Chapter 1: Introduction to Business Activities and Overview of
Financial Statements and the Reporting Process
Student: ___________________________________________________________________________
1. The activities of a business include establishing goals and strategies, obtaining financing, making investments
2. Goals are the end results toward which the firm directs its energies, and strategies are the
3. Each firm makes financing decisions about the proportion of funds to obtain from owners,
5. Patents, licenses, and other contractual rights are tangible, in the sense that the rights have a physical
7. Assets are economic resources with the potential to provide future economic benefits to
8. Liabilities are creditors’ claims for funds, usually because they have provided funds, or
9. Retained earnings represent the net assets (total assets - total liabilities) a firm derives
10. The amounts of individual assets that make up total assets, represented by accounts receivable, inventories,
11. The mix of liabilities plus shareholders’ equity reflects a firm’s investing decisions, each measured at the
13. Current assets, typically held and used for several years, include land, buildings,
14. Current liabilities and shareholders’ equity are sources of funds where the supplier of
15. The current replacement cost of an asset is the amount a firm would have to pay to obtain another asset with
16. The same asset can have different measurements for tax purposes, for financial reporting purposes, and for
18. The managers of a business prepare financial statements to present meaningful information
19. The independent external auditors of a business prepare financial statements to present meaningful
21. The historical amount reflects the acquisition cost of assets or the amount of funds originally obtained from
22. To assist users of financial reports in making over-time comparisons, both U.S. GAAP and IFRS require
23. U.S. GAAP and IFRS contain broad guidance on what the financial statements must contain, but neither
24. The cash basis separates the recognition of revenue from the process of earning those
25. The accrual basis does not match the cost of the efforts required to generate inflows with the
30. Management, under the oversight of the firm’s governing board (or boards), sets the firm’s strategies. Such
31. Examples of factors from the operating environment that would affect a firm’s goals and
32. To carry out their plans, firms require financing, that is, funds from owners and creditors. Owners provide
33. To carry out their plans, firms require financing, that is, funds from owners and creditors. When the firm
35. A firm makes investments to obtain productive capacity to carry out its business activities.
36. Management operates the productive capacity of the firm to generate earnings. Operating activities include
42. The number of days between when the employees and suppliers provide goods and services and when the
45. _____ represent amounts owed by customers for goods and services they have already received. The
46. Investments in long-lived assets, with useful lives (or service lives) that can extend for several or many
47. A _____ year ends on a date that is determined by the firm, perhaps based on its business model (for
49. A _____ item is expected to result in a cash receipt or a cash payment within approximately one year or
50. A(n) _____ item is expected to generate cash over periods longer than a year or use cash over periods longer
51. _____ are the amounts at which items entered the firm’s balance sheet and reflect economic conditions at
55. A _____ connects two successive balance sheets because it explains the change in cash from operating,
56. The _____ shows the relation between net income and cash flows from operations, and changes in assets
59. The balance sheet of Allhear, a communications firm, for the year ended December 31, 20x1, showed
current assets of $20 million, current liabilities of $16 million, shareholders’ equity of $17 million, and
noncurrent assets of $29 million.
60. The balance sheet of Old Gold Mines, a gold mining company, for the year ended June 30, 20x1, showed
current assets of $6 million, noncurrent assets of $49 million, noncurrent liabilities of $14 million, and current
liabilities of $4 million. Compute the amount of shareholders’ equity on Old Gold Mines’ balance sheet at the
61. The income statement of Ride-on Motors, an automotive manufacturer, for the year ended December 31,
20x1, reported revenues $7,400 million and cost of sales of $6,000 million. In addition, it reported other
operating expenses of $900 million, a loss of $2 million on the sale of a business, and net financing income of
$200 million. Tax expense for the year was $100 million. Compute the amount of net income or loss that
62. The income statement of Peoples Motors Corporation, a U.S. automotive manufacturer, for the year ended
December 31, 20x1, reported revenues of $207,000, cost of sales of $165,000, other operating expenses,
including income taxes of $50,000, and net financing income, after taxes, of $6,000. Compute the amount of
63. The balance sheet of Old Gold Mines for the year ended June 30, 20x2, showed a balance in retained
earnings of $6,000 million at the end of 20x2 and $4,600 million at the end of 20x1. Net income for 20x2 was
64. The balance sheet of Copper Industries, a producer of copper, showed retained earnings of $26,000 million
at March 31, 20x1. At March 31, 20x2, the balance in retained earnings was $70,500 million . Copper declared
dividends during the year ended March 31, 20x2, of $3,500 million. Compute Copper’s net income for the year
65. The statement of cash flows for Goal Corporation, a U.S. retailer, for the year ended February 2, 20x2
(fiscal 20x1), showed a net cash inflow from operations of $4,100 million, a net cash outflow for investing of
$6,200 million, and a net cash inflow for financing of $3,700 million. The balance sheet at February 3, 20x1,
