Do it! 1
Do it!
Baxter Hoffman recently received the following information related to
Hoffman Corporation’s December 31, 2014, balance sheet.
Prepaid insurance
Cash
Equipment
$ 2,300
800
10,700
Inventory
Accumulated depreciation—
equipment
Accounts receivable
$3,400
ASSETS SECTION
OF CLASSIFIED
BALANCE SHEET
2,700
1,100
Prepare the assets section of Hoffman Corporation’s classified balance sheet.
Solution
HOFFMAN CORPORATION
Balance Sheet (partial)
December 31, 2014
Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Total current assets
Property, plant, and equipment
Equipment
Less: Accumulated depreciation—equipment
Total assets
Related exercise material: BE2-2, Do it! 2-1, and E2-4.
$
800
1,100
3,400
2,300
$ 7,600
10,700
2,700
8,000
$15,600
Action Plan
• Present current assets first.
Current assets are cash and
other resources that the
company expects to convert to
cash or use up within one year.
• Present current assets in the
order in which the company
expects to convert them into
cash.
• Subtract accumulated
depreciation—equipment from
equipment to determine net
equipment.
2 chapter 2 A Further Look at Financial Statements
BALANCE SHEET
CLASSIFICATIONS
Do it!
The following financial statement items were taken from the financial
statements of Callahan Corp.
______
______
______
______
______
______
______
Salaries and wages payable
Service revenue
Interest payable
Goodwill
Debt investments (short-term)
Mortgage payable (due in 3 years)
Investment in real estate
______ Equipment
______ Accumulated depreciation—
equipment
______ Depreciation expense
______ Retained earnings
______ Unearned service revenue
Match each of the items to its proper balance sheet classification, shown below. If the item
would not appear on a balance sheet, use “NA.”
Action Plan
• Analyze whether each financial
statement item is an asset,
liability, or stockholders’
equity item.
• Determine if asset and liability
items are current or long-term.
Current assets (CA)
Long-term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long-term liabilities (LTL)
Stockholders’ equity (SE)
Solution
CL
NA
CL
IA
CA
LTL
Salaries and wages payable
Service revenue
Interest payable
Goodwill
Debt investments (short-term)
Mortgage payable
(due in 3 years)
LTI Investment in real estate
PPE Equipment
PPE Accumulated depreciation—
equipment
NA Depreciation expense
SE Retained earnings
CL Unearned service revenue
Related exercise material: BE2-1, Do it! 2-2, E2-1, E2-2, E2-3, E2-5 and E2-6.
Do it! 3
Do it!
The following information is available for Ozone Inc.
Current assets
Total assets
Current liabilities
Total liabilities
Net income
Net cash provided by operating activities
Preferred dividends
Common dividends
Expenditures on property, plant, and equipment
Shares outstanding at beginning of year
Shares outstanding at end of year
RATIO ANALYSIS
2014
2013
$ 88,000
400,000
40,000
120,000
100,000
110,000
10,000
5,000
45,000
$ 60,800
341,000
38,000
150,000
50,000
70,000
10,000
2,500
20,000
60,000
120,000
40,000
60,000
(a) Compute earnings per share for 2014 and 2013 for Ozone, and comment on the
change. Ozone’s primary competitor, Frost Corporation, had earnings per share of $2
in 2014. Comment on the difference in the ratios of the two companies.
(b) Compute the current ratio and debt to assets ratio for each year, and comment on the
changes.
(c) Compute free cash flow for each year, and comment on the changes.
Action Plan
Solution
(a) Earnings per share
2014
2013
($100,000 2 $10,000)
5 $1.00
(120,000 1 60,000)/2
($50,000 2 $10,000)
5 $0.80
(60,000 1 40,000)/2
Ozone’s profitability, as measured by the amount of income available to each share
of common stock, increased by 25% [($1.00 2 $0.80) 4 $0.80] during 2014. Earnings
per share should not be compared across companies because the number of shares
issued by companies varies widely. Thus, we cannot conclude that Frost Corporation
is more profitable than Ozone based on its higher EPS.
