1.19 (classifying financial statement...

pg. 1

1.19 (Classifying financial statement accounts.) a. NA. b. NI (revenue). c. CC. d. X. e. NA. f. CA. g. X (a footnote to the balance sheet would probably disclose the lawsuit). h. NI (expense). i. CA. j. CL. k. X (not recognized as a gain until the firm sells the land). l. RE. m. CL. n. NL.

pg. 2

1.22 (Johnson & Johnson; balance sheet relations.)

a. The given (boldface) and missing items appear below (amounts in millions).

Year 8 Year 9 Year 10 Year 11 Current Assets ............................ $ 11,132 $ 13,200a $ 15,450 $ 18,473 Noncurrent Assets ...................... 15,079 15,963 15,871 16,015 Total Assets ................................ $ 26,211 $ 29,163 $ 31,321 $ 34,488 Current Liabilities ...................... $ 8,162 $ 7,454 $ 7,140 $ 8,044c Noncurrent Liabilities ................ 4,459 5,496 5,373 2,211 Contributed Capital .................... 34 458 501 1,727 Retained Earnings ...................... 13,556 15,755 18,307b 22,506d Total Liabilities and Share- holders' Equity ....................... $ 26,211 $ 29,163 $ 31,321 $ 34,488

a$7,454 + $5,746 = $13,200. b$15,755 + $4,276 – $1,724 = $18,307. c$18,473 – $10,429 = $8,044. d$18,307 + $6,246 – $2,047 = $22,506. b. The proportion of total assets comprising noncurrent assets decreased between

Year 8 and Year 11. The dollar amount of noncurrent assets remained relatively steady, suggesting that Johnson & Johnson replaced property, plant and equipment in approximately the same amount as depreciation each year.

c. Noncurrent liabilities declined and shareholders’ equity increased as proportions

of total financing over the four-year period. Johnson & Johnson reduced the dollar amount of its long-term liabilities in Year 11. Its net income increased each year in an amount larger than dividends, resulting in an increase in retained earnings.

pg. 3

1.29 (Amazon.com; statement of cash flows relations.)

a. AMAZON.COM Statement of Cash Flows (Amounts in Thousands)

Year 10 Year 11 Year 12 Operations: Revenues Providing Cash ........... $ 2,753,398 $ 3,143,165 $ 3,892,988 Expenses Using Cash ................. (2,883,840) (3,262,947) (3,718,697) Cash Flow from Operations ............ $ (130,442) $ (119,782) $ 174,291 Investing: Acquisition of Property and Equipment .............................. $ (134,758) $ (50,321) $ (39,163) Sale (Purchase) of Market- able Securities (net) ................ 361,269 (196,775) (82,521) Acquisition of Investments in Other Companies ............... (62,533) $ (6,198) $ 0 Cash Flow from Investing ............... $ 163,978 $ (253,294) $ (121,684) Financing: Increase in Long-term Debt ........ $ 681,499 $ 10,000 $ 0 Increase in Common Stock ......... 44,697 116,456 121,689 Decrease in Long-term Debt ...... (33,049) (19,575) (14,795) Other Financing Activities ......... (37,557) (15,958) 38,471 Cash Flow from Financing.............. $ 655,590 $ 90,923 $ 145,365 Change in Cash ............................... $ 689,126 $ (282,153) $ 197,972 Cash, Beginning of Year ................. 133,309 822,435 540,282 Cash, End of Year ........................... $ 822,435 $ 540,282 $ 738,254

pg. 4

b. Cash flow from operations was negative during Year 10 and Year 11 as a result of an apparently rapid growth in revenues. The need to finance inventories likely reduced operating cash flows. Cash flow from operations turned positive in Year 12, despite another apparent rapid increase in revenues. Perhaps the firm experienced better control of its inventories or delayed paying its suppliers. Expenditures on property, plant, and equipment were largest in Year 10 during the firm’s high growth phase and then declined in Year 11 and Year 12 as the firm used its available capacity. Amazon.com sold marketable securities and issued long-term debt and common stock during Year 10 to make up the negative cash flow from operations and the amounts needed to acquire property, plant and equipment. It financed the negative cash flow from operations in Year 11 and the cash needed for acquisitions of property, plant, and equipment by issuing common stock and reducing the balance in its cash account. The positive cash flow from operations in Year 12 was more than sufficient to finance the reduced level of expenditures on property, plant, and equipment. The firm used the excess cash flow from operations over capital expenditures plus the proceeds from issuing common stock to purchase marketable securities and to increase the balance in its cash account.

pg. 5

1.34 (Southwest Airlines; preparing a balance sheet and an income statement.) a. SOUTHWEST AIRLINES

Balance Sheet (Amounts in Thousands)

Dec. 31, Dec. 31, Year 8 Year 9

Assets Cash.......................................................................... $ 378,511 $ 418,819 Accounts Receivable ................................................ 88,799 73,448 Inventories................................................................ 50,035 65,152 Other Current Assets ................................................ 56,810 73,586 Total Current Assets ............................................ $ 574,155 $ 631,005 Property, Plant and Equipment (Net) ....................... 4,137,610 5,008,166 Other Noncurrent Assets .......................................... 4,231 12,942 Total Assets ......................................................... $ 4,715,996 $ 5,652,113

Liabilities and Shareholders' Equity

Accounts Payable ..................................................... $ 157,415 $ 156,755 Current Maturities of Long-Term Debt ................... 11,996 7,873 Other Current Liabilities .......................................... 681,242 795,838 Total Current Liabilities ...................................... $ 850,653 $ 960,466 Long-Term Debt ...................................................... 623,309 871,717 Other Noncurrent Liabilities .................................... 844,116 984,142 Total Liabilities ................................................... $ 2,318,078 $ 2,816,325 Common Stock......................................................... $ 352,943 $ 449,934 Retained Earnings .................................................... 2,044,975 2,385,854 Total Shareholders' Equity .................................. $ 2,397,918 $ 2,835,788 Total Liabilities and Shareholders' Equity .............................................................. $ 4,715,996 $ 5,652,113

pg. 6

b. SOUTHWEST AIRLINES

Income Statement (Amounts in Thousands)