showed a balance in cash of $800 million. Compute the amount of cash on the balance sheet at February 2,
66. The statement of cash flows for Lights-On, a leading electric utility for the year ended December 31, 20x2,
showed a net cash inflow from operations of $427,000 million and a net cash outflow for financing of $21,800
million. The comparative balance sheets showed a balance in cash of $32,700 at December 31, 20x1, and
$101,200 at December 31, 20x2. Compute the net amount of cash provided or used by Lights-On’s investing
67. In the United States, regulatory requirements applicable to publicly traded firms require the inclusion
of a(n) _____, in which management discusses operating results, liquidity (sources and uses of cash), capital
69. _____ are creditors’ claims for funds, usually because they have provided funds, or goods and services, to
70. _____ measure the inflows of assets (or reductions in liabilities) from selling goods and providing services
72. The income statement and statement of cash flows provide information about the _____, respectively, of a
73. _____ reports information about cash generated from (or used by) operating, investing, and financing
74. The financial statements present aggregated information, for example, the total amount of land, buildings,
and equipment. Financial reports provide more detail for some of the items reported in the financial statements,
and they provide additional explanatory material to help the user to understand the information in the financial
78. The _____ is the government agency that enforces the securities laws of the U.S., including those that apply
79. Who evaluates the accounting system, including its ability to record transactions properly and its operational
effectiveness, and also determines whether the financial reports prepared conform to the requirements of the
81. Who provides an opinion that reflects their professional conclusions regarding the financial statements and
for most publicly traded firms in the U.S. also provides a separate opinion on the effectiveness of the firm’s
82. The managers of a business prepare financial statements to present meaningful information about that
83. Regulatory bodies generally require firms whose securities trade publicly (for example, common shares) to
85. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
information holds that the information should be pertinent to the decisions made by users of financial
86. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
information holds that the information should represent what it is supposed to represent, in the sense that the
information should correspond to the phenomenon being reported, and it should be verifiable and free from
87. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
88. Concerns over the quality of financial reporting have led, and continue to lead, to government initiatives in
the United States. For example, the _____, among other things, established the Public Company Accounting
Oversight Board (PCAOB), which is responsible for monitoring the quality of audits of SEC registrants. This
Act requires the PCAOB to register firms conducting independent audits of SEC registrants; establish or adopt
acceptable auditing, quality control, and independence standards; and provide for periodic inspections of the
89. _____ items are depicted in words and numbers on the face of the financial statements, with amounts
90. _____ captures the qualitative notion that financial reports need not include items that are so small as to be
91. The _____ is the private-sector financial accounting standard setter in the U.S., but has no enforcement
93. The purpose of the conceptual framework developed by the Financial Accounting Standards Board (FASB)
94. _____ is a private-sector financial accounting standard setter that promulgates accounting standards that are
95. As of 2011, the _____ is an independent accounting standard-setting entity with 15 voting members from a
C. American Institute of Certified Public Accountants (AICPA)
D. World Institute of Certified Public Accountants (WICPA)
E. International Institute of Certified Public Accountants (IICPA)
96. In 2007 the U.S. SEC adopted new rules that permit _____ that list and trade their securities in the United
101. The cash basis of accounting, as a basis for measuring performance for a particular accounting period,
102. The _____ basis of accounting typically recognizes revenue when a firm sells goods (manufacturing and
retailing firms) or renders services (service firms), and recognizes expenses in the period when the firm
103. The _____ matches revenues with the costs associated with earning those revenues and is not sensitive to
104. Broke Inc is experiencing a cash flow problem finding that its cash decreases, even though net income
105. The accrual basis of accounting is often contrasted with the cash basis of accounting. Which of the
106. The intermingling of performance of one period with that of preceding or succeeding periods is
characteristic of which basis of accounting?
107. Education Power is a charitable organization that promotes educational opportunities for inner city
108. Selected balance sheet amounts for Puff Group International Limited, a diversified electronics firm,
appears next, as of December 31, 2014, and December 31, 2013. Compute the missing amounts for the two
years.
December 31
2014 2013
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 ?
Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 ?
Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . ? $ 18,000
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . ? ?
Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000 127,000
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? 54,000
109. Use the abbreviations below to classify the following balance sheet items.
CA
- Current assets
NA
- Noncurrent assets
CL
- Current liabilities
NL
- Noncurrent liabilities
SE
- Shareholders' equity
X
- Item generally not appearing on a balance sheet
Balanc
e Sheet
Items
Examp
le
Corpo
ration,
Inc.
