EXERCISE 2-12
(a) 2 Going concern assumption
(b) 6 Economic entity assumption
EXERCISE 2-13
(a) This is a violation of the historical cost principle. The inventory was
written up to its fair value when it should have remained at cost.
(b) This is a violation of the economic entity assumption. The treatment of
SOLUTIONS TO PROBLEMS
PROBLEM 2-1A
YAHOO! INC.
Balance Sheet
December 31, 2014
(Amounts are in millions)
Assets
Current assets
Cash …………………………………………….. $2,292
Debt investments ………………………….. 1,160
Accounts receivable ……………………… 1,061
Prepaid rent ………………………………….. 233
Total current assets ……………….. $ 4,746
Long-term investments
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………. $ 152
Unearned sales revenue ……………….. 413
Total current liabilities ……………. $ 565
Long-term liabilities
PROBLEM 2-2A
TRESH CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue …………………………………………….. $68,000
Expenses
Salaries and wages expense ………………………….. $37,000
Depreciation expense …………………………………….. 3,600
TRESH CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, 2014 ……………………………………….. $31,000
Add: Net income …………………………………………………………………. 21,400
PROBLEM 2-2A (Continued)
TRESH CORPORATION
Balance Sheet
December 31, 2014
Assets
Current assets
Cash …………………………………………………………….. $10,100
Accounts receivable ……………………………………… 11,700
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………………………. $18,300
Salaries and wages payable …………………………… 3,000
PROBLEM 2-3A
(a) RAMIREZ ENTERPRISES
Income Statement
For the Year Ended April 30, 2014
Sales revenue ……………………………………………….. $5,100
Expenses
Cost of goods sold …………………………………. $1,060
Salaries and wages expense ………………….. 700
Interest expense …………………………………….. 400
RAMIREZ ENTERPRISES
Retained Earnings Statement
For the Year Ended April 30, 2014
Retained earnings, May 1, 2013 ………………………. $1,600
Add: Net income ………………………………………….. 2,230
PROBLEM 2-3A (Continued)
(b) RAMIREZ ENTERPRISES
Balance Sheet
April 30, 2014
Assets
Current assets
Cash ………………………………………………. $1,270
Stock investments ………………………….. 1,200
Accounts receivable ……………………….. 810
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ……………………………………………. $ 61
Accounts payable ………………………………………. 834
Salaries and wages payable ……………………….. 222
Income taxes payable ………………………………… 135
Total current liabilities ………………………… $1,252
PROBLEM 2-4A
(a) Bosch Company’s net income for 2014 is $248,000 ($1,800,000 –
$1,175,000 – $283,000 – $9,000 – $85,000). Its earnings per share is $3.10
(b) Bosch appears to be more liquid. Bosch’s 2014 working capital of
$340,875 ($407,200 – $66,325) is more than twice as high as Fielder’s
(c) Bosch appears to be slightly more solvent. Bosch’s 2014 debt to total
assets ratio of 18.6% ($174,825 ÷ $939,200)a is lower than Fielder’s
ratio of 22.5% ($74,400 ÷ $330,064)b. The lower the percentage of debt
to assets, the lower the risk is that a company may be unable to pay its
debts as they come due.
Another measure of solvency, free cash flow, also indicates that Bosch
PROBLEM 2-5A
(a) (i) Working capital = $458,900 – $195,500 = $263,400.
(ii) Current ratio = $458,900
$195,500 = 2.35:1.
(b) During 2014, the company’s current ratio increased from 1.65:1 to
2.35:1 and its working capital increased from $160,500 to $263,400. Both
measures indicate an improvement in liquidity during 2014.
The company’s debt to assets ratio increased from 31.0% in 2013 to
38.2% in 2014 indicating that the company is less solvent in 2014. Another
PROBLEM 2-6A
2013 2014
(a) Earnings per share.
(b)
Working capital.
(c)
Current ratio.
$155,000
$70, 000 = 2.2:1
$188,000
$75,000 = 2.5:1
(d)
Debt to assets ratio.
(f) Net income and earnings per share have increased, indicating that the
underlying profitability of the corporation has improved. The liquidity
PROBLEM 2-7A
Ratio Target Wal-Mart
(All Dollars are in Millions)
(
a
)
Working capital $17,488 – $10,512 = $6,976 $48,949 – $55,390 = ($6,441)
(
b
)
Current ratio 1.66:1 ($17,488 ÷ $10,512) .88:1 ($48,949 ÷ $55,390)
(
)
(f) The comparison of the two companies shows the following:
Liquidity—Target’s current ratio of 1.66:1 is much better than Wal-
Mart’s .88:1 and Target has significantly higher working capital than
Wal-Mart.
