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Solutions Manual and Test Bank Financial Accounting Tools for Business Decision Making 6th Edition

Financial Accounting Tools for Business Decision Making 6th Edition Solutions Manual and Test Bank

Solutions Manual and Test Bank Financial Accounting Tools for Business Decision Making 6th Edition   -- $35

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1. What are the three basic forms of business organizations?
2. What are the advantages to a business of being formed as a corporation? What are the disadvantages?
3. What are the advantages to a business of being formed as a partnership  
4. “Accounting is ingrained in our society and is vital to our economic system.” Do you agree? Explain.
5. Who are the internal users of accounting data? How does accounting provide relevant data to the internal users?
6. Who are the external users of accounting data? Give examples.
7. What are the three main types of business activity? Give examples of each activity.
8. Listed here are some items found in the financial statements of Ellyn Toth, Inc. Indicate in which financial statement(s) each item would appear. (a) Service revenue. (d) Accounts receivable. (b) Equipment. (e) Common stock. (c) Advertising expense. (f ) Interest payable.
9. Why would a bank want to monitor the dividend payment practices of the corporations it lends money to?
10. “A company’s net income appears directly on the income statement and the retained earnings statement, and it is included indirectly in the company’s balance sheet.” Do you agree? Explain.
11. What is the primary purpose of the statement of cash flows?
12. What are the three main categories of the statement of cash flows? Why do you think these categories were chosen?
13. What is retained earnings? What items increase the balance in retained earnings? What items decrease the balance in retained earnings?
14. What is the basic accounting equation?
15. (a) Define the terms assets, liabilities, and stockholders’ equity. (b) What items affect stockholders’ equity?
16. Which of these items are liabilities of White Glove Cleaning Service? (a) Cash. (c) Dividends. (b) Accounts payable. (d) Accounts receivable. (e) Supplies. (h) Service revenue. (f ) Equipment. (i) Rent expense. (g) Salaries and wages payable.
17. How are each of the following financial statements interrelated? (a) Retained earnings statement and income statement. (b) Retained earnings statement and balance sheet. (c) Balance sheet and statement of cash flows.
18. What is the purpose of the management discussion and analysis section (MD&A)?
19. Why is it important for financial statements to receive an unqualified auditor’s opinion? 20. What types of information are presented in the notes to the financial statements?
21. The accounting equation is: Assets _ Liabilities _ Stockholders’ Equity. Appendix A, at the end of this book, reproduces Tootsie Roll’s financial statements. Replacing words in the equation with dollar amounts, what is Tootsie Roll’s accounting equation at December 31, 2009?

Brief Exercises
BE1-1 Match each of the following forms of business organization with a set of characteristics:
sole proprietorship (SP), partnership (P), corporation (C).
(a) _____ Shared control, tax advantages, increased skills and resources.
(b) _____ Simple to set up and maintains control with founder.
(c) _____ Easier to transfer ownership and raise funds, no personal liability.
BE1-2 Match each of the following types of evaluation with one of the listed users of
accounting information.
1. Trying to determine whether the company complied with tax laws.
2. Trying to determine whether the company can pay its obligations.
3. Trying to determine whether a marketing proposal will be cost effective.
4. Trying to determine whether the company’s net income will result in a stock price
increase.
5. Trying to determine whether the company should employ debt or equity financing.
(a) _____ Investors in common stock. (d) _____ Chief Financial Officer.
(b) _____ Marketing managers. (e) _____ Internal Revenue Service.
(c) _____ Creditors.
BE1-3 Indicate in which part of the statement of cash flows each item would appear:
operating activities (O), investing activities (I), or financing activities (F).
(a) _____ Cash received from customers.
(b) _____ Cash paid to stockholders (dividends).
(c) _____ Cash received from issuing new common stock.
(d) _____ Cash paid to suppliers.
(e) _____ Cash paid to purchase a new office building.
BE1-4 Presented below are a number of transactions. Determine whether each transaction
affects common stock (C), dividends (D), revenue (R), expense (E), or does not
affect stockholders’ equity (NSE). Provide titles for the revenues and expenses.
(a) Costs incurred for advertising.
(b) Assets received for services performed.
(c) Costs incurred for insurance.
(d) Amounts paid to employees.
(e) Cash distributed to stockholders.
(f) Assets received in exchange for allowing the use of the company’s building.
(g) Costs incurred for utilities used.
(h) Cash purchase of equipment.
(i) Issued common stock for cash.
BE1-5 In alphabetical order below are balance sheet items for Wyoming Company at
December 31, 2012. Prepare a balance sheet following the format of Illustration 1-7.
Accounts payable $65,000
Accounts receivable 71,000
Cash 22,000
Common stock 28,000

