Chapter 01 – Financial Statements and Business Decisions
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E1–14.
LAH MANUFACTURING CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flow from operating activities
Cash collections from sales $270,000
Cash paid for operating expenses (175,000)
Net cash flow from operating activities $95,000
Chapter 01 – Financial Statements and Business Decisions
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PROBLEMS
(Note to the instructor: Most students find the Problems in this chapter to be quite
challenging.)
P1–1.
Req. 1
GASLIGHT COMPANY
Income Statement
For the Year Ended December 31, 2011
Total sales revenue (given) $126,000
Total expenses (given) 80,200
Req. 2
GASLIGHT COMPANY
Statement of Retained Earnings
For the Year Ended December 31, 2011
Beginning retained earnings $ 0
Req. 3
GASLIGHT COMPANY
Balance Sheet
At December 31, 2011
Assets
Cash (given) $24,500
Receivables from customers (given) 10,800
Chapter 01 – Financial Statements and Business Decisions
P1–2.
Req. 1
BRIDGET’S LAWN SERVICE
Income Statement
For the Three Months Ended August 31, 2011
Revenues
Lawn service–cash $12,300
–credit 700
Total revenues $13,000
Expenses
Gas, oil, and lubrication ($940+$180) 1,120
Pickup repairs 250
Req. 2
Because the above report reflects only revenues, expenses, and net income, it is
reasonable to suppose that Bridget would need the following:
(1) A balance sheet–that is, a statement that reports for the business, at the end of
August 2011, each asset (name and amount, such as Cash, $XX), each liability
(such as Wages Payable, $XX), and stockholders’ equity.
Chapter 01 – Financial Statements and Business Decisions
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P1–3.
Req. 1 Req. 2–Explanation
Transaction Income Cash
(a) +$66,000 +$55,000 All services performed increase income;
cash received during the period was,
$66,000 – 11,000 = $55,000.
(b) –0– +45,000 Cash borrowed is not income.
Based only
on the above:
Income (loss) $3,100
Chapter 01 – Financial Statements and Business Decisions
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P1–4.
Req. 1
The personal residences of the organizers are not resources of the business entity.
Therefore, they should be excluded.
Req. 2
Req. 3
The list of company resources (i.e., assets) suggests the following areas of concern:
Company resources:
(1) Cash, inventories, and bills due from customers (i.e., accounts receivable)–these
(3) Personal residences–as noted above, these items are not resources of the
(4) Unpaid wages of $19,000, which are now due, pose a serious problem because
only $12,000 cash currently is available.
(5) Unpaid taxes and accounts payable to suppliers–it is not clear when these
(7) Loan from organizer–the expected payment date and interest rate are important
issues for which details are not provided. This is a major cash demand.
Chapter 01 – Financial Statements and Business Decisions
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P1–4. (continued)
Req. 4
The amount of stockholders’ equity (i.e., assets minus liabilities) for Northwest
Company, assuming the amounts provided by the owners are acceptable, would be:
Chapter 01 – Financial Statements and Business Decisions
ALTERNATE PROBLEMS
AP1–1.
Req. 1
INFLUENCE CORPORATION
Income Statement
For the Year Ended June 30, 2011
Total sales revenue (given) $100,000
Req. 2
INFLUENCE CORPORATION
Statement of Retained Earnings
For the Year Ended June 30, 2011
Beginning retained earnings $ 0
Req. 3
INFLUENCE CORPORATION
Balance Sheet
At June 30, 2011
Assets
Cash (given) $13,150
Receivables from customers (given) 10,900
Inventory of merchandise (given) 27,000
Chapter 01 – Financial Statements and Business Decisions
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AP1–2.
Req. 1
LIST ELECTRIC REPAIR COMPANY, INC.
