EXERCISE 1-13
(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 …………………….. $9,823
Cash paid for goods and services ………………… (6,978)
Net cash provided by operating activities …….. $2,845
Cash flows from investing activities
(b) Southwest reported $2,845,000,000 cash from operating activities but
spent $1,529,000,000 to invest in new property and equipment. Its
cash from operating activities was sufficient to finance its investing
activities. Southwest supplemented the cash from operating activities
by issuing long-term debt and additional shares of common stock. It
used excess cash to repurchase stock, pay down debt, and pay
dividends. In total, it generated more cash from operating activities
than it paid for investing and financing activities resulting in a net
increase in cash for 2014.
EXERCISE 1-14
EDMINSON COMPANY
Balance Sheet
December 31, 2014
Assets
Cash …………………………………………………………………….. $18,000
Accounts receivable ……………………………………………… 12,000
Supplies ……………………………………………………………….. 9,500
EXERCISE 1-15
All dollars are in millions.
(a) Assets
Cash ……………………………………………………………………………….. $ 2,291.1
Accounts receivable ………………………………………………………… 2,883.9
Liabilities
Notes payable …………………………………………………………………. $ 342.9
Accounts payable ……………………………………………………………. 2,815.8
Stockholders’ Equity
Common stock ………………………………………………………………… $ 2,874.2
(b) Assets
EXERCISE 1-16
(a) Assets = Liabilities + Stockholders’ Equity
$110,000 = $70,000 + (a)
(a) = $40,000
(b) Assets = Liabilities + Stockholders’ Equity
(b) = $120,000 + $60,000
(b) = $180,000
(c) Beginning + Revenues – Expenses – Dividends = Ending
Stockholders’ Stockholders’
Equity Equity
EXERCISE 1-17
(a) Financial statements
(b) Auditor’s opinion
(c) Notes to the financial statements
SOLUTIONS TO PROBLEMS
PROBLEM 1-1A
(a) The concern over legal liability would make the corporate form a
better choice over a partnership. Also, the corporate form will allow
the business to raise cash more easily, which may be of importance
in a rapidly growing industry.
(b) AI should run his business as a sole proprietor. He has no real need
(c) The fact that the combined business expects that it will need to raise
significant funds in the near future makes the corporate form more
desirable in this case.
(d) It is likely that this business would form as a partnership. Its needs
for additional funds would probably be minimal in the foreseeable
PROBLEM 1-2A
(a) In deciding whether to extend credit for 30 days, The North Face
would be most interested in the balance sheet because the balance
sheet shows the assets on hand that would be available for
settlement of the debt in the near-term.
(b) In purchasing an investment that will be held for an extended period,
the investor must try to predict the future performance of
Amazon.com. The income statement provides the most useful
information for predicting future performance.
(c) In extending a loan for a relatively long period of time, the lender is
most interested in the probability that the company will generate
sufficient income to meet its interest payments and repay its principal.
The lender would therefore be interested in predicting future net
income using the income statement. It should be noted, however, that
(d) The president would probably be most interested in the statement of
cash flows since it shows how much cash the company generates
and how that cash is used. The statement of cash flows can be used
to predict the company’s future cash-generating ability.
PROBLEM 1-3A
(a) HIGHTOWER SERVICE CO.
Income Statement
For the Month Ended June 30, 2014
Revenues
Service revenue ………………………………………… $7,500
Expenses
Salaries and wages expense ……………………… $1,400
Supplies expense ……………………………………… 1,000
HIGHTOWER SERVICE CO.
Retained Earnings Statement
For the Month Ended June 30, 2014
Retained earnings, June 1 ……………………………………………….. $ 0
Add: Net income ……………………………………………………………. 3,800
3,800
PROBLEM 1-3A (Continued)
HIGHTOWER SERVICE CO.
Balance Sheet
June 30, 2014
Assets
Cash …………………………………………………………………. $ 4,600
Accounts receivable ………………………………………….. 4,000
Supplies ……………………………………………………………. 2,400
Equipment ………………………………………………………… 26,000
Total assets ………………………………………………………. $37,000
Liabilities and Stockholders’ Equity
Liabilities
Notes payable …………………………………………….. $12,000
Accounts payable ………………………………………. 500
(b) Hightower had a very successful first month, earning $3,800 or 51%
(c) Distributing a dividend after only one month of operations is probably
unusual. Most new businesses choose to build up a cash balance to
PROBLEM 1-4A
(a) Wenger Corporation should include the following items in its
statement of cash flows:
Cash paid to suppliers
Cash dividends paid
Cash paid to purchase equipment
Cash received from customers
Cash received from issuing common stock
WENGER CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash received from customers ……………………. $132,000)
Cash paid to suppliers………………………………… (104,000)
Net cash provided by operating activities ……. $28,000)
Cash flows from investing activities
Cash paid to purchase equipment ………………. (12,000)
(b) Wenger Corporation’s operating activities provided $28,000 cash
which was adequate to fund its investing activities ($12,000) and make
($7,000) of dividend payments.