BE1-6 Eskimo Pie Corporation markets a broad range of frozen treats, including its
famous Eskimo Pie ice cream bars. The following items were taken from a recent income
statement and balance sheet. In each case, identify whether the item would appear on the
balance sheet (BS) or income statement (IS).
(a) _____ Income tax expense. (f ) _____ Net sales.
(b) _____ Inventories. (g) _____ Cost of goods sold.
(c) _____ Accounts payable. (h) _____ Common stock.
(d) _____ Retained earnings. (i) _____ Receivables.
(e) _____ Property, plant, and equipment. (j) _____ Interest expense.
BE1-7 Indicate which statement you would examine to find each of the following items:
income statement (I), balance sheet (B), retained earnings statement (R), or statement of
cash flows (C).
(a) Revenue during the period.
(b) Supplies on hand at the end of the year.
(c) Cash received from issuing new bonds during the period.
(d) Total debts outstanding at the end of the period.
BE1-8 Use the basic accounting equation to answer these questions.
(a) The liabilities of Daley Company are $90,000 and the stockholders’ equity is $230,000.
What is the amount of Daley Company’s total assets?
(b) The total assets of Laven Company are $170,000 and its stockholders’ equity is
$80,000. What is the amount of its total liabilities?
(c) The total assets of Peterman Co. are $800,000 and its liabilities are equal to one fourth
of its total assets. What is the amount of Peterman Co.’s stockholders’ equity?
BE1-9 At the beginning of the year, Peale Company had total assets of $800,000 and
total liabilities of $500,000.
(a) If total assets increased $150,000 during the year and total liabilities decreased
$80,000, what is the amount of stockholders’ equity at the end of the year?
(b) During the year, total liabilities increased $100,000 and stockholders’ equity decreased
$70,000. What is the amount of total assets at the end of the year?
(c) If total assets decreased $80,000 and stockholders’ equity increased $110,000 during
the year, what is the amount of total liabilities at the end of the year?
BE1-10 Indicate whether each of these items is an asset (A), a liability (L), or part of
stockholders’ equity (SE).
(a) Accounts receivable. (d) Supplies.
(b) Salaries and wages payable. (e) Common stock.
(c) Equipment. (f ) Notes payable.
BE1-11 Which is not a required part of an annual report of a publicly traded company?
(a) Statement of cash flows.
(b) Notes to the financial statements.
(c) Management discussion and analysis.
(d) All of these are required.

Do it! Review
Do it! 1-1 Identify each of the following organizational characteristics with the organizational
form or forms with which it is associated.
(a) Easier to transfer ownership (d) Tax advantages
(b) Easier to raise funds (e) No personal legal liability
(c) More owner control
Do it! 1-2 Classify each item as an asset, liability, common stock, revenue, or expense.
(a) Issuance of ownership shares
(b) Land purchased
(c) Amounts owed to suppliers
(d) Bonds payable
(e) Amount earned from selling a product
(f) Cost of advertising


Do it! 1-3 Gould Corporation began operations on January 1, 2012. The following information
is available for Gould Corporation on December 31, 2012.

Do it! 1-4 Indicate whether each of the following items is most closely associated
with the management discussion and analysis (MD&A), the notes to the financial statements,
or the auditor’s report.
(a) Description of ability to pay near-term obligations
(b) Unqualified opinion
(c) Details concerning liabilities, too voluminous to be included in the statements
(d) Description of favorable and unfavorable trends
(e) Certified Public Accountant (CPA)
(f ) Descriptions of significant accounting policies



Exercises
E1-1 Here is a list of words or phrases discussed in this chapter:
1. Corporation 4. Partnership 7. Accounts payable
2. Creditor 5. Stockholder 8. Auditor’s opinion
3. Accounts receivable 6. Common stock
Instructions
Match each word or phrase with the best description of it.
______ (a) An expression about whether financial statements conform with generally accepted
accounting principles.
______ (b) A business enterprise that raises money by issuing shares of stock.
______ (c) The portion of stockholders’ equity that results from receiving cash from
investors.
______ (d) Obligations to suppliers of goods.
______ (e) Amounts due from customers.
______ (f ) A party to whom a business owes money.
______ (g) A party that invests in common stock.
______ (h) A business that is owned jointly by two or more individuals but does not
issue stock.
E1-2 All businesses are involved in three types of activities—financing, investing, and
operating. Listed below are the names and descriptions of companies in several different
industries.
Abitibi Consolidated Inc.—manufacturer and marketer of newsprint
Cal State–Northridge Stdt Union—university student union
Oracle Corporation—computer software developer and retailer
Sportsco Investments—owner of the Vancouver Canucks hockey club
Grant Thornton LLP—professional accounting and business advisory firm
Southwest Airlines—discount airline
Instructions
(a) For each of the above companies, provide examples of (1) a financing activity, (2) an
investing activity, and (3) an operating activity that the company likely engages in.
(b) Which of the activities that you identified in (a) are common to most businesses?
Which activities are not?

