CHAPTER 2
SOLUTIONS TO EXERCISES—SET B
EXERCISE 2-1B
CL
Accounts payable
CA
Inventory
CA
Accounts receivable
LTI
Investments
PPE
Accumulated depreciation—buildings
PPE
Land
PPE
Buildings
LTL
Mortgage payable
CA
Cash
CA
Supplies
CL
Notes payable
PPE
Equipment
CA
Prepaid rent
EXERCISE 2-2B
CA
Prepaid rent
IA
PPE
Equipment
LTL
Copyrights
Common stock
Salaries and wages payable
PPE
Accumulated
RE
Retained earnings
Unearned sales revenue
CA
Accounts receivable
Inventory
PPE
Land
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
Earnings per share
(c)
Debt to assets ratio
$527,216
$1,867,680
= 28.2%
$562,246
$1,979,558
= 28.4%
$80,796 = $133,067
$61,521 = $461,808
(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