PROBLEM 1-5A
(a) 1. Since the boat actually belongs to Bill Jensen—not to Merando
Corporation—it should not be reported on the corporation’s
balance sheet. Likewise, the boat loan is a personal loan of Bill’s—
not a liability of Merando Corporation.
(b) MERANDO CORPORATION
Balance Sheet
December 31, 2014
Assets
Cash ………………………………………………………………… $20,000*
Accounts receivable …………………………………………. 40,000*
Inventory ………………………………………………………….. 25,000*
Total assets ……………………………………………………… $85,000*
Liabilities and Stockholders’ Equity
Liabilities
Notes payable ………………………………………………. $15,000 *
PROBLEM 1-1B
(a) Randy should run his business as a sole proprietor. He has no real
need to raise funds, and he doesn’t need the expertise provided by
other partners. The sole proprietorship form would provide the
easiest form. One should avoid a more complicated form of business
unless the characteristics of that form are needed.
(b) The fact that the combined business expects that it will need to raise
significant funds in the near future makes the corporate form more
desirable in this case.
(c) The concern over legal liability would make the corporate form a
better choice over a partnership. Also, the corporate form will allow
the business to raise cash more easily, which may be of importance in
a rapidly growing industry.
PROBLEM 1-2B
(a) In purchasing an investment that will be held for an extended period,
the investor must try to predict the future performance of 24/7
Fitness. The income statement provides the most useful information
for predicting future performance.
(b) In deciding whether to extend credit for 60 days Xerox would be
most interested in the balance sheet because the balance sheet
shows the assets on hand that would be available for settlement of
the debt in the near-term.
PROBLEM 1-3B
(a) SHAW’S GARDEN
Income Statement
For the Month Ended May 31, 2014
Revenues
Service revenue ……………………………. $10,400
Expenses
Maintenance and repairs expense …. $2,100
Salaries and wages expense …………. 1,900
SHAW’S GARDEN
Retained Earnings Statement
For the Month Ended May 31, 2014
Retained earnings, May 1 …………………………………………………. $ 0
Add: Net income …………………………………………………………….. 4,200
4,200
PROBLEM 1-3B (Continued)
SHAW’S GARDEN
Balance Sheet
May 31, 2014
Assets
Cash ………………………………………………………………. $10,800
Accounts receivable ……………………………………….. 8,400
Equipment ……………………………………………………… 58,800
Total assets ……………………………………………………. $78,000
Liabilities and Stockholders’ Equity
Liabilities
Notes payable ………………………………………….. $26,000
(b) Shaw’s Garden was very profitable during its first month of operations.
(c) Many companies choose to “reinvest” in themselves by building up a
larger balance in retained earnings rather than distributing dividends
as soon as income is earned so Shaw’s Garden decision might be
PROBLEM 1-4B
(a) Preacher Corporation should include the following items in its
statement of cash flows:
Cash paid to suppliers
Cash dividends paid
Cash paid to purchase equipment
Cash received from customers
Cash received from issuing bonds payable
PREACHER CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash received from customers …………………… $162,000
Cash paid to suppliers ……………………………….. (154,000)
Net cash provided by operating activities …… $8,000
(b) Operating activities provided $8,000 cash, which was not adequate
to cover $20,000 needed for investing activities and $2,000 of
PROBLEM 1-5B
(a) 1. The $3,000 of revenue that the company earned in 2013 should
not be included in the 2014 revenues. Instead, the $3,000 should
be added to the beginning balance of retained earnings to correct
for the omission in 2013.
2. Since the corporation did not incur or pay the $10,000 of rent ex-
pense, it should not be included in the income statement. Inclu-
ding the $10,000 as an expense misstates the corporation’s net
income and presents misleading results.
3. Including the $6,000 as vacation expense misstates the corpo-
ration’s net income.
(b) WALTERS CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenue ($40,000 – $3,000)* …………………………………………….. $37,000
Expenses