E1-3 The Fair View Golf & Country Club details the following accounts in its financial
statements.
(a) (b)
Accounts payable _____ _____
Accounts receivable _____ _____
Equipment _____ _____
Sales revenue _____ _____
Service revenue _____ _____
Inventory _____ _____
Mortgage payable _____ _____
Supplies expense _____ _____
Rent expense _____ _____
Salaries and wages expense _____ _____
Instructions
(a) Classify each of the above accounts as an asset (A), liability (L), stockholders’ equity
(SE), revenue (R), or expense (E) item.
(b) Classify each of the above accounts as a financing activity (F), investing activity (I),
or operating activity (O). If you believe a particular account doesn’t fit in any of these
activities, explain why.
E1-4 This information relates to Alexis Co. for the year 2012.
Retained earnings, January 1, 2012 $67,000
Advertising expense 1,800
Dividends paid during 2012 6,000
Rent expense 10,400
Service revenue 58,000
Utilities expense 2,400
Salaries and wages expense 30,000
Instructions
After analyzing the data, prepare an income statement and a retained earnings statement
for the year ending December 31, 2012.
E1-5 The following information was taken from the 2009 financial statements of pharmaceutical
giant Merck and Co. All dollar amounts are in millions.
Retained earnings, January 1, 2009 $43,698.8
Materials and production expense 9,018.9
Marketing and administrative expense 8,543.2
Dividends 3,597.7
Sales revenue 27,428.3
Research and development expense 5,845.0
Tax expense 2,267.6
Other revenue 11,147.7
Instructions
(a) After analyzing the data, prepare an income statement and a retained earnings statement
for the year ending December 31, 2009.
(b) Suppose that Merck decided to reduce its research and development expense by 50%.
What would be the short-term implications? What would be the long-term implications?
How do you think the stock market would react?
E1-6 Presented here is information for Packee Inc. for 2012.
Retained earnings, January 1 $130,000
Revenue from legal services 400,000
Total expenses 175,000
Dividends 65,000
Instructions
Prepare the 2012 retained earnings statement for Packee Inc.
E1-7 Consider each of the following independent situations.
(a) The retained earnings statement of Scott Corporation shows dividends of $68,000,
while net income for the year was $75,000.
Exercises 31
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 5,000
Stockholders’ equity
Common stock (a)
Retained earnings (b)
Total liabilities and
stockholders’ equity $62,000
(b) The statement of cash flows for Silberman Corporation shows that cash provided by
operating activities was $10,000, cash used in investing activities was $110,000, and
cash provided by financing activities was $130,000.
Instructions
For each company provide a brief discussion interpreting these financial facts. For example,
you might discuss the company’s financial health or its apparent growth philosophy.
E1-8 The following items and amounts were taken from Linus Inc.’s 2012 income statement
and balance sheet.
______ Cash $ 84,700 ______ Accounts receivable 88,419
______ Retained earnings 123,192 ______ Sales revenue 584,951
______ Cost of goods sold 438,458 ______ Income taxes payable 6,499
______ Salaries and wages expense 115,131 ______ Accounts payable 49,384
______ Prepaid insurance 7,818 ______ Service revenue 4,806
______ Inventory $ 64,618 ______ Interest expense 1,882
Instructions
(a) In each, case, identify on the blank line whether the item is an asset (A), liability (L),
stockholder’s equity (SE), revenue (R), or expense (E) item.
(b) Prepare an income statement for Linus Inc. for the year ended December 31, 2012.
E1-9 Here are incomplete financial statements for Liam, Inc.
Identify financial statement
components and prepare
income statement.
(SO 4), C
Calculate missing amounts.
(SO 4, 5), AP
LIAM, INC.
Balance Sheet
Assets
Cash $ 7,000
Inventory 10,000
Buildings 45,000
Total assets $62,000
Income Statement
Revenues $85,000
Cost of goods sold (c)
Salaries and wages expense 10,000
Net income $ (d)
Retained Earnings Statement
Beginning retained earnings $12,000
Add: Net income (e)
Less: Dividends 5,000
Ending retained earnings $27,000
Instructions
Calculate the missing amounts.
E1-10 Deer Track Park is a private camping ground near the Lathom Peak Recreation
Area. It has compiled the following financial information as of December 31, 2012.
Revenues during 2012: camping fees $132,000 Dividends $ 9,000
Revenues during 2012: general store 25,000 Notes payable 50,000
Accounts payable 11,000 Expenses during 2012 126,000
Cash 8,500 Supplies 5,500
Equipment 114,000 Common stock 40,000
Retained earnings (1/1/2012) 5,000
Compute net income and
prepare a balance sheet.
(SO 4, 5), AP
32 chapter 1 Introduction to Financial Statements
Instructions
(a) Determine Deer Track Park’s net income for 2012.
(b) Prepare a retained earnings statement and a balance sheet for Deer Track Park as of
December 31, 2012.
(c) Upon seeing this income statement, Ken Zilber, the campground manager, immediately
concluded, “The general store is more trouble than it is worth—let’s get
rid of it.” The marketing director isn’t so sure this is a good idea. What do you
think?
E1-11 Kellogg Company is the world’s leading producer of ready-to-eat cereal and a
leading producer of grain-based convenience foods such as frozen waffles and cereal bars.
The following items were taken from its 2009 income statement and balance sheet. All
dollars are in millions.
____ Retained earnings $5,481 ____ Long-term debt $ 4,835
____ Cost of goods sold 7,184 ____ Inventories 910
____ Selling and ____ Net sales 12,575
administrative expenses 3,390 ____ Accounts payable 1,077
____ Cash 334 ____ Common stock 105
____ Notes payable 44 ____ Income tax expense 476
____ Interest expense 295 ____ Other expense 22
Instructions
Perform each of the following.
(a) In each case identify whether the item is an asset (A), liability (L), stockholders’ equity
(SE), revenue (R), or expense (E).
(b) Prepare an income statement for Kellogg Company for the year ended December 31,
2009.
E1-12 This information is for O’Brien Corporation for the year ended December 31,
2012.
Cash received from lenders $20,000
Cash received from customers 50,000
Cash paid for new equipment 28,000
Cash dividends paid 8,000
Cash paid to suppliers 16,000
Cash balance 1/1/12 12,000
Instructions
(a) Prepare the 2012 statement of cash flows for O’Brien Corporation.
(b) Suppose you are one of O’Brien’s creditors. Referring to the statement of cash flows,
evaluate O’Brien’s ability to repay its creditors.
E1-13 The following data are derived from the 2009 financial statements of Southwest
Airlines. All dollars are in millions. Southwest has a December 31 year-end.
Cash balance, January 1, 2009 $1,390
Cash paid for repayment of debt 122
Cash received from issuance of common stock 144
Cash received from issuance of long-term debt 500
Cash received from customers 9,823
Cash paid for property and equipment 1,529
Cash paid for dividends 14
Cash paid for repurchase of common stock 1,001
Cash paid for goods and services 6,978
Instructions
(a) After analyzing the data, prepare a statement of cash flows for Southwest Airlines
for the year ended December 31, 2009.
(b) Discuss whether the company’s cash from operations was sufficient to finance
its investing activities. If it was not, how did the company finance its investing
activities?
E1-14 Andrew Davis is the bookkeeper for Cheyenne Company. Andrew has been trying
to get the balance sheet of Cheyenne Company to balance. It finally balanced, but
now he’s not sure it is correct.
Identify financial statement
components and prepare an
income statement.
(SO 4, 5), AP
Prepare a statement of cash
flows.
(SO 5), AP
Prepare a statement
of cash flows.
(SO 5), AP
Correct an incorrectly
prepared balance sheet.
(SO 5), AP
Exercises 33
Instructions
Prepare a correct balance sheet.
E1-15 The following items were taken from the balance sheet of Nike, Inc.
1. Cash $2,291.1 7. Inventories $2,357.0
2. Accounts receivable 2,883.9 8. Income taxes payable 86.3
3. Common stock 2,874.2 9. Property, plant, and equipment 1,957.7
4. Notes payable 342.9 10. Retained earnings 5,818.9
5. Other assets 3,759.9 11. Accounts payable 2,815.8
6. Other liabilities 1,311.5
Instructions
Perform each of the following.
(a) Classify each of these items as an asset, liability, or stockholders’ equity and determine
the total dollar amount for each classification. (All dollars are in millions.)
(b) Determine Nike’s accounting equation by calculating the value of total assets, total
liabilities, and total stockholders’ equity.
(c) To what extent does Nike rely on debt versus equity financing?
E1-16 The summaries of data from the balance sheet, income statement, and retained
earnings statement for two corporations, Bates Corporation and Wilson Enterprises, are
presented below for 2012.
Bates Corporation Wilson Enterprises
Beginning of year
Total assets $110,000 $150,000
Total liabilities 70,000 (d)
Total stockholders’ equity (a) 70,000
End of year
Total assets (b) 180,000
Total liabilities 120,000 55,000
Total stockholders’ equity 60,000 (e)
Changes during year in retained
earnings
Dividends (c) 5,000
Total revenues 215,000 (f )
Total expenses 165,000 80,000
Instructions
Determine the missing amounts. Assume all changes in stockholders’ equity are due to
changes in retained earnings.
E1-17 The annual report provides financial information in a variety of formats, including
the following.

