Chapter 1 – A Framework for Financial Accounting
Problem 1-3B (concluded)
Gator Investments
Balance Sheet
Dec. 31, 2021
Assets
Liabilities
Cash
$ 5,500
Accounts payable
Equipment
27,000
Notes payable
Buildings
Total liabilities
Common stock
Total assets
Chapter 1 – A Framework for Financial Accounting
1-36 Financial Accounting, 5e
Problem 1-4B (LO 1-3)
(Suggested order of calculation)
On the statement of stockholders’ equity,
$14,000 + (c) = $17,000
(c) = $3,000
From (g) and (h),
$4,000 + $17,000 (g) + $8,000 (h) = (i)
(i) = $29,000
From total liabilities and stockholders’ equity,
(f) = $29,000
Chapter 1 – A Framework for Financial Accounting
Problem 1-5B (LO 1-3)
Tar Heel Corporation
Income Statement
For the year ended December 31, 2021
Service revenues
$69,400
Expenses:
Net income
Tar Heel Corporation
Statement of Stockholders’ Equity
For the year ended December 31, 2021
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Beginning balance
$21,000
$26,800
$47,800
Issuance of common stock
Add: Net income
Less: Dividends
Ending balance
$27,000
Problem 1-5B (concluded)
Tar Heel Corporation
Balance Sheet
December 31, 2021
Assets
Liabilities
Cash
$ 5,200
Accounts payable
$ 7,700
Accounts receivable
Salaries payable
Building
Total liabilities
Retained earnings
Chapter 1 – A Framework for Financial Accounting
Problem 1-6B (LO 1-7)
Assumption violated
1.
Periodicity
2.
Monetary unit
4.
Economic entity
Problem 1-7B (LO 1-7)
1.
h.
2.
g.
3.
f.
4.
a.
6.
e.
7.
i.
8.
b.
9.
c.
Chapter 1 – A Framework for Financial Accounting
1-40 Financial Accounting, 5e
ADDITIONAL PERSPECTIVES
Additional Perspective 1-1
Requirement 1
The three primary forms of business organizations include sole proprietorship, partnership, and
corporation. The major advantage of a corporation is limited liability. Stockholders of a corporation
Requirement 2
Typical financing activities include issuing common stock, borrowing, and repayment of borrowing.
Typical investing activities include the purchase of long-term assets such as land, buildings,
Requirement 3
Assets – cash, accounts receivable, supplies, and equipment.
Requirement 4
Income statement – revenues less expenses equal net income during an interval of time.
Statement of stockholders’ equity – changes in common stock and retained earnings during an
Chapter 1 – A Framework for Financial Accounting
Additional Perspective 1-2
AMERICAN EAGLE OUTFITTERS
($ in thousands)
Requirement 1
Total assets = $1,816,313
Total liabilities = $569,522
Requirement 4
Inflows
Outflows
Investing activities
There are none
Capital expenditures for
property and equipment
Financing activities
Net proceeds from stock
options exercised
Cash dividends paid
Requirement 5
The company’s auditor is Ernst & Young LLP.
The auditor states, “We have audited the accompanying consolidated balance sheets of
Chapter 1 – A Framework for Financial Accounting
1-42 Financial Accounting, 5e
Additional Perspective 1-3
BUCKLE
($ in thousands)
Requirement 1
Total assets = $538,116
Requirement 2
Consolidated Statements of Income
Requirement 3
Net sales = $913,380
Requirement 5
The company’s auditor is Deloitte & Touche LLP.
The auditor states, “We have audited the accompanying consolidated balance sheets of
The Buckle, Inc. and subsidiary (the “Company”) as of February 3, 2018 and January
28, 2017, and the related consolidated statements of income, comprehensive income,
Chapter 1 – A Framework for Financial Accounting
Additional Perspective 1-4
Requirement 1
The total assets of American Eagle are higher than the total assets of Buckle.
Requirement 2
The total liabilities of American Eagle are higher than the total liabilities of Buckle.
A higher amount of liabilities does not necessarily mean a higher chance of
Requirement 3
Ability to repay debt.
The ratio of total liabilities to total assets can be used as one measure of a company’s
Requirement 4
The net income of American Eagle is higher than the net income of Buckle. When
Requirement 5
Ability to generate profits.
Net income provides a measure of a company’s ability to generate profit for its
Chapter 1 – A Framework for Financial Accounting
1-44 Financial Accounting, 5e
Additional Perspective 1-5
1. Yes.
The role of an auditor is to express an independent, professional opinion of the extent
to which financial statements are prepared in compliance with Generally Accepted
Accounting Principles. An auditor’s ethics might be challenged because of the need to
2. No.
Auditors are not employees of the company. They are hired by a company as an
3. Yes.
Although ultimate responsibility for fair presentation of financial statements lies with
management, the auditor’s opinion lends additional credibility to those financial
4. No.
Even though the auditor faces this ethical dilemma, they serve an important role in the
reporting of financial information to help investors and creditors make decisions.
Chapter 1 – A Framework for Financial Accounting
Additional Perspective 1-6
Requirement 1
The mission of the U.S. Securities and Exchange Commission is to protect investors,
maintain fair, orderly, and efficient markets, and facilitate capital formation.
The SEC was created to restore investor confidence in our capital markets by
providing investors and the markets with more reliable information and clear rules of
honest dealing.
Chapter 1 – A Framework for Financial Accounting
1-46 Financial Accounting, 5e
Additional Perspective 1-6 (continued)
Requirement 2
The four main financial statements discussed by the SEC are: (1) balance sheets;
(2) income statements; (3) cash flow statements; and (4) statements of shareholders’
equity.
A balance sheet provides detailed information about a company’s assets, liabilities and
shareholders’ equity.
The statement of shareholders’ equity shows changes in the interests of the company’s
shareholders over time.
The disclosure notes provide additional information beyond that reported in the
financial statements. This information includes items such as significant accounting
Chapter 1 – A Framework for Financial Accounting
Additional Perspective 1-6 (concluded)
Requirement 3
The mission of the FASB is to establish and improve standards of financial accounting
and reporting for the guidance and education of the public, including issuers, auditors,
and users of financial information.
Requirement 4
(a) Yes; Nike properly prepared the four financial statements.
Chapter 1 – A Framework for Financial Accounting
1-48 Financial Accounting, 5e
Additional Perspective 1-7
The functions of financial accounting are to measure business activities of a company
and to communicate information about those activities to investors and creditors and
other outside users for decision-making purposes.
The four financial statements include:
1. Income statement, which shows revenues and expenses during the reporting period.
2. Statement of stockholders’ equity, which shows the change in stockholders’ equity
during the reporting period.