978-1133939283 Chapter 1 Solution Manual Part 3

Unlock access to all the studying documents.

View Full Document

$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

1-17

$164,000

$ 5,800

$—

4,000

20,600

$ 5,200 $21,000

26,400 1,400

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

1-18

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.

1-19

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

1-20

●

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.

1-21

●

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.

1-22

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,

1-23

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-

1-24