Financial And Managerial Accounting For MBAs, 4th Edition Solution Manual

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Solutions Manual, Module 11-1Module 1Financial Accounting for MBAsDISCUSSIONQUESTIONSQ1-1.Organizationsundertakeplanningactivitiesthatshapethreemajoractivities:financing, investing, and operating.Financingis the meansa company usesto payfor resources.Investingrefers to the buying and selling of resources necessary tocarry out the organization’s plans.Operatingactivities are the actual carrying out oftheseplans.Planningisthegluethatconnectstheseactivities,includingtheorganization’s ideas, goalsand strategies. Financial accounting information providesvaluable input into the planning process, and, subsequently, reports on the results ofplans so that corrective actioncanbe taken, if necessary.Q1-2.An organization’s financing activities (liabilities and equity= sources of funds) pay forinvesting activities (assets= uses of funds). An organization’s assetscannotbemoreor less than its liabilities and equity combined. This means: assets = liabilities +equity. This relation is called the accounting equation (sometimes called thebalancesheet equation), and it applies toallorganizations at all times.Q1-3.The four main financial statements are: income statement, balance sheet, statementof stockholders’ equity, and statement of cash flows. Theincome statementprovidesinformationaboutthe company’s revenues, expenses and profitability over a periodof time. Thebalance sheetlists the company’s assets (what it owns), liabilities (whatit owes), and stockholders’ equity (the residual claims of its owners) as of a point intime.Thestatementofstockholders’equityreportsonthechangestoeachstockholders’ equity account during the period.Thestatement of cash flowsidentifiesthe sources(inflows)and uses(outflows)of cash, that is, where the company got itscash from and what it did with it.Together, thefourstatements provide a completepicture of the financial condition of the company.

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1-2Financial& ManagerialAccounting for MBAs,4thEditionQ1-4.The balance sheet provides information that helps users understand a company’sresources (assets) and claims to those resources (liabilities and stockholders’ equity)as of a givenpoint in time.Q1-5.The income statement covers aperiod of time.An income statement reports whetherthe businesshasearned a net income (also called profit or earnings) orincurredanet loss.Importantly, the income statement lists the types and amounts of revenuesand expenses making up net income or net loss.Q1-6.The statement of cash flows reports on the cash inflows and outflows relating to acompany’s operating, investing, and financing activities over aperiod of time. Thesum of these three activities yields the net change in cash for the period.Thisstatementisausefulcomplementtotheincomestatement,whichreportsonrevenues and expenses, butwhichconveys relatively little information about cashflows.Q1-7.Retained earnings(reported on the balance sheet)is increased each period by anynet incomeearned during the period (as reported in the income statement) anddecreased each periodby the payment of dividends (as reported in the statement ofcash flowsand the statement of stockholders’ equity).Transactions reflected on thestatement of cash flows link the previous period’s balance sheet to the currentperiod’s balance sheet. The ending cash balanceappearson both the balance sheetand the statement of cash flows.Q1-8.External users and their uses of accounting information include: (a) lenders formeasuring the risk and return of loans; (b) shareholders for assessing the return andrisk in acquiring shares; and (c) analysts for assessing investment potential. Otherusersareauditors,consultants,officers,directorsforoverseeingmanagement,employees for judging employment opportunities, regulators, unions, suppliers, andappraisers.Q1-9.Managers deal with a variety of information about their employers and customersthat is notgenerally available to the public. Ethical issues arise concerning thepossibility that managers might personally benefit by using confidential information.There is also the possibility that their employers and/or customers might be harmed ifcertain information isnot kept confidential.

