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Financial And Managerial Accounting For MBAs, 4th Edition Solution Manual

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    Solutions Manual, Module 1 1 - 1 Module 1 F inancial Accounting for MBAs DISCUSSION QUESTIONS Q 1 - 1 . Organizations undertake planning activities that shape three major activities: financing, investing, and operating. Financing is the means a company uses to pay for resources. Investing refers to the buying and selling of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies. Financial accounting information provides valuable input into the planning process, and, subsequently, reports on the results of plans so that corrective action can be taken, if necessary. Q 1 - 2 . An organization’s financing activities (liabilities and equity = sources of funds ) pay for investing activities (assets = uses of funds ). An organization ’s assets cannot be more or less than its liabilities and equity combined. This means: assets = liabilities + equity. This relation is called the accounting equation (sometimes called the balance sheet equation ), and it applies to all organizations at all times. Q1 - 3. The four main financial statements are: income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows. The income statement provides information about the company’s revenues, expenses and profitability over a period of time. The balance sheet lists the company’s assets (what it owns), liabilities (what it owes), and stockholders’ equity (the residual claims of its owners) as of a point in time. The statement of stockholders’ equity reports on the changes to each stockholders ’ equity account during the period . The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash , that is, where the company got its cash from and what it did with it. Together, the four statements provide a complete picture of the financial condition of the company.

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    1 - 2 Financial & Man a gerial Accounting for MBAs, 4 th Edition Q 1 - 4 . The balance sheet provides information that helps users understand a company’s resources (assets) and claims to those resources (liabilities and stockholders’ equity) as of a given point in time . Q 1 - 5 . The income statement covers a period of time . An income statement reports whether the business has earned a net income (also called profit or earnings) or incurred a net loss. Importantly, the income statement lists the types and amounts of revenues and expenses making up net income or net loss. Q 1 - 6. The statement of cash flows reports on the cash inflows and outflows relating to a company’s operating, investing, and financing activities over a period of time . The sum of these three activities yields the net change in cash for the period. T his statement is a useful compl e ment to the income statement , which reports on revenues and expenses, but which conveys relatively little information about cash flows. Q 1 - 7 . R etained earnings (reported on the balance sheet) is increased each period by any net income earned during the period (as reported in the income statement) and decreased each period by the payment of dividends (as reported in the statement of cash flows and the statement of stockholders’ equity ). Transactions reflected on the statement of cash flows link the previous period’s balance sheet to the current period’s balance sheet. The ending cash balance appears on both the balance sheet and the statement of cash flows. Q1 - 8. External users and their uses of accounting information include: (a) lenders for measuring the risk and return of loans; (b) shareholders for assessing the return and risk in acquiring shares; and (c) analysts for assessing investment potential. Other users are auditors, consultants, officers, directors for overseeing management, employees for judging employment opportunities, regulators, unions, suppliers, and appraisers. Q1 - 9. Managers deal with a variety of information about their employers and customers that is not generally available to the public. Ethical issues arise concerning the possibility that managers might personally benefit by using confidential information. There is also the possibility that their employers and/or customers might be harmed if certain information is not kept confidential.

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    Solutions Manual, Module 1 1 - 3 Q 1 - 1 0 . A Procter & Gamble’s independent auditor is Deloitte & Touche LLP . The auditor expressly states that “our responsibility is to express an opinion on these financial statements based on our audit s .” The auditor also states that “these financial statements are the responsibility of the c ompany’s management.” Thus, the auditor does not assume responsibility for the financial statements. Q 1 - 11 . B While firms acknowledge the increasing need for more complete disclosure of financial and nonfinancial information, they have resisted these demands to protect their competitive position. Corporate executives must weigh the benefits they receive from the financial market s as a result of more transparent and revealing financial reporting against the costs of divulging proprietary information to competitors and others . Q 1 - 1 2 . B Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements. They are primarily set by the Financial Accounting Standards Board (FASB), a private sector entity with representatives from companies that issue financial statements, accounting firms that audit those statements, and users of financial information. Other bodies that contribute to GAAP are the AICPA, the EITF, and the SEC. Q1 - 13. B Corporate governance is the system of policies, procedures and mechanisms that protect the interests of stakeholders in the business. These stakeholders include investors, creditors, regulatory bodies, and employees, to name a few. Sound corporate governance involves the maintenance of an effective internal auditing function, an independent and effective external auditing function, an informed and impartial board of directors, governmental oversight (such as from the SEC), and the oversight of the courts. Q1 - 14. B The auditor’s primary function is to express an opinion as to whether the financial statements fairly present the financial condition of the company and are free from material misstatements. Auditors do not prepare the financial statements; they only audit them and issue their opinion on them. The auditors provide no guarantees about the financial statements or about the company’s continued performance.

