Solution Manual for Interpreting and Analyzing Financial Statements, 6th Edition
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6e Introduction Page 15 Chapter 1
ACTIVITY 1 CHAPTER 1 CROSSWORD PUZZLE
Across
5. Statement reporting all amounts as percentages
(2 Words)
7. Analysis used to compare revenues over a 5-year period
12. Net income earned, but not yet distributed to
stockholders (2 Words)
14. Analysis revealing relationships among two or more
accounts
16. Activity including cash transactions involving long-term
assets
17. Statement reporting assets and how they are financed
(abbreviation)
18. Statement reporting changes in contributed capital and
retained earnings (2 Words)
20. Assets = Liabilities + ____ (abbreviation)
21. Activity including cash transactions from a company's
central business
22. Measures how efficiently assets are used to generate
revenue (2 Words)
24. Amounts owed
25. Proportion of assets financed by debt (2 Words)
26. Statement reporting changes in cash (2 Words)
28. Reveals how efficiently assets generate profits
(3 Words)
Down
1. System for recording, classifying, and summarizing
financial information
2. Wholesale costs of inventory sold (abbreviation)
3. Activity including cash transactions that involve
stockholders and creditors
4. Amounts earned selling to or servicing customers
6. Items of value
8. Costs incurred to produce revenues
9. Rules for preparing the financial statements
(abbreviation)
10. Amounts paid-in by stockholders to purchase stock
(2 Words)
11. Amounts to be paid to suppliers (2 Words)
13. Principle that requires assets be recorded at the amount
paid for them (2 Words)
15. Statement reporting profitability (2 Words)
19. Profit (loss), earnings, or the bottom line (2 Words)
23. Proportion of profit from revenue (abbreviation)
27. Amounts to be received from customers (abbreviation)
ACTIVITY 1 CHAPTER 1 CROSSWORD PUZZLE
Across
5. Statement reporting all amounts as percentages
(2 Words)
7. Analysis used to compare revenues over a 5-year period
12. Net income earned, but not yet distributed to
stockholders (2 Words)
14. Analysis revealing relationships among two or more
accounts
16. Activity including cash transactions involving long-term
assets
17. Statement reporting assets and how they are financed
(abbreviation)
18. Statement reporting changes in contributed capital and
retained earnings (2 Words)
20. Assets = Liabilities + ____ (abbreviation)
21. Activity including cash transactions from a company's
central business
22. Measures how efficiently assets are used to generate
revenue (2 Words)
24. Amounts owed
25. Proportion of assets financed by debt (2 Words)
26. Statement reporting changes in cash (2 Words)
28. Reveals how efficiently assets generate profits
(3 Words)
Down
1. System for recording, classifying, and summarizing
financial information
2. Wholesale costs of inventory sold (abbreviation)
3. Activity including cash transactions that involve
stockholders and creditors
4. Amounts earned selling to or servicing customers
6. Items of value
8. Costs incurred to produce revenues
9. Rules for preparing the financial statements
(abbreviation)
10. Amounts paid-in by stockholders to purchase stock
(2 Words)
11. Amounts to be paid to suppliers (2 Words)
13. Principle that requires assets be recorded at the amount
paid for them (2 Words)
15. Statement reporting profitability (2 Words)
19. Profit (loss), earnings, or the bottom line (2 Words)
23. Proportion of profit from revenue (abbreviation)
27. Amounts to be received from customers (abbreviation)
6e Introduction Page 15 Chapter 1
ACTIVITY 1 CHAPTER 1 CROSSWORD PUZZLE
Across
5. Statement reporting all amounts as percentages
(2 Words)
7. Analysis used to compare revenues over a 5-year period
12. Net income earned, but not yet distributed to
stockholders (2 Words)
14. Analysis revealing relationships among two or more
accounts
16. Activity including cash transactions involving long-term
assets
17. Statement reporting assets and how they are financed
(abbreviation)
18. Statement reporting changes in contributed capital and
retained earnings (2 Words)
20. Assets = Liabilities + ____ (abbreviation)
21. Activity including cash transactions from a company's
central business
22. Measures how efficiently assets are used to generate
revenue (2 Words)
24. Amounts owed
25. Proportion of assets financed by debt (2 Words)
26. Statement reporting changes in cash (2 Words)
28. Reveals how efficiently assets generate profits
(3 Words)
Down
1. System for recording, classifying, and summarizing
financial information
2. Wholesale costs of inventory sold (abbreviation)
3. Activity including cash transactions that involve
stockholders and creditors
4. Amounts earned selling to or servicing customers
6. Items of value
8. Costs incurred to produce revenues
9. Rules for preparing the financial statements
(abbreviation)
10. Amounts paid-in by stockholders to purchase stock
(2 Words)
11. Amounts to be paid to suppliers (2 Words)
13. Principle that requires assets be recorded at the amount
paid for them (2 Words)
15. Statement reporting profitability (2 Words)
19. Profit (loss), earnings, or the bottom line (2 Words)
23. Proportion of profit from revenue (abbreviation)
27. Amounts to be received from customers (abbreviation)
ACTIVITY 1 CHAPTER 1 CROSSWORD PUZZLE
Across
5. Statement reporting all amounts as percentages
(2 Words)
7. Analysis used to compare revenues over a 5-year period
12. Net income earned, but not yet distributed to
stockholders (2 Words)
14. Analysis revealing relationships among two or more
accounts
16. Activity including cash transactions involving long-term
assets
17. Statement reporting assets and how they are financed
(abbreviation)
18. Statement reporting changes in contributed capital and
retained earnings (2 Words)
20. Assets = Liabilities + ____ (abbreviation)
21. Activity including cash transactions from a company's
central business
22. Measures how efficiently assets are used to generate
revenue (2 Words)
24. Amounts owed
25. Proportion of assets financed by debt (2 Words)
26. Statement reporting changes in cash (2 Words)
28. Reveals how efficiently assets generate profits
(3 Words)
Down
1. System for recording, classifying, and summarizing
financial information
2. Wholesale costs of inventory sold (abbreviation)
3. Activity including cash transactions that involve
stockholders and creditors
4. Amounts earned selling to or servicing customers
6. Items of value
8. Costs incurred to produce revenues
9. Rules for preparing the financial statements
(abbreviation)
10. Amounts paid-in by stockholders to purchase stock
(2 Words)
11. Amounts to be paid to suppliers (2 Words)
13. Principle that requires assets be recorded at the amount
paid for them (2 Words)
15. Statement reporting profitability (2 Words)
19. Profit (loss), earnings, or the bottom line (2 Words)
23. Proportion of profit from revenue (abbreviation)
27. Amounts to be received from customers (abbreviation)
6e Introduction Page 16 Chapter 1
ACTIVITY 2 THE FOUR FINANCIAL STATEMENTS
Purpose: • Identify the four financial statements.
• Understand the basic information provided by each financial statement.
Accounting is the system of recording, classifying, and reporting financial information. Four financial
statements report this information: balance sheet, income statement, statement of stockholders’ equity,
and the statement of cash flows.
BALANCE SHEET
Assets Liabilities
Stockholders’ equity
The Balance Sheet (BS) provides a snapshot of a company’s financial position as of a certain date. It
reports assets, items of value such as inventory and equipment, and whether the assets are financed with
liabilities (debt) or stockholders’ equity (equity).
INCOME STATEMENT
Revenues
(Expenses)
Net income
The Income Statement (IS) reports the company’s profitability during an accounting period. It reports
revenues, amounts received from customers for products sold or services provided, and expenses, the
costs incurred to produce revenues. The difference is net income.
STATEMENT OF STOCKHOLDERS’ EQUITY
Retained earnings, beginning Contributed capital, beginning
+ Net income + Issuance of shares
(Dividends) (Repurchase to retire shares)
Retained earnings, ending Contributed capital, ending
The Statement of Stockholders’ Equity (SE) reports if the earnings (net income) of this accounting period
are distributed as dividends or retained in the business as retained earnings. It also reports amounts
paid-in (contributed) by stockholders to purchase common stock and preferred stock.
STATEMENT OF CASH FLOWS
Cash inflows
(Cash outflows)
Change in the cash account
The Statement of Cash Flows (CF) reports cash inflows and cash outflows during an accounting period.
Q1 Which financial statement reports:
a. whether assets are primarily financed with debt or equity? (BS / IS / SE / CF)
b. whether the company was profitable or not? (BS / IS / SE / CF)
c. cash received from customers during the accounting period? (BS / IS / SE / CF)
d. dividends declared by the board of directors for shareholders? (BS / IS / SE / CF)
e. retained earnings at the beginning of the accounting period? (BS / IS / SE / CF)
f. the expenses of a corporation? (BS / IS / SE / CF)
g. the assets of a corporation? (BS / IS / SE / CF)
ACTIVITY 2 THE FOUR FINANCIAL STATEMENTS
Purpose: • Identify the four financial statements.
• Understand the basic information provided by each financial statement.
Accounting is the system of recording, classifying, and reporting financial information. Four financial
statements report this information: balance sheet, income statement, statement of stockholders’ equity,
and the statement of cash flows.
BALANCE SHEET
Assets Liabilities
Stockholders’ equity
The Balance Sheet (BS) provides a snapshot of a company’s financial position as of a certain date. It
reports assets, items of value such as inventory and equipment, and whether the assets are financed with
liabilities (debt) or stockholders’ equity (equity).
INCOME STATEMENT
Revenues
(Expenses)
Net income
The Income Statement (IS) reports the company’s profitability during an accounting period. It reports
revenues, amounts received from customers for products sold or services provided, and expenses, the
costs incurred to produce revenues. The difference is net income.
STATEMENT OF STOCKHOLDERS’ EQUITY
Retained earnings, beginning Contributed capital, beginning
+ Net income + Issuance of shares
(Dividends) (Repurchase to retire shares)
Retained earnings, ending Contributed capital, ending
The Statement of Stockholders’ Equity (SE) reports if the earnings (net income) of this accounting period
are distributed as dividends or retained in the business as retained earnings. It also reports amounts
paid-in (contributed) by stockholders to purchase common stock and preferred stock.
STATEMENT OF CASH FLOWS
Cash inflows
(Cash outflows)
Change in the cash account
The Statement of Cash Flows (CF) reports cash inflows and cash outflows during an accounting period.
Q1 Which financial statement reports:
a. whether assets are primarily financed with debt or equity? (BS / IS / SE / CF)
b. whether the company was profitable or not? (BS / IS / SE / CF)
c. cash received from customers during the accounting period? (BS / IS / SE / CF)
d. dividends declared by the board of directors for shareholders? (BS / IS / SE / CF)
e. retained earnings at the beginning of the accounting period? (BS / IS / SE / CF)
f. the expenses of a corporation? (BS / IS / SE / CF)
g. the assets of a corporation? (BS / IS / SE / CF)
6e Introduction Page 17 Chapter 1
ACTIVITY 3 BALANCE SHEET
Purpose: • Understand the information provided by the balance sheet.
• Identify asset, liability, and stockholders’ equity accounts reported on the
balance sheet.
• Understand the accounting equation.
PEPSICO (PEP*) 12/25/2010 BALANCE SHEET ($ in millions)
ASSETS LIABILITIES
Cash and cash equivalents $ 5,943 Accounts payable $ 3,865
Short-term investments 426 Short-term debt 4,898
Accounts receivable, net 6,323 Other current liabilities 7,129
Inventories 3,372 Long-term debt 19,999
Other current assets 1,505 Other noncurrent liabilities 11,098
Property, plant, and equipment, net 19,058
Goodwill 14,661 STOCKHOLDERS' EQUITY
Other intangible assets 13,808 Contributed capital 4,449
Long-term investments 1,368 Retained earnings 37,090
Other noncurrent assets 1,689 Treasury stock and other equity (20,375)
Total Assets $68,153 Total L & SE $68,153
The balance sheet reports assets and the amount of financing from liabilities and stockholders’ equity as
of a certain date. This relationship is summarized by the accounting equation, which is:
Assets = Liabilities + Stockholders’ Equity
Assets are items of value that a corporation owns or has a right to use. Typical asset accounts include
cash, accounts receivable, inventory, equipment, buildings, and land. Accounts receivable are amounts to
be received in the future from customers.
Liabilities are amounts owed to creditors; the amount of debt owed to third parties. Typical liability
accounts include accounts payable, wages payable, notes payable, and bonds payable. The key word
found in many liability accounts is payable. Accounts payable are amounts to be paid in the future to
suppliers.
Stockholders’ Equity is the portion of assets the owners own free and clear. Stockholders’ equity may also
be referred to as shareholders’ equity or owners’ equity. Typical stockholders’ equity accounts include:
Contributed Capital—Amounts paid-in (contributed) by stockholders to purchase common stock
and preferred stock.
Retained Earnings—Net income earned by the company since its incorporation and not yet
distributed as dividends.
Q1 Identify the accounting equation amounts for PepsiCo Corporation using the information above.
Assets $68,153 million = Liabilities $46,989 million + Stockholders’ Equity $21,164 million
Q2 Assets can either be financed with liabilities or stockholder’s equity.
Q3 Will the accounting equation hold true for every corporation? (Yes / No / Can’t tell) Why?
Assets will always be financed by either liabilities (debt) or stockholders’ equity. Assets
are either owned free and clear by the owners (equity) or financed by creditors (debt).
* Stock market symbols are shown in parentheses.
ACTIVITY 3 BALANCE SHEET
Purpose: • Understand the information provided by the balance sheet.
• Identify asset, liability, and stockholders’ equity accounts reported on the
balance sheet.
• Understand the accounting equation.
PEPSICO (PEP*) 12/25/2010 BALANCE SHEET ($ in millions)
ASSETS LIABILITIES
Cash and cash equivalents $ 5,943 Accounts payable $ 3,865
Short-term investments 426 Short-term debt 4,898
Accounts receivable, net 6,323 Other current liabilities 7,129
Inventories 3,372 Long-term debt 19,999
Other current assets 1,505 Other noncurrent liabilities 11,098
Property, plant, and equipment, net 19,058
Goodwill 14,661 STOCKHOLDERS' EQUITY
Other intangible assets 13,808 Contributed capital 4,449
Long-term investments 1,368 Retained earnings 37,090
Other noncurrent assets 1,689 Treasury stock and other equity (20,375)
Total Assets $68,153 Total L & SE $68,153
The balance sheet reports assets and the amount of financing from liabilities and stockholders’ equity as
of a certain date. This relationship is summarized by the accounting equation, which is:
Assets = Liabilities + Stockholders’ Equity
Assets are items of value that a corporation owns or has a right to use. Typical asset accounts include
cash, accounts receivable, inventory, equipment, buildings, and land. Accounts receivable are amounts to
be received in the future from customers.
Liabilities are amounts owed to creditors; the amount of debt owed to third parties. Typical liability
accounts include accounts payable, wages payable, notes payable, and bonds payable. The key word
found in many liability accounts is payable. Accounts payable are amounts to be paid in the future to
suppliers.
Stockholders’ Equity is the portion of assets the owners own free and clear. Stockholders’ equity may also
be referred to as shareholders’ equity or owners’ equity. Typical stockholders’ equity accounts include:
Contributed Capital—Amounts paid-in (contributed) by stockholders to purchase common stock
and preferred stock.
Retained Earnings—Net income earned by the company since its incorporation and not yet
distributed as dividends.
Q1 Identify the accounting equation amounts for PepsiCo Corporation using the information above.
Assets $68,153 million = Liabilities $46,989 million + Stockholders’ Equity $21,164 million
Q2 Assets can either be financed with liabilities or stockholder’s equity.
Q3 Will the accounting equation hold true for every corporation? (Yes / No / Can’t tell) Why?
Assets will always be financed by either liabilities (debt) or stockholders’ equity. Assets
are either owned free and clear by the owners (equity) or financed by creditors (debt).
* Stock market symbols are shown in parentheses.
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6e Introduction Page 18 Chapter 1
Q4 PepsiCo is primarily financed with (liabilities / stockholders’ equity). How can you tell?
Total liabilities of $46,989 are greater than total stockholders’ equity of $21,164.
Q5 Circle whether the account is classified as an (A)sset, (L)iability, or part of Stockholders’ Equity (SE)
on the balance sheet.
a. Cash (A / L / SE)
b. Accounts payable (A / L / SE)
c. Accounts receivable (A / L / SE)
d. Land (A / L / SE)
e. Common stock (A / L / SE)
f. Equipment (A / L / SE)
g. Notes payable (A / L / SE)
h. Building (A / L / SE)
i. Retained earnings (A / L / SE)
j. Inventory (A / L / SE)
k. Mortgage payable (A / L / SE)
l. Bonds payable (A / L / SE)
Q6 Use PepsiCo’s balance sheet on the previous page to answer the following questions:
a. What amount of cash does this company expect to receive from customers within the next
few months? $6,323 million
b. The largest asset account is Property, plant, and equipment, net reporting $19,058
million.
