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17
P1–2
1. Realty businesses, such as Paradise Realty, are service businesses that aid
their clients in buying or selling real estate.
2. a. Wages expense, $29,850 ($69,300 – $14,400 – $12,000 – $8,100 – $4,950)
b. Net income, $80,000 ($149,300 – $69,300)
c. Net income for November, $80,000
i. Retained earnings, $44,000 [see (e)]
j. Total stockholders’ equity, $314,000 ($270,000 + $44,000) from statement
of stockholders’ equity
k. Total liabilities and stockholders’ equity, $321,200 ($7,200 + $314,000)
18
P1–3
1. TARGET CORPORATION
Income Statement
For the Year Ended January 31
(in millions)
Sales ................................................................................. $75,356
Expenses:
Cost of sales............................................................... $53,299
2. TARGET CORPORATION
Statement of Stockholders’ Equity
For the Year Ended January 31
(in millions)
Common Retained Other
Stock Earnings Items Total
Balances, Feb. 1 of prior year ... $45 $6,495 $5,111 $11,651
Net income .................................. 2,937 2,937
19
P1–3, Concluded
3. TARGET CORPORATION
Balance Sheet
January 31
(in millions)
Assets
Cash .................................................................................. $ 1,556
Inventories ....................................................................... 9,497
Property and equipment, net .......................................... 25,533
Other assets ..................................................................... 4,704
Total assets ...................................................................... $41,290
20
P1–4
ALPHABET (GOOGLE) INC.
Statement of Cash Flows
For the Year Ended December 31
(in millions)
Cash flows from operating activities ...................................... $ 37,496
Cash flows from (used for) investing activities:
Proceeds from disposals of property and equipment. .... $ 99
Purchase of investments (marketable securities) ............ (92,195)
21
P1–5
1. PENDRAY SYSTEMS CORPORATION
Income Statement
For the Year Ended December 31, 20Y5
Revenue:
Sales ............................................................................ $1,175,000
Expenses:
Cost of sales ............................................................... $650,000
Selling and administrative expenses ....................... 100,000
2. PENDRAY SYSTEMS CORPORATION
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y5
Common Stock Retained Earnings Total
Balances, Jan. 1, 20Y5 .............. $ 0 $ 0 $ 0
Issuance of common stock....... 120,000 120,000
22
P1–5, Continued
3. PENDRAY SYSTEMS CORPORATION
Balance Sheet
December 31, 20Y5
Assets
Cash* ................................................................................ $ 36,000
Accounts receivable ....................................................... 88,000
Inventories ....................................................................... 111,000
Property, plant, and equipment ..................................... 265,000
Total assets ..................................................................... $500,000
Liabilities
Accounts payable ........................................................... $ 40,000
Stockholders’ Equity
Common stock ................................................................ $120,000
Retained earnings ........................................................... 245,000
23
P1–5, Concluded
4. PENDRAY SYSTEMS CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 20Y5
Cash flows from (used for) operating activities:
Cash received from operating activities .................. $1,087,000
Cash paid for operating activities ............................. (896,000)
Net cash flows from operating activities .................. $ 191,000
Cash flows used for investing activities:
Cash paid for property, plant, and equipment ......... (265,000)
Note to Instructors: The determination of cash receipts and payments from
operating activities is not discussed in Chapter 1 and is beyond the student
level of understanding or comprehension at this point in the text. This topic
will be covered in later chapters. However, for completeness of the solution, the
cash receipts and payments for operating activities are computed as follows:
24
METRIC-BASED ANALYSIS
MBA 1–1
1. The following metrics appear on the companies’ respective 10-Ks:
Interpublic Group of Companies Inc.
● Change in operating amounts, including revenues and various expenses
(salaries, office, and general expenses)
Twitter Inc.
● Monthly active users (MAUs)
● Changes in daily active users or daily active usage (DUAs)
2. In general, the differences in the metrics used by each company can be
explained by looking at each company’s operations. Interpublic Group of
25
MBA 1–2
1. The following metrics appear on the companies’ respective 10-Ks:
JetBlue Airways Corporation
● Available seat miles (ASM)
● Number of revenue passengers
● Number of passenger miles
● Load factor (percent of occupied seats)
● Aircraft utilization (hours per day aircraft is in use)
Costco
● Net sales (less merchandise costs)
● Gross margin (profit) as a percentage of net sales
2. In general, the differences in the metrics used by each company can be ex-
plained by looking at each company’s operations. JetBlue Airways Corpora-
tion uses nontraditional metrics based upon its operations. Costco uses more
traditional retail metrics based upon the financial statements.
