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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
(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