What types of asset costs are included in this account?
Answers will vary, but could include…factory equipment for producing beverage
concentrate, bottling, and making snack food; factory, warehouse, and
administrative buildings; sales and delivery vehicles; and computer equipment.
c. How much does this company currently owe suppliers? $3,865 million
d. Since the company started business, what is the total amount shareholders have paid for
their shares of stock? $4,449 million
e. Since the company started business, how much net income was earned and not yet
distributed as dividends? $37,090 million
Q4 PepsiCo is primarily financed with (liabilities / stockholders’ equity). How can you tell?
Total liabilities of $46,989 are greater than total stockholders’ equity of $21,164.
Q5 Circle whether the account is classified as an (A)sset, (L)iability, or part of Stockholders’ Equity (SE)
on the balance sheet.
a. Cash (A / L / SE)
b. Accounts payable (A / L / SE)
c. Accounts receivable (A / L / SE)
d. Land (A / L / SE)
e. Common stock (A / L / SE)
f. Equipment (A / L / SE)
g. Notes payable (A / L / SE)
h. Building (A / L / SE)
i. Retained earnings (A / L / SE)
j. Inventory (A / L / SE)
k. Mortgage payable (A / L / SE)
l. Bonds payable (A / L / SE)
Q6 Use PepsiCo’s balance sheet on the previous page to answer the following questions:
a. What amount of cash does this company expect to receive from customers within the next
few months? $6,323 million
b. The largest asset account is Property, plant, and equipment, net reporting $19,058
million.
What types of asset costs are included in this account?
Answers will vary, but could include…factory equipment for producing beverage
concentrate, bottling, and making snack food; factory, warehouse, and
administrative buildings; sales and delivery vehicles; and computer equipment.
c. How much does this company currently owe suppliers? $3,865 million
d. Since the company started business, what is the total amount shareholders have paid for
their shares of stock? $4,449 million
e. Since the company started business, how much net income was earned and not yet
distributed as dividends? $37,090 million
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6e Introduction Page 19 Chapter 1
ACTIVITY 4 INCOME STATEMENT
Purpose: • Understand the information reported on the income statement.
• Identify revenue and expense accounts reported on the income statement.
PEPSICO (PEP) 2010 INCOME STATEMENT ($ in millions)
Sales revenue $ 57,838
Cost of goods sold 26,575
Gross profit 31,263
Selling, general and administrative (SGA) expense 22,326
Research and development expense 488
Other operating expenses 217
Income before income tax 8,232
Provision for income tax 1,912
Net income $ 6,320
The income statement reports the company’s profitability during an accounting period.
Revenues are amounts received from customers for products sold and services provided. Sales revenue
and service revenue are amounts earned engaging in the primary business activity.
Expenses are the costs incurred to produce revenues. Expenses are recorded in the accounting period
they benefit (if a cause and effect relationship exists) or are incurred (if there is no cause and effect
relationship). Cost of goods sold expense reports the wholesale costs of inventory sold to customers
during the accounting period.
Net income is the difference between revenues and expenses. Net income is also referred to as profit
(loss), earnings, or the bottom line.
Revenues – Expenses = Net income
Q1 Circle whether the account is classified as a (Rev)enue, (Exp)ense, or (Not) reported on the income
statement.
a. Wage expense (Rev / Exp / Not) d. Service revenue (Rev / Exp / Not)
b. Inventory (Rev / Exp / Not) e. Rent expense (Rev / Exp / Not)
c. Cost of goods sold (Rev / Exp / Not) f. Building (Rev / Exp / Not)
Q2 Review PepsiCo’s 2010 income statement above and answer the following questions:
a. This company reports (1 / 2 / 3 / 4) revenue account(s) and (2 / 3 / 4 / 5) expense accounts.
b. Beverages and snacks were sold to customers for $57,838 million that cost the company
$26,575 million to produce.
c. The title of the largest expense account is Cost of Goods Sold reporting $26,575 million,
which is typically the largest expense account for a company within the (retail / service)
industry.
What specific types of costs would be included in this account for PepsiCo?
Answers will vary, but could include … the cost of syrup concentration for the beverages,
ingredients for snack foods, packaging materials, manufacturing labor, and other
manufacturing costs such as depreciation of PPE.
d. Was PepsiCo profitable? (Yes / No) How much profit was reported? $6,320 million
Q3 Net income can also be referred to as (revenues / expenses / common stock / earnings).
ACTIVITY 4 INCOME STATEMENT
Purpose: • Understand the information reported on the income statement.
• Identify revenue and expense accounts reported on the income statement.
PEPSICO (PEP) 2010 INCOME STATEMENT ($ in millions)
Sales revenue $ 57,838
Cost of goods sold 26,575
Gross profit 31,263
Selling, general and administrative (SGA) expense 22,326
Research and development expense 488
Other operating expenses 217
Income before income tax 8,232
Provision for income tax 1,912
Net income $ 6,320
The income statement reports the company’s profitability during an accounting period.
Revenues are amounts received from customers for products sold and services provided. Sales revenue
and service revenue are amounts earned engaging in the primary business activity.
Expenses are the costs incurred to produce revenues. Expenses are recorded in the accounting period
they benefit (if a cause and effect relationship exists) or are incurred (if there is no cause and effect
relationship). Cost of goods sold expense reports the wholesale costs of inventory sold to customers
during the accounting period.
Net income is the difference between revenues and expenses. Net income is also referred to as profit
(loss), earnings, or the bottom line.
Revenues – Expenses = Net income
Q1 Circle whether the account is classified as a (Rev)enue, (Exp)ense, or (Not) reported on the income
statement.
a. Wage expense (Rev / Exp / Not) d. Service revenue (Rev / Exp / Not)
b. Inventory (Rev / Exp / Not) e. Rent expense (Rev / Exp / Not)
c. Cost of goods sold (Rev / Exp / Not) f. Building (Rev / Exp / Not)
Q2 Review PepsiCo’s 2010 income statement above and answer the following questions:
a. This company reports (1 / 2 / 3 / 4) revenue account(s) and (2 / 3 / 4 / 5) expense accounts.
b. Beverages and snacks were sold to customers for $57,838 million that cost the company
$26,575 million to produce.
c. The title of the largest expense account is Cost of Goods Sold reporting $26,575 million,
which is typically the largest expense account for a company within the (retail / service)
industry.
What specific types of costs would be included in this account for PepsiCo?
Answers will vary, but could include … the cost of syrup concentration for the beverages,
ingredients for snack foods, packaging materials, manufacturing labor, and other
manufacturing costs such as depreciation of PPE.
d. Was PepsiCo profitable? (Yes / No) How much profit was reported? $6,320 million
Q3 Net income can also be referred to as (revenues / expenses / common stock / earnings).
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6e Introduction Page 20 Chapter 1
ACTIVITY 5 STATEMENT OF STOCKHOLDERS’ EQUITY
Purpose: • Understand information provided by the Statement of Stockholders’ Equity.
• Understand changes within contributed capital and retained earnings.
• Identify relationships among the IS, RE, and the BS.
PEPSICO (PEP) 2010 STATEMENT OF STOCKHOLDERS’ EQUITY ($ in millions)
Contributed
Capital
Retained
Earnings
Other
Equity
Total
Stockholders
Equity
Beginning balance $ 176 $ 33,805 $ (17,177) $ 16,804
Issuance of shares 4,273 4,273
Net income 6,320 6,320
Dividends (3,041) (3,041)
Other transactions 6 (3,198) (3,192)
Ending balance $ 4,449 $ 37,090 $(20,375) $ 21,164
The statement of stockholders’ equity reports changes within the contributed capital, retained earnings,
and other equity accounts during an accounting period. Contributed capital (CC) is increased when
additional shares of stock are issued and decreased when those shares are retired. Retained earnings (RE)
is increased by net income (earnings) of the accounting period and decreased when earnings are
distributed as dividends to the stockholders. Earnings not distributed as dividends are reported as
retained earnings.
Q1 Earnings is another word for (revenue / receivables / net income).
Earnings of a corporation belong to the (managers / stockholders).
Earnings can either be distributed to the stockholders as (dividends / expenses / retained
earnings) or kept in the business as (dividends / expenses / retained earnings).
Q2 Income statement: Revenues - Expenses = Net income/loss
Balance sheet: Assets = Liabilities + Stockholders’ Equity
Stockholders’ Equity = Contributed capital + Retained Earnings + Other Equity
Statement of SE: Beg Retained Earnings + Net Income - Dividends = Ending RE
Q3 Net income is computed on the (IS / SE / BS) and then transferred to the Statement of
Stockholders’ Equity to increase (CC / RE / Other SE). Ending retained earnings is reported on the
Statement of Stockholders’ Equity and then transferred to the (IS / SE / BS).
Q4 Circle whether the account is reported on the Income Statement (IS), Statement of Stockholders’
Equity (SE), or the Balance Sheet (BS). Note: Three amounts are reported on two statements.
a. Contributed capital (IS / SE / BS) e. Sales revenue (IS / SE / BS)
b. Net income (IS / SE / BS) f. Accounts receivable (IS / SE / BS)
c. Dividends (IS / SE / BS) g. Wage expense (IS / SE / BS)
d. Retained earnings (IS / SE / BS) h. Bonds payable (IS / SE / BS)
Q5 Use PepsiCo’s 2010 statement of stockholders’ equity above to answer the following questions:
a. Contributed capital reported at the end of the accounting period is $4,449 million, which is
the amount shareholders paid for (net income / dividends / issued shares).
b. Retained earnings increased by (net income / dividends / issued shares) of $6,320
million and decreased by (net income / dividends / issued shares) of $3,041 million.
c. When the company issues shares of stock, total stockholders’ equity (increases /
decreases). When the company buys back shares of stock, total stockholders’ equity
(increases / decreases).
ACTIVITY 5 STATEMENT OF STOCKHOLDERS’ EQUITY
Purpose: • Understand information provided by the Statement of Stockholders’ Equity.
• Understand changes within contributed capital and retained earnings.
• Identify relationships among the IS, RE, and the BS.
PEPSICO (PEP) 2010 STATEMENT OF STOCKHOLDERS’ EQUITY ($ in millions)
Contributed
Capital
Retained
Earnings
Other
Equity
Total
Stockholders
Equity
Beginning balance $ 176 $ 33,805 $ (17,177) $ 16,804
Issuance of shares 4,273 4,273
Net income 6,320 6,320
Dividends (3,041) (3,041)
Other transactions 6 (3,198) (3,192)
Ending balance $ 4,449 $ 37,090 $(20,375) $ 21,164
The statement of stockholders’ equity reports changes within the contributed capital, retained earnings,
and other equity accounts during an accounting period. Contributed capital (CC) is increased when
additional shares of stock are issued and decreased when those shares are retired. Retained earnings (RE)
is increased by net income (earnings) of the accounting period and decreased when earnings are
distributed as dividends to the stockholders. Earnings not distributed as dividends are reported as
retained earnings.
Q1 Earnings is another word for (revenue / receivables / net income).
Earnings of a corporation belong to the (managers / stockholders).
Earnings can either be distributed to the stockholders as (dividends / expenses / retained
earnings) or kept in the business as (dividends / expenses / retained earnings).
Q2 Income statement: Revenues - Expenses = Net income/loss
Balance sheet: Assets = Liabilities + Stockholders’ Equity
Stockholders’ Equity = Contributed capital + Retained Earnings + Other Equity
Statement of SE: Beg Retained Earnings + Net Income - Dividends = Ending RE
Q3 Net income is computed on the (IS / SE / BS) and then transferred to the Statement of
Stockholders’ Equity to increase (CC / RE / Other SE). Ending retained earnings is reported on the
Statement of Stockholders’ Equity and then transferred to the (IS / SE / BS).
Q4 Circle whether the account is reported on the Income Statement (IS), Statement of Stockholders’
Equity (SE), or the Balance Sheet (BS). Note: Three amounts are reported on two statements.
a. Contributed capital (IS / SE / BS) e. Sales revenue (IS / SE / BS)
b. Net income (IS / SE / BS) f. Accounts receivable (IS / SE / BS)
c. Dividends (IS / SE / BS) g. Wage expense (IS / SE / BS)
d. Retained earnings (IS / SE / BS) h. Bonds payable (IS / SE / BS)
Q5 Use PepsiCo’s 2010 statement of stockholders’ equity above to answer the following questions:
a. Contributed capital reported at the end of the accounting period is $4,449 million, which is
the amount shareholders paid for (net income / dividends / issued shares).
b. Retained earnings increased by (net income / dividends / issued shares) of $6,320
million and decreased by (net income / dividends / issued shares) of $3,041 million.
c. When the company issues shares of stock, total stockholders’ equity (increases /
decreases). When the company buys back shares of stock, total stockholders’ equity
(increases / decreases).
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6e Introduction Page 21 Chapter 1
ACTIVITY 6 STATEMENT OF CASH FLOWS
Purpose: • Understand information provided by the Statement of Cash Flows.
• Understand that cash flows are organized as operating, investing, and financing
activities.
The statement of cash flows organizes cash inflows and cash outflows as operating activities, investing
activities, and financing activities.
PEPSICO (PEP) 2010 STATEMENT OF CASH FLOWS ($ in millions)
Net cash received from operating activities (NCOA) $ 8,448
Net cash paid for investing activities (NCIA) (7,668)
Net cash received from financing activities (NCFA) 1,386
Effect of exchange rate changes (166)
Change in cash 2,000
+ Cash, beginning of the period 3,943
= Cash, end of the period $ 5,943
Business activities can be classified into three distinct categories: operating, investing, and
financing. Operating Activities relate to a company’s main business of selling products or services to earn
net income. Investing Activities relate to the need for investing in property, plant, and equipment or
expanding by making investments in other companies. Financing Activities relate to how a company
finances its assets—with debt or stockholders’ equity. The Statement of Cash Flows describes a
company’s cash inflows and outflows for each of these three areas.
Q1 Use PepsiCo’s 2010 statement of cash flows above to answer the following questions:
a. PepsiCo’s operating activities generated cash inflows of $8,448 million.
b. PepsiCo purchased property, plant, and equipment, which resulted in a cash (inflow /
outflow) of $7,668 million from (operating / investing / financing) activities.
c. PepsiCo borrowed money, which resulted in a cash (inflow / outflow) of $1,386 million
from (operating / investing / financing) activities.
d. At the beginning of 2010, cash was $3,943 million. During the year, cash (increased /
decreased) by $2,000 million, resulting in an ending cash balance of $5,943 million.
e. Cash at the end of 2010 is the (same as / different than) cash at the beginning of 2011.
Q2 Circle whether the account is reported on the Income Statement (IS), the Balance Sheet (BS), or the
Statement of Cash Flows (CF).
a. Retained earnings (IS / BS / CF) e. Cash from issuing common stock (IS / BS / CF)
b. Rent expense (IS / BS / CF) f. Sales revenue (IS / BS / CF)
c. Rent payable (IS / BS / CF) g. Accounts receivable (IS / BS / CF)
d. Cash paid for rent (IS / BS / CF) h. Cash received from customers (IS / BS / CF)
ACTIVITY 6 STATEMENT OF CASH FLOWS
Purpose: • Understand information provided by the Statement of Cash Flows.
• Understand that cash flows are organized as operating, investing, and financing
activities.
The statement of cash flows organizes cash inflows and cash outflows as operating activities, investing
activities, and financing activities.
PEPSICO (PEP) 2010 STATEMENT OF CASH FLOWS ($ in millions)
Net cash received from operating activities (NCOA) $ 8,448
Net cash paid for investing activities (NCIA) (7,668)
Net cash received from financing activities (NCFA) 1,386
Effect of exchange rate changes (166)
Change in cash 2,000
+ Cash, beginning of the period 3,943
= Cash, end of the period $ 5,943
Business activities can be classified into three distinct categories: operating, investing, and
financing. Operating Activities relate to a company’s main business of selling products or services to earn
net income. Investing Activities relate to the need for investing in property, plant, and equipment or
expanding by making investments in other companies. Financing Activities relate to how a company
finances its assets—with debt or stockholders’ equity. The Statement of Cash Flows describes a
company’s cash inflows and outflows for each of these three areas.
