Chapter 2

Investing and Financing Decisions and

the Accounting System

ANSWERS TO QUESTIONS
1. (a) The separate entity assumption requires that business transactions are
separate from the transactions of the owners. For example, the purchase of a
truck by the owner for personal use is not recorded as an asset of the
business.

(b) The monetary unit assumption requires information to be reported in the

national monetary unit without any adjustment for changes in purchasing
power. That means that each business will account for and report its financial
results primarily in terms of the national monetary unit, such as Yen in Japan
and Australian dollars in Australia.

(c) Under the going concern assumption, businesses are assumed to operate into
the foreseeable future. That is, they are not expected to liquidate.

(d) The historical cost principle is a measurement model that requires assets to be
recorded at the cash-equivalent cost on the date of the transaction. Cash-
equivalent cost is the cash paid plus the dollar value of all noncash
considerations.

2. Accounting assumptions are necessary because they reflect the scope of accounting
and the expectations that set certain limits on the way accounting information is
reported.

3. (a) An asset is an economic resource owned or controlled by a company; it has

measurable value and is expected to benefit the company by producing cash
inflows or reducing cash outflows in the future.

(b) A current asset is an asset that will be used or turned into cash within one year.

(c) A liability is a measurable obligation resulting from a past transaction; it is

expected to be settled in the future by transferring assets or providing services.

(d) A current liability is a short-term obligation that will be paid in cash (or other
current assets) within the current operating cycle or one year, whichever is
longer.

(e) Additional paid-in capital is the owner-provided financing to the business that
represents the amount of contributed capital less the par value of the stock.

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 (f) Retained earnings are the cumulative earnings of a company that are not
distributed to the owners and are reinvested in the business.
4. An account is a standardized format used by organizations to accumulate the dollar
effects of transactions on each financial statement item.

5. The accounting equation is: Assets = Liabilities + Stockholders' Equity

6. A business transaction is:

(a) an exchange of resources (assets) and obligations (debts) between a business
and one or more outside parties, and
(b) a measurable internal event that directly affects the entity but where there is no
exchange with external parties.

An example of situation (a) is the sale of goods or services to customers.

An example of situation (b) is the use of equipment in operations.

7. Debit is the left side of a journal entry and T-account and credit is the right side of a
journal entry and T-account. A debit is an increase in assets and a decrease in
liabilities and stockholders' equity. A credit is the opposite -- a decrease in assets and
an increase in liabilities and stockholders' equity.

8. Transaction analysis is the process of studying a transaction to determine its

economic effect on the entity in terms of the accounting equation:
Assets = Liabilities + Stockholders' Equity
The two principles underlying the process are:
* every transaction affects at least two accounts.
* the accounting equation must remain in balance after each
transaction.
The three steps in transaction analysis are:
(1) determine what the company received: identify and classify accounts
and the direction and amount of the effects.
(2) determine what the company gave: identify and classify accounts
and the direction and amount of the effects.
(3) determine that the accounting equation (A = L + SE) remains in
balance.

9. The equalities that must be maintained in transaction analysis are:

(a) Assets = Liabilities + Stockholders' Equity
(b) Debits = Credits

10. A journal entry is an accounting method for expressing the effects of a transaction on
accounts in a debits-equal-credits format. The title(s) of the account(s) to be debited
is (are) listed first and the title(s) of the account(s) to be credited is (are) listed
underneath the debited accounts. The debited amounts are placed in a left-hand
column and the credited amounts are placed in a right-hand column.

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11. The T-account is a tool for summarizing transaction effects for each account,
determining balances, and drawing inferences about a company's activities. It is a
simplified representation of a ledger account with a debit column on the left and a
credit column on the right.

12. The current ratio is computed as current assets divided by current liabilities. It
measures a company’s liquidity -- the ability of the company to pay its short-term
obligations with current assets. A ratio above 1.0 normally suggests that the company
has sufficient current assets to settle short-term obligations. Sophisticated cash
management systems allow many companies to minimize funds invested in current
assets and have a current ratio below 1.0. However, a ratio that is too high in relation
to other competitors in the industry may indicate inefficient use of resources.

13. Investing activities on the statement of cash flows include the buying and selling of
productive assets and investments. Financing activities include borrowing and
repaying debt, issuing and repurchasing stock, and paying dividends.

