CHAPTER 2
PROBLEM 2-1B
STARBUCKS CORPORATION
Balance Sheet
September 30, 2014
(Amounts are in millions)
Assets
Current assets
Cash ………………………………………………………. $281
Debt investments ……………………………………. 157
Long-term investments
Stock investments ………………………………….. 280
Property, plant and equipment
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable …………………………………………. $ 1,468
Accounts payable …………………………………………… 391
Unearned sales revenue …………………………. 297
PROBLEM 2-2B
MUELLER, INC.
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue …………………………………………….. $51,000
Expenses
Salaries and wages expense ………………………….. $34,000
Depreciation expense …………………………………….. 4,300
MUELLER, INC.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ………………………………… $14,000
PROBLEM 2-2B (Continued)
MUELLER, INC.
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ……………………………………………………………. $ 6,100
Accounts receivable …………………………………….. 2,900
Prepaid insurance ………………………………………… 2,400
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ………………………………………… $ 7,200
PROBLEM 2-3B
(a) VERN CORPORATION
Income Statement
For the Year Ended April 30, 2014
Revenues
Sales revenue ………………………………………… $20,450
Expenses
Salaries and wages expense …………………… $5,840
Depreciation expense …………………………….. 3,200
VERN CORPORATION
Retained Earnings Statement
For the Year Ended April 30, 2014
Retained earnings, May 1, 2013 ……………………… $13,960
Plus: Net income …………………………………………. 9,700
PROBLEM 2-3B (Continued)
(b) VERN CORPORATION
Balance Sheet
April 30, 2014
Assets
Current assets
Cash ………………………………………………………. $20,955
Accounts receivable ……………………………….. 10,150
Prepaid rent ……………………………………………. 380
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………………… $ 3,100
Income taxes payable …………………………….. 300
Interest payable ……………………………………… 175
PROBLEM 2-4B
(a) Wise’s net income is $215,000 ($900,000 – $450,000 –$150,000 –
$10,000 – $75,000).
(b) Wise’s 2014 working capital of $470,000 ($700,000 – $230,000) is over
4 times as high as Omaz’s working capital of $105,000 ($180,000 – $75,000).
(c) Omaz appears to be less solvent. Omaz’s 2014 debt to assets ratio of
34% ($265,000 ÷ $780,000)a is slightly higher than Wise’s ratio of 29%
($430,000 ÷ $1,500,000)b. The lower the percentage of debt to assets, the
lower the risk that a company may be unable to pay its debts as they
come due.
PROBLEM 2-5B
(a) (i) Current ratio =
$302,600
$148,700
= 2.0:1.
(ii) Working capital = $302,600 – $148,700 = $153,900.
(b) During 2014, Divine’s current ratio decreased from 2.4:1 to 2.0:1 and its
working capital dropped from $178,000 to $153,900. Both measures
indicate a slight decline in liquidity during 2014.
PROBLEM 2-6B
2013
2014
(a)
Earnings per share.
(b)
$65,000 = $93,000
$88,000 = $116,000
Working capital.
(c)
Current ratio.
(d)
Debt to assets ratio.
(e)
Free cash flow.
Free cash flow.
= $120,000
= $60,000
(f) The underlying profitability of the corporation as measured by earn–
ings per share has declined. The overall liquidity of the corporation
PROBLEM 2-7B
Ratio
Home Depot
Lowe’s
(All Dollars are in Millions)
(a)
Working capital
$14,674 – $12,706 = $1,968
$8,686 – $7,751 = $935
(b)
Current ratio
1.2:1 ($14,674 ÷ $12,706)
1.1:1 ($8,686 ÷ $7,751)
(c)
Debt to assets ratio
60.0% ($26,610 ÷ $44,324)
47.9% ($14,771 ÷ $30,869)
(f) The comparison of the two companies shows the following:
Liquidity—Home Depot’s current ratio of 1.2:1 is slightly better than
Lowes’ 1.1:1 and Home Depot has significantly higher working capital
than Lowe’s.
PROBLEM 2-8B
(a) The primary objective of financial reporting is to provide information
useful for decision making. Since Yocum’s shares appear to be ac–
tively traded, investors must be capable of using the information made
available by Yocum to make decisions about the company.