Q1 Use PepsiCo’s 2010 statement of cash flows above to answer the following questions:
a. PepsiCo’s operating activities generated cash inflows of $8,448 million.
b. PepsiCo purchased property, plant, and equipment, which resulted in a cash (inflow /
outflow) of $7,668 million from (operating / investing / financing) activities.
c. PepsiCo borrowed money, which resulted in a cash (inflow / outflow) of $1,386 million
from (operating / investing / financing) activities.
d. At the beginning of 2010, cash was $3,943 million. During the year, cash (increased /
decreased) by $2,000 million, resulting in an ending cash balance of $5,943 million.
e. Cash at the end of 2010 is the (same as / different than) cash at the beginning of 2011.
Q2 Circle whether the account is reported on the Income Statement (IS), the Balance Sheet (BS), or the
Statement of Cash Flows (CF).
a. Retained earnings (IS / BS / CF) e. Cash from issuing common stock (IS / BS / CF)
b. Rent expense (IS / BS / CF) f. Sales revenue (IS / BS / CF)
c. Rent payable (IS / BS / CF) g. Accounts receivable (IS / BS / CF)
d. Cash paid for rent (IS / BS / CF) h. Cash received from customers (IS / BS / CF)
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6e Introduction Page 22 Chapter 1
ACTIVITY 7 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Purpose: • Understand that GAAP (Generally Accepted Accounting Principles) are the rules
of financial accounting.
• Apply the historical cost principle.
GAAP (Generally Accepted Accounting Principles) are the rules that companies must follow when
preparing financial statements.
• The SEC (Securities and Exchange Commission) has legislative authority to set the reporting rules
for accounting information of the publicly held corporations it regulates. It has designated GAAP to
be the official rules. The SEC provides oversight and enforcement authority over the Financial
Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB).
• The seven full-time voting members of the FASB (Financial Accounting Standards Board) set
accounting reporting standards and formulate GAAP.
• Audits attest to whether a company’s financial statements comply with GAAP. Only CPAs (Certified
Public Accountants), licensed by the state, can conduct the audits.
• Ethical behavior is defined by the AICPA’s (American Institute of CPA’s) Code of Professional
Conduct. This code holds CPAs accountable for serving the public interest.
• The five full-time members of the PCAOB (Public Company Accounting Oversight Board) establish
auditing standards and conduct inspections of the public accounting firms that perform audits.
Q1 (FASB / SEC / GAAP / AICPA) are the rules that must be followed when preparing the financial
statements for external use.
Q2 GAAP stands for Generally Accepted Accounting Principles.
Q3 (CPAs / Management / Corporate accountants) conduct audits that attest to whether a company’s
financial statements comply with GAAP.
HISTORICAL COST PRINCIPLE
GAAP #1: The Historical Cost Principle states that assets and services should be recorded at their
acquisition cost, thus using verifiable information that is the most reliable information.
Q4 An auto has a sticker price of $20,000. A company purchases the auto, but negotiates with the sales
person and pays a price of only $18,000. On the balance sheet, ($18,000 / $20,000) will be
reported for the auto. Thirty years ago, land was purchased for $2,000, which now has a current
market value of $100,000. On the balance sheet, ($2,000 / $100,000) will be reported for the land.
Q5 When the financial statements are prepared according to GAAP, assets and services are reported at
their (acquisition cost / current market value).
Q6 THINK ABOUT IT: Is knowledge of an asset’s current market value ever useful? (Yes / No)
If so, when? Knowledge of an asset’s current market value is valuable when buying or
selling an individual asset or a business and when using an asset as collateral for a loan.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
Q7 There (are / are not) differences among the accounting standards of different countries. IFRS are
global accounting standards that U.S. GAAP is (converging toward / in full compliance with).
ACTIVITY 7 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Purpose: • Understand that GAAP (Generally Accepted Accounting Principles) are the rules
of financial accounting.
• Apply the historical cost principle.
GAAP (Generally Accepted Accounting Principles) are the rules that companies must follow when
preparing financial statements.
• The SEC (Securities and Exchange Commission) has legislative authority to set the reporting rules
for accounting information of the publicly held corporations it regulates. It has designated GAAP to
be the official rules. The SEC provides oversight and enforcement authority over the Financial
Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB).
• The seven full-time voting members of the FASB (Financial Accounting Standards Board) set
accounting reporting standards and formulate GAAP.
• Audits attest to whether a company’s financial statements comply with GAAP. Only CPAs (Certified
Public Accountants), licensed by the state, can conduct the audits.
• Ethical behavior is defined by the AICPA’s (American Institute of CPA’s) Code of Professional
Conduct. This code holds CPAs accountable for serving the public interest.
• The five full-time members of the PCAOB (Public Company Accounting Oversight Board) establish
auditing standards and conduct inspections of the public accounting firms that perform audits.
Q1 (FASB / SEC / GAAP / AICPA) are the rules that must be followed when preparing the financial
statements for external use.
Q2 GAAP stands for Generally Accepted Accounting Principles.
Q3 (CPAs / Management / Corporate accountants) conduct audits that attest to whether a company’s
financial statements comply with GAAP.
HISTORICAL COST PRINCIPLE
GAAP #1: The Historical Cost Principle states that assets and services should be recorded at their
acquisition cost, thus using verifiable information that is the most reliable information.
Q4 An auto has a sticker price of $20,000. A company purchases the auto, but negotiates with the sales
person and pays a price of only $18,000. On the balance sheet, ($18,000 / $20,000) will be
reported for the auto. Thirty years ago, land was purchased for $2,000, which now has a current
market value of $100,000. On the balance sheet, ($2,000 / $100,000) will be reported for the land.
Q5 When the financial statements are prepared according to GAAP, assets and services are reported at
their (acquisition cost / current market value).
Q6 THINK ABOUT IT: Is knowledge of an asset’s current market value ever useful? (Yes / No)
If so, when? Knowledge of an asset’s current market value is valuable when buying or
selling an individual asset or a business and when using an asset as collateral for a loan.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
Q7 There (are / are not) differences among the accounting standards of different countries. IFRS are
global accounting standards that U.S. GAAP is (converging toward / in full compliance with).
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6e Introduction Page 23 Chapter 1
ACTIVITY 8 ANALYSIS: RATIOS
Purpose: • Understand that analysis reveals relationships.
• Explore the relationships among assets, liabilities, revenues, and net income.
• Examine the debt ratio, ROS (return-on-sales) ratio, asset-turnover ratio, and
the ROA (return-on-asset) ratio.
The three types of analysis are Ratio Analysis, Trend Analysis (horizontal analysis), and Common-Size
Statements (vertical analysis). Analysis reveals relationships by comparing amounts to:
(1) other amounts for the same period (ratios and common-size statements),
(2) the same information from a prior period (trend analysis),
(3) competitor information, and industry norms.
RATIOS
Tiffany & Co (TIF), Wal-Mart Stores (WMT), and Ford Motor Company (F) are well-known companies, but
how much do you really know about them?
Q1 FINANCIAL TRIVIA For the fiscal years ending below, put a large circle in the box of the company
that you guess has …
a. the greatest amount of assets. (This one is completed for you.)
b. the greatest amount of liabilities.
c. the greatest amount of revenue.
d. the greatest amount of net income.
($ in millions) TIF
Jan 31, 2011
WMT
Jan 31, 2011
F
Dec 31, 2010
ASSETS $ $ $ 164,687
LIABILITIES $ $ $
All answers are acceptable. Solutions appear after Q7.
REVENUE $ $ $
NET INCOME $ $ $
Q2 FINANCIAL TRIVIA In each large circle, place the amount that you guess for …
a. the greatest amount of assets. (This is completed for you.)
b. the greatest amount of liabilities.
c. the greatest amount of revenue.
d. the greatest amount of net income.
Now turn to page 25 and see how well you guessed.
ACTIVITY 8 ANALYSIS: RATIOS
Purpose: • Understand that analysis reveals relationships.
• Explore the relationships among assets, liabilities, revenues, and net income.
• Examine the debt ratio, ROS (return-on-sales) ratio, asset-turnover ratio, and
the ROA (return-on-asset) ratio.
The three types of analysis are Ratio Analysis, Trend Analysis (horizontal analysis), and Common-Size
Statements (vertical analysis). Analysis reveals relationships by comparing amounts to:
(1) other amounts for the same period (ratios and common-size statements),
(2) the same information from a prior period (trend analysis),
(3) competitor information, and industry norms.
RATIOS
Tiffany & Co (TIF), Wal-Mart Stores (WMT), and Ford Motor Company (F) are well-known companies, but
how much do you really know about them?
Q1 FINANCIAL TRIVIA For the fiscal years ending below, put a large circle in the box of the company
that you guess has …
a. the greatest amount of assets. (This one is completed for you.)
b. the greatest amount of liabilities.
c. the greatest amount of revenue.
d. the greatest amount of net income.
($ in millions) TIF
Jan 31, 2011
WMT
Jan 31, 2011
F
Dec 31, 2010
ASSETS $ $ $ 164,687
LIABILITIES $ $ $
All answers are acceptable. Solutions appear after Q7.
REVENUE $ $ $
NET INCOME $ $ $
Q2 FINANCIAL TRIVIA In each large circle, place the amount that you guess for …
a. the greatest amount of assets. (This is completed for you.)
b. the greatest amount of liabilities.
c. the greatest amount of revenue.
d. the greatest amount of net income.
Now turn to page 25 and see how well you guessed.
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6e Introduction Page 24 Chapter 1
Q3 a. Compute the debt ratio for each company listed below. The debt ratio reveals the
proportion of assets financed with debt. Debt ratio = Total liabilities / Total assets
($ in millions) Year Ended Total Assets
Total
Liabilities
Debt
Ratio
Tiffany & Co (TIF) 1/31/2011 $ 3,736 $ 1,558 41.70%
Wal-Mart Stores (WMT) 1/31/2011 $ 180,663 $ 112,121 62.06%
Ford Motor Company (F) 12/31/2010 $ 164,687 $ 165,360 100.41%
b. Wal-Mart is primarily financed with (debt / equity), resulting in a debt ratio that is
(less / more) than 50.00%, whereas a company primarily financed with equity will have a
debt ratio that is (less / more) than 50.00%. Ford has a debt ratio greater than (50% /
100%), indicating its liabilities are (greater / less) than its assets.
Q4 a. Compute Return on Sales (ROS) for each company listed below. ROS reveals the portion of
each revenue dollar that results in profit. ROS = Net income / Sales revenue
($ in millions) Year Ended Revenue Net income ROS
TIF 1/31/2011 $ 3,085 $ 368 11.93%
WMT 1/31/2011 $ 421,849 $ 16,389 3.89%
F 12/31/2010 $ 128,954 $ 6,561 5.09%
b. Wal-Mart has (greater / less) revenue than Tiffany & Co, but Tiffany & Co has a
(higher / lower) ROS ratio than Wal-Mart. The ROS ratio for Tiffany & Co indicates 11.93%
of every revenue dollar resulted in profit (net income), but for Wal-Mart only 3.89% of
every revenue dollar resulted in profit.
c. For Wal-Mart, 96.11 cents of each revenue dollar went to pay for all of the costs of running
the business, leaving 3.89 cents of each revenue dollar for profit.
d. The corporation with the strongest ROS ratio is (TIF / WMT / F).
How can a company increase its ROS ratio?
A company can increase its ROS ratio by reducing costs and operating more
efficiently, thereby increasing profit for a given amount of revenue or by
generating more revenue.
e. Does a low ROS ratio indicate a weak corporation? (Yes / No) Why?
Even though Wal-Mart has a low ROS ratio compared to Microsoft, it definitely
would not be considered a weak corporation. Corporations use different
strategies to generate profits (net income). Wal-Mart’s strategy is to keep prices
low to generate a large volume of sale revenue.
Q5 a. Compute Asset Turnover for each company listed below. Asset Turnover reveals how
efficiently assets are used to generate revenue. Asset Turnover = Sales Revenue / Total Assets
($ in millions) Year Ended Revenue Total Assets Asset Turnover
TIF 1/31/2011 $ 3,085 $ 3,736 0.8257
WMT 1/31/2011 $ 421,849 $ 180,663 2.3350
F 12/31/2010 $ 128,954 $ 164,687 0.7830
b. The asset turnover ratios computed above are in the range (less than 3 / 3 or more).
c. (TIF / WMT / F) has the strongest asset turnover, indicating the company makes profits by
generating a large volume of revenue using relatively few assets. Wal-Mart generates $2.34
in revenue for every $1 invested in assets.
Q3 a. Compute the debt ratio for each company listed below. The debt ratio reveals the
proportion of assets financed with debt. Debt ratio = Total liabilities / Total assets
($ in millions) Year Ended Total Assets
Total
Liabilities
Debt
Ratio
Tiffany & Co (TIF) 1/31/2011 $ 3,736 $ 1,558 41.70%
Wal-Mart Stores (WMT) 1/31/2011 $ 180,663 $ 112,121 62.06%
Ford Motor Company (F) 12/31/2010 $ 164,687 $ 165,360 100.41%
b. Wal-Mart is primarily financed with (debt / equity), resulting in a debt ratio that is
(less / more) than 50.00%, whereas a company primarily financed with equity will have a
debt ratio that is (less / more) than 50.00%. Ford has a debt ratio greater than (50% /
100%), indicating its liabilities are (greater / less) than its assets.
Q4 a. Compute Return on Sales (ROS) for each company listed below. ROS reveals the portion of
each revenue dollar that results in profit. ROS = Net income / Sales revenue
($ in millions) Year Ended Revenue Net income ROS
TIF 1/31/2011 $ 3,085 $ 368 11.93%
WMT 1/31/2011 $ 421,849 $ 16,389 3.89%
F 12/31/2010 $ 128,954 $ 6,561 5.09%
b. Wal-Mart has (greater / less) revenue than Tiffany & Co, but Tiffany & Co has a
(higher / lower) ROS ratio than Wal-Mart. The ROS ratio for Tiffany & Co indicates 11.93%
of every revenue dollar resulted in profit (net income), but for Wal-Mart only 3.89% of
every revenue dollar resulted in profit.
c. For Wal-Mart, 96.11 cents of each revenue dollar went to pay for all of the costs of running
the business, leaving 3.89 cents of each revenue dollar for profit.
d. The corporation with the strongest ROS ratio is (TIF / WMT / F).
How can a company increase its ROS ratio?
A company can increase its ROS ratio by reducing costs and operating more
efficiently, thereby increasing profit for a given amount of revenue or by
generating more revenue.
e. Does a low ROS ratio indicate a weak corporation? (Yes / No) Why?
Even though Wal-Mart has a low ROS ratio compared to Microsoft, it definitely
would not be considered a weak corporation. Corporations use different
strategies to generate profits (net income). Wal-Mart’s strategy is to keep prices
low to generate a large volume of sale revenue.
Q5 a. Compute Asset Turnover for each company listed below. Asset Turnover reveals how
efficiently assets are used to generate revenue. Asset Turnover = Sales Revenue / Total Assets
($ in millions) Year Ended Revenue Total Assets Asset Turnover
TIF 1/31/2011 $ 3,085 $ 3,736 0.8257
WMT 1/31/2011 $ 421,849 $ 180,663 2.3350
F 12/31/2010 $ 128,954 $ 164,687 0.7830
b. The asset turnover ratios computed above are in the range (less than 3 / 3 or more).
c. (TIF / WMT / F) has the strongest asset turnover, indicating the company makes profits by
generating a large volume of revenue using relatively few assets. Wal-Mart generates $2.34
in revenue for every $1 invested in assets.
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6e Introduction Page 25 Chapter 1
Q6 a. Compute Return on Assets (ROA) for each company listed below. ROA reveals how efficiently
a company uses its assets to generate profit (net income). A high ROA ratio depends on
managing asset investments and controlling expenses to keep net income high. Analyze the
components, ROS and Asset Turnover, to better understand corporate strategy (product-
differentiation vs. low-cost strategies). ROA is the broadest measure of profitability.
ROA = Net Income / Total Assets
($ in millions) Year Ended Net Income Total Assets ROA
TIF 1/31/2011 $ 368 $ 3,736 9.85%
WMT 1/31/2011 $ 16,389 $ 180,663 9.07%
F 12/31/2010 $ 6,561 $ 167,687 3.91%
b. For each company below, compute ROA by multiplying the two components, Return on
Sales and Asset Turnover (previously computed). ROA = ROS x Asset T/O
($ in millions) Year Ended ROS x Asset Turnover = ROA
TIF 1/31/2011 11.93% 0.8257 9.85%
WMT 1/31/2011 3.89% 2.3350 9.07%
F 12/31/2010 5.09% 0.7830 *3.99%
* Rounding error
c. The corporation with the strongest overall measure of profitability is (TIF / WMT / F) with
an ROA of 9.85% indicating that for each dollar invested in assets, the company generates,
on average, 9.85 cents in profits.