Instructions
For each of the following, state in what area of the annual report the item would be presented.
If the item would probably not be found in an annual report, state “Not disclosed.”

(a) The total cumulative amount received from stockholders in exchange for common
stock.
(b) An independent assessment concerning whether the financial statements present a
fair depiction of the company’s results and financial position.
(c) The interest rate that the company is being charged on all outstanding debts.
(d) Total revenue from operating activities.
(e) Management’s assessment of the company’s results.
(f ) The names and positions of all employees hired in the last year.


Exercises: Set B and
Challenge Exercises
Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose
the Student Companion site to access Exercise Set B and Challenge Exercises.
Problems: Set A

P1-1A Presented below are five independent situations.
(a) Three physics professors at MIT have formed a business to improve the speed of information
transfer over the Internet for stock exchange transactions. Each has contributed
an equal amount of cash and knowledge to the venture. Although their approach
looks promising, they are concerned about the legal liabilities that their
business might confront.
(b) Ed Toth, a college student looking for summer employment, opened a bait shop in
a small shed at a local marina.
(c) Joan Stuebben and Ron Klinke each owned separate shoe manufacturing businesses.
They have decided to combine their businesses. They expect that within the coming
year they will need significant funds to expand their operations.
(d) Crystal, Allie, and Harry recently graduated with marketing degrees. They have been
friends since childhood. They have decided to start a consulting business focused on
marketing sporting goods over the Internet.
(e) Mark Willis wants to rent CD players and CDs in airports across the country. His
idea is that customers will be able to rent equipment and CDs at one airport, listen
to the CDs on their flights, and return the equipment and CDs at their destination
airport. Of course, this will require a substantial investment in equipment and CDs,
as well as employees and locations in each airport. Mark has no savings or personal
assets. He wants to maintain control over the business.
Instructions
In each case, explain what form of organization the business is likely to take—sole proprietorship,
partnership, or corporation. Give reasons for your choice.

P1-2A Financial decisions often place heavier emphasis on one type of financial statement
over the others. Consider each of the following hypothetical situations independently.
(a) The North Face, Inc. is considering extending credit to a new customer. The terms
of the credit would require the customer to pay within 30 days of receipt of goods.
(b) An investor is considering purchasing common stock of Amazon.com. The investor
plans to hold the investment for at least 5 years.
(c) Chase Manhattan is considering extending a loan to a small company. The company
would be required to make interest payments at the end of each year for 5 years, and
to repay the loan at the end of the fifth year.
(d) The president of Campbell Soup is trying to determine whether the company is generating
enough cash to increase the amount of dividends paid to investors in this and
future years, and still have enough cash to buy equipment as it is needed.
Instructions
In each situation, state whether the decision maker would be most likely to place primary
emphasis on information provided by the income statement, balance sheet, or statement
of cash flows. In each case provide a brief justification for your choice. Choose only
one financial statement in each case.


