Chapter 5
Communicating and Interpreting
Accounting Information
ANSWERS TO QUESTIONS
1. The primary responsibility for the accuracy of the financial records and conformance
with Generally Accepted Accounting Principles (GAAP) of the information in the
financial statements rests with management, normally the CEO and CFO.
2. Financial analysts, who normally work for brokerage and investment banking
houses, mutual funds, and investment advisory services, gather extensive financial
3. Information services provide a wide variety of financial and nonfinancial information
4. Material amounts are amounts that are large enough to influence a user’s decision.
5. a. Income statement—Accrual basis required by GAAP.
b. Balance sheet—Accrual basis required by GAAP.
c. Statement of cash flows—Cash basis required by GAAP.
6. Private companies normally issue quarterly and annual reports, both of which are
7. Public companies issue quarterly press releases, quarterly reports, and annual
reports to shareholders and Forms 10-Q (quarterly reports), 10-K (annual reports),
and 8-K (special events) reports to the SEC. Press releases include a summary of
the quarterly report information and are the first announcement of quarterly financial
8. The four major subtotals or totals on the income statement are: (a) gross profit, (b)
income from operations, (c) income before income taxes, and (d) net income.
9. The six major classifications on the balance sheet are: (a) current assets, (b)
10. Property, plant, and equipment are reported on the balance sheet. Property, plant,
and equipment are those assets held by the business not for resale but for use in
operating the business, such as a delivery truck. (a) Property, plant, and equipment
are reported at their acquisition cost which represents the amount of resources
11. The major classifications of stockholders’ equity are: (1) common stock and
additional paid-in capital, which represents the stockholders’ investments and (2)
retained earnings, which represent the earnings of the company to date less any
dividends paid to the owners.
Financial Accounting, 9/e 5-3
12. The three major classifications on the Statement of Cash Flows are (a) cash from
operating activities, (b) cash from investing activities, and (c) cash from financing
activities.
13. The three major categories of notes to the financial statements are: (1) descriptions
of accounting rules applied to the company’s statements, often called significant
14. Return on assets (ROA) is a ratio measure defined as net income divided by
average total assets. It measures how much the firm earned for each dollar of
ANSWERS TO MULTIPLE CHOICE
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
Time
No.
No.
Time
No.
Time
1
5
10
1
1
40
1
30
2
5
10
2
2
20
2
30
3
5
15
3
3
40
3
40
4
10
10
4
4
35
4
30
5
10
20
5
5
30
6
10
30
6
6
30
7
10
15
7
7
40
20
8
8
*
25
9
25
25
Continuing
Problem
12
1
45
15
2
45
15
15
20
25
20
20
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open-ended project,
it is possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
Financial Accounting, 9/e 5-5
MINI-EXERCISES
M5-1.
Players
Definitions
____D____ (1) Independent auditor
A. Adviser who analyzes financial and other economic
M5-2.
No.
Title
____3_____
Form 10-K
____1_____
Earnings press release
____2_____
Annual report
Note: Many companies now issue the annual report and the 10-K at the same time.
M5–3.
Elements of
Financial Statements Financial Statements
A (1) Expenses A. Income statement
C (2) Cash from operating activities B. Balance sheet
A (3) Losses C. Cash flow statement
M5–4.
Transaction
Current
Assets
Gross Profit
Current
Liabilities
a.
+
+
NE
b.
NE
NE
+
The effects of the transactions can be seen by making the related journal entries and
using CA, CL, R, and E to denote current asset, current liability, revenue, and expense,
respectively.
b. Advertising expense (+E) …………………………………… 10
Accounts payable (+CL) …………………………... 10
M5–5.
Assets
Liabilities
Stockholders’ Equity
a.) Accounts Receivable +1,800
Inventory –1,200
Sales Revenue +1,800
Cost of Goods Sold -1,200
Financial Accounting, 9/e 5-7
M5–6.
a. Accounts receivable (+A) ……………………………………………….. 1,800
Sales revenue (+R, +SE) ……………………………………… 1,800
Cost of goods sold (+E, –SE) …………………………………………. 1,200
M5–7.
Return on assets (ROA)
=
Net income
=
$100
=
$100
=
0.111 (11.1%)
Avg total assets
($1,000+$800)/2
$900
EXERCISES
E5-1.
Players Definitions
F (1) Financial
analyst
A (2) Creditor
A. Financial institution or supplier that lends money to the
company.
B. Chief Executive Officer and Chief Financial Officer who
E5–2.
Information Release Definitions
C (1) Form 10-Q
B (2) Quarterly report
A. Report of special events (e.g., auditor changes,
mergers) filed by public companies with the
Financial Accounting, 9/e 5-9
E5–3.
Information Item Report
B,F (1) Summarized financial data for 5-year period.
B,F (2) Notes to financial statements.
A. Form 10-Q
B. Annual report
E5–4.
No. Title
7 Long-term liabilities
E5–5.
Campbell Soup Company
Consolidated Balance Sheet
July 31, Current Year
(in millions)
Assets
Current Assets
Cash and cash equivalents
$ 484
Accounts receivable
560
Inventories
767
Other current assets
152
Property, plant, and equipment, net
Intangible assets
Other assets
136
$6,862
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
$ 585
Accrued expenses
619
Other current debt
785
Other noncurrent liabilities
Stockholders’ Equity
Common stock, $0.0375 par value
Retained earnings
745
Financial Accounting, 9/e 5-11
E5–6.
Req. 1.