January
1, Year
110. Compute the missing balance sheet amounts in each of the three independent cases that follow:
111. Use the abbreviations below to classify the following income statement items.
R
Revenues
E
Expenses
X
Item generally not appearing on an income statement
Income
Statem
ent
Items
Examp
le
Corpo
ration,
Inc.
For the
year
ended
Decem
ber 31,
112. Compute the missing amounts affecting the net income for Year 1 in each of the five independent cases
that follow. Amounts shown are in thousands.
CASE A
CASE B
CASE C
CASE D
CASE E
Sales revenue
$650
B
$400
$800
$390
Cost of goods sold
300
$110
C
400
200
Selling and
administrative expenses
150
150
120
65
E
Income tax expense
56
30
55
D
0
Net income
A
10
75
235
(15)
113. Compute the missing amount affecting retained earnings for Year 2 in each of the five independent cases
that follow. Amounts shown are in millions.
CASE A
CASE B
CASE C
CASE D
CASE E
Retained earnings, Dec. 31, Year 1
$95
B
$75
$ 87
$175
Net income
30
$450
45
D
(50)
Dividends declared and paid
10
120
C
35
E
Retained earnings, Dec. 31, Year 2
A
670
60
105
75
114. Accountants classify various items on the balance sheet or the income statement in one of the following
ways:
CA
- Current assets
NA
- Noncurrent assets
CL
- Current liabilities
NL
- Noncurrent liabilities
CC
- Contributed capital
RE
- Retained earnings
115. Compute the missing amounts affecting the change in cash for Year 1 in each of the 5 independent cases
that follow. Amounts are in thousands.
CASE A
CASE B
CASE C
CASE D
CASE E
INFLOWS OF CASH:
Operations
$600
$450
$650
$(390)
E
New financing
200
120
C
400
$400
116. Determine the missing amount “X” for each of the following:
Assets
Liabilities
Shareholders’ Equity
117. Compute the missing information in each of the four independent cases below. The letters in parentheses
refer to the following:
BS
- Balance sheet
IS
- Income statement
SCF
- Statement of cash flows
a.
Accounts Receivable, Jan. 1, Year 2 (BS)
$ 500
Sales on Account for Year 2 (IS)
1900
Collections from Customers on Account during Year 2 (SCF)
1,350
Accounts Receivable, Dec. 31, Year 2 (BS)
-?-
118. (CMA adapted, Jun 94 #6) Accounting systems vary widely from one business to another, depending on
the size of the firm, the volume of data to be handled, and the nature of the business. An accounting system
should provide information for management decision-making and generate reports on the enterprise's financial
condition and operations. The accounting profession relies on general-purpose financial statements to provide
information to users; the intent of these general-purpose statements is to provide the most useful information
possible to diverse user groups at minimal cost. The principal financial statements used for public reporting
purposes are the statement of earnings (income statement), statement of financial position (balance sheet), and
statement of cash flows.
Required:
a.
Financi
al
stateme
nts
should
provide
inform
ation
that is
useful
to
users.
Describ
e the
level of
sophisti
cation
expecte
d of the
externa
l users
1.
Statement of earnings.
2.
Statement of financial position.
3.
Statement of cash flows.
1.
Explain the role of the notes to the financial statements.
2.
Explain management's responsibility for the financial statements.
3.
Explain the auditor's responsibility for the financial statements.
119. Here is data from Cellular Communications, Inc.
December 31
BALANCE SHEET ITEMS
Year 7
Year 6
Accounts Payable
$ 5,219
$ 7,873
Accounts Receivable
58,363
48,645
Bonds Payable (due Year 20)
10,313
4,602
Cash
821
668
Common Stock
560
540
Income Taxes Payable
414
580
Inventories
33,305
30,752
Other Current Assets
2,681
742
Other Current Liabilities
185
1,115
Other Noncurrent Assets
90
152
Property, Plant, and Equipment
21,881
15,972
Retained Earnings
99,969
81,627
Salaries Payable
481
594
INCOME STATEMENT ITEMS
Year 7
Administrative Expense
$ 20,588
Cost of Goods Sold
246,864
Income Tax Expense
7,267
Interest Expense
1,803
Sales Revenue
361,026
Salary and Wage Expense
21,367
Selling Expense
44,795
Required:
7. Identify the major changes and suggest possible explanations for the changes.
3. The Sarbanes-Oxley Act of 2002 requires the AICPA to register firms conducting
independent audits.
4. The FASB is an agency of the federal government that has the authority to establish accounting standards.
5. The governing board, or board of directors, is responsible for selecting, compensating, and overseeing
121. The balance sheet of Parler, a European Union communications firm, shows current assets of €21,000
million, current liabilities of €16,849 million, shareholders’ equity of €17,654 million, and noncurrent assets of
€30,402 million. What is the amount of noncurrent liabilities on Parler’s balance sheet?
