48
P2–2, Concluded
4. UP-DATE COMPUTER SERVICES
Statement of Cash Flows
For the Month Ended August 31, 20Y4
Cash flows from operating activities:
Cash receipts from operating activities ……………… $27,000
Deduct cash payments for operating activities …… (9,000)
Net cash flows from operating activities …………………. $ 18,000
Cash flows used for investing activities:
Cash payments for land …………………………………….. (40,000)
49
P2–3
1. HARGROVE SERVICES, INC.
Income Statement
For the Year Ending May 31, 20Y7
Revenues:
Fees earned………………………………………………………. $300,000
Expenses:
Salaries expense ………………………………………………. $ 87,000
Utilities expense ……………………………………………….. 40,000
2. HARGROVE SERVICES, INC.
Retained Earnings Statement
For the Year Ending May 31, 20Y7
Net income ……………………………………………………………………………….. $113,000
50
P2–3, Concluded
3. HARGROVE SERVICES, INC.
Balance Sheet
May 31, 20Y7
Assets
Cash ……………………………………………………………………… $ 62,000
Land ……………………………………………………………………… 98,000
Total assets …………………………………………………………… $ 160,000
Liabilities
Notes payable………………………………………………………… $ 30,000
4. HARGROVE SERVICES, INC.
Statement of Cash Flows
For the Year Ending May 31, 20Y7
Cash flows from operating activities:
Cash receipts from operating activities ……………… $ 300,000
Deduct cash payments for operating activities …… (187,000)
Net cash flows from operating activities …………………. $ 113,000
Cash flows used for investing activities:
Cash payments for land …………………………………….. (98,000)
51
P2–4
1. HARGROVE SERVICES, INC.
Income Statement
For the Year Ending May 31, 20Y8
Revenues:
Fees earned………………………………………………………. $515,000
Expenses:
Salaries expense ………………………………………………. $155,000
Utilities expense ……………………………………………….. 52,000
2. HARGROVE SERVICES, INC.
Retained Earnings Statement
For the Year Ending May 31, 20Y8
Retained earnings, June 1, 20Y7 …………………………….. $100,000
Net income ……………………………………………………………. $230,000
52
P2–4, Concluded
3. HARGROVE SERVICES, INC.
Balance Sheet
May 31, 20Y8
Assets
Cash ……………………………………………………………………… $145,000
Land ……………………………………………………………………… 240,000
Total assets …………………………………………………………… $385,000
4. HARGROVE SERVICES, INC.
Statement of Cash Flows
For the Year Ending May 31, 20Y8
Cash flows from operating activities:
Cash receipts from operating activities ……………… $ 515,000
Deduct cash payments for operating activities …… (285,000)
Net cash flows from operating activities …………………. $ 230,000
Cash flows used for investing activities:
Cash payment for land ………………………………………. (142,000)
53
P2–5
a. $125,000 (net income for December of $57,500 plus total operating expenses
of $67,500; also, the amount of cash received from customers on the state-
ment of cash flows.)
b. $10,620 ($67,500 – $33,120 – $18,000 – $1,800 – $3,960)
f. $45,500 ($57,500 – $12,000)
g. $45,500 ($0 + $45,500)
h. $50,500 ($225,500 – $175,000)
m. $57,500 ($125,000 – $67,500)
n. $105,000 (See notes payable on the balance sheet.)
o. $180,000 ($75,000 + $105,000)
p. $168,000 ($180,000 – $12,000)
P2–6
1. All financial statements should contain the name of the business in their
2. The income statement, retained earnings statement, and statement of cash
3. The year in the heading for the retained earnings statement should be 20Y8
rather than 20Y7.
4. The balance sheet should be labeled as of “July 31, 20Y8,” rather than “For
the Month Ended July 31, 20Y7.”
5. In the income statement, the dividends should not be listed as an operating
expense but should be included in the retained earnings statement.
6. In the income statement, the total operating expenses are incorrectly sub-
7. In the retained earnings statement, the net income should be presented, fol-
8. Notes payable should be listed as a liability on the balance sheet.
9. Land should be listed as an asset on the balance sheet.
11. The cash payments for operating expenses have been omitted from the oper-
ating activities section of the statement of cash flows.
12. The cash flows from financing activities should not include retained earnings.
In addition, the financing activities section should include cash received from
55
P2–6, Continued
13. Since this is Alpine Realty’s first month of operation, the increase in cash for
July should equal $32,000, the cash balance as of July 31, 20Y8.
Corrected financial statements appear as follows:
ALPINE REALTY, INC.
Income Statement
For the Month Ended July 31, 20Y8
Sales commissions ………………………………………………… $60,000
Expenses:
Office salaries expense ……………………………………… $20,000
ALPINE REALTY, INC.
Retained Earnings Statement
For the Month Ended July 31, 20Y8
Net income for July ……………………………………………………………………. $29,000
56
P2–6, Concluded
ALPINE REALTY, INC.
