Financial Accounting, 10/e 3-59
COMP3–1. (continued)
Req. 2
Cash
Short-Term Investments
Accounts Receivable
Beg. 0
Beg. 0
Beg. 0
(a) 8,000
2,400 (c)
(j) 10,000
(k) 21,000
(b) 20,000
3,040 (d)
10,000
21,000
(o) 25
2,000 (h)
2,400 (i)
Beg. 0
Beg. 0
(g) 2,600
(h) 2,000
2,100 (p)
(i) 2,200
2,600
6,000
Short-Term
Note Receivable
Equipment
Accounts Payable
Beg. 0
(f) 1,000
Beg. 0
(d) 15,200
0 Beg
12,160 (d)
2,600 (g)
1,000
15,200
14,760
Utilities Payable
Unearned Revenue
Long-Term Note Payable
1,400 (q)
(n) 1,500
20,000 (b)
310
1,400
18,500
0 Beg.
10 (a)
7,990 (a)
0 Beg.
10
7,990
0
Service Revenue
Interest Revenue
Wages Expense
0 Beg.
42,000 (k)
0 Beg.
25 (o)
Beg. 0
(l) 18,000
42,000
25
18,000
Training Expense
Insurance Expense
Rent Expense
Beg. 0
Beg. 0
Beg. 0
(c) 600
2,100
Utilities Expense
Beg. 0
COMP3–1. (continued)
Req. 3
IthacaDeep, Inc.
Unadjusted Trial Balance
April 30
Debit
Credit
Cash
7,985
Short-term investments
10,000
Accounts receivable
21,000
Supplies
2,600
Prepaid expenses
6,000
Short-term note receivable
1,000
Equipment
15,200
Accounts payable
14,760
Utilities payable
Unearned revenue
1,400
Long-term note payable
18,500
Common stock
10
Additional paid-in capital
7,990
Retained earnings
0
Service revenue
42,000
Interest revenue
25
Wages expense
18,000
Training expense
2,100
Insurance expense
Rent expense
Utilities expense
Total
84,995
84,995
Financial Accounting, 10/e 3-61
COMP3–1. (continued)
Req. 4
IthacaDeep, Inc.
Unadjusted Income Statement
For the Month Ended April 30
Service revenue
$42,000
Total operating revenues
42,000
Operating expenses:
Wages expense
18,000
Training expense
Insurance expense
Rent expense
Utilities expense
Total operating expenses
21,210
Income from operations
20,790
Other items:
Interest revenue
25
Income before income taxes
20,815
Income tax expense
Net income
$20,815
Earnings per share ($20,815 ÷ 200 shares)
$104.08
IthacaDeep, Inc.
Statement of Stockholders’ Equity
For the Month Ended April 30
Common
Stock
Additional
Paid-in Capital
Retained
Earnings
Total
Stockholders’ Equity
Balances, April 1
$ 0
$ 0
$ 0
$ 0
Issue stock
Net income
Balances, April 30
COMP3–1. (continued)
Req. 4 (continued)
IthacaDeep, Inc.
Balance Sheet
April 30
Assets
Current assets:
Cash
$ 7,985
Short-term investments
10,000
Accounts receivable
21,000
Supplies
2,600
Prepaid expenses
6,000
Short-term note receivable
1,000
Total current assets
48,585
Equipment
15,200
Total assets
$63,785
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$14,760
Utilities payable
310
Unearned revenue
1,400
Total current liabilities
16,470
Long-term note payable
18,500
Total liabilities
34,970
Common stock ($0.05 par value)
Additional paid-in capital
7,990
Retained earnings
20,815
Total stockholders’ equity
28,815
Req. 5
Current ratio = Current assets ÷ Current liabilities
= $48,585 ÷ $16,470 = 2.95
CASES AND PROJECTS
CP3–1. (dollars in thousands)
1. The largest expense on the income statement for the year ended February 3, 2018,
2. This question is intended to focus students on accounts receivable and the typical
activities that increase and decrease the account.
Assuming all net sales are on credit, American Eagle Outfitters (AEO) collected
$3,803,879 from customers. .
3. Over the life of the business, total earnings will equal total net cash flow. However,
for any given year, the assumption that net earnings is equal to cash inflows is not
4. An income statement or statement of operations reports the financial performance of
a company over a period of time in terms of revenues, gains, expenses, and losses.
