Introduction to Financial Accounting, 11th Edition Solution Manual

Preview (31 of 524 Pages)

100%

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 1 preview image

Loading page ...

1CHAPTER 1COVERAGE OF LEARNING OBJECTIVESLEARNING OBJECTIVESQUESTIONSEXERCISESPROBLEMSOTHERLO1:Explain how accountinginformation assists in makingdecisions.1,2,3,4,5,25LO2:Describe the componentsof the balance sheet.6,728, 3342, 4354,55,56LO3:Analyze businesstransactions and relate them tochanges in the balance sheet.8,9,10, 2429,3035,36,37,38,39,4053LO4:Prepare a balance sheetfrom transactions data.31,3235, 36, 37, 38,39, 40,41,44,4553LO5:Compare the features ofsole proprietorships,partnerships, andcorporations.11,12,13,14,26LO6:Identify how the owners’equity section in a corporatebalance sheet differs from thatin a sole proprietorship or apartnership.15,1633,3446,47,48,49LO7:Explain the regulation offinancial reporting, includingdifferences between U.S.GAAP and IFRS.17,1850LO8:Describe auditing andhow it enhances the value offinancial information.18,19,2750,5156LO9:Evaluate the role ofethics in the accountingprocess.20,2152LO10:Recognize careeropportunities in accounting,and understand thataccounting is important to bothfor-profit and nonprofitorganizations.22, 23

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 2 preview image

Loading page ...

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 3 preview image

Loading page ...

2CHAPTER 11-1Accounting is a process of identifying, recording, summarizing,and reporting economicinformation to decision makers.1-2No.Accounting is real information about real companies.In learning accounting it ishelpful to see accounting reports from various companies. This helps put the rules andtechniques of accounting into an understandable framework and provides familiarity withthe diversity of practice.1-3Examples of decisions that are likely to be influenced by financial statements includechoosing where to expand or reduce operations, lending money, investing ownershipcapital, and rewarding mangers.1-4Users of financial statements includeinvestors,managers, lenders, suppliers, owners,income tax authorities, and government regulators.1-5The major distinction between financial accounting and management accounting is theiruse by two classes of decision makers.Management accounting is concerned mainlywith how accounting can serve internal decision makers such as the chief executiveofficerandotherexecutives.Financialaccountingisconcernedwithsupplyinginformation to external users.1-6ThebalancesheetequationisAssets=Liabilities+Owners’equity.Itisthefundamentalframeworkofaccounting.Theleftsideliststheresourcesoftheorganization, and the right side lists the claims against those resources.1-7No. Every transaction should leave the balance sheet equation in balance. Accounting isoften called “double-entry” because accountants must enter at least two numbers for eachtransaction to keep the equation in balance.1-8This is true.When a company buys inventory for cash, one asset is traded for another,and neither total assets nor total liabilities change. Thus, the balance sheet equation staysin balance.When a company buys inventory on credit, both inventory and accountspayable increase.Thus, both total assets and total liabilities increase by the sameamount, again keeping the balance sheet equation in balance.1-9The evidence for a note payable includes a promissory note, but the evidence for anaccount payable does not.A note payable is generally to a lender while an accountpayable is generally to a supplier.1-10Balance sheets for companies in the same industry will not necessarily look similar. Forexample, companies in the same industry may have quite different strategies. One mightbe capital intensive, with large amounts of property, plant, and equipment. Another mayrely less on fixed assets, but it may have large accounts receivable because of a lenientcredit policy.In addition, one may have large bank loans while another has greaterowner investment and thus larger owners’equity or stockholders’ equity.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 4 preview image

Loading page ...

31-11Ownership shares in most large corporations are easily traded in the stock markets,corporate owners have limited liability, and the owners of sole proprietorships orpartnerships are usually also managers in the company while most corporations hireprofessional managers.1-12Limited liability means that corporate owners are not personally liable for the debts of thecorporation.Creditors’claims can be satisfied only by the assets of the particularcorporation.1-13The corporation is the most prominent type of entity,and corporations do by far thelargest volume of business.1-14Yes.In the United Kingdom corporations frequently use the word limited (Ltd.) in theirname.In many countries whose laws trace back to Spain, the initials S.A. refer to a“society anonymous,” meaning thatmultipleunidentifiedowners stand behind thecompany,which isessentially the samestructureas a corporation.1-15Almostall states forbid the issuance of stock at belowpar; thus, par values arecustomarily set at very low amounts and have no real importance in affecting economicbehavior of the issuing entity.1-16The board of directors is the elected link between stockholders and the actual managers.It is the board’s duty to ensure that managers act in thebestinterests of shareholders.1-17In the U.S. GAAP is generally set by the Financial Accounting Standards Board.TheSEChas formal authority forspecifyingaccountingstandardsfor companies withpublicly held stock,as delegated by Congress, but it usually accepts the standardspromulgated by the FASB. Internationally, a majority of countries accept IFRS as set bythe International Accounting Standards Board as their GAAP.1-18Until recently this was true. However, now the SEC allows companies headquarteredoutside the U. S. to report using IFRS.1-19Audits have value because they add credibility to a company’s financial statements.Provided that auditors have the expertise to assess the accuracy of financial statementsand the integrity to report any problems they discover, the investing public can put morefaith in statements that are audited.1-20ACPA is acertifiedpublicaccountant.One becomes a CPA by a combination ofeducation, qualifying experience, and the passing of a two-day national examination.ACA(charteredaccountant)is the equivalent of a CPA in many parts of the world,including most former British Commonwealth countries.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 5 preview image

Loading page ...

