CHAPTER 1Solutions USES OF ACCOUNTING INFORMATION AND THE FINANCIAL STATEMENTS

Chapter 1, SE 1. 1. 2. 3. 4. 5. g f b c e 6. 7. 8. 9. 10. i d a j h

Chapter 1, SE 2. 1. 2. 3. b c a 4. 5. b a

Chapter 1, SE 3. 1. 2. 3. a c b 4. 5. 6. c a c

Chapter 1, SE 4. 1. 2. 3. Assets = Owner's Equity = Liabilities = $120,000 $ 72,000 $100,000

Ch1 SE1 to SE4

Chapter 1, SE 5. 1. Assets $240,000 $240,000 Owner's Equity Assets Assets 0.2 Assets 0.8 Assets Assets Assets Liabilities = = = = = = = = = Liabilities + $90,000 + $90,000 = $150,000 0.2 Assets $40,000 $40,000 $40,000 $50,000 $50,000 x Owner's Equity Owner's Equity $150,000 + $40,000

2.

0.8 0.2 = $10,000

Chapter 1, SE 6. 1. Beginning: $ 45,000 Liabilities $ 45,000 + 30,000 $75,000 Owner's Equity Assets Assets $146,000 + 40,000 $186,000 Owner's Equity = = = = = = = = = = Liabilities $ 20,000 $ 20,000 + 5,000 $ 25,000 $ 50,000 $50,000 $146,000 $50,000 30,000 $ 20,000 $166,000 + $ 25,000 + $ 25,000 + Owner's Equity + $ 96,000 + $ 96,000 + Owner's Equity

Change: End: Beginning:

2.

Change: End: Chapter 1, SE 7.

Net income Beginning of year Assets = Liabilities $280,000 = $120,000 During year Investment Withdrawals Net Income* End of year $400,000 *( $260,000 = $140,000

= + +

$108,000 Owner's Equity $160,000 $ 40,000 48,000 108,000

$260,000 $40,000 + $48,000 = $108,000

$160,000 )

Ch1 SE5 to SE7

Chapter 1, SE 8. Global Company Balance Sheet June 30, 2010 Assets Cash Accounts receivable Building $ 5,800 * 1,600 22,000 Wages payable Total liabilites Owner's Equity Owner's capital Total liabilities and Total assets *To balance $29,400 owner's equity $ 28,700 $29,400 Liabilities $ $ 700 700

Ch1 SE8

Chapter 1, SE 9. Tarech Company Income Statement For the Year Ended December 31, 2010 Revenue Service revenue Expenses Total expenses Net income Tarech Company Statement of Owner's Equity For the Year Ended December 31, 2010 Owner's capital, December 31, 2009 Net income for the year Subtotal Less withdrawals Owner's capital, December 31, 2010 Tarech Company Balance Sheet December 31, 2010 Assets Cash Other assets Liabilities $ 1,890 Accounts payable 1,000 Total liabilites Owner's Equity Owner's capital Total liabilities and $ 2,890 owner's equity $ 450 $ 450 $ 4,800 2,450 $ 2,350

$ $ $

500 2,350 2,850 410 2,440

$ $

2,440 2,890

Total assets

Ch1 SE9

Chapter 1, E 1. 1. The primary purpose of accounting is to provide decision makers with the financial information they need to make intelligent decisions. It is a valuable discipline because of the usefulness of the information it generates. Like managers of profit-seeking businesses, managers of government and notfor-profit organizations must report to those who fund them, and they must operate their organizations in a financially prudent way. No. Not all economic events involve exchanges of value between a business and someone else. For example, when a customer places an order, it is an economic event, but until the order is fulfilled, no exchange of value has taken place. Accounting treats sole proprietorships, partnerships, and corporations as entities separate and apart from their owners because each form represents a business for which financial performance must be measured and reported.

2.

3.

4.

