Class Notes for Financial Accounting in an Economic Context, 9th Edition

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CHAPTER 1Financial Accounting and Its Economic ContextSYNOPSISIn this introductory chapter, the author discusses the economic context of financial accountingincluding:1)the demand for financial information;2)the environment of financial accounting;3)the controls associated with the financial accounting process; and4)generallyaccepted accounting principles.The author illustratesand discusses the rolesthat equity investors, debt investors, managers,and auditors have in the financial accounting environment, providing a basis for the discussionof both a user orientation and an economic consequence perspective.The author introduces the auditor’s report, the management letter, the financial statements andthe footnotes. The author also presents the basic concepts of financial statement analysis,solvency and earning power. The basic forms of investment, debt and equity are described.The economic environment in which financial reports are prepared andused is discussed andkey elements of the financial environment are introduced.Aninternationalperspectiveofthegeneralstateofaccountingpracticesandstandardsthroughout the world is also considered.Theethicsvignetteconsiderstheindependenceofaccountingfirmswhoalsoserveasmiddlemen in the sale of their audit client’s products.The Internet research exercise examines subsequent results forIBMa company thathasperformed well duringrecentyears, but fell short of analysts’expectationsin Q1 of 2013.The author compares and contrasts the four different types of accounting (i.e., financial, not-for-profit, managerial, and tax) along six dimensions in Appendix 1A.The following key points are emphasized in Chapter 1:1.The economic role of financial accounting statements.2.The four financial statements and the kind of financial information each provides.3.The standard audit report, management letter, and footnotes to the financial statements.4.The two forms of investment—debt and equity—and how information on the financialstatements relates to them.5.The nature and importance of corporate governance and the role of financial statements.6.The current status ofaccounting standard setting–both in the U.S. and internationally.

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Chapter 12TEXT/LECTURE OUTLINEFinancial accounting and its economic context.I.Financial reporting and investment decisions.A.Investment decisions.1.Profit-seeking companies–Managers prepare reports for owners.Thesereportsincludethefourfinancialstatements:thebalancesheet,incomestatement, statement ofshareholders’ equity and statement of cash flows.2.Owners and other interested partiesincluding potential investors, bankers,governmentagencies,customers,andsuppliersusepubliclyavailablefinancial reports to assess the financial condition and performance of thecompany and its managers.3.User decisionsare often based on information provided by financial reports.4.Effects of user decisionsmay impact the financial condition of the company, itsmanagers and owners.B.Economic consequences.The use of financial statements by outsiders leads to economic consequences formanagersandcompanies.Knowledgeofhowbusinessdecisionseffectthefinancial statements is useful in assessing how management decisions might beperceived by outsiders. Considering and understanding how such decisions affectthe financial statements is an economic consequence perspective.C.User orientation.Managers need to know how financial statements are used. They also need toknow how to read, evaluate, and analyze financial statements.This perspective iscalled user orientation. See also Appendix 1A introducing managerial, tax and not-for-profit accounting.II.The demand for financial information: a user’s orientation (Mary Jordan / Microlinevignette).A.Consumption vs. investment.B.Where to invest?C.Demand for documentation.D.Demand for independent audit.E.Martin and the CPA: different incentives.F.The auditor’s report, management letter, financial statements, and footnotes.

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3Chapter 11.Balance sheet.a.Assets.b.Liabilities.c.Shareholders’ equity.i.Common stock.ii.Retained earnings.2.Incomestatement.a.Revenues.b.Expenses.c.Net income.3.Statement ofshareholders’ equity–retained earnings anddividends.4.Statement of cash flows.a.Operating activities.b.Investing activities.c.Financingactivities.G.Analysis of financial statements.1.Solvency.2.Earning power.H.Forms of investment.1.Debt.2.Equity.I.Summary and wind up of Microline vignette.III. The economic environment in which financial reports are prepared and used.A.Key elements of the financial accounting environment.1.Providers of capital.a)Equity investors.(1)Equityinvestorspurchaseownershipshares(i.e.,equity)inacompany.(2)Equity investors are most interested in acquiring information about acompany's earning power.b)Debt investors.(1)Debt investors loan capital to a company.

