financial accounting 习题答案文档

会计学原理FinancialAccountingbyRobertLibby答案Chapter 1Financial Statements and Business Decisions***** TO *****NS1.Accounting is a system that collects and processes (analyzes, measures, and records)financial information about an organization and reports that information to decision makers.2.Financial accounting involves preparation of the four basic financial statements andrelated disclosures for external decision makers. Managerial accounting involves the preparation of detailed plans, budgets, forecasts, and performance reports for internal decision makers.3.Financial reports are used by both internal and external groups and individuals. Theinternal groups are comprised of the various managers of the entity. The external groups include the owners, investors, creditors, governmental agencies, other interested parties, and the public at large.4.Investors purchase all or part of a business and hope to gain by receiving part of whatthe company earns and/or selling the company in the future at a higher price than they paid. Creditors lend money to a company for a specific length of time and hope to gain by charging interest on the loan.5.In a society each organization can be defined as a separate accounting entity. Anaccounting entity is the organization for which financial data are to be collected.Typical accounting entities are a business, a church, agovernmental unit, a university and other nonprofit organizations such as a hospital and a welfare organization. A business typically is defined and treated as a separate entity because the owners, creditors, investors, and other interested parties need to evaluate its performance and its potential separately from other entities and from its owners.6.Name of StatementAlternative Title(a) Income Statement(a)Statement of Earnings; Statement of Income; Statement of Operations(b)Balance Sheet(b)Statement of Financial Position(c)Audit Report(c)Report of Independent AccountantsIrwin/McGraw-HillThe McGraw-Hill Companies, Inc., 2001Financial Accounting, 2/e1-113.The accounting equation for the balance sheet is: Assets = L iabilities + Stockholders’Equity. Assets are the probable (expected) future economic benefits owned by the entity as a result of past transactions. They are the resources owned by the business at a given point in time such as cash, receivables, inventory, machinery, buildings, land, and patents. Liabilities are probable (expected) debts or obligations of the entity as a result of past transactions which will be paid with assets or services in the future. They are the obligations of the entity such as accounts payable, notes payable, and bonds payable. Stockholders’ equity is financing provided by owners of the business and operations. It is the claim of the owners to the assets of the business after the creditor claims have been satisfied. It may be thought of as the residual interest because it represents assets minus liabilities.14.The accounting equation for the statement of cash flows is: Cash flows from operating activities + Cash flows from investing activities + Cash flows fromfinancing activities = Change in cash for the period. The net cash flows for the period represent the increase or decrease in cash that occurred during the period. Cash flows from operating activities are cash flows directly related to earning income (normal business activity including interest paid and income taxes paid). Cash flows from investing activities include cash flows that are related to the acquisition or sale of productive assets used by the company. Cash flows from financing activities are directly related to the financing of the enterprise itself.15.The accounting equation for the statement of retained earnings is: Ending RetainedEarnings = Beginning Retained Earnings + Net Income - Dividends. It begins with beginning-of-the-year Retained Earnings which is the prior year’s ending retained earnings reported on the balance sheet. The current year's Net Incomereported on the income statement is added and the current year's Dividends are subtracted from this amount. The ending Retained Earnings amount is reported on the end-of-periodbalance sheet.16.Marketing managers and credit managers use customers' financial statements todecide whether to extend them credit for their purchases. Purchasing managers use potential suppliers' financial statements to judge whether the suppliers have theresources necessary to meet current and future demand. Human resource managers use financial statements as a basis for contract negotiations, to determine what pay rates the company can afford. The net income figure even serves as a basis to pay bonuses not only to management, but to other employees through profit sharing plans.17.The Securities and Exchange Commission (SEC) is the U.S. government agencywhich determines the financial statements that public companiesmust provide to stockholders and the measurement rules used in producing those statements. The Financial Accounting Standards Board (FASB) is the private sector body given the primary responsibility to work out the detailed rules which become generally accepted accounting principles.7.The heading of each of the four required financial statements should include thefollowing:(a) Name of the entity(b) Name of the statement(c) Date of the statement, or the period of time(d) Unit of measure8.(a)The purpose of the income statement is to present information about therevenues, expenses, and the income of the entity for a specified period of time.(b)The purpose of the balance sheet is to report the financial position of an entity at a given date, that is, to report information about the assets, obligations and stockholders’ equity of the entity as of a specific date.(c)The purpose of the statement of cash flows is to present information about the flow of cash into the entity (sources), the flow of cash out of the entity (uses), and the net increase or decrease in cash during the period.(d)The statement of retained earnings reports the cumulative amount of earnings for a corporation less any dividends declared and paid.9.The income statement and the statement of cash flows are dated “For the Year EndedDecember 31, 20X,” because they report the inflows and outflowsof resources during a period of time. In contrast, the balance sheet is dated “At December 31, 20X”because it represents the resources, obligations and stockholders’ equity at a specific date.10.Assets are important to creditors and investors because assets provide a basis forjudging whether sufficient resources are available to operate the company. Assets are also important because they could be sold for cash in the event the company goes out of business. Liabilities are important to creditors and investors because the company must be able to generate sufficient cash from operations or further borrowing to meet the payments required by debt agreements. If a business does not pay its creditors, the law may give the creditors the right to force the sale of assets sufficient to meet their http://.cn income is the excess of total revenues over total expenses. Net loss is the excess of total expenses over total revenues. Breakeven is when the total revenues and total expenses are exactly equal.12.The accounting equation for the income statement is Revenues - Expenses = Net Income. Thus, the three major items reported on the income statement are (1) revenues, (2) expenses, and (3) income.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 20011-2 Solutions Manual18.Management is responsible for preparing the financial statements and otherinformation contained in the annual report and for the maintenance of a system of internal accounting policies, procedures and controls intended to provide reasonable assurance, at appropriate cost, that transactions are processed in accordance with company authorization and are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. Independentexamine the financial reports (prepared by management) and the underlying records to assure that the reports represent what they claim and conform with generally accepted accounting principles (GAAP). 