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    1 - 4 Financial & Man a gerial Accounting for MBAs, 4 th Edition Q 1 - 15. Financial accounting information is frequently used in order to evaluate management performance. The return on equity (ROE) and return on assets (ROA) provide useful measures of financial performance as they combine elements from both the income statement and the balance sheet. Financial accounting information is also frequently used to monitor compliance with external contract terms . Banks often set limits on such items as the amount of total liabilities in relation to stockholders’ equity or the amount of dividends that a company may pay . Audited financial statements provide information that can be used to monitor compliance with these limits (often called covenants ). Regulators and taxing authorities also utilize financial information to monitor items of interest. Q 1 - 16. Managers are vitally concerned about disclosing proprietary information that might benefit the company’s competitors. Of most concern, is the “cost” of losing some competitive advantage . There traditionally has been tension between companies and the financial professionals (especially investment analysts) who press firms for more and more financial and nonfinancial information. Q1 - 17. Net income is an important measure of financial performance. It indicates that the market values the company’s products or services, that is, it is willing to pay a price for the products or services enough to cover the costs to bring them to market and to provide the company’s investors with a profit. Net income does not tell the whole story, however. A company can always increase its net income with additional investment in something as simple as a bank savings account. A more meaningful measure of financial performance comes from measuring the level of net income relative to the investment made. One investment measure is the balance of stockholders’ equity, and the comparison of net income to average stockholders’ equity (ROE) is a fundamental measure of financial performance. Q1 - 18. Borrowed money must be repaid, both the principal amount borrowed, as well as interest on the borrowed funds. These payments have contractual due dates. If payments are not prompt, creditors have powerful legal remedies, including forcing the company into bankruptcy. Consequently, when comparing two companies with the same return on equity, the one using less debt would generally be viewed as a safer (less risky) investment.

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    Solutions Manual, Module 1 1 - 5 MINI EXERCISES M 1 - 1 9 . (10 minutes) ($ millions) Assets = Liabilities + Equity $47,540 $36,839 $10,701 Dell receives more of its financing from nonowners ($ 36,839 million) than from owners ($ 10,701 million). Its owner financing comprises 22.5 % of its total financing ($ 10,701 mil lion / $ 47,540 mil lion ). Thus, nonowners finance 77.5 % of Dell’s total assets. M 1 - 2 0 . (10 minutes) ($ millions) Assets = Liabilities + Equity $16,787 $13,072 $3,715 Best Buy receives more of its financing from nonowners ($ 13,072 million) than from owners ($ 3,715 million). Its owner financing comprises 22.1 % of its total financing ($ 3,715 million / $ 16,787 million ). M 1 - 21 . (15 minutes) ($ millions) Assets = Liabilities + Equity Hewlett - Packard $ 108,768 $ 85,935 (a) $ 22,833 General Mills $ 22,658 (b) $ 14,562 $ 8,096 Target (c) $ 48,163 $ 31,605 $ 16,558 The percent of owner financing for each company follows: Hewlett - Packard ......................... 21.0 % ($ 22,833 million / $ 108,768 million) General Mills .............................. 35.7 % ($ 8,096 million / $ 22,658 million) Target ................................ ......... 34.4 % ($ 16,558 million / $ 48,163 million) General Mills and Target are more owner financed, while Hewlett - Packard (HP) is more nonowner financed . General Mills and Target are financed with roughly the same level of debt and equity , while HP’s debt percentage is significantly higher than th at of General Mills and Target . All three enjoy relatively stable cash flows and can, therefore, utilize a greater proportion of debt vs. equity. As the uncertainty of cash flows increases, companies generally substitute equity for debt in order to reduce the magnitude of contractual payment obligations.