For the Year Ended: Dec. 31, Year 9 Sales ...............................................................................$ 4,735,587 Interest Revenue............................................................... 14,918 Total Revenues.............................................................. $ 4,750,505 Salaries and Benefits Expense ......................................... (1,455,237) Fuel Expense .................................................................... (492,415) Maintenance Expense ...................................................... (367,606) Other Operating Expenses ............................................... (1,638,753) Interest Expense ............................................................... (22,883) Income Tax Expense ........................................................ (299,233) Net Income .......................................................................... $ 474,378 c. Retained Earnings, December 31, Year 8 ........................... $ 2,044,975 Plus Net Income for Year 9 ................................................ 474,378 Less Dividends Declared during Year 9 (Plug) .................. (133,499) Retained Earnings, December 31, Year 9 ........................... $ 2,385,854 d. Southwest Airlines made substantial investments in property, plant and equipment

during Year 9. It financed these expenditures with additional long-term debt, additional common stock, and the retention of earnings.

pg. 7

2.17 (Office Depot; asset recognition and valuation.) a. Prepaid Rent (current asset), $125,000; Security Deposit (noncurrent asset),

$130,000. b. Leasehold Improvements (noncurrent asset), $36,500 (= $10,000 + $6,500 +

$20,000). These expenditures prepare the rented facility for its intended use as a retail store.

c. Equipment or Fixtures (noncurrent asset), $31,400 [= .98 X $30,000) + $1,200 +

$800]. The latter two expenditures prepare the display counters for their intended use.

d. Accounting does not recognize an asset for the future services of employees. e. Accounting does not recognize any portion of expenditures on advertising as

assets because any future benefits of the advertising are too uncertain. f. Merchandise Inventory (current asset) $145,600 [= (.98 X $120,000) + $40,000 –

$12,000]. One might argue that Office Depot should reduce the acquisition cost of the $28,000 (= $40,000 – $12,000) of merchandise that it has not yet paid for by the 2 percent discount. It is possible, however, that cash discounts are not available on this merchandise. If Office Depot takes advantage of any discounts when it pays for this merchandise, it will reduce the acquisition cost at that time.

pg. 8

2.18 (Liability recognition and valuation.) a. This arrangement is mutually unexecuted and therefore does not give rise

to a liability under GAAP. b. Advances from Customers (current liability), $72. c. Advances from Customers (noncurrent liability), $2 million.

d. Common stock does not meet the definition of a liability because the firm need not repay the funds in a particular amount at a particular time.

e. Notes payable (current liability), $100,000.

f. This arrangement is mutually unexecuted and therefore does not give rise to a liability under GAAP.

g. This arrangement is still mutually unexecuted and therefore does not give rise to a liability.

pg. 9

2.27 (Winkle Grocery Store; journal entries for various transactions.) (1) Cash ......................................................................... 30,000 Common Stock .................................................... 30,000

Assets = Liabilities +

Shareholders' Equity (Class.)

+30,000 +30,000 ContriCap

(2) Cash ......................................................................... 5,000 Notes Payable ..................................................... 5,000



+5,000 +5,000

(3) Prepaid Rent ........................................................... 12,000 Cash ..................................................................... 12,000



+12,000

–12,000

(4) Equipment .............................................................. 8,000 Cash ..................................................................... 8,000



+8,000

–8,000

(5) Merchandise Inventory .......................................... 25,000 Cash ..................................................................... 12,000

pg. 10

Accounts Payable ................................................ 13,000



+25,000 +13,000

–12,000

(6) Cash ......................................................................... 4,000 Advances from Customers .................................. 4,000



+4,000 +4,000

(7) Prepaid Insurance .................................................. 1,200 Cash ..................................................................... 1,200



+1,200

–1,200

(8) Prepaid Advertising ................................................ 600 Cash ..................................................................... 600



+600

–600

(9) The placing of an order does not give rise to a journal entry

because it represents a mutually unexecuted contract.

pg. 1

2.29 (Moulton Corporation; recording transactions and preparing a balance sheet.) a. T-accounts. Merchandise Prepaid Cash (A) Inventory (A) Insurance (A) (1) 800,000 500,000 (2) (3) 280,000 5,000 (4) (5) 12,000 (6) 300,000 245,000 (4) 12,000 (5) 343,000 275,000 12,000

Land (A) Building (A) Equipment (A) (2) 50,000 (2) 450,000 (7) 80,000 50,000 450,000 80,000 Accounts Payable (L) Note Payable (L) Loan Payable (L) (4) 250,000 280,000 (3) 80,000 (7) 300,000 (6) 30,000 80,000 300,000 Common Stock (SE) 800,000 (1) 800,000

pg. 12

2.29 a. continued. Transactions spreadsheet.

Balance Sheet Accounts Transactions, By Number and Description Balance:

Begin- ning of Period

Issue Common Stock for

Cash

Acquire Land and

Building for Cash

Acquire Inventory on

Account

Pay for Inventory

Purchases

Prepay Insurance

Borrow from Bank

Acquire Equip. and Issue Note

Balance: End of Period

1 2 3 4 5 6 7ASSETS Current Assets: Cash 800,000 -500,000 -245,000 -12,000 300,000 343,000 Inventory 280,000 -5,000 275,000 Prepaid Insurance 12,000 12,000 Total Current Assets - 630,000 Noncurrent Assets: Land 50,000 50,000 Building 450,000 450,000 Equipment 80,000 80,000 Total Noncurrent

Assets - 580,000 Total Assets - 1,210,000

LIABILITIES AND SHARE- HOLDERS' EQUITY Current Liabilities: Accounts Payable 280,000 -250,000 30,000 Note Payable 80,000 80,000 Total Current Liabilities - 110,000 Noncurrent Liabilities: Loan Payable 300,000 300,000 Total Noncurrent

Liabilities - 300,000 Total Liabilities - 410,000 Shareholders' Equity: Common Stock 800,000 800,000 Total Shareholders'

pg. 13

Total Liabilities and

Shareholders' Equity - 1,210,000

Imbalance, if Any - - - - - - - - -

Income Statement Accounts

pg. 14

2.29 continued. b. MOULTON CORPORATION Balance Sheet December 31, Year 12 Assets Current Assets: Cash ................................................................................. $ 343,000 Merchandise Inventories ................................................ 275,000 Prepaid Insurance ........................................................... 12,000 Total Current Assets ................................................... $ 630,000 Noncurrent Assets: Land ................................................................................. $ 50,000 Building ........................................................................... 450,000 Equipment ....................................................................... 80,000 Total Noncurrent Assets ............................................. $ 580,000 Total Assets ................................................................. $ 1,210,000 Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable ............................................................ $ 30,000 Note Payable ................................................................... 80,000 Total Current Liabilities ............................................ $ 110,000 Noncurrent Liabilities: Loan Payable ................................................................... $ 300,000 Total Liabilities ........................................................... $ 410,000 Shareholders’ Equity: Common Stock ................................................................ $ 800,000 Retained Earnings .......................................................... 0 Total Shareholders’ Equity ......................................... $ 800,000 Total Liabilities and Shareholders’ Equity ................ $ 1,210,000

pg. 15

3.18 (Neiman Marcus; revenue recognition.) February March April a. -- -- $ 800 b. -- $ 2,160 -- c. $ 39,200 -- -- d. -- $ 59,400 -- e. -- $ 9,000 $ 9,000 f. -- $ 9,000 $ 9,000

pg. 16

3.20 (Sun Microsystems; expense recognition.) June July August a. -- $ 15,000 $ 15,000 b. $ 4,560 -- -- c. -- $ 5,800 $ 6,300 d. $ 600 $ 600 $ 600 e. -- -- -- f. -- -- $ 4,500 g. $ 6,600 -- --

pg. 17

3.31 (Miscellaneous transactions and adjusting entries.) a. (1) Accounts Payable ............................................. 6,000 Notes Payable .............................................. 6,000



