Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-35
AP2–2.
Req. 1
Adamson Incorporated was organized as a corporation. Only a corporation issues
shares of capital stock to its owners in exchange for their investment, as Adamson did
in transaction (c).
Req. 2 (On next page)
Req. 3
Req. 4
(a) Total assets = $35,000 + $2,000 + $85,000 + $107,000 + $510,000 = $739,000
Req. 5
Current
=
Current Assets
=
$35,000 + $2,000
=
$37,000
=
0.22
Ratio
Current Liabilities
$169,000
$169,000
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
AP2–2. (continued)
Req. 2
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Notes
Receivable
Long-Term
Investments
Equipment
Building
Short-Term
Notes
Payable
Long-Term
Notes
Payable
Contributed
Capital
Retained
Earnings
120,000
70,000
310,000
=
140,000
60,000
220,000
80,000
+110,000
=
+110,000
–3,000
+30,000
=
+27,000
+100,000
=
+100,000
–5,000
+10,000
=
+5,000
–2,000
=
=
=
=
+35,000
+107,000
=
+169,000
+320,000
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-37
AP2–3.
Req. 1 and 2
Cash and Cash
Equivalents
Short-Term
Investments
Accounts
Receivable
Beg.
74,376
Beg.
0
Beg.
12,672
(a)
1,020
3,400
(b)
(e)
2,980
Prepaid Expenses and
Other Current Assets
Property, Plant,
and Equipment
Intangibles
Beg.
36,865
Beg.
350,432
Beg.
96,823
(f)
11,230
4,020
(d)
(b)
3,400
36,865
357,642
100,223
Other Assets
Accounts
Payable
Accrued Expenses
Payable
Beg.
4,540
26,444
Beg.
109,017
Beg.
(g)
4,230
26,444
203,029
Beg.
47,710
Beg.
Beg.
9,400
(f)
1,020
(a)
212,429
47,710
22,068
* Current portion is $41.
Beg.
(h)
354,425
Req. 3
No effect was recorded for (c). Ordering goods involves no exchange or receipt of
cash, goods, or services and thus is not a transaction.
(d)
4,020
2,980
(e)
2,980
12,672
(g)
1,830
(f)
(h)
Beg.
186,265
71,216
186,265
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
AP2–3. (continued)
Req. 4
Ethan Allen Interiors, Inc.
Balance Sheet
At September 30, 2008
(in thousands of dollars)
Assets
Current assets
Cash and cash equivalents
$ 71,216
Short-term investments
2,980
Accounts receivable
Inventories
186,265
Prepaid expenses and other current assets
309,998
357,642
100,223
4,230
Total Assets
$772,093
Liabilities
Current liabilities
Accounts payable
$ 26,444
Accrued expenses payable
109,017
Current portion of long-term debt
41
135,502
Total Liabilities
Contributed capital
Retained earnings
354,425
Total Stockholders’ Equity
376,493
$772,093
Req. 5
Current
=
Total Current Assets
=
$309,998
=
2.29
Ratio
Total Current Liabilities
$135,502
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-39
AP2–4.
Transaction
Type of Activity
Effect on Cash
(a)
F
+
(b)
I
−
(c)
NE
NE
(e)
I
−
(h)
−
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-40
CASES AND PROJECTS
ANNUAL REPORT CASES
CP2–1.
1. The company is a corporation since it maintains share capital and its owners are
2. The amount listed on the balance sheet for inventories does not represent the
3. The company’s current obligations include: accounts payable, notes payable,
accrued compensation and payroll taxes, accrued rent, accrued income and other
taxes, unredeemed stored value cards and gift certificates, current portion of
deferred lease credits, and other liabilities and accrued expenses.
5. The company spent $265,335,000 on purchasing property and equipment in the
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
CP2–2.
2. No – shareholders’ equity is a residual balance, meaning that the shareholders will
3. The company’s only noncurrent liability is Deferred Rent and Other Liabilities.
4.