Income Statement
For the Three Months Ended December 31, 2011
Revenues:
Electric repair services–cash $32,000
–credit 3,500
Total revenues $35,500
Expenses:
Electrician’s assistant (wages) 7,500
Payroll taxes 175
Net Income $ 9,120
Req. 2
Because the above report reflects only revenues, expenses, and net income, it is
reasonable to suppose that Sam would have need for the following:
(1) A statement that reports for the business, at the end of 2011, each asset (name
(2) A statement of the sources and uses of cash during the period; that is, a
statement of cash flows.
Chapter 01 – Financial Statements and Business Decisions
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AP1–3.
Req. 1 Req. 2–Explanation
Transaction Income Cash
(a) +$85,000 +$70,000 All services performed increase income;
cash received during the period was,
$85,000 – 15,000 = $70,000.
(b) –0– +25,000 Cash borrowed is not income.
Based only
on the above:
Income (loss) $15,000
Chapter 01 – Financial Statements and Business Decisions
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CASES AND PROJECTS
ANNUAL REPORT CASES
CP1–1.
1. It sells its own brand of high quality, on-trend clothing, accessories, and personal
care products targeting 15 to 25 year-old customers.
3. a. Balance Sheets–2 years
4. Yes, it is audited by independent CPAs, as indicated by the ”Report of Independent
Registered Public Accounting Firm” on page 68 of the annual report.
6. As of January 31, 2009, the company had $294,928,000 in inventory.
7. Assets = Liabilities* + Stockholders’ Equity
Chapter 01 – Financial Statements and Business Decisions
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CP1–2.
1. Net income was $199,364 thousand or $199,364,000 for the year ended January 31,
2009. This is disclosed on the income statement. The instructor should note that
the reported numbers are in thousands. Some students will erroneously report
3. Inventory is $169,698,000. This is disclosed on the balance sheet.
4. Cash and cash equivalents increased by $210,764,000 during the year. This amount
CP1–3.
1. American Eagle Outfitters had total assets of $1,963,676,000 at the end of the most
2. Urban Outfitters had net sales of $1,834,618,000 in the most recent year, while
3. In the most recent year, Urban Outfitters had growth in total assets of
($1,329,009,000 – $1,142,791,000)/($1,142,791,000) = 16.3%, while American Eagle
Chapter 01 – Financial Statements and Business Decisions
FINANCIAL REPORTING AND ANALYSIS CASES
CP1–4.
Req. 1–Deficiencies:
(2) Income statement should show revenues and expenses separately.
(4) Balance sheet should separately report assets, liabilities, and stockholders’
equity.
(6) Due from customers, $13,000, should be reported under assets.
(8) Accumulated depreciation, $10,000, should be subtracted from service vehicles.
Chapter 01 – Financial Statements and Business Decisions
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CP1–4. (continued)
Req. 2–Financial Statements:
PERFORMANCE CORPORATION
Income Statement
For the Year Ended December 31, 2009
Revenues:
Sales $175,000
Services 52,000
Total revenues $227,000
PERFORMANCE CORPORATION
Balance Sheet
At December 31, 2009
Assets
Cash $ 32,000
Accounts receivable (from customers) 13,000
Liabilities
Accounts payable (to suppliers) $22,000
Note payable (to bank) 25,000
Total liabilities 47,000
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CP1–5.
Req. 1 You should forcefully assert the need for an independent audit of the financial
statements each year because this is the best way to assure credibility–
conformance with GAAP, completeness and absence of bias.
Chapter 01 – Financial Statements and Business Decisions
CP1–6.
The textbook does not explicitly cover the elements of independence. The case is
designed to permit the students to develop their own values. We have found that it is
useful to emphasize the difference between independence in fact and in appearance
during these discussions.
1. Most students feel that there is no problem with independence if the stock held is
immaterial in amount. When asked about a possible headline that might read
2. This is an example of an indirect holding of stock. A materiality threshold is
3. The AICPA Code of Professional Conduct applies only to audit professionals who
4. Clearly there is an ethics violation in this case because she would audit
5. The original Code indicated that a loan from a bank that was made under normal
lending procedures, terms, and requirements was not an impairment of
FINANCIAL REPORTING AND ANALYSIS PROJECTS
CP1–7.