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)

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)

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

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

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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

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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)

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Solution Manual for Interpreting and Analyzing Financial Statements, 6th Edition

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