Balance Sheet
July 31, 20Y8
Assets
Cash ……………………………………………………………………… $ 32,000
Land ……………………………………………………………………… 30,000
Total assets …………………………………………………………… $ 62,000
ALPINE REALTY, INC.
Statement of Cash Flows
For the Month Ended July 31, 20Y8
Cash flows from operating activities:
Cash receipts from sales commissions ……………… $ 60,000
Deduct cash payments for operating expenses ….. (31,000)
Net cash flows from operating activities …………………. $ 29,000
Cash flows used for investing activities:
Cash payments for land ……………………………………. (30,000)
57
FINANCIAL ANALYSIS
FA2–1
1.
Year 2 Year 1
Sales …………………………………………………. 100.0% 100.0%
Cost of sales …………………………………….. (73.0) (71.7)
Gross profit ………………………………………. 27.0 28.3
2. Safeway’s financial performance declined slightly in Year 2. Cost of sales as a
percent of sales increased 1.3% from 71.7% to 73.0%. This had the effect of
decreasing gross profit as a percent of sales by the same amount (1.3%). The
FA2–2
In Year 1, operating income and net income were comparable for Safeway and
Kroger. For example, Safeway had operating income of 2.8% of sales compared
to Kroger’s 2.7%. Likewise, Safeway had net income of 1.4% of sales compared to
Kroger’s 1.3%. However, Safeway’s cost of sales and operating expenses as a
percent of sales differ significantly. Safeway’s cost of sales as a percent of sales
58
FA2–3
1.
Year 2 Year 1
Sales …………………………………………………. 100.0% 100.0%
Cost of sales …………………………………….. (58.7) (57.3)
2. As a percent of sales, Kellogg’s operating income decreased from 16.1% in
Year 1 to 15.0% in Year 2. In Year 2, operating expenses as a percent of sales
FA2–4
1.
Year 2 Year 1
Sales …………………………………………………. 100.0% 100.0%
Cost of sales …………………………………….. (63.7) (60.0)
2. As a percent of sales, General Mill’s operating income decreased from 18.6%
in Year 1 to 15.4% in Year 2. In Year 2, operating expenses as a percent of
FA2–5
In Year 2, operating income as a percent of sales is comparable for Kellogg
(15.0%) and General Mills (15.4%). The primary differences between the two com-
panies involve operating expenses and cost of sales. Operating expenses as a
percent of sales for Kellogg are 26.3%, which is 5.4% higher than the 20.9% of
General Mills. In contrast, cost of sales as a percent of sales for Kellogg is 58.7%,
60
FA2–6
1.
Year 2 Year 1
Current assets:
Cash …………………………………………….. 4.2% 6.3%
Accounts receivable ……………………… 4.0 3.6
Inventories ……………………………………. 21.8 21.1
Prepaid and other assets ……………….. 1.2 1.4
Current liabilities:
Accounts payable ………………………… 18.4% 18.0%
Salaries and wages payable …………… 4.5 3.8
Debt due within one year ……………….. 5.6 2.5
Other liabilities ……………………………… 10.2 10.1
Total current liabilities ……………………….. 38.8 34.3
2. A comparison of assets for Years 1 and 2 does not indicate any significant
change in the mix of assets. Current assets have decreased 1.2% as a percent
of total assets while fixed assets have increased by the same amount. A
comparison of liabilities for Years 1 and 2 indicates an increase in both cur-
rent and long-term liabilities as a percent of total liabilities plus stockholders’
equity. As a result, total liabilities have increased 5.7% of total liabilities plus
CASES
Case 2–1
1. From our discussions in Chapter 1, the two possible business emphases that
could be used are low-cost emphasis and premium-price emphasis.
2. Real-world examples of each emphasis are as follows:
3. The answers will vary among the student groups. Normally, venture capital
Case 2–2
Dr. Turner’s comment is not correct. The difference in the cash balance of
$55,000 ($100,000 – $45,000) represents the net result of operating, investing, and
62
Case 2–3
Year 1 Year 2 Year 3
Case 2–4
Note to Instructors: The objective of this case is to familiarize students with
financial reporting resources available on the Internet. The following solution is
based upon the Apple Inc. data as of June 19, 2013, from Yahoo.com’s finance Web
site.
1. $423.00 (See opening page for AAPL)
2. $385.10 to $705.07 (See opening page for AAPL)
3. September 21, 2012, at a price of $705.07 (See Key Statistics)
6. $4,170,000 (See Profile)
7. $12.20 (See Key Statistics)
8. Strong Buy = 19
Buy = 23
Case 2–5
Note to Instructors: The purpose of this case is to make students aware of alter-
native sources of information useful for investment decisions.
1. Although some may disagree, most would characterize the article as unfavor-
able concerning Apple’s prospects for the future.
2. No. It would be unwise to sell Apple Inc. stock based only upon this article.
3. No. Other sources of information should also be obtained, such as analysts’
4. Analysts use a variety of sources of information in making investment deci-
sions and recommendations. In addition to published financial statements,
