Dmp3e Ch02 Solutions 04.13.10 Final

7/27/2019 Dmp3e Ch02 Solutions 04.13.10 Final

1/56

Chapter 2

Constructing Financial Statements

Learning Objectives coverage by question

Mini-exercises Exercises Problems Cases

LO1 Describe and constructthe balance sheet andunderstand how it can be usedfor analysis.

14, 15, 16, 17,

19, 21, 22, 23,

25, 26, 27, 29,

30, 31

32, 33, 34, 35,

36, 37, 38, 39,

40, 41, 42, 43,

44, 45, 46

47, 48, 49, 50,

51, 52, 53, 54,

55, 57, 58, 59,

60, 62, 64, 65,

67

69

LO2 Use the financialstatement effects template(FSET) to analyze transactions.

20, 29 33, 42, 45 55, 60, 65, 67

LO3 Describe and constructthe income statement anddiscuss how it can be used toevaluate managementperformance.

19, 20, 21, 22,

23, 28, 29

33, 34, 35, 37,

38, 39, 40, 41

47, 48, 49, 50,

51, 52, 53, 54,

55, 57, 58, 59,

60, 62, 63, 64,

65, 67

69, 70

LO4 Explain revenuerecognition, accrual accounting,and their effects on retainedearnings.

20, 22, 23, 24,

2937, 38

53, 55, 57, 58,

60, 64, 65, 6769

LO5 Illustrate equitytransactions and the statementof stockholders equity.

18, 19, 21, 22,

23, 27, 2933, 39, 41 51, 64, 65, 67 69

LO6 Use journal entries andT-accounts to analyze andrecord transactions.

25, 26, 29, 30,31

43, 44, 46 53, 56, 57, 58,61, 66, 68

69

LO7 Compute net workingcapital, the current ratio, andthe quick ratio, and explain howthey reflect liquidity.

32, 34, 36, 38,40, 44

50, 53, 54, 57,58

Cambridge Business Publishers, 2011

Solutions Manual, Chapter 2 2-1


2/56

QUESTIONS

Q2-1. An asset is something that we own that is expected to provide futurebenefits. A liability is a current obligation that will require a futuresacrifice. Equity is the difference between assets and liabilities. It

represents the claims of the companys owners to its income and assets.The following are some examples of each:

Assets Cash

Receivables

Inventories

Plant, property and equipment

Liabilities Accounts payable

Accrued liabilities

Notes payable

Long-term debt

Equity Contributed capital (common and preferred stock)

Additional paid-in capital

Earned capital (retained earnings)

Treasury stock

Q2-2. The revenue recognition principle requires that revenues be recognizedwhen earned. Revenues are earned when the product has been deliveredto the buyer and is usually signified by a formal transfer of title. A goodtest of whether revenue has been earned is whether the rights, risks andobligations of ownership have been transferred to the buyer. If a serviceis involved, revenues are not earned until the service has been provided.The matching principle prescribes that the expenses incurred inproviding the service or product be matched against the revenuesrecognized from the sale or the provision of the service. When these twoprinciples are followed, income can be properly measured in a givenaccounting reporting period.

Q2-3. Accrual accounting entails the recognition of revenue under the revenuerecognition principle (record revenues when earned), and the recognitionof expenses using the matching principle (record expenses whenincurred). The recognition of revenues or the expenses does not require

that cash be received or disbursed. For example the recognition ofrevenues on sale can lead to an account receivable, and wage expensecan be accrued using a wages payable (accrued) liability account.


Financial Accounting, 3rd Edition2-2


3/56


4/56

Q2-9. An intangible asset is an asset that we cannot touch. To be included onthe balance sheet, it has to meet the tests of an asset (e.g., we own it, andit will provide future benefits). Intangible assets are always acquired.Internally generated intangible assets are not recorded on the balancesheet. Some examples are goodwill, patents and trademarks, contractual

agreements like royalties, leases, and franchise agreements. All of theintangible assets, though not recorded if internally generated, arerecorded if purchased, as in an acquisition of another company, forexample.

Q2-10. Both the current ratio and quick ratio are measures of a firms ability topay its obligations as they come due; measures of a firms liquidity. Thecurrent ratio is computed by dividing the firms current assets by itscurrent liabilities. Current ratios that exceed 1.0 are deemed to representa strong current liquidity position. The quick ratio is an even moreconservative measure of a firms liquidity. The quick ratio is computed bydividing the firms cash and cash equivalents by its current liabilities.

Q2-11. The three conditions necessary to recognize a liability are:

1. The liability reflects a probable future sacrifice on the part of theorganization.

2. The amount of the obligation is known or can be reasonablyestimated.

3. The transaction that caused the obligation has occurred.

Q2-12. Net working capital = current assets current liabilities. Increasing theamount of trade credit (e.g., accounts payable to suppliers) increasescurrent liabilities and reduces net working capital. As trade credit

increases, we are using someone elses cash rather than our own. As abusiness grows, its net working capital grows, as the growth ofinventories and receivables are generally greater than that of accountspayable and accrued liabilities. Net working capital is an asset categorythat must be financed just like fixed assets.

Q2-13. $700,000 Assets - $220,000 Liabilities = $480,000 Stockholders' equity

$480,000 $300,000 Common stock = $180,000 Retained earnings




5/56

MINI EXERCISES

M2-14 (10 minutes)

Use the accounting equation.

a. Cash $ 8,000Accounts receivable 23,000Supplies 9,000Equipment 138,000

178,000Accounts payable $ 11,000Common stock 110,000 121,000Retained earnings $ 57,000

b. Retained Earnings:December 31, 2010 $ 57,000January 1, 2010 30,000

Increase 27,000Add: Dividends 12,000Net Income $ 39,000

M2-15 (5 minutes)a. $200,000 - $85,000 = $115,000 equityb. $32,000 + $28,000 = $60,000 assetsc. $93,000 - $52,000 = $41,000 liabilities

M2-16 (5 minutes)a. $375,000 - $105,000 = $270,000 equityb. $43,000 + $11,000 = $54,000 assetsc. $878,000 - $422,000 = $456,000 liabilities

M2-17 (5 minutes)a. $450,000 - $326,000 = $124,000 equityb. $618,000 - $165,000 = $453,000 liabilities.c. $400,000 + $200,000 + $185,000 = $785,000 assets.

