Chapter1
1. The Mill Run Golf & Country Club details the following accounts in its financial statements.
(a) (b)
Accounts payable and accrued liabilities ____ ____
Accounts receivable ____ ____
Property, plant, and equipment ____ ____
Food and beverage operations revenue ____ ____
Golf course operations revenue ____ ____
Inventory ____ ____
Long-term debt ____ ____
Office and general expense ____ ____
Professional fees expense ____ ____
Wages and benefits 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.
2.The following information was taken from the 2004 financial statements of
pharmaceutical giant Merck and Co. All dollar amounts are in millions.
Retained earnings, January 1, 2004 $34,142.0
Materials and production expense 4,959.8
Marketing and administrative expense 7,346.3
Dividends 3,329.1
Sales revenue 22,938.6
Research and development expense 4,010.2
Tax expense 2.161.1
Other revenue 1,352.2
Instructions.
(a)After analyzing the data, prepare an income statement and a retained earnings statement
for the year ending December 31,2004.
(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?
3.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 2004 income statement and balance sheet. All dollars
are in millions.
_____Retained earnings $2,701.3 _____ Long-term debt
$3,892.6
_____Cost of goods sold 5,298.7 _____ Inventories 681.0
_____Selling and administrative expense 2,634.1 _____ Net sales 9,613.9
_____Cash 417.4 _____ Accounts payable
767.2
_____Notes payable 709.7 _____Common stock 103.8
_____Interest expense 308.6 _____ Income tax expense
475.3
_____ Other expense 6.6
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,
2004.
4.The following items were taken from the balance sheet of Nike, Inc.
(1)Cash $828.0 (7) Inventories
$1,633.6
(2)Accounts receivable 2,120.2 (8) Income taxes payable
118.2
(3)Common stock 890.6 (9) Property, plant, and equipment
1,586.9
(4)Notes payable 146.0 (10)Retained earnings
3,891.1
(5)Other assets 1,722.9 (11)Accounts payable
763.8
(6)Other liabilities 2,081.9
Instructions.
Perform each of the following.
(a)Classify each of these items as an asset, liability, or stockholders’ equity.
(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 dose Nike rely on debt versus equity financing?
Chapter 2.
1．These items are taken from the financial statements of Donovan Co. at December 31.2007
Building $105,800
Accounts receivable 12,600
Prepaid insurance 4,680
Cash 16,840
Equipment 82,400
Land 61,200
Insurance expense 780
Depreciation expense 5,300
Interest expense 2,600
Common stock 62,000
Retained earnings (January 1, 2007) 40,000
Accumulated depreciation-building 45,600
Accounts payable 9,500
Mortgage payable 93,600
Accumulated depreciation-equipment 18,720
Interest payable 3,600
Bowling revenues 19,180
Instructions.
Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be
paid in 2008.
2. The following items were taken from the 2004 financial statements of Texas Instruments,
Inc.(All dollars are in millions.)
Long-term debt $ 368 Cash $ 2,668
Common stock 2,488 Accumulated depreciation 5,655
Prepaid expense 326 Accounts payable 1,444
Property, plant, and equipment 9,573 Other noncurrent assets 1,927
Other current assets 554 Other noncurrent liabilities
943
Other current liabilities 470 Retained earnings 10,575
Long-term investments 264 Accounts receivable 1,696
Short-term investments 3,690 Inventories 1,256
Loans payable in 2005 11
Instructions.
Prepare a classified balance sheet in good form as of December 31, 2004.
3. These financial statement items are for Snyder Corporation at year-end, July 31, 2007.
Salaries payable $ 2,080
Salaries expense 51,700
Utilities expense 22,600
Equipment 18,500
Accounts payable 4,100
Commission revenue 61,100
Rent revenue 8,500
Long-term note payable 1,800
Common stock 16,000
Cash 24,200
Accounts receivable 9,780
Accumulated depreciation 6,000
Dividends 4,000
Depreciation expense 4,000
Retained earnings (beginning of the year) 35,200
Instructions.
(a)Prepare an income statement and a retained earnings statement for the year. Snyder
Corporation did not issue any new stock during the year.
(b)Prepare a classified balance sheet at July 31.
(c)Compute the current ratio and debt to total assets ratio.
(d)Suppose that you are the president of Allied Equipment. Your sales manager has
approached you with a proposal to sell $20,000 of equipment to Snyder. He would like
to provide a loan to Snyder in the form of a 10%, 5-year note payable. Evaluate how
this loan would change Snyder’s current ratio and debt to total assets ratio, and
discuss whether you would make the sale.
4. The chief financial officer (CFO) of SuperClean Corporation requested that the
accounting department prepare a preliminary balance sheet on December 30, 007, so that
the CFO could get an idea of how the company stood. He knows that certain debt agreements
with its creditors require the company to maintain a current ratio of at least 2:1. The
preliminary balance sheet is as follows.
SUPERCLEAN CORP.
Balance Sheet
December 30, 2007
Current assets Current liabilities
Cash $30,000 Accounts payable $25,000
Accounts receivable 20,000 Salaries payable 15,000 $40,000 Prepaid insurance 10,000 $60,000 Long-term liabilities
Notes payable 80,000 Total liabilities 120,000 Property, plant, and equipment (net) 200,000 Stockholders’ equity
Total assets $260,000 Common stock 100,000
Retained earnings 40,000 140,000
Total liabilities and stockholders equity$260,000
Instructions.
(a)Calculate the current ratio and working capital based on the preliminary balance sheet.
(b)Based on the results in (a), the CFO requested that $25,000 of cash be used to pay
off the balance of the accounts payable account on December 31, 2007. Calculate the new current ratio and working capital after the company takes these actions.
(c)Discuss the pros and cons of the current ratio and working capital as measures of
liquidity.
(d)Was it unethical for the CFO to take these steps?
5. The following data were taken from the 2004 and 2003 financial statements of American Eagle Outfitters. (All dollars are in thousands.)
2004 2003 Current assets $525,623 $427,878
Total assets 865,071 741,339
Current liabilities 189,035 141,586
Total liabilities 221,401 163,857
Total stockholders’ equity 643,670 577,482
Cash provided by operating activities 189,469 104,548
Capital expenditures 64,173 61,407
Dividends paid -0- -0-
Instructions.
Perform each of the following.
(a)Calculate the debt to total assets ratio for each year.
(b)Calculate the free cash flow for each year.
(c)Discuss American Eagle’s solvency in 2004 versus 2003.
(d)Discuss American Eagle’s ability to finance its investment activities with cash
provided by operating activities, and how any deficiency would be met.
Chapter 3.
1．During 2007, its first year of operations as a delivery service, Cheng Corp.
entered into the following transactions.
(1)Issued shares of common stock to investors in exchange for $110,000 in cash.
(2)Borrowed $45,000 by issuing bonds.
(3)Purchased delivery trucks for $60,000 cash.
(4)Received $16,000 from customers for services provided.
(5)Purchased supplies for $4,200 on account.
(6)Paid rent of $5,600.
(7)Performed services on account for $8,000.
(8)Paid salaries of $28,000.
(9)Paid a dividend of $11,000 to shareholders.
Instructions
Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to Stockholders’Equity in the right-hand margin.
Assets = Liabilities +