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    1 - 6 Financial & Man a gerial Accounting for MBAs, 4 th Edition M 1 - 22 . A (15 minutes) In its September 30, 2012 annual report, Starbucks reports the following figures (in $ millions): Assets = Liabilities + Equity $ 8,219.2 = $ 3,104.7 + $ 5,114.5 As shown, the accounting equation holds for Starbucks. Also, we can see that Starbucks’ nonowner financing is 37.8 % ($ 3,104.7 / $ 8,219.2 ) of its total financing. M1 - 23 . A (20 minutes) DuPont Statement of Reinvested Earnings For Year Ended December 31, 201 2 Beginning reinvested earnings , December 31, 20 11 ................................ ............. $ 13,422 Net income for 201 2 ................................ ................................ .............................. 2,788 Common stock dividends ................................ ................................ ...................... ( 1,5 93 ) Preferred stock dividends ................................ ................................ ...................... (10) Treasury stock retirement * ................................ ................................ .................... ( 321 ) Ending reinvested earnings , December 31, 201 2 ................................ .................. $ 14,286 * Treasury Stock represents the company’s repurchase of Common Stock. The effect is to decrease stockholders’ equity , which is the opposite effect from the issuance of stock . During 201 2 , DuPont retired Treasury Stock and will not reissue these shares again . This transaction reduced the company’s retained earnings , but did not affect net income for the year . M 1 - 24 . (20 minutes) a. BS and SCF f. BS and SE b. IS g. SCF and SE c. BS h. SCF and SE d. BS and SE i. IS, SE, and SCF e. SCF

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    Solutions Manual, Module 1 1 - 7 M 1 - 25 . (10 minutes) There are many stakeholders impacted by this business decision , including the following (along with a description of how) : • You a s a Manager — your reputation, self - esteem, and potentially your livelihood could be negatively impacted. • Creditors and Bondholders — credit decisions based on inaccurate information could occur. • S hareholders — buying or selling shares based on inaccurate information could occur. • M anagement and other E mployees of your company — repercussions of your decision extend to all other employees. A lso, a decision to record these revenues suggest s an e nvironment condoning dishonesty . I ndeed, y our decisions can affect many more parties than you might initially realize. The short - term benefit of meeting Wall Street’s expectations could have serious long - term ramifications. M 1 - 26 . B (10 minutes) I nternal controls are designed for the following purposes: • M onitoring an organization’s activities to promote efficiency and to prevent wrongful use of its resources • E nsuring the validity and credibility of external accounting reports • P romoting effective operations • E nsuring reliable internal reporting Congress has a special interest in internal controls and report s about them . Specifically, the absence or failure of internal controls can adversely affect the effectiveness of domestic and global financial markets. Enron provided Congress with a case in point.

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    1 - 8 Financial & Man a gerial Accounting for MBAs, 4 th Edition EXERCISES E 1 - 2 7 . (15 minutes) a. Target’s inventories consist of the product lines it carries: c lothing, electronics, home furnishings, food products, and so forth. b. Target’s Property and Equipment assets consist of land, buildings, store improvements such as lighting, flooring, HVAC, store shelving, shopping carts , and cash registers. c. Although Target sells some of its merchandise via its W ebsite, the majority of its sales activity is conducted in its retail locations. These store s represent a s ubstantial and necessary capital investment for its business model . E1 - 28 . (20 minutes) ($ millions) a. Using the accounting equation: Assets ($ 84,351 ) = Liabilities ($ 33,148 ) + Equity (?) Thus: $ 51,203 = Equity High - tech companies must contend with a substantial amount of risk re lating to changing technology. Future cash flows are, therefore, not as certain and cannot support high levels of debt. Thus, the company uses equity financing; 60.7 % in the case of Intel. b. Using the accounting equation at the beginning of the year: Assets ($ 7,071 ) = Liabilities (?) + Equity ($ 1,757 ) Thus: Beginning Liabilities = $ 5,314 Using the accounting equation at the end of the year: Assets ($ 7,071 - $ 1) = Liabilities ($ 5,314 - $ 132 ) + Equity (?) Thus: Ending Equity = $ 1,888 Alternative approach to solving part (b):  Assets($ - 1) =  Liabilities($ - 132) +  Equity(?) where “  ” refers to “change in.” Thus:  Ending Equity = $ - 1 - $ - 132 = $131 and Ending equity = $1,757 + $131 = $1,888 c. Retained Earnings is the balance sheet account that provides the link between the balance sheet and the income statement. Each accounting period, Retained Earnings is updated by the net income (loss) reported for that period (and is reduced by any dividends that are declared to shareholders). The balance sheet and the income statement are, therefore, linked by this balance sheet account.