19.A sole proprietorship is an unincorporated business owned by one individual. Apartnership is an unincorporated association of two or more individuals to carry on a business. A corporation is a business that is organized under the laws of a particular state whereby a charter is granted and the entity is authorized to issue shares of stock as evidence of ownership by the owners (i.e., stockholders).20.A CPA firm normally renders three services: auditing, management advisory services,and tax services. Auditing involves examination of the records and financial reports to determine whether they “fairly present” the financial position and results of operations of the entity. Management advisory service involves management advice to the individual business enterprises and other entities. It is like a consulting firm. Tax service involves providing tax planning advice to clients (both individuals and businesses) and preparation of their tax returns.Authors' Recommended Solution Time(Time in minutes)AlternateCases andMini-exercisesExercisesProblemsProblemsProjectsNo.TimeNo.TimeNo.TimeNo.TimeNo.Time********-*************-********-********-********-**********9259*************************143014** Due to the nature of these cases and projects, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sharpen research skills, we devote class time discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries.Irwin/McGraw-HillThe McGraw-Hill Companies, Inc., 2001Financial Accounting, 2/e1-5*****ESE1C1.Term or AbbreviationDefinitionK(1)SECA.A system that collects and processes financialG(2)Auditinformation about an organization and reports that (3)Sole proprietorshipinformation to decision makers.E(4)CorporationB.Measurement of information about an entity in theA(5)Accountingmonetary unitCdollars or other national currency.D(6)Separate entityC.An unincorporated business owned by two or more(7)Audit reportpersons.F(8)Cost principleD.The organization for which financial data are to beC(9)Partnershipcollected (separate and distinct from its owners).O(10)AICPAE.An incorporated entity that issues shares of stock as(11)FASBevidence of ownership.H(12)CPAF.Initial recording of financial statement elements atB(13)Unit of measureacquisition cost.N(14)GAAPG.An examination of the financial reports to assure that they(15)Publicly tradedrepresent what they claim and conform with generally accepted accounting principles.H.Certified Public Accountant.I.An unincorporated business owned by one person.J.A report that describes the auditors’ opinion of thefairness of the financial statement presentations and the evidence gathered to support that opinion.K.Securities and Exchange Commission.L.Financial Accounting Standards Board.M.A company that can be bought and sold by investors onestablished stock exchanges .N.Generally Accepted Accounting Principles.O.American Institute of Certified Public Accountants.MINI-*****ESM1C1.ElementFinancial StatementB(1)ExpensesA. Balance SheetD(2)Cash Flow from Investing ActivitiesB. Income StatementA(3)AssetsC. Statement of Retained EarningsC(4)DividendsD. Statement of Cash FlowsB(5)RevenuesD(6)Cash Flow from Operating ActivitiesA(7)LiabilitiesD(8)Cash Flow from Financing ActivitiesM1C2.SE(1)Retained earnings(2)Accounts receivable(3)Sales revenue(4)Property, plant, and equipmentE(5)Cost of goods sold expense(6)Inventories(7)Interest expense(8)Accounts payableA(9)LandM1C3.AbbreviationFull Designation(1)CPACertified Public Accountant(2)GAAPGenerally Accepted Accounting Principles(3)CMACertified Management Accountant(4)AICPAAmerican Institute of Certified Public Accountants(5)SECSecurities and Exchange Commission(6) FASBFinancial Accounting Standards BoardIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 20011-6 Solutions ManualE1C2.L(1)Accounts payableA(2)Accounts receivableA(3)Cash and cash equivalentsE(4)Cost of products soldA(5)Property, plant and equipmentE(6)Income taxesE(7)InterestexpenseA(8)InventoriesA(9)LandE(10)Marketing, administrative, and other operating expensesL(11)Long-term debtR(12)Net salesL(13)Notes payableSE(14)Retained earningsL(15)Taxes payableE1C3.L(1)Accounts payableA(10)BuildingsA(2)Accounts receivableA(11)Cash and cash equivalents E(3)Cost of goods soldA(12)LandE(4)Distribution and warehousingA(13)Machinery and equipment L(5)Dividends payableE(14)Marketing, selling andadvertisingE(6)General and administrativeR(15)Net salesL(7)Income taxes payable L(16)Notes payable to banks A(8)InventoriesE(17)Provision for income taxes* A(9)InvestmentsSE(18)Retained earnings*Note that “Provision for income taxes” is a common synonym for “Income tax expense.”Honda Motor Co., Ltd.Balance Sheet as of March 31, 20A(in millions of Yen)Cash and cash equivalents150,554Trade accounts, notes, and other receivables817,761Inventories606,689Investments212,294Net property, plant and equipment1,008,196Other assets 213,845Total assetsAccounts payable and other current liabilities 1,308,748Long-term debt569,479Other liabilities94,485Contributedcapital281,208Retained earnings755,419Total liabilities an d stockholders’ equityIrwin/McGraw-HillThe McGraw-Hill Companies, Inc., 2001Financial Accounting, 2/e1-9E1C7.WAL-MART STORES, INC.Income StatementFor the Quarter ended October 31, 20A(in thousands)Net sales$20,417,717Rental and other income Total revenues$20,652,833 Cost of sales$16,200,873Operating, selling and general and 3,340,263administrative expensesInterest costs184,190Total costs and expenses19,725,326Pretax income$ 927,507Provision for income taxes* 339,422Net income*Note that “Provision for income taxes” is a common synonym for “Income tax expense.”E1C8.HOME REALTY, *****RATEDIncome StatementFor the Year Ended December 31, 20CRevenue:Commissions earned ($150,000+$16,000)$166,000 Rental service fees 20,000Total revenues $186,000Expenses:Salaries expense$ 62,000 Commission expense 35,000 Payroll tax expense 2,500 Rent expense ($2,200+$200)* 2,400 Utilities expense 1,600 Promotion and advertising expense 8,000 Miscellaneous expenses 500Total expenses (excluding income taxes)112,000Pretax income$74,000Income tax expense 18,500Net Income*$2,200 has been paid for 11 months ($200 per month) plus $200 owed for December.Req. 1READ MORE STOREBalance SheetAt December 31, 20AASSETS*****TIESCash$48,900Accounts payable $8,000Accounts receivable26,000Note payable2,000Storeand office equipment48,000Interest payable 120 Total liabilities$10,120*****LDERS’ *****ontributed capital$100,000Retained earnings12,780 Total stockholders’ equity112,780Total liabilities andTotal assets$122,900stockholders' equity$122,900Req. 2Net income for the year was $12,780. This is the first year of operations and no dividends were declared or paid to stockholders; therefore, retained earnings is $12,780 (which represents income for one year).E1C6.THE *****ATE SHOPIncome StatementFor the Month of January 20ARevenue from Sales:Sales:Cash$120,000On credit1,000Total sales revenue$121,000Expenses:Cost of goods sold$ 40,000Salaries, rent, supplies, and otherexpenses (paid in cash)38,000Utilities600Total Expenses78,600Net IncomeIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 20011-10Solutions ManualE1C9.ABCDTotal Expenses = $50,000 - $13,000 =EE1C10.CLAY *****TIONIncome StatementFor the Month of January 20ATotal revenues$130,000Less: Total expenses (excluding income tax) 80,000Pretax income$ 50,000Less: Income tax expense15,000Net incomeCLAY *****TIONBalance SheetAt January 31, 20AAssets Cash$30,000 Receivables from customers 15,000 Merchandise inventory 42,000Total assetsLiabilities:Payables to suppliers$11,000 Income taxes payable15,000Total liabilities26,000Stockholders' equity:Contributed capital (2,600 shares)$26,000 Retained earnings (from income statement above) 35,00061,000Total liabilities and stockholders' equity1.Average monthly revenue, $216,000÷ 12 = $18,000.2.Monthlyrent, $21,000 ÷ 12 = $1,750.3.“Supplies, $25,000” is an expense because it represents the cost of supplies used inperforming the services sold. Use of the supplies caused their purchase cost to be an expense of the period when used.4.“Interest” is an expense because it represents the cost of borrowing. The company hasan outstanding loan (from another party) and this $8,000 is the amount of interest(owed, if not already paid) on that debt; therefore the interest for 20A on the loan is an expense of 20A (whether or not paid by December 31).5.Average income tax rate, $21,000 ÷ $60,000 = 35%.6.Standing alone, the income statement does not report, or make it possible todetermine, the ending cash balance. This financial item isreported on the balance sheet under assets and on the cash flow statement as the final amount reported.7.Price/earnings ratio, $468,000/$39,000 = 12.E1C12.(O)(1)Cash paid to suppliers and employeesO(2)Cash received from customers(O)(3)Income taxes paidO(4)Interest and dividends received(O)(5)Interest paidI(6)Proceeds from sale of investment in Conner Peripherals, Inc.