M2-18 (10 minutes)a. no effectb. decreasec. decreased. no effecte. increasef. increaseg. increase




6/56

M2-19 (15 minutes)

a. Balance sheet

b. Income statement

c. Balance sheet

d. Income statement

e. Balance sheet

f. Balance sheet

g. Balance sheet

h. Balance sheet

i. Income statement

j. Income statement

k. Balance sheet

l. Balance sheet

M2-20 (20 minutes)

a. Net income computation

Service revenue (record when earned) $100,000Wage expense . (60,000 )Net income $ 40,000

b. Yes, recognizing the wage liability would cause wage expense to increaseby $10,000 and income would go down by the same amount (before taxes).

M2-21 (10 minutes)

a. Balance sheetb. Income statement, Statement of stockholders equityc. Balance sheetd. Income statemente. Statement of stockholders equity

f. Statement of stockholders equityg. Balance sheeth. Income statementi. Statement of stockholders equity, Balance sheet




7/56

M2-22 (10 minutes)

a. Balance sheetb. Balance sheetc. Income statement, Statement of stockholders equityd. Statement of stockholders equity, Balance sheet

e. Balance sheetf. Income statementg. Balance sheeth. Balance sheet

M2-23 (10 minutes)

a. Balance sheetb. Income statementc. Statement of stockholders equity, Balance sheet

d. Income statemente. Statement of stockholders equity*f. Balance sheetg. Balance sheeth. Balance sheet

M2-24 (15 minutes)

Ending retained earnings = Beginning retained earnings + Net income Dividends + the effects of other adjustments. And, the ending retained earningsfor one period is the beginning retained earnings for the following period.

For the year ended January 31, 2009: $4,758 + Net income $201 = $4,777, so Netincome = $220

Ending retained earnings for the year ended February 2, 2008 equals $4,758, thebeginning retained earnings for the following year.

For the year ended February 2, 2008: $4,277 + $718 Dividends $10 = $4,758, soDividends = $227

Fiscal year ending February 2, 2008 January 31, 2009

Beginning retained earnings (deficit) $ 4,277 $ 4,758Net income (loss) 718 220Dividends paid 227 201Increases (decreases) from other retained

earnings changes (10) Ending retained earnings (deficit) $ 4,758 $ 4,777




8/56

M2-25 (10 minutes)

a. Increase assets (Cash)Increase equity (Service Revenues)

b. Increase assets (Office Supplies)Increase liabilities (Accounts Payable)

c. Increase assets (Cash)Increase equity (Contributed Capital or Common Stock)

d. Decrease liabilities (Accounts Payable)Decrease assets (Cash)

e. Increase assets (Cash)Increase liabilities (Notes Payable)

f. Increase assets (Accounts Receivable)Increase equity (Service Revenues)

g. Increase assets (Office Equipment)Decrease assets (Cash)

h. Decrease equity (Interest Expense)

Decrease assets (Cash)i. Decrease equity (Utilities Expense)

Increase liabilities (Accounts Payable)

M2-26 (10 minutes)

a. Increase assets (Office Equipment)Decrease assets (Cash)

b. Increase assets (Accounts Receivable)Increase equity (Service Revenue)

c. Decrease assets (Cash)

Decrease equity (Rent Expense)d. Increase assets (Cash)

Increase equity (Service Revenue)e. Increase assets (Cash)

Decrease assets (Accounts Receivable)f. Increase assets (Office Equipment)

Increase liabilities (Accounts Payable)g. Decrease assets (Cash)

Decrease equity (Salaries Expense)h. Decrease assets (Cash)

Decrease liabilities (Accounts Payable)

i. Decrease assets (Cash)Decrease equity (Retained Earnings)




9/56

M2-27 (10 minutes)

Johnson & JohnsonStatement of Retained Earnings

For Year Ended December 28, 2008

Retained earnings, December 30, 2007................................... $55,280Add: Net income...................................................................... 12,949

Less: Dividends........................................................................ (5,024)

Other retained earnings changes................................. 174

Retained earnings, December 28, 2008................................... $63,379

M2-28 (10 minutes)

2010 2011

Revenues.................................................................. $350,000 $ 0

Expenses............................................................ 200,000 0

Net income......................................................... $150,000 $ 0

Explanation: All of the revenue is reported in 2010 when it is earnedper therevenue recognition principle. Likewise, the expense is reported in 2010 when itis incurredper application of the matching principle. The receipt or payment ofcash does not affect the recording of revenues, expenses, and net income.

M2-29 (15 minutes)

Balance Sheet Income Statement

Transaction CashAsset +NoncashAssets =

Liabil-ities +

Contrib.Capital +

EarnedCapital Revenues - Expenses =

NetIncome

a. Issue stock for$1,000 cash.

+1,000Cash =

+1,000Common

Stock

- =

b. Purchaseinventory for $500cash.

-500Cash

+500Inventory = - =

c. Sell inventory for

$2,000 on credit.

+2,000

Accts Rec =

+2,000

RetainedEarnings

+2,000

Sales - =

+2,000

d. Record $500 forcost of inventorysold in c.

-500Inventory =

-500RetainedEarnings

-+500COGS

Expense=

-500

e. Receive $2,000cash onreceivable from c.

+2,000Cash

-2,000Accts Rec = - =

Totals 2,500 + 0 = = + 1,000 + 1,500 2,000 - 500 = 1,500




10/56

M2-30 (10 minutes)

a. Cash (+A)........................................................................... 1,000Common stock (+SE).................................................. 1,000

b. Inventory (+A)................................................................... 500

Cash (-A)....................................................................... 500

c. Accounts receivable (+A)................................................ 2,000Sales (+R, +SE)............................................................. 2,000

d. Cost of goods sold (+E, -SE)........................................... 500Inventory (-A)................................................................ 500

e. Cash (+A)........................................................................... 2,000Accounts receivable (-A)............................................. 2,000

M2-31 (10 minutes)

+ Cash (A) - + Accounts Receivable (A) -

(a) 1,000 (b) 500 (c) 2,000 (e) 2,000

(e) 2,000

- Sales (R) +

(c) 2,000

+ Inventory (A) - + Cost of Goods Sold (E) -

(b) 500 (d) 500 (d) 500

- Common Stock (SE) +

(a) 1,000




11/56

EXERCISES

E2-32 (25 minutes)

Use the accounting equation to determine Retained Earnings as of May 31, 2010.

Beaver, Inc.a. and b. BALANCE SHEETS

May 31,June 1,

2010 2010

AssetsCash $ 12,200 $ 3,200Accounts receivable 18,300 18,300Supplies 16,400 16,400Equipment 55,000 70,000Total assets $101,900 $107,900

LiabilitiesNotes payable $ 20,000 $ 33,000Accounts payable 5,200 5,200

Total liabilities 25,200 38,200

Stockholders' EquityCommon stock 42,500 42,500Retained earnings 34,200 27,200

Total stockholders' equity 76,700 69,700Total liabilities and stockholders' equity $101,900 $107,900

c. Net working capital = current assets current liabilities$32,700 = ($3,200 + $18,300 + $16,400) $5,200




12/56


13/56

E2-34(30 minutes)

Use the accounting equation to determine stockholders equity balances.

