Module 2 Solutions

Module 2
Introducing Financial Statements

and Transaction Analysis
DISCUSSION QUESTIONS
Q2-! An asset re"resents resources a com"any o#ns or controls!
Assets are e$"ected to "ro%ide &uture economic 'ene&its! Assets
arise &rom "ast e%ents or transactions! A lia'ility is an o'ligation
t(at #ill re)uire a &uture economic sacri&ice! E)uity is t(e
di&&erence 'et#een assets and lia'ilities! It re"resents t(e claims
o& t(e com"any*s o#ners to its income and assets! T(e &ollo#ing
are some e$am"les o& eac(+
Assets Cas(
,ecei%a'les
In%entories
-lant. "ro"erty and e)ui"ment /--E0
1ia'ilities Accounts "aya'le
Accrued lia'ilities
De&erred re%enue
Notes "aya'le
1ong-term de't
E)uity Contri'uted ca"ital /common and "re&erred stoc20
Additional "aid-in ca"ital
,etained earnings
Accumulated ot(er com"re(ensi%e income
Treasury stoc2
Cambridge Business Publishers, 2013
Solutions Manual, Module 2 2-1
Q2-2! A cost t(at creates an immediate 'ene&it is re"orted on t(e income
statement as an e$"ense! A cost t(at creates a &uture 'ene&it is
added to t(e 'alance s(eet as an asset /ca"itali3ed0 and #ill 'e
trans&erred to t(e income statement as t(e 'ene&it is reali3ed! For
e$am"le. --E creates a &uture 'ene&it and t(e cost o& t(e --E is
trans&erred to t(e income statement /as de"reciation e$"ense0
o%er t(e li&e o& t(e --E!
Q2-4! Accrual accounting means t(at #e record re%enues #(en earned.
and record e$"enses #(en t(ey are incurred! Accrual accounting
does not rely on cas( &lo#s in determining #(en items are
re%enues or e$"enses! T(is is #(y net income /a 5AA- measure0
di&&ers &rom cas( &rom o"erations!
Q2-6! Transitory items are re%enues and e$"enses t(at are not e$"ected
to recur! One o'7ecti%e o& &inancial analysis is to "redict future
"er&ormance! 5i%en t(at "ers"ecti%e. transitory /nonrecurring0
items are not rele%ant e$ce"t to t(e e$tent t(at t(ey con%ey
in&ormation a'out &uture &inancial "er&ormance!
Q2-8! T(e statement o& stoc2(olders* e)uity "ro%ides in&ormation a'out
t(e e%ents t(at im"act stoc2(olders* e)uity during t(e "eriod! It
contains in&ormation relating to net income. stoc2 sales and
re"urc(ases. o"tion e$ercises. di%idends and ot(er accumulated
com"re(ensi%e income!
Q2-9! T(e statement o& cas( &lo#s re"orts t(e com"any*s cas( in&lo#s
and out&lo#s during t(e "eriod. and categori3es t(em according to
o"erating. in%esting and &inancing acti%ities! T(e income
statement re"orts "ro&it earned under accrual accounting. 'ut
does not "ro%ide su&&icient in&ormation concerning cas( &lo#s!
T(e statement o& cas( &lo#s &ills t(at %oid!
Q2-:! Articulation re&ers to t(e &act t(at t(e &our &inancial statements are
lin2ed to eac( ot(er and t(at c(anges in one statement a&&ect t(e
ot(er t(ree! For e$am"le. net income re"orted on t(e income
statement is lin2ed to t(e statement o& retained earnings. #(ic( in
turn is lin2ed to t(e 'alance s(eet! Understanding (o# t(e
&inancial statements articulate (el"s us to analy3e transactions
and e%ents and to understand (o# e%ents a&&ect eac( &inancial
statement se"arately and all &our toget(er!
2-2 Financial Managerial !ccounting for MB!s, 3rd "dition
Q2-;! <(en a com"any "urc(ases a mac(ine it records t(e cost as an
asset 'ecause it #ill "ro%ide &uture 'ene&its! As t(e mac(ine is
used u". a "ortion o& t(is cost is trans&erred &rom t(e 'alance
s(eet to t(e income statement as de"reciation e$"ense! T(e
mac(ine asset is. t(us. reduced 'y t(e de"reciation. and e)uity is
reduced as t(e e$"ense reduces net income and retained
earnings! I& t(e entire cost o& t(e mac(ine #as immediately
e$"ensed. "ro&it #ould 'e reduced considera'ly in t(e year t(e
mac(ine #as "urc(ased! T(en. in su'se)uent years. net income
#ould 'e &ar too (ig( as none o& t(e mac(ine*s cost #ould 'e
re"orted in t(ose years e%en t(oug( t(e mac(ine "roduced
re%enues during t(at "eriod!
Q2-=! An asset must 'e >o#ned? or >controlled.? it must "ro%ide >&uture
economic 'ene&its.? and it must arise &rom a "ast transaction or
e%ent! O#ning means (a%ing title to t(e asset /some leased assets
are also recorded on t(e 'alance s(eet as #e #ill discuss in our
Module @ entitled. >,e"orting and Analy3ing O&&-Aalance-S(eet
Financing?0! Future 'ene&its may mean t(e &uture in&lo#s o& cas(.
or an increase in anot(er asset. or reduction o& a lia'ility! -ast
e%ent means t(e com"any (as "urc(ased t(e asset or ac)uired it
in some ot(er cas( or noncas( transaction or e%ent!
Q2-@! 1i)uidity re&ers to t(e ready a%aila'ility o& cas(! T(at is. (o# muc(
cas( t(e com"any (as on (and. (o# muc( cas( is 'eing
generated. and (o# muc( cas( can 'e raised )uic2ly! 1i)uidity is
essential to t(e sur%i%al o& t(e 'usiness! A&ter all. &irms must "ay
loans and em"loyee #ages #it( cas(!
Q2-! Current means t(at t(e asset #ill 'e li)uidated /con%erted to cas(0
#it(in t(e ne$t year /or t(e o"erating cycle i& longer t(an one
year0!
Q2-2! 5AA- uses (istorical costs 'ecause t(ey are less su'7ecti%e t(an
mar2et %alues! Mar2et %alues can 'e 'iased &or t#o reasons+ &irst.
#e may not 'e a'le to measure t(em accurately /consider our
ina'ility to accurately measure t(e mar2et %alue o& a
manu&acturing &acility. &or e$am"le0. and second. managers may
inter%ene in t(e re"orting "rocess to intentionally 'ias t(e results
to ac(ie%e a "articular o'7ecti%e /li2e en(ancing t(e stoc2 "rice0!
Q2-4! 5enerally. e$cluded intangi'le /unrecorded0 assets are t(ose t(at
contri'ute to a com"any*s sustaina'le com"etiti%e ad%antage. 'ut
t(at cannot 'e measured accurately! Some e$am"les include t(e
%alue o& a 'rand. t(e management o& a com"any. em"loyee morale.
a strong su""ly c(ain. su"erior store locations. credi'ility #it( t(e
&inancial mar2ets. re"utation. and so &ort(!
Q2-6! An intangi'le asset is an asset t(at is not "(ysical in nature! To 'e
included on t(e 'alance s(eet. it (as to meet t#o tests+ t(e
com"any must o#n or control t(e asset. it must "ro%ide &uture
economic 'ene&its. and t(e asset must arise &rom a "ast e%ent or
transaction! Some e$am"les are good#ill. "atents and trademar2s.
contractual agreements li2e royalties. leases. and &ranc(ise
agreements! An intangi'le asset is only recorded on t(e 'alance
s(eet #(en it is "urc(ased &rom an outside "arty! For e$am"le.
good#ill arises #(en t(e com"any ac)uires /eit(er #it( cas( or
stoc20 anot(er com"any*s 'rand name or any o& t(e ot(er
intangi'les listed a'o%e!
Q2-8! An accrued lia'ility is an o'ligation &or e$"enses t(at (a%e 'een
incurred 'ut not yet "aid &or #it( cas(! E$am"les include #ages
t(at (a%e 'een earned 'y em"loyees and not yet "aid. interest
o#ing on a 'an2 loan. and "otential &uture #arranty claims &or
"roducts sold to customers! <(en t(e lia'ility is recogni3ed on
t(e 'alance s(eet. a corres"onding e$"ense is recogni3ed in t(e
income statement!
Q2-9! Net #or2ing ca"ital B current assets C current lia'ilities! Increasing
t(e amount o& trade credit /e!g!. accounts "aya'le to su""liers0
increases current lia'ilities and reduces net #or2ing ca"ital! Trade
credit is li2e 'orro#ing &rom a su""lier to ma2e "urc(ases! As
trade credit increases. t(e su""lier is lending more money t(an
'e&ore! T(is &rees u" cas(. #(ic( t(e com"any can use &or ot(er
"ur"oses suc( as "aying do#n interest-'earing de't or
"urc(asing additional "roducti%e assets! T(us. net #or2ing ca"ital
decreases! T(is can 'e a good t(ing! As a 'usiness gro#s. its net
#or2ing ca"ital gro#s 'ecause in%entories and recei%a'les
generally gro# &aster t(an accounts "aya'le and accrued
lia'ilities do! Net #or2ing ca"ital must 'e &inanced 7ust li2e long-
term assets!
2-# Financial Managerial !ccounting for MB!s, 3rd "dition
Q2-:! Aoo2 %alue is t(e amount at #(ic( an asset /or lia'ility0 is carried
on t(e 'alance s(eet! T(e 'oo2 %alue o& t(e com"any is t(e 'oo2
%alue o& all t(e assets less t(e 'oo2 %alue o& all t(e lia'ilities. t(at
is. t(e 'oo2 %alue o& stoc2(olders* e)uity! Aoo2 %alues are
determined in accordance #it( 5AA-! Mar2et %alue is t(e sale
"rice o& an asset or lia'ility! Mar2ets are not constrained 'y 5AA-
standards and. t(ere&ore. can consider a num'er o& &actors t(at
accountants cannot! Mar2et %alues. t(ere&ore. generally di&&er
signi&icantly &rom 'oo2 %alues!
Q2-;! T(e arro# running &rom net income to earned ca"ital in t(e
&inancial statement e&&ects tem"late denotes t(at retained earnings
/"art o& earned ca"ital0 (a%e 'een u"dated &or t(e "ro&it earned
during t(e "eriod! ,etained earnings are reconciled as &ollo#s+
'eginning retained earnings D "ro&it /C loss0 C di%idends B ending
retained earnings! T(e line. t(us. re"resents t(e "ro&its t(at (a%e
'een added /or t(e losses su'tracted0 to retained earnings
/di%idends are recorded as a direct reduction o& retained earnings
in t(e tem"late0!