(I)(7)Purchases of property, plant, and equipment(F)(8)Repayment of borrowingsIrwin/McGraw-HillThe McGraw-Hill Companies, Inc., 2001Financial Accounting, 2/e1-13*****S(Note to the instructor: Most students find the Problems in this chapter to be quite challenging.)P1C1.Req. 1**********Income StatementFor the Year Ended December 31, 20ATotal sales revenue (given)$140,000Total expenses (given) 89,100Pretax income50,900Income tax expense ($50,900 x 30%) 15,270Net incomeReq. 2***** *****Balance SheetAt December 31, 20AAssets:Cash (given)$25,000Receivables from customers (given) 12,000Inventory of merchandise (given) 90,000Equipment (given)Total Assets Liabilities:Accounts payable$47,370Salary payable (given)Total Liabilities$ 49,370Stockholders' equity:Contributed capital (given)$87,000Retained earnings*Total stockholders' equity122,630Total liabilities and stockholders' equity*Beginning RE ($C0C) + Net income ($35,630) C Dividends ($C0C) = Ending RE ($35,630).NITSU *****TURING *****TIONStatement of Cash FlowsFor the Year Ended December 31, 20DCash flow from operating activitiesRevenues$270,000 Expenses (180,000)Net cash flow from operating activities $90,000Cash flow from investing activities Sale of land 15,000 Purchase of new machines (38,000)Net cash flow from investing activities (23,000)Cash flow from financing activities Sale of capital stock 30,000 Payment on long-term notes (80,000) Payment of cash dividends (22,000)Net cash flow from financing activities (72,000)Net decrease in cash (5,000)Cash at beginning of year 63,000Cash at end of year E1C14.Req. 1PAUL'S *****SCash Flow from OperationsFor the Month of January 20ACash InflowsCash services$105,000Cash Outflows:Salaries and wages$50,000Other expenses paid 26,000Total cash outflowsDifference: Net increase (decrease) in cashReq. 2Reconciliation with income: Income (positive)$40,500 Noncash services (30,500) Noncash expenses ($3,000 + $2,000 + $500 + $13,500) 19,000 Net increase (decrease) in cashIrwin/McGraw-Hill The McGraw-Hill Companies, Inc., 20011-14 Solutions ManualP1C2.Req. 1SUSAN'S LAWN *****Income StatementFor the Three Months Ended August 31, 20ARevenues from services:Lawn serviceCcash$12,600Ccredit800Total revenues$13,400Expenses:Gas, oil, and lubrication ($920+$200) 1,120Pickup repairs 210Repair of mowers75Miscellaneous supplies used 80Helpers (wages) 4,500Payroll taxes175Preparation of payroll tax forms 25Insurance 125Telephone 110Interest expense on note paid 75Equipment use cost (depreciation)500Total expenses6,995Net incomeReq. 2Because the above report reflects only revenues, expenses, and net income, it is reasonable to suppose that Susan would need the following:(1)A balance sheetCthat is, a statement that reports for the business, at the end of 20A, each asset (name and amount, such as Cash, $XX), each liability (such as Wages Payable, $XX), and stockholders’ equity.(2)A Statement of Cash FlowsCthat is, a statement of the inflows and outflows of cash during the period in three categories: operations, investing, and financing.Req. 1Req. 2CExplanationTransactionIncomeCash(a)$+66,000$+55,000All services performed increase income;cash received during the period was, $66,000 x 5/6 = $55,000. (b)C0C +30,000Cash borrowed is not income.(c)C0CC2,700Purchase of the truck does not represent an expense; cash outflow was, $9,000 x30% = $2,700.(d)C36,000C30,000All expenses incurred reduce income; cash expended was, $36,000 x 5/6 =$30,000.(e)C2,400C2,250Not all of the supplies were used; expense is the amount used, $3,000 x 4/5 = $2,400.Cash paid during the quarter was, $3,000 x3/4= $2,250.(f)C21,000C10,500All of the wages incurred reduce income,$21,000; cash paid during the quarter was, $21,000 x 1/2 = $10,500. The $10,500 owed will be paid on the next payroll date.Based only on the above:Income (loss)Cash inflow (outflow)Irwin/McGraw-HillThe McGraw-Hill Companies, Inc., 2001Financial Accounting, 2/e1-17P1C4. (continued)Req. 4The amount of net resources (i.e., assets minus liabilities) for West Company, assuming the amounts provided by the owners are acceptable, would be:Assets ($322,000C$190,000)$132,000Liabilities97,000Net resources of the companyReq. 1The personal residences of the organizers are not resources of the business entity. Therefore, they should be excluded.Req. 2It is not indicated whether the $68,000 listed for service trucks and equipment is their cost when acquired or the current market value on December 31, 20A.Req. 3The list of company resources (i.e., assets) suggests the following areas of concern:Company resources:(1)Cash, inventories, and bills due from customers (i.e., accounts receivable)Ctheseitems tend to fluctuate; they may be significantly more or less atdate of the loan and during the term of the loan.(2)Service trucks and equipmentCas noted above, it is not indicated whether the $68,000 is cost when acquired or current market value on December 31, 20A.(3) Personal residencesCas noted above, these items are not resources of the business entity and should be excluded. Usually they would not be subject to creditors' claims against the corporation. Also, there is no indication whether the $190,000 is cost at acquisition or current market value at December 31, 20A. Also, there is no indication as to any amounts that might be owed on the residences.Company obligations:(4)Unpaid wages of $19,000, which are now due, pose a serious problem becauseonly $12,000 cash currently is available.(5)Unpaid taxes and accounts payable to suppliersCit is not clear when thesepayments of $8,000 and $10,000, respectively, are due (cash needed to pay them is a problem).(6)The $50,000 owed on the service trucks probably is long term; however, short-terminstallments may be requiredCthese details are very important to the bank.(7)Loan from organizerCthe expected payment date and interest rate are important issues for which details are not provided. This is a major cash demand.In general, the bank should request more details about the specific resources and debts. The personal residences are not a part of the resources of the business entity. The bank should request that the owners provide audited information about the entity's assets and debts.Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 20011-18Solutions Manual*****TE *****SAP1C1.Req. 1*****N *****TIONIncome StatementFor the Year Ended June 30, 20CTotal sales revenue (given)$90,000Total expenses (given) 60,500Pretax income29,500Income tax expense ($29,500 x 30%) 8,850Net incomeReq. 2*****N *****TIONBalance SheetAt June 30, 20CAssets:Cash (given)$13,150Receivables from customers (given) 9,500Inventory of merchandise (given) 57,000Equipment (given) 36,000Total Assets Liabilities:Accounts payable (given)$31,500Salary payable (given)1,500Total Liabilities$ 33,000Stockholders' equity:Contributed capital (given)$62,000Retained earnings*20,650Total stockholders' equityTotal liabilities and stockholders' equity* Beginning RE ($0) + Net income ($20,650) C Dividends ($0) = Ending RE ($20,650).Req. 1ABEL *****C REPAIR *****, INC.Income StatementFor the Three Months Ended December 31, 20ARevenues from services:Electric repair servicesCcash$32,000Ccredit3,000Total revenues$35,000Expenses:Electrician's assistant (wages) 8,500Payroll taxes175Supplies used on jobs9,500Oil, gas, and maintenance on truck 1,200Insurance700Rent ($500+$200) 700Utilities and telephone 825Miscellaneous expenses600Depreciation of truck and tools (use)1,200Total expenses23,400Pretax income11,600Income taxes ($11,600 x 30%)3,480Net income Req. 2Because the above report reflects only revenues, expenses, and net income, it is reasonable to suppose that John would have need for the following:(1)A statement that reports for the business, at the end of 20A, each asset (name and amount such as Cash, $XX), and each liability (such as Income taxes payable, $XX), and stockholders' equity; that is, a balance sheet.(2)A statement of the sources and uses of cash during the period;that is, a statement of cash flows.Irwin/McGraw-HillThe McGraw-Hill Companies, Inc., 2001Financial Accounting, 2/e1-21$133,363,000= $28,069,000 + $105,294,000CASES AND *****S CP1C1.1.Net income was $54,118 thousand or $54,118,000. This is disclosed on the income statement. The instructor should note that the reported numbers are in thousands. Some students will erroneously report income as $54,118. Students should also be warned that different companies often use different terminology―some companies may use the term “net earnings” to describe net http://.cn sales were $587,600,000. This is also disclosed on the income statement.3.Inventory is $49,688,000. This is disclosed on the balance sheet.4.Cash and cash equivalents increased by $23,581,000 during the year. This amount can be computed from the balance sheet or it can be found on the statement of cash flows.5.The auditor is Ernst Young. This is found on the auditor’s report (in this case, called the “report of independent auditors”).CP1C2.1.It sells a variety of general consumer products, especially clothing.2.Yes. It reported increased sales, record earnings, and increasing growth rates.3.The company’s fiscal year ends on January 31.4.a. Balance SheetsC2 yearsb. Income StatementsC3 yearsc. Cash Flow StatementsC3 years。

