CHAPTER 1
SOLUTIONS TO EXERCISES—SET B
EXERCISE 1-1B
LAVER CO.
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue ……………………………………………… $68,000
Expenses
Salaries and wages expense …………………………... $39,000
Rent expense ………………………………………………….. 11,400
LAVER CO.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ………………………………………………….. $74,000
Add: Net income …………………………………………………………………… 11,400
85,400
1-2
EXERCISE 1-2B
(a) MERCK and CO.
Income Statement
For the Year Ended December 31, 2014
(in millions)
Revenues
Sales revenue …………………………………………………. $40,332.8
Expenses
Cost of goods sold ………………………………………….. $11,396.4
Selling and administrative expenses ……………….. 8,543.2
MERCK and CO.
Retained Earnings Statement
For the Year Ended December 31, 2014
(in millions)
Retained earnings, January 1 …………………………………. $41,404.9
Add: Net income …………………………………………………… 11,280.6
52,685.5
EXERCISE 1-2B (Continued)
The long-term implications would be more difficult to quantify but it is
safe to predict that a reduction in research and development
expenses would probably result in lower sales revenues in the future.
EXERCISE 1-3B
JOSE BARBOSAC INC.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ……………………………. $140,000
Add: Net income …………………………………………….. 230,000
370,000
EXERCISE 1-4B
RICARDO INC.
Income Statement
For the Year Ended December 31, 2014
Revenues
Sales revenue ……………………………………………………………. $693,485
Service revenue ………………………………………………………… 8,998
Total revenues ……………………………………………………….. 702,483
Expenses
EXERCISE 1-5B
First note that the retained earnings statement shows that (b) equals $31,000.
Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders’
equity
EXERCISE 1-6B
(a) Service revenue …………………………………………………………….. $148,000
Sales revenue ………………………………………………………………… 35,000
Total revenue ………………………………………………………….. 183,000
(b) COZY BEAR
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 …………………………………………. $15,000
Add: Net income ………………………………………………………….. 48,000
COZY BEAR
Balance Sheet
December 31, 2014
Assets
Cash …………………………………………………………… $ 18,500
Supplies ……………………………………………………… 12,500
Liabilities and Stockholders’ Equity
Liabilities
Notes payable …………………………..………….. $50,000
Accounts payable ………………………………… 16,000
Total liabilities ……………………………….. $ 66,000
Stockholders’ equity
1-6
EXERCISE 1-6B (Continued)
(c) The income statement indicates that revenues from the general store
were only about 19.1% ($35,000 ÷ $183,000) of total revenue which
tends to support Dare’s opinion. In order to decide if the store is
“more trouble than it is worth,” I would need to know the amount of
expenses attributable to the general store. The income statement
EXERCISE 1-7B
KELLOGG COMPANY
Income Statement
For the Year Ended December 31, 2014
(in millions)
Revenues
Sales revenue ………………………………………………… $12,822
Expenses
Cost of goods sold ………………………………………… $7,455
EXERCISE 1-8B
(a) BIRCH CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash received from customers ……………………… $60,000)
Cash paid to suppliers ………………………………….. (18,000)
Net cash provided by operating activities ………. $42,000
Cash flows from investing activities
(b) As a creditor, I would feel confident that Birch has the ability to repay
its lenders. During 2014, Birch generated $42,000 of cash from its
EXERCISE 1-9B
(a) SOUTHWEST AIRLINES
Statement of Cash Flows
For the Year Ended December 31, 2014
(in millions)
Cash flows from operating activities
Cash received from customers ……………………….. $12,104
Cash paid for goods and services …………………… (10,543)
Net cash provided by operating activities ………… $ 1,561
Cash flows from investing activities
Cash paid for property and equipment …………….. (493)
(b) Southwest reported $1,561,000,000 cash from operating activities but
spent $493,000,000 to invest in new property and equipment. Its cash
EXERCISE 1-10B
EATON COMPANY
Balance Sheet
December 31, 2014
Assets
Cash …………………………………………………………………….. $28,500
Accounts receivable ……………………………………………… 15,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable ………………………………………….. $ 6,000
Stockholders’ equity
1-10
EXERCISE 1-11B
All dollars are in millions.
(a) Assets
Cash ………………………………………………………………………………. $ 5,146
Accounts receivable ……………………………………………………….. 2,898
Inventory ………………………………………………………………………… 2,040
Liabilities
Notes payable …………………………………………………………………. $ 446
Accounts payable …………………………………………………………… 3,218
Stockholders’ Equity
Common stock ……………………………………………………………….. $ 3,443
(b)
Assets
Liabilities
Stockholders’ Equity
(c) Nike has relied more heavily on equity than debt to finance its assets.
EXERCISE 1-12B
(a)
Assets
=
Liabilities
+
Stockholders’ Equity
$140,000
=
$24,000
+
(a)
(a)
=
$116,000
(b)
Assets
=
Liabilities
+
Stockholders’ Equity
(b)
=
+
$136,000
(b)
=
(d)
Assets
=
Liabilities
+
Stockholders’ Equity
$230,000
=
+
(d)
=
(e)
Assets
=
Liabilities
+
Stockholders’ Equity
$280,000
=
+
(e)
(e)
=
(c) Beginning + Revenues – Expenses – Dividends = Ending
Stockholders’ Stockholders’
Equity Equity
$116,000(a) + $300,000 – $200,000 – (c) = $136,000
$216,000 – (c) = $136,000
(c) = $80,000