41-21Public accountants must obey standards of independence and integrity. In addition, thereare many more ethical standards that pertain to accountants.Some folks call accountingthe moral guardian of companies. This reputation has been sullied recently by corporatescandals that went undetected (or, at least, unreported by accountants), but accountantsare working to regain the high ethical regard they have traditionally maintained.1-22All managers find accounting useful formakingdecisions, and often their superiors useaccounting numbers in evaluating them. In addition, experience in accounting is valuableto anyone in an organization. Many operating executives got their start in accounting. Itprovided them a broad knowledge of the company and brought them into contact withmanagers throughout the organization.1-23No.The fundamental accounting principles apply equally to nonprofit (also callednot-for-profit) and profit-seeking organizations.Managers and accountants in hospitals,universities,governmentagencies,andothernonprofitorganizationsusefinancialstatements.They need to raise and spend money, prepare budgets, and judge financialperformance.Nonprofit organizations need to use their limited resources wisely, andfinancial statements are essential for judging their use of resources.1-24Double-entry refers to the concept that every transaction involves two or more accountswith the effect being to retain the balance in the balance sheet equation.The double-entry concept is important because it emphasizes that there are assets and claims onassets.In the balance sheet, for example, borrowing money provides an asset, cash, andcreates a liability.In addition to this conceptual benefit there is a clerical benefit.Maintaining a balanced relationship provides an indicator of errors.If the balance sheetequation does not balance, an error has been made.1-25Historians are primarily concerned with events that have already occurred. In that sense,a company’s financial statements do report on history—transactions that are complete.The negative side of this is that many important things that affect the value of a firm arebased on what will happen in the future.Thus, investors often worry aboutexpectationsand predictions.Of course, there is no way to agree on the accuracy of expectations andpredictions.The positive side of historical financial statements is that they present ano-nonsense perspective on what actually happened, where the company was at a point intime, or what it accomplished over a period of time. It is easier to predict the future whenyou know whereyou are and how you got there.You might liken the importance ofhistorical financial statements to the importance of navigation instruments. If you do notknow where you are and where you are headed, it is very hard to get to where you wantto go.Most people who refer to accountants as historians intend it as a criticism, although, asindicated above, a historical focus ensures that the data are measurable and verifiable.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 6 preview image

Loading page ...

51-26Such arguments are fun but can never be truly resolved.The notion behind theimportance of the corporation is that for any substantial growth to occur there must be asystem for organizing resources and using them over long periods of time. The corporateform of ownership helps companies raise large amounts of capital via stock issuance aswell as borrowing.Itallows us to separate ownership from management.Itprotects thepersonal assets of shareholders,and because their maximum losses can be limited, morerisky undertakings can be financed.Finally,it has perpetual life so its activity is notdisruptedby thedeath ofanyshareholder.Corporationsoperateundera setofestablished rules of behavior for entering into contracts and being sure that other partiescan be relied upon to uphold their side of an agreement.Accounting helped corporations emerge as the dominant economic organization in theworld.Without accounting it would be difficult to coordinate the activities of largecorporations.It would be especially difficult to separate management from ownership ifaccounting did not provide information about the performance of managements.1-27The auditor increases the value of financial statements by reassuring the reader of thestatementsthatan“independent”anda“qualified”thirdpartyhasreviewedmanagement’s disclosures and believes they fairly present the company’s performance.The fact that you personally do not recognize the name of the audit firm should not be aproblem, because only CPAs can perform public audits and sign audit opinions.Everystate has strict procedures for licensing CPAs, so such people are qualified. Nevertheless,audit firms develop reputations, and ones with a positive public image may give somefinancial statement users more confidence in the financial statements they audit.1-28(10 min.) Amounts are in millions.1.Assets = Liabilities + Owners’ Equity$7=$4+$32.Assets and liabilities would increase by $2million. Owners’ equity would be unaffected.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 7 preview image

Loading page ...

61-29(15-20 min.)May2Owners invested $6,000 additional cash inRadloff’sFurniture Company.3Owners invested an additional $4,000 into the company by contributingadditional store fixtures valued at $4,000.4Radloff’sFurniture Company purchased additional furniture inventory for$3,000 cash.5Radloff’sFurniture Company purchased furniture inventory on accountfor $6,000.6Radloff’sFurniture Company sold store fixtures for $3,000 cash.7Radloff’sFurniture Company purchased $6,000 of store fixtures, paying$5,000 cash now and agreeing to pay $1,000 later.8Radloff’sFurniture Company paid $2,000 on accounts payable.9Radloff’sFurniture Company returned $400 of merchandise (furnitureinventory) for credit against accounts payable.10Owners withdrew $3,000 cash fromRadloff’sFurniture Company.1-30(10-20 min.)Nov.2Melbournepurchased $2,500 of store fixtures on account.3Owner or owners withdrew $2,000 cash.4Melbournereturned $5,000 ofits inventory ofcomputers for $5,000 creditagainst its accounts payable.5Computers (inventory) valued at $7,000 were invested in the company byowners.8Melbournepaid $500 on accounts payable.9Melbournepurchased $3,500 of store fixtures, paying $1,000 now andagreeing to pay $2,500 later.10Melbournereturned $500of store fixtures for credit against accountspayable.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 8 preview image

Loading page ...