+6,000

–6,000

(2) Interest Expense [$6,000 X .10 X (30/360)] ..... 50 Interest Payable .......................................... 50



+50 –50 IncSt RE

b. (1) Cash ................................................................. 18,000 Advances from Customers .......................... 18,000



+18,000 +18,000

(2) Advances from Customers ($18,000 X 4/24) ... 3,000

Insurance Revenue ...................................... 3,000



–3,000 +3,000 IncSt RE

pg. 18

c. (1) Equipment ....................................................... 40,000 Cash ............................................................. 40,000



+40,000

–40,000

(2) Depreciation Expense [.25($40,000 –

$4,000)/4] ..................................................... 2,250 Accumulated Depreciation ...................... 2,250



–2,250 –2,250 IncSt RE

d. (1) Automobile ....................................................... 24,000 Cash ............................................................. 24,000



+24,000

–24,000

(2) Depreciation Expense [.5 X {($24,000 – $3,000)/3}] .................................................... 3,500

Accumulated Depreciation ...................... 3,500



–3,500 –3,500 IncSt RE

pg. 19

e. (1) Prepaid Rent .................................................... 12,000 Cash ............................................................. 12,000



+12,000

–12,000

(2) Rent Expense ................................................... 4,000

Prepaid Rent ................................................ 4,000



–4,000 –4,000 IncSt RE

f. (1) Office Supplies Inventory ................................ 7,000 Accounts Payable......................................... 7,000



+7,000 +7,000

(1) Accounts Payable ............................................. 5,000 Cash ............................................................. 5,000



–5,000 –5,000

(2) Office Supplies Expense ($7,000 – $1,500) ..... 5,500 Office Supplies Inventory ............................ 5,500

pg. 20



–5,500 –5,500 IncSt RE

21

3.33 (Moulton Corporation; analysis of transactions and preparation of income statement and balance sheet.) a. T-accounts. Cash (A) Accounts Receivable (A) √ 343,000 √ 0 (4) 1,400,000 950,000 (5) (2) 2,000,000 1,400,000 (4) 625,000 (6) 82,400 (7) √ 85,600 √ 600,000 Inventory (A) Prepaid Insurance (A) √ 275,000 √ 12,000 (1) 1,100,000 1,200,000 (3) 12,000 (9) √ 175,000 √ 0 Land (A) Building (A) √ 50,000 √ 450,000 √ 50,000 √ 450,000

Equipment (A) Accumulated Depreciation (XA) √ 80,000 0 √ 34,000 (10) √ 80,000 34,000 √ Accounts Payable (L) Note Payable (L) 30,000 √ 80,000 √ (5) 950,000 1,100,000 (1) (7) 80,000 180,000 √ 0 √ Interest Payable (L) Income Tax Payable (L) 0 √ 0 √ 24,000 (8) 41,040 (11) 24,000 √ 41,040 √

22

Loan Payable (L) Common Stock (SE) 300,000 √ 800,000 √ 300,000 √ 800,000 √ Retained Earnings (SE) Sales Revenue (SE) 0 √ (12) 2,000,000 2,000,000 (2) 61,560 (12) 61,560 √ Selling and Cost of Goods Sold (SE) Administrative Expense (SE) (3) 1,200,000 1,200,000 (12) (6) 625,000 625,000 (12) Interest Expense (SE) Insurance Expense (SE) (7) 2,400 (9) 12,000 12,000 (12) (8) 24,000 26,400 (12)

Depreciation Expense (SE) Income Tax Expense (SE) (10) 34,000 34,000 (12) (11) 41,040 41,040 (12)

23

See the following page for the transactions spreadsheet. b. MOULTON CORPORATION Income Statement For Year 13 Sales Revenue .................................................................. $ 2,000,000 Expenses: Cost of Goods Sold ....................................................... $ 1,200,000 Selling and Administrative Expenses ........................ 625,000 Insurance ..................................................................... 12,000 Depreciation ................................................................ 34,000 Interest ($2,400 + $24,000) ......................................... 26,400 Total Expenses ........................................................ $ 1,897,400 Net Income before Income Taxes .................................... $ 102,600 Income Tax Expense at 40 Percent ................................ (41,040) Net Income ....................................................................... $ 61,560


Balance Sheet Accounts Transactions, By Number and Description

Balance: Beginning of Period

Acquire Inventory

on Account

Sell Inventory

on Account

Recog. COGS

Collect Accts. Rec.

Pay Accts. Pay.

Pay S&A Expenses

Repay Note

Payable

Recog. Int. on Bank Loan

Recog. Insur.

Expired

Recog. Depre.

Recog. Inc. Tax

Exp.


1 2 3 4 5 6 7 8 9 10 11

ASSETS

Current Assets:

Cash 343,000 1,400,000 -950,000 -625,000 -82,400 85,600

Accounts Receivable 2,000,000 -1,400,000 600,000

Inventory 275,000 1,100,000 -1,200,000 175,000

Prepaid Insurance 12,000 -12,000 0

Total Current Assets 630,000 860,600

Noncurrent Assets:

Land 50,000 50,000

Building 450,000 450,000

Equipment 80,000 80,000

Accumulated

Depreciation

-34,000

(34,000)

Total Noncurrent Assets 580,000 546,000

Total Assets 1,210,000 1,406,600

LIABILITIES AND SHARE-

HOLDERS' EQUITY

Current Liabilities:

Accounts Payable 30,000 1,100,000 -950,000 180,000

Note Payable 80,000 -80,000 -

Interest Payable 24,000 24,000

Income Tax Payable 41,040 41,040

Total Current Liabilities 110,000 245,040

Noncurrent Liabilities:

Loan Payable 300,000 300,000

Total Noncurrent

Liabilities

300,000

300,000

Total Liabilities 410,000 545,040

Shareholders' Equity:

Common Stock 800,000 800,000

Retained Earnings 2,000,000 -1,200,000 -625,000 -2,400 -24,000 -12,000 -34,000 -41,040 61,560

Total Shareholders'

Equity

800,000

861,560


Shareholders' Equity

1,210,000

1,406,600

Imbalance, if Any - - - - - - - - - - - - -


Sales Rev. COGS S&A Exp. Int. Exp. Int. Exp. Insur.