P1-3A On June 1, Beardsley Service Co. was started with an initial investment in the
company of $22,100 cash. Here are the assets and liabilities of the company at June 30,
and the revenues and expenses for the month of June, its first month of operations:
Cash $ 4,600 Notes payable $12,000
Accounts receivable 4,000 Accounts payable 500
Service revenue 7,500 Supplies expense 1,000
Supplies 2,400 Maintenance and repairs expense 600
Advertising expense 400 Utilities expense 300
Equipment 26,000 Salaries and wages expense 1,400
In June, the company issued no additional stock, but paid dividends of $1,400.
Instructions
(a) Prepare an income statement and a retained earnings statement for the month of
June and a balance sheet at June 30, 2012.
(b) Briefly discuss whether the company’s first month of operations was a success.
(c) Discuss the company’s decision to distribute a dividend.

P1-4A Presented below is selected financial information for Yvonne Corporation for
December 31, 2012.
Inventory $ 25,000 Cash paid to purchase equipment $ 12,000
Cash paid to suppliers 104,000 Equipment 40,000
Building 200,000 Revenues 100,000
Common stock 50,000 Cash received from customers 132,000
Cash dividends paid 7,000 Cash received from issuing
common stock 22,000
Instructions
(a) Determine which items should be included in a statement of cash flows and then
prepare the statement for Yvonne Corporation.
(b) Comment on the adequacy of net cash provided by operating activities to fund the
company’s investing activities and dividend payments.

P1-5A Gabelli Corporation was formed on January 1, 2012. At December 31, 2012, John
Paulus, the president and sole stockholder, decided to prepare a balance sheet, which appeared
as follows.

John willingly admits that he is not an accountant by training. He is concerned that his
balance sheet might not be correct. He has provided you with the following additional
information.
1. The boat actually belongs to Paulus, not to Gabelli Corporation. However, because
he thinks he might take customers out on the boat occasionally, he decided to list it
as an asset of the company. To be consistent, he also listed as a liability of the corporation
his personal loan that he took out at the bank to buy the boat.
2. The inventory was originally purchased for $25,000, but due to a surge in demand
John now thinks he could sell it for $36,000. He thought it would be best to record
it at $36,000.
3. Included in the accounts receivable balance is $10,000 that John loaned to his brother
5 years ago. John included this in the receivables of Gabelli Corporation so he
wouldn’t forget that his brother owes him money.
Instructions
(a) Comment on the proper accounting treatment of the three items above.
(b) Provide a corrected balance sheet for Gabelli Corporation. (Hint: To get the balance
sheet to balance, adjust stockholders’ equity.)


Problems: Set B

P1-1B Presented below are five independent situations.
(a) Rachel Jackson, a college student looking for summer employment, opened a vegetable
stand along a busy local highway. Each morning she buys produce from local
farmers, then sells it in the afternoon as people return home from work.
(b) Colin Doyle and Jason Elliot each owned separate swing-set manufacturing businesses.
They have decided to combine their businesses and try to expand their reach
beyond their local market. They expect that within the coming year they will need
significant funds to expand their operations.
(c) Three chemistry professors at FIU have formed a business to employ bacteria to clean
up toxic waste sites. Each has contributed an equal amount of cash and knowledge
to the venture. The use of bacteria in this situation is experimental, and legal obligations
could result.
(d) Brittany Medler has run a successful, but small cooperative health food store for over
20 years. The increased sales of her store have made her believe that the time is right
to open a national chain of health food stores across the country. Of course, this
will require a substantial investment in stores, inventory, and employees in each store.
Brittany has no savings or personal assets. She wants to maintain control over the
business.
(e) Cheryl Lamb and Tom Majors recently graduated with masters degrees in economics.
They have decided to start a consulting business focused on teaching the basics of
international economics to small business owners interested in international trade.
Instructions
In each case, explain what form of organization the business is likely to take—sole proprietorship,
partnership, or corporation. Give reasons for your choice.

P1-2B Financial decisions often place heavier emphasis on one type of financial statement
over the others. Consider each of the following hypothetical situations independently.
(a) An investor is considering purchasing common stock of the Bally Total Fitness company.
The investor plans to hold the investment for at least 3 years.
(b) Boeing is considering extending credit to a new customer. The terms of the credit
would require the customer to pay within 60 days of receipt of goods.
(c) The president of Northwest Airlines is trying to determine whether the company is
generating enough cash to increase the amount of dividends paid to investors in this
and future years, and still have enough cash to buy new flight equipment as it is
needed.
(d) Bank of America is considering extending a loan to a small company. The company
would be required to make interest payments at the end of each year for 5 years, and
to repay the loan at the end of the fifth year.
Instructions
In each of the situations above, state whether the decision maker would be most likely
to place primary emphasis on information provided by the income statement, balance
sheet, or statement of cash flows. In each case, provide a brief justification for your choice.
Choose only one financial statement in each case.