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    Solutions Manual, Module 1 1 - 9 E 1 - 29 . (15 minutes) External constituents use accounting information from financial statements to answer questions such as the following: 1. Shareholders (investors), ask questions such as: a. Are the company’s resources adequate to carry out strategic plans? b. Are the company’s debts appropriate in amount given the company’s existing assets and plans for growth ? c. What is the current level of income (and what are its components)? d. I s the current stock price indicative of the company’s profitability and level of debt? 2. Creditors , ask questions such as: a. Does the business have the ability to repay its debts as they come due ? b. Can the business take on additional debt? c. Are current assets sufficient to cover current liabilities ? 3. Employees , ask questions such as: a. Is the business financially stable? b. Can the business afford to pay higher salaries? c. What are growth prospects for the organization? d. Will the company be able to pay my pension when I retire? E 1 - 3 0 . (10 minutes) Computation of dividends Beginning retained earnings , 20 12 ................................ $ 15,649 + Net income ................................ ................................ ................................ 2,472 – Cash d ividends ................................ ................................ ( ? ) = Ending retained earnings , 20 12 ................................ ................................ $ 16,953 Thus, dividends were $ 1,168 million for 20 12 . The company paid out dividends equal to 47.2 % of 20 12 net income ($ 1,168 / $ 2,472 ) .

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    1 - 10 Financial & Man a gerial Accounting for MBAs, 4 th Edition E 1 - 3 1 . (20 minutes) a. Colgate - Palmolive was profitable during 20 12 as evidenced by its positive net profit margin of 14 %. However , the profit margin is lower than in 20 11 . b. Colgate - Palmolive’s productivity measure ( asset turnover ) decreased slightly from 1. 4 in 20 11 to 1. 3 in 201 2 . This indicates that operating assets are generating a slightly lower l evel of sales tha n in the prior year. This is a negative development . c. ROA = P rofit margin  asset turnover . 201 2 ROA = 14 %  1. 3 = 18.2 % . 20 11 ROA = 15 %  1. 4 = 21.0 % . The decrease in ROA during 20 12 results f ro m a decrease in both profitability and productivity . E 1 - 3 2 . (15 minutes) Return on assets (ROA) = Net income / Average assets = $ 735 / ($ 8,491 + $ 8,089 ) / 2] = 8.9 % E 1 - 3 3 . (20 minutes) a. Creditors are an important group of external stakeholders. They are primarily interested in the ability of the company to generate sufficient cash flow in order to repay the amounts owed. Stockholders are another significant stakeholder in the company. They are primarily interested in the company’s ability to effectively raise capital and to invest that capital in projects with a rate of return in excess of the cost of the capital raised, that is, to increase the value of the firm. Regulators such as the SEC and the tax authorities , including the IRS and state and local tax officials, are important constituents that are interested in knowing whether the company is complying with all applicable laws and regulations. b. Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements. They are primarily set by the Financial Accounting Standards Board (FASB), a private sector entity with representatives from companies that issue financial statements, accounting firms that audit those statements, and users of financial information. Other bodies that contribute to GAAP are the AICPA, the EITF, and the SEC. c. Financial information provides users with information that is useful in assessing the financial performance of companies and, therefore, in setting stock and bond prices . To the extent that these prices are accurate, the costs of the funds that companies raise will accurately reflect their relative efficiency and risk of operations. C ompanies that can utilize capital more effectively will be able to obtain that capital at a reasonable cost and society’s financial resources will be effectively allocated. Continued next page