Exp.

Depre. Exp.

Inc Tax Exp.

2

3.33 continued. c. MOULTON CORPORATION Comparative Balance Sheet December 31, December 31, Year 12 Year 13

Assets Cash ............................................................. $ 343,000 $ 85,600 Accounts Receivable ................................... 0 600,000 Inventories .................................................. 275,000 175,000 Prepaid Insurance ...................................... 12,000 0 Total Current Assets .............................. $ 630,000 $ 860,600 Land (at Cost) ............................................. $ 50,000 $ 50,000 Building ....................................................... 450,000 450,000 Equipment .................................................. 80,000 80,000 Less Accumulated Depreciation ................. 0 (34,000) Land, Building, and Equipment (Net) ....... $ 580,000 $ 546,000 Total Assets ............................................. $ 1,210,000 $ 1,406,600

Liabilities and Shareholders' Equity Accounts Payable ........................................ $ 30,000 $ 180,000 Notes Payable ............................................. 80,000 0 Interest Payable .......................................... 0 24,000 Income Tax Payable .................................... 0 41,040 Total Current Liabilities ........................ $ 110,000 $ 245,040 Loan Payable .............................................. 300,000 300,000 Total Liabilities ...................................... $ 410,000 $ 545,040 Common Stock ............................................ $ 800,000 $ 800,000 Retained Earnings ...................................... 0 61,560 Total Shareholders' Equity .................... $ 800,000 $ 861,560 Total Liabilities and Shareholders' Equity .................................................. $ 1,210,000 $ 1,406,600

28

2.30 (Regaldo Department Stores; recording transactions and preparing a balance sheet.) a. T-accounts. Merchandise Cash (A) Inventory (A) Prepaid Rent (A) (1) 500,000 20,000 (2) (5) 200,000 8,000 (6) (4) 60,000 4,000 (2) 3,200 (7) 60,000 (4) 156,800 (7) 12,000 (8) 247,200 188,800 60,000

Prepaid Insurance (A) Patent (A) Accounts Payable (L) (8) 12,000 (2) 20,000 (6) 8,000 200,000 (5) (2) 4,000 (7) 160,000 12,000 24,000 32,000 Common Stock (SE) 500,000 (1) 500,000

29


30

Balance Sheet Accounts Transactions, By Number and Description Balance:

B i iIssue

CPurchase P t t f

Order M h

Prepay R t

Receive M h

Return D f ti

Pay for M h

Prepay I

Balance: E d f 1 2 3 4 5 6 7 8

ASSETS Current Assets: Cash 500,000 -24,000 -60,000 -156,800 -12,000 247,200 Merchandise Inventory 200,000 -8,000 -3,200 188,800 Prepaid Rent 60,000 60,000 Prepaid Insurance 12,000 12,000 Total Current Assets - 508,000 Noncurrent Assets: Patent 24,000 24,000 Total Noncurrent Total Assets - 532,000

LIABILITIES AND SHARE- Current Liabilities: Accounts Payable 200,000 -8,000 -160,000 32,000 Total Current Liabilities - 32,000 Noncurrent Liabilities: Total Noncurrent Total Liabilities - 32,000 Shareholders' Equity: Common Stock 500,000 500,000 Total Shareholders' Total Liabilities and

Shareholders' Equity -

532,000

Imbalance, if Any - - - - - - - - - -


31

2.30 continued. b. REGALDO DEPARTMENT STORES Balance Sheet January 31, Year 8 Assets Current Assets: Cash ................................................................................. Ps 247,200 Merchandise Inventory ................................................... 188,800 Prepaid Rent ................................................................... 60,000 Prepaid Insurance........................................................... 12,000 Total Current Assets .................................................. Ps 508,000 Patent .............................................................................. 24,000 Total Assets ................................................................. Ps 532,000 Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable ............................................................ Ps 32,000 Total Current Liabilities ............................................ Ps 32,000 Shareholders’ Equity: Common Stock ................................................................ Ps 500,000 Retained

Earnings .............................................................................. 0 Total Shareholders’ Equity ......................................... Ps 500,000 Total Liabilities and Shareholders’ Equity................ Ps 532,000

32

3.34 (Regaldo Department Stores; analysis of transactions and preparation of income statementand balance sheet.) a. T-accounts. Cash (A) Accounts Receivable (A) √ 247,200 √ 0 (3a) 62,900 32,400 (4) (3a) 194,600 84,600 (6) (6) 84,600 2,700 (5) 205,800 (7a) 29,000 (7b) √ 124,800 √ 110,000

Inventory (A) Prepaid Rent (A) √ 188,800 √ 60,000 (2) 217,900 162,400 (3b) 4,200 (7a) 30,000 (11) √ 240,100 √ 30,000 Prepaid Insurance (A) Equipment (A) √ 12,000 1,000 (12) √ 0 (1) 90,000 √ 11,000 √ 90,000 Accumulated Depreciation (XA) Patent (A) 0 √ √ 24,000 1,500 (10) 400 (13) 1,500 √ √ 23,600 Accounts Payable (L) Note Payable (L) 32,000 √ 0 √ (7a) 210,000 217,900 (2) (7b) 29,000 90,000 (1) 10,900 √ 90,000 √ Compensation Payable (L) Utilities Payable (L) 0 √ 0 √ 6,700 (8) 800 (9) 6,700 √ 800 √

33

Interest Payable (L) Income Tax Payable (L) 0 √ 0 √ 900 (14) 5,610 (15) 900 √ 5,610 √ Common Stock (SE) Retained Earnings (SE) 500,000 √ 0 √ 13,090 (16) 500,000 √ 13,090 √

Sales Revenue (SE) Cost of Goods Sold (SE) (16) 257,500 257,500 (3a) (3b) 162,400 162,400 (16) Compensation Expense (SE) Utilities Expense (SE) (4) 32,400 (5) 2,700 (8) 6,700 39,100 (16) (9) 800 3,500 (16) Depreciation Expense (SE) Rent Expense (SE) (10) 1,500 1,500 (16) (11) 30,000 30,000 (16) Patent Insurance Expense (SE) Amortization Expense (SE) (12) 1,000 1,000 (16) (13) 400 400 (16) Interest Expense (SE) Income Tax Expense (SE) (14) 900 900 (16) (15) 5,610 5,610 (16)

34

Balance Sheet Accounts

Transactions, By Number and Description

Balance: Begin- ning of Period

Purchase Equip.

with Loan

Acquire Merchan. On Acct.