2014
(b)
Current ratio
Debt to assets ratio
$88,000 5 2.20:1
$40,000
$120,000 5 30%
$400,000
2013
$60,800 5 1.60:1
$38,000
$150,000 5 44%
$341,000
The company’s liquidity, as measured by the current ratio, improved from 1.60:1 to
2.20:1. Its solvency also improved, as measured by the debt to assets ratio, which
declined from 44% to 30%.
(c) Free cash flow
2014: $110,000 2 $45,000 2 ($10,000 1 $5,000) 5 $50,000
2013: $70,000 2 $20,000 2 ($10,000 1 $2,500) 5 $37,500
The amount of cash generated by the company above its needs for dividends and
capital expenditures increased from $37,500 to $50,000.
Related exercise material: BE2-3, BE2-5, BE2-6, Do it! 2-3, E2-7, E2-9, E2-10, and E2-11.
• Use the formula for earnings per
share (EPS): (Net income 2
Preferred dividends) 4
(Average common shares
outstanding).
• Use the formula for the current
ratio: Current assets 4 Current
liabilities.
• Use the formula for the debt
to assets ratio: Total liabilities 4
Total assets.
• Use the formula for free cash
flow: Net cash provided by
operating activities 2 Capital
expenditures 2 Cash dividends.
4 chapter 2 A Further Look at Financial Statements
FINANCIAL
ACCOUNTING
CONCEPTS AND
PRINCIPLES
Do it!
The following items guide the FASB when it creates accounting standards.
Relevance
Faithful representation
Comparability
Consistency
Monetary unit assumption
Economic entity assumption
Periodicity assumption
Going concern assumption
Historical cost principle
Full disclosure principle
Materiality
Match each item above with a description below.
1. ________ Ability to easily evaluate one company’s results relative to another’s.
2. ________ Belief that a company will continue to operate for the foreseeable future.
3. ________ The judgment concerning whether an item is large enough to matter to
decision-makers.
4. ________ The reporting of all information that would make a difference to financial
statement users.
5. ________ The practice of preparing financial statements at regular intervals.
6. ________ The quality of information that indicates the information makes a difference
in a decision.
7. ________ A belief that items should be reported on the balance sheet at the price that
was paid to acquire the item.
8. ________ A company’s use of the same accounting principles and methods from year
to year.
Action Plan
• Understand the need for
conceptual guidelines in
accounting.
• List the characteristics of useful
financial information.
• Review the assumptions,
principles, and constraint that
comprise the guidelines in
accounting.
9. ________ Tracing accounting events to particular companies.
10. ________ The desire to minimize errors and bias in financial statements.
11. ________ Reporting only those things that can be measured in dollars.
Solution
1.
2.
3.
4.
5.
6.
Comparability
Going concern assumption
Materiality
Full disclosure principle
Periodicity assumption
Relevance
7.
8.
9.
10.
11.
Historical cost principle
Consistency
Economic entity assumption
Faithful representation
Monetary unit assumption
Related exercise material: BE2-8, BE2-9, BE2-10, BE2-11, Do it! 2-4, E2-12, and E2-13.
Do it! 5
Comprehensive Do it!
Listed here are items taken from the income statement and balance sheet of Bargain Electronics, Inc. for the year ended December 31, 2014. Certain items have been combined for
simplification. (Amounts are given in thousands.)
Notes payable (due in 3 years)
Cash
Salaries and wages expense
Common stock
Accounts payable
Accounts receivable
Equipment, net
Cost of goods sold
Income taxes payable
Interest expense
Mortgage payable
Retained earnings
Inventory
Sales revenue
Debt investments (short-term)
Income tax expense
Goodwill
Notes payable (due in 6 months)
$
50.5
141.1
2,933.6
454.9
922.2
723.3
921.0
9,501.4
7.2
1.5
451.5
1,336.3
1,636.5
12,456.9
382.6
30.5
202.7
784.6
Instructions
Prepare an income statement and a classified balance sheet using the items listed. Do not
use any item more than once.
Solution to Comprehensive
Do it!
BARGAIN ELECTRONICS, INC.
Income Statement
For the Year Ended December 31, 2014
(in thousands)
Revenues
Sales revenue
Expenses
Cost of goods sold
Salaries and wages expense
Interest expense
Income tax expense
Total expenses
Net loss
$12,456.9
$9,501.4
2,933.6
1.5
30.5
12,467.0
$
(10.1)
Action Plan
• In preparing the income
statement, list revenues, then
expenses.