The corporation with the weakest ROA is (TIF / WMT / F).
d. Wal-Mart has a (high / low) ROS and a (high / low) Asset Turnover, indicating that a (low-
cost / product-differentiation) strategy is used, whereas Tiffany & Co has a (high / low)
ROS and a (high / low) Asset Turnover, indicating that a (low-cost / product-
differentiation) strategy is used. Ford Motor Company has (high / low) ROS and (high /
low) Asset Turnover, indicating that it is (doing well / still recovering).
Q7 a. The ratio that measures the ability to translate revenue into profit is the
(Debt / ROS / Asset Turnover / ROA) ratio.
b. The ratio that measures the proportion of debt used to finance assets is the
(Debt / ROS / Asset Turnover / ROA) ratio.
c. The broadest measure of profitability that can be broken down into components to better
understand corporate strategy is the (Debt / ROS / Asset Turnover / ROA) ratio.
d. A high (Debt / ROS / Asset Turnover / ROA) ratio indicates a high-volume strategy
Solutions to FINANCIAL TRIVIA Q1 and Q2.
($ in millions) TIF
Jan 31, 2011
WMT
Jan 31, 2011
F
Dec 31, 2010
ASSETS $ 3,736 $ 180,663 $ 164,687
LIABILITIES 1,558 112,121 165,360
STOCKHOLDERS’ EQUITY 2,178 68,542 (673)
REVENUE 3,085 421,849 128,954
NET INCOME $ 368 $ 16,389 $ 6,561
Q6 a. Compute Return on Assets (ROA) for each company listed below. ROA reveals how efficiently
a company uses its assets to generate profit (net income). A high ROA ratio depends on
managing asset investments and controlling expenses to keep net income high. Analyze the
components, ROS and Asset Turnover, to better understand corporate strategy (product-
differentiation vs. low-cost strategies). ROA is the broadest measure of profitability.
ROA = Net Income / Total Assets
($ in millions) Year Ended Net Income Total Assets ROA
TIF 1/31/2011 $ 368 $ 3,736 9.85%
WMT 1/31/2011 $ 16,389 $ 180,663 9.07%
F 12/31/2010 $ 6,561 $ 167,687 3.91%
b. For each company below, compute ROA by multiplying the two components, Return on
Sales and Asset Turnover (previously computed). ROA = ROS x Asset T/O
($ in millions) Year Ended ROS x Asset Turnover = ROA
TIF 1/31/2011 11.93% 0.8257 9.85%
WMT 1/31/2011 3.89% 2.3350 9.07%
F 12/31/2010 5.09% 0.7830 *3.99%
* Rounding error
c. The corporation with the strongest overall measure of profitability is (TIF / WMT / F) with
an ROA of 9.85% indicating that for each dollar invested in assets, the company generates,
on average, 9.85 cents in profits.
The corporation with the weakest ROA is (TIF / WMT / F).
d. Wal-Mart has a (high / low) ROS and a (high / low) Asset Turnover, indicating that a (low-
cost / product-differentiation) strategy is used, whereas Tiffany & Co has a (high / low)
ROS and a (high / low) Asset Turnover, indicating that a (low-cost / product-
differentiation) strategy is used. Ford Motor Company has (high / low) ROS and (high /
low) Asset Turnover, indicating that it is (doing well / still recovering).
Q7 a. The ratio that measures the ability to translate revenue into profit is the
(Debt / ROS / Asset Turnover / ROA) ratio.
b. The ratio that measures the proportion of debt used to finance assets is the
(Debt / ROS / Asset Turnover / ROA) ratio.
c. The broadest measure of profitability that can be broken down into components to better
understand corporate strategy is the (Debt / ROS / Asset Turnover / ROA) ratio.
d. A high (Debt / ROS / Asset Turnover / ROA) ratio indicates a high-volume strategy
Solutions to FINANCIAL TRIVIA Q1 and Q2.
($ in millions) TIF
Jan 31, 2011
WMT
Jan 31, 2011
F
Dec 31, 2010
ASSETS $ 3,736 $ 180,663 $ 164,687
LIABILITIES 1,558 112,121 165,360
STOCKHOLDERS’ EQUITY 2,178 68,542 (673)
REVENUE 3,085 421,849 128,954
NET INCOME $ 368 $ 16,389 $ 6,561
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6e Introduction Page 26 Chapter 1
ACTIVITY 9 ANALYSIS: TREND
Purpose: • Prepare a trend analysis and understand the information provided.
A trend analysis compares amounts of a more recent year to a base year. The base year is the earliest
year being studied. The analysis measures the percentage of change from the base year.
Q1 Complete the trend indexes for Total expenses and Net income using the amounts listed below. To
compute, divide each amount by the amount of the base year and multiply by 100. Record the
resulting trend index in the shaded area below. Use 2007 as the base year.
PEPSICO
($ in millions) 2010 2009 2008 Base Year
2007
Sales revenue $57,838 147 $43,232 110 $43,251 110 $39,474 100
Total expenses 51,518 152 37,286 110 38,109 113 33,794 100
Net income $ 6,320 111 $ 5,946 105 $ 5,142 90 $ 5,682 100
ROS 10.93% 13.75% 11.89% 14.39%
Q2 From 2007 to 2010 sales growth for PepsiCo was 47%. During the same period, total expenses
increased 52%. When net sales increase, expenses would be expected to (increase / stay the
same / decrease). It is favorable when sales increase by 47% and expenses increase at a (greater /
lesser) rate than 47%. From 2007 to 2010 (revenues / expenses) of PepsiCo increased at a greater
rate, which is (favorable / unfavorable), resulting in a (small / large) increase in net income.
Q3 Assume PepsiCo had a goal of increasing profits by 5% each year. This goal was (met / not met).
47% / 3 years ~16% > 5%
Q4 The best year financially for PepsiCo was (2010 / 2009 / 2008). Why?
Both answers are acceptable:
In 2009, total expenses were kept under control. Expenses increased by 10%, no more
than the 10% increase in sales revenue. Also, expenses decreased from the previous
year. For 2009, ROS was 13.75% compared to only 10.93% for 2010.
2010 reported the greatest increase in revenue (47%) and net income (11%).
The worst year financially for PepsiCo was (2010 / 2009 / 2008). Why?
Expenses increased at a greater rate than revenue; expenses increased by 13%, while
sales revenue increased by only 10%, resulting in a 10% decrease in net income since the
base year. ROS for 2008 was only 11.89% compared to 13.75% for 2009.
ACTIVITY 9 ANALYSIS: TREND
Purpose: • Prepare a trend analysis and understand the information provided.
A trend analysis compares amounts of a more recent year to a base year. The base year is the earliest
year being studied. The analysis measures the percentage of change from the base year.
Q1 Complete the trend indexes for Total expenses and Net income using the amounts listed below. To
compute, divide each amount by the amount of the base year and multiply by 100. Record the
resulting trend index in the shaded area below. Use 2007 as the base year.
PEPSICO
($ in millions) 2010 2009 2008 Base Year
2007
Sales revenue $57,838 147 $43,232 110 $43,251 110 $39,474 100
Total expenses 51,518 152 37,286 110 38,109 113 33,794 100
Net income $ 6,320 111 $ 5,946 105 $ 5,142 90 $ 5,682 100
ROS 10.93% 13.75% 11.89% 14.39%
Q2 From 2007 to 2010 sales growth for PepsiCo was 47%. During the same period, total expenses
increased 52%. When net sales increase, expenses would be expected to (increase / stay the
same / decrease). It is favorable when sales increase by 47% and expenses increase at a (greater /
lesser) rate than 47%. From 2007 to 2010 (revenues / expenses) of PepsiCo increased at a greater
rate, which is (favorable / unfavorable), resulting in a (small / large) increase in net income.
Q3 Assume PepsiCo had a goal of increasing profits by 5% each year. This goal was (met / not met).
47% / 3 years ~16% > 5%
Q4 The best year financially for PepsiCo was (2010 / 2009 / 2008). Why?
Both answers are acceptable:
In 2009, total expenses were kept under control. Expenses increased by 10%, no more
than the 10% increase in sales revenue. Also, expenses decreased from the previous
year. For 2009, ROS was 13.75% compared to only 10.93% for 2010.
2010 reported the greatest increase in revenue (47%) and net income (11%).
The worst year financially for PepsiCo was (2010 / 2009 / 2008). Why?
Expenses increased at a greater rate than revenue; expenses increased by 13%, while
sales revenue increased by only 10%, resulting in a 10% decrease in net income since the
base year. ROS for 2008 was only 11.89% compared to 13.75% for 2009.
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6e Introduction Page 27 Chapter 1
Q5 Complete the trend indexes for Liabilities and Stockholders’ Equity using the amounts listed below.
To compute, divide each amount by the amount for the base year and multiply by 100. Record the
resulting trend index in the shaded area below. Use 2007 as the base year.
PEPSICO
($ in millions) 12/25/2010 12/26/2009 12/27/2008 Base Year
12/29/2007
Assets $68,153 197 $39,848 115 $35,994 104 $34,628 100
Liabilities 46,989 270 23,044 132 23,888 137 17,394 100
SEquity $21,164 123 $16,804 98 $12,106 70 $17,234 100
Q6 The assets of PepsiCo increased by 97% from 12/29/2007 to 12/25/2010, indicating PepsiCo is
(growing / shrinking). From 12/29/2007 to 12/25/2010, (assets / liabilities) increased at a
greater rate, indicating the corporation is relying (more / less) on debt to finance assets.
Q7 Stockholders’ equity amounts are greater than the base year on (12/25/2010 / 12/26/2009 /
12/27/2008) when the trend index is (greater / less) than 100. Stockholders’ equity amounts are
less than the base year on (12/25/2010 / 12/26/2009 / 12/27/2008) when the trend index is
(greater / less) than 100.
Q8 It is easier to analyze PepsiCo (before / after) preparing the trend analysis.
Q5 Complete the trend indexes for Liabilities and Stockholders’ Equity using the amounts listed below.
To compute, divide each amount by the amount for the base year and multiply by 100. Record the
resulting trend index in the shaded area below. Use 2007 as the base year.
PEPSICO
($ in millions) 12/25/2010 12/26/2009 12/27/2008 Base Year
12/29/2007
Assets $68,153 197 $39,848 115 $35,994 104 $34,628 100
Liabilities 46,989 270 23,044 132 23,888 137 17,394 100
SEquity $21,164 123 $16,804 98 $12,106 70 $17,234 100
Q6 The assets of PepsiCo increased by 97% from 12/29/2007 to 12/25/2010, indicating PepsiCo is
(growing / shrinking). From 12/29/2007 to 12/25/2010, (assets / liabilities) increased at a
greater rate, indicating the corporation is relying (more / less) on debt to finance assets.
Q7 Stockholders’ equity amounts are greater than the base year on (12/25/2010 / 12/26/2009 /
12/27/2008) when the trend index is (greater / less) than 100. Stockholders’ equity amounts are
less than the base year on (12/25/2010 / 12/26/2009 / 12/27/2008) when the trend index is
(greater / less) than 100.
Q8 It is easier to analyze PepsiCo (before / after) preparing the trend analysis.
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6e Introduction Page 28 Chapter 1
ACTIVITY 10 ANALYSIS: COMMON-SIZE STATEMENTS
Purpose: • Prepare common-size statements and understand the information provided.
The COMMON-SIZE INCOME STATEMENT compares all amounts within one year to revenue of that same
year. The analysis measures each income statement amount as a percentage of revenue.
Q1 Prepare the common-size statements for the Coca-Cola (KO) and the Starbucks (SBUX) companies
listed below. To compute, divide each amount on the income statement by sales revenue. Record
the resulting common-size percent in the shaded area provided.
2010 PEPSICO (PEP) COCA-COLA (KO) STARBUCKS (SBUX)
($ in millions) Amount % Amount % Amount %
Sales revenue $57,838 100 $35,119 100 $10,707 100
Total expenses 51,518 89 23,310 66 9,761 91
Net income $ 6,320 11 $11,809 34 $ 946 9
Q2 (PEP / KO / SBUX) is the largest company above, reporting sales revenue of approximately $57.8
(trillion / billion / million / thousand). ROS for PepsiCo is 11% or 0.11 in decimal form, which
indicates 11 cents of every dollar of sales revenue resulted in profit. ROS = NI / Revenue
Q3 On the common-size income statement, every amount is compared to or divided by total
(assets / liabilities / sales revenue / net income).
Q4 Common-size statements are helpful when comparing companies of different size. (True / False)
Q5 Based only on the information provided above, which company would be your choice of
investment? (PEP / KO / SBUX) Why?
Coca-Cola’s ROS of 34% is the greatest, indicating for every dollar of sales revenue 34
cents goes toward profit and 66 cents towards expenses. Said another way, KO incurs
only 66 cents of expenses to generate each $1 of sales revenue.
The COMMON-SIZE BALANCE SHEET compares all amounts within one year to total assets of that same
year. The analysis measures each balance sheet amount as a percentage of total assets.
Q6 Prepare the common-size statements for the Coca-Cola (KO) and Starbucks (SBUX) companies
listed below. To compute, divide each amount on the balance sheet by total assets. Record the
resulting common-size percent in the shaded area provided.
2010 PEPSICO (PEP) COCA-COLA (KO) STARBUCKS (SBUX)
($ in millions) Amount % Amount % Amount %
Assets $68,153 100 $72,921 100 $6,386 100
Liabilities 46,989 69 41,918 57 2,712 42
SEquity $21,164 31 $31,003 43 $3,674 58
Q7 Starbucks primarily finances assets with (liabilities / stockholders’ equity). The debt ratio for
Starbucks is 42%, which indicates debt (liabilities) is used to finance 42% of assets and equity
(stockholders’ equity) is used to finance 58% of assets. On the common-size balance sheet, every
amount is compared to or divided by total (assets / liabilities). Debt Ratio = Liabilities / Assets
ACTIVITY 10 ANALYSIS: COMMON-SIZE STATEMENTS
Purpose: • Prepare common-size statements and understand the information provided.
The COMMON-SIZE INCOME STATEMENT compares all amounts within one year to revenue of that same
year. The analysis measures each income statement amount as a percentage of revenue.
Q1 Prepare the common-size statements for the Coca-Cola (KO) and the Starbucks (SBUX) companies
listed below. To compute, divide each amount on the income statement by sales revenue. Record
the resulting common-size percent in the shaded area provided.
2010 PEPSICO (PEP) COCA-COLA (KO) STARBUCKS (SBUX)
($ in millions) Amount % Amount % Amount %
Sales revenue $57,838 100 $35,119 100 $10,707 100
Total expenses 51,518 89 23,310 66 9,761 91
Net income $ 6,320 11 $11,809 34 $ 946 9
Q2 (PEP / KO / SBUX) is the largest company above, reporting sales revenue of approximately $57.8
(trillion / billion / million / thousand). ROS for PepsiCo is 11% or 0.11 in decimal form, which
indicates 11 cents of every dollar of sales revenue resulted in profit. ROS = NI / Revenue
Q3 On the common-size income statement, every amount is compared to or divided by total
(assets / liabilities / sales revenue / net income).
Q4 Common-size statements are helpful when comparing companies of different size. (True / False)
Q5 Based only on the information provided above, which company would be your choice of
investment? (PEP / KO / SBUX) Why?
Coca-Cola’s ROS of 34% is the greatest, indicating for every dollar of sales revenue 34
cents goes toward profit and 66 cents towards expenses. Said another way, KO incurs
only 66 cents of expenses to generate each $1 of sales revenue.
The COMMON-SIZE BALANCE SHEET compares all amounts within one year to total assets of that same
year. The analysis measures each balance sheet amount as a percentage of total assets.
Q6 Prepare the common-size statements for the Coca-Cola (KO) and Starbucks (SBUX) companies
listed below. To compute, divide each amount on the balance sheet by total assets. Record the
resulting common-size percent in the shaded area provided.