Sell Mer. For Cash & on Acct.

Recog. COGS

Paid Compen. To Emp.

Paid Utilitie

s

Collects Accts. Rec.

Pay Accts. Pay. With

Discount

Pay Accts. Pay. W/O

Discount

Recog. Unpaid Comp. Exp.

Recog. Unpaid

Util. Exp.

Recog. Depre. Exp.

Recog. Rent Exp.

Recog. Insur. Exp.

Recog. Patent Amort.

Recog. Int.

Exp.

Recog. Inc. Tax Exp.


1 2 3a 3b 4 5 6 7a 7b 8 9 10 11 12 13 14 15

ASSETS

Current Assets:

Cash 247,200 62,900 -32,400 -2,700 84,600 -205,800 -29,000 124,800

Accounts Receivable

194,600 -84,600 110,000

Merchandise

Inventories

188,800

217,900 -162,400 -4,200

240,100

Prepaid Rent 60,000 -30,000 30,000

Prepaid Insurance

12,000 -1,000 11,000

Total Current Assets

508,000 515,900

Noncurrent Assets:

Equipment 90,000 90,000

Accumulated

Depreciation

-1,500

(1,500)

Patent 24,000 -400 23,600

Total

35

Noncurrent

Assets

24,000 112,100

Total Assets 532,000 628,000

LIABILITIES AND SHARE-

HOLDERS' EQUITY

Current Liabilities:

Accounts Payable

32,000 217,900 -210,000 -29,000 10,900

Note Payable 90,000 90,000

Compensation Payable

6,700 6,700

Utilities Payable 800 800

Interest Payable 900 900

Income Tax Payable

5,610 5,610

Total Current Liabilities

32,000 114,910

Noncurrent Liabilities:

Total Noncurrent

Liabilities

-

-

Total Liabilities 32,000 114,910

Shareholders' Equity:

36

Common Stock 500,000 500,000

Retained Earnings

257,500 -162,400 -32,400 -2,700 -6,700 -800 -1,500 -30,000 -1,000 -400 -900 -5,610 13,090

Total Shareholders'

Equity

500,000

513,090


Shareholders' Equity

532,000

628,000

Imbalance, if Any

- - - - - -

-

- - - -

-

-

-

-

-

-

-

-


Sales Rev.

COGS Comp. Exp.

Utility Exp.

Comp. Exp.

Utility Exp.

Depre. Exp.

Rent

Exp.

Insur. Exp.

Amort. Exp.

Int.

Exp.

Income Tax Exp.

37

3.34 continued.

b. REGALDO DEPARTMENT STORES Income Statement For the Month of February Year 8 Sales Revenue ..................................................................... Ps 257,500 Expenses: Cost of Goods Sold .......................................................... Ps 162,400 Compensation (Ps32,400 + Ps6,700) .............................. 39,100 Utilities (Ps2,700 + Ps800) ............................................. 3,500 Depreciation .................................................................... 1,500 Rent ................................................................................. 30,000 Insurance ........................................................................ 1,000 Patent Amortization ....................................................... 400 Interest ............................................................................ 900 Total Expenses ............................................................ Ps 238,800 Net Income before Income Taxes ....................................... Ps 18,700 Income Tax Expense at 30 Percent .................................... (5,610) Net Income Ps 13,090

38

4.26 (Southwest Airlines; preparing a statement of cash flows from changes in balance sheet accounts.) a. SOUTHWEST AIRLINES Statement of Cash Flows For the Year (Amounts in Thousands) Operations: Net Income .................................................................. $ 474,378 Additions: Depreciation Expense .............................................. 264,088 Decrease in Accounts Receivable ............................ 15,351 Increase in Other Current Liabilities ..................... 114,596 Subtractions: Increase in Inventories ............................................ (15,117) Increase in Prepayments ......................................... (16,776) Decrease in Accounts Payable ................................. (660) Cash Flow from Operations ............................................. $ 835,860 Investing: Acquisition of Property, Plant and Equipment ......... $ (1,134,644) Increase in Other Non-operating Assets ................... (8,711) Cash Flow from Investing ............................................... $ (1,143,355) Financing: Increase in Long-term Debt ....................................... $ 244,285 Increase in Common Stock ......................................... 96,991 Payment of Dividendsa .............................................. (133,499) Increase in Non-operating Liabilities ........................ 140,026 Cash Flow from Financing .............................................. $ 347,803 Net Change in Cash ......................................................... $ 40,308 Cash, Beginning of Year .................................................. 378,511 Cash, End of Year ............................................................ $ 418,819

aNet Income of $474,378 less Increase in Retained Earnings of $340,879 = Dividends of $133,499.

39

4.26 continued.

b. Cash flow from operations exceeds net income primarily because of the addback for depreciation expense and increases in other current liabilities, so Southwest Airlines relied on long-term debt and common stock to make up the needed amount.

4.28 (Green Mountain Coffee Roasters; preparing a columnar work sheet for a statement of cash flows from changes in balance sheet accounts.) (Amounts in Thousands.) a. Balance Sheet Changes Operations Investing Financing (Increases) Decreases in Assets Accounts Receivable .................... $ (2,231) $ (2,231) Inventories.................................... 59 59 Prepayments ................................. 475 475 Property, Plant and Equip- ment (at Cost) .......................... (2,129) $ 2,468a (4,597) Accumulated Depreciation ........... 1,038 2,968 (1,930)a Other Noncurrent Assets .............. (434) (434) Increases (Decreases) in Liabilities and Share- holders’ Equity Accounts Payable ......................... 1,574 1,574 Other Current Liabilities .............. 560 560 Bonds Payable .............................. 2,827 $ 5,567 (2,740) Common Stock............................. (5,878) (5,878) Retained Earnings ........................ 4,213 4,213 Increase (Decrease) in Cash ......................................... $ 74 $ 7,184 $ (4,059) $ (3,051) aCash proceeds of sale are $538 thousand (= $2,468 – $1,930). b. Cash flow from operations approximately equaled net income plus depreciation. Accounts

receivable increased during the year. The firm appeared to increase accounts payable to finance the buildup in accounts receivable. Cash flow from operations was more than sufficient to finance capital expenditures. The firm used the excess cash flow and the proceeds of additional long-term borrowing to repay long-term debt and reacquire common stock.