Solutions Manual, Module 2 2-$
MINI EEE,CISES
M2-= /8 minutes0
a! Income statement
'! Aalance s(eet
c! Income statement
d! Aalance s(eet
e! Income statement
&! Aalance s(eet
g! Income statement
(! Aalance s(eet
i! Income statement
M2-2@ /8 minutes0
a! Aalance s(eet
'! Income statement
c! Aalance s(eet
d! Income statement
e! Aalance s(eet
&! Aalance s(eet
g! Aalance s(eet
(! Aalance s(eet
i! Income statement
7! Income statement
2! Aalance s(eet
l! Aalance s(eet
2-% Financial Managerial !ccounting for MB!s, 3rd "dition
M2-2 /2@ minutes0
a! Net income com"utation
Ser%ice re%enue /record #(en earned0 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F@@.@@@
<ages e$"ense /record #(en incurred. e%en i& un"aid0!!!!!!!!!! /6@.@@@0 /F28.@@@ D F8.@@@0
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 9@.@@@
'! Net cas( &lo# com"utation
Cas( in&lo# &rom ser%ices rendered!!!!!!!!!!!!!!!!!!!!!!!!!!!! F8@.@@@ /F4@.@@@ D F2@.@@@0
Cas( out&lo# &or #ages "aid!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /28.@@@0
Net cas( in&lo#!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F28.@@@
Cas( in&lo# &rom ser%ices rendered #ill 'e F8@.@@@ less t(an ser%ice
re%enue "er t(e income statement 'ecause -enno only collected
F8@.@@@ o& re%enues in cas( 'ut re"orted F@@.@@@ as re%enue! Cas(
out&lo# &or #ages "aid #ill 'e F8.@@@ less t(an #ages e$"ense on t(e
income statement 'ecause F8.@@@ remained un"aid at year-end! T(e
com'ined e&&ects o& t(ese t#o items yields an o%erall di&&erence o&
F48.@@@ 'et#een net income and net cas( in&lo# /F9@.@@@ net income -
F8@.@@@ D F8.@@@ B F28.@@@ net cas( in&lo#s0!
M2-22 /8 minutes0
a! A
'! 1
c! E
d! A
e! 1
&! E
g! E
(! 1
Solutions Manual, Module 2 2-&
M2-24 /@ minutes0
2@ 2@2
Aeginning retained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F;=.@;= F 9=.946
Add+ Net income /loss0 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /=.6880 6;.=2
1ess+ Di%idends!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! @ /8.@9@0
Ending retained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F9=.946 F@2.:99
M2-26 /@ minutes0
Go(nson H Go(nson
Statement o& ,etained Earnings
For Iear Ended Ganuary 2. 2@
,etained earnings. Ganuary 4. 2@@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F:@.4@9
Add+ Net earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4.446
Add+ Ot(er retained earnings c(anges!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /940
1ess+ Di%idends!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /8.;@60
,etained earnings. Ganuary 2. 2@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F::.::4
M2-28 /8 minutes0
2@ 2@2
,e%enues!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F48@.@@@ F @
E$"enses!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2@@.@@@ @
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F8@.@@@ F @
E$"lanation+ All o& t(e re%enue is re"orted in 2@ #(en it is earnedJ"er
t(e re%enue recognition "rinci"le! 1i2e#ise. t(e #ages e$"ense is re"orted
in 2@ #(en it is incurred. t(at is #(en t(e lia'ility to "ay t(e #ages
arises! T(e recei"t or "ayment o& cas( does not a&&ect t(e recording o&
re%enues. e$"enses. and net income! T(ere are no re%enues or e$"enses in
2@2!
2-' Financial Managerial !ccounting for MB!s, 3rd "dition
M2-29 /8 minutes0
Aalance S(eet Income Statement
Transaction
Cas(
Asset
D
Noncas(
Assets
B
1ia'il-
ities
D
Contri'!
Ca"ital
D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Cas( .@@@
CS .@@@
a( Issue stoc2
&or F.@@@ cas(
D.@@@
Cas(
B
D.@@@
Common
Stoc2
C B
INK 8@@
Cas( 8@@
b( -urc(ase
in%entory &or
F8@@ cas(
-8@@
Cas(
D8@@
In%entory
B C B
A, 2.@@@
Sales 2.@@@
CO5S 8@@
INK 8@@
c( Sell
in%entory in
transaction b
&or F2.@@@ on
credit
D2.@@@
Accounts
,ecei%a'le
-8@@
In%entory
B
D.8@@
,etained
Earnings
D2.@@@
Sales
C
D8@@
Cost o&
5oods
Sold
B
D.8@@
Cas( 2.@@@
A, 2.@@@ d( Collect
F2.@@@ on
account
recei%a'le in
transaction c
D2.@@@
Cas(
-2.@@@
Accounts
,ecei%a'le
B C B
Solutions Manual, Module 2 2-)
EEE,CISES
E2-2: /2@ minutes0
Aart( Com"any
Income Statement
For Iear Ended Decem'er 4. 2@
Sales re%enue!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F6@@.@@@
E$"enses
Cost o& goods sold!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F;@.@@@
<ages e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6@.@@@
Su""lies e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.@@@
Total e$"enses!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 229.@@@
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F:6.@@@
Aart( Com"any
Aalance S(eet
Decem'er 4. 2@
Assets 1ia'ilities and e)uity
Cas(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 6;.@@@ Accounts "aya'le!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 9.@@@
Accounts recei%a'le!!!!!!!!!! 4@.@@@ Aonds "aya'le!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2@@.@@@
Su""lies in%entory!!!!!!!!!!!!! 4.@@@ Total lia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 29.@@@
In%entory!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 49.@@@
1and!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ;@.@@@ Common stoc2!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8@.@@@
E)ui"ment!!!!!!!!!!!!!!!!!!!!!!!!!!! :@.@@@ ,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9@.@@@
Auildings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8.@@@ Total e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2@.@@@
5ood#ill!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ;.@@@
Total assets!!!!!!!!!!!!!!!!!!!!!!!!! F629.@@@ Total lia'ilities and e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F629.@@@
E2-2; /8 minutes0
Aaiman Cor"oration
Income Statement
For Mont( ended Ganuary 4
Aaiman Cor"oration
Aalance S(eet
Ganuary 4
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4@.@@@ Cas(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F @
<age e$"ense!!!!!!!!!!!!!!! 2.@@@ Accounts recei%a'le!!!!!!!!!!!!!!!!!!!!!!!! 4@.@@@
Net income /loss0!!!!!!!!! F;.@@@ Total assets!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4@.@@
@
<ages "aya'le!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F2.@@
@
,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!! ;.@@@
Total lia'ilities and e)uity!!!!!!!!!!!!!!!! F4@.@@
@
E2-2= /4@ minutes0
Carter Com"any
Income Statement
For Mont( Ended Marc( 4
Sales re%enue!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F;.@@@ /F6.@@@ D F6.@@@0
E$"enses!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
,ent e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4.2@@
<age e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6.;@@ ;.@@@
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F@.@@@
E2-4@ /8 minutes0
Transaction
Cas(
Asset
D
Noncas(
Assets
B
1ia'il-
ities
D
Contri'!
Ca"ital
D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Cas( @@.@@@
--E 2@.@@@
CS 2@.@@@
a( Issued
stoc2 &or
F@@.@@@
cas( and
--E o&
F2@.@@@!
D@@.@@@
Cas(
D2@.@@@
--E
B
D2@.@@@
Common
Stoc2
C B
,NTE 4.2@@
Cas( 4.2@@
b( -aid
F4.2@@ &or
rent!
-4.2@@
Cas(
B
-4.2@@
,etained
Earnings
C
D4.2@@
,ent
E$"ense
B -4.2@@
Cas( 6.@@@
,e% 6.@@@ c(
-er&ormed
ser%ices &or
F6.@@@
cas(!
D6.@@@
Cas(
B
D6.@@@
,etained
Earnings
D6.@@@
,e%enue
C B D6.@@@
A, 6.@@@
,e% 6.@@@
d(
-er&ormed
ser%ices &or
F6.@@@ on
account!
D6.@@@
Accounts
,ecei%a'le
B
D6.@@@
,etained
Earnings
D6.@@@
,e%enue
C B D6.@@@
<E 6.;@@
Cas( 6.;@@
e( -aid
F6.;@@ cas(
&or #ages!
-6.;@@
Cas(
B
-6.;@@
,etained
Earnings
C
D6.;@@
<ages
E$"ense
B -6.;@@
Cas( @.@@@
A, @.@@@
f( ,ecei%ed
F@.@@@
cas( on
recei%a'le!
D@.@@@
Cas(
-@.@@@
Accounts
,ecei%a'le
B C B
DIK =48
Cas( =48
g( -aid
di%idends
o& F=48!
-=48
Cas(
B -=48
Di%idends
C B
E2-4 /8 minutes0
a!
Sta"les. Inc! /F millions0 Amount Classi&ication
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 26.868 I
Accumulated de"reciation!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4.899 A
De"reciation e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6=; I
,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.6=2 A
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ;;= I
-ro"erty. "lant and e)ui"ment. net!!!!!!!!!!!!!!!!!!!! 2.6; A
Selling. general and admin e$"ense!!!!!!!!!!!!!!!!!! 6.=4 I
Accounts recei%a'le!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! .=86 A
Total lia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.=9@ A
Stoc2(oldersL e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.=8 A
'! Total Assets B Total 1ia'ilities D Stoc2(olders* E)uity
Total Assets B F9.=9@ D F9.=8 B F4.=
Sales C Total E$"enses B Net Income
F26.868 C Total E$"enses B F;;=
T(us. Total E$"enses B F24.989
c! Net -ro&it Margin B Net incomeMSales B F;;=MF26.868
Net -ro&it Margin B 4!92N
Total 1ia'ilities-to-E)uity ,atio B Total 1ia'ilitiesMStoc2(olders* E)uity
Total 1ia'ilities-to-E)uity ,atio B F9.=9@MF9.=8 B !@@
E2-42 /8 minutes0
a!
Target Cor" /F millions0 Amount Classi&ication
Total re%enues!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 9:.4=@ I
Accumulated de"reciation!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! .888 A
De"reciation e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2.@;6 I
,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2.9=; A
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2.=2@ I
-ro"erty. "lant H e)ui"ment !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 28.6=4 A
Selling. general H admin e$"ense!!!!!!!!!!!!!!!!!!!!!!!! 4.69= I
Credit card recei%a'les!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.84 A
Total lia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2;.2; A
Stoc2(oldersL e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 8.6;: A
'! Total Assets B Total 1ia'ilities D Stoc2(olders* E)uity
Total Assets B F2;.2; D F8.6;: B F64.:@8
Total ,e%enue C Total E$"enses B Net Income
F9:.4=@ C Total E$"enses B F2.=2@
T(us. Total E$"enses B F96.6:@
c! Net -ro&it Margin B Net income M Sales
Net -ro&it Margin B F2.=2@ M F9:.4=@ B 6!44N
Total 1ia'ilities-to-E)uity ,atio B Total 1ia'ilities M Stoc2(olders* E)uity
Total 1ia'ilities-to-E)uity ,atio B F2;.2; M F8.6;: B !;2
2-1# Financial Managerial !ccounting for MB!s, 3rd "dition
E2-44 /8 minutes0
a!