Lang Servicesa. Balance Sheet

December 31,

20112010

AssetsCash $10,000 $ 8,000Accounts receivable 22,800 17,500Supplies 4,700 4,200Equipment 32,000 27,000

Total assets $69,500 $56,700

LiabilitiesAccounts payable $25,000 $25,000Notes payable 1,800 1,600


Stockholders equityEquity 42,700 30,100Total liabilities and stockholders equity $69,500 $56,700

b.Equity, December 31, 2011 $42,700Equity, December 31, 2010 30,100Increase 12,600Add: Dividends 17,000

29,600Less: Common Stock issued 5,000Net Income for 2011 $24,600

c.Current ratio = ($10,000 + $22,800 + $4,700)/$25,000 = 1.5Quick ratio = ($10,000 + $22,800)/$25,000 = 1.31

d. Langs liquidity position is satisfactory as it meets the industry norm, andits quick ratio is also above the industry average. The firm appears to haveinvested about the right amount in liquid assetsneither too much, nortoo little.




14/56


15/56

E2-35 (30 minutes)

Use the accounting equation to determine Retained Earnings balances.

LYNCH SERVICESa. BALANCE SHEETS

December 31,2011 2010

AssetsCash $ 23,000 $ 20,000Accounts receivable 42,000 33,000Supplies 20,000 18,000Land 40,000 40,000Building 250,000 260,000Equipment 43,000 45,000Total assets $418,000 $416,000

LiabilitiesAccounts payable $ 6,000 $ 9,000Mortgage payable 90,000 100,000


Stockholders' equityCommon stock 220,000 220,000Retained earnings 102,000 87,000

Total stockholders' equity 322,000 307,000Total liabilities and stockholders' equity $418,000 $416,000

b.Retained Earnings, December 31, 2011 $102,000Retained Earnings, December 31, 2010 87,000

Increase during 2011 15,000Add: Dividend for 2011 10,000Net Income for 2011 $ 25,000




16/56

E2-36 (30 minutes)

Use the accounting equation to determine Retained Earnings as of September 30,2011. The two transactions have the following effects:

Equipment purchase increases the equipment asset by $11,000, decreases

the cash asset by $3,000, and increases the notes payable liability by$8,000.

Dividend payment decreases the cash asset by $3,000 and decreases theretained earnings equity by $3,000.

a. & b. BROWNLEE CATERING SERVICEBALANCE SHEETS

September 30, 2011 October 1, 2011Assets

Cash $ 10,000 $ 4,000Accounts receivable 17,000 17,000Supplies Inventory 9,000 9,000Equipment 34,000 45,000

Total assets $ 70,000 $ 75,000

LiabilitiesAccounts payable $ 24,000 $ 24,000Notes payable 12,000 20,000


Stockholders EquityCommon stock 27,500 27,500Retained earnings 6,500 3,500

Total stockholders equity 34,000 31,000Total liabilities andstockholders equity $ 70,000 $ 75,000

c.Current ratio (10,000 + 17,000 + 9,000)

24,000 = 1.50(4,000 + 17,000 + 9,000)

24,000 = 1.25

Quick ratio (10,000 + 17,000) 24,000 = 1.13

(4,000 + 17,000) 24,000 = 0.88

d. Quite a few possibilities exist, from increasing long-term borrowing toissuing new stock to selling unneeded equipment.




17/56

E2-37 (15 minutes)

Income statement Balance sheet

Sales.............................. $30,000 Cash............................................... $ 8,000

Wages expense............ 12,000 Accounts receivable..................... 30,000

Net income (loss)......... $18,000 Total assets................................... $38,000

Wages payable.............................. $12,000

Common stock ............................. 8,000

Retained earnings......................... 18,000

Total liabilities and equity............ $38,000

E2-38 (15 minutes)a.

Procter & Gamble ($ millions) Amount Classification

Net sales............................................................. $ 79,029 I

Depreciation expense....................................... 1,358 I

Retained earnings............................................. 57,309 B

Net earnings...................................................... 13,436 I

Property, plant and equipment (net)......... 19,462 B

Selling, general and admin expense............... 24,008 I

Accounts receivable......................................... 5,836 B

Total liabilities................................................... 71,734 B

Stockholders' equity......................................... 63,099 B

b. Total assets = Total liabilities + stockholders equity

Total assets = $71,734 + $63,099 = $134,833

Total Revenue Total Expenses = Net Income$79,029 Total Expenses = $13,436; Thus, Total Expenses = $65,593




18/56

c. Return on equity = Net income/Stockholders equity= $13,436/$63,099 = 21.3%

ROE is an estimate because we have only this years equity for thedenominator.

Debt-to-equity ratio = Total liabilities/Stockholders equity= $71,734/$63,099 = 1.14

E2-39 (15 minutes)a.

Target Corp ($ millions) Amount Classification

Sales.................................................................... $ 62,884 I

Depreciation and amortization expense.......... 1,826 I

Retained earnings.............................................. 11,443 B

Net earnings....................................................... 2,214 I

Property, plant & equipment, net..................... 25,756 B

Selling, general & admin. expense.................. 12,954 I

Accounts payable.............................................. 6,337 B

Total liabilities and shareholdersinvestment.......................................................... 44,106 B

Total shareholders investment........................ 13,712 B

b. Total assets = Total liabilities and shareholders investmentTotal assets = $44,106

Total revenue Total expenses = Net income$62,884 Total expenses = $2,214

Thus, Total expenses = $60,670

c. Return on equity = Net income/Stockholders equity= $2,214 / $13,712 = 16.1%

ROE is an estimate because we have only this years equity for thedenominator.




19/56

E2-40 (15 minutes)

a.

Briggs & Stratton ($ millions) Amount Classification

Net sales............................................................. $ 2,092 I

Interest expense................................................ 31 I


Net income......................................................... 32 I

Property, plant & equipment, net.................... 364 B

Eng. selling, general & admin. expense......... 265 I

Accounts receivable, net.................................. 263 B

Total liabilities................................................... 924 B

Shareholders investment................................ 695 B

b. Total assets = Total liabilities + Shareholders investmentTotal assets = $924 + $695 = $1,619

Total revenue Total expenses = Net income

$2,092 Total expenses = $32


c. Return on equity = Net income/Stockholders equity= $32 / $695 = 4.6%

ROE is an estimate because we have only this years equity for thedenomintator.

