:
P2–3
Nimmo Brothers Corporation
Statement of Cash Flows Balance Sheet
for the year ending 12/31/2014 as of 12/31/2014
Cash-Operating 275 Cash 825
Revenue 4,200 Contributed Capital 1,200
Expenses 4,050 Retained Earnings 580
Net Income 150 Total 3,975
Statement of Stockholders’ Equity
for the year ending 12/31/2014
Contributed Retained
Capital Earnings