ANF TGE
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4.69= F2.=62
Cost o& goods sold!!!!!!!!!!!!!! .28: 49!2N 9.@6@ :4!N
5ross "ro&it!!!!!!!!!!!!!!!!!!!!!!!!!! 2.22 94!;N 8.=@2 29!=N
Total e$"enses!!!!!!!!!!!!!!!!!!!!! 2.@92 8=!8NO 6.88= 2@!;N
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!! F 8@ 6!4N F .464 9!N
Orounded
ANF is a (ig(-end retailer and TGE o"erates in t(e %alue-"riced segment
o& t(e mar2et! T(eir res"ecti%e 'usiness models are clearly e%ident in
t(e gross "ro&it margin! ANF*s gross "ro&it margin is o%er 2!4 times t(at
o& TGE /94!;N com"ared to 29!=N0! T(is im"lies t(at ANF adds a (ealt(y
mar2u" to determine t(eir merc(andise sales "rice! T(e (ig(-end
segment also re)uires additional "ersonnel. ad%ertising. and ot(er
o"erating costs! ANF*s e$"ense margin is also o%er 2!; times (ig(er! On
'alance. TGE is 'ringing do#n to t(e 'ottom line a greater "ercentage o&
eac( sales dollar t(an is ANF /9!N %s! 6!4N0! In t(is year. TGE*s
'usiness model a""ears to 'e more "ro&ita'le t(an ANF*s!
'!
ANF TGE
Current assets!!!!!!!!!!!!!!!!!!!!! F .644 6;!9N F 8.@@ 96!@N
1ong-term assets!!!!!!!!!!!!!!!!! .88 8!6N 2.;:2 49!@N
Total assets!!!!!!!!!!!!!!!!!!!!!!!!!! F 2.=6; F :.=:2
Current lia'ilities!!!!!!!!!!!!!!!!! F 88= =!@N F 4.44 4=!4N
1ong-term lia'ilities!!!!!!!!!!!! 6=; 9!=N .:4= 2!;N
Total lia'ilities!!!!!!!!!!!!!!!!!!!!!! .@8: 48!=N 6.;:2 9!N
Stoc2(oldersL e)uity!!!!!!!!!!! .;= 96!N 4.@@ 4;!=N
Total lia'! and e)uity!!!!!!!!!!! F 2.=6; F :.=:2
ANF (as lo#er le%els o& current assets relati%e to total assets t(an does
TGE! For clot(ing retailers. current assets are "rimarily cas( and
in%entories! I& t(e t#o com"anies (a%e a'out t(e same le%els o& cas(.
#e #ould conclude t(at ANF (olds less in%entory! T(is ma2es sense
gi%en t(at TGE (as discount-ty"e stores c(oc2-&ull o& merc(andise!
Tangi'le long-term assets consist o& lease(old im"ro%ements and
e)ui"ment! A'ercrom'ie re"orts a (ig(er concentration o& assets in
--E. #(ic( is due. in "art. to its large in%estment in lease(old
im"ro%ements!
Solutions Manual, Module 2 2-1$
E2-44 /concluded0
c! ANF (as a muc( greater "ro"ortion o& stoc2(olders* e)uity in its ca"ital
structure /96!N com"ared to 4;!=N at TGE0! T(is means t(at TGE relies
more on de't to &und its o"erations t(an ANF! T(is is e%ident in 'ot( a
(ig(er "ercentage o& current and long-term lia'ilities as a "ercent o&
total assets! Current lia'ilities are ty"ically non-interest 'earing and
sel&-li)uidating /&or e$am"le. "aid &rom t(e cas( &rom in%entory sales0!
1ong-term de't. (o#e%er. is ty"ically interest 'earing and re)uires
"eriodic "ayments o& interest and "rinci"al! T(e de't "ayment
re)uirements add an element o& ris2 and #e mig(t conclude t(at TGE is
a slig(tly ris2ier com"any!

2-1% Financial Managerial !ccounting for MB!s, 3rd "dition
E2-46 /8 minutes0
a!
AA-1 DE11
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F98.228 F9.6=6
CO5S!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4=.86 9@!9N 8@.@=; ;!8N
5ross "ro&it!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 28.9;6 4=!6N .4=9 ;!8N
Total e$"enses!!!!!!!!!!!!!!!!!!!!!!!! .9: :!=N ;.:9 6!2N
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!F6.@4 2!8N F 2.948 6!4N
AA-1*s gross "ro&it margin is more t(an dou'le DE11*s! T(is is li2ely
due to t#o &actors+ &irst. a large "ro"ortion o& AA-1*s sales relate to t(e
i-od. i-(one. and i-ad #(ic( are all %ery (ig(-margin "roducts 'ecause
t(ey are "remium "riced! Second. DE11 com"etes as t(e lo#-"rice
leader in t(e -C-sales segment!
'!
AA-1 DE11
Current assets!!!!!!!!!!!!!!!!!!!!!!!! F6.9:; 88!6N F2=.@2 :8!2N
1ong-term assets!!!!!!!!!!!!!!!!!!! 44.8@8 66!9N =.8:; 26!;N
Total assets!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F:8.;4 F4;.8==
Current lia'ilities!!!!!!!!!!!!!!!!!!!! F2@.:22 2:!8NO F=.6;4 8@!8N
1ong-term lia'ilities!!!!!!!!!!!!!!! 9.9:@ ;!=N .48@ 2=!6N
Total lia'ilities!!!!!!!!!!!!!!!!!!!!!!!!! 2:.4=2 49!6N 4@.;44 :=!=N
Stoc2(oldersL e)uity!!!!!!!!!!!!!! 6:.:= 94!9N :.:99 2@!N
Total lia's and e)uity!!!!!!!!!!!!! F:8.;4 F4;.8==
Orounded
AA-1 (as a greater "ro"ortion o& stoc2(olders* e)uity in its ca"ital
structure! Neit(er o& t(ese com"anies carries a large "ercentage o& long-
term lia'ilities! A greater "ro"ortion o& de't is generally %ie#ed as a
ris2ier ca"ital structure! Po#e%er. Dell*s relati%ely (ig( le%el o& s(ort-
term de't arises &rom t(e &act t(at t(e com"any relies %ery (ea%ily on
su""lier &inancing! Dell is an im"ortant customer &or many o& its
su""liers. #(ic( gi%es Dell 'argaining "o#er o%er su""liers #it(
res"ect to credit terms! Dell*s (ig( le%el o& "ro&ita'ility also lessens any
concerns one mig(t (a%e regarding its sol%ency! A""le*s e)uity gro#t(
(as 'een relati%ely recent. resulting &rom t(e meteoric rise o& t(e (ig(ly
"ro&ita'le i-ods. i-(ones. and i-ads! Unless t(e com"any (as need &or
ca"ital. it mig(t come under "ressure &rom s(are(olders. to "ay some o&
its accumulated cas( out to s(are(olders in t(e &orm o& a di%idend or
stoc2 re"urc(ase!
Solutions Manual, Module 2 2-1&
E2-48 /8 minutes0
a!
CMCSA KQ
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4:.=4: F@9.898
O"erating costs!!!!!!!!!!!!!!!!!!!!!! 2=.=8: :=!@N =.=2@ ;9!4N
O"erating "ro&it!!!!!!!!!!!!!!!!!!!!!! :.=;@ 2!@N 6.968 4!:N
Nono"erating e$"enses!!!!!!!!! 6.468 !6NO 6.62; 6!NO
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 4.948 =!9N F @.2: =!9N
Orounded
Comcast*s "roduct lines yield considera'ly more o"erating "ro&it margin
t(an do Keri3on*s! Its nono"erating e$"ense. (o#e%er. is (ig(er t(an
Keri3on*s. yielding an identical net "ro&it margin &or t(e t#o com"anies!
'!
CMCSA KQ
Current assets!!!!!!!!!!!!!!!!!!!!!!!! F ;.;;9 :!8N F 22.46; @!2N
1ong-term assets!!!!!!!!!!!!!!!!!!! @=.96; =2!8N =:.98: ;=!;N
Total assets!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F;.846 F22@.@@8
Current lia'ilities!!!!!!!!!!!!!!!!!!!! F ;.246 :!@NO F 4@.8=: 4!=N
1ong-term lia'ilities!!!!!!!!!!!!!!! 98.:24 88!6N @2.6=9 69!9N
Total lia'ilities!!!!!!!!!!!!!!!!!!!!!!!!! :4.=8: 92!6N 44.@=4 9@!8N
Stoc2(oldersL e)uity!!!!!!!!!!!!!! 66.8:: 4:!9N ;9.=2 4=!8N
Total lia's and e)uity!!!!!!!!!!!!! F;.846 F22@.@@8
Orounded
Aot( com"anies are (ig(ly ca"ital intensi%e. #it( o%er ;=N o& t(eir
assets in t(e long-term category! Aot( com"anies* 'usiness models
necessitate continued in%estment in long-term assets as t(ey see2 to
continue to de%elo" t(eir in&rastructure!
c! T(e t#o com"anies (a%e relati%ely (ig( de't loads. #(ic( ma2es t(em
ris2y com"ared to ot(er industrial com"anies! 5i%en t(e large le%el o&
ca"ital e$"enditures /CA-EE0 t(at t(e com"anies #ill ma2e o%er t(e
ne$t decade. and t(e amount o& additional de't t(at t(ey #ill (a%e to
incur to &und CA-EE. t(e de't le%els #ill 'e a continuing &inancial issue
&or 'ot( com"anies!
2-1' Financial Managerial !ccounting for MB!s, 3rd "dition
E2-49 /4@ minutes0
a!
TGE AA-1
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F2.=62 F98.228
CO5S!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.@6@ :4!N 4=.86 9@!9N
5ross "ro&it!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8.=@2 29!=N 28.9;6 4=!6N
Total e$"enses!!!!!!!!!!!!!!!!!!!!!!!! 6.88= 2@!;N .9: :!=N
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F .464 9!N F6.@4 2!8N
Orounded
TGE is a %alue-"riced clot(ing retailer #(ose main e$"ense is cost o&
sales! AA-1*s "roducts are #ell di&&erentiated and "atent-"rotected! T(e
di&&erence in t(eir res"ecti%e 'usiness models is clearly e%ident in t(e
le%el o& gross "ro&it! AA-1*s gross "ro&it margin is o%er 6@N greater t(an
TGE*s! T(is does not im"ly t(at AA-1 is a 'etter-managed com"any!
Muc( o& t(e di&&erence in o"erating "ercentages 'et#een com"anies in
di&&erent industries is related to di&&erences in t(eir res"ecti%e 'usiness
models! AA-1 net income as a "ercentage o& sales is more t(an 4!8E
t(an t(at o& TGE! On t(is dimension. AA-1*s 'usiness model a""ears to
'e more "ro&ita'le!
'!
TGE AA-1
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F2.=62 F98.228
Total assets!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F :.=:2 F:8.;4
Sales M Total assets!!!!!!!!!!!!!!!! 2!:8 @!;:
TGE*s sales are almost t(ree times its total assets! AA-1*s sales are less
t(an its total assets! It mig(t 'e tem"ting. t(ere&ore. to conclude t(at
AA-1 is more ca"ital intensi%e t(an TGE! O%er one-t(ird o& AA-1*s total
assets. (o#e%er. consist o& cas( and s(ort-term in%estments in
mar2eta'le securities! T(is le%el o& li)uidity increases total assets.