CP3–1. (continued)
5.
Fiscal year
ended
Net
Income
÷
Net Sales (or
Operating) Revenues
=
Net Profit Margin
Ratio
2/3/18
$204,163
$3,795,549
0.0538 or 5.38%
0.0619 or 6.19%
Financial Accounting, 10/e 3-65
CP3-2. (dollars in thousands)
1. Express, Inc.’s, revenue recognition policy, in Note 2 Summary of Significant
Accounting Policies, states:
The Company recognizes sales at the time the customer takes possession
2. Assuming that $50,000 of cost of goods sold was due to distribution and occupancy
costs, Express, Inc., purchased $1,497,644 worth of inventory.
3. Dollars in thousands:
Fiscal Year
SG&A Expenses
÷
Net Sales Revenue
=
Percentage
2017
$562,088
$2,138,030
0.2629 or 26.29%
2015
Selling, General & Administrative Expenses increased over time, from 25.01% to
26.29% of net sales revenue.
4. Percentage change in Selling, General, & Administrative expense (in thousands):
Between
Numerator
÷
Denominator
=
Percentage Change
2016 and 2017
($562,088 – $559,541)
$559,541
0.0046 or 0.46%
2015 and 2016
$587,747
(0.0480) or (4.80)%
CP3-2. (continued)
5.
Fiscal
Year
Net
Income
÷
Net Sales (or
Operating) Revenues
=
Net Profit Margin
Ratio
2017
$ 19,366
$2,138,030
0.0091 or 0.91%
2015
Financial Accounting, 10/e 3-67
CP3–3. (dollars in thousands)
1. American Eagle Outfitters calls its income statement the “Consolidated
Statements of Operations.” Express, Inc., calls its income statement the
2. American Eagle Outfitters had the higher net income of $240,163 for the year
3.
For Fiscal Year 2017
Net
Income
÷
Net Sales (or
Operating)
Revenues
=
Net Profit Margin
Ratio
American Eagle Outfitters
$204,163
$3,795,549
0.0538 or 5.38%
Express, Inc.
0.0091 or 0.91%
4. Comparison to industry:
Industry
Average
American Eagle
Outfitters
Express,
Inc.
5. Cash provided by operations (from Statement of Cash Flows):
American Eagle Outfitters
Fiscal Year
2017
2016
% Change
2016
2015
% Change
2017
2016
% Change
2016
2015
% Change
Operating
$394,426
$365,596
7.89%
$365,596
$341,918
6.93%
CP3–4. (dollars in thousands)
Req. 1.
American Eagle Outfitters
Year Ended
Income from
Continuing
Operations
÷
Net Sales (or
Operating)
Revenues
=
Net Profit Margin
Ratio
2/3/18
$204,163
$3,795,549
0.0538 or 5.38%
0.0606 or 6.06%
2/1/14
Req. 2.
Current ratio reported in American Eagle Outfitters’ 10-K report (Item 6) for fiscal year
ended:
Year
Ended
Reported
Current Ratio
2/3/18
2.00
1.83
1.56
1.80
2/1/14
2.11
Between fiscal years ended in 2014 and 2016, the current ratio declined steadily from
2.11 to 1.56. Since then, it increased each year – in fiscal year ending in 2017 to
1.83 and in fiscal year ending in 2018 to 2.00. American Eagle Outfitters continues to
have sufficient liquidity as a cushion against future economic stresses. Companies
with strong cash management systems tend to have lower current ratios. In addition,
Financial Accounting, 10/e 3-69
CRITICAL THINKING CASES
CP3–5.
Req. 1
Estela used the cash basis of accounting. We can infer this from his references to
income collected rather than earned, expenses paid rather than incurred, and supplies
purchased rather than used. Accrual accounting should be used because it correctly
assigns revenues and expenses to the accounting period in which they are earned or
incurred.
Req. 2
(a)
Building (+A) ………………………………………………………………
21,000
Tools and equipment (+A) ……………………………………………
Land (+A) ………………………………………………………………….
20,000
Cash (+A) ………………………………………………………………….
Additional paid-in capital (+SE) [difference] ……………
58,000
(b)
Cash (+A) …………………………………………………………………..
55,000
Accounts receivable (+A) ……………………………………………..