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MULTIPLE CHOICE

1. d 6. c
2. d 7. a
3. a 8. d
4. a 9. b
5. d 10. a

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 (Time in minutes)

Alternate Cases and

Mini-exercises Exercises Problems Problems Projects
No. Time No. Time No. Time No. Time No. Time
1 3 1 8 1 20 1 20 1 15
2 3 2 15 2 25 2 25 2 15
3 4 3 8 3 40 3 40 3 15
4 4 4 10 4 15 4 15 4 20
5 4 5 10 5 40 5 40 5 15
6 5 6 10 6 20
7 3 7 10 7 30
8 3 8 15 8 20
9 6 9 20 9 *
10 6 10 20
11 6 11 20
12 6 12 20 Continuing
13 4 13 20 Problem
14 4 14 30 1 40
15 20
16 20
17 10
18 10
19 10
20 10
21 15

* Due to the nature of these cases and projects, it is very difficult to estimate the amount of
time students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While students
often benefit from the extra effort, we find that some become frustrated by the perceived
difficulty of the task. You can reduce student frustration and anxiety by making your
expectations clear. For example, when our goal is to sharpen research skills, we devote
class time to discussing research strategies. When we want the students to focus on a real
accounting issue, we offer suggestions about possible companies or industries.

Financial Accounting, 11/e 2-5

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MINI-EXERCISES

M2–1.
F (1) Going concern assumption
H (2) Historical cost principle
G (3) Credits
A (4) Assets
I (5) Account

M2–2.
D (1) Journal entry
C (2) A = L + SE, and Debits = Credits
A (3) Assets = Liabilities + Stockholders’ Equity
I (4) Liabilities
B (5) Income statement, balance sheet, statement of stockholders’ equity, and
statement of cash flows

M2–3.
(1) N
(2) N
(3) Y
(4) Y
(5) Y
(6) N

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M2–4.
CL (1) Accounts Payable
CA (2) Accounts Receivable
NCA (3) Buildings
CA (4) Cash
SE (5) Common Stock
NCA (6) Land
CA (7) Merchandise Inventory
CL (8) Income Taxes Payable
NCA (9) Long-Term Investments
NCL (10) Notes Payable (due in three years)
CA (11) Notes Receivable (due in six months)
CA (12) Prepaid Rent
SE (13) Retained Earnings
CA (14) Supplies
CL (15) Utilities Payable
CL (16) Wages Payable

M2–5.
SE (1) Additional Paid-in Capital
NCA (2) Buildings and Leased Assets
CL (3) Current Lease Liabilities
CL (4) Dividends Payable
NCA (5) Equipment
NCA (6) Intangible Assets
NCL (7) Long-Term Lease Liabilities
CL (8) Notes Payable (due in six months)
CA (9) Prepaid Insurance
CA (10) Short-Term Investments
CA (11) Trade Accounts Receivable
SE (12) Treasury Stock
CL (13) Unearned Revenue

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M2–6.
Assets = Liabilities + Stockholders’ Equity
a. Cash +30,000 Notes payable +30,000
b. Cash –10,000
Notes
receivable +10,000
+10
c. Cash +500 Common stock
Additional paid-
in capital +490
d. Cash –5,000 Notes payable +10,000
Equipment +15,000
e. Dividends Retained
payable +2,000 earnings –2,000

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M2–7.
Debit Credit
Assets Increase Decrease
Liabilities Decrease Increase
Stockholders’ equity Decrease Increase

M2–8.
Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Stockholders’ equity Credit Debit

M2–9.

a. Cash (+A) ........................................................................... 30,000

Notes payable (+L) ...................................................... 30,000

b. Notes receivable (+A) ......................................................... 10,000

Cash (A) .................................................................... 10,000

c. Cash (+A) ........................................................................... 500

Common stock (+SE) .................................................. 10
Additional paid-in capital (+SE)…………………………. 490

d. Equipment (+A) ................................................................... 15,000

Cash (A) .................................................................... 5,000
Notes payable (+L) ...................................................... 10,000

e. Retained earnings (SE) .................................................... 2,000

Dividends payable (+L) ............................................... 2,000

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M2–10.