4.37 (Flight Training Corporation; preparing and interpreting a statement of cash flows using aaccount work sheet.)

a. T-Account Work Sheet for Year 2 Cash √ 142

Operations

Net Income (1) 739 185 (2) Increase in Ac- Depreciation Expense (6) 1,425 counts Receiv- Increase in Accounts able Payable (8) 54 950 (3) Increase in Inven- Increase in Other Cur- tories rent Liabilities (12) 1,113 412 (4) Increase in Pre- Increase in Other Non- payments current Liabilities (13) 1,029

Investing Sale of Noncurrent 6,230 (5) Acquisition of Assets (7) 471 Property, Plant, and Equipment

Financing Increase in Long-Term 881 (9) Decrease in Notes Debt (11) 3,751 Payable Increase in Common Stock (14) 247 √ 313

4.37 a. continued.

Accounts Receivable Inventories √ 2,490 √ 602 (2) 185 (3) 950 √ 2,675 √ 1,552 Prepayments Property, Plant and Equipment √ 57 √ 17,809 (4) 412 (5) 6,230 √ 469 √ 24,039 Accumulated Depreciation Other Noncurrent Assets 4,288 √ √ 1,112 1,425 (6) 471 (7) 5,713 √ √ 641 Accounts Payable Notes Payable 939 √ 1,021 √ 54 (8) (9) 881 993 √ 140 √ Current Portion— Long-Term Debt Other Current Liabilities 1,104 √ 1,310 √ 685 (10) 1,113 (12) 1,789 √ 2,423 √ Long-Term Debt Other Noncurrent Liabilities 6,738 √ -- √ (10) 685 3,751 (11) 1,029 (13) 9,804 √ 1,029 √ Common Stock Additional Paid-In Capital 20 √ 4,323 √ 1 (14) 246 (14) 21 √ 4,569 √ Retained Earnings 2,469 √ 739 (1) 3,208 √

4.37 a. continued.

T-Account Work Sheet for Year 3 Cash √ 313

Operations

Net Income (1) 594 2,199 (2) Increase in Ac- Depreciation Expense (6) 3,130 counts Receiv- Increase in Accounts able Payable (8) 5,286 962 (3) Increase in Inven- Increase in Other Cur- tories rent Liabilities (12) 9,701 360 (4) Increase in Pre- payments 129 (13) Decrease in Other Noncurrent Liabilities

Investing 52,936 (5) Acquisition of Property, Plant, and Equipment 24 (7) Acquisition of Other Noncur- rent Assets

Financing Increase in Notes Payable (9) 805 Increase in Long-Term Debt (11) 36,446 Increase in Common Stock (14) 918 √ 583

4.37 a. continued.

Accounts Receivable Inventories √ 2,675 √ 1,552 (2) 2,199 (3) 962 √ 4,874 √ 2,514 Prepayments Property, Plant and Equipment √ 469 √ 24,039 (4) 360 (5) 52,936 √ 829 √ 76,975 Accumulated Depreciation Other Noncurrent Assets 5,713 √ √ 641 3,130 (6) (7) 24 8,843 √ √ 665 Accounts Payable Notes Payable 993 √ 140 √ 5,286 (8) 805 (9) 6,279 √ 945 √ Current Portion— Long-Term Debt Other Current Liabilities 1,789 √ 2,423 √ 5,229 (10) 9,701 (12) 7,018 √ 12,124 √ Long-Term Debt Other Noncurrent Liabilities 9,804 √ 1,029 √ (10) 5,229 36,446 (11) (13) 129 41,021 √ 900 √ Common Stock Additional Paid-In Capital 21 √ 4,569 √ 1 (14) 917 (14) 22 √ 5,486 √ Retained Earnings 3,208 √ 594 (1) 3,802 √

4.37 a. continued.

T-Account Work Sheet for Year 4 Cash √ 583

Operations

Decrease in Prepay- 3,831 (1) Net Loss ments (4) 164 1,671 (2) Increase in Ac- Depreciation Expense (6) 8,388 counts Receiv- Increase in Accounts able Payable (8) 6,149 2,592 (3) Increase in Inven- Increase in Other Cur- tories rent Liabilities (12) 779 900 (13) Decrease in Other Noncurrent Liabilities

Investing Sale of Noncurrent 29,554 (5) Acquisition of Assets (7) 195 Property, Plant, and Equipment

Financing Increase in Long-Term 945 (9) Decrease in Notes Debt (11) 12,551 Payable Increase in Common Stock (14) 10,843 √ 159

4.37 a. continued.

Accounts Receivable Inventories √ 4,874 √ 2,514 (2) 1,671 (3) 2,592 √ 6,545 √ 5,106 Prepayments Property, Plant and Equipment √ 829 √ 76,975 164 (4) (5) 29,554 √ 665 √ 106,529 Accumulated Depreciation Other Noncurrent Assets 8,843 √ √ 665 8,388 (6) 195 (7) 17,231 √ √ 470 Accounts Payable Notes Payable 6,279 √ 945 √ 6,149 (8) (9) 945 12,428 √ 0 √ Current Portion— Long-Term Debt Other Current Liabilities 7,018 √ 12,124 √ 53,572 (10) 779 (12) 60,590 √ 12,903 √ Long-Term Debt Other Noncurrent Liabilities 41,021 √ 900 √ (10) 53,572 12,551 (11) (13) 900 0 √ 0 √ Common Stock Additional Paid-In Capital 22 √ 5,486 √ 12 (14) 10,831 (14) 34 √ 16,317 √ Retained Earnings 3,802 √ (1) 3,831 √ 29

4.37 continued.

b. FLIGHT TRAINING CORPORATION Statement of Cash Flows (Amounts in Thousands)