#(ic( de"resses t(e asset turno%er ratio!
Solutions Manual, Module 2 2-1)
E2-49 /concluded0
c!
TGE AA-1
Total lia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F6.;:2 F2:.4=2
Stoc2(oldersL e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4.@@ F6:.:=
Total lia'ilities M Stoc2(oldersL e)uity!!!!!!!!! !8: @!8:
TGE o"erates #it( muc( more de't relati%e to e)uity t(an does AA-1!
Com"anies #it( (ig(er "ro"ortions o& de't are generally %ie#ed as
ris2ier 'ecause &ailure to ma2e re)uired de't "ayments can (a%e
signi&icant negati%e conse)uences!
d!
TGE AA-1
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F.464 F6.@4
Stoc2(oldersL e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4.@@ F6:.:=
Net income M Stoc2(oldersL e)uity!!!!!!!!!!!!!! 64!4N 2=!4N
TGE net income to stoc2(olders* e)uity ratio /,OE0 is almost !8E
greater t(an AA-1*s! Alt(oug( TGE*s "ro&it "er sales dollar is 2;N o&
AA-1*s. its sales-to-assets ratio more t(an o&&sets t(e di&&erence! TGE
relies on asset "roducti%ity to dri%e its returns. and a""ears to 'e
succeeding on t(at dimension! It is im"ortant to 2ee" in mind. (o#e%er.
t(at A--1*s net income to e)uity ratio is de"ressed 'y t(e relati%ely lo#
yields on mar2eta'le securities and could 'e increased signi&icantly i&
some o& t(at li)uidity #ere to 'e returned to s(are(olders as a di%idend
or stoc2 'uy'ac2!
E2-4: /2@ minutes0
Transaction
Cas(
Asset
D
Noncas(
Assets
B
1ia'il-
ities
D
Contri'!
Ca"ital
D
Earned
Ca"ital
,e%-
enues
C E$"en-ses B
Net
Income
<E 8@@
<- 8@@ a( F8@@ o&
#ages are
earned 'y
em"loyees
'ut not yet
"aid
B
D8@@
<ages
-aya'le
-8@@
,etained
Earnings
C
D8@@
<ages
E$"ense
B -8@@
INK 2.@@@
A- 2.@@@
b( F2.@@@ o&
in%entory is
"urc(ased
on credit
D2.@@@
In%entory
B
D2.@@@
Accounts
-aya'le
C B
A, 4.@@@
Sales 4.@@@
CO5S 2.@@@
INK 2.@@@
c( T(e
in%entory
"urc(ased in
transaction b
is sold &or
F4.@@@ on
credit
D4.@@@
Accounts
,ecei%a'le
-2.@@@
In%entory
B
D.@@@
,etained
Earnings
D4.@@@
Sales
C
D2.@@@
Cost o&
5oods Sold
B
D.@@@
Cas( 4.@@@
A, 4.@@@ d( Collected
F4.@@@ cas(
&rom
transaction
c(
D4.@@@
Cas(
-4.@@@
Accounts
,ecei%a'le
B C B
--E 8.@@@
Cas( 8.@@@
e( F8.@@@
e)ui"ment
is ac)uired
&or cas(
-8.@@@
Cas(
D8.@@@
-ro"erty
-lant and
E)ui"ment
B C B
DE .@@@
--E .@@@
f( ,ecord
de"reciation
-.@@@
-ro"erty
-lant and
E)ui"ment
B
-.@@@
,etained
Earnings
C
D.@@@
De"recia-
tion
E$"ense
B
-.@@@
E2-4: /concluded0
Transaction
Cas(
Asset
D
Noncas(
Assets
B
1ia'il-
ities
D
Contri'!
Ca"ital
D
Earned
Ca"ital
,e%-
enues
C E$"en-ses B
Net
Income
N- @.@@@
Cas( @.@@@ g( -aid
F@.@@@
cas( on
a note
"aya'le t(at
came due
-@.@@@
Cas(
B
-@.@@@
Note
-aya'le
C B
IE 2.@@@
Cas( 2.@@@
h( -aid
F2.@@@ cas(
interest on
'orro#ings
-2.@@@
Cas(
B
-2.@@@
,etained
Earnings
C
D2.@@@
Interest
E$"ense
B -2.@@@
-,OA1EMS
-2-4; /4@ minutes0
a!
Current
Assets
1ong-term
Assets
Total
Assets
Current
1ia'ilities
1ong-term
1ia'ilities
Total
1ia'ilities
Stoc2(oldersL
E)uity
2@@; F=.8=; F9.=8 F28.:=4 F8.=4= F=.88@ F8.6;= F@.4@6
2@@= @.:=8 9.688 2:.28@ 6.;=: =.@8 4.=6; 4.4@2
2@@ 2.28 :.=6 4@.89 9.@;= ;.@8@ 6.4= 9.@:
'! 4M*s current assets most li2ely include cas(. accounts recei%a'le.
in%entories. and "re"aid assets!
Its long-term assets most li2ely include "ro"erty. "lant and e)ui"ment
/--E0. good#ill. and ot(er intangi'le assets t(at (a%e arisen &rom
ac)uisitions!
-2-4= /4@ minutes0
a!
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Aeginning 'al! @ @ B @ @ @ C B
Cas( 8@.@@@
N- @@.@@@
CS 8@.@@@
! Se&ci2
in%ested
F8@.@@@ into
t(e
'usiness in
e$c(ange
&or common
stoc2R
com"any
also
'orro#ed
F@@.@@@
&rom a 'an2
D8@.@@@
Cas( B
D@@.@@@
Note
-aya'le
D8@.@@@
Common
Stoc2
C B
--E =8.@@@
INK 6@.@@@
Cas( =8.@@@
A- 6@.@@@
2! Se&ci2
"urc(ased
e)ui"ment &or
F=8.@@@ cas(
and "urc(ased
in%entory o&
F6@.@@@ on
credit
-=8.@@@
Cas(
D=8.@@@
--E
D6@.@@@
In%entory
B
D6@.@@@
Accounts
-aya'le
C B
-2-4= /continued0
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Cas( 8@.@@@
CO5S 4@.@@@
Sales 8@.@@@
INK 4@.@@@
4! Se&ci2 Co!
sold
in%entory
costing
F4@.@@@
&or
F8@.@@@
cas(
D8@.@@@
Cas(
-4@.@@@
In%entory
B
D8@.@@@
,etained
Earnings
-4@.@@@
,etained
Earnings
D8@.@@@
Sales
C D4@.@@@
Cost o&
5oods
Sold
B
D8@.@@@
-4@.@@@
<E @.@@@
Cas( @.@@@
6! Se&ci2 Co!
"aid
F@.@@@
cas( &or
#ages
o#ed
em"loyees
&or
Octo'er
#or2
-@.@@@
Cas( B
-@.@@@
,etained
Earnings
C
D@.@@@
<age
E$"ense
B
-@.@@@
IE .@@@
Cas( .@@@
8! Se&ci2 Co!
"aid
interest on
t(e 'an2
loan o&
F.@@@
cas(
-.@@@
Cas(
B
-.@@@
,etained
Earnings
C
D.@@@
Interest
E$"ense
B
-.@@@

-2-4= /continued0
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
DE 8@@
--E 8@@
9! Se&ci2 Co!
recorded F8@@
de"reciation
e$"ense
related to
e)ui"ment
-8@@
--E
B
-8@@
,etained
Earnings
C
D8@@
De"rec!
E$"
B -8@@
DIK 2.@@@
Cas( 2.@@@
:! Se&ci2 Co!
"aid
a di%idend o&
F2.@@@ cas(
-2.@@@
Cas(
B
-2.@@@
Di%idends
C B
Ending
'alance
=2.@@@ @6.8@@ B 6@.@@@ 8@.@@@ 9.8@@ 8@.@@@ C 6.8@@ B ;.8@@
'!
-2-4= /concluded0
'!
Se&ci2 Co!
Income Statement
For Mont( o& Octo'er
Sales re%enue!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F8@.@@@
Total e$"enses!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6.8@@
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F ;.8@@
Se&ci2 Co!
,etained Earnings ,econciliation
For Mont( o& Octo'er
,etained earnings. Octo'er !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F @
Add+ Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ;.8@@
1ess+ Di%idends!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /2.@@@0
,etained earnings. Octo'er 4!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 9.8@@
Se&ci2 Co!
Aalance S(eet
Octo'er 4
Cas(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F =2.@@@ 1ia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F6@.@@@
Noncas( assets!!!!!!!!!!!!!!!!!! @6.8@@
Contri'uted ca"ital!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8@.@@@
,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.8@@
SSSSSSSS Total e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 89.8@@
Total assets!!!!!!!!!!!!!!!!!!!!!!!!! F=9.8@@ Total lia'ilities and e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F=9.8@@
-2-6@ /4@ minutes0
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Cas( @.@@@
CS @.@@@
! S(are(olders
contri'ute F@.@@@
cas( to t(e
'usiness in
e$c(ange &or
common stoc2
D@.@@@
Cas(
B
D@.@@@
Common
Stoc2
C B
<E 8@@
<- 8@@
2! Em"loyees earn
F8@@ in #ages t(at
(a%e not 'een "aid
at "eriod-end
B
D8@@
<ages
-aya'le
-8@@
,etained
Earnings
C
D8@@
<ages
E$"ense
B
-8@@
INK 4.@@@
A- 4.@@@
4! In%entory o& F4.@@@
is "urc(ased on
credit
D4.@@@
In%entory B
D4.@@@
Accounts
-aya'le
C B

-2-6@ /continued0
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
A, 6.8@@
CO5S 4.@@@
Sales 6.8@@
INK 4.@@@
6! T(e in%entory
"urc(ased in
transaction 4 is
sold &or F6.8@@
on credit
D6.8@@
Accounts
,ecei%a'le
-4.@@@
In%entory
B
D6.8@@
,etained
Earnings
-4.@@@
,etained
Earnings
D6.8@@
Sales
C
D4.@@@
Cost o&
5oods
Sold
B
D6.8@@
-4.@@@
Cas( 6.8@@
A, 6.8@@
8! T(e com"any
collected t(e
F6.8@@ o#ed
to it "er
transaction 6
D6.8@@
Cas(
-6.8@@
Accounts
,ecei%a'le
B C B
--E 8.@@@
Cas( 8.@@@
9! E)ui"ment is
"urc(ased &or
F8.@@@ cas(
-8.@@@
Cas(
D8.@@@
--E
B C B
-2-6@ /continued0
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"enses
B
Net
Income
DE .@@@
--E .@@@
:! De"reciation o&
F.@@@ is recorded
on t(e e)ui"ment
&rom transaction 9
-.@@@
--E
B
-.@@@
,etained
Earnings
C
D.@@@
De"reciation
E$"ense
B
-.@@@
SU-E 4.@@@
SU- 4.@@@
;! Su""lies account
(ad a F4.;@@
'alance at
'eginning o& t(is
"eriodR a "(ysical
count at "eriod-end
s(o#s F;@@ o&
su""lies still
a%aila'le! No
su""lies #ere
"urc(ased t(is
"eriod!
