FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-1
(5-10 min.)
Solution:
Research has shown that over 50% of financial statement frauds are committed by
companies that recognize revenue improperly. What does this mean? Describe the
most common ways companies improperly recognize revenue.
There are several ways that companies improperly recognize revenue which results in
financial statement fraud whereby revenues are overstated.
a. “Channel stuffing” where a company may ship inventory to regular customers in
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 1 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-2
(10 min.)
Solution:
Req. 1
1. How much gross profit did Kurzic Imports earn on the sale of its products in 2016?
How much was income from continuing operations? Net income?
2. At the end of 2016, what dollar amount of net income would most sophisticated
investors use to predict Kurzic Imports’ net income for 2017 and beyond? Name this
item, give its amount, and state your reason.
Gross profit = $760,212 thousand ($1,806,092 − $1,045,880)
Income from continuing operations = $117,187 thousand
Net income = $117,397 thousand
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 2 of 68
Req. 2
Continuing operations will continue from period to period. Their continuity makes
income or loss from continuing operations a good predictor of future net income.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-3
(10-15 min.)
Solution:
(Thousands)
Net sales revenue $195,000
Cost of goods sold 74,000
Musicality, Inc.
Income Statement
Year Ended December 31, 2016
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 3 of 68
Gross profit 121,000
Operating income 55,000
Income from continuing operations before income tax 32,000
Income from continuing operations 19,200
Loss on discontinued operations, $10,000,
less income tax savings of $4,000 (6,000)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-4
(10-15 min.)
Solution:
Earnings per share
$ 2.10
0.1
At a capitalization rate of 10%, how much should one share of Orange stock be
worth? Compare your estimated stock price with the market price of $71.04 as
quoted in the newspaper. Based on your estimated market value, should you buy,
hold, or sell Orange stock?
Estimated value
of one share
of Orange stock
=
Investment
capitalization rate
=
=
$ 21.00
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 4 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-5
(10 min.)
Solution:
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Sept. 12 Accounts Receivable (200,000 x $.36) 72,000
Sales Revenue 72,000
Journalize these three transactions for Natural Soda Corp. Ignore cost of goods sold.
Journal
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 5 of 68
Accounts Receivable ($72,000 x ½) 36,000
Accounts Receivable 36,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-6
(10-15 min.)
Solution:
Req. 1
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Apr. 24 Cash (700,000 pesos × $0.096) 67,200
Accounts Receivable (700,000 pesos × $0.092) 64,400
Foreign-Currency Transaction Gain 2,800
Collection on account.
Journal
In these two scenarios, which currencies strengthened? Which currencies weakened?
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 6 of 68
Req. 2
Cash (29,000 Swiss francs × $0.83) 24,070
Req. 3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-7
(15 min.)
Requirements
Solution:
Req. 1
1. Were Juneau Cruise Line’s discontinued operations more like an expense or
revenue? How can you tell?
2. Should the discontinued operations of Juneau Cruise Lines be included in or
excluded from net income? State your reason.
3. Suppose you are working as a financial analyst and your job is to predict Juneau
Cruise Line’s net income for 2017 and beyond. Which item from the income
statement will you use for your prediction? Identify its amount. Why will you use
this item?
The discontinued operations were more like a revenue. This is clear from the fact
that their amount is added in determining net income.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 7 of 68
Req. 2
Req. 3
The discontinued operations should be included in net income because they
Use Income from continuing operations ($12,400 million) to predict future income
because that amount of income is most likely to repeat in future years.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-8
(5-10 min.)
Solution:
DATE DEBIT CREDIT
1 Income Tax Expense ($171,000 × .40) 68,400
Income Tax Payable ($148,000 × .40)
59,200
Deferred Tax Liability 9,200
Recorded income tax for the year.
1. Make the entry to record Colossal Marine’s income taxes for 2016.
2. Show what Colossal Marine will report on its 2016 income statement, starting with
income before income tax. Also show what Colossal Marine will report for current and
long-term liabilities on its December 31, 2016, balance sheet.
Journal
ACCOUNT TITLES AND EXPLANATION
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 8 of 68
2 INCOME STATEMENT
Income before income tax 171,000$
BALANCE SHEET
Current liabilities:
Long-term liabilities:
Deferred tax liability 9,200
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-9
(10 min.)
Solution:
Req. 1
1. Give the basic equation to compute earnings per share of common stock
for net income.
2. List the income items for which Weather Seal Windows must report
earnings-per-share data.
3. What makes earnings per share useful as a business statistic?
Earnings
per share
=
Weighted-average number of
common shares outstanding
Net income − preferred dividends
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 9 of 68
Req. 2
Req. 3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-10
(10-15 min.)
Report Musicality’s earnings per share on the income statement. (Round all
calculations to two decimal places.)
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 10 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-11
(5-10 min.)
Solution:
(in thousands)
Net income 13,200$
(in thousands)
Stockholders’ Equity:
Accumulated Other Comprehensive Income 5,300$
(assuming no beginning balance)
Musicality, Inc.
Balance Sheet (Partial)
December 31, 2016
Show how the company could report other comprehensive income on its 2016 financial
statements.
Should Musicality report earnings per share for other comprehensive income? State
why or why not.