CHAPTER 1FINANCIAL ACCOUNTING ANDITS ECONOMIC CONTEXTISSUES FOR DISCUSSIONID1–1Security analysts and stockholders: These users would use financial statements to try to estimate the future earnings and cash flow potential of the company, which would be used to project a value for the company’s stock.Bank loan officers: These users would use the financial statements to determine the ability of a company to repay loans to the bank.A company’s customers and suppliers: These users would use financial statements todetermine whether to extend credit to the company (suppliers) or whether to rely upon the company to be a supplier (customers). Both suppliers and customers would also use the financial statements to monitor the company’s profit margins.Public utilities: This group would use the financial statements to determine the company’s growth rate and how that might impact upon the company’s utility needs. Also, they would evaluate the company’s ability to pay its bills.Labor unions: These groups would use the financial statements to monitor the profitability of the company to help determine the amount of pay raises and benefits that it will negotiate for from the company.A company’s managers: The company’s managers will use the financial statements to assessthe overall financial health of the company. This could impact the managers in a number of ways: raises, promotion opportunities, performance of other departments, etc.ID1–2The board of directors serves various functions for a company. One is to represent and protect the interests of the stockholders who are not on the board. Another is to provide oversight and input to management. The managers are involved in running the business on a day-to-day basis whereas the board is more focused on the bigger, long-term picture. A weak board may not ask probing questions of management but instead may take everything at face value and believe anything that management says to them. A healthy management team would want a strong board that delivers valuable input. A management team that wants a weak board of directors may be trying to hide something (management fraud).Auditors are concerned with management fraud because, if there is a problem, in many cases the auditors will be sued by the stockholders on the basis that the auditors should have detected the fraud.ID1–3The function of the audit committee is to provide a channel whereby the auditors report their findings and concerns, if any, to the board of directors. Typically there are outside members of the board that are on the audit committee so that if the auditors have concerns about management’s financial statements or activities, then the auditors have a way to speak directly to the board of directors.The auditors are in a sensitive position because the financial statements and activities that they are auditing are prepared by the same people who hire and pay the auditors. Therefore, they may be reluctant to jeopardize their relationship with the company by being too negative.ID1–4Since Pepsi’s profits increased by a greater percentage than sales increased, it must mean that expenses as a percentage of sales dropped. Pepsi was able to improve its profitability per dollar of sales.The growth in equity was larger than the growth in assets, indicating that Pepsi reduced its liabilities. The financing activities verify that Pepsi used a significant amount of cash, partially to reduce debt. In addition to the reduction in liabilities, the strong cash flow from operations was used to purchase additional assets for the company.ID1–5Creditors would impose these types of restrictions on Continental Airlines so that the creditors would be protected for their loans. These types of restrictions are fairly common and act as a trip wire to warn the creditors that business may not be going well. The cash restriction would force Continental to have enough cash to pay the interest on the debt, the minimum stockholders’ equity makes sure that there are assets to act as collateral for the loans, and the restriction of dividends insures that management doesn’t distribute cash or assets out to the stockholders and not leave assets in the company to satisfy the creditors.These restrictions act as trip wires in that as soon as a restriction is violated the creditors can call the debt and force the company to pay back the loans. What is more typical is for the loans to be restructured. This usually means higher interest rates and fees to do the restructuring. These all put the creditors in a better position to protect their loans.ID1–6Companies would usually engage in this type of behavior to try to improve their stock price. By showing higher revenues or lower expenses investors are more likely to reward the company with a higher stock price. Companies that have negative cash flow are under a lot of pressure to maintain a high stock price since selling stock is the only way to fund the business. This type of incentive can lead to questionable behavior.The ethical implications are significant because if investors lose faith in the financial statements that are reported this would severely impact the stock market. A strong driver to a robust economy is access to capital (stock markets). If this source is reduced because investors don’t believe the numbers that are reported, a very bad impact on the overall economy would result.ID1–7This is the normal statement that an auditor would make about a company whose books it had audited and found no significant problems. This would be part of what is called a “non-qualified opinion”. If there was a particular item that the auditors did not agree with they would issue a “qualified opinion” – they would agree with everything except the qualified item that would be identified.“In our opinion”, it is their opinion and not a fact, “fairly, in all material respects”, means that the auditors can not say that every single number is exactly accurate to the penny but that the numbers are generally about right. This reflects the concept of materiality. The auditors believe that all material items have been presented accurately. “in conformity with generally accepted accounting principles”, this means that the financial statements have been compiled in a way that meets all of the accounting principles that are called GAAP.ID1–8Corporate governance describes the relationship among the stakeholders of a company, mainly : the shareholders, the Board of Directors, management and the company’s auditors.Corporate governance mechanisms encourage management and the Board of Directors to act in the best interest of the shareholders and to provide the shareholders with accurate and timely financial information. The Sarbanes-Oxley Act was passed to upgrade the financial transparency of corporate operations, requiring increased financial disclosures and management responsibilities for the intergrity of the financial statements. Improved information provided to shareholders and other providers of capital will strenghten the confidence in the financial system, ultimately benefitting both providers and users of capital.ID1–9Management is charged with the responsibility to benefit the shareholders’ investment in the company. Choosing investments that will boost the short-term results of the company in lieu of long-term gains does not meet this requirement. While satisfying the needs of Wall Street analysts for short-term results, a management decision to forego larger long-term returns violates the relationship between the owners of the company and the management of the company. Many observers feel that short-term profit pressures from analysts have caused management to ignore its responsibility to work for the long-term benefit of the shareholder.ID1–10While the NYSE is reacting to potential rules changes based on marketing considerations, the SEC is reacting based