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    Solutions Manual, Module 1 1 - 11 E1 - 33 . concluded d. First, the preparation of financial statements involves an understanding of complex accounting rules and significant assumptions and considerable estimation. Second, GAAP allows for differing accounting treatments for the same transaction. And third, auditors are at a relative information disadvantage vis - à - vis company accountants. As the capital markets place increasing pressures on companies to perform, accountants are often placed in a difficult ethical position to use the flexibility given to them under GAAP in order to bias the financial results or to use their inside information to their advantage . E1 - 3 4 . (20 minutes) a. ROE = N et income / A verage stockholders’ equity = $ 1,383.8 million / [($ 4,387.3 million + $ 5,114.5 million) / 2] = 29.1 % b. The repurchase of common stock reduces the denominator (average stockholders’ equity) . The outflow of cash for the repurchase, however, reduces net income by the return on the cash that is forgone. Generally, the reduction in the denominator is greater than that for the numerator, and consequently ROE increases. That is one of the reasons cited for share repurchases. c. Companies usually repurchase their own stock when they feel that it is undervalued by the market. The repurchase is a way to send a signal to the market to that effect. Company management is, in essence, backing up its assertions that the stock is undervalued with a tangible investment of the company’s funds. Companies also repurchase their own stock to have shares available to give to executives and other employees as compensation.

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    1 - 12 Financial & Man a gerial Accounting for MBAs, 4 th Edition PROBLEMS P1 - 35 . (40 minutes) a. 20 13 ROE = $ 16,999 / [($ 81,738 + $ 75,761 )/2] = 21.6 % 20 12 ROE = $ 15,699 / [($ 75,761 + $ 71,247 )/2] = 21.4 % Wal - Mart’s ROE increased slightly from 20 1 2 to 20 1 3 , and is slightly above the median ROE of 2 1.5 for other companies in the Dow Jones average. b. 20 13 ROA = $ 16,999 / [($ 203,105 + $ 193,406 )/2] = 8.6 % 20 12 ROA = $ 15,699 / [($ 193,406 + $ 180,782 )/2] = 8.4 % Wal - Mart’s ROA increased slightly from 20 1 2 to 20 1 3 and is above the median 6.7% for other Dow Jones companies. c. Wal - Mart does not sell products with a high level of technology and specialization, and it, therefore, is not protected by patents or other legal barriers to entry. It does, however, have considerable market power over suppliers as a result of its considerable size , which may result in product cost savings. Wal - Mart is also able to use its considerable advertising budget to its advantage. P1 - 36 . (30 minutes) a. GENERAL MILLS, INC. Income Statement ($ millions) For Year Ended May 26, 2013 Revenue $17,774.1 Cost of goods sold 11,350.2 Gross profit 6,423.9 Total expenses 4,568.7 Net income $ 1,855.2 GENERAL MILLS, INC. Balance Sheet ($ millions) May 26, 2013 Cash $ 741.4 Total liabilities $14,562.0 Noncash assets 21,916.6 Stockholders’ equity 8,096.0 Total assets $ 22,658.0 Total liabilities and equity $22,658.0 Continued next page

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    Solutions Manual, Module 1 1 - 13 P 1 - 3 6. concluded GENERAL MILLS, INC. Statement of Cash Flows ($ millions) For Year Ended May 26, 2013 Cash from operating activities $ 2,926.0 C ash from investing activities (1,515.4) Cash from financing activities (1,140.4) Net change in cash 270.2 Cash, beginning of year 471.2 Cash, ending year $ 741.4 b. A negative amount for cash from investing activities reflects additional investment by the company in its long - term assets, which is generally a positive sign of management’s commitment to future business success. A negative amount for cash from financing activities reflects the reduction of long - term debt, which is often a positive sign of the company’s ability to retire debt obligations. c. Profit margin = $ 1,855.2 / $ 17,774.1 = 10.44 % A sset turnover = $ 17,774.1 / $ 22,658.0 = 0.78 4 Return on assets = $ 1,855.2 / $ 22,658.0 = 8.2 % ( 10.44 % × 0. 78 4 ) Return on equity = $ 1,855.2 / $ 8,096.0 = 22.9 % P1 - 3 7 . (30 minutes) a. ABERCROMBIE & FITCH Income S tatement ($ millions ) For Year Ended February 2, 2013 Revenue ................................ ...................... $ 4,511 Cost of goods sold ................................ ....... 1,694 Gross p rofit ................................ .................. 2,817 Expenses ................................ .................... 2,580 Net income ................................ .................. $ 237 ABERCROMBIE & FITCH Balance S heet ($ millions ) February 2, 2013 C ash ................................ $ 644 Total liabilities ................................ $ 1,169 Noncash assets ......................... 2,343 Stockholders’ equity ............................ 1,818 Total assets ............................... $ 2,987 Total liabilities and equity .................... $ 2,987 Continued next page