2010 PEPSICO (PEP) COCA-COLA (KO) STARBUCKS (SBUX)
($ in millions) Amount % Amount % Amount %
Assets $68,153 100 $72,921 100 $6,386 100
Liabilities 46,989 69 41,918 57 2,712 42
SEquity $21,164 31 $31,003 43 $3,674 58
Q7 Starbucks primarily finances assets with (liabilities / stockholders’ equity). The debt ratio for
Starbucks is 42%, which indicates debt (liabilities) is used to finance 42% of assets and equity
(stockholders’ equity) is used to finance 58% of assets. On the common-size balance sheet, every
amount is compared to or divided by total (assets / liabilities). Debt Ratio = Liabilities / Assets
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6e Introduction Page 29 Chapter 1
COCA-COLA (KO*) 12/31/2010 BALANCE SHEET ($ in millions)
ASSETS LIABILITIES
Cash and cash equivalents $ 8,517 Accounts payable $ 1,887
Short-term investments 2,820 Short-term debt 8,100
Accounts receivable, net 4,430 Other current liabilities 8,521
Inventories 2,650 Long-term debt 14,041
Other current assets 3,162 Other non-current liabilities 9,369
Property, plant, and equipment, net 14,727
Goodwill 11,665 STOCKHOLDERS’ EQUITY
Other intangibles 15,244 Contributed capital 10,937
Long-term investments 7,585 Retained earnings 49,278
Other non-current assets 2,121 Other stockholders’ equity (29,212)
TOTAL ASSETS $ 72,921 TOTAL L & SE $ 72,921
COCA-COLA (KO) 2010 INCOME STATEMENT ($ in millions)
Sales revenue $ 35,119
Cost of goods sold 12,693
Gross profit 22,426
Selling, general, and administrative expense 7,199
Other operating expenses 6,778
Nonoperating (revenues) and expenses ( 5,794)
Income before income tax 14,243
Provision for income tax 2,434
Net income $ 11,809
COCA-COLA (KO) 2010 STATEMENT OF STOCKHOLDERS’ EQUITY ($ in millions)
Contributed Capital Retained Earnings Other Equity TOTAL S/E
Beginning balance $ 9,417 $ 41,537 $ (26,155) $ 24,799
Issuance of shares 1,520 1,520
Net income 11,809 11,809
Dividends (4,068) (4,068)
Other transactions (3,057) (3,057)
Ending balance $ 10,937 $ 49,278 $(29,212) $ 31,003
COCA-COLA (KO) 2010 STATEMENT OF CASH FLOWS ($ in millions)
Net cash received from operating activities (NCOA) $ 9,532
Net cash paid from investing activities (NCIA) (4,405)
Net cash paid from financing activities (NCFA) (3,465)
Effect of exchange rate changes (166)
Change in cash 1,496
+ Cash, beginning of the period 7,021
= Cash, end of the period $ 8,517
COCA-COLA (KO*) 12/31/2010 BALANCE SHEET ($ in millions)
ASSETS LIABILITIES
Cash and cash equivalents $ 8,517 Accounts payable $ 1,887
Short-term investments 2,820 Short-term debt 8,100
Accounts receivable, net 4,430 Other current liabilities 8,521
Inventories 2,650 Long-term debt 14,041
Other current assets 3,162 Other non-current liabilities 9,369
Property, plant, and equipment, net 14,727
Goodwill 11,665 STOCKHOLDERS’ EQUITY
Other intangibles 15,244 Contributed capital 10,937
Long-term investments 7,585 Retained earnings 49,278
Other non-current assets 2,121 Other stockholders’ equity (29,212)
TOTAL ASSETS $ 72,921 TOTAL L & SE $ 72,921
COCA-COLA (KO) 2010 INCOME STATEMENT ($ in millions)
Sales revenue $ 35,119
Cost of goods sold 12,693
Gross profit 22,426
Selling, general, and administrative expense 7,199
Other operating expenses 6,778
Nonoperating (revenues) and expenses ( 5,794)
Income before income tax 14,243
Provision for income tax 2,434
Net income $ 11,809
COCA-COLA (KO) 2010 STATEMENT OF STOCKHOLDERS’ EQUITY ($ in millions)
Contributed Capital Retained Earnings Other Equity TOTAL S/E
Beginning balance $ 9,417 $ 41,537 $ (26,155) $ 24,799
Issuance of shares 1,520 1,520
Net income 11,809 11,809
Dividends (4,068) (4,068)
Other transactions (3,057) (3,057)
Ending balance $ 10,937 $ 49,278 $(29,212) $ 31,003
COCA-COLA (KO) 2010 STATEMENT OF CASH FLOWS ($ in millions)
Net cash received from operating activities (NCOA) $ 9,532
Net cash paid from investing activities (NCIA) (4,405)
Net cash paid from financing activities (NCFA) (3,465)
Effect of exchange rate changes (166)
Change in cash 1,496
+ Cash, beginning of the period 7,021
= Cash, end of the period $ 8,517
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6e Introduction Page 30 Chapter 1
ACTIVITY 11 TEST YOUR UNDERSTANDING
Purpose: • Review the four financial statements.
• Compute net income.
• Prepare and evaluate trend analyses, common-size statements, and ratios.
Q1 Make the following statements true by correcting the false information.
Note: There may be more than one way to correct the false information.
a. The four financial statements include the income revenue statement, statement of
stockholders’ equity contributed capital, balance asset sheet, and the statement of
cash flows.
b. The balance sheet statement of cash flows reports the assets of the business and how
those assets are financed.
c. Assets are financed either by liabilities or stockholders’ equity expenses.
d. Accounts receivable Retained earnings is an asset account, accounts payable
receivable is a liability account, and retained earnings accounts payable is a
stockholders’ equity account.
e. Accounts payable receivable are amounts to be paid later to suppliers by the corporation.
f. The statement of cash flows income statement reports cash inflows and cash outflows.
g. Revenue Cash is the amount earned engaging in the primary business activity.
h. Earnings is another term for net income revenue.
i. Net income distributed to shareholders is referred to as dividends contributed capital.
j. Dividends are not reported as an expense on the income statement.
Q2 Circle the income statement amounts and cross out amounts not reported on the income
statement. Then compute net income.
Supply expense $ 8,000 Sales revenue $100,000
Notes payable 30,000 Common stock 50,000
Cost of goods sold 70,000 Dividends 2,000
Net income totals $22,000 (= $100,000 – 70,000 – 8,000)
Q3 Suppose that during the first year of business $100,000 of wage costs were incurred; $90,000 were
paid in cash to employees; and the remaining wages will be paid to employees on January 3 of the
coming year, the next payday. What account title and amount will be reported on the following
year-end financial statements?
a. Income Statement account title: Wages (expense / payable / paid) of $100,000
b. Balance Sheet account title: Wages (expense / payable / paid) of $ 10,000
c. Statement of Cash Flows account title: Wages (expense / payable / paid) of $ 90,000
ACTIVITY 11 TEST YOUR UNDERSTANDING
Purpose: • Review the four financial statements.
• Compute net income.
• Prepare and evaluate trend analyses, common-size statements, and ratios.
Q1 Make the following statements true by correcting the false information.
Note: There may be more than one way to correct the false information.
a. The four financial statements include the income revenue statement, statement of
stockholders’ equity contributed capital, balance asset sheet, and the statement of
cash flows.
b. The balance sheet statement of cash flows reports the assets of the business and how
those assets are financed.
c. Assets are financed either by liabilities or stockholders’ equity expenses.
d. Accounts receivable Retained earnings is an asset account, accounts payable
receivable is a liability account, and retained earnings accounts payable is a
stockholders’ equity account.
e. Accounts payable receivable are amounts to be paid later to suppliers by the corporation.
f. The statement of cash flows income statement reports cash inflows and cash outflows.
g. Revenue Cash is the amount earned engaging in the primary business activity.
h. Earnings is another term for net income revenue.
i. Net income distributed to shareholders is referred to as dividends contributed capital.
j. Dividends are not reported as an expense on the income statement.
Q2 Circle the income statement amounts and cross out amounts not reported on the income
statement. Then compute net income.
Supply expense $ 8,000 Sales revenue $100,000
Notes payable 30,000 Common stock 50,000
Cost of goods sold 70,000 Dividends 2,000
Net income totals $22,000 (= $100,000 – 70,000 – 8,000)
Q3 Suppose that during the first year of business $100,000 of wage costs were incurred; $90,000 were
paid in cash to employees; and the remaining wages will be paid to employees on January 3 of the
coming year, the next payday. What account title and amount will be reported on the following
year-end financial statements?
a. Income Statement account title: Wages (expense / payable / paid) of $100,000
b. Balance Sheet account title: Wages (expense / payable / paid) of $ 10,000
c. Statement of Cash Flows account title: Wages (expense / payable / paid) of $ 90,000
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6e Introduction Page 31 Chapter 1
Q4 Review the 2010 Financial Statements of the Coca-Cola Company on page 28 to answer the
following questions:
a. Assets $72,921 million = Liabilities $41,918 million + SE $31,003 million
Is the accounting equation in balance? (Yes / No)
b. Net Income of $11,809 million is reported on the Income Statement. It is also reported on
the (Statement of Stockholders’ Equity / Balance Sheet / Statement of Cash Flows).
c. The ending balance of retained earnings on the Statement of Stockholders’ Equity is
$49,278 million. It is also reported on the (Income Statement / Balance Sheet /
Statement of Cash Flows).
d. Cash reported on the Balance Sheet is $8,517 million. It is also reported on the (Income
Statement / Statement of Stockholders’ Equity / Statement of Cash Flows).
e. Total Assets of $72,921 million helped to generate Sales Revenue of $35,119 million, which
results in an Asset Turnover ratio of 0.482.
f. Sales Revenue of $35,119 million helped to generate Net Income of $11,809 million, which
results in a ROS ratio of 33.6%.
g. Total Assets of $72,821 million helped to generate Net Income of $11,809 million, which
results in a ROA ratio of 16.2%.
h. The most comprehensive measure of profitability is (Asset Turnover / ROS / ROA). For
Coca-Cola, ROA of 16.2% = Asset Turnover of 0.482 x ROS of 33.6% indicating that a (low-
cost / product-differentiation) strategy is used.
Q5 Complete Coca-Cola’s trend indexes for Total expenses and Net income using the amounts listed
below. Record the resulting trend index in the shaded area. Use 2007 as the base year.
Coca-Cola (KO)
($ in millions) 2010 2009 2008 Base Year
2007
Sales revenue $35,119 122 $30,990 107 $31,994 111 $28,857 100
Total expenses 23,310 102 24,166 106 26,187 114 22,876 100
Net income $11,809 197 $ 6,824 114 $ 5,807 97 $ 5,981 100
From 2007 to 2010 sales revenue of Coca-Cola increased by 22% while expenses increased by 2%
resulting in an increase in net income of 97%. Coca-Cola has (kept /not kept) spending under
control, resulting in a (small / large) increase in net income that is (greater / less) than the
increase in sales revenue over the same time period.
Q4 Review the 2010 Financial Statements of the Coca-Cola Company on page 28 to answer the
following questions:
a. Assets $72,921 million = Liabilities $41,918 million + SE $31,003 million
Is the accounting equation in balance? (Yes / No)
b. Net Income of $11,809 million is reported on the Income Statement. It is also reported on
the (Statement of Stockholders’ Equity / Balance Sheet / Statement of Cash Flows).
c. The ending balance of retained earnings on the Statement of Stockholders’ Equity is
$49,278 million. It is also reported on the (Income Statement / Balance Sheet /
Statement of Cash Flows).
d. Cash reported on the Balance Sheet is $8,517 million. It is also reported on the (Income
Statement / Statement of Stockholders’ Equity / Statement of Cash Flows).
e. Total Assets of $72,921 million helped to generate Sales Revenue of $35,119 million, which
results in an Asset Turnover ratio of 0.482.
f. Sales Revenue of $35,119 million helped to generate Net Income of $11,809 million, which
results in a ROS ratio of 33.6%.
g. Total Assets of $72,821 million helped to generate Net Income of $11,809 million, which
results in a ROA ratio of 16.2%.
h. The most comprehensive measure of profitability is (Asset Turnover / ROS / ROA). For
Coca-Cola, ROA of 16.2% = Asset Turnover of 0.482 x ROS of 33.6% indicating that a (low-
cost / product-differentiation) strategy is used.
Q5 Complete Coca-Cola’s trend indexes for Total expenses and Net income using the amounts listed
below. Record the resulting trend index in the shaded area. Use 2007 as the base year.
Coca-Cola (KO)
($ in millions) 2010 2009 2008 Base Year
2007
Sales revenue $35,119 122 $30,990 107 $31,994 111 $28,857 100
Total expenses 23,310 102 24,166 106 26,187 114 22,876 100
Net income $11,809 197 $ 6,824 114 $ 5,807 97 $ 5,981 100
From 2007 to 2010 sales revenue of Coca-Cola increased by 22% while expenses increased by 2%
resulting in an increase in net income of 97%. Coca-Cola has (kept /not kept) spending under
control, resulting in a (small / large) increase in net income that is (greater / less) than the
increase in sales revenue over the same time period.
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6e Introduction Page 32 Chapter 1
Q6 Complete Coca-Cola’s common-size statements for 12/31/2008, 12/31/2009, and 12/31/2010
using the amounts listed below. Record the resulting common-size percent in the shaded area
provided.
Coca-Cola (KO)
($ in millions)
Dec 31,
2010 % Dec 31,
2009 % Dec 31,
2008 % Dec 31,
2007 %
Assets $72,921 100 $48,671 100 $40,519 100 $43,269 100
Liabilities 41,918 57 23,872 49 20,047 49 21,525 50
SEquity $31,003 43 $24,799 51 $20,472 51 $21,744 50
On 12/31/2007, 50% of assets were financed with liabilities and on 12/31/2010 assets were
primarily financed with (liabilities / stockholders’ equity), indicating that on 12/31/2010 this
company is relying (more / less) on debt to finance assets.
In the common-size balance sheet, every amount is compared to or divided by total assets.
In the common-size income statement, every amount is compared to or divided by revenue.
Q7 To answer the following questions, use the chart below that presents financial information for
PepsiCo, Coca-Cola, and ratio averages for the beverage industry.
($ in millions) PEP
12/25/2010
KO
12/31/2010
Beverage
Industry Average
Assets $ 68,153 $ 72,921 NA
Liabilities 46,989 41,918 NA
Stockholders’ Equity 21,164 31,003 NA
Revenue 57,838 35,119 NA
Net Income $ 6,320 $ 11,809 NA
ROS 10.93% 33.63% 19%
Asset Turnover 0.8486 0.4816 0.80
ROA 9.27% 16.19% 15%
Debt Ratio 68.95% 57.48% 74%
a. (PEP / KO) has a stronger ROS, indicating it generates more (expense / profit) from each
dollar of revenue.
b. (PEP / KO) reports the greatest volume of sales as indicated by the (ROS / Asset Turnover
/ ROA) ratio.
c. The most comprehensive measure of profitability, the (ROS / Asset Turnover / ROA) ratio,
indicates (PEP / KO) is the more profitable company.
d. (PEP / KO / both / neither) are at greater financial risk than average for the beverage
industry, which is indicated by the (ROS / Asset Turnover / ROA / Debt) ratio.
Q8 Are Generally Accepted Accounting Principles (GAAP) necessary? (Yes / No) Why or why not?
Yes, rules are needed so that different companies report items in similar ways. This
enables the public to understand the financial statements and compare companies.
Q6 Complete Coca-Cola’s common-size statements for 12/31/2008, 12/31/2009, and 12/31/2010
using the amounts listed below. Record the resulting common-size percent in the shaded area
provided.
Coca-Cola (KO)
($ in millions)
Dec 31,
2010 % Dec 31,
2009 % Dec 31,
2008 % Dec 31,
2007 %
Assets $72,921 100 $48,671 100 $40,519 100 $43,269 100
Liabilities 41,918 57 23,872 49 20,047 49 21,525 50
SEquity $31,003 43 $24,799 51 $20,472 51 $21,744 50
On 12/31/2007, 50% of assets were financed with liabilities and on 12/31/2010 assets were
primarily financed with (liabilities / stockholders’ equity), indicating that on 12/31/2010 this
company is relying (more / less) on debt to finance assets.
In the common-size balance sheet, every amount is compared to or divided by total assets.
In the common-size income statement, every amount is compared to or divided by revenue.
Q7 To answer the following questions, use the chart below that presents financial information for
PepsiCo, Coca-Cola, and ratio averages for the beverage industry.