Chapter 1, E 2. 1. Expenses and withdrawals are the same in that they both reduce the owner's capital component of owner's equity. They are different in that expenses are also a component of net income, whereas withdrawals are a distribution of assets to the owner resulting from net income. CVS and Southwest are comparable in that like all companies they have two main goals: profitability and liquidity. How companies such as CVS and Southwest achieve these goals may make them incomparable in certain ways. For instance, CVS is a retail (pharmacy and related) company, whereas Southwest is a service (air transportation) company. CVS buys and leases retail stores, whereas Southwest buys and leases aircraft. GAAP differ from the laws of science in that they are not unchanging but rather are constantly evolving. They may change as business conditions change or as improved methods of accounting are introduced. Unethical ways of accounting include recording and reporting business transactions that did not occur or being dishonest in recording those that did occur. Financial statements are unethically prepared when they misrepresent a company's financial situation or contain false information.

2.

3.

4.

Ch1 E1 to E2

Chapter 1, E 3. 1. 2. 3. 4. a l c i 5. 6. 7. 8. k e b j 9. 10. 11. 12. g d f h

Chapter 1, E 4. People who are interested in Gottlieb's financial statements are the following: Management Investors (owners of the company) Creditors Tax authorities Regulators Labor unions Customers Economic planners A partnership is a business that has two or more owners. A corporation is a business unit that has been granted a charter from the state and is legally separate from its owners (stockholders). A major advantage of the corporate form of business over the partnership is that the stockholders' liability is limited to the amount of the stockholders' investments in the company, whereas the personal assets of partners can be called upon to pay the obligations of the partnership. Also, the transfer of ownership is easier with the corporation because the shares owned by a stockholder can be sold to another party. When ownership of a partnership changes, the partnership must be dissolved and another one formed. Chapter 1, E 5. 1. 2. 3. 4. This is not a business transaction because no economic exchange has taken place. Yes, this is properly an expense of the business. Yes, this is properly an expense of the business. Yes, this is properly an expense of the business (assuming that Velu intends to repay the loan).

Ch1 E3 to E5

Chapter 1, E 6. 1. 2. 3. 4. 5. b c a a b 6. 7. 8. 9. 10. c b a c a

Chapter 1, E 7. Company U.S.Chip Nanhai Tova Holstein Company U.S.Chip Nanhai Tova Holstein 1,300,000 2,800,000 290,000,000 3,900,000 x x x x 2,750,000 5,000,000 350,000,000 3,500,000 x x x x Sales 1.000 0.130 0.011 1.350 Assets 1.000 0.130 0.011 1.350 = = = = $1,300,000 $ 364,000 $3,190,000 $5,265,000 = = = = $2,750,000 $ 650,000 $3,850,000 $4,725,000

Holstein is the largest in terms of sales and assets due to the high value of the euro.

Ch1 E6 to E7

Chapter 1, E 8. 1. Assets $380,000 Liabilities Assets Assets Assets Assets 2/3 Assets Assets Liabilities $310,000 Liabilities $310,000 + 45,000 = = = = = = = = = = = = = Liabilities Liabilities $225,000 Liabilities $ 65,000 $144,500 1/3 Assets $180,000 $270,000 1/3 Liabilities $160,000 $160,000 22,500 + Owner's Equity + $155,000 + Owner's Equity + $79,500 + $180,000

2.

3.

4.

Beginning:

x $270,000 + $150,000 + $150,000

= $90,000

Change: End: Chapter 1, E 9. 1. a. b. c. d. e. f. g. A L A OE A L A 2. a. b. c. d. e. f. g.

$355,000 = $137,500 Owner's Equity = $217,500

+ Owner's Equity

IS BS IS BS IS BS OE

Ch1 E8 to E9

Chapter 1, E 10. Uptime Services Company Balance Sheet December 31, 2011 Liabilities $ 12,500 Accounts payable 31,250 Total liabilities Owner's Equity 6,250 56,250 Owner's Capital 25,000 Total liabilities and $131,250 owner's equity $ 25,000 $ 25,000 $106,250 $131,250

