a.
Liabilities & Owners’ Equity
Cash 9,300$ Liabilities:
Accounts receivable 15,000 Notes payable 65,000$
Apple trees 84,000 Accounts payable 8,100
Livestock 5,000 Property taxes payable 4,700
b.
PROBLEM 2.6B
MAPLE VALLEY FARMS
20 Minutes, Medium
The loss of an asset, Barns and sheds, from a tornado would cause a decrease in total assets. When
MAPLE VALLEY FARMS
Balance Sheet
September 30, current year
Assets
a.
Liabilities & Owners’ Equity
Cash 4,920$ Liabilities:
b.
Liabilities & Owners’ Equity
Cash 31,320$ Liabilities:
Accounts receivable 9,840 Notes payable 48,000$
Assets
Balance Sheet
PROBLEM 2.7B
COLLIER BUTCHER SHOP
COLLIER BUTCHER SHOP
35 Minutes, Medium
COLLIER BUTCHER SHOP
Balance Sheet
Assets
July 5, current year
July 1, current year
PROBLEM 2.7B
COLLIER BUTCHERSHOP (concluded)
COLLIER BUTCHER SHOP
Statement of Cash Flows
For the Period July 1-5, current year
Collier Butcher Shop is in a stronger financial position on July 5 than it was on July 1.
Cash payment of accounts payable
Cash purchase of supplies
Cash flows from financing activities:
Cash flows from investing activities:
a.
Liabilities & Owners’ Equity
Cash 6,900$ Liabilities:
Accounts receivable 5,000 Notes payable * 50,000$
b.
Land
Liabilities & Owners’ Equity
Cash 34,000$ Liabilities:
Accounts receivable 5,000 Notes payable 50,000$
8,000$
Balance Sheet
September 30, current year
Assets
PROBLEM 2.8B
THE SWEET SHOP
40 Minutes, Strong
THE SWEET SHOP
THE SWEET SHOP
Income Statement
For the Period October 1-6, current year
Revenues
Assets
THE SWEET SHOP
October 6, current year
Balance Sheet
Land
Cash used in operating activities
PROBLEM 2.8B
THE SWEET SHOP (concluded)
THE SWEET SHOP
The Sweet Shop is in a stronger financial position on October 6 than on September 30. On
Statement of Cash Flows
For the Period October 1-6, current year
Cash received from revenues
Cash flows from financing activities:
Cash flows from investing activities:
a.
Liabilities & Owner’s Equity
Cash 18,400$ Liabilities:
Accounts receivable 10,000 Notes payable 15,000$
b. (1)
(2)
(3)
(4)
(5)
(6)
(7)
As the automobile is not used in the business, it appears to be Jaffe’s personal asset rather than
Only the amount receivable from Dell, Inc. ($10,000) should be included in the company’s
relate to completed transactions and are not yet assets of the business.
The props and costumes should be shown in the balance sheet at their cost, $18,000 , not at just
The cash in Jaffe’s personal savings account is not an asset of the business entity Old Town
Playhouse. Therefore, it should not appear in the balance sheet of the business. The money on
PROBLEM 2.9B
OLD TOWN PLAYHOUSE
35 Minutes, Strong
OLD TOWN PLAYHOUSE
Balance Sheet
September 30, current year
Assets
(8)
(9)
PROBLEM 2.9B
OLD TOWN PLAYHOUSE (concluded)
Owner’s equity is not valued at either the original amount invested or at the estimated market
value of the business. In fact, owner’s equity cannot be valued independently of the values
The amount owed to stagehands for work done through September 30 is the result of completed
a.
Liabilities & Owner’s Equity
Cash 3,200$ Liabilities:
Notes receivable 3,400 Notes payable 72,500$
b. (1)
(2)
(3)
(4)
(5)
(6)
(7)
The proper valuation for the land is its historical cost of $15,000, the amount established by the
PROBLEM 2.10B
STAR SCRIPTS
30 Minutes, Strong
STAR SCRIPTS
Balance Sheet
November 30, current year
Assets
The $25,000 described as “Other assets” is not an asset, because there is no valid legal claim or
The cash in Joe’s personal savings account is not an asset of the business entity Star Scripts and
The years-old IOU does not qualify as a business asset for two reasons. First, it does not belong
The total amount to be included in “Office furniture” for the rug is $10,000, the total cost,
The computer is no longer owned by Star Scripts and therefore cannot be included in the assets.
CONTENT OF A BALANCE SHEET
This case requires students to prepare a hypothetical balance sheet for an entity to be specified by the
instructor. Therefore, we cannot provide a “solution.”
The purpose of the case is to challenge students to think about the types of assets necessary to the
SOLUTIONS TO CRITICAL THINKING CASES
CASE 2.1
30 Minutes, Medium
CASE 2.2
30 Minutes, Strong
This case is intended to acquaint students with using the financial statements and annual report of a
publicly held company of their (or your) choice. As students will select various reports, we cannot
USING FINANCIAL STATEMENTS
a.
b.
CASE 2.3
30 Minutes, Medium
Bankers considering a loan application are particularly interested in the ability of the company
to pay its debts. They want to make loans that will be repaid promptly and in full at the agreed
A banker is also interested in the amount of owners’ equity, since this ownership capital serves
as a protecting buffer between the banker and any losses that may befall the business. Although
Star Corporation has greater owners’ equity than Moon Corporation, the difference is relatively
USING A BALANCE SHEET
As an investor, you would probably be willing to pay a higher price to buy the capital stock of
Star Corporation. Since both companies are newly organized and the cost of assets shown on the
balance sheet approximates fair market value, we can assume in this case that total
a.
b.
John’s preliminary evaluation is focusing too much on the “bottom line” and not looking at the
details of the cash flow information. The most important difference between the cash flows of the
30 Minutes, Medium
USING STATEMENTS OF CASH FLOW
CASE 2.4
Look at the underlying details of financial statements, not just the final figures or bottom line.
c.
One possibility is that Walker Company ran out of financing in Year-3. We do not know the
General recommendations to John should include the following:
1.
2.
3.
4.
ETHICS AND WINDOW DRESSING
CASE 2.5
35 Minutes, Medium
Postponing the cash purchase of WordMaster would indeed leave Omega Software with an
additional $8 million in cash at year-end, which would make the company appear more liquid.
The deliberate omission of liabilities from the balance sheet is unethical and illegal. This action
There is nothing unethical or illegal about renegotiating the due date of a liability. In fact, as
Omega needs to borrow money anyway, extending this obligation to Delta at a 10% interest rate
reasonable in today’s credit market.
The intentional violation of generally accepted accounting principles with the intent to mislead
a.
b.
c.
d.
The Sarbanes-Oxley Act of 2002 directs the PCAOB to establish auditing and related professional
The enforcement authority of the PCAOB is a broad investigative and disciplinary authority over
registered public accounting firms and persons associated with such firms for noncompliance with the
The members of the PCAOB as of March 2016 are:
CASE 2.6
30 Minutes, Easy
The mission of the PCAOB is stated as follows: “The PCAOB is a private-sector non-profit corporation
ETHICS, FRAUD & CORPORATE GOVERNANCE
PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
Lewis H. Ferguson
Jay D. Hanson
James R. Doty, chair
b.
170 West Tasman Drive
San Jose, CA 95134
CASE 2.7
25 Minutes, Easy
Cash and Cash Equivalents is the first item in the balance sheet. The end-of-quarter balance appears in the
a.
The business address of Cisco Systems is:
INTERNET
GATHERING FINANCIAL INFORMATION
d.