71-31(15-25 min.)JACKSONVILLECORPORATIONBalance SheetMarch 31, 20X1Liabilities andAssetsStockholders’EquityCash$5,000 (a)Liabilities:Merchandise inventory43,000 (b)Accounts payable$11,000(f)Furniture and fixtures2,000 (c)Notes payable10,000Machinery and equipment27,000 (d)Long-term debt27,000(g)Land39,000 (e)Total liabilities48,000Building24,000Stockholders’equity:Totalassets$140,000Paid-in capital92,000(h)Totalliab. & stk. equity$140,000(a)Cash:$14,000 +$1,000–$10,000 =$5,000(b)Merchandise inventory:$40,000 +$3,000 =$43,000(c)Furniture and fixtures:$3,000–$1,000 =$2,000(d)Machinery and equipment:$15,000 +$12,000 =$27,000(e)Land:$14,000 +$25,000 =$39,000(f)Accounts payable:$8,000 +$3,000 =$11,000(g)Long-term debt:$12,000 +$15,000 =$27,000(h)Paid-in capital:$80,000 +$12,000 =$92,000Note: Event 5 requires no change in the balance sheet.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 9 preview image

Loading page ...

81-32(25-35 min.)SOUTHAMPTONCOMPANYBalance SheetNovember 30, 20X1Liabilities andAssetsStockholders’ EquityCash£17,000(a)Liabilities:Merchandise inventory29,000Accounts payable£9,000(d)Furniture and fixtures8,000Notes payable30,000(e)Machinery and equip.33,000(b)Long-term debtpayable111,000(f)Land35,000(c)Total liabilities150,000Building241,000Stockholders’ equity:Totalassets£363,000Paid-in Capital213,000(g)Totalliab. & stk. equity£363,000(a)Cash:£22,000–£4,000–£7,000 +£6,000 =£17,000(b)Machinery and equipment:£20,000 +£13,000 =£33,000(c)Land:£41,000–£6,000 =£35,000(d)Accounts payable:£16,000–£7,000 =£9,000(e)Notes payable:£21,000 + (£13,000–£4,000) =£30,000(f)Long-term debtpayable:£134,000–£23,000 =£111,000(g)Paid-in capital:£190,000 +£23,000 =£213,000Note: Event 4 requires no change in the balance sheet.1-33(5-10 min.)1.Total liabilities=Total assetsstockholders’ equity=$26,271,000,000$12,002,000,000=$14,269,000,0002.Common stock, par value = $.005×434,266,000= $2,171,330.Like other items onCostco’s balance sheet, the amount would be rounded off to millions:Common stock, par value$2

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 10 preview image

Loading page ...

91-34(5–10 min.)The Mammal CenterBalance SheetJuly 1, 20X1AssetsLiabilities andStockholder’sEquityCash$45,000Accounts payable$14,000Account receivable13,000Bank loan payable9,000Property, plant, and equipment25,000Capital stock at par2,000Total assets$83,000Additional paid-in capital$58,000Totalliab.andstockholder’sequity$83,0001-35(20-30 min.) See Exhibit 1-35. Equipment and furniture could be in two separateaccounts rather than combined.1-36(20-35 min.)1.See Exhibit 1-36.2.JBWCORPORATIONBalance SheetJanuary 31, 20X1(In Thousands of Dollars)Liabilities andAssetsStockholders’EquityLiabilities:Cash$153Accountspayable$108Notepayable30Merchandise inventory249Total liabilities$138Stockholders’equity:Equipment36Capital stock,$1 par, 30,000 sharesissued and outstanding$ 30Additional paid-in capitalin excess of par value270300Totalassets$438Totalliabilities & stockholders’ equity$438

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 11 preview image

Loading page ...

10EXHIBIT 1–35MARYMOUNTSERVICES, INC.Analysis of April 20X1 Transactions(In Thousands of Dollars)AssetsLiabilities andStockholders’EquityEquipmentNoteAccountsPaid-inDescription of TransactionsCash+and Furniture=Payable+Payable+Capital1.Issuance of stock+60=+602.Issuance of stock+20=+203.Borrowing+35=+354.Acquisition for cash–33+33=5.Acquisition on account+10=+106.Payments to creditors–4=–47.Sale of equipment+8–8=8.No entry=+66+55=+35+ 6+80121121MARYMOUNTSERVICES, INC.Balance SheetApril 30, 20X1AssetsLiabilities andStockholders’EquityAccountspayable$6,000Cash$66,000Notepayable35,000Equipment and furniture55,000Paid-in Capital80,000Totalassets$121,000Totalliab. & stk. equity$121,000

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 12 preview image

Loading page ...

11EXHIBIT 1–36JBWCORPORATIONJanuary 20X1Analysis of Transactions(In Thousands of Dollars)AssetsLiabilities+Stockholders’EquityMerch-CapitalAdditionalandiseEquip-NotesAccountsStockPaid-inDescription of TransactionsCash+Inventory+ment=Payable+Payable+(at par)+Capital1.Original incorporation+300=+30+ 2702.Inventory purchased–75+75=3.Inventory purchased+85=+ 854.Return of inventory tosupplier–11=–115.Purchase of equipment–10+40=+306.Sale of equipment+ 4–4=7.Payment to creditor–16=–168.Inventory purchased–50+100=+ 509.No entry except ondetailed underlyingrecords=Balance, January 31,20X1+153+249+36=+30+108+30+ 270438438

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 13 preview image

Loading page ...