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Solutions Manual, Module 11-3Q1-10.AProcter & Gamble’sindependent auditor isDeloitte & ToucheLLP. The auditorexpressly states that “our responsibility is to express an opinion on these financialstatementsbasedon ouraudits.”Theauditoralsostatesthat“thesefinancialstatements are the responsibility of thecompany’s management.”Thus, the auditordoes not assume responsibility for the financial statements.Q1-11.BWhilefirmsacknowledgetheincreasingneed formorecompletedisclosureoffinancial and nonfinancial information, they have resisted these demands to protecttheir competitive position.Corporate executivesmust weigh the benefits they receivefrom thefinancialmarketsas a result of more transparentand revealingfinancialreporting against the costs of divulging proprietary informationto competitors andothers.Q1-12.BGenerally Accepted Accounting Principles (GAAP) are the various methods, rules,practices, and other procedures that have evolved over time in response to the needto regulate the preparation of financial statements.They are primarily set by theFinancialAccountingStandardsBoard(FASB),aprivatesectorentitywithrepresentatives from companies that issue financial statements, accounting firmsthat audit those statements, and users of financial information.Other bodies thatcontribute to GAAP are the AICPA, the EITF,and the SEC.Q1-13.BCorporate governance is the system of policies, procedures and mechanisms thatprotect the interests of stakeholders in the business. These stakeholders includeinvestors,creditors,regulatorybodies,andemployees,tonameafew.Soundcorporate governance involves the maintenance of an effective internal auditingfunction, an independent and effective external auditing function, an informed andimpartial board of directors, governmental oversight (such as from the SEC), and theoversight of the courts.Q1-14.BThe auditor’s primary function is to express an opinion as to whether the financialstatements fairly present the financial condition of the company and are free frommaterial misstatements. Auditors do not prepare the financial statements; they onlyaudit them and issue their opinion on them.The auditors provide no guaranteesabout the financial statements or about the company’s continued performance.

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1-4Financial& ManagerialAccounting for MBAs,4thEditionQ1-15.Financialaccountinginformation is frequently used in order to evaluate managementperformance. The return on equity (ROE) and return on assets (ROA) provide usefulmeasures of financial performance as they combine elementsfromboth the incomestatement and the balance sheet. Financialaccountinginformation is also frequentlyused to monitor compliancewith external contractterms. Banks often set limits onsuch items as the amount of total liabilities in relation to stockholders’ equity or theamount of dividends thata company may pay. Audited financial statements provideinformation that can beusedto monitor compliance with these limits (often calledcovenants). Regulators and taxing authorities also utilize financial information tomonitor items of interest.Q1-16.Managersare vitally concerned aboutdisclosingproprietary information that mightbenefit the company’scompetitors.Of most concern,is the “cost”of losing somecompetitiveadvantage. There traditionallyhasbeen tension between companies andthe financialprofessionals(especiallyinvestmentanalysts)whopress firms for moreand morefinancial and nonfinancial information.Q1-17.Net income is an important measure of financial performance. It indicates that themarket values the company’s products or services, that is, it is willing to pay a pricefor the products or services enough to cover the costs to bring them to market and toprovide the company’s investors with a profit. Net incomedoes not tell the wholestory, however. A company canalways increase its net incomewith additionalinvestment in something as simple as a bank savings account. A more meaningfulmeasure of financial performance comes from measuring the level of net incomerelativetotheinvestmentmade.Oneinvestmentmeasureisthebalanceofstockholders’ equity, and the comparison of net income to average stockholders’equity (ROE) is a fundamental measure of financial performance.Q1-18.Borrowed money must be repaid, both the principal amount borrowed, as well asinterest on the borrowed funds. These payments have contractual due dates. Ifpayments are not prompt, creditors have powerful legal remedies, including forcingthe company into bankruptcy. Consequently, when comparing two companies withthe same return on equity, the one using less debt would generally be viewed as asafer (less risky) investment.