Current
=
Current Assets
=
$624,402,000
=
4.42
Ratio
Current Liabilities
$141,150,000
5. The company had a net cash outflow from investing activities of $56,907,000,
primarily because of capital expenditures (the purchase of property and equipment
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-42
CP2–3.
1.
Industry
Average
American Eagle
Outfitters
Urban
Outfitters
Current Ratio =
2.55
2.30
4.42
American Eagle Outfitters’ current ratio of 2.30 is slightly lower than the industry
2. As indicated in the financing activities section of each company’s statement of cash
flows, during the most recent year, American Eagle Outfitters spent $3,432,000
3. As indicated the statement of cash flows, American Eagle Outfitters paid
4. American Eagle reports “Property and equipment, at cost, net of accumulated
depreciation and amortization” and Urban Outfitters reports “Property and
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-43
FINANCIAL REPORTING AND ANALYSIS CASES
CP2–4.
1. (a) Papa John’s total assets reported at March 29, 2009 are $387,861,000.
(b) Long-term debt including the current portion due decreased over three months
from $130,654,000 ($123,579,000 long-term + $7,075,000 current portion) at
December 28, 2008, to $111,525,000 ($103,075,000 long-term + $8,450,000
2. (a) For the three months ended March 29, 2009, Papa John’s spent $5,064,000 on
the purchase of property and equipment, its largest use of cash for investing
CP2–5.
The major deficiency in this balance sheet is the inclusion of the owner’s personal
residence as a business asset. Under the separate-entity assumption, each business
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-44
CP2–6.
1. The company is a corporation since its owners are referred to as “stockholders.”
3.
Current
=
Current Assets
=
$20,151
=
1.36 (dollars in millions)
Ratio
Current Liabilities
$14,859
4.
Accounts Payable (−L) …………………………..
8,309 million
Cash (−A) ……………………………………………………….
8,309 million
5. Over its years in business, it appears that Dell has been profitable, based on a
positive amount in Retained Earnings of $20,677,000,000. The Retained Earnings
account represents the cumulative earnings of the firm less any dividends paid to the
shareholders since the business began.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
CRITICAL THINKING CASES
CP2–7.
Req. 1
Dewey, Cheetum, and Howe, Inc.
Balance Sheet
December 31, 2012
Assets
Current Assets:
Cash
$ 1,000
Accounts receivable
8,000
Inventory
8,000
Total current assets
17,000
Furniture and fixtures
52,000
Delivery truck (net)
12,000
Buildings (net)
60,000
Total assets
$141,000
Liabilities
Current Liabilities:
Accounts payable
$ 16,000
Payroll taxes payable
13,000
Total current liabilities
29,000
Notes payable (due in three years)
15,000
Mortgage payable
50,000
Total liabilities
Stockholders’ Equity
Contributed capital
80,000
Accumulated deficit
(33,000)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$141,000
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-46
CP2–7. (continued)
Req. 2
Dear ___________,
I corrected the balance sheet for Dewey, Cheetum, and Howe, Inc. Primarily, I
reduced the amount reported for buildings to $60,000 which is the historical cost less
any depreciation. Estimated market value is not a generally accepted accounting
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
2-47
CP2–8.
1. The most obvious parties harmed by the fraud at Ahold’s U.S. Foodservice, Inc.,
were the stockholders and creditors. Stockholders were purchasing shares of stock
that were inflated due to the fraud. Creditors were lending funds to the company
2. U.S. Foodservice set certain financial goals and tied the former executives’ bonuses
to meeting the goals. Adopting targets is a good tool for monitoring progress toward
3. In many cases of fraudulent activity, auditors are named in lawsuits along with the
company. If the auditors are found to be negligent in performing their audit, then
they are liable. However, in many frauds, the management at multiple levels of the
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP2–9.
The solution to this team project will depend on the companies and/or accounting
period selected for analysis.