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Chapter 14(2)Debt investors are most interested in acquiring information about acompany's solvency position.2.Managers.3.Contracts.a)Debt contracts.b)Compensation contracts.4.Financial accounting statements.5.Independent auditors.6.Legal liability.7.Ethics and professional reputation.B.Reporting entities and industries.1.Consolidated financial statements.2.Subsidiaries.3.Industries.a.Manufacturing.b.Retailing.c.Services.d.SIC codes.IV.Corporate governance.A.Financial information users and capital markets.1)Equity investors.2)Debt investors.3)Management and other users.4)Capital markets.B.Contracts.1)Debt covenants.2)Management compensation.C.Regulations and standards.1)SEC.2)GAAP.3)Political process.D.Independent auditors.1)“Big Four”.2)Regional and local firms.

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5Chapter 1E.Board of directors and audit committee.F.Sarbanes-Oxley Act (2002).1)Certification by principal executive and financial officers.2)Additional responsibilities to assure adequate internal control.3)Annual report on internal controls over financial reporting.G.Legal liability.H.Professionalreputation and ethics.V.InternationalPerspective:MovementTowardaSingleGlobalFinancialReportingSystem.VI.Appendix 1A Three Other Kinds of Accounting:A.Not-for-profit accounting.Not-for-profit accounting generates financial information for those entities that donot exist solely to generate profits.B.Managerial accounting.Managerial accounting generates financial information useful to managers formaking day-to-day operating decisions.C.Tax accounting.Tax accounting generates financial information in compliance with the InternalRevenue Code.VII.Ethics in the real world.VIII.Internet research exercise.LECTURE TIPS1.Students often expect accounting to be a boring “cookbook” course. Discussion of Chapter1 can set the tone forthe rest of the course through a relevant, interesting discussion of theeconomics of accounting and an early introduction of real world examples.2.Although students usually understand the motives underlying the economic consequencesarguments, they often do not apply these motives to accounting.OUTSIDE ASSIGNMENT OPPORTUNITIESArticle search: current developments atGoogle.1.Search the financial press (The Wall Street Journal, Barrons, Fortune, Forbes,etc.) for anarticle reporting a current development that relates toGoogle.Consider the impact onGoogle’s financial statements (presented in Appendix C), from both a user orientation andan economic consequence perspective and present your findings in writing and/or orally tothe class.

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Chapter 16Article search: current developments in accounting standards2.Search the financial press (The Wall Street Journal, Barrons, Fortune, Forbes,etc.) for anarticle that reports a current development in accounting standards, for example, a new orproposed pronouncement by the FASB or IASB.Consider its impact from both a userorientation and an economic consequence perspective and present your findings in writingand/or orally to the class.ANSWERS TOIN-TEXT DISCUSSION QUESTIONSPage No.4.The first statement reflects an economic consequences perspective.Management ofhigh-tech companies knows that the capital markets make decisions based on the levelof a company’s reported profits. Therefore, management would prefer to use accountingmethods that would tend to maximize their reported profits.The second statement takes a user orientation.Analysis of financial statements isimportant to users in making investment and credit decisions.As will be learnedthroughout the text, financial statements that do not reflect the true costs associated withreportedearningsmisleadinvestorswhodependontheinformationcontainedinfinancial statements in making investment decisions.12.Sales and net income would be reported in the income statement.Net income wouldalso be reported in the statement ofshareholders’ equity. Total assets and total liabilitieswould be reported in the balance sheet.Net cash flows from operating activities wouldbe reported in the statement of cash flows.Total expenses would be $8,510million, the difference between sales and net income.Shareholders’ equity would be $3.9billion, the difference between total assets and totalliabilities. The netincome to sales ratio would be10.4%, or net income divided by sales.13.A financial services company such as Bank of New York is especially interested inassets that are liquid and have contractual terms that specify the future amounts of cashflows, which can be matched with funding sources such as deposits and borrowings.Abank’s loan portfolio turns over fairly rapidly.A consumer products company such asCoca Cola Company makes investments in bottling companies and other entities tofurtheritsproductionandmarketingofsoftdrinksandotherbeverages.Suchinvestments would be relatively more permanent and less liquid than those of a financialservices company, and future cash flows would be less easily determinable.15.The reported earnings of over $13.8billion leads one to conclude that GE has significantearning power and strongly suggests the possibility of similar earnings in the future. Pastbusiness decisions by GE’s management resulted in earnings of this magnitude. Acomparison of these earnings against management’s goals, or against earnings for otheryears,oragainsttheircompetitors’earningswouldtellusalotmoreaboutmanagement’s performance. Compensation contracts with managers would ordinarily