Debt-to-equity ratio = Total liabilities / Stockholders equity

= $924 / $695 = 1.33




20/56

E2-41 (15 minutes)

a.

Kimberly-Clark ($ millions) Amount Classification

Net sales............................................................. 19,415 I

Cost of goods sold............................................ 13,557 I


Net income......................................................... 1,690 I

Property, plant & equipment, net.................... 7,667 B

Mktg. res., selling, general expense............... 3,291 I

Accounts receivable, net.................................. 2,492 B

Total liabilities................................................... 14,211 B

Total stockholders' equity................................ 3,878 B

b. Total assets = Total liabilities + Stockholders equityTotal assets = $14,211 + $3,878 = $18,089

Total revenue Total expenses = Net income

$19,415 Total expenses = $1,690


c. Debt-to-equity ratio = Total liabilities / Stockholders equity= $14,211 / $3,878 = 3.66




21/56


22/56

E2-43 (20 minutes)

a.1. Cash (+A)........................................................................... 50,000

Common stock (+SE)................................................... 50,000Receive 50,000 in exchange for common stock.

2. Cash (+A)........................................................................... 10,000Notes payable (+L)....................................................... 10,000

Borrow 10,000 from bank.

3. Inventory (+A)................................................................... 2,000Accounts payable (+L)................................................ 2,000

Purchase 2,000 supplies inventory on account.

4. Cash (+A)........................................................................... 15,000Revenue (+R, +SE)....................................................... 15,000

Recognize 15,000 revenue for services provided.

5. Accounts payable (-L)...................................................... 2,000Cash (-A)....................................................................... 2,000

Pay supplier 2,000 cash.

6. Cash (+A)........................................................................... 3,500Unearned revenue (+L)................................................ 3,500

Receive 3,500 advance from customer.

7. Retained earnings (-SE)................................................... 5,000Cash (-A)....................................................................... 5,000Pay 5,000 cash dividend to shareholders.

8. Wages expense (+E, -SE)................................................ 6,000Cash (-A)....................................................................... 6,000

Pay employees 6,000

9. Interest expense (+E, -SE)............................................... 500Cash (-A)....................................................................... 500

Pay 500 interest on note.




23/56

b.

+ Cash (A) - - Accounts Payable (L) +

(1) 50,000 2,000 (5) (5) 2,000 2,000 (3)

(2) 10,000 5,000 (7) 0 Bal.

(4) 15,000 6,000 (8)(6) 3,500 500 (9) - Unearned Revenue (L) +

Bal. 65,000 3,500 (6)

3,500 Bal.

+ Supplies Inventory (A) - - Notes Payable (L) +

(3) 2,000 10,000 (2)

Bal. 2,000 10,000 Bal.

- Common Stock (SE) +

50,000 (1)

50,000 Bal.- Retained Earnings (SE) +

(7) 5,000

Bal. 5,000

- Revenue (R) +

15,000 (4)

15,000 Bal.

+ Wages Expense (E) -

(8) 6,000

Bal. 6,000

+ Interest Expense (E) -(9) 500

Bal. 500




24/56


25/56

Exercise 2-45 (15 minutes)



Liabil-ities +

Contrib.Capital +


NetIncome

1. Receive $20,000

cash inexchange forcommon stock.

+20,000Cash

=+20,000

CommonStock

- =

2. Purchase $2,000of inventory oncredit.

+2,000Inventory

=+2,000

AccountsPayable

- =

3. Sell inventory for$3,000 on credit.

+3,000Accounts

Receivable =

+3,000RetainedEarnings

+3,000Sales -

=

+3,000

4. Record cost of

goods sold in 3.

-2,000

Inventory

=

-2,000Retained

Earnings

-+ 2,000COGS

Expense

=- 2,000

5. Collect $3,000cash fromtransaction 3.

+3,000Cash

-3,000Accounts

Receivable= - =

6. Acquire $5,000of equipment bysigning a note.

+5,000Equipment

=+5,000Notes

Payable- =

7. Pay wages of$1,000 in cash.

-1,000Cash

=

-1,000RetainedEarnings

-+ 1,000Wages

Expense=

- 1,000

8. Pay $5,000 cash

on a notepayable.

-5,000

Cash=

-5,000Notes

Payable- =

9. Pay $2,000 cashdividend. -2,000

Cash=


- =

TOTALS 15,000 + 5,000 = 2,000 + 20,000 + -2,000 3,000 - 3,000 = 0




26/56

E2-46 (20 minutes)

a.1. Cash (+A)........................................................................... 20,000

Common stock (+SE)................................................... 20,000

2. Inventory (+A)................................................................... 2,000Accounts payable (+L)................................................ 2,000

3. Accounts receivable (+A)................................................ 3,000Sales (+R, +SE)............................................................. 3,000

4. Cost of goods sold (+E, -SE)........................................... 2,000Inventory (-A)................................................................ 2,000

5. Cash (+A)........................................................................... 3,000Accounts receivable (-A)............................................. 3,000

6. Equipment (+A)................................................................. 5,000Notes payable (+L)....................................................... 5,000


8. Notes payable (-L)............................................................ 5,000Cash (-A)....................................................................... 5,000

9. Retained earnings (-SE)................................................... 2,000

Cash (-A)....................................................................... 2,000




27/56

b.

+ Cash (A) - - Common Stock (SE) +

(1) 20,000 1,000 (7) 20,000 (1)

(5) 3,000 5,000 (8)2,000 (9)

- Sales Revenue (R) +

3,000 (3)

+ Inventory (A) - + Cost of Goods Sold (E) -

(2) 2,000 2,000 (4) (4) 2,000


(7) 1,000

+ Accounts Receivable (A) - - Accounts Payable (L) +

(3) 3,000 3,000 (5) 2,000 (2)

- Retained Earnings (SE) +

(9) 2,000

+ Equipment (A) -

(6) 5,000

- Notes Payable (L) +

(8) 5,000 5,000 (6)




28/56

PROBLEMS

P2-47 (30 minutes)

a. Comcast, Target and Harley-Davidson are financed primarily by debt

(between 65% and 75% of total assets). Apple is about equally financed bydebt and equity, while Nike is 2/3 financed by equity and only 1/3 by debt.

b. Apple and Nike both earned over 10% on assets. Possible reasonsinclude the firms ability to command a premium price for their brands andthe ability to outsource a significant amount of their production (and avoidinvestments in productive capacity).

c. Harley-Davidson has the highest estimated ROE at 31%. (The ROE isestimated because we have only this years equity.) Harley-DavidsonsROE is higher than those of Apple and Nike due to the difference in their

debt-equity relationship. We explore this topic more in Chapter 5.