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Solutions Manual, Module 11-5MINIEXERCISESM1-19.(10 minutes)($ millions)Assets=Liabilities+Equity$47,540$36,839$10,701Dell receives more of its financing from nonowners ($36,839million)than fromowners ($10,701million). Its owner financing comprises22.5% of its total financing ($10,701million/ $47,540million).Thus,nonownersfinance77.5% of Dell’s total assets.M1-20.(10 minutes)($ millions)Assets=Liabilities+Equity$16,787$13,072$3,715Best Buyreceives more of its financing from nonowners ($13,072million)than fromowners($3,715million). Its owner financing comprises22.1% of its total financing ($3,715million/$16,787million).M1-21.(15 minutes)($ millions)Assets=Liabilities+EquityHewlett-Packard$108,768$85,935(a)$22,833General Mills$22,658(b)$14,562$8,096Target(c)$48,163$31,605$16,558The percent of owner financing for each company follows:Hewlett-Packard.........................21.0%($22,833million / $108,768million)General Mills..............................35.7%($8,096million / $22,658million)Target.........................................34.4%($16,558million / $48,163million)GeneralMillsand Target are more ownerfinanced, while Hewlett-Packard(HP)is morenonowner financed. General Mills and Targetare financed with roughly the same level of debtand equity, whileHP’s debt percentage is significantly higher thanthat of General Mills andTarget. All three enjoy relatively stable cash flows and can, therefore, utilize a greater proportionof debt vs. equity. As the uncertainty of cash flows increases, companies generally substituteequity for debt in order to reduce the magnitude of contractual payment obligations.

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1-6Financial& ManagerialAccounting for MBAs,4thEditionM1-22.A(15minutes)In itsSeptember 30, 2012annual report, Starbucks reports the following figures (in $ millions):Assets=Liabilities+Equity$8,219.2=$3,104.7+$5,114.5As shown, the accounting equation holds for Starbucks. Also, we can see that Starbucks’nonowner financing is37.8% ($3,104.7/ $8,219.2) of its total financing.M1-23.A(20 minutes)DuPontStatement ofReinvestedEarningsFor Year Ended December 31,2012Beginning reinvested earnings, December 31,2011.............................................$13,422Net incomefor2012..............................................................................................2,788Commonstockdividends......................................................................................(1,593)Preferredstockdividends......................................................................................(10)Treasury stock retirement*....................................................................................(321)Ending reinvestedearnings, December 31,2012..................................................$14,286*Treasury Stock represents thecompany’srepurchase of Common Stock.The effect is to decreasestockholders’equity, whichisthe opposite effect from the issuance of stock.During2012, DuPont retired Treasury Stock andwill not reissue these shares again.This transaction reduced the company’s retained earnings,but did not affectnet income for the year.M1-24.(20 minutes)a.BSand SCFf.BS and SEb.ISg.SCF and SEc.BSh.SCF and SEd.BS and SEi.IS, SE, and SCFe.SCF

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Solutions Manual, Module 11-7M1-25.(10 minutes)There are many stakeholdersimpacted bythisbusinessdecision, including the following (alongwith a description of how):•Youas aManager—your reputation, self-esteem, and potentially your livelihoodcouldbenegativelyimpacted.•CreditorsandBondholders—credit decisions based on inaccurate informationcouldoccur.•Shareholders—buying or selling sharesbased on inaccurate informationcouldoccur.•Managementand otherEmployees ofyourcompany—repercussions of your decisionextend toall otheremployees. Also,adecision to record these revenues suggestsanenvironment condoning dishonesty.Indeed,your decisionscanaffect many more parties thanyoumightinitiallyrealize.The short-term benefit of meeting Wall Street’sexpectations could have serious long-term ramifications.M1-26.B(10 minutes)Internal controlsare designed for the followingpurposes:•Monitoring an organization’s activities to promote efficiency and to prevent wrongful useof its resources•Ensuringthe validity and credibility ofexternalaccounting reports•Promotingeffective operations•EnsuringreliableinternalreportingCongress has a special interest in internal controls and reports about them.Specifically,theabsenceor failureof internal controls can adversely affect the effectiveness ofdomestic andglobal financial markets.Enron provided Congress with a case in point.