Snyder’s-Lance
Consolidated Balance Sheet
December 31, Current Year
(in millions)
Assets
Current Assets
Cash and cash equivalents
$ 20,841
Accounts receivable, net
143,238
Other intangible assets, net
376,062
Other assets
21,804
Total assets
$1,466,790
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
$ 52,930
Accrued compensation
29,248
Other payables and accrued liabilities
68,712
Short-term debt
Total current liabilities
155,146
Long-term debt
253,939
Other long-term liabilities
219,114
Total liabilities
Stockholders’ Equity
Common stock, 67,820,798 shares outstanding
56,515
Additional paid-in capital
730,338
Retained earnings
51,738
Total stockholders’ equity
838,591
Total liabilities and stockholders’ equity
$1,466,790
Prepaid expenses and other
20,705
Other current assets
96,983
Total current assets
388,028
Property, plant and equipment, net
313,043
Goodwill
367,853
E5–6. (continued)
Req. 2.
In each case, the term “net” means that the account is reported after the balance in the
E5-7.
Macy’s, Inc.
Consolidated Statement of Income
For the Year Ended February 1, Current Year
(in millions)
Net sales
$27,931
Cost of sales
16,725
Gross margin
11,206
Selling, general and administrative expenses
Other operating expenses
Operating income
Interest income
Income before income taxes
Federal, state and local income tax expense
Net income
$1,486
Financial Accounting, 9/e 5-13
E5-8.
TOWNSHIP CORPORATION
Income Statement
For the Year Ended December 31, Current Year
Computations in Order
Sales revenue ………………………….. Given $85,000
Cost of goods sold…………………….. (a) $85,000 – $30,000 55,000
Gross profit ………………………………. Given 30,000
Net income ………………………………. (e) $13,000 – $4,550 $ 8,450
Earnings per share ($8,450 2,500 shares*) $3.38
*Given
E5-9.
Req. 1.
Hewlett Packard Company
Consolidated Statement of Income
For Year Ended October 31, Current Year
(In millions)
Net sales
Product sales
$84,799
Service sales
40,816
Financing income
Cost of sales:
Cost of products
65,064
Cost of services
30,590
Cost of financing
Total cost of sales
95,956
Gross profit
30,077
Operating expenses:
Research and development
2,959
Selling, general and administrative
12,718
Amortization of purchased intangible assets
1,484
Restructuring charges
1,144
Acquisition-related charges
18,598
Operating income
11,479
Interest expense
Income before income taxes
10,974
Provision for taxes
2,213
Net income
8,761
Net earnings per share
$3.78
Weighted average shares outstanding
2,319
Req. 2.
Product sales: $84,799 – $65,064 = $19,735
Financial Accounting, 9/e 5-15
E5–10.
Case A Case B Case C Case D Case E
Sales revenue $800 $600 $500 $1,170* $760*
Cost of goods sold 425* 150 280* 500 320
Gross margin 375 450* 220* 670* 440
Operating expenses:
E5–11.
Case A Case B Case C Case D Case E
Sales revenue $770 $1,200* $400* $600 $1,050
Cost of goods sold 300* 320 125 250 420*
Gross margin 470* 880 275* 350* 630
Operating expenses:
E5–12.
Common Stock
Additional
Paid-in
Retained
Total
Stockholders’
Shares
Amount
Capital
Earnings
Equity
Shares issued for
E5–13.
Req. 1.
Beginning RE + Net income – Dividends = Ending RE
Req. 2.
Cash (+A) ………………………………………………. 34,000,000
Common stock ($959 M – $958 M) (+SE) ………….. 1,000,000
Additional paid-in capital ($3,427 M – $3,394 M) (+SE) ……… 33,000,000
E5-14.
Transaction
Current
Assets
Gross Profit
Current
Liabilities
a.
+$2,449.3
+$2,449.3
NE
b.
+$500.0
NE
+$500.0
c.
–$197.6
NE
NE
The effects of the transactions can be seen by making the related journal entries and
using CA, CL, R, and E to denote current asset, current liability, revenue, and expense,
respectively.
a. Accounts receivable (+CA) …………………………………. 4,285.6
Sales revenue (+R) ……………………………………. 4,285.6
Financial Accounting, 9/e 5-17
E5-15.
Transaction
Current
Assets
Gross Profit
Current
Liabilities
Cash Flow from
Operating Activities
a.
NE
NE
NE
+ 40.8
b.
– 5.6
NE
– 5.6
NE
The effects of the transactions can be seen by making the related journal entries and
using CA and CL to denote current asset and current liability, respectively.
E5-16.
AVALOS CORPORATION
Statement of Cash Flows
For the Year Ended December 31 Current Year
From Operating Activities
Net income ……………………………………………………….. $25,000
Increase in accounts receivable …………………………... (9,000)
Decrease in inventory ………………………………………… 1,000
Decrease in accounts payable …………………………….. (3,000)
Cash flows from operating activities ………………….. $ 14,000
E5-17.
Req. 1.
Current
Year
Prior
Year
Net Income (given)
$439,190 = 0.111
$368,403 = 0.102
Req. 2.
ROA Analysis
Current
Year
Prior
Year
Net Income
Net Sales
$439,190 = 0.1206
$3,642,937
$368,403 = 0.1194
$3,085,290
Average Total Assets
$3,642,937 = 0.9229
Return on Assets
E5-18.
Req. 1.
Current
Year
Prior
Year
Req. 2.
Security analysts would be more likely to increase their estimates of share value on the
basis of this change. The company increased its earnings by $0.006 for each $1 of
investment and, hence, increased the corresponding value of that investment.
E5–19
a. Notes payable (long-term) (–L) ……………………………. 2,000
Cash (–A) ……………………………………………….. 2,000
PROBLEMS
P5–1.
P5–2.
P (1) Capital in excess of par B (11) Current liabilities
E (2) Assets C (12) Long-term liabilities