on a desire to improve the quality of financial information that companies disclose. The SEC has a very strong argument in that the US equity markets are the largest and most liquid markets in the world. All other countries would love to have a financial market like the ones that exist in the US.One of the possible reasons that other countries don’t want to adopt the same accounting rules as exist in the US is that their companies may not compare well with US companies that have been operating under the stricter rules. To lower the accounting standards may have the impact of influencing the US capital markets to look more like capital markets in other countries, which would not be good for the US economy.ID1–11Many experts agree that one of the driving forces recently in economic growth has been the globalization of the economy, with countries across the world doing more and more business with each other. This globalization is threatened when the companies cannot agree on a uniform set of guidelines covering a business practice as important as financial reporting. The flow of capital is dependent on transparent and accurate financial information. If countries cannot agree on accounting standards, the ability of those companies to do business in each other’s markets, and the ability of capital to move from one country to another, will be limited.ID1–12Management accounting is the accounting system that generates information that is used exclusively by the managers of the company. Financial accounting refers to the financial statements that are prepared and distributed outside of the company. So in many cases management accounting information is the operational information used by the managers of the company. This can be very proprietary to the company and so is not made public.Management accounting numbers are not subject to audit and therefore are prepared in whatever form is helpful to the manager.Financial accounting information is audited and therefore has to follow GAAP. Its primary purpose is to be used by people outside of the company.ID1-13a. Home Depot is a large retailing company, focusing on hardware sales to consumers andcontractors. It is a retailer because it does not manufacture the goods that it sells. It buys products from vendors and offers those products for sale in its stores.b. The firm of KPMG audits the financial statements of Home Depot. The audit report consists of4 paragraphs. The first paragraph states what years and financial statements were auditedand therefore being commented upon by this audit report. The second paragraph explains what an audit is intended to do and how the company has gone about doing this audit. The third paragraph states the auditors’ opinion regarding the financial statements that have been audited. The final paragraph indicates a change in accounting methods by the company.c. Net income in 2003 was $4,304,000,000, for 2002 net income was $3,664,000,000 and for2001 net income was $3,044,000,000.d. 2003 2002Current liabilities $9,554 27.7% $8,035 26.8%Long-term liabilities 2,476 7.2% 2,174 7.2%Total assets $34,437 $30,011From 2002 to 2003 Home Depot increased its current liabilities by $1.5 billion and increased its long-term liabilities by $300 million. As a percentage of total assets, however, long-term liabilities remained constant. The ratio of current liabilities to total assets increased by nearly a percentage point. This shows that the increase in total assets (over $4 billion) was generated by the increase in current liabilities and net income.e. Cash from operating activities was $6,545,000,000 in 2003, in 2002 it was $4,802,000,000 andin 2001 was $5,963,000,000.f. Home Depot is considered to be one of the best-managed companies in the US. The companyis extremely profitable (see c above), growing and well-capitalized. This financial condition is reflected in the company’s cash balance of over $2.8 billion and shareholders’ equity of over $22 billion.。

CHAPTER 8INVESTMENTS IN EQUITY SECURITIESBRIEF EXERCISESBE8–1a. Comprehensive income includes the change in value assets that have been sold and incertain assets that the company has not sold. Net income only includes the changes in assets that have been sold.b. Through the first two years (‘01-’02) the prices of these investments increased by $11 and$73. In 2003 Merck shows an unrealized loss of $46.BE8–2Bristol-Myers Squibb designated its Marketable Securities as Available-for-Sale Securities and as such reflected holding gains/losses (unrealized) in Comprehensive Income, not on the Income Statement. The $23 million reflected a change in the market value of the Securities which were still owned by the company. The asset section of the balance sheet will also show the change, with the carrying value of the Securities adjusted by the $23 million.BE8–3a. Investment in Equity Securities (+A) 151Equity in net income of affiliates (R, +SE) 151b. The equity in net income of affiliates was deducted from the cash flow statement becausethe affilate income increased the company’s earnings but did not provide any cash to the company. The cash to the company would have come from dividends, but since no amount was deducted from the add-back to the cash flow statement, no cash was received from the affiliate companies.c. Since no dividends were received the asset increased by the amount of net income fromaffiliates recognized, $151 million.BE8–4Goodwill is the amount paid above fair value when assets are acquired. P & G, in its business growth strategy, has acquired other companies and has paid, collectively, $11.1 billion above the fair value of the assets acquired.1BE8–5Assets (+A) 1,323Goodwill (+A) 1,800Liabilities(+L) 323Cash(-A) 2,800Goodwill is an intangible asset that represents the excess above fair value paid for assets acquired.J & J paid $2.8 billion in cash and assumed liabilities. Balancing the journal entry, the company acquired assets with a fair value of $1.323 billion. Assets and liabilities increased by $323 million with no change to equity.EXERCISESE8–1a. (1) Trading Securities (+A)........................................................... 50,000Cash (–A).......................................................................... 50,000 Invested in IBM.(2) Trading Securities (+A)........................................................... 40,000Cash (–A).......................................................................... 40,000 Invested in GM.(3) Cash (+A)................................................................................ 45,000Trading Securities (–A)..................................................... 37,500Realized Price Increase on Sale of TradingSecurities (Ga, +SE)...................................................... 7,500 Sold IBM stock.(4) Cash (+A) (750)Dividend Receivable (750)Received dividend.(5) Trading Securities (+A)........................................................... 8,000Cash (–A).......................................................................... 8,000 Invested in Xerox.(6) Cash (+A)................................................................................ 7,500Realized Price Decrease on Sale of TradingSecurities (Lo, –SE).......................................................... 5,000Trading Securities (–A)..................................................... 12,500 Sold IBM stock.(7) Cash (+A)................................................................................ 11,600Trading Securities (–A)..................................................... 8,000Realized Gain on Sale of Marketable Securities (Ga, +SE) 3,600 Sold Xerox stock.(8) Cash (+A)................................................................................ 30,000Realized Loss on Sale of Trading Securities (Lo, –SE).......... 10,000Trading Securities (–A)..................................................... 