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1-8Financial& ManagerialAccounting for MBAs,4thEditionEXERCISESE1-27.(15 minutes)a.Target’sinventoriesconsistofthe productlinesitcarries: clothing, electronics, homefurnishings, food products, and so forth.b.Target’sProperty and Equipmentassets consist of land, buildings,storeimprovementssuchaslighting, flooring, HVAC, store shelving, shoppingcarts, and cash registers.c.Although Target sells some of its merchandise via itsWebsite, the majority of its salesactivityisconductedinitsretaillocations.Thesestoresrepresentasubstantialandnecessarycapital investmentfor its business model.E1-28.(20 minutes)($ millions)a.Using the accounting equation:Assets ($84,351)= Liabilities ($33,148) + Equity (?)Thus:$51,203= EquityHigh-tech companies must contend with a substantial amount of risk relating to changingtechnology.Future cash flows are, therefore, not as certain and cannot support high levelsof debt. Thus, the company uses equity financing;60.7% in the case of Intel.b.Using the accounting equation at thebeginningof the year:Assets ($7,071)= Liabilities (?) + Equity ($1,757)Thus: BeginningLiabilities= $5,314Using the accounting equation at theendof the year:Assets ($7,071-$1)=Liabilities ($5,314-$132) + Equity (?)Thus:EndingEquity=$1,888Alternative approach to solving part (b):Assets($-1) =Liabilities($-132) +Equity(?)where “” refers to “change in.”Thus:EndingEquity = $-1-$-132 = $131 andEnding equity = $1,757 + $131 = $1,888c.Retained Earnings is the balance sheet account that provides the link between the balancesheet and the income statement.Each accounting period, Retained Earnings is updated bythe net income (loss) reported for that period (and is reduced by any dividends that aredeclaredto shareholders). The balance sheet and the income statement are, therefore,linked by this balance sheet account.

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Solutions Manual, Module 11-9E1-29.(15 minutes)Externalconstituents use accounting information from financial statements to answerquestionssuch as the following:1.Shareholders(investors),askquestions such as:a.Arethe company’sresources adequate to carry outstrategicplans?b.Are thecompany’sdebtsappropriatein amountgiven the company’s existing assets andplans for growth?c.What is the current level of income (andwhat areits components)?d.Is the current stock priceindicative ofthe company’s profitability and level of debt?2.Creditors,askquestions such as:a.Does the business have the ability to repay its debtsas they come due?b.Can the business take on additional debt?c.Arecurrent assetssufficient to cover currentliabilities?3.Employees,askquestions such as:a.Is the business financially stable?b.Can the business afford to pay higher salaries?c.What are growth prospects for the organization?d.Will the company be able to pay my pension when I retire?E1-30.(10minutes)Computation of dividendsBeginning retained earnings,2012................................$15,649+Net income................................................................................................2,472–Cash dividends................................................................(?)=Ending retained earnings,2012................................................................$16,953Thus, dividends were $1,168millionfor2012.The company paidoutdividends equal to47.2%of2012net income($1,168/ $2,472).

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1-10Financial& ManagerialAccounting for MBAs,4thEditionE1-31.(20 minutes)a.Colgate-Palmolivewas profitable during2012asevidencedby its positive net profit marginof14%.However, the profit margin islowerthan in2011.b.Colgate-Palmolive’sproductivity measure (asset turnover)decreasedslightlyfrom1.4in2011to1.3in2012. This indicates thatoperatingassets are generatingaslightly lowerlevelof sales thanin the prior year.This is a negative development.c.ROA =Profit marginasset turnover.2012ROA=14%1.3=18.2%.2011ROA =15%1.4=21.0%.ThedecreaseinROAduring2012resultsfromadecreaseinbothprofitabilityandproductivity.E1-32.(15 minutes)Return on assets (ROA)=Netincome/Average assets=$735/ ($8,491+ $8,089)/2]=8.9%E1-33.(20minutes)a.Creditors are an important group of external stakeholders. They are primarily interested inthe ability of the company to generate sufficient cash flow in order to repay the amountsowed. Stockholders are another significant stakeholder in the company. They are primarilyinterested inthe company’sability to effectively raise capital and to invest that capital inprojects with a rate of return in excess of the cost of the capital raised, that is, to increasethe value of the firm.Regulators such as the SEC and the tax authorities, includingthe IRSand state and local tax officials,are importantconstituents thatare interestedin knowingwhetherthe company is complying with all applicable laws and regulations.b.Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices,and other procedures that have evolved over time in response to the need to regulate thepreparation of financial statements.They are primarily set by the Financial AccountingStandards Board (FASB),aprivate sectorentitywith representatives from companies thatissue financial statements, accounting firms that audit those statements, and users offinancial information. Other bodies that contribute to GAAP arethe AICPA, the EITF, andthe SEC.c.Financial information provides users with information that is useful in assessing the financialperformance of companies and, therefore, in settingstock and bond prices. To the extentthattheseprices are accurate, the costs of the funds that companies raise will accuratelyreflect their relative efficiency and risk of operations.Companies that can utilize capitalmoreeffectivelywill be able to obtain that capital at a reasonable cost and society’s financialresources will be effectively allocated.Continued next page