122. Maeve Irwin is the CEO of Maeve’s Spa. At the end of its accounting period, December 31, 2013,
123. Hemd Company has liabilities equal to one fourth of the total assets. Hemd’s shareholders’equity
is €60,000. Using the accounting equation, what is the amount of liabilities for Hemd?
124. The following information is based on the financial statements of Hadley Company, a large manufacturer.
Annual revenues are $65,387 million and net expenses (including income taxes) are $62,313 million. During the
year, the firm collected $64,995 million in cash from customers and had cash outflows associated with
payments to suppliers and vendors of $56,411 million.
125. The following information is reported by ComCo, a Singapore company; all figures are in millions of
1. Calculate net income and its net cash flow.
2. Explain why ComCo’s net income is so much different than its net cash flow.
126. Describe some of the factors that would affect a firm’s goals and strategies.
129. Briefly list and describe the principal financial statements.
130. Explain the roles, duties, and responsibilities of managers and governing boards of reporting entities.
131. FASB board members make standard-setting decisions guided by a conceptual framework
132. Discuss internal and external users of accounting information. What areas of accounting provide them
with information? Give an example of the type of report each type of user might use.
133. What are the roles, duties, and responsibilities of the independent auditor?
134. Who are the users of financial statements and what do they need?
135. What is US GAAP?
136. Concerns over the quality of financial reporting have led, and continue to lead, to government
137. Briefly describe the International Accounting Standards Board (IASB) and who can use IFRS in the United
States?
139. Describe the accrual basis of accounting.
Chapter 1: Introduction to Business Activities and Overview of
Financial Statements and the Reporting Process Key
1. The activities of a business include establishing goals and strategies, obtaining financing, making investments
2. Goals are the end results toward which the firm directs its energies, and strategies are the
3. Each firm makes financing decisions about the proportion of funds to obtain from owners,
5. Patents, licenses, and other contractual rights are tangible, in the sense that the rights have a physical
7. Assets are economic resources with the potential to provide future economic benefits to
8. Liabilities are creditors’ claims for funds, usually because they have provided funds, or
9. Retained earnings represent the net assets (total assets - total liabilities) a firm derives
10. The amounts of individual assets that make up total assets, represented by accounts receivable, inventories,
11. The mix of liabilities plus shareholders’ equity reflects a firm’s investing decisions, each measured at the
13. Current assets, typically held and used for several years, include land, buildings,
14. Current liabilities and shareholders’ equity are sources of funds where the supplier of
15. The current replacement cost of an asset is the amount a firm would have to pay to obtain another asset with
16. The same asset can have different measurements for tax purposes, for financial reporting purposes, and for
18. The managers of a business prepare financial statements to present meaningful information
19. The independent external auditors of a business prepare financial statements to present meaningful
21. The historical amount reflects the acquisition cost of assets or the amount of funds originally obtained from
22. To assist users of financial reports in making over-time comparisons, both U.S. GAAP and IFRS require
23. U.S. GAAP and IFRS contain broad guidance on what the financial statements must contain, but neither
24. The cash basis separates the recognition of revenue from the process of earning those
25. The accrual basis does not match the cost of the efforts required to generate inflows with the
30. Management, under the oversight of the firm’s governing board (or boards), sets the firm’s strategies. Such
31. Examples of factors from the operating environment that would affect a firm’s goals and
32. To carry out their plans, firms require financing, that is, funds from owners and creditors. Owners provide
33. To carry out their plans, firms require financing, that is, funds from owners and creditors. When the firm
35. A firm makes investments to obtain productive capacity to carry out its business activities.
36. Management operates the productive capacity of the firm to generate earnings. Operating activities include
42. The number of days between when the employees and suppliers provide goods and services and when the
45. _____ represent amounts owed by customers for goods and services they have already received. The
46. Investments in long-lived assets, with useful lives (or service lives) that can extend for several or many
47. A _____ year ends on a date that is determined by the firm, perhaps based on its business model (for
49. A _____ item is expected to result in a cash receipt or a cash payment within approximately one year or
50. A(n) _____ item is expected to generate cash over periods longer than a year or use cash over periods longer
51. _____ are the amounts at which items entered the firm’s balance sheet and reflect economic conditions at
55. A _____ connects two successive balance sheets because it explains the change in cash from operating,
56. The _____ shows the relation between net income and cash flows from operations, and changes in assets
59. The balance sheet of Allhear, a communications firm, for the year ended December 31, 20x1, showed
current assets of $20 million, current liabilities of $16 million, shareholders’ equity of $17 million, and
noncurrent assets of $29 million.