Assets Cash Accounts receivable Supplies Building Equipment Total assets

Ch1 E10

Chapter 1, E 11. Proviso Company Income Statement For the Year Ended December 31, 2010 Revenue Service revenue Expenses Rent expense Wages expense Advertising expense Utilities expense Total expenses Net income Proviso Company Statement of Owner's Equity For the Year Ended December 31, 2010 Owner's Capital, December 31, 2009 Investments by K. Proviso Net income for the year Subtotal Less withdrawals Owner's Capital, December 31, 2010 Proviso Company Balance Sheet December 31, 2010 Assets Cash Accounts receivable Supplies Land Total assets Liabilities $ 3,100 Accounts payable 1,500 Total Liabilities Owner's Equity 200 2,000 Owner's Capital Total liabilities and $ 6,800 owner's equity $ 6,800 $ $ 900 900 $ 2,000 2,480 2,820 $ 7,300 1,400 $ 5,900 $ 26,400 $ 2,400 16,680 2,700 1,800 23,580 $ 2,820

$ 5,900

Ch1 E11

Chapter 1, E 12. 1. Net income is: End: Beginning: $13,250 Assets $275,000 180,000 = = = Liabilities $150,500 68,750 + + + Owner's Equity $124,500 111,250 $ 13,250

Net income $40,750 2. Net income is: Change in Owner's Equity + Owner's withdrawals Net income $3,000 3. Net loss is: Change in Owner's Equity Owner's investments Net loss $29,750 4. Net income is: Change in Owner's Equity + Owner's withdrawals Owner's investments Net income

$ 13,250 27,500 $40,750 $ 13,250 16,250 ($3,000) $ 13,250 29,000 $42,250 12,500 $29,750

Ch1 E12

Chapter 1, E 13. Martin Service Company Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash flows from operating activities ($ 7,800) Increase in accounts receivable Increase in accounts payable 11,700 Net cash flows from operating activities Cash flows from investing activities Purchase of equipment Net cash flows from investing activities Cash flows from financing activities Borrowings from bank Owner's withdrawals Net cash flows from financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year Chapter 1, E 14. Mrs. Kitty's Cookies Statement of Owner's Equity For the Year Ended January 31, 2010 Owner's Capital, January 31, 2009 Net income for the year Subtotal Less withdrawals Owner's Capital, January 31, 2010

$ 38,000

3,900 $ 41,900

($125,000) ( 125,000) $ 78,000 19,500) 58,500 ($ 24,600) 55,900 $ 31,300

$105,000 54,490 $159,490 $159,490

Owner's equity represents the equity of the owner generated from the income-producing activities of the business and kept for use in the business. The owner of Mrs. Kitty's Cookies may have decided not to pay any withdrawals because she wanted to use the funds for other purposes such as to finance the company's growth or pay off debt.

Ch1 E13 to E14

Chapter 1, E 15. AICPA: SEC: PCAOB: GAAP: FASB: IRS: GASB: IASB: IMA: CPA: American Institute of Certified Public Accountants Securities and Exchange Commission Public Company Accounting Oversight Board Generally accepted accounting principles Financial Accounting Standards Board Internal Revenue Service Governmental Accounting Standards Board International Accounting Standards Board Institute of Management Accountants Certified public accountant

Ch1 E15

Chapter 1, P 1. 1. Matching completed Utilities expense Building Owner's capital Net income Land Equipment Revenues Accounts receivable BS IS OE IS BS BS IS Accounts payable Rent expense Withdrawals Fees earned Cash Supplies Wages expense

IS BS BS IS/OE BS BS IS BS 2.

User insight: Statement associated with profitability identified

The income statement is most closely associated with the goal of profitability.

Ch1 P1

Chapter 1, P 2. 1. Financial statements completed Set A Income Statement Revenues Expenses Net income Statement of Owner's Equity Beginning balance Net income Less withdrawals Ending balance Balance Sheet Total assets Liabilities Owner's equity Owner's capital Total liabilities and owner's equity 2. User insight: Income statement discussed The income statement must be prepared first because the amount of net income is necessary to determine the ending balance of owner's captial. The ending balance of owner's capital is necessary for the preparation of the balance sheet. $2,700 $ 600 2,100 $2,700 (e) (f) $18,000 $ 2,000 16,000 $18,000 (k) (l) (j) $1,900 $1,300 600 $1,900 (q) (r) $5,320 4,810 $ 510 $1,780 510 190 $2,100 Set B $ 8,600 7,000 $ 1,600 $15,400 1,600 1,000 $16,000 Set C $2,460 2,010 $ 450 $ 200 450 50 $ 600 (m) (n)