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Solutions Manual, Module 11-11E1-33.concludedd.First,thepreparationoffinancialstatementsinvolvesanunderstandingofcomplexaccounting rules and significant assumptions andconsiderableestimation.Second, GAAPallows for differing accounting treatments for the same transaction. And third, auditors are ata relative information disadvantage vis-à-vis company accountants. As the capital marketsplace increasing pressures on companies to perform, accountants are often placed in adifficult ethical position to use the flexibility given to them under GAAP in order to bias thefinancial resultsor to use their inside information to their advantage.E1-34.(20 minutes)a.ROE=Net income/Average stockholders’ equity= $1,383.8million / [($4,387.3million + $5,114.5million)/2] =29.1%b.The repurchase of common stock reduces the denominator(average stockholders’ equity).The outflow of cash for the repurchase, however, reduces net income by the return on thecash that is forgone. Generally, the reduction in the denominator is greater than that for thenumerator, andconsequentlyROE increases. That is one of the reasonscitedfor sharerepurchases.c.Companies usually repurchase theirownstock when they feel that it is undervalued by themarket. The repurchase is a way to send a signal to the market to that effect. Companymanagement is, in essence, backing up its assertions that the stock is undervalued with atangible investment of the company’s funds.Companies also repurchase their own stock tohave shares available to give to executives and other employees as compensation.

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1-12Financial& ManagerialAccounting for MBAs,4thEditionPROBLEMSP1-35.(40 minutes)a.2013ROE = $16,999/ [($81,738+ $75,761)/2] =21.6%2012ROE = $15,699/ [($75,761+ $71,247)/2] =21.4%Wal-Mart’s ROE increasedslightlyfrom 2012to 2013, and is slightly above the median ROEof 21.5for other companies in the Dow Jones average.b.2013ROA = $16,999/ [($203,105+ $193,406)/2] =8.6%2012ROA = $15,699/ [($193,406+ $180,782)/2] =8.4%Wal-Mart’s ROA increasedslightlyfrom 2012to 2013andisabove the median6.7%forother Dow Jones companies.c.Wal-Mart does not sell products with a high level of technology and specialization, and it,therefore,isnot protected by patents or other legal barriers to entry. It does, however, haveconsiderable market powerover suppliers as a result of its considerable size,which mayresult in product cost savings. Wal-Mart is also able to use its considerable advertisingbudget to its advantage.P1-36.(30 minutes)a.GENERAL MILLS, INC.Income Statement ($millions)For Year Ended May 26, 2013Revenue$17,774.1Cost of goods sold11,350.2Gross profit6,423.9Total expenses4,568.7Net income$1,855.2GENERAL MILLS, INC.Balance Sheet ($ millions)May 26, 2013Cash$741.4Totalliabilities$14,562.0Noncash assets21,916.6Stockholders’ equity8,096.0Total assets$22,658.0Total liabilities and equity$22,658.0Continued next page