121-37(20-35 min.)1.See Exhibit 1-37.2.AUTOPARTESLISBONBalance SheetMarch 31, 20X1AssetsLiabilities and Owner’sEquityCash€62,800Liabilities:Inventory16,600Accounts payable€4,500Equipment17,500Note payable8,000Total liabilities12,500You, capital84,400Totalassets€96,900Totalliabilities and owner’s equity€96,9001-38(25-40 min.) Note that transaction 9 is not covered directly in the text. However, it shouldbe possible to figure out the accounting for it from similar items that are covered. However, someinstructors may want to omit transaction 9.1.See Exhibit 1-38.2.LEIDACRUZ, ATTORNEY-AT-LAWBalance SheetDecember 31, 20X0Liabilities andAssetsOwner’s EquityLiabilities:Cash in bank$50,000Accountspayable$1,000Note receivable3,000Notepayable3,000Rental damage deposit1,000Total liabilities$4,000Legal supplies on hand1,000Owner’s equity:Computer5,000Leida Cruz, capital60,000Office furniture4,000Total liabilities andTotal assets$64,000owner’s equity$64,0001-39(15-25 min.) See Exhibit 1-39.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 14 preview image

Loading page ...

13EXHIBIT 1–37AUTOPARTESLISBONAnalysis of Transactions(in Euros)For the Month Ended March 31, 20X1AssetsLiabilities+ Owner’s EquityEquip-AccountsNoteYou,Description of TransactionsCash+Inventory+ ment=Payable+ Payable+Capital1.Initial investment+80,000=+80,0002.Inventory acquired for cash10,000+10,000=3.Inventory acquired on credit+ 8,000=+ 8,0004.Equipment acquired–5,000+15,000=+10,0005.No entry=6.Tires for family–600=-6007.Parts returned tosupplier for cash+300–300=8.No effect on total inventory*=9.Parts returned tosupplier for credit–500=–50010.Payment on note–2,000=–2,00011.Equipment acquired+ 5,000 =+5,00012.Payment to creditors–3,000=–3,00013.No entry14.No entry15.Exchange of equipment+2,500–4,000=+ 1,500+62,800+16,600+17,500=+4,500+8,000+84,40096,90096,900*Entries could have reduced both inventory and accounts payable by€800 and then increased the same two accounts by €800. Thenet effect is no change in either account.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 15 preview image

Loading page ...

14EXHIBIT 1–38LEIDACRUZ ATTORNEYAnalysis of Business Transactions(In Thousands of Dollars)Assets=LiabilitiesandOwner’s EquityOwner’sCashNoteRentalLegalOfficeLiabilitiesEquityDescriptioninReceiv-DamageSuppliesFurni-NoteAccountL. Cruzof TransactionsBankableDepositon HandComputerturePayablePayableCapital2.Openinginvestment+60=+604.Rental deposit–1+1=5.Purchased computer–2+5=+36.Purchased supplies+1=+17.Purchasedfurniture–4+4=9.Note receivablefromWhitman–3+3=Balance, December31,20X0+50+3+1+1+5+4=+3+1+606464General Comments:•Transactions 1 and 3 are personal rather than business transactions.•In transaction 4, no obligation (liability) is set up for the rent because it is not payable until January 2 and no rental services willoccur until January.•Transaction 8 requires no entry because no services have been performed during December.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 16 preview image

Loading page ...

15EXHIBIT 1–39WALGREEN COMPANYAnalysis of Transactions(In Millions of Dollars)AssetsLiabilities and Stockholders’EquityPropertyStock-Inven-and OtherNotesAccountsOtherholders’Description of TransactionsCash+ tories+Assets=Payable+ Payable+ Liabilities+EquityBalanceAugust311,5568,04417,854=4,8107,79714,8471.Issuance of stockfor cash+30=+ 302.Issuance of stockfor equipment+42=+ 423.Borrowing+13=+134.Acquisition of equipment for cash–18+18=5.Acquisition of inventory on account+89=+896.Payments to creditors–35=–357.Sale of equipment+2-2=BalanceSeptember21,5488,13317,912=134,8647,79714,91927,59327,593WALGREEN COMPANYBalance SheetSeptember 2,2011(In Millions of Dollars)AssetsLiabilities and Stockholders’EquityCash$1,548Notes payable$13Inventories8,133Accounts payable4,864Property and other assets17,912Other liabilities7,797Stockholders’equity14,919Totalassets$27,593Totalliab. and stockholders’ equity$27,593

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 17 preview image

Loading page ...

161-40(20-35 min.)1.See Exhibit 1-40.2.NIKE, INC.Balance SheetJune 3, 2011(InMillions)Liabilities andAssetsStockholders’EquityCash$ 2,086Total liabilities$ 5,213Inventories2,758Stockholders’equity9,933Property,plant,and equipment2,089Other assets8,213Total$15,146Totalliabilities & stk. equity$15,1461-41(15-20 min.)JENNIFER GRANT, REALTORBalance SheetNovember 30, 20X1Liabilities andAssetsOwners’EquityCash$6,000Liabilities:Undeveloped land170,000Accounts payable$6,000Office furniture16,000 (a)Mortgage payable85,000Franchise18,000 (b)Total liabilities91,000Owner’s equity:Jennifer Grant, capital119,000(c)Total assets$210,000Total liabilities andowner’s equity$210,000(a)$17,000–$1,000 = $16,000(b)A franchise is an economic resource that has been purchased to benefit future operations.(c)$210,000–$91,000 = $119,000Note thatRubenstein’s death may have considerable negative influence on future operations,but accounting does not formally measure its monetary impact.Moreover, transactions 3 and 4 arepersonal rather than business transactions.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 18 preview image

Loading page ...