40,000 Sold GM stock.E8–1 Concludedb. The transactions that affected the income statement for Monroe Auto Supplies are the gainsand losses Monroe Auto Supplies realized from selling marketable securities for amounts different from their purchase prices. Monroe Auto Supplies realized gains of $7,500 and $3,600, respectively, on the first sales of IBM and Xerox stock and realized losses of $5,000 and $10,000, respectively, on the second sale of IBM stock and on GM stock. Thus, the net effect of the dividends, gains, and losses on net income was to decrease net income by $3,900. The dividends received from the General Motors stock were recognized as income in the previous period.E8–2a. Change in the wealth level of each of the four companies can be computed by comparing thebeginning and year-end balance in the short-term equity investment account. Therefore, the amounts for each company are as follows.Wearever Fabrics $12,000Frames Corp. 2,000Pacific Transport (24,000)Video Magic 13,000b. The amount that should be reported as holding gains and losses on the income statement isalways due to changes in the market value of trading securities. Therefore, the holding gains and losses for each company are as follows.Wearever Fabrics $20,000Frames Corp. (10,000)Pacific Transport (20,000)Video Magic 10,000c. The reason that the answers to (a) and (b) are not the same is due to the fact that in part (a) thewealth charges are computed for the trading securities and available-for-sale securities together. In part (b) the holding gains and losses that are being reported on the income statement pertain to only trading securities. For the available-for-sale securities, the holding gains and losses are taken directly to the stockholders’ equity on the balance sheet via comprehensive income.E8–3a. (1) 1/28 Short-Term Investments (+A) (140)Cash (–A) (140)Invested in Able Co.(2) 2/18 Short-Term Investments (+A) (520)Cash (–A) (520)Invested in Baker Co.(3) 3/15 Cash (+A) (10)Dividend Revenue (R, +SE) (10)Received dividends.E8–3 Continued(4) 4/29 Cash (+A) (75)Short-Term Investments (–A) (70)Realized Gain on Sale of Short-TermInvestments (Ga, +SE) (5)Sold Able Co. stock.(5) 5/18 Cash (+A) (40)Dividend Revenue (R, +SE) (40)Received dividends.(6) 6/1 Cash (+A) (110)Realized Loss on Sale of Short-TermInvestments (Lo, –SE) (20)Marketable Securities (–A) (130)Sold Baker Co. stock.b. Cost Market ValueAble (5 shares) 70 85Baker (15 shares) 390 300Total 460 385June 30 Adjusting Entry(1) If Able and Baker are both considered trading securities:Unrealized Price Decrease on trading securities (Lo, –SE) (75)Trading Securities (–A) (75)Revalued trading securities to market.(2) If Able is a trading security and Baker is an available-for-sale security:AbleTrading Securities (+A) (15)Unrealized Price Increase on Trading Securities(Ga, +SE) (15)BakerUnrealized Price Decrease (–SE) (90)Available-for-Sale Securities (–A) (90)(3) If Able is considered an available-for-sale security and Baker is considered a tradingsecurity:AbleAvailable-for-Sale Securities (+A) (15)Unrealized Price Increase on Available-for-SaleSecurities (+SE) (15)BakerUnrealized Price Decrease on Trading Securities(Lo,–SE) (90)Trading Securities (–A) (90)E8–3 Concluded(4) If Able and Baker are both considered available-for-sale securities:Unrealized Price Decrease on Available-for-SaleSecurities (–SE) (75)Available-for-Sale Securities (–A) (75)c. Since management usually want to keep losses off the income statement, the secondcombination in (b) will depict the management as the most successful in the current period. All the losses ($90) are shown as unrealized losses in stockholders equity while the gain of $15 goes to the income statement.E8–4a. Trading Available-For-Sale2005 income $ 401 $ 0112/31/05 balance sheet investment value 200220022006 income 1031042006 balance sheet investment value 120512052007 income 206607 Total income $ 70 $ 701. 20 shares were purchased at $8, and on 12/31/05 their market value has increased to $10 ashare. An unrealized price increase of $40 for Trading Securities will go to the income statement, but the same unrealized gain for available-for-sale securities will go directly into the stockholders’ equity. Therefore there is no impact on the 2005 income statement.2. 20 shares @ $10 a share as of 12/31/05.3. 2006 Cash (+A) (90)Unrealized Price Increase (–Ga, –SE) (20)Trading Securities (100)Realized Price Increase (+Ga, +SE) (10)12/31/06 Trading Securities (+A) (20)Unrealized Price Increase (+Ga, +SE) (20)The net value of all income statement-related accounts is $10 of increase in income.4. For available-for-sale securities, the Journal entries would remain the same, but all theunrealized price increases would go directly to the stockholders’ equity account, leaving only $10 of realized gain on the income statement.5. Purchased 20 shares @ $8 = $16012/31/05 Mark to Market @ $10 = 40Sold 10 shares @ cost basis of $10 = (100)12/31/06 Mark to Market @ $12 = _ 2012/31/06 balance sheet value = $120E8–4 Concluded6. Cash (+A) (140)Unrealized Price Increase (–Ga, –SE) (40)Trading Securities (–A) (120)Realized Price Increase (+Ga, +SE) (60)7. For available-for-sale securities, the entry would remain the same, but the $40 unrealized priceincrease debit would go directly to the stockholders’ equity section, leaving the $60 realized gain on the income statement.b. Whether a security is classified as a trading security or available-for-sale security, the balancesheet investment value remains the same due to the mark-to-market rule. However, the classification does impact the income statement as can be seen from this problem. Overall, whether the security is a trading security or an available-for-sale security, the total income would remain the same.E8–5a. Fair market value of Biomet’s available-for-sale securities:20022003Cost $19,371 $21,065Gains 348 54Losses (3,401) (4,180)Fair value $16,318 $16,939b. The effect on the company’s comprehensive income associated with its available-for-salesecurities is:20022003Gains 348 54Losses (3,401) (4,180)Net losses $ (3,053) $(4,126)c. The income that would be realized would be $(4,126) [$7,179 - $3,053].Cash (+A)......................................................................................... 16,939Realized Price Decrease (Loss, –SE).............................................. 7,179 Available-for-sale Securities (–A).............................................. 21,065Unrealized Price Decrease (-Loss, -SE).................................... 3,053E8–6a.Tom MillerBalance SheetDecember 31, 2005Assets Liabilities & Stockholders' EquityCash.................................. $ 2,880 Accounts payable............. $ 1,500Marketable securities........ 3,840* Contributed capital........... 6,000Inventory............................ 1,500 Securities fair valueadjustments (available-for-sale)......................... 720**Total liabilities &Total assets....................... $ 8,220 stockholders' equity....... $ 8,220* $3,840 = 120 shares × $32** 720 = 3,840 – 3,120Larry RogersBalance SheetDecember 31, 2005Assets Liabilities & Stockholders' EquityCash.................................. $ 2,880b Accounts payable............. $ 1,500Marketable securities........ 3,840a Contributed capital........... 6,000Inventory............................ 1,500 Retained earnings............ 720cTotal liabilities &Total assets....................... $ 8,220 stockholders' equity....... $ 8,220a$3,840 = 20 shares x $32b$2,880 = $6,000 contributed by Larry – $3,120 for initial investment in Diskette + $3,840 in proceeds from sale of Diskette – $3,840 for reinvestment in Diskette.c$720 = $3,840 proceeds from sale of Diskette – $3,120 cost of Diskette.b.Tom Miller Larry Rogers Net income $0.00 $720.00Working capital 6,720.00 6,720.00Current ratio 5.48 5.48c. Truly speaking no one. Both have the same working capital and current ratio. However, Larrywould report a net income of $720 while Tom would not.d. Tom Miller is actually in better financial position than Larry Rogers. Both of them own the exactsame marketable securities, and both own $1,500 in inventory. Tom would have more cash because he chose to simply hold on to his investment and not incur the transaction costs of buying and selling. On the other hand, Larry sold and repurchased his securities, and each transaction cost him brokerage fees.E8–7a.(1) This investment should be classified as a long-term investment and accounted for using theequity method. Hartney Consulting owns 40% of the investee's common stock, whichindicates that it can exert some control over the company, and Hartney Consulting intends to hold the investment for longer than the time frame of current assets.(2) This investment should be classified as a long-term investment and accounted for using theconsolidated method. Hartney owns greater than 50% of the investee, and it appears that Hartney Consulting has no intention of disposing of the investment within the time frame of current assets.(3) This investment should be classified as a long-term investment and accounted for using thecost method. To be classified as a short-term investment, a ready market for the securities must exist so that the investor can dispose of the investment at any time. In this case, because the company is closely held, Hartney Consulting could not dispose of the investment when it desires.