P1-3B Special Delivery was started on May 1 with an investment of $45,000 cash. Following
are the assets and liabilities of the company on May 31, 2012, and the revenues
and expenses for the month of May, its first month of operations.
Accounts receivable $ 6,200 Notes payable $28,000
Service revenue 10,400 Salaries and wages expense 2,000
Advertising expense 800 Equipment 56,000
Accounts payable 2,400 Maintenance and repairs expense 2,900
Cash 15,800 Insurance expense 400
No additional common stock was issued in May, but a dividend of $1,700 in cash was paid.
Instructions
(a) Prepare an income statement and a retained earnings statement for the month of
May and a balance sheet at May 31, 2012.
(b) Briefly discuss whether the company’s first month of operations was a success.
(c) Discuss the company’s decision to distribute a dividend.

P1-4B Presented below are selected financial statement items for Rowe Corporation for
December 31, 2012.
Inventory $ 55,000 Cash paid to purchase equipment $ 30,000
Cash paid to suppliers 154,000 Equipment 40,000
Buildings 400,000 Revenues 200,000
Common stock 20,000 Cash received from customers 172,000
Cash dividends paid 6,000 Cash received from issuing
bonds payable 40,000
Instructions
(a) Determine which items should be included in a statement of cash flows, and then
prepare the statement for Rowe Corporation.
(b) Comment on the adequacy of net cash provided by operating activities to fund the
company’s investing activities and dividend payments.

P1-5B Austin Corporation was formed during 2011 by Joanna Kay. Joanna is the president
and sole stockholder. At December 31, 2012, Joanna prepared an income statement
for Austin Corporation. Joanna is not an accountant, but she thinks she did a reasonable
job preparing the income statement by looking at the financial statements of other companies.
She has asked you for advice. Joanna’s income statement appears as follows.
AUSTIN CORPORATION
Income Statement
For the Year Ended December 31, 2012
Accounts receivable $17,000
Service revenue 47,000
Rent expense 10,000
Insurance expense 7,000
Vacation expense 4,000
Net income $43,000
Joanna has also provided you with these facts.
1. Included in the service revenue account is $3,000 of revenue that the company earned
and received payment for in 2011. She forgot to include it in the 2011 income statement,
so she put it in this year’s statement.
2. Joanna operates her business out of the basement of her parents’ home. They do
not charge her anything, but she thinks that if she paid rent it would cost her
about $10,000 per year. Therefore, she included $10,000 of rent expense in the income
statement.
3. To reward herself for a year of hard work, Joanna went to Greece. She did not use
company funds to pay for the trip, but she reported it as an expense on the income
statement since it was her job that made her need the vacation.
Instructions
(a) Comment on the proper accounting treatment of the three items above.
(b) Prepare a corrected income statement for Austin Corporation.



Problems: Set C
Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the
Student Companion site to access Problem Set C.
Continuing Cookie Chronicle
CCC1 Natalie Koebel spent much of her childhood learning the art of cookie-making
from her grandmother. They spent many happy hours mastering every type of cookie
imaginable and later devised new recipes that were both healthy and delicious. Now at
the start of her second year in college, Natalie is investigating possibilities for starting
her own business as part of the entrepreneurship program in which she is enrolled.
A long-time friend insists that Natalie has to include cookies in her business plan.
After a series of brainstorming sessions, Natalie settles on the idea of operating a cookiemaking
school. She will start on a part-time basis and offer her services in people’s homes.
Now that she has started thinking about it, the possibilities seem endless. During the fall,
she will concentrate on holiday cookies. She will offer group sessions (which will probably
be more entertainment than education) and individual lessons. Natalie also decides
to include children in her target market. The first difficult decision is coming up with
the perfect name for her business. She settles on “Cookie Creations,” and then moves on
to more important issues.
Instructions
(a) What form of business organization—proprietorship, partnership, or corporation—
do you recommend that Natalie use for her business? Discuss the benefits and weaknesses
of each form that Natalie might consider.
(b) Will Natalie need accounting information? If yes, what information will she need and
why? How often will she need this information?
(c) Identify specific asset, liability, revenue, and expense accounts that Cookie Creations
will likely use to record its business transactions.
(d) Should Natalie open a separate bank account for the business? Why or why not?
(e) Natalie expects she will have to use her car to drive to people’s homes and to pick
up supplies, but she also needs to use her car for personal reasons. She recalls from
her first-year accounting course something about keeping business and personal assets
separate. She wonders what she should do for accounting purposes. What do
you recommend?


FINANCIAL REPORTING PROBLEM: Tootsie Roll Industries Inc.
BYP1-1 The 2009 financial statements of Tootsie Roll Industries, Inc. are provided in
Appendix A.
Instructions
Refer to Tootsie Roll’s financial statements to answer the following questions.
(a) What were Tootsie Roll’s total assets at December 31, 2009? At December 31, 2008?
(b) How much cash did Tootsie Roll have on December 31, 2009?
(c) What amount of accounts payable did Tootsie Roll report on December 31, 2009? On December
31, 2008?
(d) What were Tootsie Roll’s total revenues in 2009? In 2008?
(e) What is the amount of the change in Tootsie Roll’s net income from 2008 to 2009?