-4.@@@
Su""lies
B
-4.@@@
,etained
Earnings
C
D4.@@@
Su""lies
E$"ense
B
-4.@@@
N- @.@@@
IE 8@@
Cas( @.8@@ =! T(e com"any "aid
F@.@@@ cas(
to#ard t(e
"rinci"al on a note
"aya'leR also. F8@@
cas( is "aid to
co%er t(is note*s
interest e$"ense
&or t(e "eriod
-@.8@@
Cas(
B
-@.@@@
Note
-aya'le
-8@@
,etained
Earnings
C
D8@@
Interest
E$"ense
B
-8@@

-2-6@ /concluded0
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en
-ses
B
Net
Income
Cas( ;.@@@
U, ;.@@@
@! T(e com"any
recei%e F;.@@@
cas( in ad%ance
&or ser%ices to 'e
deli%ered ne$t
"eriod
D;.@@@
Cas( B
D;.@@@
Unearned
,e%enue
C B

-2-6 /4@ minutes0
a!
Com"any
5ross
-ro&it M
Sales
Net
IncomeM
Sales
Net
IncomeM
E)uity
1ia'ilitiesM
E)uity
Target!!!!!!!!!!!!!!!!!!!!!!!!!! 42!N 6!4N ;!=N !;2
Ni2e!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 68!9N @!2N 2!:N @!82
Parley-Da%idson!!!!!!!!! 64!6N 4!@N 9!:N 4!2:
Cisco Systems!!!!!!!!!!!! 96!@N =!6N :!8N @!;4
'! Com"anies generally reali3e (ig(er gross "ro&it margins i& t(ere is some
limit on com"etition. suc( as a 'arrier to entry! T(is 'arrier to entry can
'e legal in nature suc( as t(at a&&orded 'y a "atentR or o"erational. suc(
as t(at created 'y strong 'rand identity! Cisco. Ni2e and Parley all en7oy
a'o%e-a%erage gross "ro&it margins! Cisco is a tec(nology com"any
t(at 'ene&its &rom "atents on desira'le tec(nology! Ni2e and Parley (a%e
strong and %alua'le 'rands! Ni2e relies on its ad%ertising cam"aigns
#(ile Parley en7oys its cult &ollo#ing! Target. #(ile a strong 'rand. sells
goods t(at are di&&icult to di&&erentiate and t(e com"any cannot
command t(e "ricing "o#er t(at t(e ot(er t(ree com"anies en7oy!
Net "ro&it margin /Net income M Sales0 is a &unction o& 'ot( gross "ro&it
margin and e$"ense control! Cisco*s and Ni2e*s net "ro&it margins are
t(e (ig(est o& t(e com"anies in t(is sam"le. resulting &rom t(eir (ig(
gross "ro&it margin and e$cellent e$"ense control! Parley*s (ig( gross
"ro&it margin is eroded. to some e$tent. 'y t(e signi&icant o"erating
e$"enses t(at reduce its net income! Target*s net "ro&it margin is only
a%erage &or "u'licly-traded com"anies. re&lecting t(e lac2 o& "roduct
di&&erentiation and signi&icant ad%ertising e$"ense!
c! Ni2e en7oys t(e (ig(est return on e)uity /measured as net income to
e)uity0. &ollo#ed 'y Target and Cisco! Ni2e and Cisco. and to a lesser
e$tent Target. are "remium 'rands t(at (a%e e&&ecti%ely di&&erentiated
t(eir "roducts and can. t(ere&ore. en7oy a'o%e-a%erage returns on
stoc2(older in%estment!
-2-6 /concluded0
d! Target and Parley (a%e t(e (ig(est "ro"ortion o& de't in t(eir ca"ital
structures mostly 'ecause o& Target*s "ro"rietary credit card and
Parley-Da%idson Financial Ser%ices /its loan and lease &inancing
su'sidiary0! T(e 'alance s(eets and income statements o& &inancial
o"erations are similar to t(at o& a 'an2 C (ig( de't le%els and relati%ely
lo# margins! Aot( com"anies consolidate t(eir &inancial o"erations #it(
t(ose o& t(e o"erating com"any! T(is in&lates t(eir consolidated de't
le%el a'o%e #(at #e ty"ically o'ser%e &or stand-alone retail and
manu&acturing o"erations! Finally. com"anies t(at en7oy relati%ely sta'le
cas( &lo#s can a&&ord (ig(er de't le%els 'ecause t(ere is some
assurance t(at &uture cas( &lo#s #ill 'e su&&icient to co%er &i$ed de't
"ayments! T(e ot(er t#o com"anies o"erate #it( a greater "ro"ortion o&
e)uity t(an o& de't!
-2-62 /4@ minutes0
a!
Com"any Net Income M Sales ,an2
Macy*s 4!6N 8
Pome De"ot. Inc! 6!=N
Sta"les. Inc! 4!9N 6
Target Cor"! 6!4N 2
<al-Mart Stores 4!=N 4
Pome De"ot and Target re"ort t(e (ig(est net "ro&it margins! T(ese
com"anies (a%e succeeded at e&&ecti%ely di&&erentiating t(eir 'rands
andMor controlling t(eir costs! <al-Mart. Sta"les and Macy*s o"erate in
(ig(ly com"etiti%e mar2ets #it( undi&&erentiated "roduct lines!
-2-62 /concluded0
'!
Com"any O"erating Cas( Flo# M Sales ,an2
Macy*s 9!@N 4
Pome De"ot. Inc! 9!:N 2
Sta"les. Inc! 8!=N 6
Target Cor"! :!;N
<al-Mart Stores 8!9N 8
Target and Pome De"ot re"ort t(e (ig(est le%el o& o"erating cas( &lo#
as a "ercentage o& sales! T(ese are %ery e&&icient o"erations! <al-Mart
and Sta"les are not as e&&ecti%e on t(is dimension!
c!
Com"any In%esting Cas( Flo# M Sales ,an2
Macy*s -!=N 2
Pome De"ot Inc! -!8N
Sta"les Inc! -!=N 4
Target Cor"! -2!9N 6
<al-Mart Stores -2!=N 8
In%esting cas( &lo#s are ty"ically negati%e /cas( out&lo#0. re"resenting
t(e "urc(ase o& --E! Pome De"ot*s ran2ing o& (ere. does corres"ond
#it( its ran2ing o& in "art a. 'ut t(ere is no similarity &or t(e ot(er
com"anies!
d! Negati%e cas( &lo#s &rom &inancing acti%ities can occur &or t(ree
reasons+ net de't re"ayments in e$cess o& ne# 'orro#ings. stoc2
re"urc(ases /in e$cess o& stoc2 sales0. and di%idend "ayments!
Com"anies ty"ically do not reduce de't unless t(eir de't le%els are
uncom&orta'ly (ig( or t(e com"any (as e$cess cas( or mar2eta'le
securities! Com"anies re"urc(ase t(eir stoc2 to 0 signal to t(e mar2et
t(at t(e com"any 'elie%es its stoc2 is under%alued. 20 return ca"ital to
s(are(olders in a ta$-ad%antaged #ay /&or e$am"le. i& t(e ta$ rates on
ca"ital gains are less t(an t(ose on di%idends0. or 40 (onor em"loyee
stoc2 o"tion e$ercises! Not all com"anies "ay di%idends so t(is is not
as common as t(e &irst t#o reasons &or negati%e &inancing cas( &lo#s!
-2-64 /6@ minutes0
a! De"reciation is added 'ac2 to undo t(e e&&ect it (ad on t(e income
statement! <al-Mart deducted F:.96 million o& de"reciation /and
amorti3ation0 e$"ense in com"uting net income! De"reciation is a
noncas( e$"ense so <al-Mart did not actually use F:.96 million o& cas(
to "ay de"reciation e$"ense! T(us. to determine (o# muc( cas( #as
generated. net income is too lo# 'y t(e de"reciation amount o& F:.96
million! T(e de"reciation add-'ac2 is NOT a source o& cas( as some
mista2enly 'elie%e! Cas( is. ultimately. generated 'y "ro&ita'le
o"erations. not 'y de"reciation!
'! ,e%enue is recogni3ed. and "ro&it increased. #(en it is earned. #(et(er
or not cas( is recei%ed! Sales on account. t(ere&ore. increase "ro&it. and
t(e deduction &or t(e increase in recei%a'les re&lects t(e &act t(at cas(
(as not yet 'een recei%ed!
T(e negati%e sign on t(e increase in in%entories re&lects t(e out&lo# o&
cas( #(en in%entories are "urc(ased! In%entories are ty"ically
"urc(ased on account! As a result. "ayment is not made #(en t(e
in%entories are "urc(ased! T(e "ositi%e sign on t(e increase in
accounts "aya'le o&&sets a "ortion o& t(e negati%e sign on t(e in%entory
increase. and t(e net amount re"resents t(e net cas( "aid &or t(e
increase in in%entories! Accounts "aya'le are ty"ically non-interest
'earing. t(us "ro%iding a c(ea" and im"ortant source o& cas(!
Accruals relate to e$"enses t(at (a%e 'een recogni3ed in t(e income
statement t(at (a%e not yet 'een "aid! A decrease in accrued lia'ilities
means t(at cas( "aid out &or e$"enses during t(e year #as greater t(an
t(e e$"enses recogni3ed in t(e income statement! T(ere&ore. a
decrease in accrued e$"enses is s(o#n as a cas( out&lo#!
c! Com"anies must continue to in%est in t(eir in&rastructure. 'ot( &or ne#
additions and re"lacement. to remain com"etiti%e! De"reciation e$"ense
re"resents t(e using u" o& de"recia'le assets! In general. #e s(ould
e$"ect ca"ital e$"enditures /CA-EE0 to e$ceed de"reciation e$"ense!
T(is indicates t(at t(e com"any is gro#ing its in&rastructure as #ell as
re"lacing t(e "ortion t(at is #earing out!
-2-64 /concluded0
d! I& <al-Mart can ma2e a 'etter return on rein%esting its cas( 'ac2 into t(e
'usiness t(an t(e return s(are(olders can earn &or t(emsel%es on t(e
cas( t(ey #ould recei%e. <al-Mart s(ould &orgo "aying di%idends or
re"urc(asing s(ares! Many com"anies #it( large cas( in&lo#s.
es"ecially mature com"anies in relati%ely saturated mar2ets. &ind it (ard
to unco%er additional in%estment o""ortunities! In t(ose cases.
returning t(e cas( to in%estors is 'etter t(an in%esting it in mar2eta'le
securities. 'ecause in%estors can do t(at &or t(emsel%es!
e! <al-Mart is a large. mature. and "ro&ita'le com"any! In &iscal 2@. t(e
com"any generated 4=N more o"erating cas( &lo#s t(an re"orted
"ro&itsR F24!9 'illion o& o"erating cas( &lo# com"ared to F:!@ 'illion in
net income! It &unds ca"ital e$"enditures &or ne# stores and remodels
#it( o"erating cas( &lo#s #it( no need &or e$ternal &inancing! In t(e
&inancing area. t(e com"any is 'orro#ing to re"urc(ase stoc2 and to
"ay di%idends. a su'stitution o& lo#er-cost de't &or (ig(er-cost e)uity!