(a)

(g) (h)

(b) (c) (d)

(i)

(o) (p)

Ch1 P2

Chapter 1, P 3. 1. Financial statements prepared Special Assets Income Statement For the Year Ended December 31, 2011 Revenue Commission sales revenue Expenses Commissions expense Marketing expense Office rent expense Supplies expense Telephone and computer expenses Wages expense Total expenses Net income Special Assets Statement of Owner's Equity For the Year Ended December 31, 2011 Owner's Capital, December 31, 2010 Net income for the year Subtotal Less withdrawals Owner's Capital, December 31, 2011 Special Assets Balance Sheet December 31, 2011 Assets Cash Accounts receivable Supplies Equipment $ Liabilities 71,700 Accounts payable $ 3,600 22,700 4,500 Commissions payable Total liabilities 700 59,900 Owner's Equity Owner's Capital Total liabilities and 136,800 owner's equity $ 400,000 $ 225,000 20,100 36,000 2,600 5,100 32,000 320,800 $ 79,200

64,300 79,200 $ 143,500 33,000 $ 110,500

26,300

$ 110,500 $ 136,800

Total assets

Ch1 P3 (1)

Chapter 1, P 3. (Continued) 2. User insight: Useful statement identified The statement of cash flows is very useful in assessing whether a company's operations are generating sufficient funds to support expansion. The statement tells whether operations are producing enough cash or whether the company will need to obtain outside financing from creditors or owners.

Ch1 P3 (2)

Chapter 1, P 4. 1. Financial statements prepared Unique Ad Income Statement For the Year Ended January 31, 2010 Revenue Advertising service revenue Expenses Equipment rental expense Marketing expense Salaries expense Supplies expense Office rent expense Total expenses Net income Unique Ad Statement of Owner's Equity For the Year Ended January 31, 2010 Owner's Capital, January 31, 2009 Investments by owner Net income for the year Subtotal Less withdrawals Owner's Capital, January 31, 2010 Unique Ad Balance Sheet January 31, 2010 Assets Cash Accounts receivable Supplies Liabilities $ 1,800 Accounts payable $ 19,400 1,300 24,900 Salaries payable 1,600 Total liabilities Owner's Equity Owner's capital Total liabilities and $ 28,300 owner's equity 7,600 $ 28,300 $165,200 $ 37,200 6,800 86,000 19,100 13,500 162,600 $ 2,600

5,000 2,600 $ 7,600 $ $ 7,600

$ 20,700

Total assets

Ch1 P4 (1)

Chapter 1, P 4. (Continued) 2. User insight: Financial challenges identified The company is challenged both in terms of profitability and liquidity. Profitability is low in that it has earned only $2,600 on revenues of $165,200. Liquidity is low because the company has cash of only $1,800 and liabilities of $20,700.

Ch1 P4 (2)

Chapter 1, P 5. 1. User insight: Relationship of financial statements The income statement shows net income of $3,775 earned by the company over a period of time. The amount of net income is necessary for the preparation of the statement of owner's equity. The statement of owner's equity shows an ending balance of $42,850. The ending balance of owner's equity appears in the owner's equity section of the balance sheet. The statement of cash flows explains the changes in the cash balance on the balance sheet during the year. User insight: Liquidity and profitability The income statement is most closely associated with the goal of profitability, because it shows the earnings of the business. The cash flow statement is most closely associated with the goal of liquidity, because it shows the changes in cash. User insight: Company's performance evaluated The company appears to be very profitable because it has earned $3,775 of net income on revenues of $6,100. The owner also withdrew money in the amount of $2,400. However, the return on total assets (net income divided by total assets) is only 6.98 percent, or $0.0698 on each dollar of assets invested. Moreover, the company might experience some challenges in its liquidity position in the future because it has liabilities of $11,250 and cash of only $6,700. User insight: Role of CPA When deciding whether to make a loan to a company, a banker evaluates the company's ability to pay interest charges and repay the loan at the appropriate time. Accordingly, a banker studies the company's liquidity and cash flows as well as its profitability. That information is represented in financial statements, which are prepared by a company's management and can be falsified for personal gain. To lend credibility to the financial statements, the banker may request an independent CPA audit. The audit would verify that the financial statements present the data fairly and conform to GAAP in all material respects.