($ in millions) PEP
12/25/2010
KO
12/31/2010
Beverage
Industry Average
Assets $ 68,153 $ 72,921 NA
Liabilities 46,989 41,918 NA
Stockholders’ Equity 21,164 31,003 NA
Revenue 57,838 35,119 NA
Net Income $ 6,320 $ 11,809 NA
ROS 10.93% 33.63% 19%
Asset Turnover 0.8486 0.4816 0.80
ROA 9.27% 16.19% 15%
Debt Ratio 68.95% 57.48% 74%
a. (PEP / KO) has a stronger ROS, indicating it generates more (expense / profit) from each
dollar of revenue.
b. (PEP / KO) reports the greatest volume of sales as indicated by the (ROS / Asset Turnover
/ ROA) ratio.
c. The most comprehensive measure of profitability, the (ROS / Asset Turnover / ROA) ratio,
indicates (PEP / KO) is the more profitable company.
d. (PEP / KO / both / neither) are at greater financial risk than average for the beverage
industry, which is indicated by the (ROS / Asset Turnover / ROA / Debt) ratio.
Q8 Are Generally Accepted Accounting Principles (GAAP) necessary? (Yes / No) Why or why not?
Yes, rules are needed so that different companies report items in similar ways. This
enables the public to understand the financial statements and compare companies.
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6e Balance Sheet Page 45 Chapter 2
ACTIVITY 12 CROSSWORD PUZZLE FOR CHAPTER 2
Across
5. Lends money
6. Extra value recorded when buying another company
8. Reports assets, liabilities, and stockholders’ equity
(2 words)
9. Investments available for quick liquidation (2 words)
12. Patents, copyrights, and brand names
13. Accounts payable is a _____ account
16. Buildings, equipment, and land (abbreviation)
17. Cost allocation
20. Acquisition Cost less Accumulated Depreciation
(2 words)
22. Owners of a corporation
23. Income tax amounts to be paid later
24. Money in the bank
25. Ratio that measures the ability to pay current liabilities
with current assets
26. Total liabilities divided by total assets (2 words)
Down
1. Amounts owed to suppliers (2 words)
2. Distribution of earnings
3. Merchandise held for sale
4. Borrows money
7. Ratios that measure the ability to pay liabilities as they
come due
9. Lawsuits and other events that could create new
liabilities for the company
10. Inventory is an _____ account
11. Total amount of depreciation expensed since the assets'
date of purchase
14. Monies to be received from customers
15. Equipment is a _____ asset account, which is used for
more than one year
18. Ratios that measure the ability to pay liabilities for many
years
19. Balance Sheet reporting all amounts as a percentage of
total assets (2 words)
21. Liabilities due within 12 months
ACTIVITY 12 CROSSWORD PUZZLE FOR CHAPTER 2
Across
5. Lends money
6. Extra value recorded when buying another company
8. Reports assets, liabilities, and stockholders’ equity
(2 words)
9. Investments available for quick liquidation (2 words)
12. Patents, copyrights, and brand names
13. Accounts payable is a _____ account
16. Buildings, equipment, and land (abbreviation)
17. Cost allocation
20. Acquisition Cost less Accumulated Depreciation
(2 words)
22. Owners of a corporation
23. Income tax amounts to be paid later
24. Money in the bank
25. Ratio that measures the ability to pay current liabilities
with current assets
26. Total liabilities divided by total assets (2 words)
Down
1. Amounts owed to suppliers (2 words)
2. Distribution of earnings
3. Merchandise held for sale
4. Borrows money
7. Ratios that measure the ability to pay liabilities as they
come due
9. Lawsuits and other events that could create new
liabilities for the company
10. Inventory is an _____ account
11. Total amount of depreciation expensed since the assets'
date of purchase
14. Monies to be received from customers
15. Equipment is a _____ asset account, which is used for
more than one year
18. Ratios that measure the ability to pay liabilities for many
years
19. Balance Sheet reporting all amounts as a percentage of
total assets (2 words)
21. Liabilities due within 12 months
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6e Balance Sheet Page 46 Chapter 2
ACTIVITY 13 THE CLASSIFIED BALANCE SHEET
Purpose: • Identify account classifications typically used on the balance sheet.
STARBUCKS (SBUX) 10/02/2011 BALANCE SHEET ($ in millions)
ASSETS LIABILITIES
Cash and cash equivalents $ 1,148.1 Accounts payable $ 540.0
Short-term investments 902.6 Short-term debt 0.0
Accounts receivable 385.6 Other current liabilities 1,535.8
Inventories 965.8 Long-term debt 549.5
Other current assets 392.8 Other noncurrent liabilities 350.2
PPE, net 2,355.0 STOCKHOLDERS’ EQUITY
Goodwill and intangibles 433.5 Contributed capital 41.2
Long-term investments 479.3 Retained earnings 4,297.4
Other noncurrent assets 297.7 Other stockholders’ equity 46.3
TOTAL ASSETS $7,360.4 TOTAL L & SE $7,360.4
A classified balance sheet breaks the three major account types (assets, liabilities, and stockholders’
equity) into smaller classifications to help decision makers better understand the information presented.
Typical classifications and a brief description follow.
• Current assets (CA) are those assets expected to be converted into cash, sold, or consumed within
12 months.
• Property, plant, and equipment (PPE) summarize amounts for equipment, buildings, and land.
These are long-term assets that are expected to benefit more than one accounting period.
Depreciation expense is the cost allocated to each year of an asset’s long-term useful life.
Accumulated depreciation is the total amount of depreciation expensed since the asset’s date of
purchase. Acquisition cost – accumulated depreciation = the book value of PPE, which is the
amount added to compute total assets on the balance sheet. Land is not depreciated.
• Goodwill is created when acquiring a company for an amount greater than its net assets; amounts
paid for the value of its management team, customer base, and overall reputation. Other
intangible assets include amounts paid for patents, copyrights, and brand names.
• Other assets are noncurrent asset (NCA) accounts such as long-term investments, which are not
included in any other asset classification.
• Current liabilities (CL) are amounts owed to creditors that are expected to be repaid within 12
months. Examples include accounts payable and short-term debt.
• Noncurrent liabilities (NCL) are amounts owed to creditors that are expected to be repaid in more
than 12 months. Examples include bonds payable and long-term debt.
• Contributed capital (CC) are amounts paid-in (contributed) by stockholders to purchase common
stock and preferred stock. Accounts include capital stock and additional-paid-in capital (APIC).
• Retained earnings (RE) is net income earned by the company since its incorporation and not yet
distributed as dividends.
• Other stockholders’ equity includes treasury stock and adjustments to stockholders’ equity such as
the change in value of long-term investments.
To answer the following questions refer to the balance sheet presented above.
Q1 How many accounts listed are Current Assets? (1 / 3 / 5) Property, Plant, and Equipment? (1 / 3 / 5)
Goodwill and Intangibles? (1 / 3 / 5) Other Assets? (1 / 2 / 5)
Q2 What is the total amount reported for Current Liabilities? $2,075.8 million
Noncurrent Liabilities? $899.7 million Total Stockholders’ Equity? $4,384.9 million
ACTIVITY 13 THE CLASSIFIED BALANCE SHEET
Purpose: • Identify account classifications typically used on the balance sheet.
STARBUCKS (SBUX) 10/02/2011 BALANCE SHEET ($ in millions)
ASSETS LIABILITIES
Cash and cash equivalents $ 1,148.1 Accounts payable $ 540.0
Short-term investments 902.6 Short-term debt 0.0
Accounts receivable 385.6 Other current liabilities 1,535.8
Inventories 965.8 Long-term debt 549.5
Other current assets 392.8 Other noncurrent liabilities 350.2
PPE, net 2,355.0 STOCKHOLDERS’ EQUITY
Goodwill and intangibles 433.5 Contributed capital 41.2
Long-term investments 479.3 Retained earnings 4,297.4
Other noncurrent assets 297.7 Other stockholders’ equity 46.3
TOTAL ASSETS $7,360.4 TOTAL L & SE $7,360.4
A classified balance sheet breaks the three major account types (assets, liabilities, and stockholders’
equity) into smaller classifications to help decision makers better understand the information presented.
Typical classifications and a brief description follow.
• Current assets (CA) are those assets expected to be converted into cash, sold, or consumed within
12 months.
• Property, plant, and equipment (PPE) summarize amounts for equipment, buildings, and land.
These are long-term assets that are expected to benefit more than one accounting period.
Depreciation expense is the cost allocated to each year of an asset’s long-term useful life.
Accumulated depreciation is the total amount of depreciation expensed since the asset’s date of
purchase. Acquisition cost – accumulated depreciation = the book value of PPE, which is the
amount added to compute total assets on the balance sheet. Land is not depreciated.
• Goodwill is created when acquiring a company for an amount greater than its net assets; amounts
paid for the value of its management team, customer base, and overall reputation. Other
intangible assets include amounts paid for patents, copyrights, and brand names.
• Other assets are noncurrent asset (NCA) accounts such as long-term investments, which are not
included in any other asset classification.
• Current liabilities (CL) are amounts owed to creditors that are expected to be repaid within 12
months. Examples include accounts payable and short-term debt.
• Noncurrent liabilities (NCL) are amounts owed to creditors that are expected to be repaid in more
than 12 months. Examples include bonds payable and long-term debt.
• Contributed capital (CC) are amounts paid-in (contributed) by stockholders to purchase common
stock and preferred stock. Accounts include capital stock and additional-paid-in capital (APIC).
• Retained earnings (RE) is net income earned by the company since its incorporation and not yet
distributed as dividends.
• Other stockholders’ equity includes treasury stock and adjustments to stockholders’ equity such as
the change in value of long-term investments.
To answer the following questions refer to the balance sheet presented above.
Q1 How many accounts listed are Current Assets? (1 / 3 / 5) Property, Plant, and Equipment? (1 / 3 / 5)
Goodwill and Intangibles? (1 / 3 / 5) Other Assets? (1 / 2 / 5)
Q2 What is the total amount reported for Current Liabilities? $2,075.8 million
Noncurrent Liabilities? $899.7 million Total Stockholders’ Equity? $4,384.9 million
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6e Balance Sheet Page 47 Chapter 2
ACTIVITY 14 UNDERSTANDING THE BALANCE SHEET
Purpose: • Identify the value at which amounts are reported on the balance sheet.
Use Starbucks’ balance sheet dated 10/02/2011 (on the opposite page) to answer the following questions.
a. How much do customers owe this company? $385.6 million
b. For inventories, $965.8 million is the (acquisition cost / current market value / can’t tell).
c. For property, plant, and equipment, net, $2,355.0 million is the (acquisition cost / current market
value / book value / can’t tell).
d. What amount of investments does this company intend to hold for more than a year?
$479.3 million
e. (PPE / Goodwill / Long-term investments) is created when a company is acquired.
f. How much does this company owe to suppliers? $540.0 million
g. Current assets total $3,794.9 million and current liabilities total $2,075.8 million. Current assets are
used to pay off (current / noncurrent) liabilities. This company has (sufficient / insufficient) current
assets to pay off its current liabilities.
h. Noncurrent assets total $3,565.5 million and noncurrent liabilities total $899.7 million. Noncurrent
liabilities are used to finance (current / noncurrent) assets.
i. Contributed capital represents (amounts borrowed / amounts paid-in by shareholders / net
income earned by the company).
j. This company is relying primarily on (long-term debt / contributed capital / retained earnings) to
finance assets, which is an (external / internal) source of financing.
k. The balance sheet reports a company’s financial position (as of a certain date / over a period of
time).
l. Assets and liabilities are recorded on the balance sheet in order of (magnitude / alphabetically /
liquidity), which means that (PPE / cash) will always be reported before (PPE / cash).
m. U.S. GAAP and IFRS treat (cash / PPE) essentially the same. However, for (cash / PPE), IFRS allows
valuation at fair value, whereas U.S. GAAP requires (historical cost / fair value).
ACTIVITY 14 UNDERSTANDING THE BALANCE SHEET
Purpose: • Identify the value at which amounts are reported on the balance sheet.
Use Starbucks’ balance sheet dated 10/02/2011 (on the opposite page) to answer the following questions.
a. How much do customers owe this company? $385.6 million
b. For inventories, $965.8 million is the (acquisition cost / current market value / can’t tell).
c. For property, plant, and equipment, net, $2,355.0 million is the (acquisition cost / current market
value / book value / can’t tell).
d. What amount of investments does this company intend to hold for more than a year?
$479.3 million
e. (PPE / Goodwill / Long-term investments) is created when a company is acquired.
f. How much does this company owe to suppliers? $540.0 million
g. Current assets total $3,794.9 million and current liabilities total $2,075.8 million. Current assets are
used to pay off (current / noncurrent) liabilities. This company has (sufficient / insufficient) current
assets to pay off its current liabilities.
h. Noncurrent assets total $3,565.5 million and noncurrent liabilities total $899.7 million. Noncurrent
liabilities are used to finance (current / noncurrent) assets.
i. Contributed capital represents (amounts borrowed / amounts paid-in by shareholders / net
income earned by the company).
j. This company is relying primarily on (long-term debt / contributed capital / retained earnings) to
finance assets, which is an (external / internal) source of financing.
k. The balance sheet reports a company’s financial position (as of a certain date / over a period of
time).
l. Assets and liabilities are recorded on the balance sheet in order of (magnitude / alphabetically /
liquidity), which means that (PPE / cash) will always be reported before (PPE / cash).
m. U.S. GAAP and IFRS treat (cash / PPE) essentially the same. However, for (cash / PPE), IFRS allows
valuation at fair value, whereas U.S. GAAP requires (historical cost / fair value).
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6e Balance Sheet Page 48 Chapter 2
ACTIVITY 15 UNDERSTANDING THE BALANCE SHEET
Purpose: • Identify the value at which amounts are reported on the balance sheet.
• Understand what an increase or a decrease in an account indicates.
• Develop strategies for analyzing the balance sheet.
STARBUCKS (SBUX) BALANCE SHEET ($ in millions)
ASSETS 10/02/2011 10/03/2010 9/27/2009 9/28/2008
Cash and cash equivalents $ 1,148.1 $ 1,164.0 $ 599.8 $ 269.8
Short-term investments 902.6 285.7 66.3 52.5
Accounts receivable 385.6 302.7 271.0 329.5
Inventories 965.8 543.3 664.9 692.8
Other current assets 392.8 460.7 433.8 403.4
Property, plant, and equipment 6,163.1 5,888.7 5,700.9 5,717.3
Accumulated depreciation (3,808.1) (3,472.2) (3,164.5) (2,760.9)
PPE, net 2,355.0 2,416.5 2,536.4 2,956.4
Goodwill and other intangibles 433.5 333.2 327.3 333.1
Long-term investments 479.3 533.3 423.5 374.0
Other noncurrent assets 297.7 346.5 253.8 (L)
TOTAL ASSETS $ 7,360.4 $ 6,385.9 $ 5,576.8 $ 5,672.6
LIABILITIES
Accounts payable $ 540.0 $ 282.6 $ 267.1 $ 324.9
Short-term debt 0.0 0.0 0.0 713.0
Other current liabilities 1,535.8 1,496.5 1,313.9 1,151.8
Long-term debt 549.5 549.4 549.3 549.6
Other noncurrent liabilities 350.2 382.7 400.8 442.4
STOCKHOLDERS’ EQUITY
Contributed capital 41.2 146.3 187.1 40.1
Retained earnings 4,297.4 3,471.2 2,793.2 2,402.4
Other stockholders’ equity 46.3 57.2 65.4 48.4
TOTAL L & SE $ 7,360.4 $ 6,385.9 $ 5,576.8 $ (Z)
Q1 Calculate the amounts that should be reported for (L) and (Z) on the 9/28/2008 balance sheet:
(L) = $261.1 million (Z) = $5,672.6 million
Q2 What was the beginning balance of the inventories account for the fiscal year ended on
10/02/2011? $543.3 million 10/03/2010? $664.9 million 9/27/2009? $692.8 million
Q3 What amount of property, plant, and equipment was purchased (assuming no PPE was sold) during
fiscal year ended 10/02/2011? $274.4 million 10/03/2010? $187.8 million
Q4 From 9/28/2008 to 10/02/2011 accounts payable (increased / decreased), indicating
(more / less) financial risk. This company paid off accounts payable during fiscal years ended in
(2011 / 2010 / 2009). As of 10/02/2011 this company owes $540.0 million to its suppliers.
ACTIVITY 15 UNDERSTANDING THE BALANCE SHEET
Purpose: • Identify the value at which amounts are reported on the balance sheet.
• Understand what an increase or a decrease in an account indicates.
• Develop strategies for analyzing the balance sheet.