PROBLEM 2-8A
(a) Accounting information is the compilation and presentation of financial
information for a company. It provides information in the form of finan-
cial statements and additional disclosures that is useful for decision
making.
The accounting rules and practices that have substantial authoritative
support and are recognized as a general guide for financial reporting
(b) Sue is correct in her understanding that the low success rate for new
biotech products will be a cause of concern for investors. Her
suggestion that detailed scientific findings be reported to prospective
PROBLEM 2-1B
STARBUCKS CORPORATION
Balance Sheet
September 30, 2014
(Amounts are in millions)
Assets
Current assets
Cash ………………………………………………………. $281
Debt investments ……………………………………. 157
Long-term investments
Stock investments ………………………………….. 280
Property, plant and equipment
Equipment ……………………………………………… 3,036
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable …………………………………………. $ 1,468
Accounts payable ………………………………………….. 391
Long-term liabilities
Notes payable …………………………………………. 550
Stockholders’ equity
Common stock ……………………………………….. 40
PROBLEM 2-2B
MUELLER, INC.
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue …………………………………………….. $51,000
Expenses
Salaries and wages expense ………………………….. $34,000
Depreciation expense …………………………………….. 4,300
MUELLER, INC.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ………………………………… $14,000
Plus: Net income …………………………………………………. 6,200
PROBLEM 2-2B (Continued)
MUELLER, INC.
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ……………………………………………………………. $ 6,100
Accounts receivable …………………………………….. 2,900
Prepaid insurance ………………………………………… 2,400
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ………………………………………… $ 7,200
Salaries and wages payable ………………………….. 3,000
PROBLEM 2-3B
(a) VERN CORPORATION
Income Statement
For the Year Ended April 30, 2014
Revenues
Sales revenue ………………………………………… $20,450
Expenses
Salaries and wages expense …………………… $5,840
Depreciation expense …………………………….. 3,200
VERN CORPORATION
Retained Earnings Statement
For the Year Ended April 30, 2014
Retained earnings, May 1, 2013 ……………………… $13,960
Plus: Net income …………………………………………. 9,700
PROBLEM 2-3B (Continued)
(b) VERN CORPORATION
Balance Sheet
April 30, 2014
Assets
Current assets
Cash ………………………………………………………. $20,955
Accounts receivable ……………………………….. 10,150
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………………… $ 3,100
Income taxes payable …………………………….. 300
PROBLEM 2-4B
(a) Wise’s net income is $215,000 ($900,000 – $450,000 – $150,000 – $10,000 –
$75,000).
(b) Wise’s 2014 working capital of $470,000 ($700,000 – $230,000) is over
(c) Omaz appears to be less solvent. Omaz’s 2014 debt to assets ratio of
34% ($265,000 ÷ $780,000)a is slightly higher than Wise’s ratio of 29%
($430,000 ÷ $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.
Omaz’s free cash flow is only $26,000 ($46,000 – $20,000) compared to
PROBLEM 2-5B
(a) (i) Current ratio = $302, 600
$148, 700 = 2.0:1.
(ii) Working capital = $302,600 – $148,700 = $153,900.
(b) During 2014, Divine’s current ratio decreased from 2.4:1 to 2.0:1 and its
working capital dropped from $178,000 to $153,900. Both measures
indicate a slight decline in liquidity during 2014.
PROBLEM 2-6B
2013 2014
(a)
Earnings per share.
$113,000
320, 000 shares = $.35
$100, 000
370, 000 shares = $.27
(b)
Working capital.
(d)
Debt to assets ratio.
$135,000
$619,000 = 21.8%
$178, 000
$802, 000 = 22.2%
(e) Free cash flow. Free cash flow.
PROBLEM 2-7B
Ratio Home Depot Lowe’s
(All Dollars are in Millions)
(
a
)
Working capital $14,674 – $12,706 = $1,968 $8,686 – $7,751 = $935
(
b
)
Current ratio 1.2:1 ($14,674 ÷ $12,706) 1.1:1 ($8,686 ÷ $7,751)
(
)
(f) The comparison of the two companies shows the following:
Liquidity—Home Depot’s current ratio of 1.2:1 is slightly better than
Lowes’ 1.1:1 and Home Depot has significantly higher working capital