Year Ended December 31 Year 2 Year 3 Year 4 Operations: Net Income (Loss) .......................... $ 739 $ 594 $ (3,831) Depreciation ................................... 1,425 3,130 8,388 Increase (Decrease) in Other Non- current Liabilities ...................... 1,029 (129) (900) (Increase) Decrease in Accounts Receivable ................................... (185) (2,199) (1,671) (Increase) Decrease in Inventories (950) (962) (2,592) (Increase) Decrease in Prepay- ments .......................................... (412) (360) 164 Increase (Decrease) in Accounts Payable ....................................... 54 5,286 6,149 Increase (Decrease) in Other Cur- rent Liabilities ............................ 1,113 9,701 779 Cash Flow from Operations ............... $ 2,813 $ 15,061 $ 6,486 Investing: Acquisition of Property, Plant, and Equipment .................................. $ (6,230) $ (52,936) $ (29,554) Sale (Acquisition) of Other Non- current Assets ............................ 471 (24) 195 Cash Flow from Investing .................. $ (5,759) $ (52,960) $ (29,359) Financing: Increase (Decrease) in Notes Pay- able ............................................. $ (881) $ 805 $ (945) Increase (Decrease) in Long-Term Debt ............................................ 3,751 36,446 12,551 Increase in Common Stock ............ 247 918 10,843 Cash Flow from Financing ................. $ 3,117 $ 38,169 $ 22,449 Change in Cash .................................. $ 171 $ 270 $ (424) Cash, Beginning of Year .................... 142 313 583 Cash, End of Year .............................. $ 313 $ 583 $ 159

4.37 continued.

c. Cash flow from operations exceeded net income during Year 2 because of the addbacks for depreciation and other noncurrent liabilities. Changes in current assets just slightly exceeded changes in current liabilities, suggesting effective working capital management. Cash flow from operations was insufficient to fund expenditures on property, plant, and equipment. The firm primarily used long-term debt to finance the shortfall from operating cash flows in acquiring these fixed assets.

Net income declined between Year 2 and Year 3 but cash flow from operations increased significantly. The increased cash flow from operations, however, results primarily from increases in accounts payable and other current liabilities. The firm had insufficient cash to pay its suppliers and therefore stretched the payment time. The firm increased substantially its purchase of property, plant, and equipment during Year 3, financing its purchases with cash flow from operations and additional long-term debt. The use of operating cash flows to finance purchases of fixed assets is generally undesirable if it occurs as it does in this case from stretching short-term suppliers.

Net income turns negative in Year 4, primarily because of a substantial increase in depreciation expense from purchases of depreciable assets in the current and prior years. Cash flow from operations is positive because of the addback for depreciation expense and the continued stretching of accounts payable suppliers. Flight Training Corporation again spent significant amounts on property, plant, and equipment, financing the purchases in part with additional long-term debt and in part with issuances of common stock.

d. The cash flow problems of Flight Training Corporation trace to expanding fixed

assets too rapidly, relative to increases in sales, and to using cash flow from operations in part to finance the purchases. Sales increased 76.3 percent [= ($36,597/$20,758) – 1] between Year 2 and Year 3 while fixed assets increased 220.2 percent [= ($76,975/$24,039) – 1] between those years. Sales increased 50.3 percent [= ($54,988/$36,597) – 1] between Year 3 and Year 4 while fixed assets increased 38.4 percent [= ($106,529/$76,975) – 1]. For the two years as a whole, sales increased 164.9 percent [= ($54,988/$20,758) – 1] while depreciable assets increased 343.2 percent [= ($106,529/$24,039) – 1]. Although these sales increases are substantial, they are significantly less than the increase in fixed assets. Stretching creditors to purchase these fixed assets could jeopardize the availability of goods (for example, jet fuel) and services (pilots’ services) needed to remain in business.

4.34 (Hale Company; preparing and interpreting a statement of cash flows using a T-account work sheet.) a. HALE COMPANY Statement of Cash Flows For the Year Operations: Net Income $ 44,000 Additions: Depreciation Expense 54,000 Increase in Accounts Payable 5,000 Subtractions: Increase in Accounts Receivable (13,000) Increase in Inventory (11,000) Decrease in Interest Payable (2,000) Cash Flow from Operations $ 77,000 Investing: Sale of Equipment $ 5,000 Acquisition of Equipment (55,000) Cash Flow from Investing (50,000) Financing: Dividends $ (10,000) Retirement of Portion of Mortgage Payable (11,000) Cash Flow from Financing (21,000) Net Change in Cash $ 6,000 Cash, January 1 52,000 Cash, December 31 $ 58,000

4.34 a. continued.

The amounts in the T-account work sheet below are in thousands. Cash √ 52

Operations Net Income (1) 44 13 (5) Increase in Ac- Depreciation (3) 54 counts Receiv- Increase in Accounts able Payable (8) 5 11 (6) Increase in Inventory 2 (9) Decrease in Interest Payable

Investing Sale of Equipment (4) 5 55 (7) Acquisition of Equipment

Financing 10 (2) Dividends 11 (10) Payment of Mortgage Payable √ 58

Accounts Receivable Inventory Land √ 93 √ 151 √ 30 (5) 13 (6) 11 √ 106 √ 162 √ 30 Buildings and Accumulated Equipment (Cost) Depreciation Accounts Payable √ 790 460 √ 136 √ (7) 55 15 (4) (4) 10 54 (3) 5 (8) √ 830 504 √ 141 √

4.34 a. continued. Interest Payable Mortgage Payable Common Stock 10 √ 120 √ 250 √ (9) 2 (10) 11 8 √ 109 √ 250 √

Retained Earnings 140 √ (2) 10 44 (1) 174 √

4.34 continued. b. Deriving Direct Method Cash Flow from Operations Using Data from T-Account Work Sheet (All Dollar

Amounts in Thousands) 1. Copy Income Statement and Cash Flow from Operations; see Column (a) in the display below. 2. Copy Information from T-Account Work Sheet Next to Related Income Statement Item; see Columns (b) and (c) in th

display below. 3. Sum Across Rows to Derive Direct Receipts and Expenditures; see Column (d) in the display below.

Indirect

Changes in

Direct

From Operations:

Operations Method Related Balance Sheet Accounts from

T-Account Work Sheet

Method Receipts less Expenditures

(a) (b) (c) (d)

Revenues……………… $1,200 $ (13) = Accounts Receivable Increase $ 1,187 Receipts from Customers

Cost of Goods Sold…… (788) 5 = Accounts Payable Increase (794) Payments for Merchandise

(11) = Merchandise Inventory Increase

Wages and Salaries…… (280) -- = Other Current Liabilities Increase (280) Payments for Wages and Salari

Depreciation Expense…. (54) 54 (Expense Not Using Cash) --

Interest Expense……….. (12) (2) = Interest Payable Decrease (14) Payments for Interest

Income Tax Expense….. (22) -- = Income Taxes Payable Increase (22) Payments for Income Taxes

Net Income……………... $ 44 $ 44 Totals $ 77 = Cash Flow from Operations

Derived via Direct Method

$ 77 = Cash Flow from Operations Derived via

Indirect Method

4.34 continued.