Cash Notes Receivable Equipment

Beg. 900 Beg. 1,000 Beg. 15,100
(a) 30,000 10,000 (b) (b) 10,000 (d) 15,000
(c) 500 5,000 (d)
16,400 11,000 30,100

Notes Payable Dividends Payable

3,000 Beg. 0 Beg.
30,000 (a) 2,000 (e)
10,000 (d)
43,000 2,000

Common Stock Additional Paid-in Capital Retained Earnings

1,000 Beg. 3,000 Beg. 10,000 Beg.
10 (c) 490 (c) (e) 2,000
1,010 3,490 8,000

M2-11.

JonesSpa Corporation
Trial Balance
January 31

Debit Credit
Cash 16,400
Notes receivable 11,000
Equipment 30,100
Notes payable 43,000
Dividends payable 2,000
Common stock 1,010
Additional paid-in capital 3,490
Retained earnings 8,000
Totals 57,500 57,500

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M2–12.
JonesSpa Corporation
Balance Sheet
At January 31

Assets Liabilities
Current assets: Current liabilities:
Cash $ 16,400 Notes payable $ 43,000
Notes receivable 11,000 Dividends payable 2,000
Total current assets 27,400 Total current liabilities 45,000
Stockholders’ Equity
Equipment 30,100 Common stock 1,010
Additional paid-in capital 3,490
Retained earnings 8,000
Total stockholders’ equity 12,500
Total Liabilities &
Total Assets $ 57,500 Stockholders’ Equity $ 57,500

M2–13.

Current Ratio =
Current Assets ÷ Current Liabilities
2018 $280,000 ÷ $155,000 = 1.806
2019 $270,000 ÷ $ 250,000 = 1.080

This ratio indicates that Matteo’s Taco Company has sufficient current assets to settle
current liabilities, but that the ratio has also decreased between 2018 and 2019 by .726
(40%). Matteo’s Taco Company ratio of 1.080 is lower than Chipotle’s 2019 ratio of 1.609,
indicating that Matteo’s Taco Company appears to have weaker liquidity than Chipotle.
Because the restaurant industry typically has high immediate cash inflows from customers,
both companies can maintain a lower current ratio.

M2–14.
(a) F
(b) I
(c) F
(d) I

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Transaction (e) for the declaration of cash dividends creates an obligation. Thus, it would not
be included on the statement of cash flows because no cash was paid in January.

EXERCISES

E2–1.
E (1) Transaction
F (2) Going concern assumption
B (3) Balance sheet
P (4) Liabilities
K (5) Assets = Liabilities + Stockholders’ Equity
M (6) Notes payable
L (7) Common stock
H (8) Historical cost principle
I (9) Account
Q (10) Dual effects
O (11) Retained earnings
A (12) Current assets
C (13) Separate entity assumption
X (14) Par value
D (15) Debits
J (16) Accounts receivable
N (17) Monetary unit assumption
R (18) Stockholders’ equity

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E2–2.

Req. 1
Received Given
(a) Cash (A) Common stock and Additional
paid-in capital (SE)
(b) Equipment (A) [or Delivery truck] Cash (A)
(c) No exchange transaction —
(d) Equipment (A) [or Computer equipment] Notes payable (current) (L)
(e) Building (A) [or Construction in progress] Cash (A)
(f) Intangibles (A) [or Copyright] Cash (A)
(g) Retained earnings (SE) [Received a reduction Dividends payable (L) [a
in the owners’ claims to the company’s assets] promise to pay]
(h) Land (A) Cash (A)
(i) Intangibles (A) [or Patents] Cash (A) and Notes payable
(current) (L)
(j) No exchange transaction —
(k) Investments (A) Cash (A)
(l) Cash (A) Notes payable (current) (L)
(m) Notes payable (L) [Received a reduction in its Cash (A)
promise to pay]

Req. 2

The truck in (b) would be recorded as an asset of $18,000. The land in (h) would be
recorded as an asset of $50,000. These are applications of the historical cost principle.

Req. 3

The agreement in (c) involves no exchange or receipt of cash, goods, or services and thus is
not a transaction. Since transaction (j) occurs between the owner and others, there is no
effect on the business because of the separate entity assumption.