(4) This investment should be classified as a long-term investment and accounted for using theequity method. Hartney Consulting owns 45% of the investee's common stock, which indicates that it desires to exert some control over the company, and Hartney Consulting intends to hold the investment for five years, which is longer than the time frame of current assets.(5) This investment should be classified as a long-term investment and accounted for using themark-to-market method.(6) This investment should be classified as a long-term investment and accounted for using theequity method. Although Hartney Consulting owned less than 20% of the investee for a portion of the year, it owned greater than 20% of the investee as of December 31, 2006.Furthermore, the company intends to hold the investment for four years.b. To be classified as a short-term marketable equity investment, the equity investment mustmeet two criteria. First, the investor must intend to dispose of the investment within the time frame of current assets. Second, a ready market for the securities must exist. A ready market for the investment enables the investor to dispose of the investment at any time. In the case of nonmarketable equity securities, the investor may not be able to dispose of the investment when it wishes. Since too much uncertainty exists as to whether the investor could actually dispose of nonmarketable investments within the time frame of current assets, the investment should be classified as a long-term investment. Classifying the investment as long-term is more conservative than classifying the investment as current because classifying the investment as long-term reduces the company's measures of solvency (e.g., working capital, current ratio, and quick ratio). To account for equity investments using the mark-to-market method, the market value of the equity securities must be known. With nonmarketable equity securities, no market value exists. Consequently, nonmarketable equity securities are accounted for using the cost method rather than the mark-to-market method.E8–8(1) Investment in Equity Securities (+A)........................................... 260,000Cash (–A)............................................................................... 260,000Invested in Thayers International.(2) Investment in Equity Securities (+A)........................................... 875,000Cash (–A)............................................................................... 875,000 Invested in Bayhe Enterprises.(3) Dividend Receivable (+A)............................................................ 20,000Dividend Revenue (R, +SE).................................................. 20,000 Earned, but did not receive, dividend.(4) Cash (+A)..................................................................................... 135,000Loss on Sale of Equity Securities (Lo, –SE)................................ 22,500 Investment in Equity Securities (–A)..................................... 157,500 Sold Bayhe Enterprises stock.(5) Cash (+A)..................................................................................... 256,000Investment in Equity Securities (–A)..................................... 208,000Gain on Sale of Equity Securities (Ga, +SE)......................... 48,000 Sold Thayers International stock.E8–9a. (1) Long-Term Available-For-Sale Securities (+A)................... 260,000Cash (–A)....................................................................... 260,000 Invested in Thayers International.(2) Long-Term Available-For-Sale Securities (+A)................... 875,000Cash (–A)....................................................................... 875,000 Invested in Bayhe Enterprises.(3) Dividend Receivable (+A).................................................... 20,000Dividend Revenue (R, +SE).......................................... 20,000 Earned, but did not receive, dividend.(4) Cash (+A)............................................................................. 135,000Realized Loss on Long-Term Available-For-SaleSecurities (Lo, –SE).......................................................... 22,500Available-For-Sale Securities (–A)................................ 157,500 Sold Bayhe Enterprises stock.(5) Cash (+A)............................................................................. 256,000Available-For-Sale Securities (–A)................................ 208,000Realized Gain on Sale of EquitySecurities (Ga, +SE)................................................... 48,000 Sold Thayers International stock.E8–9 Concludedb.Securities Shares Held Cost Market ValueBayhe 20,500 $ 717,500 $ 656,000Thayers 2,000 52,000 50,000Total $ 769,500 $ 706,000Unrealized Loss on Long-Term Available-For-SaleSecurities (–SE)......................................................................... 63,500Available-For-Sale (–A)............................................................. 63,500 Adjusted long-term equity investments to market.E8–10a. 2005Investment in Equity Securities (+A)................................................ 190,000 Cash (–A)................................................................................... 190,000 Invested in Reilly Manufacturing.Cash (+A)......................................................................................... 15,000 Investment in Equity Securities (–A).......................................... 15,000 Received dividends (equity method).Investment in Equity Securities (+A)................................................ 18,750* Income from Equity Investments (R, +SE)................................ 18,750 Earned investment revenue (equity method).* $18,750 = $75,000 investee net income × 25%2006Cash (+A)......................................................................................... 15,000 Investment in Equity Securities (–A).......................................... 15,000 Received dividends (equity method).Loss on Equity Investments (Lo, –SE)............................................. 1,500* Investment in Equity Securities (–A).......................................... 1,500 Incurred investment loss (equity method).* $1,500 = $6,000 investee net loss × 25%b. Cost of investment $ 190,000Plus: Portion of investee's 2005 net income 18,750Less: Portion of investee's 2005 declared dividends (15,000)Book value of investment as of December 31, 2005 $ 193,750Less: Portion of investee's 2006 net loss (1,500)Less: Portion of investee's 2006 declared dividends (15,000)Book value of investment as of December 31, 2006 $ 177,250E8–11a. During 2003 Pepsi reported equity income of $323 million on its income statement. Since itowns 40% of its bottling operations, the bottling operations reported net income of $323 million ÷ 40% or $807.5 million.b. Pepsi would deduct this amount, $323 million, from its reported net income because this is anon-cash income amount. There has been no cash that has been transferred from the operating companies to Pepsi due to the operating companies’ earnings. Pepsi just records its ownership percentage times the net income of the operating companies.E8–12a. Since Mainmont Industries owns 30% of Tumbleweed Construction, 30% of TumbleweedConstruction's net income "flows through" to Mainmont Industries' income statement.Consequently, Tumbleweed Construction's total net income for 2005 would have been $40,000 ($12,000 ÷ 30%).b. Long-term investment in equity securities: 12/31/04 $25,00030% of Tumbleweed Construction's 2005 net income 12,000Less: 30% of Tumbleweed Construction's 2005 declared dividends XLong-term investment in equity securities: 12/31/05 $29,000Mainmont Industries' portion of the dividends declared by Tumbleweed Construction was $8,000. Since this amount represents 30% of the total dividends declared by Tumbleweed, the total dividends declared by Tumbleweed were $26,667 ($8,000 ÷ 30%).c. Cash (+A)......................................................................................... 8,000Investment in Equity Securities (–A).......................................... 8,000 Received dividends (equity method).Investment in Equity Securities (+A)................................................ 12,000 Income from Equity Investments (R, +SE)................................ 