T(is is a ty"ical "ro&ile &or a large. #ell-ca"itali3ed com"any li2e <al-
Mart! In sum. <al-Mart is e$ce"tionally strong. and t(e com"any #ill
li2ely continue in%esting in its in&rastructure!
-2-66 /6@ minutes0
a! De"reciation is added 'ac2 to undo t(e e&&ect it (ad on t(e income
statement! Keri3on deducted F9.6@8 million o& de"reciation e$"ense in
com"uting net income! De"reciation is a noncas( e$"ense so Keri3on
did not actually use F9.6@8 million cas( to "ay de"reciation! T(us. to
determine (o# muc( cas( #as generated. net income is too lo# 'y t(e
de"reciation amount o& F9.6@8 million! T(e de"reciation add-'ac2 is
NOT a source o& cas( as some mista2enly 'elie%e! Cas( is. ultimately.
generated 'y "ro&ita'le o"erations. not 'y de"reciation!
T(e relati%e si3e o& t(e add-'ac2 indicates t(at t(e com"any is
e$tremely ca"ital intensi%e! T(e add-'ac2 is !9 times t(e si3e o& net
income!
'! T(e MDHA section o& t(e @-T "ro%ides management*s assessment o&
t(e o"erating results and in%estment acti%ities o& t(e com"any! Aecause
it is regulated 'y SEC disclosure rules. t(e @-T is a source o& use&ul
in&ormation t(at includes less "romotional material t(an ot(er
statements 'y t(e com"any!
Com"anies must continue to in%est in t(eir in&rastructure. 'ot( &or ne#
additions and re"lacement. to remain com"etiti%e! De"reciation e$"ense
re"resents t(e using u" o& de"recia'le assets! In general. #e s(ould
e$"ect ca"ital e$"enditures /CA-EE0 to e$ceed de"reciation e$"ense!
T(is indicates t(at t(e com"any is gro#ing its in&rastructure as #ell as
re"lacing t(e "ortion t(at is #earing out! Keri3on*s CA-EE is only
slig(tly (ig(er t(an de"reciation!
c! Keri3on*s (ig( de't load "laces se%ere demands on its o"erating cas(
&lo#! Cas( t(at s(ould 'e used to de%elo" its in&rastructure must 'e
allocated to t(e "ayment o& de't! T(is is "articularly "ro'lematic &or
Keri3on as it is &acing sti&& com"etition &rom ri%al Comcast and must
ma2e su'stantial ca"ital in%estments to remain com"etiti%e!
-2-66 /concluded0
d! Di%idends are not a contractual o'ligation until declared 'y t(e 'oard o&
directors! Alt(oug( stoc2 "rice may &all i& t(e com"any reduces
di%idends. s(are(olders cannot &orce t(e com"any into 'an2ru"tcy li2e
de't (olders can! Ne%ert(eless. (ig( di%idend-"aying com"anies. suc(
as Keri3on. ty"ically continue t(eir di%idend "ayout e%en i& t(ey must
'orro# &unds to do so as &ailure to maintain di%idend "ayment le%els
#ould de"ress t(e mar2et "rice o& t(e com"any stoc2 and increase t(e
cost o& e)uity ca"ital s(ould t(e com"any need to use its stoc2 to raise
ca"ital or ac)uire anot(er com"any!
e! Keri3on*s o"erations generated a signi&icant amount o& cas(! Its ca"ital
e$"enditures are signi&icant as t(e com"any continues to u"grade its
in&rastructure to im"lement ne# tec(nology to remain com"etiti%e #it(
ot(er telecom and ca'le com"anies! Pig( ca"ital outlays #ould.
ordinarily. not 'e a "ro'lem #ere it not &or t(e com"any*s signi&icant
e$isting de't load! Keri3on*s de't re"ayment &or 2@@ #as o%er F; 'illion
&or long-term de't and an additional F 'illion &or s(ort-term de't! In
addition. t(e com"any "aid interest e$"ense t(at is recorded in its
income statement! Alt(oug( t(e com"any is &inancially strong.
'alancing its de't le%el #it( t(e cas( &lo# needs &or ca"ital
e$"enditures to su""ort its o"erating acti%ities and di%idends to su""ort
its stoc2 "rice is a di&&icult c(allenge &acing t(e com"any!
2-#0 Financial Managerial !ccounting for MB!s, 3rd "dition
-2-68 /28 minutes0
a!
Transaction
Cas(
Asset
D
Noncas(
Assets
B
1ia'il-
ities
D
Contri'!
Ca"ital
D
Earned
Ca"ital
,e%-
enues
C E$"en-ses B
Net
Income
Cas( 88.@@@
N- 88.@@@
CS @@.@@@
! ,ecei%ed
F@@.@@@
cas( &or
common
stoc2 and
'orro#ed
F88.@@@
cas(
D88.@@@
Cas(
B
D88.@@@
Notes
-aya'le
D@@.@@@
Common
Stoc2
C B
--E 8@.@@@
N- 6@.@@@
Cas( @.@@@
2!
-urc(ased
F8@.@@@ o&
e)ui"ment.
&or F@.@@@
cas( and
F6@.@@@
note
"aya'le
-@.@@@
Cas(
D8@.@@@
--E
B
D6@.@@@
Notes
-aya'le
C B
INK ;@.@@@
Cas( ;@.@@@
4!
-urc(ased
F;@.@@@ o&
in%entory
&or cas(
-;@.@@@
Cas(
D;@.@@@
In%entory
B C B
Cas( 9@.@@@
A, 6@.@@@
CO5S :@.@@@
Sales @@.@@@
INK :@.@@@
6! Sold
In%entory
&or F9@.@@@
cas( and
F6@.@@@ on
credit. cost
o&
in%entory
F:@.@@@
D9@.@@@
Cas(
D6@.@@@
Accounts
,ecei%a'le
-:@.@@@
In%entory
B
D4@.@@@
,etained
Earnings
D@@.@@@
Sales
C
D:@.@@@
Cost o&
5oods Sold
B
D4@.@@@
Solutions Manual, Module 2 2-#1
-2-68 /continued0
Transaction
Cas(
Asset
D
Noncas(
Assets
B
1ia'il-
ities
D
Contri'!
Ca"ital
D
Earned
Ca"ital
,e%-
enues
C E$"enses B
Net
Income
--DA @.@@@
Cas(
@.@@@
8! -aid F@.@@@ cas(
&or &uture ad%ertising
time
-@.@@@
Cas(
D@.@@@
-re"aid
Ad%ertising
B C B
AE :.8@@
--DA
:.8@@
9! F:.8@@ o&
ad%ertising time in
transaction 8 is aired
-:.8@@
-re"aid
Ad%ertising
B
-:.8@@
,etained
Earnings
C
D:.8@@
Ad%ertising
E$"ense
B
-:.8@@
<E 8.@@@
Cas(
8.@@@
:! Em"loyees "aid
F8.@@@ cas( in
#ages
-8.@@@
Cas(
B
-8.@@@
,etained
Earnings
C
D8.@@@
<ages
E$"ense
B
-
8.@@@
<E .@@@
<-
.@@@
;! Em"loyees earn
F.@@@ in #ages not
yet "aid
B
D.@@@
<ages
-aya'le
-.@@@
,etained
Earnings
C
D.@@@
<ages
E$"ense
B
-.@@@
DE 2.@@@
--E
2.@@@
=! ,ecord
de"reciation o&
F2.@@@ on e)ui"mentO
-2.@@@
--E
B
-2.@@@
,etained
Earnings
C
D2.@@@
De"reciation
E$"ense
B
-2.@@@
Ending Aalances @@.@@@ @@.8@@ B =9.@@@ @@.@@@ 6.8@@ @@.@@@ C =8.8@@ B 6.8@@
O -ro"erty and E)ui"ment. gross less Accumulated De"reciation!
-2-68 /concluded0
'!
AniFoods. Inc!
Income Statement
For Mont( Ended Marc( 4
Sales!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F@@.@@@
Cost o& goods sold!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /:@.@@@0
5ross "ro&it!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4@.@@@
Ad%ertising e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /:.8@@0
<ages e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!/9.@@@0
De"reciation e$"ense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /2.@@@0
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 6.8@@
AniFoods. Inc!
Aalance S(eet
Marc( 4
Cas(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F@@.@@@ <ages "aya'le!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F .@@@
Accounts recei%a'le!!!!!!!!!!!!6@.@@@ Note "aya'le /to o#ner0!!!!!!!!!!!!!!!!!!! 88.@@@
In%entory!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!@.@@@ Note "aya'le /to %endor0!!!!!!!!!!!!!!!!! 6@.@@@
-re"aid ad%ertising!!!!!!!!!!!!! 2.8@@ Total lia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! =9.@@@
E)ui"ment. gross!!!!!!!!!!!!!!!!!8@.@@@
1ess+ Accum
de"reciation!!!!!!!!!!!!!!!!!!!!!!!!!!
/2.@@@0
Common stoc2!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
@@.@@@
E)ui"ment. net!!!!!!!!!!!!!!!!!!!!! 6;.@@@ ,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6.8@@
Total assets!!!!!!!!!!!!!!!!!!!!!!!!!! F2@@.8@@ Total lia'ilities and e)uity!!!!!!!!!!!!!!!! F2@@.8@@

-2-69
a!
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Aeginning 'al! ;@.@@@ 48.@@@ B :@.@@@ @.@@@ 48.@@@ C B
SU- 8.@@@
Cas( 8.@@@
! T(e com"any
"urc(ased
su""lies &or
F8.@@@ cas(R
none #ere used
t(is mont(
-8.@@@
Cas(
D8.@@@
Su""lies
B C B
A, 2.8@@
,EK 2.8@@
2! Ser%ices o&
F2.8@@ #ere
"er&ormed t(is
mont( on credit
D2.8@@
Accounts
,ecei%a'le
B
D2.8@@
,etained
Earnings
D2.8@@
,e%enues
C B D2.8@@
Cas( @.@@@
,EK @.@@@
4! Ser%ices #ere
"er&ormed &or
F@.@@@ cas( t(is
mont(
D@.@@@
Cas(
B
D@.@@@
,etained
Earnings
D@.@@@
,e%enues C B D@.@@@
--DA ;.@@@
Cas( ;.@@@
6! T(e com"any
"urc(ased
ad%ertising &or
F;.@@@ cas(R t(e
ads #ill run ne$t
mont(
-;.@@@
Cas(
D;.@@@
-re"aid
Ad%ertising
B C B
2-## Financial Managerial !ccounting for MB!s, 3rd "dition
-2-69 /Continued0!
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Cas( .2@@
A, .2@@
8! T(e com"any
recei%ed F.2@@
cas( as "artial
"ayment on
accounts
recei%a'le &rom
transaction 2
D.2@@
Cas(
-.2@@
Accounts
,ecei%a'le
B C B
A- 4.6@@
Cas( 4.6@@
9! T(e com"any
"aid F4.6@@
cas( to#ard
accounts
"aya'le!