c. Statement of Cash Flows presenting the direct method and reconciliation of income to cash flows from operations. HALE COMPANY Statement of Cash Flows For the Year Operating Activities: Sources of Cash: Cash Received from Customers ........................ $ 1,187,000 Uses of Cash: Payments to Suppliers ...................................... (794,000) Payments to Employees .................................... (280,000) Interest Payments ............................................. (14,000) Tax Payments .................................................... (22,000) Cash Flow from Operations ...................................... $ 77,000 Reconciliation of Net Income to Cash from Operations: Net Income ............................................................. $ 44,000 Depreciation ........................................................... 54,000 Changes in Operating Accounts: Accounts Receivable .......................................... (13,000) Inventory............................................................ (11,000) Accounts Payable ............................................... 5,000 Interest Payable ................................................ (2,000) Cash from Operations ............................................... $ 77,000 Investing Activities: Cash Used for New Acquisition of Equipment ..... $ (55,000) Cash Received from Disposition of Equipment .... 5,000 Net Cash Provided by (Used for) Investing .............. (50,000) Financing Activities: Cash Used for Dividends ....................................... $ (10,000) Cash Used to Repay Mortgage .............................. (11,000) Net Cash Provided by (Used for) Financing ............. (21,000) Net Change in Cash for Year .................................... $ 6,000 Cash, January 1 ......................................................... 52,000 Cash, December 31 .................................................... $ 58,000 d. Cash flow from operations was sufficient to finance acquisitions of equipment during the year. The firm used the excess cash flow to pay dividends and retire long-term debt.

57

6.21 (Heath Company; journal entries for the allowance method.) a. Year 6 Bad Debt Expense (.03 X $340,000) ........................ 10,200 Allowance for Uncollectible Accounts ................. 10,200



–10,200 –10,200 IncSt RE

Allowance for Uncollectible Accounts ..................... 1,800 Accounts Receivable ............................................ 1,800



+1,800

–1,800

Year 7 Bad Debt Expense (.03 X $450,000) ........................ 13,500 Allowance for Uncollectible Accounts ................. 13,500



–13,500 –13,500 IncSt RE




+8,300

–8,300

Year 8 Bad Debt Expense (.03 X $580,000) ........................ 17,400 Allowance for Uncollectible Accounts ................. 17,400

58



–17,400 –17,400 IncSt RE




+14,100

–14,100

b. Yes. Uncollectible accounts arising from sales of Years 6, 7 and 8

total $42,600, which equals 3.1 percent (= $42,600/$1,370,000) of total sales on account during the three year period.

6.33 (General Electric Company; income recognition for nuclear generator manufacturer.) a.1. Percentage-of-Completion Method Incremental Percentage Revenue Expenses Year Complete Recognized Recognized Income 2 42/120 (.35) $ 70,000,000 $ 42,000,000 $ 28,000,000 3 54/120 (.45) 90,000,000 54,000,000 36,000,000 4 24/120 (.20) 40,000,000 24,000,000 16,000,000 Total..... 120/120 (1.00) $ 200,000,000 $ 120,000,000 $ 80,000,000 2. Completed Contract Method Revenue Expenses Year Recognized Recognized Income 2 -0- -0- -0- 3 -0- -0- -0- 4 $ 200,000,000 $ 120,000,000 $ 80,000,000 Total.... $ 200,000,000 $ 120,000,000 $ 80,000,000 3. Installment Method Cash Fraction Expenses Collected of Cash (= Fraction X Year (= Revenue) Collected Total Cost) Income 2 $ 20,000,000 1/10 $ 12,000,000 $ 8,000,000 3 100,000,000 5/10 60,000,000 40,000,000 4 80,000,000 4/10 48,000,000 32,000,000 Total...... $ 200,000,000 1.00 $ 120,000,000 $ 80,000,000 4. Cost-Recovery-First Method Cash Collected Expenses Year (= Revenue) Recognized Income 2 $ 20,000,000 $ 20,000,000 -0- 3 100,000,000 100,000,000 -0- 4 80,000,000 -0- $ 80,000,000 Total..... $ 200,000,000 $ 120,000,000 $ 80,000,000 b. The percentage-of-completion method probably provides a better measure of performance over

the life of the contract because each period receives a portion of the net income from the contract. General Electric’s original estimates of the cost of the contract were correct. Also, the periodic payments from Consolidated Edison suggest that General Electric will probably collect cash in the amount of the contract price.

7.36 (Best Furniture, Inc.; preparation of journal entries and income statement for a manufacturing firm.) a. (1) Raw Materials Inventory .................................. 667,200 Accounts Payable ........................................... 667,200



+667,200 +667,200

(2) Work-in-Process Inventory ............................... 689,100 Raw Materials Inventory .............................. 689,100



+689,100

–689,100

(3) Work-in-Process Inventory ............................... 432,800 Selling Expenses ................................................ 89,700 Administrative Expenses .................................. 22,300 Cash ............................................................... 544,800



+432,800 –89,700 IncSt RE

–544,800 –22,300 IncSt RE

(4) Work-in-Process Inventory ............................... 182,900 Selling Expenses ................................................ 87,400 Administrative Expenses .................................. 12,200 Accumulated Depreciation ............................ 282,500



+182,900 –87,400 IncSt RE

–282,500 –12,200 IncSt RE

7.36 a. continued. (5) Work-in-Process Inventory ............................... 218,500 Selling Expenses ................................................ 55,100 Administrative Expenses .................................. 34,700 Cash ............................................................... 308,300



+218,500 –55,100 IncSt RE

–308,300 –34,700 IncSt RE

(6) Finished Goods Inventory ................................. 1,564,500 Work-in-Process Inventory ........................... 1,564,500



+1,564,500

–1,564,500

(7) Accounts Receivable .......................................... 2,400,000 Sales ............................................................... 2,400,000



+2,400,000 +2,400,000 IncSt RE

(8) Cost of Goods Sold ............................................. 1,536,600 Finished Goods Inventory ............................. 1,536,600



–1,536,600 –1,536,600 IncSt RE

$182,700 + $1,564,500 – $210,600 = $1,536,600.

7.36 continued. b. BEST FURNITURE, INC. Income Statement For the Month of January Sales ....................................................... ..... $ 2,400,000 Less Expenses: Cost of Goods Sold ... .................................. $ 1,536,600 Selling ....... ................................................. 232,200 Administrative ..... ..................................... 69,200 (1,838,000) Net Income ....... .............................................. $ 562,000 Note: Instead of using a functional classification of expenses (that is, selling,

administrative), classification by their nature (salary, depreciation, other operating) is acceptable.

1.19 (classifying financial statement...

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