Musicality, Inc.
Statement of Comprehensive Income
Year Ended December 31, 2016
Earnings per share is not reported for other comprehensive income; it is reported only
for net income and its components.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 11 of 68
Other comprehensive income:
Unrealized gains on investments in AFSS, net of tax 2,100$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-12
(10 min.)
Solution:
Retained earnings balance, December 31, 2015,
as originally reported 55,000$
Prior period adjustment — debit to correct error
Prepare iWorld’s 2016 statement of retained earnings to show the correction of the
error—that is, the prior-period adjustment. (Hint: Use the end-of-chapter summary
problem as an example.)
iWorld Inc.
Statement of Retained Earnings
Year Ended December 31, 2016
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 12 of 68
Retained earnings balance, December 31, 2015,
as adjusted 45,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-13
(10-15 min.)
Solution:
Req. 1
1. Define a “segment” of a business. What would be a logical way for Worldwide
Electronics Corporation to segment its business for financial reporting purposes?
2. What is the purpose of segment reporting? In what ways might segment
reporting benefit prospective investors in Worldwide Electronics?
A segment is any subset or division of a business that earns revenues and incurs
expenses. Typically, large corporations have segments that may be by product
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 13 of 68
Req. 2
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S11-14
(10-15 min.)
Solution:
Req. 1
Req. 2
1. Who is responsible for Meinike’s financial statements?
2. By what accounting standards are the financial statements prepared?
3. Identify one concrete action that Meinike management takes to fulfill its
responsibility for the reliability of the company’s financial information.
4. Which entity gave an outside, independent opinion on the Meinike financial
statements? Where was this entity located, and when did it release its opinion to
the public?
5. Exactly what did the audit cover? Give names and dates.
6. By what standards did the auditor conduct the audit?
7. What was the auditor’s opinion of Meinike’s financial statements?
Management of Meinike Computer Inc. is responsible for the company’s financial
statements.
The accounting standards for preparation of the financial statements are generally
accepted accounting principles in the United States of America (GAAP).
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 14 of 68
Req. 3
Req. 4
Req. 5
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 6
The standards for conducting an audit are the standards of the Public Company
Accounting Oversight Board (United States).
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 15 of 68
Req. 7
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E11-15A
(15-20 min.)
Requirements
Solution:
Req.1
Thousands
Net sales 13,500$
Total operating expenses 12,200
1. Show how the Searstown Cycles, Inc., multistep income statement for the
year ended September 30, 2016, should appear. Omit earnings per share. Use
the end-of-chapter summary problem as an example.
2. Prepare the Statement of Comprehensive Income for Searstown Cycles, Inc.,
for the year ended September 30, 2016. Use Exhibit 11-2 as an example.
Searstown Cycles, Inc.
Income Statement
Year Ended September 30, 2016
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 16 of 68
Req.2
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E11-16A
(20-25 min.)
Requirements
Solution:
Req. 1
Thousands
Sales revenue 122,000$
Other revenues 1,600
Req. 2
Req. 3
Hooper Book Company
1. Prepare Hooper Book Company’s single-step income statement for the year ended
December 31, 2016, including EPS. Hooper had 1,000,000 shares of common stock
and no preferred stock outstanding during the year.
2. Assume Hooper Book Company’s income from operations reflects that its core
business has been steadily increasing by about 10% per year over the past three years
and that none of its operations have been discontinued. What does this say about the
quality of its earnings?
3. Assume investors capitalize Hooper Book Company’s earnings from continuing
operations at 7%. Estimate the price of one share of the company’s stock.
Income Statement
Year Ended December 31, 2016
The company’s quality of earnings would be considered to be very good,
based on it’s steady growth each year and no discontinued operations
during recent years.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 17 of 68
Total revenue 123,600
Total operating expenses 104,800
Earnings per share (EPS):
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E11-17A
(10-15 min.)
Solution:
Estimated value of
one share of Flash
=
EPS from continuing
operations
Investment
What investment capitalization rate did investors appear to be using to
determine the value of one share of Flash Bytes stock? The formula for the
value of one share of stock uses EPS in the calculation.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 18 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E11-18A
(10-15 min.)
Requirements
Solution:
Req. 1
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
May 9 Inventory 6,440
Accounts Payable (700,000 yen × $.0092) 6,440
1. Journalize these transactions for Holloway. Focus on the gains and losses caused by
changes in foreign-currency rates. Round your answers to the nearest whole dollar.
2. On May 10, immediately after the purchase, and on June 23, immediately after the
sale, which currencies did Holloway want to strengthen? Which currencies did in fact
strengthen? Explain your reasoning.
Journal
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 19 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E11-19A
(10 min.)
Requirements
Solution:
Req. 1
Income Tax Expense ($320,000 × .25) 80,000
Income Tax Payable ($280,000 × .25)
70,000
Deferred Tax Liability 10,000
1. Journalize Martell Heights’ income taxes for 2016.
2. How much income tax did Martell Heights have to pay for the year 2016?
3. At the beginning of 2016, Martell Heights’ balance of Deferred Tax Liability
was $31,000. How much Deferred Tax Liability did Martell Heights report on its
balance sheet at December 31, 2016?
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 20 of 68
Req. 2
Req. 3