52,000
Unearned revenue (+L) ………………………………………
20,000
Service fees revenue (+R, +SE) …………………………..
87,000
(c)
No entry (the stock is not owned by the company)
(d)
Operating expenses (+E, −SE) ……………………………………..
61,000
Accounts payable (+L) ………………………………………..
39,000
Cash (−A) …………………………………………………………
22,000
(e)
Supplies expense (+E, −SE)* ……………………………………….
Supplies (+A) ……………………………………………………………..
Cash (−A) …………………………………………………………
(1)
Loss from theft (+E, −SE) …………………………………………….
Cash (−A) …………………………………………………………
(2)
Tools and equipment (+A) ……………………………………………
Cash (−A) …………………………………………………………
supplies used
CP3–5. (continued)
Req. 2 (continued)
ASSETS:
Cash
Accounts Receivable
Supplies
700
Land
Beg. 0
(a) 1,000
22,000 (d)
Beg. 0
(b) 52,000
Beg. 0
(e) 700
LIABILITIES:
Accounts Payable
Unearned Revenue
0 Beg.
39,000 (d)
0 Beg.
20,000 (b)
39,000
20,000
SHAREHOLDER’S EQUITY:
58,000 (a)
58,000
Supplies Expense
0 Beg.
87,000 (b)
Beg. 0
87,000
0
Common
Additional Paid-in
Loss from Theft
Beg. 0
(1) 500
500
Retained
Financial Accounting, 10/e 3-71
CP3–5. (continued)
Req. 3
ESTELA COMPANY
(a)
Income Statement
(b)
For the Year Ended December 31
(c)
Revenues:
(d)
Service fees revenue
$ 87,000
(e)
[see note]
(f)
Expenses:
(g)
(i)
Loss from theft
500
(j)
Total expenses
(k)
(a) Use the standard title.
(b) Date to indicate time period covered.
(c) Use appropriate title.
(d) Use accrual figure — revenue earned, rather than cash collected.
(e) Exclude the dividends because the stock is owned by Julio and not the
CP3–5. (continued)
Req. 3 (continued)
Common
Stock
Additional
Paid-in Capital
Retained
Earnings
Total Stockholder’s
Equity
Beginning balance
$ 0
$ 0
$ 0
$ 0
Stock issuance
Net income
ESTELA COMPANY
Balance Sheet
At December 31
ASSETS
Current Assets:
Cash
$ 29,300
Accounts receivable
52,000
Supplies
Total current assets
82,000
Buildings
21,000
Land
20,000
Tools and equipment
18,000
Total assets
$141,000
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable
$ 39,000
Unearned revenue
20,000
Total current liabilities
59,000
Common stock
1,000
Additional paid-in capital
58,000
Retained earnings
23,000
Total stockholder’s equity
82,000
Financial Accounting, 10/e 3-73
CP3–5. (continued)
Req. 4
The revised income statement does not yet take into account most year-end
adjustments, including depreciation and income taxes. The adjusting entry for
income taxes is especially important because of the implication for future cash
flows.
The revised statements also report the building, land, and tools and equipment
originally contributed in exchange for shares in the new company at their market
its viability.
CP3–5. (continued)
Req. 5
(today’s date)
Dear Mr. Estela:
We regret to inform you that your request for a $100,000 loan has been denied.
Your current business appears profitable and appears to generate sufficient cash to
maintain operations, even once additional expenses, such as income taxes, are
considered. However, pro forma financial statements (or budgets) outlining the
If you would like us to reconsider your application, please provide us with the pro
forma financial statements and with the current market values of any assets you
would pledge as collateral.
Financial Accounting, 10/e 3-75
CP3–6.
Req. 1
This type of ethical dilemma occurs quite frequently. The situation is difficult personally
because of the possible repercussions to you by your boss, Mr. Lynch, if you do not
was done). To record the collection as revenue overstates income in the current period.
Req. 2
In the short run, Mr. Lynch would benefit by receiving a larger bonus. You also
benefit in the short run because you would not experience any negative repercussions
Req. 3
In the larger picture, shareholders are harmed by the misleading income figures
Req. 4
Managers are agents for shareholders. To act in ways to the benefit of the
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP3–7.
The solution to this project will depend on the companies and/or accounting periods
selected for analysis.