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7Chapter 1contain provisions that enhanced managers’ earnings when earnings targets and otherspecified criteria are met.16.BoeingmanufacturerTommy Hilfigermanufacturer (outsources actual manufacturing)DuPontmanufacturerAmerican ExpressfinancialservicesGeneral ElectricmanufacturerMicrosoftmanufacturereBayserviceSouthwest AirlinesserviceSprintservice17.Private companies, that is,those companies whose shares are not traded on the publicstockexchangesarenotsubjecttooversightbytheSecuritiesandExchangeCommission or the Public Company Accounting Oversight Board. Private companiesavoid the costs of complying with regulations issued by these authorities. These costshave risen in recent years due largely to compliance with the requirements of theSarbanes Oxley Act. The managers of private companies are less burdened by therestrictions and costs of regulation. The investing public largely is unable to invest inprivate companies.Those who do invest in privatecompaniesdo not benefit from theprotections regulation affords, nor do they suffer the costs of regulatory compliance.18.Because stock market analysts werelessoptimistic aboutIBM’s future revenues andearnings, the market price of the company’s stockdecreased. This wasbecause thedesire to own the company’s stock decreased. More investors wanted to own the stockbecause the future of the company lookedweaker than it had before publication of the2013 first quarter results.Share prices are related to the market’s expectations of theprobability of future cash flows.When the prospect of future cash flowsdecreases,share prices respondnegatively.Management compensation is often tied to profitabilityand/or to the market price of the company’s stock. These incentives are designedtoimpactmanagementbehaviourbyencouragingmanagementtoworktoimproveprofitability.18.Motorola’s employee incentive plan awards bonuses to eligible employees that achievespecifiedbusinessgoals.Tyingmanagement’sfinancialgoalstoemployeecompensation increases the likelihood that employees will address corporate financialgoals with enthusiasm, thereby increasing the likelihood that financial goals will be met.19.Perhaps the current controversy over accounting standards for measuring managementcompensation rages because the benefits of improving financial reportingare not readilysusceptible tomeasurement while the perceivednegative consequences are apparent tothose whofear theywould be negatively impacted.This is true with respect to all kinds ofchange.21.Dell,Inc.andPricewaterhouseCooperswould havehadaconversationaboutthemagnitudeandscopeoftheaccountingirregularities,theimpactonthefinancialstatements and the extent to which the errors may have affected decisions made (or tobe made) by persons relying on the accuracy of thefinancial statements.If it wasdetermined that the financial statements were materially in error, corrections to the

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Chapter 18financial statements would have been discussed. Possible restatement of prior years’financial statements may also have been discussed.21.Audit committee members share the responsibility for oversight of management’s choiceof auditor and monitoring the audit to ensure it is thorough, objective and independent.Since the auditor’s job is to audit the financial statements, audit committee membersneed to have a pretty good understanding of both audits and financial statements.22.Sarbanes-Oxleywasintendedtoforceatighteningofcorporategovernance.Theresponsibilities of corporate directors, audit committees, corporate executives, financialofficers and auditors have been dramatically increased.With the new emphasis onresponsibility auditors and managers are on high alert and are less willing to overlookerrors in financial reporting and weaknesses in internal controls.This new, higher levelof diligence has lead to an increase in incidents of accounting errors being admitted andcorrected.23.“Sound principles of corporate governance are critical to obtaining and retaining the trustof investors--and to GE's overarching goal of performance with integrity”,-as quotedfrom the web site cited.24.A single set of global standards wouldprovide uniformity across international bordersandto provide investors and creditors credible information forcomparison and decisionmaking and improve transparency in global financial markets.Having two different setsof financial reporting standards results in costs associated with duplicate reporting andreconciling two sets of information. Having a single set of standards creates interestingand unresolved international legal issues. For instance, can the SEC impose its authorityto determine accounting standards to international standards setters? Also, should smallbusinesses across the world be forced to adopt international accounting standards evenif they poorly serve the needs of their exclusively local users?CHARACTERISTICS OF END-OF-CHAPTER ASSIGNMENTSItemDifficultyDescriptionIssues for discussion:ID1–1EFinancial statement usersID1–2EAuditors and management fraudID1–3EAudit committeesID1–4MBanks, the credit crunch, and the financial statementsID1–5MFinancial statement relationshipsID1–6EDebt covenantsID1–7EManaging reported profitsID1–8EAudit reportID1–9ECorporate governanceID1–10EEthics and accountingID1–11MGlobal reporting standardsID1–12EInternational accounting standardsID1–13EManagerial vs. Financial accountingID1–14MThe annual report of Google