60. The balance sheet of Old Gold Mines, a gold mining company, for the year ended June 30, 20x1, showed
current assets of $6 million, noncurrent assets of $49 million, noncurrent liabilities of $14 million, and current
liabilities of $4 million. Compute the amount of shareholders’ equity on Old Gold Mines’ balance sheet at the
61. The income statement of Ride-on Motors, an automotive manufacturer, for the year ended December 31,
20x1, reported revenues $7,400 million and cost of sales of $6,000 million. In addition, it reported other
operating expenses of $900 million, a loss of $2 million on the sale of a business, and net financing income of
$200 million. Tax expense for the year was $100 million. Compute the amount of net income or loss that
62. The income statement of Peoples Motors Corporation, a U.S. automotive manufacturer, for the year ended
December 31, 20x1, reported revenues of $207,000, cost of sales of $165,000, other operating expenses,
including income taxes of $50,000, and net financing income, after taxes, of $6,000. Compute the amount of
63. The balance sheet of Old Gold Mines for the year ended June 30, 20x2, showed a balance in retained
earnings of $6,000 million at the end of 20x2 and $4,600 million at the end of 20x1. Net income for 20x2 was
64. The balance sheet of Copper Industries, a producer of copper, showed retained earnings of $26,000 million
at March 31, 20x1. At March 31, 20x2, the balance in retained earnings was $70,500 million . Copper declared
dividends during the year ended March 31, 20x2, of $3,500 million. Compute Copper’s net income for the year
65. The statement of cash flows for Goal Corporation, a U.S. retailer, for the year ended February 2, 20x2
(fiscal 20x1), showed a net cash inflow from operations of $4,100 million, a net cash outflow for investing of
$6,200 million, and a net cash inflow for financing of $3,700 million. The balance sheet at February 3, 20x1,
showed a balance in cash of $800 million. Compute the amount of cash on the balance sheet at February 2,
66. The statement of cash flows for Lights-On, a leading electric utility for the year ended December 31, 20x2,
showed a net cash inflow from operations of $427,000 million and a net cash outflow for financing of $21,800
million. The comparative balance sheets showed a balance in cash of $32,700 at December 31, 20x1, and
$101,200 at December 31, 20x2. Compute the net amount of cash provided or used by Lights-On’s investing
67. In the United States, regulatory requirements applicable to publicly traded firms require the inclusion
of a(n) _____, in which management discusses operating results, liquidity (sources and uses of cash), capital
69. _____ are creditors’ claims for funds, usually because they have provided funds, or goods and services, to
70. _____ measure the inflows of assets (or reductions in liabilities) from selling goods and providing services
72. The income statement and statement of cash flows provide information about the _____, respectively, of a
73. _____ reports information about cash generated from (or used by) operating, investing, and financing
74. The financial statements present aggregated information, for example, the total amount of land, buildings,
and equipment. Financial reports provide more detail for some of the items reported in the financial statements,
and they provide additional explanatory material to help the user to understand the information in the financial
78. The _____ is the government agency that enforces the securities laws of the U.S., including those that apply
79. Who evaluates the accounting system, including its ability to record transactions properly and its operational
effectiveness, and also determines whether the financial reports prepared conform to the requirements of the
81. Who provides an opinion that reflects their professional conclusions regarding the financial statements and
for most publicly traded firms in the U.S. also provides a separate opinion on the effectiveness of the firm’s
82. The managers of a business prepare financial statements to present meaningful information about that
83. Regulatory bodies generally require firms whose securities trade publicly (for example, common shares) to
85. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
information holds that the information should be pertinent to the decisions made by users of financial
86. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
information holds that the information should represent what it is supposed to represent, in the sense that the
information should correspond to the phenomenon being reported, and it should be verifiable and free from
87. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
88. Concerns over the quality of financial reporting have led, and continue to lead, to government initiatives in
the United States. For example, the _____, among other things, established the Public Company Accounting
Oversight Board (PCAOB), which is responsible for monitoring the quality of audits of SEC registrants. This
Act requires the PCAOB to register firms conducting independent audits of SEC registrants; establish or adopt
acceptable auditing, quality control, and independence standards; and provide for periodic inspections of the
89. _____ items are depicted in words and numbers on the face of the financial statements, with amounts
90. _____ captures the qualitative notion that financial reports need not include items that are so small as to be
91. The _____ is the private-sector financial accounting standard setter in the U.S., but has no enforcement
93. The purpose of the conceptual framework developed by the Financial Accounting Standards Board (FASB)
94. _____ is a private-sector financial accounting standard setter that promulgates accounting standards that are
95. As of 2011, the _____ is an independent accounting standard-setting entity with 15 voting members from a
C. American Institute of Certified Public Accountants (AICPA)
D. World Institute of Certified Public Accountants (WICPA)
E. International Institute of Certified Public Accountants (IICPA)
96. In 2007 the U.S. SEC adopted new rules that permit _____ that list and trade their securities in the United
101. The cash basis of accounting, as a basis for measuring performance for a particular accounting period,
102. The _____ basis of accounting typically recognizes revenue when a firm sells goods (manufacturing and
retailing firms) or renders services (service firms), and recognizes expenses in the period when the firm
103. The _____ matches revenues with the costs associated with earning those revenues and is not sensitive to
104. Broke Inc is experiencing a cash flow problem finding that its cash decreases, even though net income
105. The accrual basis of accounting is often contrasted with the cash basis of accounting. Which of the
106. The intermingling of performance of one period with that of preceding or succeeding periods is
characteristic of which basis of accounting?