P2-48 (30 minutes)

a. Dell is over 80% debt financed while Apple is just over 50% equity financed.We describe Dell as the more heavily leveraged firm.

b. Dell's net income to asset ratio is 9.4% while Apples is 10.6%. The ratiosare quite close, which might be expected given the similarities of theiractivities. On the other hand, more heavily leveraged firms are open togreater risk and for this reason, we might expect a greater return to beearned on Dells assets to compensate for the higher risk. Dells returndoes not exceed Apples suggesting that Apple has superior product or ismore efficient in its operations.

c. Dells gross profit as a percent of sales is 18% while Apples is 36%. Theimplication is that Apple does have the more efficient production operationand/or product designs that allow it to command a premium price fromconsumers.




29/56

P2-49 (30 minutes)

a. Verizon is 79% financed by debt while Comcast is 64% financed withdebt. Such similar financing is not unusual for companies in the sameindustry.

b. Verizon has the slightly higher net income to total asses ratio at 3%, butneither company is doing very well. The cost of raising operating funds isprobably larger than either firms current return. Certainly one reason isthe highly competitive market in which these two firms operate.

c. Verizon has a slightly higher return on total assets but also more leverage(debt), so it is hard to conclude which firm would have more difficultyraising additional capital. The decision would likely turn on other factorsincluding trends in these numbers and others like cash flows. Based onthe limited data supplied, it appears that Comcast might find it easier toborrow additional capital. If lenders are willing to fund 79% of Verizons

assets, they might be willing to increase Comcasts debt funding from 64%.

P2-50 (30 minutes)

a. 3M at 61% is the more heavily debt-financed firm. Apple is about equallyfinanced with owner (stockholder) funds and debt (nonowner) funds.Abercrombie and Fitch is 35% financed by debt.

b. Apple has more working capital, but it is also the larger firm. A bettermeasure of the comparative differences in working capital is the ratio of the

firms current assets to its current liabilities. This ratio is greatest forAbercrombie & Fitch at 2.4




30/56


31/56

P2-53 (30 minutes)

a.

3MCurrentAssets

Long-termAssets

TotalAssets

CurrentLiabilities

Long-termLiabilities

TotalLiabilities

Stockholders'Equity

2003 7,720 9,880 17,600 5,082 4,633 9,715 7,885

2004 8,720 11,988 20,708 6,071 4,259 10,330 10,378

2005 7,115 13,398 20,513 5,238 5,175 10,413 10,100

2006 8,946 12,348 21,294 7,323 4,012 11,335 9,959

2007 9,838 14,856 24,694 5,362 7,585 12,947 11,747

2008 9,598 15,949 25,547 5,839 9,829 15,668 9,879

b. 3Ms current assets most likely include cash, accounts receivable,inventories, and prepaid assets.

Its long-term assets most likely include property, plant and equipment

(PPE), goodwill, and other intangible assets that have arisen fromacquisitions.

c. 2003: $7,720/$5,082 = 1.52. 2008: $9,598/$5,839 = 1.64.

d. 3Ms current ratio is reasonable and has not changed appreciably in the sixyears covered by the data. Apparently the company is comfortable with itscurrent liquidity position even though it is below the industry average.




32/56

P2-54 (30 minutes)

a.

Abercrombie& Fitch

CurrentAssets

Long-termAssets

TotalAssets

CurrentLiabilities


TotalLiabilities

Stockholders'Equity

2002 405 366 771 164 12 176 595

2003 601 394 995 211 34 245 750

2004 753 446 1,199 280 48 328 871

2005 671 718 1,389 429 71 500 889

2006 947 843 1,790 492 303 795 995

2007 1,092 1,156 2,248 511 332 843 1,405

2008 1,140 1,428 2,568 543 406 949 1,619

b. We might reasonably predict inventories to comprise the bulk of its currentassets. In reality, ANFs largest current asset is cash and short-terminvestmentssuggesting that the company is very liquid.

c. In fiscal year 2002, current assets comprised 53% ($405/$771) of totalassets. In fiscal year 2008, current assets comprised 44% ($1,140/$2,568).Thus, the company has fewer current assets as a percentage of total assets

in 2008 than it did 7 years ago.

d. Yes, but the company is less conservatively financed in 2008 [63%:$1,619/$2,568]. In 2002, stockholders equity comprises 77% ($595/$771) ofits total capitalization. The average publicly traded firm is about 50%equity financed.

e. In fiscal 2002, ANFs current ratio is 2.47 ($405/$164). In fiscal 2008 theratio is 2.10 ($1,140/$543).

f. While less than 2.25, the ratio is reasonable for ANF. The firms current

ratio has decreased relative to what it was in 2002. Despite the less liquidposition of the firm, this change is likely to be to the firms advantage asmore of its assets are deployed in productive activities. The change alsosuggests a less conservative financing of the company.




33/56

P2-55 (30 minutes)

a.



Liabil-ities +

Contrib.Capital +


NetIncome

1. Issued commonstock $7,000. +7,000Cash = +7,000CommonStock

- =

2. Paid rent $750. -750Cash =


-+750Rent

Expense=

-750

3. Received $500invoice foradvertisingexpense.

=

+500AccountsPayable

-500RetainedEarnings -

+500Advertising

Expense =

-500

4. Borrowed $15,000cash from bank.

+15,000Cash =

+15,000Notes

Payable- =

5. $1,200 Cashreceived forservices.

+1,200Cash

=

+1,200Retained

Earnings

+1,200Counseling

ServicesRevenue

- =

+1,200

6. Billed clients$6,800 forservices.

+6,800Accounts

Receivable=


+6,800ServicesRevenue

- =+6,800

7. Paid $2,200 cashfor salary.

-2,200Cash =


-+2,200Salary

Expense=

-2,200

8. Paid $370 cash forutilities.

-370Cash =


-+370UtilitiesExpense

=-370

9. Paid $900 cashdividend.

-900Cash =


- =

10. Acquired land for$13,000. -13,000Cash +13,000Land = - =

11. Paid $100 interestin cash.

-100Cash =


-+100

InterestExpense

=-100

Totals $5,880 + $19,800 = $15,500 + $7,000 + $3,180 $8,000 - $3,920 = $4,080

b. Lambert ServicesIncome Statement

For the Month of December 2010

Counseling services revenue $8,000

ExpensesRent expense $ 750Advertising expense 500Salary expense 2,200Utilities expense 370Interest expense 100Total expenses 3,920

Net income $4,080




34/56

P2-56 (30 minutes)a.