17EXHIBIT 1–40NIKE, INC.Analysis of Transactions(In Millions of Dollars)AssetsLiabilities andStockholders’EquityDescription of TransactionsCash+Inven-tories+Property,Plant,andEquip.+Other Assets=TotalLiabil-ities+Stock-holders’EquityBalance May 311,9552,7152,1158,2135,1559,8431.Inventory purchased28+28=2.Inventory purchased+19=+193.Return of inventoryto supplier4=44.Purchase of equipment5+14=+95.Sale of equipment+4040=6.No entry=7.Payment to creditor16=168.Borrowed from bank+50=+509.Issued common stock+90=+9010.No entry except ondetailed underlyingrecords=Balance, June 32,0862,7582,0898,213=5,2139,93315,14615,146

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 19 preview image

Loading page ...

181-42(10 min.)1.Cash wouldincreaseby $1,000 and the liability, Deposits, wouldincreaseby the sameamount.2.Deposits are liabilities becauseWells Fargoowes these amounts to depositors.They aredepositors’claims on the assets of the bank.3.LoansReceivablewould increase and Cash would decrease by $75,000.4.Both Depositsand Cash would decrease by $5,000.1-43(10 min.)Amounts are in millions.1.a.Cash=Total assetsNoncash assets=€27,739€24,860=€2,879b.Stockholders’ equity=Total assetsTotal liabilities=€27,739€21,512=€6,2272.Total liabilities and stockholders’ equity = total assets =€27,739.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 20 preview image

Loading page ...

191-44(20-30 min.)UNITED TECHNOLOGIESCORPORATIONBalance SheetSeptember30,2011(In Millions of Dollars)Liabilities andAssetsStockholders’EquityCash$5,966(1)Accounts payable$5,597Inventories8,617Other liabilities22,935Fixed assets6,137Long term debt9,501Other assets41,228Total liabilities38,033Common stock$13,330Other stockholders’equity10,585(3)Total stockholders’equity23,915(2)Total liabilities andTotal assets$61,948stockholders’equity$61,948Notations (1), (2), and (3) designate the answers to the requirements.(1) The $5,966cash was computed by taking total assets minus all assets except cash.To calculate (2) and (3),note that total assets must equal total liabilities plus stockholders’equity, $61,948. Furthermore,total liabilitiesequal($5,597+ $22,935+ $9,501)= $38,033.Therefore, total stockholders’equity is($61,948–$38,033)= $23,915, denoted by (2) above.Otherstockholders’equity is($23,915–$13,330)= $10,585, denoted by (3) above.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 21 preview image

Loading page ...

201-45(20 min.)MACY’S, INC.Balance SheetOctober 29, 2011(In Millions of Dollars)Liabilities andAssetsShareholders’EquityCash$1,097(1)Merchandise accountsInventories7,158payable$3,576Property, plant,Long-term debt6,151and equipment8,423Other liabilities6,684Total liabilities$16,411(2)Other assets5,585Shareholders’equity5,852(3)Total liabilities andTotal assets$22,263shareholders’equity$22,263Notations (1), (2), and (3) designate the answers to the requirements.Cash is calculated bysubtracting the values given for the other assets from total assets:($22,263$7,158$8,423$5,585)= $1,097.Cash is the smallest individual asset.Companies try to keep cash balancessmall because they do not earn large returns on cash accounts.To calculate (2),simply add the components($3,576+ $6,151+$6,684).For (3),note that total liabilities andshareholders’ equity equals total assets, $22,263, soshareholders’equity is $22,263less total liabilities of $16,411, which equals $5,852.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 22 preview image

Loading page ...

211-46(10 min.)1.EL-HASHEMPARTNERSBalance SheetJune 15, 20X0AssetsLiabilitiesandOwners’ EquityRental house$350,000Mortgage loanpayable$260,000Owners’ equityMuhabEl-Hashem, Capital45,000GhassanEl-Hashem, Capital45,000Total assets$350,000Total liabilitiesandowners’equity$350,0002.EL-HASHEMCORPORATIONBalance SheetJune 15, 20X0AssetsLiabilities & Stockholders’ EquityRental house$350,000Mortgage loanpayable$260,000Stockholders’ equityCommon stock, par value2,000Additional paid-in capital88,000Total assets$350,000Total liabilities and stockholders’equity$350,0001-47(10 min.)1.The par value line would increase by(500,000,000×$.01)= $5,000,000 and the numberof shares issued and outstanding would increase by 500 million.Additional paid-incapital would increase by[500,000,000×($25.00–$.01)]= $12,495,000,000.2.IBM shows all of its paid-in capital as a one-line item. Therefore, its common stock linewould increase by $180,000,000,and the number of issued and outstanding shares wouldincrease by 1 million.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 23 preview image

Loading page ...

