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1.
$248,000
$ 70,400
111,000
$141,600 Accounts payable $ 7,400
9,100 2,700
2. The company's ability to pay its bills or its liquidity appears good because it has cash
Assets
Cash
Owner's capital, November 30, 2013
Sears Labs
Balance Sheet
P8. Preparation and Interpretation of Financial Statements
Design service revenue
Expenses:
Sears Labs
Income Statement
For the Year Ended November 30, 2014
Revenues:
Liabilities
Accounts receivable Salaries payable
Sears Labs
Statement of Owner's Equity
November 30, 2014
For the Year Ended November 30, 2014
Net income for the year
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
$164,000
$ 5,800
$—
4,000
20,600
$ 5,200 $21,000
26,400 1,400
2.
Bachino's Pizza
Expenses:
For the Year Ended September 30, 2014
Equipment rental expense
Revenues:
Net income for the year
Pizza revenue
The owner of a sole proprietorship receives all the profit (or losses) of the company
September 30, 2014
Bachino's Pizza
Statement of Owner's Equity
Cash Accounts payable
Income Statement
For the Year Ended September 30, 2014
P9. Preparation and Interpretation of Financial Statements
Bachino's Pizza
Investments by owner
Salaries payable
Assets Liabilities
Balance Sheet
Owner's capital, September 30, 2013
Accounts receivable
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
3.
4.
P10. Use and Interpretation of Financial Statements
The income statement shows net income of $3,600 earned by the company over a
period of time. The amount of net income is necessary for the preparation of the
statement of owner's equity. The statement of owner's equity shows an ending bal-
cent, or $0.0660 on each dollar of assets invested. Moreover, the company might ex-
The company appears to be very profitable because it has earned $3,600 of net income
on revenues of $5,925. The owner also withdrew money in the amount of $2,400. How-
cordingly, a banker studies the company's liquidity and cash flows as well as its
When deciding whether to make a loan to a company, a banker evaluates the com-
pany's ability to pay interest charges and repay the loan at the appropriate time. Ac-
fairly and conform to GAAP in all material respects.
by a CPA. The audit would determine that the financial statements present the data
of $13,350 and cash of only $7,125.
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
ning its business). Financing activities include obtaining capital from owners and from
Cases
creditors, such as banks and suppliers. They also include repaying creditors and paying
a return to the owners. Investing activities include buying land, buildings, equipment, and
C1. Conceptual Understanding: Business Activities and Management Functions
The three basic activities in which Costco will engage to achieve its goals are financing
activities (obtaining adequate funds or capital to operate its business), investing activities
(spending the capital it receives so that it will be productive), and operating activities (run-
management must perform to fulfill its responsibilities are obtaining financial resources
(assets) so the company can continue operating (financial management); investing the
(asset management); developing and producing goods and services (operations manage-
financial resources of the business in productive assets that support the company's goals
producing, and selling goods and services; and paying taxes to the government.
Costco's management is the group of people who have overall responsibility for operating
the business and for meeting the company's profitability and liquidity goals. The functions
Assets are economic resources owned by a business that are expected to benefit future
operations. The people in an organization are not assets of the business because they are
not owned by the business. Businesses pay their employees on a periodic basis (hourly,
weekly, monthly, or annually); they do not buy employees. Salaries, wages, and other
costs associated with employment are considered expenses and appear on the income
statement.
ment); selling, advertising, and distributing goods and services (marketing management);
hiring, evaluating, and compensating employees (human resource management); and cap-
turing, organizing, and communicating data about all aspects of the company's operations
(information management). Accounting is covered by the last function.
C2. Conceptual Understanding: Concept of an Asset
of hiring, training, motivating, and compensating high-quality employees who will benefit
Southwest Airlines considers its people to be its most important asset because of the costs
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by public companies.
C3. Conceptual Understanding: Generally Accepted Accounting Principles
Generally accepted accounting principles (GAAP) encompass the conventions, rules, and
procedures necessary to define accepted practice at a particular time. When financial
Some bodies that influence GAAP are as follows:
ments and will be able to assess a company's performance with confidence.
statements are prepared in accordance with GAAP and audited by an independent CPA,
Public Company Accounting Oversight Board (PCAOB): Regulates financial reporting
International Accounting Standards Board (IASB): Sets international accounting
standards.
Internal Revenue Service (IRS): Influences practice through rules for determining
income tax liabilities. These rules sometimes conflict with GAAP.
Governmental Accounting Standards Board (GASB): Issues accounting standards for
government entities.
Financial Accounting Standards Board (FASB): The most important body that issues
generally accepted accounting principles.
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1.
●
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7.
The names CVS gives its four basic financial statements are as follows:
C4. Interpreting Financial Reports: Analysis of Four Basic Financial Statements
Consolidated statements of income
Consolidated balance sheets
CVS was audited by Ernst & Young LLP. The auditors' report is important because it
tells whether or not the company's financial statements and accompanying informa-
tion are prepared in accordance with generally accepted accounting principles. If
this is so, then the reader of the financial statements can rely on them and analyze
them. The auditors' report lends credibility to the financial statements.
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
2.
3.
With sales of $107,100 million and total assets of $64,543 million, CVS is much larger
than Southwest, which has revenues of $15,658 million and total assets of $18,068 mil-
C5. Comparison Analysis: Performance Measures and Financial Statements
CVS has net income (earnings) of $3,457 million, which is about 19 times more than
CVS has cash and cash equivalents of $1,413 million compared to Southwest's cash
and cash equivalents of $829 million. CVS's cash decreased by $14 million compared
to the $432 million decrease by Southwest. CVS had cash flows from operating activi-
ties of $5,856 million compared with Southwest's cash flows from operating activities
of $1,385 million.
from 2009 to 2010 but then decreased greatly from 2010 to 2011.
Southwest's earnings of $178 million. CVS's net income declined from 2009 to 2010,
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
5.
The ethical situations are presented for discussion purposes. Students are likely to have
many different viewpoints.
The alternative courses of action are to disclose or not to disclose the employee's
Note to Instructor: Answers will vary depending on company selected.
C7. Continuing Case: Annual Report Project
C6. Ethical Dilemma: Professional Situations
The alternative courses of action are to report or not to report the $200 in cash. Ac-
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