2.

3.

4.

Ch1 P5

Chapter 1, P 6. 1. Financial statements completed Set A Income Statement Revenue Expenses Net income Statement of Owner's Equity Beginning balance Net income Less withdrawals Ending balance Balance Sheet Total assets Liabilities Owner's equity Owner's capital Total liabilities and owner's equity $4,690 (d) $1,600 3,090 (e) $4,690 (f) $30,000 $ 5,000 25,000 (k) $30,000 (l) $580 (q) $300 (r) 280 $580 $1,200 810 (a) $ 390 (b) $2,900 390 (c) 200 $3,090 Set B $ 6,600 (g) 5,000 $ 1,600 (h) $24,400 1,600 1,000 (i) $25,000 (j) Set C $240 92 (m) $ 148 $240 148 (n) 108 (o) $280 (p)

2. User insight: Financial statement order explained The income statement must be prepared first because the amount of net income is necessary to determine the ending balance of owner's equity. The statement of owner's equity is prepared second because it provides the ending balance of owner's equity for the balance sheet, which is prepared last.

Ch1 P 6

Chapter 1, P 7. 1. Financial statements prepared Metro Labs Income Statement For the Year Ended November 30, 2011 Revenue Design service revenue Expenses Salaries expense Marketing expense Office rent expense Supplies expense Total expenses Net income Metro Labs Statement of Owner's Equity For the Year Ended November 30, 2011 Owner's Capital, November 30, 2010 Net income for the year Subtotal Less withdrawals Owner's Capital, November 30, 2011 Metro Labs Balance Sheet November 30, 2011 Assets Cash Accounts receivable Supplies $115,750 Accounts payable 51,900 Salaries payable 800 Total liabilities Liabilities $ 7,400 2,700 $ 10,100 $300,000 $ 96,000 19,700 50,000 6,350 172,050 $127,950

$ 70,400 127,950 $198,350 40,000 $158,350

Owner's Equity Owner's Capital Total liabilities and $168,450 owner's equity $158,350 $168,450

Total assets

2. User insight: Ability to pay bills evaluated The company's ability to pay its bills or its liquidity appears good because it has cash of $115,750 and total liabilities of only $10,100.

Ch1 P 7

Chapter 1, P 8. 1. Financial statements prepared Giordano's Pizza Income Statement For the Year Ended September 30, 2010 Revenue Pizza revenue Expenses Equipment rental expense Marketing expense Salaries expense Supplies expense Truck rent expense Total expenses Net income Giordano's Pizza Statement of Owner's Equity For the Year Ended September 30, 2010 Owner's Capital, September 30, 2009 Investments by owner Net income for the year Subtotal Less withdrawals Owner's Capital, September 30, 2010 Giordano's Pizza Balance Sheet September 30, 2010 Assets Cash Accounts receivable Supplies Equipment $ 2,600 Accounts payable 13,200 Salaries payable 400 Total liabilities 6,300 Liabilities $ 10,500 700 $ 11,200 $ 82,000 $ 2,900 1,500 56,000 4,100 7,200 71,700 $ 10,300

$ 2,000 10,300 $ 12,300 1,000 $ 11,300

Owner's Equity Owner's capital Total liabilities and $ 22,500 owner's equity $ 11,300 $ 22,500

Total assets

2. User insight: Form of business discussed The sole proprietorship has several advantages over the partnership including not being required to pay income taxes; the owner pays income taxes from withdrawals from the company.

Ch1 P8

Chapter 1, P 9. 1. Financial statements completed Set X Income Statement Revenue Expenses Net income Statement of Owner's Equity Beginning balance Net income Less withdrawals Ending balance Balance Sheet Total assets Liabilities Owner's Equity Owner's capital Total liabilities and owner's equity $4,600 $1,600 3,000 $4,600 (e) (f) (d) $31,000 $ 5,000 26,000 $31,000 (k) (l) $580 $300 280 $580 (q) (r) $1,100 800 $ 300 $2,900 300 200 $3,000 Set Y $ 6,800 5,200 $ 1,600 $24,400 1,600 $26,000 (g) (h) Set Z $240 160 $ 80 $340 80 40 $280

(a) (b)

(m)

(c)

(i) (j)

(n) (o) (p)

2. User Insight: Financial statement order explained The income statement must be prepared first because the amount of net income is necessary to determine the ending balance of owner's equity. The statement of owner's equity is prepared second because it provides the ending balance of owner's equity for the balance sheet, which is prepared last.