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E2–3.
Balance Sheet Debit or Credit
Account Classification Balance
(1) Accounts Receivable CA Debit
(2) Retained Earnings SE Credit
(3) Accrued Expenses Payable CL Credit
(4) Prepaid Expenses CA Debit
(5) Common Stock SE Credit
(6) Long-Term Investments NCA Debit
(7) Plant, Property, and Equipment NCA Debit
(8) Accounts Payable CL Credit
(9) Short-Term Investments CA Debit
(10) Long-Term Debt NCL Credit
(11) Inventories CA Debit
(12) Additional Paid-in Capital SE Credit
(13) Current Lease Obligations CL Credit
(14) Operating Lease Right-of-Use Assets NCA Debit
(15) Treasury Stock SE Debit

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E2–4.

Event Assets = Liabilities + Stockholders’ Equity

a. Cash +40,000 Common
stock +1,000
Additional
paid-in
capital +39,000
b. Operating Long-term
lease right- lease +12,000
of-use liabilities
assets +15,000
Cash –3,000
c. Cash +10,000 Notes payable +10,000
d. Note
receivable +800
Cash –800
e. Land +13,000 Notes payable +9,000
Cash –4,000

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E2–5.

Req. 1 (dollars in millions)

Event Assets = Liabilities + Stockholders’ Equity

a. Buildings +303 Notes payable
Equipment +1,202 (long-term) +1,073
Cash – 432
b. Cash +885 Common stock +10
Additional paid-in
capital +875
c. Dividends Retained
payable +1,491 earnings –1,491
d. Short-term +2,426
investments
Cash -2,426
e. No effects
f. Cash +2,379
Short-term
investments –2,379
g. Cash +6,134 Notes payable
(long-term) +6,134
h. Cash –3,067 Treasury stock –3,067

Req. 2

The separate entity assumption states that transactions of the business are separate from
transactions of the owners. Since transaction (e) occurs between the owners and others in
the stock market, there is no effect on the business.

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E2–6.

a. Cash (+A) ........................................................................... 40,000

Common stock (+SE)* ................................................. 1,000
Additional paid-in capital (+SE) ………………………… 39,000

b. Operating lease right-of-use assets (+A)............................ 15,000

Cash (A) .................................................................... 3,000
Long-term lease liabilities (+L) ................................... 12,000

c. Cash (+A) ........................................................................... 10,000

Notes payable (+L) ...................................................... 10,000

d. Notes receivable (+A) ........................................................ 800

Cash (A) .................................................................... 800

e. Land (+A) ............................................................................ 13,000

Cash (A) .................................................................... 4,000
Notes payable (+L) ..................................................... 9,000

*Common stock at par value: 1,000 shares x $1 par value = $1,000

Additional paid-in capital is the excess over market: 1,000 shares x $39 excess = $39,000

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E2–7.

Req. 1 (dollars in millions)

a. Buildings (+A) ..................................................................... 303

Equipment (+A) .................................................................. 1,202
Cash (A) .................................................................... 432
Notes payable (+L) ..................................................... 1,073

b. Cash (+A) ........................................................................... 885

Common stock (+SE) .................................................. 10
Additional paid-in capital (+SE) 875

c. Retained earnings (SE) .................................................... 1,491

Dividends payable (+L) ............................................... 1,491

d. Short-term investments (+A) ............................................... 2,426

Cash (A) .................................................................... 2,426

e. No journal entry required.

f. Cash (+A) ........................................................................... 2,379

Short-term investments (A)........................................ 2,379

g. Cash (+A) .......................................................................... 6,134

Notes payable (+L) .................................................... 6,134

h. Treasury stock (SE) ......................................................... 3,067

Cash (A) .................................................................. 3,067

Req. 2

The separate entity assumption states that transactions of the business are separate from
transactions of the owners. Since transaction (e) occurs between the owners and others in
the stock market, there is no effect on the business.

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E2–8.

Req. 1

a. Cash (+A) .......................................................................... 30,000

Notes payable (+L) .................................................... 30,000

b. Cash (+A) (500 shares x $30 market value per share) ....... 15,000
Common stock (+SE) (500 shares x $0.10 par value) . 50
Additional paid-in capital (+SE) (difference)................ 14,950

c. Operating lease right-of-use assets (+A)............................ 115,000

Cash (A) .................................................................... 3,000
Long-term lease liabilities (+L) ................................... 112,000

d. Equipment (+A) ................................................................... 20,000

Cash (A) ................................................................... 4,000
Notes payable (+L) ..................................................... 16,000

e. Notes receivable (+A) ......................................................... 1,000

Cash (A) .................................................................... 1,000

f. Notes payable (L) ............................................................. 2,000

Cash (A) .................................................................... 2,000

g. Short-term investments (+A) ............................................... 10,000

Cash (A) .................................................................... 10,000

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E2–9.

