85
P3–2, Concluded
Sheet
= Liabilities + Stockholders’ Equit
y
Accts. Unearned Wa
g
es Notes Common Retained
+ Land = Pa
y
able + Revenue + Pa
y
able + Pa
y
able + Stock + Earnin
g
s
60,000 2,250 13,500 0 15,000 30,000 124,250
(
)
(
)
(
)
(
)
1,450
(
1,450
)
31.
60,000 2,250 12,000 1,450 15,000 30,000 121,800
2,500 31.
60,000 2,250 12,000 1,450 15,000 30,000 124,300
Income Statement
Jan. 20. Fees earned 26,000
Jan. 25. Fees earned 7,500
Jan. 30. Wa
g
es exp.
(
15,500
)
Utilities exp.
(
4,250
)
Rent expense
(
2,650
)
(
)
(
)
(
)
(
)
r
(
)
g
(
)
86
P3–3
SLO HEALTH CARE INC.
Income Statement
For the Month Ended January 31, 20Y6
Fees earned …………………………………………………………… $ 36,000
Operating expenses:
Wages expense …………………………………………………. $16,950
Utilities expense ………………………………………………… 4,250
Rent expense ……………………………………………………. 2,650
SLO HEALTH CARE INC.
Statement of Stockholders’ Equity
For the Month Ended January 31, 20Y6
Common Stock Retained Earnings Total
Balances, Jan. 1, 20Y6 ………….. $25,000 $118,750 $143,750
Issued common stock …………… 5,000 5,000
87
P3–3, Concluded
SLO HEALTH CARE INC.
Balance Sheet
January 31, 20Y6
Assets
Current assets:
Cash …………………………………………………….. $ 18,500
Accounts receivable ……………………………… 34,750
Prepaid insurance …………………………………. 2,900
Liabilities
Current liabilities:
Accounts payable …………………………………. $ 2,250
Unearned rent ……………………………………….. 12,000
Wages payable ……………………………………… 1,450
Total current liabilities ………………………. $ 15,700
Long-term liabilities:
88
P3–4
1. SLO HEALTH CARE INC.
Statement of Cash Flows
For the Month Ended January 31, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers …………………………… $ 37,000*
Cash paid for expenses ……………………………………… (29,500)**
Net cash flows from operating activities …………….. $ 7,500
*$37,000 = $13,500 + $16,000 + $7,500
**$29,500 = $3,000 + $2,500 + $24,000
2. Net income …………………………………………………………….. $ 9,550
Depreciation ………………………………………………………….. $ 1,150
Changes in noncash current operating
assets and liabilities:
Increase in accounts receivable …………………………. (12,500)
P3–5
Total
Net Total Total Stockholders’
Income Assets Liabilities Equity
Reported amounts $ 127,500 $480,000 $ 150,000 $ 330,000
Corrections:
Adjustment (a) 9,700 9,700 0 9,700
89
P3–6
1.
Financial Statement Effects
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Laundry Prepaid Laundry Acc. Accts. Wages Common Retained
Cash +Supplies + Ins. + Equip.
–
Dep
r
. = Payable + Payable + Stock + Earnings
Unadjusted balances 53,000 9,000 6,000 250,000 (65,000) 7,000 0 50,000 196,000
31. (a) 2,150 (2,150) (a)
Statement of Cash Flows Income Statement
Operating (Revenues) 275,000 Laundry revenue 275,000
Financing (Common Stock) 25,000 Wages expense (110,000)
Operating (Expenses) (200,000) Rent expense (30,000)
90
P3–6, Continued
2. MS. ELLEN’S LAUNDRY INC.
Income Statement
For the Year Ended December 31, 20Y8
Laundry revenue ……………………………………………………. $275,000
Operating expenses:
Wages expense …………………………………………………. $112,150
Rent expense ……………………………………………………. 30,000
MS. ELLEN’S LAUNDRY INC.
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y8
Common Stock Retained Earnings Total
Balances, Jan. 1, 20Y8 ………….. $25,000 $101,500 $126,500
Issued common stock …………… 25,000 25,000
91
P3–6, Continued
3. MS. ELLEN’S LAUNDRY INC.
Balance Sheet
December 31, 20Y8
Assets
Current assets:
Cash …………………………………………………………………. $ 53,000
Laundry supplies ………………………………………………. 1,500
Prepaid insurance ……………………………………………… 1,400
Total current assets ………………………………………. $ 55,900
Property, plant, and equipment:
Laundry equipment ……………………………………………. $250,000
Less accumulated depreciation …………………….. (77,500) 172,500
Total assets ……………………………………………………………. $228,400
Liabilities
92
P3–6, Concluded
4. MS. ELLEN’S LAUNDRY INC.
Statement of Cash Flows
For the Year Ended December 31, 20Y8
Cash flows from (used for) operating activities:
Cash received from customers …………………………… $ 275,000
Cash paid for expenses ……………………………………… (200,000)
Net cash flows from operating activities …………….. $ 75,000
Cash flows from (used for) investing activities:
93
METRIC-BASED ANALYSES
MBA 3–1
Metric Effects
Transactions
Liquidity
Quick Assets
Profitability
Net Income
–
Accrual Basis
a. Issued common stock $35,000
(
(
(
g
(
)
—
b. Pur. supplies on credit — —
c. Paid accounts pa
y
able
(
800
)
—
94
MBA 3–2
Metric Effects
Liquidit
y
Profitabilit
y
Transactions Quick Assets Net Income
–
Accrual Basis
Jan. 1 Received unearned rent $13,500 —
1 Paid insurance
(
3,000
)
—
6 Purch. supplies on credit — —
9 Collected receivables — —
11 Paid creditors
(
2,500
)
—
(
)
(
)
MBA 3–3
Metric Effects
Liquidit
y
Profitabilit
y
Ad
j
ustments Quick Assets Net Income
–
Accrual Basis
Jan. 31 Insurance expired — $
(
450
)
31 Supplies expense —
(
900
)
(
)
(
)
95
MBA 3–4
Metric Effects
Liquidity
Quick Assets
Profitability
Net Income
–
Accrual Basis
Ad
j
ustments
Dec. 31 Wa
g
es expense — $
(
2,150
)
31 Depreciation expense
(
(
)
(
12,500
)
MBA 3–5
1. Year 2 (in millions): $1,047 = $864 + $183
Year 1 (in millions): $890 = $669 + $221
2. Year 2: 0.55 = $1,047 ÷ $1,916
Year 1: 0.51 = 890 ÷ $1,762
4. GameStop is experiencing competitive pressures from the availability of in-
expensive games that can be downloaded from various online sources for
cell phones, computers, and computer tablets. GameStop is also experienc-
96
MBA 3–6
1. Year 2 (in millions): $2,065 = $1,783 + $282
Year 1 (in millions): $2,118 = $1,783 + $335
MBA 3–7
1. Year 2 (in millions): $492 = $414 + $78
Year 1 (in millions): $466 = $379 + $87
2. Year 2: 1.01 = $492 ÷ $485
Year 1: 0.94 = $466 ÷ $494
MBA 3–8
The quick assets, current liabilities, and quick ratios (from MBA 3-6 and MBA 3-7)
for Year 2 are summarized as follows.
American Eagle
The Gap Outfitters
Quick assets ………………………………….. $2,065 $492
97
MBA 3–9
1. This item is intended to encourage students to think about different types of
2. Quick Ratio
Alphabet ($120,207 ÷ $24,183) …………………… 4.97
Walmart ($12,370 ÷ $78,521) ……………………… 0.16
3. Walmart has a significantly lower quick ratio than does Alphabet. Walmart’s
quick ratio is 0.16, compared to Alphabet’s 4.97. This difference can be partially
explained by the nature of the operations of the two companies. As a large
retailer, Walmart has a significant amount of merchandise inventory (more
than $43 billion) included in its current assets. In contrast, Alphabet has no
98
CASES
Case 3–1
Revenue is normally recorded when the services are provided or when the goods
are delivered (title passes) to the buyer. By waiting until after the services are
provided, the expenses of providing the services can be more accurately
measured and matched against the related revenues. Also, at this point, the pro-
vider of the services has a right to demand payment for the services if payment
hasn’t already been received.
(1) The receipt of revenue from customers in advance of a flight represents un-
earned revenues to the airline. For example, the purchase of discount tickets,
(2) At the end of the airline’s accounting period, it would have adjustments relat-
ed to items such as the following:
Accrued wages for employees
Depreciation on airplanes, terminal buildings, etc.
99
Case 3–2
a. There are several indications that adjustments were not recorded before the
financial statements were prepared, including the following:
1. All expenses on the income statement are identified as “paid” items and
not as “expenses.”
b. Likely accounts requiring adjustment include the following:
1. Accumulated Depreciation—Truck and Depreciation Expense—Truck
2. Supplies (paid) Expense and Supplies for supplies on hand
100
Case 3–3
1. The answers will vary among the student groups. The objective of this case is
to generate student interest and discussion of business emphases.
The advantages of the do-it-yourself emphasis are as follows:
a. It requires less capital equipment and training of employees. For example,
The advantages of the do-it-for-me emphasis are as follows:
a. Demographically, the population of the United States is aging. In the fu-
ture, such demographics mean more customers will be less willing to fix
their own cars. That is, they would rather pay someone to fix their cars for
them.
2. Examples of real-world businesses that have a do-it-yourself emphasis include
AutoZone, Pep Boys, and Napa Auto Parts in the automotive industry. In the
101
Case 3–4
2. Cigna: 83.06% ($1,854 ÷ $2,232)
Deere: 1.9% ($41 ÷ $2,159)
3. Deere’s accrual-based net income is closer to what would be reported as net
income under the cash basis based on the preceding calculations. The differ-
ence is only 1.9%, as compared to 83.06% for Cigna. These differences are
surprising since Cigna is a service business, and Deere is a manufacturing
Case 3–5
1. Company A is Facebook, Inc.
2. Facebook (Company A) has experienced rapid growth since its inception.
Year 3 revenues were two times those of Year 1. At the same time, operating
income has grown from $12,427 in Year 1 to $24,913 in Year 3. Likewise, net
income has grown from $10,217 in Year 1 to $22,112 in Year 3. Cash flows
from operating activities matches the growth in operating income while the
constant between years from $117,470 in Year 1 to $123,382 in Year 3.
Apple (Company C) has a history of innovating with new products and updat-
ing existing products. As a result, its revenues grew by over 23% from Year 1
revenues of $215,639 to Year 3 revenues of $265,595. Likewise, its operating
income grew from $60,024 in Year 1 to $70,898 in Year 3, while its net income