STARBUCKS (SBUX) BALANCE SHEET ($ in millions)
ASSETS 10/02/2011 10/03/2010 9/27/2009 9/28/2008
Cash and cash equivalents $ 1,148.1 $ 1,164.0 $ 599.8 $ 269.8
Short-term investments 902.6 285.7 66.3 52.5
Accounts receivable 385.6 302.7 271.0 329.5
Inventories 965.8 543.3 664.9 692.8
Other current assets 392.8 460.7 433.8 403.4
Property, plant, and equipment 6,163.1 5,888.7 5,700.9 5,717.3
Accumulated depreciation (3,808.1) (3,472.2) (3,164.5) (2,760.9)
PPE, net 2,355.0 2,416.5 2,536.4 2,956.4
Goodwill and other intangibles 433.5 333.2 327.3 333.1
Long-term investments 479.3 533.3 423.5 374.0
Other noncurrent assets 297.7 346.5 253.8 (L)
TOTAL ASSETS $ 7,360.4 $ 6,385.9 $ 5,576.8 $ 5,672.6
LIABILITIES
Accounts payable $ 540.0 $ 282.6 $ 267.1 $ 324.9
Short-term debt 0.0 0.0 0.0 713.0
Other current liabilities 1,535.8 1,496.5 1,313.9 1,151.8
Long-term debt 549.5 549.4 549.3 549.6
Other noncurrent liabilities 350.2 382.7 400.8 442.4
STOCKHOLDERS’ EQUITY
Contributed capital 41.2 146.3 187.1 40.1
Retained earnings 4,297.4 3,471.2 2,793.2 2,402.4
Other stockholders’ equity 46.3 57.2 65.4 48.4
TOTAL L & SE $ 7,360.4 $ 6,385.9 $ 5,576.8 $ (Z)
Q1 Calculate the amounts that should be reported for (L) and (Z) on the 9/28/2008 balance sheet:
(L) = $261.1 million (Z) = $5,672.6 million
Q2 What was the beginning balance of the inventories account for the fiscal year ended on
10/02/2011? $543.3 million 10/03/2010? $664.9 million 9/27/2009? $692.8 million
Q3 What amount of property, plant, and equipment was purchased (assuming no PPE was sold) during
fiscal year ended 10/02/2011? $274.4 million 10/03/2010? $187.8 million
Q4 From 9/28/2008 to 10/02/2011 accounts payable (increased / decreased), indicating
(more / less) financial risk. This company paid off accounts payable during fiscal years ended in
(2011 / 2010 / 2009). As of 10/02/2011 this company owes $540.0 million to its suppliers.
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6e Balance Sheet Page 49 Chapter 2
Q5 Total Assets are (increasing / decreasing), indicating that this company is
(expanding / shrinking).
Q6 What are total liabilities for the fiscal year ended on:
10/02/2011? $2,975.5 million 9/28/2008? $3,181.70 million
What is the debt ratio for the fiscal year ended on:
10/02/2011? 40.4% 9/28/2008? 56.1%
Discuss the change in the company’s use of debt over this 4-year period.
On 9/28/2008 this company is primarily financing assets with debt (56.1% debt ratio),
and three years later the company has reduced its liabilities and is financing assets
primarily with equity (40.4% debt ratio).
Q7 From 9/28/2008 to 9/27/2009, Contributed Capital (increased / decreased), indicating the
company (issued more stock / purchased more assets / reported net income) during this
accounting period.
Q8 Retained Earnings is (increasing / decreasing), indicating the company (issued more stock /
purchased more assets / reported net income) during this accounting period. Assuming no
dividends were issued, how much net income (loss) was reported for the fiscal year ended on:
10/02/2011? $826.2 million 10/03/2010? $678.0 million 9/27/2009? $390.8 million
The most profitable year was fiscal year ended (2011 / 2010 / 2009).
Q9 Develop a strategy to analyze the balance sheet. Which line would you look at first? Second? Third?
Why?
Answers will vary…but one possible method of analyzing the balance sheet is to first
review the trend in total assets, and then study how those assets are financed by
examining liabilities, contributed capital, and retained earnings.
Q10 Review the series of balance sheets. This company appears to report a (strong / weak) financial
position. Why? Support your response with at least two observations.
Answers will vary, but should include two of the following:
• Total assets increased, indicating the company is expanding.
• The gross amount of property, plant, and equipment increased, indicating the
company is updating assets on a regular basis.
• The debt ratio decreased from 56.1% down to 40.4%, indicating a decrease in
financial risk. Decreasing financial risk in a volatile economy creates a stronger
financial position.
• Retained earnings increased, indicating the company remained profitable
during challenging economic times.
Q5 Total Assets are (increasing / decreasing), indicating that this company is
(expanding / shrinking).
Q6 What are total liabilities for the fiscal year ended on:
10/02/2011? $2,975.5 million 9/28/2008? $3,181.70 million
What is the debt ratio for the fiscal year ended on:
10/02/2011? 40.4% 9/28/2008? 56.1%
Discuss the change in the company’s use of debt over this 4-year period.
On 9/28/2008 this company is primarily financing assets with debt (56.1% debt ratio),
and three years later the company has reduced its liabilities and is financing assets
primarily with equity (40.4% debt ratio).
Q7 From 9/28/2008 to 9/27/2009, Contributed Capital (increased / decreased), indicating the
company (issued more stock / purchased more assets / reported net income) during this
accounting period.
Q8 Retained Earnings is (increasing / decreasing), indicating the company (issued more stock /
purchased more assets / reported net income) during this accounting period. Assuming no
dividends were issued, how much net income (loss) was reported for the fiscal year ended on:
10/02/2011? $826.2 million 10/03/2010? $678.0 million 9/27/2009? $390.8 million
The most profitable year was fiscal year ended (2011 / 2010 / 2009).
Q9 Develop a strategy to analyze the balance sheet. Which line would you look at first? Second? Third?
Why?
Answers will vary…but one possible method of analyzing the balance sheet is to first
review the trend in total assets, and then study how those assets are financed by
examining liabilities, contributed capital, and retained earnings.
Q10 Review the series of balance sheets. This company appears to report a (strong / weak) financial
position. Why? Support your response with at least two observations.
Answers will vary, but should include two of the following:
• Total assets increased, indicating the company is expanding.
• The gross amount of property, plant, and equipment increased, indicating the
company is updating assets on a regular basis.
• The debt ratio decreased from 56.1% down to 40.4%, indicating a decrease in
financial risk. Decreasing financial risk in a volatile economy creates a stronger
financial position.
• Retained earnings increased, indicating the company remained profitable
during challenging economic times.
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6e Balance Sheet Page 50 Chapter 2
ACTIVITY 16 DEBT VS. EQUITY
Purpose: • Identify the characteristics of debt and equity.
• Assess financial risk.
Corporations externally finance the purchase of assets with debt (liabilities) or equity (common stock).
Assets = Liabilities + Stockholders’ Equity
Large amounts of debt are usually issued in the form of bonds. The borrowing corporation records a bond
payable and is referred to as the debtor, while the entity loaning the money records a bond receivable
and is referred to as the creditor. The debtor must pay back the amount borrowed plus interest to the
creditor. The interest paid by the borrowing corporation is an expense that reduces taxable income. The
return to creditors is the interest received. Creditors are not owners of the corporation and, therefore,
have no ownership rights.
Equity refers to the issuance of stock, which may be common stock or preferred stock. Entities owning
shares of stock are the owners of the corporation and are referred to as stockholders or shareholders.
Stockholders’ primary ownership rights include a right to vote at annual meetings and a right to a portion
of the profits (net income). Dividends are the distribution of profits to stockholders. The corporate board
of directors decides whether to pay dividends or not and has no obligation to purchase the shares of stock
back from the stockholders. If stockholders sell their shares of stock, they usually sell to another investor
using a stockbroker, who in turn executes the trade on a stock exchange such as the New York Stock
Exchange or NASDAQ. Stockholders earn a return on their investment by receiving dividends or selling the
stock for a greater amount than the purchase price.
The balance sheet helps investors, both creditors and stockholders, assess the degree of financial risk a
corporation is assuming. In general, the more a corporation relies on debt to finance assets, the greater
the financial risk of the corporation.
($ in millions) Google (GOOG)
12/31/2011
General Mills (GIS)
5/29/2011
Assets $ 72,574 $18,675
Liabilities $ 14,429 $ 12,309
Stockholders’ equity $ 58,145 $ 6,366
Debt ratio 19.88% 65.91%
Q1 Compute the values for (B) and (Y) in the above chart. Compute the Debt Ratio and record in the
above chart. (Debt ratio = Liabilities / Assets) This ratio quantifies the proportion of assets financed
with debt. (Google / GIS) is financing assets primarily with debt; therefore, (Google / GIS) is
assuming the greater financial risk. Based only on the information presented above, which
company would you choose as an investment? (Google / GIS) Why?
Google, because it has the lower debt ratio, indicating lower financial risk.
Q2 For each item circle the correct response when comparing the issuance of debt and equity.
a. The corporation (does / does not) have to pay interest to creditors, but (does / does not)
have to pay dividends to shareholders.
b. The corporation (must / never has to) repay amounts borrowed from creditors, but (must /
never has to) repay amounts invested by shareholders, thus the title, “contributed” capital.
c. The interest expense of debt (reduces / does not reduce) taxable income, but dividends
paid to shareholders (reduce / do not reduce) taxable income.
ACTIVITY 16 DEBT VS. EQUITY
Purpose: • Identify the characteristics of debt and equity.
• Assess financial risk.
Corporations externally finance the purchase of assets with debt (liabilities) or equity (common stock).
Assets = Liabilities + Stockholders’ Equity
Large amounts of debt are usually issued in the form of bonds. The borrowing corporation records a bond
payable and is referred to as the debtor, while the entity loaning the money records a bond receivable
and is referred to as the creditor. The debtor must pay back the amount borrowed plus interest to the
creditor. The interest paid by the borrowing corporation is an expense that reduces taxable income. The
return to creditors is the interest received. Creditors are not owners of the corporation and, therefore,
have no ownership rights.
Equity refers to the issuance of stock, which may be common stock or preferred stock. Entities owning
shares of stock are the owners of the corporation and are referred to as stockholders or shareholders.
Stockholders’ primary ownership rights include a right to vote at annual meetings and a right to a portion
of the profits (net income). Dividends are the distribution of profits to stockholders. The corporate board
of directors decides whether to pay dividends or not and has no obligation to purchase the shares of stock
back from the stockholders. If stockholders sell their shares of stock, they usually sell to another investor
using a stockbroker, who in turn executes the trade on a stock exchange such as the New York Stock
Exchange or NASDAQ. Stockholders earn a return on their investment by receiving dividends or selling the
stock for a greater amount than the purchase price.
The balance sheet helps investors, both creditors and stockholders, assess the degree of financial risk a
corporation is assuming. In general, the more a corporation relies on debt to finance assets, the greater
the financial risk of the corporation.
($ in millions) Google (GOOG)
12/31/2011
General Mills (GIS)
5/29/2011
Assets $ 72,574 $18,675
Liabilities $ 14,429 $ 12,309
Stockholders’ equity $ 58,145 $ 6,366
Debt ratio 19.88% 65.91%
Q1 Compute the values for (B) and (Y) in the above chart. Compute the Debt Ratio and record in the
above chart. (Debt ratio = Liabilities / Assets) This ratio quantifies the proportion of assets financed
with debt. (Google / GIS) is financing assets primarily with debt; therefore, (Google / GIS) is
assuming the greater financial risk. Based only on the information presented above, which
company would you choose as an investment? (Google / GIS) Why?
Google, because it has the lower debt ratio, indicating lower financial risk.
Q2 For each item circle the correct response when comparing the issuance of debt and equity.
a. The corporation (does / does not) have to pay interest to creditors, but (does / does not)
have to pay dividends to shareholders.
b. The corporation (must / never has to) repay amounts borrowed from creditors, but (must /
never has to) repay amounts invested by shareholders, thus the title, “contributed” capital.
c. The interest expense of debt (reduces / does not reduce) taxable income, but dividends
paid to shareholders (reduce / do not reduce) taxable income.
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6e Balance Sheet Page 51 Chapter 2
d. Issuing additional debt (does / does not) dilute current shareholders’ ownership, but
issuing additional shares of common stock (does / does not) dilute current shareholders’
ownership.
e. If you were the CFO of a company, how would you recommend financing assets?
Primarily with (debt / equity). Why?
Either choice may be correct if supported with good reasons.
The issuance of debt maintains current shareholders’ ownership interest:
• Debt does not increase the number of issued shares.
• Interest expense on debt is tax deductible.
The issuance of equity reduces financial risk:
• Amounts paid-in by shareholders for capital stock never have to be paid
back.
• Dividend payments are not required.
d. Issuing additional debt (does / does not) dilute current shareholders’ ownership, but
issuing additional shares of common stock (does / does not) dilute current shareholders’
ownership.
e. If you were the CFO of a company, how would you recommend financing assets?
Primarily with (debt / equity). Why?
Either choice may be correct if supported with good reasons.
The issuance of debt maintains current shareholders’ ownership interest:
• Debt does not increase the number of issued shares.
• Interest expense on debt is tax deductible.
The issuance of equity reduces financial risk:
• Amounts paid-in by shareholders for capital stock never have to be paid
back.
• Dividend payments are not required.
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6e Balance Sheet Page 52 Chapter 2
ACTIVITY 17 ANALYSIS: RATIOS
Purpose: • Understand the information provided by the current ratio and the debt ratio.
Liquidity and Solvency Ratios measure the ability to meet financial obligations and the level of financial
risk.
The Current Ratio measures the ability to pay current payables as they come due by comparing current
assets to current liabilities. It is a measure of short-term liquidity. A higher ratio indicates a stronger ability
to pay current debts.
Current Ratio = Current assets
Current liabilities
The Debt Ratio measures the proportion of assets financed by debt by comparing total liabilities to total
assets. It is a measure of long-term solvency. A higher ratio indicates greater financial risk.
Debt Ratio = Total liabilities
Total assets
For the year 2010
Industry
Average for
Restaurants
DineEquity
(DIN)
Darden
Restaurants
(DRI)
Nathan’s
Famous
(NATH)
Current Ratio 1.1 1.32 0.54 6.12
Debt Ratio 52% 97% 64% 17%
Debt-to-Equity Ratio* 1.10 33.17 1.77 0.20
Use the chart above to answer the following questions. Stock symbols are shown in parentheses.
Q1 Of the above three restaurant chains, which is your favorite? (DIN / DRI / NATH)
All responses are correct.
• DIN operates Applebee’s Neighborhood Grill & Bar and IHOP.
• DRI operates Red Lobster, Olive Garden, Bahama Breeze, and Smokey Bones Barbeque and Grill.
• NATH operates Nathan’s Famous.
Q2 (DIN / DRI / NATH) have sufficient current assets to pay off current liabilities and, therefore, have
a current ratio (greater / less) than 1.0. A current ratio that is (lower / higher) than the industry
average may indicate a lack of short-term liquidity, which includes (DIN / DRI / NATH). Does this
indicate that this corporation is insolvent or unable to pay its bills? (Yes / No) Explain.
Not necessarily. By definition, current liabilities become due within one year, and
therefore, do not all have to be paid at this time. However, they do need to be paid
when due. Comparing a company ratio to the industry average gives a sense of how this
company ranks when compared to other restaurants. If a company’s ratio is
significantly below the industry average, this is a warning sign and may warrant further
investigation.
Q3 (DIN / DRI / NATH) are relying more on debt to finance assets and have a debt ratio (greater /
less) than 50%. Darden Restaurants is financing 64% of assets with debt. For a company wanting to
be lower risk and less dependent on debt, a(n) (increasing / decreasing) trend in the debt ratio is
considered favorable. A company that has higher financial risk will, in general, be required to pay
(higher / lower) interest rates when borrowing money.
ACTIVITY 17 ANALYSIS: RATIOS
Purpose: • Understand the information provided by the current ratio and the debt ratio.
Liquidity and Solvency Ratios measure the ability to meet financial obligations and the level of financial
risk.
The Current Ratio measures the ability to pay current payables as they come due by comparing current
assets to current liabilities. It is a measure of short-term liquidity. A higher ratio indicates a stronger ability
to pay current debts.
Current Ratio = Current assets
Current liabilities
The Debt Ratio measures the proportion of assets financed by debt by comparing total liabilities to total
assets. It is a measure of long-term solvency. A higher ratio indicates greater financial risk.