26
MBA 1–3
Note: Amounts in millions
1. $7,791
2. $4,216
The markup percentage is computed as follows:
Cost of Sales + (Markup % × Cost of Sales) = Sales
$4,216 + (Markup % × $4,216) = $7,791
MBA 1–4
1. 61.4% ($320 ÷ $521) (Rounded)
2. 62.8% (Rounded)
The markup percentage is computed as follows:
Cost of Sales + (Markup % × Cost of Sales) = Sales
27
MBA 1–4, Concluded
5. Hershey’s markup percentage of 84.8% is higher than Tootsie Roll’s markup
MBA 1–5
1. Note to Instructors: Answers will vary. The purpose of this requirement is to
get students thinking about businesses and their profitability. This is done by
focusing on real-world companies and their products with which students are
familiar. Requirements (2) and (3) provide the opportunity for students to
compare their rankings with real-world results.
2. Pfizer:
Return on Assets = $21,308 ÷ [($171,615 + $171,797) ÷ 2] = 12.4%
Ford:
3. Pfizer has the highest return on assets of 12.4%. Microsoft has the next high-
est return of 9.8%. Ford has the lowest return of 3.1%. Pfizer’s high ROI can
be explained by increased profitability due to gains in research and develop-
ment models for pharmaceutical companies. Microsoft’s ROI results from
28
MBA 1–6
1. Note to Instructors: Answers will vary. The purpose of this requirement is to
get students thinking about businesses and their profitability. This is done by
2. ExxonMobil:
Return on Assets = $19,710 ÷ [($330,314 + $348,691) ÷ 2] = 5.8%
Coca-Cola:
3. ExxonMobil has the highest return on assets of 5.8%. This is due to the high
demand for petroleum-based products. At the same time, ExxonMobil’s
operations have the most risks. These risks include such factors as oil spills,
with their resulting fines and clean-up costs, as well as the uncertainty of
MBA 1–7
1. Return on Assets = $370 ÷ [($5,098 + $5,468) ÷ 2] = 7.0%
Tiffany’s return on assets of 7.0% is approximately two percentage points
29
CASES
Case 1–1
Management’s actions are ethical. Management has a responsibility to the com-
pany’s stockholders to remain competitive and profitable. Similarly, many com-
panies have moved their production offshore to take advantage of cheaper labor.
Case 1–2
1. Acceptable professional conduct requires that Loretta Smith supply City
National Bank with all the relevant financial statements necessary for the
2. a. Owners are generally willing to provide bankers with information about
the operating and financial conditions of the business, such as the follow-
ing:
Operating Information:
description of business operations
Financial Condition:
list of assets and liabilities (balance sheet)
Owners are normally reluctant to provide proprietary operating infor-
mation to bankers. Such information, which could hurt the business if it
becomes known by competitors, might include special processes used by
30
Case 1–2, Concluded
the business or future plans to expand operations into areas not currently
served by a competitor.
b. Bankers typically want as much information as possible about the ability
of the business to repay the loan with interest. Examples of such infor-
Case 1–3
1. In a commodity business like poultry production, the dominant business em-
phasis is a low-cost emphasis because customers cannot differentiate
2. A major business risk includes the selling of contaminated chickens and the
possibility that competitors will develop lower-cost methods of breeding and
raising chickens. Also, a major cost of raising chickens is the cost of feed.
3. The company could differentiate its products by emphasizing that it raises its
chickens with only “natural” feeds without the use of artificial ingredients
31
Case 1–4
The difference in the two bank balances, $175,000 ($215,000 – $40,000), may not
be pure profit from an accounting perspective. To determine the accounting profit
for the 8-month period, the revenues for the period would need to be matched
Case 1–5
Note to Instructors: Answers will vary. The purpose of this activity is to show
students that the accounting equation has real-world impact. By illustrating how
the accounting equation applies to well-known companies, the importance of
accounting and the concepts discussed in this chapter are emphasized to students.
32
Case 1–6
As can be seen from the balance sheet data in the case, Enron was financed
largely by debt as compared to equity. Specifically, Enron’s stockholders’ equity
represented only 17.5% ($11,470 ÷ $65,503) of Enron’s total assets. The remainder
of Enron’s total assets, 82.5%, was financed by debt. When a company is financed
largely by debt, it is said to be highly leveraged.
After the allegations of misstatements became public, Enron’s stock rapidly de-
clined and the company filed for bankruptcy. Subsequently, numerous lawsuits
were filed against the company and its management. In addition, the Securities
and Exchange Commission, the Justice Department, and Congress launched in-
vestigations into Enron. As a result, several of Enron’s top executives were crim-
inally prosecuted and were sentenced to prison.