1. Cash (+A)........................................................................... 7,000Common stock (+SE)................................................... 7,000

2. Rent expense (+E,-SE)..................................................... 750Cash (-A)....................................................................... 750

3. Advertising expense (+E, -SE)........................................ 500Accounts payable (+L)................................................ 500


5. Cash (+A)........................................................................... 1,200

Counseling services revenue (+R,+SE)..................... 1,200

6. Accounts receivable (+A)................................................ 6,800Counseling services revenue (+R,+SE)..................... 6,800

7. Salary expense (+E,-SE).................................................. 2,200Cash (-A)....................................................................... 2,200

8. Utilities expense (+E,-SE)................................................ 370Cash (-A)....................................................................... 370

9. Retained earnings (dividend paid) (-SE)........................ 900Cash (-A)....................................................................... 900

10. Land (+A)........................................................................... 13,000Cash (-A)....................................................................... 13,000

11. Interest expense (+E,-SE) 100Cash (-A)....................................................................... 100




35/56

b.


(1) 7,000 750 (2) 500 (3)

(4) 15,000 2,200 (7)(5) 1,200 370 (8)

900 (9)13,000 (10)

100 (11)

- Notes Payable (L) +

15,000 (4)

+ Accounts Receivable (A) - - Common Stock(SE) +

(6) 6,800 7,000 (1)

+ Land (A) - - Retained Earnings (SE) +

(10) 13,000 (9) 900

- Counseling Services Rev. (R) +

1,200 (5)6,800 (6)

+ Rent Expense (E) - + Advertising Expense (E) -

(2) 750 (3) 500

+ Salary Expense (E) - + Utilities Expense (E) -

(7) 2,200 (8) 370

+ Interest Expense (E) -

(11) 100




36/56

P2-57 (30 minutes)

a.

CA NCA TA CL NCL TL SE

2004 $ 7,055 $ 995 $ 8,050 $ 2,651 $ 323 $ 2,974 $5,076

2005 10,300 1,251 11,551 3,484 601 4,085 7,466

2006 14,509 2,696 17,205 6,471 750 7,221 9,984

2007 21,956 3,391 25,347 9,280 1,535 10,815 14,532

2008 32,311 7,261 39,572 14,092 4,450 18,542 21,030

2009 36,265 17,586 53,851 19,282 6,737 26,019 27,832

b. For a computer company we might reasonably expect inventories and cashto be the predominant items in current assets. The reality is that inventoryis not a large dollar amount because the companys business modeldepends on high inventory turnoverthat is, it works diligently to minimizethe quantity of inventory to avoid product obsolescence. The surprise isthat two-thirds of Apples current assets are about equally divided betweencash and short-term marketable securities. Long-term assets are primarilyconcentrated in property, plant and equipment (PPE) and financialsecurities. The latter grew to over 50% in 2009.

c. The percentage of Apples assets that is financed with liabilities hasincreased steadily over this period (from 37% in 2004 to 48% in 2009). Thisincrease in the proportion of debt financing coincides with an increase inthe proportion of noncurrent assets to total assets (from 12% in 2004 to33% in 2009).

d. 2004: $7,055/$2,651 = 2.66; 2009: $36,265/$19,282 = 1.88

e. Apples current ratio has fallen from above the industry average to belowthe industry average. A probable cause of this decrease is the increasing

size of the company. Net working capital increased from $4,404 in 2004 to$16,983 in 2009. So, even though the ratio has declined, the monetarycushion of current assets over current liabilities has increasedsubstantially.




37/56


Harley-Davidson

CurrentAssets

Long-termAssets

TotalAssets

CurrentLiabilities


TotalLiabilities

Stockholders'Equity

2003 2,729 2,194 4,923* 956 1,010 1,966 2,958*

2004 3,683 1,800 5,483 1,173 1,092 2,265 3,218

2005 3,145 3,022 6,167 873 2,211 3,084 3,083

2006 3,551 1,981 5,532 1,596 1,179 2,775 2,757

2007 3,467 2,190 5,657 1,905 1,377 3,282 2,375

2008 5,378 2,451 7,829 2,603 3,110 5,713 2,116

* Due to rounding, total assets of $4,923 has a $1 difference from total liabilities and equity of $4,924.

b. Harleys current assets are likely to be comprised of cash, accountsreceivable, inventories and prepaid expenses.

Its long-term assets will likely be comprised of property, plant andequipment (PPE) for its manufacturing operations and goodwill andother intangible assets arising from acquisitions.

c. No, stockholders equity represents only 27% ($2,116/$7,829) of total

capitalization. However, this ratio was 60% in 2003. Harley Davidsonbecame significantly more leveraged in 2008. The capitalization ofthe average publicly traded company is financed through about 50%of equity and about 50% nonowner financing.

d. 2003: $2,729 - $956 = $1,773. 2008: $5,378 - $2,603 = $2,775.




38/56


($ millions) RevenuesCost of

Goods SoldGrossProfit

OperatingExpenses

OperatingIncome

OtherExpenses

NetIncome

2002 9,893 6,005 3,888 2,820 1,068 405 663

2003 10,697 6,313 4,384 3,138 1,246 772 474

2004 12,253 7,001 5,252 3,702 1,550 604 946

2005 13,740 7,625 6,115 4,222 1,893 682 1,211

2006 14,955 8,368 6,587 4,478 2,109 717 1,392

2007 16,326 9,165 7,161 5,029 2,132 640 1,492

2008 18,627 10,240 8,387 5,954 2,433 550 1,883

b. The gross profit percentage (also called gross profit margin) for each yearfollows:

Nike, Inc. Gross Profit Percentage

2002................ 39.3%

2003................ 41.0%

2004................42.9%

2005................ 44.5%

2006................ 44.0%

2007................ 43.9%

2008................ 45.0%

Nikes gross profit has fluctuated over this period, and it is somewhathigher recently than it has been in earlier years reflecting continuedstrength and a possible upward trend. The company's operating expenses

have grown substantially over this period, from 28.5% of revenue to 32.0%of revenue, but net income has increased steadily from 2002 to 2008 bothin absolute terms and as a percentage of revenue.

c. Cost of goods sold, wages, and selling and administration expenses arelikely to be the major cost categories for Nike.




39/56




Liabil-ities +

Contrib.Capital +


NeInco

1. Issued common

stock for cash.