-4.6@@
Cas( B
-4.6@@
Accounts
-aya'le
C B
<E 4.@@
Cas( 4.@@
:! -aid F4.@@ cas(
to#ard t(is
mont(*s #ages
e$"enses
-4.@@
Cas( B
-4.@@
,etained
Earnings
C
D4.@@
<ages
E$"ense
B -4.@@
DIK 8@@
Cas( 8@@
;! T(e com"any
declared and
"aid di%idends
o& F8@@ cas(
-8@@
Cas( B
-8@@
Di%idends
C B
Ending 'alance :.2@@ 6=.4@@ B 99.9@@ @.@@@ 64.=@@ 2.8@@ C 4.@@ B =.6@@
Solutions Manual, Module 2 2-#$
2-#% Financial Managerial !ccounting for MB!s, 3rd "dition

-2-69 /concluded0
'!
Panlon Ad%ertising Com"any
Income Statement
For Current Mont(
Sales re%enue!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F2.8@@
Total e$"enses!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4.@@
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F =.6@@
For Current Mont(
,etained earnings. 'eginning o& mont(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 48.@@@
Add Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! =.6@@
1ess+ Di%idends!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /8@@0
,etained earnings. end o& mont(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 64.=@@
Aalance S(eet
Mont(-End
Cas(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F :.2@@ 1ia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 99.9@@
Noncas( assets!!!!!!!!!!!!!!!!!! 6=.4@@
Contri'uted ca"ital!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! @.@@@
,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 64.=@@
SSSSSSSS Total e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 84.=@@
Total assets!!!!!!!!!!!!!!!!!!!!!!!!! F22@.8@@ Total lia'ilities and e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F22@.8@@
Solutions Manual, Module 2 2-#&
-2-6: /2@ minutes0
a!
O"erating acti%ities
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F4@.@@@
Ad7ustments to reconcile net income to o"erating cas( &lo#
De"reciation!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F28.@@@
Accounts recei%a'le increase!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /@.@@@0
-re"aid e$"ense decrease!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4.@@@
Accounts "aya'le increase!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.@@@
<ages "aya'le decrease!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! /6.@@@ 0 2@.@@@
Net cas( "ro%ided &rom o"erating acti%ities!!!!!!!!!!!!!!!!!!!!!!!!!!!! F8@.@@@
'! No. t(e "ositi%e sign on de"reciation e$"ense does not mean t(at
-etroni Com"any is generating cas( 'y recording de"reciation! T(e
de"reciation add-'ac2 undoes t(e noncas( de"reciation e$"ense t(at is
included in t(e com"utation o& net income! Cas( is generated &rom sales
and "ro&ita'le o"erations and not &rom de"reciation e$"ense!
c! T(e increase in accounts recei%a'le relates to sales on credit! Aecause
-etroni Com"any uses 5AA-. t(e com"any recogni3es re%enues #(en
>earned.? e%en i& no cas( is recei%ed! T(ese credit sales are included in
net income e%en t(oug( no cas( (as 'een recei%ed &rom t(e sale! T(at
means t(at net income is (ig(er t(an cas( &rom o"erations! Su'tracting
t(e increase in recei%a'les o&&sets t(e noncas( sales included in net
income!
d! -re"aid e$"enses arise #(en a com"any "ays out cas( in ad%ance o&
incurring t(e e$"ense! An e$am"le is t(e "ayment &or radio or TK
ad%ertising t(at is not aired in t(e current "eriod! <(en "aid. t(e
com"any records t(e decrease in cas( and also records an asset.
"re"aid ad%ertising! <(en t(e ads are aired. t(e "re"aid ad%ertising
account is reduced and an e$"ense is recogni3ed e%en t(oug( no cas(
#as "aid in t(e "eriod t(e ads aired! T(e e&&ect is t(at net income is
lo#er /'y t(e ad%ertising e$"ense0 t(an cas( &rom o"erations! To
reconcile t(e t#o. t(e com"any needs to add 'ac2 t(e decrease in t(e
"re"aid e$"ense asset!
2-#' Financial Managerial !ccounting for MB!s, 3rd "dition
-2-6; /2@ minutes0
a!
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"en-
ses
B
Net
Income
Aeginning 'al! 4@.@@@ 228.@@@ B =@.@@@ 68.@@@ 2@.@@@ C B
SU- 9.@@@
A- 9.@@@
! T(e com"any
"urc(ased F9.@@@
o& su""lies on
credit
D9.@@@
Su""lies
B D9.@@@
Accounts
-aya'le
C B
Cas( ;.@@@
U, ;.@@@
2! T(e com"any
recei%ed F;.@@@
cas( &rom a ne#
customer &or
ser%ices to 'e
"er&ormed ne$t
mont(
D;.@@@
Cas(
B D;.@@@
Unearned
,e%enues
C B
,NTE 4.@@@
--,NT 4.@@@
Cas( 9.@@@
4! T(e com"any
"aid F9.@@@ cas(
to co%er o&&ice
rent &or t#o
mont(s /t(e
current mont(
and t(e ne$t0
-9.@@@
Cas(
D4.@@@
-re"aid
,ent
B -4.@@@
,etained
Earnings
C D4.@@@
,ent
E$"ense
B -4.@@@
Solutions Manual, Module 2 2-#)
2-$0 Financial Managerial !ccounting for MB!s, 3rd "dition

2-#% Financial Managerial !ccounting for MB!s, 3rd "dition
-2-6; /continued0
Aalance S(eet
Income Statement
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"enses
B
Net
Income
A, 28.@@@
,EK 28.@@@
6! T(e com"any
'illed clients &or
F28.@@@ o& #or2
"er&ormed
D28.@@@
Accounts
,ecei%a'le
B
D28.@@@
,etained
Earnings
D28.@@@
,e%enues C B
D28.@@@
<E 9.@@@
Cas( 9.@@@
8! T(e com"any
"aid em"loyees
F9.@@@ cas( &or
#or2 "er&ormed
-9.@@@
Cas(
B -9.@@@
,etained
Earnings
C D9.@@@
<ages
E$"ense
B -9.@@@
Cas( 28.@@@
A, 28.@@@
9! T(e com"any
collected F28.@@@
cas( &rom
accounts
recei%a'le in #
D28.@@@
Cas(
-28.@@@
Accounts
,ecei%a'le
B C B
DE 4.@@@
--E 4.@@@
:! T(e com"any
recorded F4.@@@
de"reciation on
its e)ui"ment
-4.@@@
--E
B -4.@@@
,etained
Earnings
C D4.@@@
De"reciation
E$"ense
B -4.@@@
Solutions Manual, Module 2 2-$1
2-$2 Financial Managerial !ccounting for MB!s, 3rd "dition

Solutions Manual, Module 2 2-#&
-2-6; /continued0
Transaction
Cas(
Asset D
Noncas(
Assets
B
1ia'il-
ities D
Contri'!
Ca"ital D
Earned
Ca"ital
,e%-
enues
C
E$"enses
B
Net
Income
SU-E 6.@@@
SU- 6.@@@
;! At mont(-end.
F2.@@@ o&
su""lies
"urc(ased in 1
are still a%aila'leR
no su""lies #ere
a%aila'le #(en
t(e mont( 'egan
-6.@@@
Su""lies B
-6.@@@
,etained
Earnings
C
D6.@@@
Su""lies
E$"ense
B -6.@@@
Ending 'alance 8.@@@ 22:.@@@ B @6.@@@ 68.@@@ 2=.@@@ 28.@@@ C 9.@@@ B =.@@@
Solutions Manual, Module 2 2-$3

2-#' Financial Managerial !ccounting for MB!s, 3rd "dition
-2-6; /concluded0
'!
<erner ,ealty Com"any
Income Statement
For Current Mont(
Sales re%enue!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 28.@@@
Total e$"enses!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9.@@@
Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F =.@@@
For Current Mont(
,etained earnings. 'eginning o& mont(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F2@.@@@
Add+ Net income!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! =.@@@
1ess+ Di%idends!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! @
,etained earnings. end o& mont(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F2=.@@@
Aalance S(eet
Current Mont(-End
Cas(!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F 8.@@@ 1ia'ilities!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F@6.@@@
Noncas( assets!!!!!!!!!!!!!!!!!! 22:.@@@
Contri'uted ca"ital!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 68.@@@
,etained earnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2=.@@@
SSSSSSSS Total e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! :6.@@@
Total assets!!!!!!!!!!!!!!!!!!!!!!!!! F2:;.@@@ Total lia'ilities and e)uity!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! F2:;.@@@
2-$# Financial Managerial !ccounting for MB!s, 3rd "dition
IF,S ASSI5NMENTS
I 2-6= /8 minutes0
a!
Income Statement Tesco
Fe'ruary 29. 2@
A(old
Ganuary 2. 2@
Umillions N Vmillions
N
Sales U9@.=4 @@!@N V2=.84@
@@!@N
Cost o& goods sold 88.;: =!:N 2.9@
:4!2N
5ross "ro&it 8.@9@ ;!4N :.=2@ 29!;N
Total e$"enses 2.6@8 4!=N :.@9:
24!=N
Net income U 2.988 6!6N V ;84
2!=N
A(old*s gross "ro&it margin /29!;N0 is t(ree times t(at o& Tesco /;!4N0
due to t(eir relati%ely lo# cost o& goods sold! Aut t(e o""osite "attern
(olds &or t(e total e$"enses! T(e t#o com"anies (a%e roug(ly t(e same
common-si3e net income! T(is could indicate t(at t(e com"anies
classi&y certain e$"enses di&&erently C Tesco classi&ies more e$"enses
as CO5S!
'!
Aalance S(eet Tesco A(old
Fe'ruary 29. 2@ Ganuary 2. 2@
/Umillions0 N /Vmillions0 N
Current assets U.64; 26!2N V 8.=6 48!4N
1ong-term assets 48.:9; :8!;N =.84 96!:N
Total assets U6:.2@9 @@!@N V6.:28 @@!@N
Current lia'ilities U:.:4 4:!9N V 6.@=2 2:!;N
1ong-term lia'ilities 2.;82 2:!2N 6.:24 42!N
Total lia'ilities 4@.8;4 96!;N ;.;8 8=!=N
Stoc2(older*s e)uity 9.924 48!2N 8.=@ 6@!N
Total lia'ilities and e)uity U6:.2@9 @@!@N V6.:28 @@!@N
c! A(old (as a greater "ro"ortion o& stoc2(olders* e)uity in its ca"ital
structure C 6@!N com"ared to Tesco*s 48!2N! A greater "ro"ortion o&
de't is generally %ie#ed as a ris2ier ca"ital structure! So. on t(at 'asis.
#e #ould conclude t(at Tesco is t(e ris2ier com"any! T(at said. neit(er
o& t(ese com"anies carries a large "ercentage o& long-term de't! <e
#ould conclude t(at t(ey are 'ot( %ery sol%ent!