• In preparing a classified balance
sheet, list current assets in order
of liquidity.
6 chapter 2 A Further Look at Financial Statements
BARGAIN ELECTRONICS, INC.
Balance Sheet
December 31, 2014
(in thousands)
Assets
Current assets
Cash
Debt investments
Accounts receivable
Inventory
$ 141.1
382.6
723.3
1,636.5
Total current assets
$2,883.5
Equipment, net
Goodwill
921.0
202.7
Total assets
$4,007.2
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable
Accounts payable
Income taxes payable
$ 784.6
922.2
7.2
Total current liabilities
Long-term liabilities
Mortgage payable
Notes payable
$1,714.0
451.5
50.5
Total liabilities
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
502.0
2,216.0
454.9
1,336.3
1,791.2
$4,007.2
Do it! 7
Do it!
Review
Do it! 2-1 Lonyear Corporation has collected the following information related to its
December 31, 2014, balance sheet.
Prepare assets section of
balance sheet.
Accounts receivable
Accumulated depreciation—equipment
Cash
(LO 1), AP
$22,000
50,000
13,000
Equipment
Inventory
Supplies
$180,000
58,000
7,000
Prepare the assets section of Lonyear Corporation’s balance sheet.
The following financial statement items were taken from the financial statements of Zheng Corp.
Do it! 2-2
____
____
____
____
____
____
Trademarks
Notes payable (current)
Interest revenue
Income taxes payable
Debt investments (long-term)
Unearned sales revenue
____
____
____
____
____
____
Inventory
Accumulated depreciation
Land
Common stock
Advertising expense
Mortgage payable (due in 3 years)
Classify financial statement
items by balance sheet
classification.
(LO 1), AP
Match each of the financial statement items to its proper balance sheet classification. (See
E2-1, on page 77, for a list of the balance sheet classifications.) If the item would not
appear on a balance sheet, use “NA.”
Do it! 2-3
Compute ratios and analyze.
The following information is available for Benser Corporation.
Current assets
Total assets
Current liabilities
Total liabilities
Net income
Net cash provided by operating activities
Preferred dividends
Common dividends
Expenditures on property, plant, and equipment
Shares outstanding at beginning of year
Shares outstanding at end of year
2014
2013
$ 54,000
240,000
22,000
72,000
80,000
90,000
6,000
3,000
27,000
$ 36,000
205,000
30,000
100,000
40,000
56,000
6,000
1,500
12,000
40,000
75,000
30,000
40,000
(LO 4, 5), AP
(a) Compute earnings per share for 2014 and 2013 for Benser, and comment on the
change. Benser’s primary competitor, Matile Corporation, had earnings per share of
$1 per share in 2014. Comment on the difference in the ratios of the two companies.
(b) Compute the current ratio and debt to assets ratio for each year, and comment on the
changes.
(c) Compute free cash flow for each year, and comment on the changes.
Do it! 2-4 The following characteristics, assumptions, principles, and constraint guide
the FASB when it creates accounting standards.
Relevance
Faithful representation
Comparability
Consistency
Monetary unit assumption
Economic entity assumption
Periodicity assumption
Going concern assumption
Historical cost principle
Full disclosure principle
Materiality
Cost constraint
Match each item above with a description below.
1. __________ Items not easily quantified in dollar terms are not reported in the financial statements.
2. __________ Accounting information must be complete, neutral, and free from error.
3. __________ Personal transactions are not mixed with the company’s transactions.
4. __________ The cost to provide information should be weighed against the benefit
that users will gain from having the information available.
Identify financial accounting
concepts and principles.
(LO 7), K
8 chapter 2 A Further Look at Financial Statements
5. __________ A company’s use of the same accounting principles from year to year.
6. __________ Assets are recorded and reported at original purchase price.
7. __________ Accounting information should help users predict future events, and
should confirm or correct prior expectations.
8. __________ The life of a business can be divided into artificial segments of time.
9. __________ The reporting of all information that would make a difference to financial
statement users.
10. __________ The judgment concerning whether an item’s size makes it likely to influence a decision-maker.
11. __________ Assumes a business will remain in operation for the foreseeable future.
12. __________ Different companies use the same accounting principles.