COMPARATIVE ANALYSIS PROBLEM: Tootsie Roll vs. Hershey
BYP1-2 Tootsie Roll’s financial statements are presented in Appendix A, and the financial statements
of The Hershey Company are presented in Appendix B.
Instructions
(a) Based on the information in these financial statements, determine the following for each
company.
(1) Total assets at December 31, 2009.
(2) Net property, plant, and equipment at December 31, 2009.
(3) Total revenue for 2009.
(4) Net income for 2009.
(b) What conclusions concerning the two companies can you draw from these data?

RESEARCH CASE
BYP1-3 The September 3, 2009, issue of BusinessWeek includes an article by Lindsey Gerdes
entitled “The Best Places to Launch a Career.” It provides interesting information regarding the job
opportunities for accounting students.
Instructions
Read the article and answer the following questions. (The article can be found at
www.businessweek.com/magazine/content/09_37/b4146032027785.htm.)
(a) What position did each of the “Big Four” (the four largest international accounting firms) receive
in the survey?
(b) To what did the article attribute the accounting firms’ success?
(c) What was the starting salary for a new employee at Deloitte and Touche?
(d) The accounting firms’ hiring was affected by the recession although not as much as many
of the other employers in the survey. Which one of the Big Four firms had the smallest decline
in hiring, and which had the largest?

INTERPRETING FINANCIAL STATEMENTS
BYP1-4 Xerox was not having a particularly pleasant year. The company’s stock price had
already fallen in the previous year from $60 per share to $30. Just when it seemed things couldn’t
get worse, Xerox’s stock fell to $4 per share. The data below were taken from the statement of cash
flows of Xerox. All dollars are in millions.

Instructions
Analyze the information above, and then answer the following questions.
(a) If you were a creditor of Xerox, what reaction might you have to the above information?
(b) If you were an investor in Xerox, what reaction might you have to the above information?
(c) If you were evaluating the company as either a creditor or a stockholder, what other information
would you be interested in seeing?
(d) Xerox decided to pay a cash dividend. This dividend was approximately equal to the amount
paid in the previous year. Discuss the issues that were probably considered in making this
decision.

FINANCIAL ANALYSIS ON THE WEB
BYP1-5 Purpose: Identify summary information about companies. This information includes
basic descriptions of the company’s location, activities, industry, financial health, and financial
performance.
Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/kimmel
Steps
1. Type in a company name, or use the index to find company name.
2. Choose Quote, then choose Profile, then choose Income Statement. Perform instructions
(a) and (b) below.
3. Choose Industry to identify others in this industry. Perform instructions (c)–(e) below.
Instructions
Answer the following questions.
(a) What was the company’s net income? Over what period was this measured?
(b) What was the company’s total sales? Over what period was this measured?
(c) What is the company’s industry?
(d) What are the names of four companies in this industry?
(e) Choose one of the competitors. What is this competitor’s name? What were its sales? What
was its net income?

Critical Thinking
DECISION MAKING ACROSS THE ORGANIZATION
BYP1-6 Kim Walters recently accepted a job in the production department at Tootsie Roll.
Before she starts work, she decides to review the company’s annual report to better understand its
operations.
Instructions
Use the annual report provided in Appendix A to answer the following questions.
(a) What CPA firm performed the audit of Tootsie Roll’s financial statements?
(b) What was the amount of Tootsie Roll’s earnings per share in 2009?
(c) What are the company’s net sales in foreign countries in 2009?
(d) What did management suggest as the cause of the decrease in the earnings from operations
in 2009?
(e) What were net sales in 2005?
(f ) How many shares of Class B common stock have been authorized?
(g) How much cash was spent on capital expenditures in 2009?
(h) Over what life does the company depreciate its buildings?
(i) What was the value of raw material and supplies inventory in 2008?

COMMUNICATION ACTIVITY
BYP1-7 Jane Noonan is the bookkeeper for Wilson Company, Inc. Jane has been trying to get the
company’s balance sheet to balance. She finally got it to balance, but she still isn’t sure that it is
correct.

Instructions
Explain to Jane Noonan in a memo (a) the purpose of a balance sheet, and (b) why this balance
sheet is incorrect and what she should do to correct it.



ETHICS CASE
BYP1-8 Rules governing the investment practices of individual certified public accountants prohibit
them from investing in the stock of a company that their firm audits. The Securities and
Exchange Commission (SEC) became concerned that some accountants were violating this rule.
In response to an SEC investigation, PricewaterhouseCoopers fired 10 people and spent $25 million
educating employees about the investment rules and installing an investment tracking system.
Instructions
Answer the following questions.
(a) Why do you think rules exist that restrict auditors from investing in companies that are
audited by their firms?
(b) Some accountants argue that they should be allowed to invest in a company’s stock as long
as they themselves aren’t involved in working on the company’s audit or consulting. What do
you think of this idea?
(c) Today a very high percentage of publicly traded companies are audited by only four very large
public accounting firms. These firms also do a high percentage of the consulting work that
40 chapter 1 Introduction to Financial Statements
Liabilities and Stockholders’ Equity
Common stock $12,000
Accounts receivable (6,000)
Dividends (2,000)
Notes payable 10,000
Retained earnings 10,000
Total liabilities and
stockholders’ equity $24,000
is done for publicly traded companies. How does this fact complicate the decision regarding
whether CPAs should be allowed to invest in companies audited by their firm?
(d) Suppose you were a CPA and you had invested in IBM when IBM was not one of your firm’s
clients. Two years later, after IBM’s stock price had fallen considerably, your firm won the
IBM audit contract. You will be involved in working with the IBM audit. You know that your
firm’s rules require that you sell your shares immediately. If you do sell immediately, you will
sustain a large loss. Do you think this is fair? What would you do?
(e) Why do you think PricewaterhouseCoopers took such extreme steps in response to the SEC
investigation?