12,000 Earned investment revenue (equity method).E8–13a. Cash (+A)..............................................................................90,000Accounts Receivable (+A).....................................................60,000Inventory (+A)......................................................................160,000Plant & Equipment (+A)......................................................560,000Goodwill (+A).......................................................................330,000Payables (+L)............................................................................. 300,000Cash (-A).................................................................................... 900,000 Purchased Lipley Company.b. The net book values of assets and liabilities represent the amounts at which the assets andliabilities are carried on the balance sheet. Some assets are carried at original cost, others at net realizable value or lower-of-cost-or-market value. If the fair market value exceeds these other valuation bases, then the net fair market value of Lipley's assets and liabilities could exceed their book values.Multiplex is purchasing all of Lipley Company. Consequently, Multiplex is not only purchasing the net assets of Lipley, but it is also purchasing the nonquantifiable items that make Lipley a viable company. These nonquantifiable items include customer loyalty, name recognition, and employee skills and loyalty. These items make Lipley more valuable than the sum of its quantifiable assets and liabilities. Therefore, Multiplex is willing to pay more for Lipley because it is more valuable than the sum of its individual assets and liabilities due to synergy.E8–14Purchase Price = Net Book Value + Net Market Value in Excess of Book Value + Goodwill Transactions:(1) Purchase Price = $7,000 + $1,000 + $1,000Purchase Price = $9,000(2) $6,000 = $6,000 + Net Market Value in Excess of Book Value + $0Net Market Value in Excess of Book Value = $0(3) $12,000 = Net Book Value + $4,000 + $3,000Net Book Value = $5,000(4) $15,000 = $10,000 + $3,000 + GoodwillGoodwill = $2,000(5) Purchase Price = $2,000 + $1,000 + $3,000Purchase Price = $6,000(6) $12,000 = $4,000 + $8,000 + GoodwillGoodwill = $0E8–15a. Book Value per Share = Book Value ÷ Number of Common Shares Outstanding= $36,000 ÷ Number of Common Shares Outstanding= $12Number of Common Shares Outstanding = 3,000 Sharesb. Market Value/Share = Market Value ÷ Number of Common Shares Outstanding= $51,000 ÷ 3,000 Shares= $17c. Conglomerate would be willing to pay more than the market value per share due to goodwill.Camden has generated goodwill, such as name recognition and employee and customer loyalty, that makes its net assets more valuable taken as a whole than taken as individual net assets. In other words, due to synergy Camden is worth more than the sum of its individual parts. Additionally, combining Camden's assets with Conglomerate's assets may provide economies of scale, thereby making Camden's assets more valuable to Conglomerate than their individual fair market values.d. Investment in Subsidiary (+A).......................................................... 66,000*Cash (–A)................................................................................... 66,000 Acquired subsidiary.*66,000 = $22 per Share Purchase Price × 3,000 Common Shares OutstandingCash (+A)......................................................................................... 15,000Receivables (+A).............................................................................. 24,000Inventories (+A)................................................................................ 25,000Fixed Assets (+A)............................................................................. 47,000Goodwill (+A).................................................................................... 15,000 Liabilities.................................................................................... 60,000Investment in Subsidiary............................................................ 66,000 Consolidated financial statements.E8–16Goodwill = Excess of Purchase Price Over FMV of Net Assets Purchased= Purchase Price – FMV of Net Assets Purchased= [(10,000 Shares × 80%) × $18 per Share] – [80% ×($150,000 + $80,000 – $70,000)]= $144,000 – $128,000= $16,000Minority Interest = FMV of Net Assets × Percentage of Net Assets Not Owned by Parent= ($150,000 + $80,000 – $70,000) × 20%= $32,000E8–17Adjustments andEliminations Consolidated Accounts Glover Ward Debit Credit Balance Sheet Cash 73,000 10,000 83,000Accts. Receivable 110,000 40,000 150,000Inventory 220,000 60,000 10,000 290,000Investment in Sub. 100,000 0 100,000 0Fixed Assets 615,000 120,000 5,000 740,000Goodwill __30,000 _____0 _5,000 ______ __35,000Total Assets 1,148,000 230,000 20,000 100,000 1,298,000Accounts Payable 80,000 70,000 150,000 Long-Term Notes 450,000 80,000 530,000 Common Stock 500,000 70,000 70,000 500,000 Retained Earnings _118,000 _10,000 10,000 _____0 _118,000 Total Liabilities &Stockholders'Equity 1,148,000 230,000 80,000 0 1,298,000 The Adjustments and Eliminations columns adjust assets to market value, eliminate the investment account, eliminate the stockholders' equity section of Ward, and recognize goodwill. The goodwill of $5,000 equals the excess of the $100,000 purchase price over the $95,000 fair market value of Ward's individual net assets (i.e., $10,000 in cash + $40,000 in accounts receivable + $70,000 in inventory + $125,000 in fixed assets – $70,000 in accounts payable – $80,000 in notes payable).PROBLEMSP8–1Rule: For trading securities as well as for available-for-sale securities, the realized gains or losses go on the income statement. However, for unrealized holding gains and losses there is a difference. For trading securities the unrealized price changes go directly to the income statement. Available-for-sale securities go on the stockholders’ equity section of the balance sheet.Therefore, the total gains and losses reported on the income statement are as follows:。

FinancialAccounting第五版课后作业答案（部分）EXERCISE 1-31. (c) 5. (d)2. (d) 6. (b)3. (a) 7. (e)4. (b) 8. (f)EXERCISE 1-7(a) Total assets (beginning of year) $ 97,000Total liabilities (beginning of year) 85,000Total stockholders’ equity (beginning of year) $ 12,000(b) Total stockholders’ equity (end of year) $ 40,000 Total stockholders’ equity (beginning of year) 12,000 Increase in stockholders’ equity $ 28,000Total revenues $215,000Total expenses 175,000Net income $ 40,000Increase in stockholders’ equity $ 28,000Less: Net income $(40,000)Add: Dividends 24,000) (16,000 )Additional investment $ 12,000(c) T otal assets (beginning of year) $129,000Total stockholder s’ equity (beginning of year) 75,000Total liabilities (beginning of year) $ 54,000EXERCISE 1-7 (Continued)(d) Total stockholders’ equity (end of year) $130,000 Total stockholders’ equity (beginning of year) 75,000 Increase in stockholders’ equity $ 55,000Total revenues $100,000Total expenses 55,000Net income $ 45,000Increase in stockholders’ equity $55,000Less: Net income $(45,000)Additional investment (25,000) (70,000)Dividends $15,000PROBLEM 1-1A (Continued)Key to Retained Earnings column on previous page.(a) Rent Expense(b) Advertising Expense(c) Service Revenue(d) Dividends(e) Salaries Expense(b) Service revenue $7,500ExpensesSalaries $2,200Rent 400Advertising 300 2,900Net income $4,600P1-3A(a) DIVINE COSMETICS CO.Income StatementFor the Month Ended June 30, 2006RevenuesService revenue $5,500 ExpensesSupplies expense $1,600Gas and oil expense 800 Advertising expense 500Utilities expense 300Total expenses 3,200Net income $2,300DIVINE COSMETICS CO. Retained Earnings StatementFor the Month Ended June 30, 2006Retained Earnings, June 1 $ 0 Add: Net income 2,3002,300Less: Dividends 1,700Retained Earnings, June 30 $ 600DIVINE COSMETICS CO.Balance SheetJune 30, 2006AssetsCash $10,000Accounts receivable 4,000 Cosmetic supplies 2,000 Equipment 25,000Total assets $41,000Liabilities and Stockholders’ Equity LiabilitiesNotes payable $13,000Accounts payable 1,200Total liabilities ?14,200Stoc kholders’ equityCommon stock $26,200Retained earnings 600Total stockholders’ equity ?26,800Total liabilities and stockholders’ equity $41,000(b) DIVINE COSMETICS CO.Income StatementFor the Month Ended June 30, 2006RevenuesService revenue ($5,500 + $800) $6,300 ExpensesSupplies expense $1,600Gas and oil expense ($800 + $100) 900 Advertising expense 500Utilities expense 300Total expenses 3,300Net income $3,000DIVINE COSMETICS CO.Retained Earnings StatementFor the Month Ended June 30, 2006Retained Earnings, June 1 $ 0 Add: Net income 3,0003,000Less: Dividends 1,700Retained Earnings, June 30 $1,300。