+$50,000Cash =

+$50,000Common

Stock- =

2. Rent paid in cash$4,800.

-4,800Cash =


-+4,800

Rent Expense =-4,80

3. Invoice forentertainmentexpense: $1,600.

=+1,600

AccountsPayable


-+1,600

EntertainmentExpense

=-1,60

4. Cash paid foradvertising: $900.

-900Cash =


-+900

AdvertisingExpense

=-90

5. July insurancepremium prepaidin cash: $1,800.

-1,800Cash

+1,800Prepaid

Insurance= - =

6. Flight servicescollected in cash$22,700.

+22,700Cash =+22,700RetainedEarnings

+22,700FlightServicesRevenue

- =+22,7

7. Billed for flightservices $15,900.

+15,900Accounts

Receivable=


+15,900Flight

ServicesRevenue

- =

+15,9

8. Paid $1,500 onaccounts.

-1,500Cash =

-1,500AccountsPayable

- =

9. Received $13,200on account.

+13,200Cash

-13,200Accounts

Receivable= - =

10. Paid wages in

cash: $16,000.

-16,000Cash

=

-16,000RetainedEarnings -

+16,000Wages

expense =

-16,0

11. Invoice receivedfor fuel; $3,500. =

+3,500AccountsPayable


-+3,500

Fuel Expense =-3,50

12. Cash dividendpaid: $3,000.

-3,000Cash =


- =

TOTALS $57,900 + $4,500 = $3,600 + $50,000 + $8,800 $38,600 - $26,800 = $11,8




40/56

b.Outback Flights

INCOME STATEMENTFORTHE MONTHOF JUNE 2010

Revenue

Services fees earned $38,600Expenses

Rent expense $4,800Entertainment expense 1,600Advertising expense 900Wages expense 16,000Fuel expense 3,500Total expenses 26,800

Net income $11,800

Note that the insurance premium paid is for the next month (July) and is not an

expense at the end of June.


1. Cash (+A)........................................................................... 50,000Common stock (+SE)................................................... 50,000

2. Rent expense (+E,-SE)..................................................... 4,800

Cash (-A)....................................................................... 4,800

3. Entertainment expense (+E,-SE)..................................... 1,600Accounts payable (+L)................................................ 1,600

4. Advertising expense (+E,-SE)......................................... 900Cash (-A)....................................................................... 900

5. Prepaid insurance (+A).................................................... 1,800Cash (-A)....................................................................... 1,800

6. Cash (+A) .......................................................................... 22,700Flight services revenue (+R,+SE)............................... 22,700

7. Accounts receivable (+A)................................................ 15,900Flight services revenue (+R,+SE)............................... 15,900

8. Accounts payable (-L)...................................................... 1,500Cash (-A)....................................................................... 1,500




41/56


42/56


Starbucks SalesCost of


OperatingExpenses

OperatingIncome

OtherExpenses

NetIncome

2003 4,076 1,686 2,390 1,965 425 157 2682004 5,294 2,191 3,103 2,497 606 217 389

2005 6,369 2,605 3,764 2,983 781 287 494

2006 7,787 3,179 4,608 3,715 893 329 564

2007 9,412 3,999 5,413 4,359 1,054 381 673

2008 10,383 4,645 5,738 5,234 504 188 316

2009 9,775 4,325 5,450 4,888 562 171 391


Starbucks, Inc. Gross Profit Percentage

2003 58.6%

2004 58.6%

2005 59.1%

2006 59.2%2007 57.5%

2008 55.3%

2009 55.8%

SBUX gross profit percentage has declined since 2007 reflecting thedecline of in-store sales over the last several years.

c. Cost of goods sold, wages, and advertising expenses are likely to be major

cost categories for Starbucks.




43/56


($ millions) RevenuesCost of


OperatingExpenses

OperatingIncome

OtherExpenses

NetIncome

2002 42,722 29,260 13,462 10,198 3,264 1,610 1,654

2003 46,781 31,790 14,991 11,472 3,519 1,678 1,841

2004 45,682 31,445 14,237 10,636 3,601 403 3,198

2005 51,271 34,927 16,344 12,021 4,323 1,915 2,408

2006 57,878 39,399 18,479 13,410 5,069 2,282 2,787

2007 61,471 41,895 19,576 14,304 5,272 2,423 2,849

2008 62,884 44,157 18,727 14,325 4,402 2,188 2,214

Table notes:

1. Sales and Cost of Goods Sold relate only to product sales. Targetscredit card revenue and costs are netted and included in operatingexpenses.

2. Targets Other Expenses is small in 2004 because it includes a largegain on discontinued operations (the sale of Marshall Fields andMervyns stores). Those transactions also account for the drop inrevenues from 2003 to 2004. All numbers are as reported in thatfiscal year not as subsequently restated for discontinuedoperations.




44/56


Target Corporation Gross Profit Percentage

2002 31.5%

2003 32.0%

2004 31.2%

2005 31.9%

2006 31.9%

2007 31.8%

2008 29.8%

Targets gross profit percentage has decreased over the past two years.The decline reflects the difficult economic conditions and declining

consumer spending that occurred during that period.

c. Cost of goods sold, wages, and advertising expenses are likely to be themajor cost categories for Target Corporation.


Geyer, Inc.Income Statement

For Year Ended December 31, 2011

Service fees........................................................................... $67,600

Supplies expense................................................................. $ 9,700

Insurance expense............................................................... 1,500

Salaries expense.................................................................. 30,000

Advertising expense............................................................ 1,700

Rent expense........................................................................ 7,500

Miscellaneous expense....................................................... 200Total expenses................................................................ 50,600

Net income............................................................................ $17,000




45/56

b.

Geyer, Inc.Statement of Stockholders EquityFor Year Ended December 31, 2011

CommonStock

RetainedEarnings

Total StockholdersEquity

Balance at December 31, 2010 $4,000 $6,200 $10,200

Stock issuance.......................... 1,400 1,400

Dividends.................................. (13,500) (13,500)

Net income................................ _____ 17,000 17,000

Balance at December 31, 2011 $5,400 $9,700 $15,100

c.

Geyer, Inc.

Balance SheetDecember 31, 2011

Cash.................................... $14,800 Accounts payable................... $ 1,800

Supplies.............................. 6,100 Notes payable ......................... 4,000

Total assets........................ $20,900 Total liabilities 5,800

Common stock . 5,400

Retained earnings* . 9,700

Total liabilities and equities .. $20,900

* $6,200 beginning balance + $17,000 net income - $13,500 dividend




46/56


47/56


48/56


1. Accounts payable (-L)...................................................... 600Cash (+A)...................................................................... 600

2. Rent expense (+E,-SE)..................................................... 3,600Cash (-A)....................................................................... 3,600

3. Accounts receivable (+A)................................................ 11,500Services revenue (+R,+SE)......................................... 11,500

4. Advertising expense (+E, -SE)........................................ 500Accounts payable (+L)................................................ 500



7. Utilities expense (+E, -SE)............................................... 680Accounts payable (+L)................................................ 680

8. Interest expense (+E, -SE)............................................... 20Cash (-A)....................................................................... 20

9. Retained earnings (-SE)................................................... 900Cash (-A)....................................................................... 900

10. Equipment (+A)................................................................. 4,000Cash (-A)....................................................................... 4,000




49/56

b.