“ALL ABOUT YOU” ACTIVITY
BYP1-9 Some people are tempted to make their finances look worse to get financial aid.
Companies sometimes also manage their financial numbers in order to accomplish certain goals.
Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth
out bumps in net income. In managing earnings, companies’ actions vary from being within the
range of ethical activity, to being both unethical and illegal attempts to mislead investors and
creditors.
Instructions
Provide responses for each of the following questions.
(a) Discuss whether you think each of the following actions (adapted from www.finaid.
org/fafsa/maximize.phtml) to increase the chances of receiving financial aid is ethical.
(i) Spend down the student’s assets and income first, before spending parents’ assets and
income.
(ii) Accelerate necessary expenses to reduce available cash. For example, if you need a new
car, buy it before applying for financial aid.
(iii) State that a truly financially dependent child is independent.
(iv) Have a parent take an unpaid leave of absence for long enough to get below the “threshold”
level of income.
(b) What are some reasons why a company might want to overstate its earnings?
(c) What are some reasons why a company might want to understate its earnings?
(d) Under what circumstances might an otherwise ethical person decide to illegally overstate or
understate earnings?


FASB CODIFICATION ACTIVITY
BYP1-10 The FASB has developed the Financial Accounting Standards Board Accounting
Standards Codification (or more simply “the Codification”). The FASB’s primary goal in developing
the Codification is to provide in one place all the authoritative literature related to a particular
topic. To provide easy access to the Codification, the FASB also developed the Financial
Accounting Standards Board Codification Research System (CRS). CRS is an online, real-time
database that provides easy access to the Codification. The Codification and the related CRS provide
a topically organized structure, subdivided into topic, subtopics, sections, and paragraphs,
using a numerical index system.
You may find this system useful in your present and future studies, and so we have provided an
opportunity to use this online system as part of the Broadening Your Perspective section.
Instructions
Academic access to the FASB Codification is available through university subscriptions, obtained
from the American Accounting Association (at http://aaahq.org/FASB/Access.cfm), for an annual fee
of $150. This subscription covers an unlimited number of students within a single institution. Once
this access has been obtained by your school, you should login (at http://aaahq.org/ascLogin.cfm)
and familiarize yourself with the resources that are accessible at the FASB Codification site.


Answers to Insight and Accounting Across the Organization Questions
p. 6 The Scoop on Accounting Q: What are the benefits to the company and to the employees
of making the financial statements available to all employees? A: If employees can read and use
financial reports, a company will benefit in the following ways. The marketing department will
make better decisions about products to offer and prices to charge. The finance department
will make better decisions about debt and equity financing and how much to distribute in dividends.
The production department will make better decisions about when to buy new equipment
and how much inventory to produce. The human resources department will be better able to determine
whether employees can be given raises. Finally, all employees will be better informed about
the basis on which they are evaluated, which will increase employee morale.
p. 7 Spinning the Career Wheel Q: How might accounting help you? A: You will need to understand
financial reports in any enterprise with which you are associated. Whether you become a
manager, a doctor, a lawyer, a social worker, a teacher, an engineer, an architect, or an entrepreneur,
a working knowledge of accounting is relevant.
p. 8 The Numbers Behind Not-for-Profit Organizations Q: What benefits does a sound accounting
system provide to a not-for-profit organization? A: Accounting provides at least two benefits
to not-for-profit organizations. First, it helps to ensure that money is used in the way that donors
intended. Second, it assures donors that their money is not going to waste and thus increases the
likelihood of future donations.
p. 15 Rocking the Bottom Line Q: What is one way that some of these disputes might be resolved?
A: Frequently, when contractual payments depend on accounting-based financial results,
interested parties employ outside auditors to evaluate whether the financial information has been
prepared fairly and accurately. The musicians would like auditors to have easy access to inventory
and manufacturing information of the recording companies.
Answers to Self-Test Questions
1. b 2. c 3. d 4. d 5. c 6. a 7. d 8. d 9. a 10. b 11. c 12. d 13. d 14. a 15. b



IFRS Concepts and Application
IFRS1–1 Who are the two key international players in the development of international accounting
standards? Explain their role.
IFRS1-2 What might explain the fact that different accounting standard-setters have developed
accounting standards that are sometimes quite different in nature?
IFRS1-3 What is the benefit of a single set of high-quality accounting standards?
IFRS1-4 Discuss the potential advantages and disadvantages that countries outside the United
States should consider before adopting regulations, such as those in the Sarbanes-Oxley Act, that
increase corporate internal control requirements.
INTERNATIONAL FINANCIAL REPORTING PROBLEM: Zetar plc
IFRS1-5 The financial statements of Zetar plc are presented in Appendix C. The company’s
complete annual report, including the notes to its financial statements, is available at
www.zetarplc.com.
Instructions
Visit Zetar’s corporate website and answer the following questions from Zetar’s 2009 annual
report.
(a) What accounting firm performed the audit of Zetar’s financial statements?
(b) Over what life does the company depreciate its buildings?
(c) What is the address of the company’s corporate headquarters?
(d) What is the company’s reporting currency?
(e) What two segments does the company operate in, and what were the sales for each segment
in the year ended April 30, 2009?