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    1 - 14 Financial & Man a gerial Accounting for MBAs, 4 th Edition P 1 - 3 7. concluded ABERCROMBIE & FITCH Statement of C ash F lows ($ millions ) For Year Ended February 2, 2013 C ash from operating activities $ 684 C ash from investing activities (247) C ash from financing activities (377) Net change in cash 60 Cash, beginning year 58 4 Cash, ending year $ 644 b. A negative amount for cash from investing activities reflects further investment by the company in its long - term assets, which is generally a positive sign of management commitment to future business success. A negative amount for cash from financing activities reflects the reduction of long - term debt, which is often a positive sign of the company’s ability to retire debt obligations. c. i. Profit margin = $ 237 / $ 4,511 = 5.25 % ii. Asset t urnover = $ 4,511 / $ 2,987 = 1.51 iii. Return on assets = $ 237 / $ 2,987 = 7.93 % ( 5.25 % × 1.51 ) iv. Return on equity = $ 237 / $ 1,818 = 13.04 % P 1 - 38 . (30 minutes) a. CISCO SYSTEMS, INC. Income Statement ($ millions) For Year Ended July 27, 2013 Sales ................................ ................................ ................................ .. $ 48,607 Cost of goods sold ................................ ................................ .............. 19,167 Gross profit ................................ ................................ ......................... 29,440 Expenses ................................ ................................ ........................... 19,457 Net income ................................ ................................ ......................... $ 9,983 CISCO SYSTEMS, INC. Balance Sheet ($ millions) July 27, 2013 Cash ................................ $ 7,925 Total liabilities ................................ ......... $ 42,063 Noncash assets ........................ 93,266 Stockholders’ equity ............................... 59,128 Total assets .............................. $ 101,191 Total liabilities and equity ........................ $ 101,191 Continued next page

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    Solutions Manual, Module 1 1 - 15 P 1 - 3 8. concluded CISCO SYSTEMS, INC. Statement of Cash Flows ($ millions) For Year Ended July 27, 2013 Cash from operating activities $ 12,894 Cash from investing activities (11,768) Cash from financing activities (3,000) Net change in cash (1,874) Cash, beginning year 9,799 Cash, ending year $ 7,925 b. A negative amount for cash from investing activities reflects further investment by the company in its long - term assets, which is generally a positive sign of management commitment to future business success. A negative amount for cash from financing activities reflects the reduction of long - term debt, which is often a positive sign of the company’s ability to retire debt obligations. c. i. Profit margin = $ 9,983 / $ 48,607 = 20.5 4 % ii. Asset t urnover = $ 48,607 / $ 101,191 = 0. 48 iii. Return on assets= $ 9,983 / $ 101,191 = 9.87 % ( 20.5 4 % × 0.4 8 ) iv. Return on equity = $ 9,983 / $ 59,128 = 16.9 % P 1 - 39 . (15 minutes) CROCKER CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 201 3 Contributed Capital Retained Earnings Stockholders’ Equity December 31, 201 2 ................................ $ 120 ,000 $ 30,000 $ 150 ,000 Issuance of common stock .............................. 30,000 30,000 Net income ................................ ...................... 50,000 50,000 Cash dividends ................................ ................ _ ______ (25,000 ) (25,000 ) December 31, 201 3 ................................ $ 150 ,000 $ 55,000 $ 205 ,000

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