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CHAPTER 2The Financial StatementsSYNOPSISThe author opens the chapter with anillustration of the flow of capital through a business.Operating,investingandfinancingactivitiesareintroduced.Theauthorthenpresentsoverviews that include the various components of each financial statement: the classifiedbalance sheet, the income statement, the statement ofshareholders’ equity, and the statementof cash flows.The main part of the chapter ends with a discussion of the relationships amongthe financial statements.An international perspective is presented on how financial statements differ in other countries.This discussion includes an examination ofthe financial statementsofUnilever,a leadingsupplier ofconsumer brands registered in the Netherlands.The ethics vignette considers issues faced by a Swissmanager who ishesitantto adopt IFRS.TheInternetresearchexerciseconsidersthefinancialresultsandcorporatestrategyofJCPenney.The following key points are emphasized in Chapter 2:1.Thethreebasicactivities ofabusinessand howthey arereflectedinthefinancialstatements.2.The balance sheet, income statement, statement ofshareholders’ equity, and statement ofcash flows and how these financial statements are used.3.Non-U.S. financial statement format and terminology, similarities and differences.TEXT/LECTURE OUTLINEThe financialstatements.I.How businesses are conducted.A.Flow of capital through a business.B.Three activities of a business.1.Financing activities: those activities involving the collection of capital throughdebt or equity issuances and anyassociated payments.2.Investing activities: those activities involving the acquisition and the sale ofproducing assets (i.e., the assets used to produce and support the goods andservices provided).

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Chapter 2233.Operating activities: those activitiesinvolving the sale of goods and services.II.The four fundamental financial statements.A.Classified balance sheet.1.The classified balance sheet is a statement of the company’s financial positionas of a point in time.The balance sheet is astatement of the fundamentalaccounting equation.2.In a classified balance sheet, assets and liabilities are grouped into sub-classifications; in an unclassified balance sheet, assets and liabilities are notgrouped into sub-classifications, they are simply listed.3.Assets and liabilities are listed on the balance sheet in order of liquidity.4.Asset groupings.a)Current assets.(1)Currentassetsareassetsthatareexpectedtoberealizedorconverted into cash in the near future, usually within one year.(2)Currentassetstypicallyincludecash,short-terminvestments,accounts receivable, inventory, and prepaid expenses.b)Long-term investments.c)Property, plant, and equipment.d)Intangible assets.5.Liability groupings.a)Current liabilities.(1)Currentliabilitiesareliabilitiesthatareexpectedtobesettledthrough the use of current assets.(2)Current liabilities typically include accounts payable, miscellaneousother payables (such as wages payable, interest payable, and soforth), and current maturities of long-term debts.b)Long-term liabilities.6.Shareholders’ equity groupings.a)Contributed capital.

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32Chapter 2b)Retained earnings (i.e., earned capital).c)Effect of organizational form (i.e., corporateversus partnership) on theequity section.B.Income statement.1.The income statement explains the change in the company’s net assets (i.e.,total assets less total liabilities) during the accounting period due to operatingactivities.2.The change in net assets from operating activities is called net income (orloss) and is computed as revenues less expenses.a)Revenues are defined as inflows of assets or outflows of liabilities over aperiod of time due to a company’s operating activities.b)Expenses are defined as outflows of assets or inflows of liabilities over aperiod of time due to a company’s operating activities.3.Since revenues and expenses are defined by the changes in assets andliabilities, every transaction affecting the income statement also affects at leastone asset or liability account on the balance sheet.C.Statement ofshareholders’ equity.1.The statement ofshareholders’ equity explains the change in the retainedearnings and contributed capital balances during the accounting period.2.The change in the retained earnings balance is due to the company’s netincome or loss and distributions to the company’s owners (i.e., dividends).3.The change in the contributed capital balance is due to capital collected fromthe sale of equity securities.D.Statement of cash flows.1.The statement of cash flows explains (i.e., summarizes) the change in thecash balance during the accounting period.a)Cash flows from operating activities.b)Cash flows from investing activities.c)Cash flows from financing activities.III.Relationships among the financial statements.IV.International perspective.