Beg. Bal. 5,000 600 (1) (1) 600 1,000 Beg. Bal.(5) 10,000 3,600 (2) 500 (4)

2,400 (6) 680 (7)

20 (8) 1,580 End Bal.

900 (9) - Notes Payable (L) +

4,000 (10) 2,500 Beg. Bal.

End Bal. 3,480

2,500 End Bal.

+ Accounts Receivable (A) - - Common Stock (SE) +

Beg. Bal. 5,200 10,000 (5) 5,500 Beg. Bal.(3) 11,500

End Bal. 6,700 5,500 End Bal.

+ Equipment (A) - - Retained Earnings (SE) +(10) 4,000 (9) 900 1,200 Beg. Bal.

End Bal. 4,000 300 End Bal.

- Services Revenue (R) +

11,500 (3)

11,500 End Bal.

+ Rent Expense (E) - + Utilities Expense (E) -

(2) 3,600 (7) 680

End Bal. 3,600 End Bal. 680

+ Advertising Expense (E) - + Interest Expense (E) -

(4) 500 (8) 20

End Bal. 20

End Bal. 500


(6) 2,400

End Bal. 2,400




50/56

P2-67 (45 minutes)a & b.



Liabil-ities +

Contrib.Capital +


NetIncome

Beginning Balances +6,700 +14,800 +3,100 +6,000 +12,400

1. Paid $950 cash forrent. -950Cash = -950RetainedEarnings

- +950RentExpense

= -$950

2. Received $8,800cash on account.

+8,800Cash

-8,800Accounts

Receivable= - =

3. $500 paid onaccts. payable.

-500Cash =

-500AccountsPayable

- =

4. Received $1,600cash for services.

+1,600Cash =



- =+1,600

5. Borrowed $5,000signed note.

+5,000Cash =

+5,000Notes

Payable- =

6. Billed $8,100 forservices. +8,100AccountsReceivable

= +8,100RetainedEarnings


- = +8,100

7. Paid $4,000 forcash salary.

-4,000Cash =


-+4,000Salary

Expense=

-4,000

8. Received invoicefor utilities: $410. =

+410AccountsPayable


-+410

UtilitiesExpense

=-410

9. Paid $6,000dividend.

-6,000Cash =


- =

10. Paid $9,800 cashfor vehicle.

-9,800Cash

+9,800Vehicles = - =

11. Paid $50 cash

interest on note.

-50

Cash =

-50

RetainedEarnings -

+50

InterestExpense =

-50

TOTALS $800 + $23,900 = $8,010 + $6,000 + $10,690 $9,700 - $5,410 = $4,290

c.

Kross, Inc.Income Statement

For Month Ended January 31, 2011

Services revenue.......................................................................... $9,700

Rent expense... $ 950

Utilities expense. 410Salary expense... 4,000

Interest expense.... 50

Total expenses.............................................................................. 5,410

Net income................................................................................ $4,290




51/56


52/56

P2-68 (30 minutes)

a.1. Rent expense (+E,-SE)..................................................... 950

Cash (-A)....................................................................... 950


3. Accounts payable (-L)...................................................... 500Cash (-A)....................................................................... 500

4. Cash (+A)........................................................................... 1,600Services revenue (+R,+SE)......................................... 1,600


6. Accounts receivable (+A)................................................ 8,100Services revenue (+R, +SE)........................................ 8,100

7. Salary expense (+E,-SE).................................................. 4,000Cash (-A)....................................................................... 4,000

8. Utilities expense (+E,-SE)................................................ 410Accounts payable (+L)................................................ 410

9. Retained earnings (-SE)................................................... 6,000Cash (-A)....................................................................... 6,000

10. Vehicles (+A)..................................................................... 9,800Cash (-A)....................................................................... 9,800

11. Interest expense (+E,-SE)................................................ 50Cash (-A)....................................................................... 50




53/56


54/56


55/56

c. WILDLIFE PICTURE GALLERYBALANCE SHEETMARCH 31, 2011

Assets LiabilitiesCash $51,200 Payable to artists** $12,500

Advance recvbl.* 500 Notes payable 10,000Accounts payable 2,050

Total liabilities 24,550Stockholders equity 27,150Total liabilities and

Total assets $51,700 stockholders equity $51,700

* It is important to recognize that the Wildlife Picture Gallery is a separate entityfrom its shareholder/operator, Sarah Penney. The $500 payment for airfare is notan expense of the business, but rather a payment on behalf of an employee.Sarah will have to reimburse the company or have the amount deducted in future

compensation, as recognized in the advance receivable asset for Wildlife PictureGallery.

**70%($95,000) $54,000 is owed to artists.




56/56

C2-70 (30 minutes)

Andrea faces a dilemma when she prepares her expense reimbursement request.She has, in essence, been asked by her supervisor to join him in overchargingexpenses to the company. Should Andrea not file a reimbursement request for theLuxury Inn lodging costs, the company may question why she and her supervisor

stayed at different locations.

Discussion of this case should focus on the options available to Andrea. Theoptions include the following:

1. File an expense reimbursement request for the Luxury Inn and, therefore,minimize the likelihood of jeopardizing her relationship with her supervisor.

2. File an expense reimbursement request for the Spartan Inn and let future eventstake whatever course they follow.

3. Report the situation to her supervisor's boss.4. Discuss the situation with her supervisor and indicate that she (Andrea) is not

comfortable with filing the Luxury Inn receipt. Perhaps encourage thesupervisor to seek a change in company policy to provide daily allowances forlodging and meal costs rather than reimbursing actual costs.

5. Leave the employ of the company.

There is no single correct answer to the problem. The first choice is not a goodsolution for the long run as it starts a slippery slope for Andrea, which is likely tolead to further concessions to proper behavior and more serious problems.Additional and more serious situations increase the chances her behavior islikely to be discovered and she could be fired or even sent to jail. One wouldhope that sleepless nights would intervene long before this time. It is better to

draw the line here. Talking to her supervisor is a good idea and perhapsinstituting a policy that avoids any temptation. Leaving the company would be afallback choice if discussion of the situation does not lead to a resolution of thesituation that preserves Andreas ethical requirements.

Dmp3e Ch02 Solutions 04.13.10 Final

Documents

Transcript of Dmp3e Ch02 Solutions 04.13.10 Final