221-48(5-10 min.)The common stock line should show(2,442,676,580×$.75)= $1,832million; note thatbalance sheet amounts are rounded to the nearest million.Thetotalprice per share paid by theoriginal investors for theChevroncommon stock was($15,110million+ $1,832 million)=$16,942million;the average price per share was($16,942 million÷2,442,676,580)= $6.94.Note that the par value is small, $.75, as compared to $6.94.The relatively large difference between the original issuance price ($6.94) and the currentmarket price (nearly$100in early 2012) is quite typical of many large successful companies.This is usually caused by increased investment attractiveness based on a record of profitableoperations over many years.1-49(5-10 min.)1.The par value of Honda’s shares is(¥86,067,000,000 ÷1,811,428,430)= ¥47.5.2.The average price per share paid by the original investors was ¥142.76:(¥86,067 million+ ¥172,529 million)= ¥258,596 million;(¥258,596 million ÷1,811,428,430)= ¥142.76.Note that the ¥142.76easily exceeds the par value of ¥47.5.3.The large difference between the original issuance price of ¥142.76and the market priceof ¥3,000at the end of fiscal2011is typical for many successful companies.Thisphenomenon is usually caused by increased investment attractiveness based on a recordof profitable operations over many years.1-50(10 min.)There are two popular sets of generally accepted accounting principles (GAAP) in theworld—IFRS set by the International Accounting Standards Board, and U.S. GAAP set by theFinancial Accounting Standards Board. In 2005 the European Union adopted IFRS to be used byall companies in its member nations. Thus, Carrefour, a French company, must issue financialstatementsthat comply with IFRS. Its auditors will examine its financial statements to ensurecompliance with IFRS and mustconfirm this inthe audit opinion.Although not mentioned inthe chapter, the phrase “as adopted by the European Union” is also significant.Countries thatadopt IFRS may not accept 100% of its standards, and the European Union makes a fewadjustments to the standards.In contrast, companies based in the United States, such as Safeway, must use U.S.GAAP, not IFRS. Thus, Safeway’s audit opinion clearly states that its statements comply withU. S. GAAP.Both companies use Deloitte & Touche LLP as an auditor, but the auditor must applydifferent standards when auditing Carrefour than when auditing Safeway.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 24 preview image

Loading page ...

231-51(15-20 min.)NOTE TO INSTRUCTOR:You may want to assign a more recent annual report, and thecomposition on the board may have changed. However, the general mix of backgrounds of theboard members is unlikely to change.1.The board of directors of General Mills has13members, of whichonly one is aGeneralMillsexecutive—Kendall J. Powell, the CEO andchairmanof theboard.2.Of the12independent directors,9are either current or retired executives of othercompanies, one is an attorney, one is a venture capitalist, and one is an academic (deanofDartmouth’s Tuck School).However,tworetired executivesand the attorney arecurrently academics, also. The board should have sufficient independent directors toavoid too much management influence and should have extensive and varied experiencesto bring to the board discussions.3.There are five members of the audit committee. None are General Mills executives; theyare all independent directors. Theattorneychairs the audit committee. The auditcommittee was given extensive power by the Sarbanes-OxleyAct. It is charged withresponsibility for overseeing the financial reporting of the company, a task that isextremely important to shareholders, who rely on the financial reports for importantinformation.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 25 preview image

Loading page ...

241-52(10 min)Credibility of accounting reports is essential. Decision makers both within and outside ofan organization rely on accounting reports for important decisions.For accounting reports tohave credibility, users must have confidence in both the preparers and the auditors of thosereports.Internalaccountantshaveaccesstomuchsensitivedata,andtheyhaveaccessto information across an entire organization.They need to be trusted to keep certain types ofinformation confidential as well as to report fully and accurately to managers who needinformation for their decisions. Because of their access to so much information, accountants alsooftenactastheconscienceofanorganization,identifyingareaswheremanagersmayintentionallyorunintentionallybemisusingorganizationalresources.Thisisalargeresponsibility, and it requires the trust of managers throughout the organization.External audits have value because they add credibility to the financial statements.Management prepares the financial statements and may be prone to overstate operating resultseither because of natural optimism or because their reputation or compensation is linked tooperating performance.If investors and other users of financial statement do not have faith inthe competence, fairness, and objectivity of the auditors, audits will have little value. Therefore,developing and maintaining high ethical standards is a hallmark of the auditing profession.Not only are individual accountants cognizant of the need to develop and maintain areputation for ethical behavior, but they recognize the need to be collectively regarded as highlyethical.Any breach of ethical conduct by one accountant has spillover effects on others.It isimportant to all accountants that the profession of accounting be regarded as highly ethical.Therefore, professional accounting organizations have developed standards of ethical conduct.Certificationexaminations,suchastheCertifiedPublicAccountant(CPA)andCertifiedManagement Accountant (CMA) exams, test applicants’ knowledge of ethical standards, and theassociations enforce compliance to ethical standards by penalizingthose whoviolatethestandards.In this way the public can be reasonably assured that when they deal with a certifiedaccountant he or she will be familiar with ethical standards and will have been in compliancewith them.1-53(60 or more min.)The purpose of this exercise is to learn how to find a company’s balance sheet, to pickout significant items on it, and to understand how basic transactions affect the balance sheet.Each student will become an “expert” on one or two types of transactions and will be required toexplain the accounting for that transaction to the rest of the group.Requirement 2 is a test ofhow well the “experts” explained the effects of their transactions.The hypothetical transactionsare chosen so that only the selected accounts are affected.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 26 preview image

Loading page ...

