122 Chapter 4
7. There is no information provided that helps us determine whether
B. $4,999
To answer this question, one would look at the statement of stock-
holders’ equity. That statement was not provided in this problem, so
This is also a question that is usually answered from the statement
of stockholders’ equity. But that statement is not provided. Instead,
P4–18 A. Far East Specialties’ financial statements represent the company’s
transformation process by describing the financial effects of transac-
tions and events occurring in the process. Accounts listed on the
balance sheet, such as notes payable, common stock, and retained
Reporting Earnings and Financial Position 123
B. The financial statements indicate the financial results of transactions
for specific periods of time. Periodic reports measure the effect of
transactions occurring during the period. Measurement rules deter-
mine when certain events will be recognized because lags exist be-
If time were not considered in reporting accounting information, de-
cision makers would have difficulty using the information. Decision
P4–19
M E M O R A N D U M
DATE: (today’s date)
TO: Markus O’Realius
FROM: (student’s name)
RE: Limitations of financial statements
Your assessment of the value of Caesar Company relies on amounts re-
ported in the company’s financial statements. These amounts indicate
124 Chapter 4
P4–20 1. Use of estimates and allocations:
The depreciation expense (on the income statement) and accumu-
2. Use of historical costs:
The buildings (on the balance sheet) are almost fully depreciated
which indicates that the company may have purchased the buildings
long enough ago that the historical cost ($90,000) does not ade-
3. Omission of resources and costs:
The wages expense and wages payable are a relatively large ex-
pense and liability, respectively, compared to other account balanc-
Reporting Earnings and Financial Position 125
P4–21 The Book Wermz
Income Statement
For the Month Ended November 30, 2007
Sales $ 43,312.25
Service revenues 1,566.23
Total revenues $ 44,878.48
The Book Wermz
Statement of Stockholders’ Equity
For the Month Ended November 30, 2007
Contributed Retained
Capital Earnings Total
Balance at October 31, 2007 $100,000.00 $64,389.11 $164,389.11
126 Chapter 4
The Book Wermz
Balance Sheet
November 30, 2007
November October
Assets
Current assets:
Cash $ 12,307.99 $ 15,389.55
Liabilities
Current liabilities:
Accounts payable $ 6,131.77 $ 0
Wages payable 1,150.68 527.12
P4–22
1
2
3
4
5
6
7
8
9
10
Reporting Earnings and Financial Position 127
CASES
C4-1 A. This information should be helpful to the owners because it provides
the following information:
1. The amount and categories of company resources (assets) as of
B. Some of the events that occurred during the first month are as fol-
lows:
1. The owners invested a total of $5,500 ($4,340 + $1,160) cash into
the same ($5,500).
2. The company borrowed $6,800 cash from a bank.
7. Employees were paid $810 cash during the month ($990 total
wages expense minus the $180 of wages not yet paid).
128 Chapter 4
C. It is too early to tell whether the pizza business was a good idea.
Though the company lost money during the first month, such losses
C4-2 A. 1. Sales of over $11 billion are reported on the statement of earn-
ings. This is an accrual figure, however, so we do not know how
3. Cost of Sales is the largest expense.
2004 2003 2002
Cost of sales $6,584 $6,109 $4,662
5. A company’s stock price is influenced by earnings because in-
vestors expect to receive cash in the future as a result of profita-
Reporting Earnings and Financial Position 129
6. Dividends are not expenses, so they are not on the income
130 Chapter 4
B. 1. A company has assets in order to create value through success-
C. Comprehensive income is a broader definition of value created than