Ch 1 P9

Chapter 1, P 10. 1. Financial statements prepared Brad Realty Income Statement For the Year Ended December 31, 2011 Revenue Commission sales revenue Expenses Commissions expense Marketing expense Office rent expense Supplies expense Telephone and computer expenses Wages expense Total expenses Net income Brad Realty Statement of Owner's Equity For the Year Ended December 31, 2011 Owner's Capital, December 31, 2010 Net income for the year Subtotal Less withdrawals Owner's Capital, December 31, 2011 Brad Realty Balance Sheet December 31, 2011 Assets Cash Accounts receivable Supplies Equipment Liabilities $ 91,600 Accounts payable $ 3,600 22,700 4,500 Commissions payable 700 Total liabilities 59,900 Owner's Equity Owner's capital Total liabilities and $ 156,700 owner's equity $ $ 225,000 29,200 36,000 2,600 5,100 32,000 329,900 $ 120,100 450,000

$ $ $

50,300 120,100 170,400 40,000 130,400

$ 26,300

130,400 $ 156,700

Total assets

Ch1 P10(1)

Chapter 1, P 10. (Continued) 2. User insight: Financial challenges identified The statement of cash flows is very useful in assessing whether a company's operations are generating sufficient funds to support expansion. The statement tells whether operations are producing enough cash or whether the company will need to obtain outside financing from creditors or owners.

Ch1 P10(2)

Chapter 1, C 1. The three basic activities Costco will engage in to achieve its goals are financing activities (obtaining adequate funds or capital to operate its business), investing activities (spending the capital it receives so that it will be productive), and operating activities (running its business). Financing activities include obtaining capital from owners and from creditors, such as banks and suppliers. They also include repaying creditors and paying a return to the owners. Investing activities include buying land, buildings, equipment, and other long-lived resources needed in the operation of the business and the sale of these resources when they are no longer needed by the business. Operating activities include selling merchandise and services to customers; employing managers and workers; buying, producing, and selling goods and services. Costco's management is the group of people who have overall responsibility for operating the business and for meeting the company's profitability and liquidity goals. The functions management must perform to fulfill its responsibility are obtaining financial resources so the company can continue operating (financial management); investing the financial resources of the business in productive assets that support the company's goals (asset management); developing and producing goods and services (operations management); selling, advertising, and distributing goods and services (marketing management); hiring, evaluating, and compensating employees (human resource management); and capturing, organizing, and communicating data about all aspects of the company's operations (information management). Accounting is covered by the last function. Chapter 1, C 2. Assets are economic resources owned by a business that are expected to benefit future operations. The people in an organization are not assets of the business because they are not owned by the business. Businesses pay their employees on a periodic basis (hourly, weekly, monthly, annually); they do not buy employees. Salaries, wages, and other costs associated with employment are considered expenses and appear on the income statement. Southwest Airlines considers its people to be its most important asset because of the costs of hiring, training, motivating, and compensating high-quality employees who will benefit future operations. Airlines depend on their ability to develop and keep competent and motivated individuals. And their success in attracting and retaining high-quality employees depends on the opportunities and compensation they provide.

Ch1 C1 to C2

Chapter 1, C 3. Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures necessary to define accepted practice at a particular time. When financial statements are prepared in accordance with GAAP and audited by an independent CPA, financial analysts will understand the significance of the amounts in the financial statements and will be able to assess a company's performance with confidence. Some bodies that influence GAAP are as follows: Public Companies Accounting Oversight Board (PCAOB): Regulates accountanting profession and determines standards for auditors Financial Accounting Standards Board (FASB): The most important body that issues rules on accounting practice. American Institute of Certified Public Accountants (AICPA): Influences accounting practice through its senior technical committees. Governmental Accounting Standards Board (GASB): Sets accounting standards for government entities. International Accounting Standards Board (IASB): Sets international accounting standards. Internal Revenue Service (IRS): Influences practice through rules for determining income tax liabilities. Securities and Exchange Commission (SEC): set and enforce accounting practices for companies whose securities are offered for sale to the general public.

