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CHAPTER 2
A Further Look at Financial Statements
PROBLEM 2-1C
KELLOGG COMPANY
Balance Sheet
December 31, 2014
(in millions)
Assets
Current assets
Cash ...................................................................... $ 334
Accounts receivable, net .................................... 1,093
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable—current ...................................... $ 1,211
Accounts payable ................................................ 1,077
Total current liabilities ................................. $ 2,288
Long-term liabilities
PROBLEM 2-2C
TILLEY, INC.
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue ..................................................... $53,000
Expenses
Salaries and wages expense ................................ $36,000
Depreciation expense ........................................... 4,300
TILLEY, INC.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ...................................... $14,000
Plus: Net income ......................................................... 6,200
PROBLEM 2-2C (Continued)
TILLEY, INC.
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ...................................................................... $ 5,100
Accounts receivable ............................................ 4,900
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ................................................ $8,200
Salaries and wages payable ............................... 2,000
PROBLEM 2-3C
(a) RAPP CORPORATION
Income Statement
For the Year Ended April 30, 2014
Revenues
Sales revenue ................................................ $21,450
Expenses
Salaries and wages expense ....................... $6,840
Depreciation expense ................................... 2,200
Income tax expense ...................................... 1,600
RAPP CORPORATION
Retained Earnings Statement
For the Year Ended April 30, 2014
Retained earnings, May 1, 2013 ........................... $13,960
PROBLEM 2-3C (Continued)
(b) RAPP CORPORATION
Balance Sheet
April 30, 2014
Assets
Current assets
Cash ................................................................ $21,955
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable .......................................... $ 2,100
Income taxes payable .................................... 300
Stockholders’ equity
Common stock ............................................... 20,000
Retained earnings .......................................... 20,860
(c) Rapp Corporation reports its revenues and expenses on the income
statement with net income being the result. Net income from the
income statement is reported on the retained earnings statement as an
item added to beginning retained earnings as part of the determination
of retained earnings at year end. The year end retained earnings is
then reported as part of stockholders’ equity on the balance sheet.
PROBLEM 2-4C
(a) Weber’s net income is $136,000 ($890,000 – $620,000 –$59,000 –
$10,000 – $65,000).
Its earnings per share is $.34 ($136,000 ÷ 400,000 shares).
(b) Weber’s 2014 working capital of $400,000 ($700,000 – $300,000) is over
(c) Al Sharif appears to be less solvent. Al Sharif’s 2014 debt to assets ratio
of 34% ($265,000 ÷ $780,000)a is slightly higher than Weber’s ratio of 33%
($500,000 ÷ $1,500,000)b. The lower the percentage of debt to assets, the
lower the risk that a company may be unable to pay its debts as they
come due.
PROBLEM 2-5C
(a) (i) Current ratio =
$298,600
$148,700
= 2.0:1.
(ii) Working capital = $298,600 – $148,700 = $149,900.
(b) During 2014, DeVoe’s current ratio decreased from 2.4:1 to 2.0:1 and
its working capital dropped from $178,000 to $149,900. Both measures
indicate a slight decline in liquidity during 2014.
PROBLEM 2-6C
2013
2014
(a)
Earnings per share.
(b)
Working capital.
(c)
Current ratio.
(d)
Debt to assets.
(e)
Free cash flow.
Free cash flow.
(f) The underlying profitability of the corporation as measured by earn-
ings per share has declined. The liquidity of the corporation dropped
PROBLEM 2-7C
Ratio
Blockbuster Inc
Movie Gallery, Inc.
(All Dollars Are in Millions)
(a)
Working capital
$171 ($1,566 – $1,395)
($29) ($239 – $268)
(b)
Current ratio
1.12:1 ($1,566 ÷ $1,395)
.89:1 ($239 ÷ $268)
(f) The comparison of the two companies shows the following:
Liquidity—Blockbuster’s current ratio is 1.12:1 compared to Movie
Gallery’s .89:1. Its working capital is $171 compared to Movie Gallery’s
PROBLEM 2-8C
(a) The primary objective of financial reporting is to provide information
useful for decision making. Since Net Nanny’s shares appear to be ac-
(b) The investors must feel as if the company will show earnings in the
future. They must recognize that information relevant to their invest-