107. Education Power is a charitable organization that promotes educational opportunities for inner city
108. Selected balance sheet amounts for Puff Group International Limited, a diversified electronics firm,
appears next, as of December 31, 2014, and December 31, 2013. Compute the missing amounts for the two
years.
December 31
2014 2013
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 ?
Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 ?
Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . ? $ 18,000
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . ? ?
Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000 127,000
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? 54,000
109. Use the abbreviations below to classify the following balance sheet items.
CA
- Current assets
NA
- Noncurrent assets
CL
- Current liabilities
NL
- Noncurrent liabilities
SE
- Shareholders' equity
X
- Item generally not appearing on a balance sheet
Balanc
e Sheet
Items
Examp
le
Corpo
ration,
Inc.
January
1, Year
a. CL
b. CA
c. NL
d. NL
e. NA
f. CA
g. X
h. SE
i. NA
j. X
k NA
l. CA
m CL
n.NA
o.NA
p.SE
q.X
110. Compute the missing balance sheet amounts in each of the three independent cases that follow:
CASE A
CASE B
CASE C
Noncurrent assets
$460,000
$ 90,000
$280,000
Shareholders' equity
A
870,000
340,000
Total assets
B
E
500,000
Current liabilities
270,000
20,000
I
Current assets
250,000
F
J
Noncurrent liabilities
100,000
G
K
Total liabilities and shareholders' equity
C
990,000
L
Current assets minus current liabilities
D
H
200,000
111. Use the abbreviations below to classify the following income statement items.
R
Revenues
E
Expenses
X
Item generally not appearing on an income statement
Income
Statem
ent
Items
Examp
le
Corpo
ration,
Inc.
For the
year
ended
Decem
ber 31,
a. X
b. R
c. X
d. E
e. X
f. X
g. E
h. X
i. E
j. E
k. R
l. R
m. X
n. X
o. X
p. X
q. E
112. Compute the missing amounts affecting the net income for Year 1 in each of the five independent cases
that follow. Amounts shown are in thousands.
CASE A
CASE B
CASE C
CASE D
CASE E
Sales revenue
$650
B
$400
$800
$390
Cost of goods sold
300
$110
C
400
200
Selling and
administrative expenses
150
150
120
65
E
Income tax expense
56
30
55
D
0
Net income
A
10
75
235
(15)
113. Compute the missing amount affecting retained earnings for Year 2 in each of the five independent cases
that follow. Amounts shown are in millions.
CASE A
CASE B
CASE C
CASE D
CASE E
Retained earnings, Dec. 31, Year 1
$95
B
$75
$ 87
$175
Net income
30
$450
45
D
(50)
Dividends declared and paid
10
120
C
35
E
Retained earnings, Dec. 31, Year 2
A
670
60
105
75
114. Accountants classify various items on the balance sheet or the income statement in one of the following
ways:
CA
- Current assets
NA
- Noncurrent assets
CL
- Current liabilities
NL
- Noncurrent liabilities
CC
- Contributed capital
RE
- Retained earnings
IS
- Income statement item (revenue or expense)
X
- Item generally not appearing on a balance sheet
Using the abbreviations above, indicate the classification of each of the following items:
a. NA
b. NL
c. IS
d. CC
e. NA
f. CA
g. X
h. IS
i. CL
115. Compute the missing amounts affecting the change in cash for Year 1 in each of the 5 independent cases
that follow. Amounts are in thousands.