Solutions Manual, Module 2 2-$$
I 2-8@ /6@ minutes0
a. De"reciation is added 'ac2 to undo t(e e&&ect it (ad on t(e income
statement! AstraQeneca deducted F2.@;: million o& de"reciation e$"ense
in com"uting net income! De"reciation is a noncas( e$"ense so
AstraQeneca did not actually use F2.@;: million o& cas( to "ay
de"reciation e$"ense! T(us. to determine (o# muc( cas( #as
generated. net income is lo#er t(at cas( &rom o"erations 'y t(e
de"reciation amount o& F2.@;: million! T(e de"reciation add-'ac2 is
NOT a source o& cas( as some mista2enly 'elie%e! Cas( is generated 'y
"ro&ita'le o"erations. not 'y de"reciation!
'! ,e%enue is recogni3ed. and net "ro&it increased. #(en it is earned.
#(et(er or not cas( is recei%ed! Sales on account. t(ere&ore. increase
"ro&it. and t(e deduction &or t(e increase in recei%a'les re&lects t(e &act
t(at cas( (as not yet 'een recei%ed!
T(e "ositi%e sign on t(e decrease in in%entories re&lects t(at t(e cost o&
goods sold includes in%entory t(at #as "aid &or in a "rior "eriod!
AstraQeneca "urc(ases muc( o& its in%entories on credit! T(e increase
in trade and ot(er "aya'les and "ro%isions re&lects in%entories t(at (a%e
'een "urc(ased. 'ut (a%e not yet 'een "aid &or in cas(! T(is add-'ac2
to net income re&lects t(e &act t(at cas( "ro&it is (ig(er 'ecause t(ese
accounts "aya'le are not yet "aid!
c! To gro# and remain com"etiti%e. com"anies must continue to in%est in
t(eir in&rastructure! Ca"ital e$"enditures /CA-EE0 are necessary 'ot(
&or routine e)ui"ment re"lacements and &or ne# additions! De"reciation
e$"ense re"resents t(e using u" o& de"recia'le assets! In general. #e
s(ould e$"ect CA-EE to e$ceed de"reciation e$"ense! T(is indicates
t(at t(e com"any is gro#ing its in&rastructure as #ell as re"lacing t(e
"ortion t(at is #earing out! T(is is not t(e case in 2@@= &or Astra Qeneca!
T(e com"any may (a%e slo#ed its gro#t( to #eat(er t(e economic
do#nturn during t(e 2@@= "eriod!
2-$% Financial Managerial !ccounting for MB!s, 3rd "dition
I 2-8@ /concluded0
d! AstraQeneca generated a signi&icant amount o& cas( in 2@@= and "aid a
(e&ty di%idend! I& AstraQeneca can ma2e a 'etter return on rein%esting
its cas( 'ac2 into t(e 'usiness t(an t(e return s(are(olders can earn
&or t(emsel%es on t(e cas( t(ey #ould recei%e. AstraQeneca s(ould
&orgo "aying di%idends! Many com"anies #it( large cas( in&lo#s.
es"ecially mature com"anies in relati%ely saturated mar2ets. &ind it (ard
to unco%er additional in%estment o""ortunities! In t(ose cases.
returning t(e cas( to in%estors is 'etter t(an in%esting it in mar2eta'le
securities. 'ecause in%estors can do t(at &or t(emsel%es!
e! AstraQeneca generated cas( &lo#s o& F.:4= million &rom o"erating
acti%ities in 2@@=! T(e com"any (ad a net cas( out&lo# &rom in%esting
acti%ities o& F2.6:9 million! T(is out&lo# #as due "rimarily to mo%ement
in s(ort-term in%estments and &i$ed de"osits and relati%ely small
"urc(ases o& "ro"erty. "lant. and e)ui"ment! T(e com"any also (ad a
net cas( out&lo# &rom &inancing acti%ities o& F4.92= &rom loan
re"ayments. di%idend "ayments. and mo%ement in s(ort-term
'orro#ings! Cas( increased signi&icantly during t(e year &rom F6.24
million to F=.;2; million!
Solutions Manual, Module 2 2-$&
MANA5EMENT A--1ICATIONS
MA2-8 /28 minutes0
a! T(e cas( con%ersion cycle is t(e num'er o& days t(at "ass &rom t(e
time t(e com"any "ays cas( to "urc(ase or manu&acture in%entory. sells
t(e in%entory and ultimately collects t(e accounts recei%a'le! T(is
"eriod o& time is reduced to t(e e$tent t(at su""liers &inance a "ortion o&
t(e in%entory "urc(ase!
,ecei%a'les and in%entories are costly to maintain! T(ey must 'e
&inanced /eit(er #it( 'orro#ed &unds or 'y &orgoing in%estment in ot(er
earning assets0. collected /#it( some "ros"ect o& loss0. stored. insured.
and mo%ed! Ay reducing t(e amount o& in%estment in t(ese assets.
com"anies can reduce t(eir e$"enses and t(eir need &or e$ternal
ca"ital!
'! A com"any mig(t reduce its cas( con%ersion cycle 'y reducing
recei%a'les and in%entories and 'y increasing accounts "aya'le!
! ,ecei%a'les C managers can reduce recei%a'les 'y
in%o2ing more stringent credit-granting "olicies! Com"anies need
a""ro"riate "olicies to decide to #(om to e$tend credit and in #(at
dollar amount! As credit "olicies 'ecome more restricti%e. t(e dollar
amount o& recei%a'les declines! Managers can also im"lement more
aggressi%e and or e&&icient collection "ractices
2! In%entories C &or retailers. in%entories are t(e cost o& t(e
goods "urc(ased &or resale! For manu&acturers. in%entory costs
include ra# materials. and additional la'or and o%er(ead costs to
con%ert t(e goods into sala'le &orm! ,educing in%entory le%els #ill
reduce t(e cas( con%ersion cycle time! T(is can (a""en #it( more
e&&icient 'uying /"urc(asing &or actual orders rat(er t(an &or
estimated demand0 and #it( leaner manu&acturing "rocesses!
4! -aya'les C lengt(ening t(e time to "ay accounts
"aya'le />leaning on t(e trade?0 reduces t(e cas( con%ersion cycle
time 'ecause less o& t(e com"any*s o#n ca"ital is in%ested in
recei%a'les and in%entories!
2-$' Financial Managerial !ccounting for MB!s, 3rd "dition
MA2-8 /concluded0
c! Eac( action descri'ed a'o%e (as im"lications &or t(e com"any*s
relations #it( customers and su""liers!
! ,ecei%a'les C recei%a'les are a mar2eting tool. li2e ad%ertising.
"roduct "romotions and selling e$"enses! Tig(tening a com"any*s
credit "olicies can ad%ersely a&&ect sales! On t(e ot(er (and. more
restricti%e credit "olicies can reduce collection costs. 'ad de't
e$"ense. and &inancing costs! Esta'lis(ing a credit "olicy and
collection "rocedures in%ol%es 'alancing t(e com"eting e&&ects o&
lost sales #it( cost sa%ings!
2! In%entories C reducing &inis(ed goods in%entory le%els
increases t(e ris2 o& stoc2-outs and could result in lost sales! T(e
decision a'out #(at de"t( and 'readt( o& &inis(ed goods in%entories
to carry is as muc( a mar2eting decision as it is a &inancial one!
Furt(er. t(e amount o& ra# materials and #or2-in-"rocess in%entories
on (and a&&ects "roduction e&&iciency and (as &inancial im"lications!
In%entory management is a delicate "rocess t(at must 'e (andled
#it( care to 'alance com"eting needs!
4! -aya'les C lengt(ening t(e time to "ay accounts "aya'le. #(ile
reducing t(e cas( con%ersion cycle. may also damage relations #it(
su""liers! One com"any*s account "aya'le is anot(er*s account
recei%a'le! T(ere is a natural tension 'et#een t#o com"anies
see2ing to 'alance t(e "eriod o& time t(at t(e credit is outstanding!
Alt(oug( e$tending "aya'les is &a%ora'le &rom a &inancial %ie#"oint.
s(ould su""lier relations 'ecome strained. t(e com"any*s a'ility to
o'tain additional "roducts or ser%ices may 'e 7eo"ardi3ed! -olicies
relating to t(e "ayment o& su""liers must 'e (andled #it( care!
<or2ing ca"ital management is as muc( art as it is science! Com"anies
must consider many constituencies in &raming t(e a""ro"riate "olicies!
Solutions Manual, Module 2 2-$)
MA2-82 /4@ minutes0
T(e FASA (as traditionally ta2en t(e "osition t(at accounting standards
s(ould re&lect t(e di%ersity o& 'usiness models 'y allo#ing discretion in
t(eir a""lication! ,e%enue recognition and e$"ense recording is a case in
"oint!
a! Follo#ing are some "ros and cons o& dra&ting more restricti%e
accounting standards+
-ros+
! >One si3e &its all? accounting standards sim"li&y t(e accounting
"rocess and ma2e t(e resulting &inancial statements easier to
inter"ret!
2! ,educing t(e discretion a%aila'le to accountants also reduces t(e
tem"tation to manage t(e &inancial statements to ac(ie%e managers*
sel&-ser%ing o'7ecti%es!
4! Sim"li&ying accounting standards #ill reduce com"le$ity o& t(e audit
"rocess as #ell as "otential litigation costs 'ecause t(e rules are
clear!
Cons+
! Ausinesses are too com"le$ to use a >one si3e &its all? standard-
setting "(iloso"(y! Uni)ue transactions and cor"orate relations may
not lend t(emsel%es to classi&ication in a standardi3ed accounting
system!
2! Creating >'rig(t line? accounting standards /e!g!. standards #it(
numerical guidelines t(at direct t(e a""ro"riate accounting
treatment. suc( as t(e rules regarding recognition o& o&&-'alance
s(eet entities0 in%ites creati%e managers to structure t(eir deals so as
to meet t(e tec(nical re)uirements o& t(e standard #(ile %iolating its
intent!
4! Standardi3ing accounting rules reduces t(e %alue added 'y
"ro&essional accountants!
2-%0 Financial Managerial !ccounting for MB!s, 3rd "dition
MA2-82 /concluded0
'! T(e >end 7usti&ies t(e means? argument. &re)uently used in su""ort o&
earnings management. is &la#ed on at least t#o &ronts+
! Earnings management is generally "er&ormed to >smoot(? earnings
&luctuations or to meet earnings targets! Ty"ically t(e "arties
'ene&iting &rom t(is action are managers /'ecause t(eir
com"ensation is contingent on meeting targets and 'ecause t(ere
#ill 'e less s(are(older dissent #(en earnings targets are met0 and
in%estors long in t(e stoc2! Future in%estors. in%estors s(ort in t(e
stoc2. su""liers. lenders. and &uture em"loyees may all 'e damaged
as a result o& t(e &ailure to "ro%ide timely and accurate &inancial
in&ormation!
2! T(e argument im"licitly assumes t(at managers are more ca"a'le o&
understanding &inancial re"orts t(an ot(er mar2et "artici"ants! To 'e
sure. managers (a%e access to in&ormation t(at is not a%aila'le to t(e
mar2et. 'ut managing &inancial results to &ilter #(at is seen. or not
seen. 'y t(e mar2et is not t(e ans#er! ,at(er. management s(ould
di%ulge more o& its in&ormation in an un&iltered &orm and let t(e
mar2et ma2e its o#n assessment!
Solutions Manual, Module 2 2-%1

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Introducing Financial Statements

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