251-54(15-30 min.)Each solution is unique and will change each year.The purpose of this problem is forstudents to recognize the format of a balance sheet and to see how it relates to the balance sheetequation.1-55(10-15 min.) NOTE: This solution is based on Starbucks’2011financial statement. If amore recent annual report is used, the numbers will change.Dollar amounts are in millions.1.Cash = $1,148.12.Cash and cash equivalents$1,148.1Inventories965.8Property, plant, and equipment *2,355.0Accounts payable540.0Common stock.7Additional paid-in capital**1.1Other additional paid-in capital**39.4* This was called store equipment in the chapter.** The reason additional paid-in capital is separated into 2 parts is beyond our scope at this time.3.Assets = Liabilities + Stockholders’Equity$7,360.4= $2,973.1 + $4,387.3

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 27 preview image

Loading page ...

261-56(30-60 min.)NOTE TO INSTRUCTOR:This solution is based on the web site as it was in2012 and thefinancial statements for the year ended June 30, 2011. Be sure to examine the current web sitebefore assigning this problem, as the information there may have changed.1.Despite therecession, the letter is very optimisticand future oriented.It indicates that“Fiscal 2011 was one of the mosttransformative years we have seen atCisco. Weprioritized, simplified, andtook action to drive Cisco’s continuedmarket leadership. Weaggressivelychanged the way we do businessto become a faster and more agilepartner,with the goal continuing tobe to increase our ability to deliverunique value to ourshareholders,customers, partners, and employees.”2.Cisco was founded in 1984.The companydesigns, manufactures, and sells InternetProtocol (IP)-based networking and other products related to the communications andinformationtechnology(IT)industryandprovidesservicesassociatedwiththeseproducts.3.Cisco’s total assetsat the endoffiscal2011were$87,095million, its total liabilitieswere$39,836million, and total shareholders’ equitywas$47,259million.(The itemcalled“noncontrolling interest”is part of shareholders’ equity that is held by shareholders otherthan those of Cisco.It will be discussed in Chapter 11.)4.Inventories are $1,486million, $159millionmorethan a year ago.Inventory grew 12%in fiscal 2011, faster than total assets growth of 7%. Although this inventory build-up isnot excessive, when inventories grow faster than assets itmay bea signof trouble.5.The audit report states:“The Company’s management is responsible forthese financialstatements. . . Our responsibility is to express opinions on these financial statements. . .based on our integrated audits.”6.Cisco has12members of the board of directors.Of these,2are part of Cisco’smanagement team.Thereis oneacademic, the president of Stanford University.Theothers are all executivesor retired executiveswith other companies.There are 5members on the audit committee.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 28 preview image

Loading page ...

CHAPTER 2COVERAGE OF LEARNING OBJECTIVESLEARNINGOBJECTIVESQUESTIONSEXERCISESPROBLEMSOTHERLO1:Explain howaccountants measureincome.1,2,3,4,26,2732, 3645,49,5167LO2:Determine when acompany should recordrevenue from a sale.5,63145,46,49,51,6167LO3:Use the concept ofmatching to record theexpenses for a period.7,8,934, 3645,47,48,50,52,53,54,56LO4:Prepare anincome statement andshow how it is related toa balance sheet.10,11,1230,35,36,37,38,39,40,4145,47,48,50,52,53,54,55,56,57,5865,66,67LO5:Account for cashdividends and prepare astatement ofstockholders’ equity.13,14,15,2833,35,38,39,4054,55,57,5865,66LO6:Compute andexplain earnings pershare, price-earningsratio, dividend-yieldratio, and dividend-payout ratio.17,18,19,20,2942,4359, 6064,66LO7:Explain how theconceptual frameworkguides the standardsetting process and howaccounting regulatorstrade off relevance andfaithful representationin setting accountingstandards.21,22,2362LO8:Explain how thefollowing concepts affectfinancial statements:entity, going concern,materiality,stablemonetary unit,periodicity andreliability.16,24,25,264463

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 29 preview image

Loading page ...

CHAPTER 22-1Thelength of theoperating cycle depends on the nature of the company. It is the time ittakes the company to use cash to acquire goods and services, to sell those goods andservices to customers, and to collect cash from the sales.2-2A fiscal year is the year used for financial reporting.It may be the same as a calendaryear, but often it is not.Many companies elect to begin and end a fiscal year at the lowpoint in their annual business activity.2-3Expenses are reductions in stockholders’equity; thus they may be described as negativestockholders’equity accounts.2-4The cash basis fails to match accomplishments with effortsin a single accounting period.In particular, the cash basis fails to match revenues and expenses properly.Inventorymay be bought and paid for in one period,andsold in the second with the collection fromcustomers in a third period. Accrual accounting matches revenue and cost of goods soldin the second period, although the cash outlayoccurredin the first and the collection wasmadein the third.2-5Thetwocriteriaforrevenuerecognitionareearningandrealization(realizedorrealizable).2-6Revenue recognition is delayed when a company sells a magazine subscription becausethe company does not recognize revenue until it is earned by delivery of the magazines.Revenue recognition is also delayed if collection of the account receivable is notreasonably certain, which means that it is not realized or realizable.This may happenwith speculative land sales.2-7Product costs are naturally linked to revenues, while period costs support a company’soperations for a given period.Product costs become expenses when the companyrecognizes the related revenue. Period costs become expenses in the period in which theyare incurred.2-8In theory, all expenses are goods and services that were first purchased as assets and thathave now beenconsumedor usedin the conduct of operations.2-9Managers acquire assets (goods and services) that are then either used instantaneously orat a later time. When the assets are used, they become expenses.2-10The balance sheet is a financial picture of a company at one point in time, like a snapshot.In contrast, an income statement shows activity over a period of time. It shows the seriesof events that take a company from one “snapshot” (balance sheet) to another, just as amoving picture shows movement from one position to the next.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 30 preview image

Loading page ...

