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CHAPTER 2
SOLUTIONS TO EXERCISES—SET B
EXERCISE 2-1B
CL
Accounts payable
CA
Inventory
CA
Accounts receivable
LTI
Investments
EXERCISE 2-2B
CA
Prepaid rent
IA
Patents
PPE
Equipment
LTL
Bonds payable
EXERCISE 2-3B
BOEING COMPANY
Partial Balance Sheet
December 31, 2014
(in millions)
Assets
Current assets
Cash ....................................................................... $ 7,042
Debt investments .................................................. 2,266
Accounts receivable ............................................. 5,740
EXERCISE 2-4B
H. J. HEINZ COMPANY
Partial Balance Sheet
April 30, 2014
(in thousands)
Assets
Current assets
Cash ................................................. $ 617,687
Accounts receivable ....................... 1,161,481
EXERCISE 2-5B
TROTTER COMPANY
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ........................................................... $18,840
Accounts receivable ................................. 10,600
Prepaid insurance ..................................... 3,200
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ..................................... $ 9,500
Current maturity of note payable .............. 13,600
EXERCISE 2-6B
TEXAS INSTRUMENTS, INC.
Balance Sheet
December 31, 2014
(in millions)
Assets
Current assets
Cash ........................................................................... $ 1,328
Debt investments ...................................................... 1,596
Total current assets .......................................... $ 6,918
Long-term investments
Stock investments .................................................... 267
Property, plant, and equipment
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ..................................................... $1,368
Income taxes payable ............................................... 657
EXERCISE 2-7B
(a) Earnings (loss) per share =
Net income Preferred dividends
Average common shares outstanding
—
(b) Using net loss as a basis to evaluate profitability, Callaway Company’s
(c) To determine earnings (loss) per share, dividends on preferred stock
EXERCISE 2-8B
(a) WI-HAUL CORPORATION
Income Statement
For the Year Ended July 31, 2014
Revenues
Service revenue .............................................. $66,100
Rent revenue .................................................. 8,500
WI-HAUL CORPORATION
Retained Earnings Statement
For the Year Ended July 31, 2014
Retained earnings, August 1, 2013 ...................... $34,000
Less: Net loss ...................................................... $4,500
(b) WI-HAUL CORPORATION
Balance Sheet
July 31, 2014
Assets
Current assets
Cash ................................................................ $26,200
EXERCISE 2-8B (Continued)
(b) WI-HAUL CORPORATION
Balance Sheet (Continued)
July 31, 2014
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ................................................ $ 4,100
Salaries and wages payable ............................... 2,080
Total current liabilities ................................... $ 6,180
Long-term liabilities
(c)
$37,980
Current ratio = = 6.1:1
$6,180
(d) The current ratio would not change because equipment is not a
current asset and a 5-year note payable is a long-term liability rather
than a current liability.
The debt to assets ratio would increase from 16.1% to 40.3%*.
Looking solely at the debt to assets ratio, I would favor making the
sale because Wi-Haul’s debt to assets ratio of 16.1% is very low.
Looking at additional financial data, I would note that Wi-Haul
EXERCISE 2-9B
(a)
Beginning of Year
End of Year
Working capital
$2,742 – $1,433 = $1,309
$3,361 – $1,635 = $1,726
(b) Nordstrom’s liquidity increased during the year. Its current ratio in-
creased from 1.91:1 to 2.06:1. Also, Nordstrom’s working capital
increased by $417,000,000.
EXERCISE 2-10B
(a)
Current ratio =$60,000
$30,000 = 2.0: 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.
EXERCISE 2-10B (Continued)
Payment of current obligations frequently requires cash. Neither
working capital nor the current ratio indicate the composition of
current assets. If a company’s current assets are largely comprised of
items such as inventory and prepaid expenses it may have difficulty
(d) The CFO’s decision to use $18,000 of cash to pay off accounts
payable is not in itself unethical. However doing so just to improve the
EXERCISE 2-11B
2014
2013
(a)
Current ratio
$1,020,834
$376,178
= 2.71:1
$1,189,108
$464,618
= 2.56:1
(c)
Debt to assets ratio
$527,216
$1,867,680
= 28.2%
$562,246
$1,979,558
= 28.4%
(e) Using the debt to assets ratio and free cash flow as measures of
solvency produces negative results for American Eagle Outfitters. Its
EXERCISE 2-11B (Continued)
(f) In both 2014 and 2013 American Eagle Outfitters cash provided by
operating activities was greater than the cash used for capital
EXERCISE 2-12B
(a) 2 Going concern assumption
(b) 6 Economic entity assumption
EXERCISE 2-13B
1. Incorrect. The historical cost principle requires that assets be recorded
and reported at their cost.
3. Incorrect. The economic entity assumption requires that the activities
