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EXERCISE 2-10 (Continued)
(b)
Current ratio = $40,000*
$10,000** =4.0: 1
(c) Liquidity measures indicate a company’s ability to pay current obliga-
tions as they become due. Satisfaction of current obligations usually
requires the use of current assets.
(d) The CFO’s decision to use $20,000 of cash to pay off accounts payable is
not in itself unethical. However, doing so just to improve the year-end
current ratio could be considered unethical if this action misled creditors.
EXERCISE 2-11
2017
2016
$925,359 $1,020,834
$179,061 $400,019
(c)
Debt to assets ratio
$554,645
$527, 216
(d)
Free cash flow
$302,193 – $265,335 – $82,394
$464,270 – $250,407 – $80,796
(e) Using the debt to assets ratio and free cash flow as measures of
solvency produces deteriorating results for American Eagle Outfitters.
(f) In 2016 American Eagle Outfitters’s cash provided by operating activities
EXERCISE 2-12
(a) 2 Going concern assumption
(b) 6 Economic entity assumption
EXERCISE 2-13
(a) This is a violation of the historical cost principle. The inventory was
written up to its fair value when it should have remained at cost.
(b) This is a violation of the economic entity assumption. The treatment of
the transaction treats Victor Lopez and Lopez Co. as one entity when
SOLUTIONS TO PROBLEMS
PROBLEM 2-1A
YAHOO! INC.
Balance Sheet
December 31, 2017
(Amounts are in millions)
Assets
Current assets
Cash ..................................................... $2,292
Debt investments ................................ 1,160
Accounts receivable ........................... 1,061
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ............................... $ 152
Unearned sales revenue .................... 413
Total current liabilities ................ $ 565
Long-term liabilities
PROBLEM 2-2A
MARTIN CORPORATION
Income Statement
For the Year Ended December 31, 2017
Revenues
Service revenue ..................................................... $68,000
Expenses
Salaries and wages expense ................................ $37,000
MARTIN CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2017
Retained earnings, January 1, 2017 ............................................... $31,000
Add: Net income ............................................................................ 21,400
PROBLEM 2-2A (Continued)
MARTIN CORPORATION
Balance Sheet
December 31, 2017
Assets
Current assets
Cash ....................................................................... $10,100
Accounts receivable ............................................. 11,700
Prepaid insurance ................................................. 3,500
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ................................................. $18,300
Salaries and wages payable ................................. 3,000
PROBLEM 2-3A
(a) LAZURIS ENTERPRISES
Income Statement
For the Year Ended April 30, 2017
Sales revenue ........................................................ $5,100
Expenses
Cost of goods sold ........................................ $1,060
Salaries and wages expense ....................... 700
LAZURIS ENTERPRISES
Retained Earnings Statement
For the Year Ended April 30, 2017
Retained earnings, May 1, 2013 ............................ $1,600
Add: Net income .................................................. 2,230
PROBLEM 2-3A (Continued)
(b) LAZURIS ENTERPRISES
Balance Sheet
April 30, 2017
Assets
Current assets
Cash ....................................................... $1,270
Stock investments ................................ 1,200
Property, plant, and equipment
Land. ...................................................... 3,100
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable .................................................... $ 61
Accounts payable .............................................. 834
Salaries and wages payable ............................. 222
Income taxes payable ....................................... 135
PROBLEM 2-4A
(a) Loeb Company’s net income for 2017 is $248,000 ($1,800,000 –
$1,175,000 – $283,000 – $9,000 – $85,000). Its earnings per share is $3.10
(b) Loeb appears to be more liquid. Loeb’s 2017 working capital of
$340,875 ($407,200 – $66,325) is more than twice as high as Bowsh’s
(c) Loeb appears to be slightly more solvent. Loeb’s 2017 debt to total
assets ratio of 18.6% ($174,825 ÷ $939,200)a is lower than Bowsh’s ratio
of 22.5% ($74,400 ÷ $330,064)b. The lower the percentage of debt to
assets, the lower the risk is that a company may be unable to pay its
debts as they come due.
PROBLEM 2-5A
(a) (i) Working capital = $458,900 – $195,500 = $263,400.
(ii) Current ratio =
$458,900
$195,500
= 2.35:1.
(b) During 2017, the company’s current ratio increased from 1.65:1 to
2.35:1 and its working capital increased from $160,500 to $263,400. Both
measures indicate an improvement in liquidity during 2017.
PROBLEM 2-6A
2016
2017
(a)
Earnings per share.
(b)
Working capital.
(c)
Current ratio.
(d)
Debt to assets ratio.
(f) Net income and earnings per share have increased, indicating that the
underlying profitability of the corporation has improved. The liquidity
PROBLEM 2-7A
Ratio
Target
Wal-Mart
(All Dollars are in Millions)
(a)
Working capital
$17,488 – $10,512 = $6,976
$48,949 – $55,390 = ($6,441)
(f) The comparison of the two companies shows the following:
Liquidity—Target’s current ratio of 1.66:1 is much better than Wal-
Mart’s .88:1 and Target has significantly higher working capital than
Wal-Mart.
PROBLEM 2-8A
(a) Accounting information is the compilation and presentation of financial
information for a company. It provides information in the form of finan-
cial statements and additional disclosures that is useful for decision
making.
(b) Saira is correct in her understanding that the low success rate for new
biotech products will be a cause of concern for investors. Her
suggestion that detailed scientific findings be reported to prospective
investors might offset some of their concerns but it probably won’t
conform to the qualitative characteristics of accounting information.
CT 2-1 FINANCIAL REPORTING PROBLEM
(a) Total current assets were $68,531,000 at September 27, 2014, and
(b) Current assets are properly listed in the order of liquidity. As you will
(c) The asset classifications are similar to the text: (a) current assets,
CT 2-2 COMPARATIVE ANALYSIS PROBLEM
(a)
($ in thousands)
Columbia Sports wear
VFC
1. Working capital
$1,266,041 – $373,120 = $892,921
$4,185,854 – $1,620,241 =
$2,565,613
(b) Liquidity
VFC Company appears much more liquid since it has about $1,673
million more working capital than Columbia. But, looking at the current
ratios, we see that Columbia’s ratio is more than 1.3 times as large as
VFC’s.
Solvency
CT 2-3 COMPARATIVE ANALYSIS PROBLEM
(a)
($ in millions)
Amazon
Wal-Mart
1.
Working capital
$31,327 – $28,089 = $3,238
$63,278 – $65,272 = $(1,994)
(b) Liquidity
Amazon appears more liquid since it has $5,232 million more working
capital than Wal-Mart. Also, Amazon’s current ratio is slightly better
than Wal-Mart’s.
Solvency