2-11Synonymsfortheincomestatementincludestatementofearnings,statementofoperations,and operating statement.A major reason to learn accounting is to be able toread real financial statements. Such statements contain a variety of terms that may differfrom the one first leaned in an introductory accounting course.To be able to read andinterpret the financial statements, users need to understand the terminology,includingsynonyms used for the major accounting terms.2-12Managers are often optimistic and feel that things are bound to get better, so they do notlike to report bad news. In addition, they may have bonuses or possible promotions thatdepend on the financial results, so they want the reports to be as good as possible.Finally, financial reports are often the “scorecard” for business success, and competitivemanagers want to report a high score.2-13Cash dividends are not necessary in the conduct of revenue-producing operations.Therefore, they are not expenses but arevoluntarydistributions of assets to owners.These distributions are made possible because of profitable operations, but are not part ofthe profitable operations.2-14Retained earnings is a stockholders’equity account (a residual claim against assets), andnot an asset account.It is a claim against resources, not a resource itself.2-15Thestatementofstockholders’equityprovidesinformationonwhatcausedthestockholders’ equity accountstochange during a given period. The three main items thataffect stockholders’ equity are net income, transactions with stockholders(sale of stock,distribution of dividends), and other comprehensive income—a catch-all category of allequity changes that are neither part of net income nor arise from transactions withowners.2-16No.An accounting entity can be a part of an organization, such as a division ordepartment. It can also be an entire economy, such as national income accounting for theUnited Statesor another country.2-17No.One financial ratio, earnings per share (EPS), is presented on the income statement.2-18A high P-E ratiosuggeststhat investors expect future earnings tosignificantlyexceedcurrent earnings. This is likely to be true for fast growing companies.2-19Two dividend ratios areas follows:Dividend-yield ratio—The amount of dividends paid per dollar invested in a stockat the current market price.The dividend-yield ratio iscomputed as Dividends pershare ÷ Market price per share.Dividend-payout ratio—The percentage of a company’s earnings that is paid out individendsThe dividend-payout ratio iscomputed as Dividends per share ÷ EPS.

Introduction to Financial Accounting, 11th Edition Solution Manual - Page 31 preview image

Loading page ...

2-20No.A highdividend-payout ratio may be a bad sign.Companies with a high dividend-payout ratio tend to be slow-growing companies. They return a larger percentage of theirincome to shareholders because they do not have profitableopportunities in which toinvest.2-21Yes, accountants make many trade-offs between relevance and faithful representation.Although both are desirablecharacteristics, sometimes it is necessary to sacrifice someof one to gain much of the other. A major trade-off is between marketvalues, which areoften more relevant but may raise questions about faithful representation, and historicalcosts, which faithfully represent an event but may be less relevant.2-22The two main characteristics that make accounting information relevant are predictivevalue—meaningthatithelpsusersformtheirexpectations aboutthefuture—andconfirmatory value—meaning that it can confirm or contradict existing expectations.2-23These criteria support faithful representation.They help ensure that information trulycapturestheeconomicsubstanceofthetransactions,events,orcircumstancesitdescribes.2-24Reliable data require convincing evidence that can be verified by independent auditors.Accountants must make sure that data reported in the financial statements can bemeasured with enough accuracy to be useful to users of the statements.2-25Materiality means that items that are not large enough to influence users’ decisions canbe omitted from the financial statements.Thus, you do not find pencils or paper clipslistedseparatelyamong a company’s assets. Cost-benefit means, for example, that if thecost of measuring an item is greater than the value from knowing it,the itemcan beomitted.Thus, thefinancial statements of a division of a companymay not include anexpense for any portionof the company president’s salary, even though the presidentspends time overseeing the division’s activities.It would simply be toocostlyfor thepresident to account for each minute spent on each different activity heor sheundertakes,and there islittlebenefit to attempting to allocate the president’s salary to individualdivisions.However, in the corporate financial statements, the president’s salary would betreated as an operating cost assigned to the corporation as a whole.2-26A year is a long time to wait for new information about a company’s performance.Preparing full financial statements is time consuming and costly.Quarterly financialdisclosures are less complete than annual ones, but they represent a balanced answer tohow often and how complete information should be.Within companies, managers getfinancial reports daily, weekly, or monthly depending on their needs.In differentcountries the tradition and the identity of investors have led to different customs.TheUnited States relies on public ownership of companies and needs a system to keep largenumbers of investors adequately informed.In countries where more of the ownership isclosely held and more of the liabilities are bank financed, there is less need for frequentpublic disclosure.

Preview Mode

This document has 524 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

Introduction to Financial Accounting, 11th Edition Class Notes

Accounting Principles II – Traditional Cost Systems

Accounting Principles II – Statement of Cash Flows

Accounting Principles II – Partnerships

Accounting Principles II – Managerial and Cost Accounting Concepts

Accounting Principles II – Long-Term Liabilities

Accounting Principles II – Investments

Accounting Principles II – Incremental Analysis

Accounting Principles II – Flexible Budgets and Standard Costs

Accounting Principles II – Financial Statement Analysis

Company

Explore

Study Tools