Debt Ratio = Total liabilities
Total assets
For the year 2010
Industry
Average for
Restaurants
DineEquity
(DIN)
Darden
Restaurants
(DRI)
Nathan’s
Famous
(NATH)
Current Ratio 1.1 1.32 0.54 6.12
Debt Ratio 52% 97% 64% 17%
Debt-to-Equity Ratio* 1.10 33.17 1.77 0.20
Use the chart above to answer the following questions. Stock symbols are shown in parentheses.
Q1 Of the above three restaurant chains, which is your favorite? (DIN / DRI / NATH)
All responses are correct.
• DIN operates Applebee’s Neighborhood Grill & Bar and IHOP.
• DRI operates Red Lobster, Olive Garden, Bahama Breeze, and Smokey Bones Barbeque and Grill.
• NATH operates Nathan’s Famous.
Q2 (DIN / DRI / NATH) have sufficient current assets to pay off current liabilities and, therefore, have
a current ratio (greater / less) than 1.0. A current ratio that is (lower / higher) than the industry
average may indicate a lack of short-term liquidity, which includes (DIN / DRI / NATH). Does this
indicate that this corporation is insolvent or unable to pay its bills? (Yes / No) Explain.
Not necessarily. By definition, current liabilities become due within one year, and
therefore, do not all have to be paid at this time. However, they do need to be paid
when due. Comparing a company ratio to the industry average gives a sense of how this
company ranks when compared to other restaurants. If a company’s ratio is
significantly below the industry average, this is a warning sign and may warrant further
investigation.
Q3 (DIN / DRI / NATH) are relying more on debt to finance assets and have a debt ratio (greater /
less) than 50%. Darden Restaurants is financing 64% of assets with debt. For a company wanting to
be lower risk and less dependent on debt, a(n) (increasing / decreasing) trend in the debt ratio is
considered favorable. A company that has higher financial risk will, in general, be required to pay
(higher / lower) interest rates when borrowing money.
Loading page 27...
6e Balance Sheet Page 53 Chapter 2
Q4 Why does a company with a higher debt ratio tend to have greater financial risk?
A higher debt ratio indicates greater debt. Debt is a legal liability that must be repaid
plus interest. If the principal or interest cannot be repaid, then a company can be forced
into bankruptcy and creditors may not get fully repaid. Therefore, creditors are at
financial risk of not receiving the full amount due to them. As the amount of company
debt increases, so does the financial risk of not being able to pay back that debt plus
interest when due.
Q5 Does a high debt ratio indicate a weak corporation? (Yes / No) Explain your answer.
The answer is no, not necessarily. Even though DineEquity has a higher debt ratio, it
may not be considered a weak corporation. Companies use different strategies to
finance assets. Companies within a stable industry have the ability to use more debt
than companies within a volatile industry. Companies with a large investment in PPE
can use that PPE as collateral for debt financing. Also, some corporations make the
decision to accept higher financial risk.
* Instead of reporting the Debt Ratio, some financial sources report the Debt-to-Equity ratio, computed as liabilities
divided by stockholders’ equity. To convert:
Debt ratio = [Debt-to-equity ratio/ (1 + Debt-to-equity ratio)]
For DineEquity 0.97 = 33.17 / 34.17
Q4 Why does a company with a higher debt ratio tend to have greater financial risk?
A higher debt ratio indicates greater debt. Debt is a legal liability that must be repaid
plus interest. If the principal or interest cannot be repaid, then a company can be forced
into bankruptcy and creditors may not get fully repaid. Therefore, creditors are at
financial risk of not receiving the full amount due to them. As the amount of company
debt increases, so does the financial risk of not being able to pay back that debt plus
interest when due.
Q5 Does a high debt ratio indicate a weak corporation? (Yes / No) Explain your answer.
The answer is no, not necessarily. Even though DineEquity has a higher debt ratio, it
may not be considered a weak corporation. Companies use different strategies to
finance assets. Companies within a stable industry have the ability to use more debt
than companies within a volatile industry. Companies with a large investment in PPE
can use that PPE as collateral for debt financing. Also, some corporations make the
decision to accept higher financial risk.
* Instead of reporting the Debt Ratio, some financial sources report the Debt-to-Equity ratio, computed as liabilities
divided by stockholders’ equity. To convert:
Debt ratio = [Debt-to-equity ratio/ (1 + Debt-to-equity ratio)]
For DineEquity 0.97 = 33.17 / 34.17
Loading page 28...
6e Balance Sheet Page 54 Chapter 2
ACTIVITY 18 ANALYSIS: TREND
Purpose: • Prepare a trend analysis and understand the information provided.
A Trend Analysis compares amounts of a more recent year to a base year. The base year is the earliest
year being studied. The analysis measures the percentage of change from the base year.
Q1 For Starbucks, use the amounts listed below to compute the trend indexes for noncurrent (NC)
liabilities, common stock, and retained earnings by dividing each amount by the amount for the
base year. Record the resulting trend index in the shaded area. Use 9/28/2008 as the base year.
STARBUCKS 10/02/2011 10/03/2010 9/27/2009 9/28/2008
($ in millions) $ Trend $ Trend $ Trend BASE YEAR
Current assets 3,794.9 217 2,756.4 158 2,035.8 116 1,748.0 100
PPE, net 2,355.0 80 2,416.5 82 2,536.4 86 2,956.4 100
Goodwill + Intang. 433.5 130 333.2 100 327.3 98 333.1 100
Other assets 777.0 122 879.8 139 677.3 107 635.1 100
TOTAL ASSETS 7,360.4 130 6,385.9 113 5,576.8 98 5,672.6 100
Current liabilities 2,075.8 95 1,779.1 81 1,581.0 72 2,189.7 100
NC liabilities 899.7 91 932.1 94 950.1 95 992.0 100
Common stock 41.2 103 146.3 365 187.1 467 40.1 100
Retained earnings 4,297.4 179 3,471.2 144 2,793.2 116 2,402.4 100
Other SE 46.3 96 57.2 118 65.4 135 48.4 100
TOTAL L and SE 7,360.4 130 6,385.9 113 5,576.8 98 5,672.6 100
Refer to the series of balance sheets and the trend analysis above to answer the following questions.
Q2 A trend index of 130 (total assets) indicates that the dollar amount is (greater / less) than the
(previous / base) year, whereas a trend index of 80 (PPE, net) indicates the dollar amount is
(greater / less) than the (previous / base) year. For total assets, the trend index of 130 is
computed by dividing $7,360.4 (total assets on 10/02/2011) by $5,672.6 million (total assets of the
base year). A trend index of 130 indicates total assets (increased / decreased) by 30% (from an
index of 100 to 130) from 9/28/2008 to 10/02/2011.
Q3 From 9/28/2008 to 10/02/2011, which of the following accounts increased at a greater rate than
total assets? (Noncurrent liabilities / Common stock / Retained earnings). The assets of this
company are primarily financed with (liabilities / contributed capital / retained earnings). This is
referred to as (internal / external) financing because these funds are generated by operations.
Issuing stocks and bonds are forms of (internal / external) financing because these funds come
from investors outside of the firm.
Q4 The annual total asset growth rate can be compared between companies.
Assume less than 5% is low, 5 to 15% is moderate, and more than 15% is high.
The three-year average total asset growth rate of this company is considered
(low / moderate / high). (30% / 3 years = 10% < 15%, but > 5%)
ACTIVITY 18 ANALYSIS: TREND
Purpose: • Prepare a trend analysis and understand the information provided.
A Trend Analysis compares amounts of a more recent year to a base year. The base year is the earliest
year being studied. The analysis measures the percentage of change from the base year.
Q1 For Starbucks, use the amounts listed below to compute the trend indexes for noncurrent (NC)
liabilities, common stock, and retained earnings by dividing each amount by the amount for the
base year. Record the resulting trend index in the shaded area. Use 9/28/2008 as the base year.
STARBUCKS 10/02/2011 10/03/2010 9/27/2009 9/28/2008
($ in millions) $ Trend $ Trend $ Trend BASE YEAR
Current assets 3,794.9 217 2,756.4 158 2,035.8 116 1,748.0 100
PPE, net 2,355.0 80 2,416.5 82 2,536.4 86 2,956.4 100
Goodwill + Intang. 433.5 130 333.2 100 327.3 98 333.1 100
Other assets 777.0 122 879.8 139 677.3 107 635.1 100
TOTAL ASSETS 7,360.4 130 6,385.9 113 5,576.8 98 5,672.6 100
Current liabilities 2,075.8 95 1,779.1 81 1,581.0 72 2,189.7 100
NC liabilities 899.7 91 932.1 94 950.1 95 992.0 100
Common stock 41.2 103 146.3 365 187.1 467 40.1 100
Retained earnings 4,297.4 179 3,471.2 144 2,793.2 116 2,402.4 100
Other SE 46.3 96 57.2 118 65.4 135 48.4 100
TOTAL L and SE 7,360.4 130 6,385.9 113 5,576.8 98 5,672.6 100
Refer to the series of balance sheets and the trend analysis above to answer the following questions.
Q2 A trend index of 130 (total assets) indicates that the dollar amount is (greater / less) than the
(previous / base) year, whereas a trend index of 80 (PPE, net) indicates the dollar amount is
(greater / less) than the (previous / base) year. For total assets, the trend index of 130 is
computed by dividing $7,360.4 (total assets on 10/02/2011) by $5,672.6 million (total assets of the
base year). A trend index of 130 indicates total assets (increased / decreased) by 30% (from an
index of 100 to 130) from 9/28/2008 to 10/02/2011.
Q3 From 9/28/2008 to 10/02/2011, which of the following accounts increased at a greater rate than
total assets? (Noncurrent liabilities / Common stock / Retained earnings). The assets of this
company are primarily financed with (liabilities / contributed capital / retained earnings). This is
referred to as (internal / external) financing because these funds are generated by operations.
Issuing stocks and bonds are forms of (internal / external) financing because these funds come
from investors outside of the firm.
Q4 The annual total asset growth rate can be compared between companies.
Assume less than 5% is low, 5 to 15% is moderate, and more than 15% is high.
The three-year average total asset growth rate of this company is considered
(low / moderate / high). (30% / 3 years = 10% < 15%, but > 5%)
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6e Balance Sheet Page 55 Chapter 2
Q5 Examine the financial information reported above and comment on at least two items of
significance that the trend analysis helps to reveal.
Answers will vary and may include two of the following…
• Assets increased 30% over the three-year period, indicating moderate growth.
SBUX has been expanding by building domestic relationships (Green Mountain
Coffee Roasters) and international joint-ventures within China and India.
• The majority of asset growth was in current assets. SBUX has greatly increased
its cash and equivalents over the past three years.
• PP&E has been trending downwards, indicating the international joint-ventures
must not include the ownership of additional PPE.
• Goodwill and intangibles increased at a rate equal to that of total assets,
indicating growth through the acquisition of other businesses. However, these
amounts are only a small proportion of total assets.
• Both current liabilities and noncurrent liabilities decreased, indicating lower
financial risk.
• Retained earnings increased, indicating the company remains profitable even
during these uncertain economic times.
Q5 Examine the financial information reported above and comment on at least two items of
significance that the trend analysis helps to reveal.
Answers will vary and may include two of the following…
• Assets increased 30% over the three-year period, indicating moderate growth.
SBUX has been expanding by building domestic relationships (Green Mountain
Coffee Roasters) and international joint-ventures within China and India.
• The majority of asset growth was in current assets. SBUX has greatly increased
its cash and equivalents over the past three years.
• PP&E has been trending downwards, indicating the international joint-ventures
must not include the ownership of additional PPE.
• Goodwill and intangibles increased at a rate equal to that of total assets,
indicating growth through the acquisition of other businesses. However, these
amounts are only a small proportion of total assets.
• Both current liabilities and noncurrent liabilities decreased, indicating lower
financial risk.
• Retained earnings increased, indicating the company remains profitable even
during these uncertain economic times.
Loading page 30...
6e Balance Sheet Page 56 Chapter 2
ACTIVITY 19 ANALYSIS: COMMON-SIZE STATEMENTS
Purpose: • Prepare common-size statements and understand the information provided.
The Common-Size Balance Sheet compares all amounts to total assets of that same year. The analysis
measures each item as a percentage of total assets.
Q1 For DineEquity and Nathan’s Famous listed below, complete the common-size statements by
dividing each item on the balance sheet by the amount of total assets. Record the resulting
common-size percentage in the shaded area provided.
(Hint: Percentages for CA + PPE, net + Goodwill + Other = 100% and CL + LTD + Other NCL + CS + RE + Other = 100 %.)
2010 DineEquity
(DIN)
Darden Restaurants
(DRI)
Nathan’s Famous
(NATH)
($ in millions) $ CS% $ CS% $ CS%
Current assets 351.0 12.3% 678.5 12.9% 43.82 82.1%
PPE, net 612.2 21.4% 3,403.7 64.9% 5.47 10.2%
Goodwill + intangibles 1,533.4 53.7% 994.9 19.0% 1.44 2.7%
Other assets 360.0 12.6% 170.3 3.2% 2.63 4.9%
TOTAL ASSETS 2,856.6 100.0% 5,247.4 100.0% 53.37 100.0%
Current liabilities 265.1 9.3% 1,254.6 23.9% 7.16 13.4%
Long-term debt 2,013.0 70.5% 1,466.3 27.9% 0.0 0.0%
Other NC liabilities 494.7 17.3% 632.5 12.1% 1.91 3.6%
Contributed capital 234.5 8.2% 2,297.9 43.8% 52.1 97.6%
Retained earnings 124.3 4.3% 2,621.9 50.0% 16.8 31.5%
Other SE (275.0) (9.6)% (3,025.8) (57.7)% (24.6) (46.1)%
TOTAL L and SE 2,856.6 100.0%* 5,247.4 100.0% 53.37 100.0%
* Note: The percentages may not sum to 100% due to rounding error.
Refer to the information above to answer the following questions.
Q2 The debt ratio (Total liabilities / Total assets) for Darden Restaurants is 63.90% or
0.6390 (decimal form).
Q3 Which company finances assets primarily with amounts borrowed long term? (DIN / DRI / NATH)
Q4 Which company finances assets primarily with amounts invested by shareholders?
(DIN / DRI / NATH)
Q5 Which company finances assets primarily with past profits? (DIN / DRI / NATH)
ACTIVITY 19 ANALYSIS: COMMON-SIZE STATEMENTS
Purpose: • Prepare common-size statements and understand the information provided.
The Common-Size Balance Sheet compares all amounts to total assets of that same year. The analysis
measures each item as a percentage of total assets.
Q1 For DineEquity and Nathan’s Famous listed below, complete the common-size statements by
dividing each item on the balance sheet by the amount of total assets. Record the resulting
common-size percentage in the shaded area provided.
(Hint: Percentages for CA + PPE, net + Goodwill + Other = 100% and CL + LTD + Other NCL + CS + RE + Other = 100 %.)
2010 DineEquity
(DIN)
Darden Restaurants
(DRI)
Nathan’s Famous
(NATH)
($ in millions) $ CS% $ CS% $ CS%
Current assets 351.0 12.3% 678.5 12.9% 43.82 82.1%
PPE, net 612.2 21.4% 3,403.7 64.9% 5.47 10.2%
Goodwill + intangibles 1,533.4 53.7% 994.9 19.0% 1.44 2.7%
Other assets 360.0 12.6% 170.3 3.2% 2.63 4.9%
TOTAL ASSETS 2,856.6 100.0% 5,247.4 100.0% 53.37 100.0%
Current liabilities 265.1 9.3% 1,254.6 23.9% 7.16 13.4%
Long-term debt 2,013.0 70.5% 1,466.3 27.9% 0.0 0.0%
Other NC liabilities 494.7 17.3% 632.5 12.1% 1.91 3.6%
Contributed capital 234.5 8.2% 2,297.9 43.8% 52.1 97.6%
Retained earnings 124.3 4.3% 2,621.9 50.0% 16.8 31.5%
Other SE (275.0) (9.6)% (3,025.8) (57.7)% (24.6) (46.1)%
TOTAL L and SE 2,856.6 100.0%* 5,247.4 100.0% 53.37 100.0%
* Note: The percentages may not sum to 100% due to rounding error.
Refer to the information above to answer the following questions.
Q2 The debt ratio (Total liabilities / Total assets) for Darden Restaurants is 63.90% or
0.6390 (decimal form).
Q3 Which company finances assets primarily with amounts borrowed long term? (DIN / DRI / NATH)
Q4 Which company finances assets primarily with amounts invested by shareholders?
(DIN / DRI / NATH)
Q5 Which company finances assets primarily with past profits? (DIN / DRI / NATH)
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