CASE A
CASE B
CASE C
CASE D
CASE E
INFLOWS OF CASH:
Operations
$600
$450
$650
$(390)
E
New financing
200
120
C
400
$400
A. $80
B. $420
C. $590
D. $(80)
E. $100
116. Determine the missing amount “X” for each of the following:
Assets
Liabilities
Shareholders’ Equity
a. $85,700 - 40,000 = $45,700
b. $66,570 + 145,000 = $211,570
c. $57,900 - 34,000 = $23,900
117. Compute the missing information in each of the four independent cases below. The letters in parentheses
refer to the following:
BS
- Balance sheet
IS
- Income statement
SCF
- Statement of cash flows
a.
Accounts Receivable, Jan. 1, Year 2 (BS)
$ 500
Sales on Account for Year 2 (IS)
1900
Collections from Customers on Account during Year 2 (SCF)
1,350
Accounts Receivable, Dec. 31, Year 2 (BS)
-?-
a. $1,050
b. $650
c. $320
d. $600
118. (CMA adapted, Jun 94 #6) Accounting systems vary widely from one business to another, depending on
the size of the firm, the volume of data to be handled, and the nature of the business. An accounting system
should provide information for management decision-making and generate reports on the enterprise's financial
condition and operations. The accounting profession relies on general-purpose financial statements to provide
information to users; the intent of these general-purpose statements is to provide the most useful information
possible to diverse user groups at minimal cost. The principal financial statements used for public reporting
purposes are the statement of earnings (income statement), statement of financial position (balance sheet), and
statement of cash flows.
Required:
a.
Financi
al
stateme
nts
should
provide
inform
ation
that is
useful
to
users.
Describ
e the
level of
sophisti
cation
expecte
d of the
externa
l users
1.
Statement of earnings.
2.
Statement of financial position.
3.
Statement of cash flows.
1.
Explain the role of the notes to the financial statements.
2.
Explain management's responsibility for the financial statements.
3.
Explain the auditor's responsibility for the financial statements.
1.The statement of earnings (income statement) measures the success of enterprise operations for a period of
2. The statement of financial position (balance sheet) discloses the assets, liabilities, and owners' equity on a
3.The primary purpose of the statement of cash flows is to provide relevant information about the cash receipts
3. The independent auditor(s) is/are responsible for auditing the financial statements, and expressing an opinion
119. Here is data from Cellular Communications, Inc.
December 31
BALANCE SHEET ITEMS
Year 7
Year 6
Accounts Payable
$ 5,219
$ 7,873
Accounts Receivable
58,363
48,645
Bonds Payable (due Year 20)
10,313
4,602
Cash
821
668
Common Stock
560
540
Income Taxes Payable
414
580
Inventories
33,305
30,752
Other Current Assets
2,681
742
Other Current Liabilities
185
1,115
Other Noncurrent Assets
90
152
Property, Plant, and Equipment
21,881
15,972
Retained Earnings
99,969
81,627
Salaries Payable
481
594
INCOME STATEMENT ITEMS
Year 7
Administrative Expense
$ 20,588
Cost of Goods Sold
246,864
Income Tax Expense
7,267
Interest Expense
1,803
Sales Revenue
361,026
Salary and Wage Expense
21,367
Selling Expense
44,795
Required:
7. Identify the major changes and suggest possible explanations for the changes.
a.
Cellular Communications Inc.
Comparative Balance Sheet
As of December 31,
Assets
Year 7
Year 6
Current assets
Cash
$ 821
$ 668
Accounts receivable
58,363
48,645
Inventories
33,305
30,752
Other current assets
2,681
742
Total current assets
95,170
80,807
Noncurrent assets
Property, plant and equipment
21,881
15,972
Other noncurrent assets
90
152
Total noncurrent assets
21,971
16,124
Total assets
$117,141
$96,931
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
$ 5,219
$ 7,873
Salaries payable
481
594
Income taxes payable
414
580
Other current liabilities
185
1,115
Total current liabilities
6,299
10,162
Noncurrent liabilities
Bonds payable, due Year 20
10,313
4,602
Total liabilities
16,612
14,764
3. The Sarbanes-Oxley Act of 2002 requires the AICPA to register firms conducting
independent audits.
4. The FASB is an agency of the federal government that has the authority to establish accounting standards.
5. The governing board, or board of directors, is responsible for selecting, compensating, and overseeing
121. The balance sheet of Parler, a European Union communications firm, shows current assets of €21,000
million, current liabilities of €16,849 million, shareholders’ equity of €17,654 million, and noncurrent assets of
€30,402 million. What is the amount of noncurrent liabilities on Parler’s balance sheet?
(amounts in millions of euros [€])
Shareholders’
Current Noncurrent Current Noncurrent Shareholders’
Assets + Assets = Liabilities + Liabilities + Equity
€21,000 + €30,402 = €16,849 + ? + €17,654
122. Maeve Irwin is the CEO of Maeve’s Spa. At the end of its accounting period, December 31, 2013,
123. Hemd Company has liabilities equal to one fourth of the total assets. Hemd’s shareholders’equity
is €60,000. Using the accounting equation, what is the amount of liabilities for Hemd?