Ch1 C3

Chapter 1, C 4. The ethical situations are presented for discussion purposes. Students are likely to have many different viewpoints. 1. The alternative courses of action are to disclose or not to disclose the employee's hourly rate. The information should not be disclosed because of its confidential nature. 2. The alternative courses of action are to ignore the inappropriate expenses or to report them to the home office. It might also be possible to discuss them with the manager in private. This is a difficult situation because of the possibility of retribution. If the manager does not take appropriate remedial action, the accountant should report his actionsand be prepared to look for another job. The alternative courses of action are to accept the gift or to return it. To avoid a conflict of interest, the appropriate action would be to return the gift. This is a common problem faced by young accountants. The alternative courses of action are to do the work and not report it, to do the work and report it, or to talk to a superior as soon as the problem is recognized. The third alternative is the best because there may be some other reason that the job cannot be done in the allotted time. Underreporting hours usually is not tolerated by CPA firms. The alternative courses of action are to report or not to report the $200 in cash. Accountants must maintain their integrity, which means being honest. The $200 should be reported; it would be illegal not to report it. The courses of action are to disclose the investment or not to disclose the investment. A CPA must avoid even the appearance of a conflict of interest. To be independent, the CPA should disclose the investment and then sell the stock.

3. 4.

5.

6.

Ch1 C4

Chapter 1, C 5. 1. The names CVS gives its four basic financial statements are as follows: Consolidated Statements of Operations (Income Statement) Consolidated Balance Sheets Consolidated Statements of Shareholders' Equity; includes data for retained earnings Consolidated Statements of Cash Flows 2. The accounting equation for CVS on December 31, 2008, is as follows: (in millions) Assets = Liabilities + Stockholders' Equity $60,959.9 = $26,385.5 + $34,574.4 3. Total revenues of CVS for the year ended December 31, 2008 were $87,471.9 million. 4. Yes. The company earned $3,212.1 million. This was an increase from net earnings of $2,637.0 million for the year ended December 31, 2007. (Note: Preference dividends are distributions to owners.) 5. Yes, the company's cash and cash equivalents increased by $295.8 million. This number can be found toward the bottom of the statement of cash flows or can be computed by taking the difference of the cash and cash equivalents from the 2007 and 2008 balance sheets. 6. Cash flows provided by operating activities increased from 2007 to 2008. Cash flows used in investing activities increased from 2007 to 2008. Cash flows provided by financing activities increased from 2007 to 2008. 7. CVS was audited by Ernst & Young LLP. The auditor's report is important because it tells whether or not the company's financial statements and accompanying information are prepared in accordance with generally accepted accounting principles. If this is so, then the reader of the financial statements can rely on them and analyze them. The auditor's report lends credibility to the financial statements.

Ch1 C 5

Chapter 1, C 6. 1. With sales of $87,471.9 million and total assets of $60,659.9 million, CVS is larger than Southwest, which has revenues of $11,023 million and total assets of $14,308 million. Note that CVS generates almost 8 times as much sales on about 4 times the total assets of Southwest. Neither assets nor revenues are better than the other to measure the size of a company. Assets tell how large a company's resources are, and revenues tell how well the company is able to generate revenue. Both are useful measures of a company's size. 2. CVS has net income (earnings) of $3,212.1 million, which is about 18 times more than Southwest's earnings of $178 million. CVS has had increasing net income over the three years, whereas Southwest's net income rose from 2006 to 2007 and declined greatly from 2007 to 2008. 3. CVS has cash and cash equivalents of $1,352.4 million compared to Southwest's cash and cash equivalents of $1,368 million. CVS's cash increased by $295.8 million compared to the $845 million decrease by Southwest. CVS had cash flows from operating activities of $3,947.1 million compared with Southwest's cash flows from operating activities of negative $1,521 million. Thus, by these measures CVS has more liquidity.

Ch1 C 6