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Chapter 243V.Review Problem: Bed Bath & Beyond.VI.Ethics in the real world.VII.Internet research exercise.LECTURE TIPS1.The illustration of the flow of capital through a business introduces the concept of operating,investing and financing activities.2.Students should be encouraged to read the text carefully so as to thoroughly understandwhat each account measures. A useful in-class drill requires students to explain what theamount reported on the balance sheet for a particular account represents.3.Many introductory students have difficulty differentiating between cash collections andrevenueandbetweencashdisbursementsandexpenses.Itiscriticalthatthesedifferentiations are made when discussing the income statement versus the operatingactivities section of the statement of cash flows.4.It is critical to students’understanding of accounting and how to use financial statementinformationthattheygrasphowthefourfinancialstatementsrelate.However,moststudents often view each financial statement as independent and do not appreciate how thestatements relate. Therefore, explain and demonstrate how the financial statements arelinked together and complement one another.5.When first discussing how to use the information in the financial statements, provide ageneral overview of how a potential investor would ascertain the company’s solvency (i.e.,compare its assets to its obligations) and earning power. Then provide a more detaileddiscussion by using a classified balance sheet (i.e., using current assets versus currentliabilities), the income statement, the statement of cash flows, and ratio analysis.OUTSIDE ASSIGNMENT OPPORTUNITIESStudy of annual reports: evaluation of profitability and solvency using financial statements andother information.1.Obtain a recent annual report for alocalpublicly held company.Read the financialstatements and notes and evaluate profitability and solvency using concepts developed inthe chapter.Read the letter toshareholders and other information in the annual report andcompare with the results of your analysis; especially note instances where the letter toshareholders or the other information reads more favorably than indicated in the financialstatements. Report your findings in writing and/or in a brief presentation to the class.Comparative study of annual reports: a foreign company compared to a U.S. company.2.Obtain a recent annual report for a publicly held foreign company. Compare the form,content, and terminology used in its financial statements to that of a U. S. public company,

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52Chapter 2preferably one in the same industry. Report your findings in writing and/or in a briefpresentation to the class.ANSWERS TO IN-TEXT DISCUSSION QUESTIONSPage No.31.Cash provided by operating activities includes cash collected from the sale products andcash payments for related costs and expenses.Investing activities consist of capitalexpenditures foradditional plant and equipment and other assets that relate to theproductive capacity of the business.Financing activities include proceeds from theissuance of debt and/or equity, and related repayments of debt and/or payment ofdividends.34.McDonald’s Corporation’stotalassets consist mostly ofproperty, plant, and equipmentbecause McDonald’s is a traditional “brick and mortar” business, whereas Google is aninternet company whose presence exists mostly in cyberspace and which is valuedmostly for it’s intangible assets and intellectual property.34.The principal revenue producing asset of a retailer such as Searsis its inventory ofmerchandise, which is included in current assets.The amount of inventory would be highrelative to property, plant and equipment, especially given that many retailers lease,rather than own, their premises, and leasehold interests and obligations are not shownonthebalancesheet.Currentassetsalsoincludecash,short-terminvestments,receivables, and prepaid expenses.AT&T, a legacy telephone company, has a hugeinvestment inequipment which is spread throughout its network. All this equipment is anon-current asset. AT&T has little inventory and its current assets are mostly cash andreceivables.35.Short-term investments are made in readily marketable debt and equity securities to earnincome on otherwise idle funds.Aninsurance company such as WellPointmaintains ahigh level of short-term investments to insure that they will be able to pay claims, makerefunds, and so on, on a timely basis.35.The principal activities of banks such asJP Morgan Chaseare to earn net interestincome by gathering deposits and in turn loaning those funds out to others, as well asproviding fee-based services.The largest asset category involved in this process is theloan portfolio, a category of receivable.Wal-Mart is a retailer.It’s main businessinvolves buying and re-selling inventory. Receivables are a relatively minor facet of Wal-Mart’s business.35.Retailers such as Home Depot and manufacturers such as Goodyear Tire & Rubber arein the business of selling products, and carry significant amounts of inventory.Serviceenterprises such as Yahoo and financial institutions such as Bank of America do not dealin products and therefore do not have inventories.36.These arethe productionand/or acquisitioncosts of television programming that has notyet been licensed or sold. These costs will be expensed when the programs arelicensedorsold.