124. The following information is based on the financial statements of Hadley Company, a large manufacturer.
Annual revenues are $65,387 million and net expenses (including income taxes) are $62,313 million. During the
year, the firm collected $64,995 million in cash from customers and had cash outflows associated with
payments to suppliers and vendors of $56,411 million.
REQUIRED:
a. Calculate net income and net cash flow for the year.
b. How can cash collected from customers be less than revenues?
c. How can cash payments to suppliers and vendors be less than expenses?
125. The following information is reported by ComCo, a Singapore company; all figures are in millions of
1. Calculate net income and its net cash flow.
2. Explain why ComCo’s net income is so much different than its net cash flow.
1. Calculation of net income:
Revenue
$ 15,882
Cost of Goods Sold
(13,671)
Interest and Other Expenses
(2,113)
Income Before Taxes
98
Tax Expense
(67)
Net Income
$ 31
2. Under the cash basis of accounting as reflected in net cash flow, a firm measures performance from selling goods and providing services as it
126. Describe some of the factors that would affect a firm’s goals and strategies.
1. Goals and strategies of competitors.
2. Barriers to entry of the industry, such as patents or large investments in buildings.
3. Nature of the demand for the firm’s products and services. For example, demand might
be increasing, such as for certain pharmaceutical products, or demand might be relatively
stable, such as for groceries.
4. Existence and nature of government regulation.
127. Understanding financial reports requires an understanding of the activities of the business. Describe at least
four investing activities that firms use to obtain the productive capacity to carry out its business activities.
1. Land, buildings, and equipment. These investments provide the capacity to manufacture and
3. Common shares or bonds of other firms. These investments make a firm an owner or creditor
4. Inventories. Firms maintain an inventory of products to sell to customers. For example,
5. Accounts receivable from customers. In many businesses, customers do not pay for goods
128. Understanding financial reports requires an understanding of the activities of the business. Describe at least
three operating activities that firms use to generate earnings.
1. Purchasing. The purchasing department of a retailer, such as Great Deal, acquires items
2. Production. The production department in a manufacturing firm combines raw materials,
3. Marketing. The marketing department oversees selling and distributing products and services to customers.
129. Briefly list and describe the principal financial statements.
130. Explain the roles, duties, and responsibilities of managers and governing boards of reporting entities.
Firms receive funds from owners with the expectation that managers will use the funds to increase the market
value of the firm. From a legal perspective, managers are agents of the shareholders and have responsibility for
safeguarding and properly using the firm’s resources. Managers establish internal control procedures to ensure
the proper recording of transactions and the appropriate measurement and reporting of the results of those
transactions. Shareholders elect a governing board, sometimes called a board of directors, which is responsible
for selecting, compensating, and overseeing managers; for setting the firm’s dividend policy; and for making
decisions on major issues such as acquisitions of other firms and divestitures of lines of business. Some
governing boards, including all boards of publicly traded U.S. firms, have a special committee charged with
oversight of financial reporting.
131. FASB board members make standard-setting decisions guided by a conceptual framework
132. Discuss internal and external users of accounting information. What areas of accounting provide them
with information? Give an example of the type of report each type of user might use.
133. What are the roles, duties, and responsibilities of the independent auditor?
2. An assessment of the operational effectiveness of this accounting system.
3. A determination of whether the financial report complies with the requirements of the applicable authoritative
guidance.
134. Who are the users of financial statements and what do they need?
135. What is US GAAP?
Institute of Certified Public Accountants (AICPA), a professional association. The FASB issues its major
pronouncements in the form of Statements of Financial Accounting Standards (SFAS) that are available on the
FASB’s Web site (www.fasb.org). These standards have both a number (for example, SFAS 95) and a title (for
example, “Statement of Cash Flows”).
136. Concerns over the quality of financial reporting have led, and continue to lead, to government
137. Briefly describe the International Accounting Standards Board (IASB) and who can use IFRS in the United
States?
138. As a basis for measuring performance for a particular accounting period, the cash basis of accounting has
three weaknesses. Briefly describe the three weaknesses.
139. Describe the accrual basis of accounting.
The accrual basis of accounting typically recognizes revenue when a firm sells goods (manufacturing and
retailing firms) or renders services (service firms), and recognizes expenses in the period when the firm
recognizes the revenues that the costs helped produce. Thus accrual accounting attempts to match expenses with
associated revenues. When the usage of an asset’s future benefits does not match with particular revenues, the
firm recognizes those costs as expenses of the period during which the firm uses the benefits provided by the
assets.