Accounting Chapter 1 Homework Realty businesses, such as Paradise Realty, are service businesses that aid their clients in buying or selling real estate

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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)

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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

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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

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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)

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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

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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

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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:

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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

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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.

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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

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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

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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

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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

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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.

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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.