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Chapter 26337.Patents are intangible assets that arereflected on a company’s balance sheet when itpurchasesthem fromanothercompany. The costs of developing patents internally aregenerally expensed when incurred. The costs of registering a patent, however, arecapitalized. Patents are intellectual property of great value and can confer a monopolyon a patent holder. Patent rights must be zealously protected to prevent their value frombeing diminished. Patents are reported in the balance sheet at cost, net of accumulatedamortization.38.Theintangibleassetgoodwillisreflectedonacompany’sbalancesheetwhenitpurchasesanothercompanyforanamountgreaterthanthemarketvalueofitsidentifiable assets and liabilities.A large portion of goodwill on Cisco System’s balancesheet indicates that Cisco Systems is growing through acquisitions of other companiesas opposed to growth through internal expansion.39.The primary source of funding for banks such as Bank of America is through depositsgathered from its diverse customer base.Banks do not present classified balancesheets, but most deposits are relatively short-term (current). Borrowings are a secondarysource offunding, and are not as great as thedeposit liability. Banks are highlyleveraged,i.e.,shareholders’ equity represents a smaller portion of total assets (usuallyless than 10%).40.A deficit in retained earnings means that Amazon.com has not been profitable on acumulative basis since its inception, net of any distributions toshareholders.This is notanuncommonsituationforyoungcompanies,especiallythoseinInternetrelatedbusinesses.42.Cost of goods sold represents the original cost of inventory items sold by manufacturers,wholesalers,andretailers.Thisinventorycostisreportedseparatelyfromotheroperating expenses.Service businesses such as H & R Block provide services and donot sell inventory, thus there is no cost of goods to report.43.If the profits were the result of expense reductions, and continued expense reductionswere in doubt, continued profits would be doubtful as well.43.An excess of other(non-operating)expenses over other(non-operating)revenues wouldcause net income to be lower than net income from operating activities.In AMR’s case,there is an overall net loss.Investors would be more concerned about net income fromoperating activities which would be expected to recur while (significant) other revenuesand expenses tend to be one-time items.Analysts may see potential for on-goingprofitability if non-operating expenses can be controlled, but there should be cautiongiven the overall loss shown by the company.44.Dividends are reported in the statement ofshareholders’ equity as a reduction in retainedearnings. Net income is reported as an increase in retained earnings in the statement ofshareholders’ equity.Retained earnings represent the portion of net income not paid toshareholders as dividends.The difference–60% to 70% of net income in the case ofJohnson&Johnson–representstheportionofearningsnormallyreinvestedinthebusiness.

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72Chapter 245.Cash flows from operating activities generally areusuallybe expected to continue,whereas cash flows from investing activities are understood tovary considerably fromyear to year. Furthermore,cash flows from operating activities are more closely tied toprofitability than are investing cash flows, which tend to be negative when a company ishealthy and growing.Reclassifying cash outflows from operating to investing wouldmake the company’s continuing operations appear more profitable while the increasecash outflows forinvestingwould make the company appear to be enjoying positivegrowth.46.Cash flow from (or used) in operations is shown in the first section of the statement ofcash flows under the caption “operating activities”.Analysts do not necessarily reactnegatively to negative cash flows from operations for emerging businesses.Negativecash flows during the introductory phase of a company’s life cycle are not uncommon. Afavorable trend in cash flows, and prospects for positive cash flows as the businessgrows, would be important to the analyst.46.Cash flows from investing activities include cash inflows and outflows associated with thepurchase and sale of productive assets (property, plant and equipment, and intangibles),including the acquisition of other businesses, and long-term investments in securities.Yahoo’s use of cash for investing activities indicates additional investment in assets,while Amazon appears to have sold more assets than it purchased.46.Cash flows from financing activities include proceeds from the issuance ofcommonstock, so both companies would likely have had positive cash flows from financingactivities during their early years.CHARACTERISTICS OF END-OF-CHAPTER ASSIGNMENTSItemDifficultyDescriptionBrief Exercises:BE2–1EDividends as a percentage of net incomeBE2–2EFinancing assetsBE2–3EAssessing solvencyBE2–4EThe statement of cash flows across timeBE2–5EFinancial statement formats-InternationalExercises:E2–1MIdentifying financing, investing, and operatingtransactionsE2–2MIdentifying financing, investing, and operating transactionsE2–3EBalance sheet or income statement account?E2–4MFinancial statements and the lending decisionE2–5MRetained earnings changes across timeE2–6MRetained earnings changes across timeE2–7MUsing working capital to assess solvencyE2–8HSolvency, financing and debt covenantsE2–9MThe statement of cash flows across timeE2–10MThe statement of cash flows across time

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