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Solutions Manual, Module 11-13P1-36.concludedGENERAL MILLS, INC.Statement of Cash Flows ($ millions)ForYear Ended May 26, 2013Cash from operating activities$2,926.0Cash from investing activities(1,515.4)Cash from financing activities(1,140.4)Net change in cash270.2Cash, beginning of year471.2Cash, ending year$741.4b.A negative amount for cash from investing activities reflectsadditionalinvestment by thecompany in itslong-term assets, whichis generally a positive sign of management’scommitment to future business success.A negative amount for cash fromfinancingactivities reflects the reduction of long-term debt, which is often a positive sign of thecompany’s ability to retire debt obligations.c.Profit margin = $1,855.2/ $17,774.1=10.44%Assetturnover= $17,774.1/ $22,658.0=0.784Return on assets = $1,855.2/$22,658.0=8.2% (10.44%×0.784)Return on equity = $1,855.2/ $8,096.0=22.9%P1-37.(30 minutes)a.ABERCROMBIE & FITCHIncomeStatement ($millions)For Year EndedFebruary 2, 2013Revenue......................................................$4,511Cost of goods sold.......................................1,694Grossprofit..................................................2,817Expenses....................................................2,580Net income..................................................$237ABERCROMBIE & FITCHBalanceSheet ($millions)February 2, 2013Cash................................$644Totalliabilities................................$1,169Noncash assets.........................2,343Stockholders’ equity............................1,818Total assets...............................$2,987Total liabilities and equity....................$2,987Continued next page

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1-14Financial& ManagerialAccounting for MBAs,4thEditionP1-37.concludedABERCROMBIE & FITCHStatement ofCashFlows ($millions)For Year EndedFebruary 2, 2013Cashfromoperating activities$684Cashfrominvestingactivities(247)Cashfromfinancingactivities(377)Net change incash60Cash, beginning year584Cash, ending year$644b.A negative amount for cash from investing activities reflects further investment by thecompanyinitslong-termassets,whichisgenerallyapositivesignofmanagementcommitment to future business success.A negative amount for cash fromfinancingactivities reflects the reduction of long-term debt, which is often a positive sign of thecompany’s ability to retire debt obligations.c.i.Profit margin =$237/ $4,511=5.25%ii.Asset turnover =$4,511/$2,987=1.51iii.Return on assets=$237/ $2,987=7.93%(5.25%×1.51)iv.Return on equity =$237/ $1,818=13.04%P1-38.(30 minutes)a.CISCO SYSTEMS, INC.Income Statement ($ millions)For Year Ended July27, 2013Sales..................................................................................................$48,607Cost of goods sold..............................................................................19,167Gross profit.........................................................................................29,440Expenses...........................................................................................19,457Net income.........................................................................................$9,983CISCO SYSTEMS, INC.Balance Sheet ($ millions)July27, 2013Cash................................$7,925Total liabilities.........................................$42,063Noncash assets........................93,266Stockholders’ equity...............................59,128Total assets..............................$101,191Total liabilities and equity........................$101,191Continued next page

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Solutions Manual, Module 11-15P1-38.concludedCISCO SYSTEMS, INC.Statement of Cash Flows ($ millions)For Year Ended July27, 2013Cash fromoperating activities$12,894Cashfrominvesting activities(11,768)Cashfromfinancing activities(3,000)Net change in cash(1,874)Cash, beginning year9,799Cash, ending year$7,925b.A negative amount for cash from investing activities reflects further investment by thecompanyinitslong-termassets,whichisgenerallyapositivesignofmanagementcommitment to future business success.A negative amount for cash from financing activitiesreflects the reduction of long-term debt, which is often a positive sign of the company’sability to retire debt obligations.c.i.Profit margin = $9,983/ $48,607=20.54%ii.Asset turnover = $48,607/$101,191= 0.48iii.Return on assets= $9,983/ $101,191=9.87% (20.54%×0.48)iv.Return on equity = $9,983/ $59,128=16.9%P1-39.(15 minutes)CROCKER CORPORATIONStatement of Stockholders’ EquityFor Year Ended December 31,2013ContributedCapitalRetainedEarningsStockholders’EquityDecember 31,2012................................$120,000$ 30,000$150,000Issuance of common stock..............................30,00030,000Net income......................................................50,00050,000Cash dividends................................................_______(25,000)(25,000)December 31,2013................................$150,000$ 55,000$205,000

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