Req. 1

Cash Notes Receivable Equipment

Beg. 0 Beg. 0 Beg. 0
(a) 70,000 4,500 (c) (f) 2,500 (c) 18,000
(e) 3,000 2,500 (f)
66,000 2,500 18,000

Operating Lease
Land Right-of-Use Assets Notes Payable
Beg. 0 Beg. 0 0 Beg.
(e) 15,000 (b) 150,000 13,500 (c)
15,000 150,000 13,500

Long-term Lease Liabilities Common Stock Additional Paid-in Capital

0 Beg. 0 Beg. 0 Beg.
150,000 (b) 5,040 (a)* 64,960 (a)
100 (e) 17,900 (e)
150,000 5,140 82,860

*6 investors x 8,400 shares each = 50,400 shares issued

50,400 shares issued x $0.10 par value per share = $5,040 for common stock

Req. 2

Assets $ 251,500 = Liabilities $ 163,500 + Stockholders’ Equity $ 88,000

Req. 3

The agreement in (d) involves no exchange or receipt of cash, goods, or services and thus is
not a transaction. Since transaction (g) occurs between the owner and others, there is no
effect on the business due to the separate entity assumption.

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E2–10.

Req. 1

Cash Notes Receivable Equipment

Beg. 0 Beg. 0 Beg. 0
(a) 60,000 9,000 (b) (c) 2,500 (b) 36,000
2,500 (c)
12,000 (e)
36,500 2,500 36,000

Land Notes Payable Common Stock

Beg. 0 0 Beg. 0 Beg.
(a) 35,000 (e) 12,000 27,000 (b) 300 (a)*

35,000 15,000 300

Additional Paid-in Capital

0 Beg.
94,700 (a)*

94,700

* Common Stock: 3 investors x 1,000 shares each = 3,000 shares issued

3,000 shares issued x $0.10 par value per share = $300 for common stock
Additional Paid-in Capital: $95,000 received - $300 par value = $94,700

Req. 2

Assets $ 110,000 = Liabilities $ 15,000 + Stockholders’ Equity $ 95,000

Req. 3

Since transaction (d) is a personal purchase, not purchased by Precision Builders, there is
no effect on the business due to the separate entity assumption.

Req. 4

Market value per share = Total assets received ÷ Number of shares issued
= $95,000 ÷ 3,000 shares issued
= $31.67 per share
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2-22 Solutions Manual
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E2–11.

Req. 1

Transaction Brief Explanation

1 Issued common stock to shareholders for $15,000 cash. (FastTrack
Sports Inc. is a corporation because it issues stock. Par value of the
stock was $0.10 per share because $1,500 common stock amount
divided by 15,000 shares issued equals $0.10 per share).
2 Borrowed $75,000 cash and signed a short-term note for this amount.
3 Leased assets for $135,000; paid $5,000 cash and signed a long-term
operating right-of-use lease for the balance.
4 Loaned $1,000 cash; borrower signed a short-term note for this amount
(Note Receivable).
5 Purchased store fixtures for $9,500 cash.
6 Repaid $4,000 cash on the notes payable.

Ending balances are reflected in the balance sheet in Requirement 2.

Req. 2
FastTrack Sports Inc.
Balance Sheet
At January 7

Assets Liabilities
Current Assets Current Liabilities
Cash $ 70,500 Notes payable $ 71,000
Notes receivable 1,000 Total Current Liabilities 71,000
Total Current Assets 71,500 Long-term lease liabilities 130,000
Total Liabilities 201,000

Stockholders’ Equity
Store fixtures 9,500 Common stock 1,500
Operating lease right-of-use assets 135,000 Additional paid-in capital 13,500
Total Stockholders’ Equity 15,000
Total Liabilities &
Total Assets $216,000 Stockholders’ Equity $216,000

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E2–12.

Req. 1

Transaction Brief Explanation

1 Issued common stock to shareholders for $45,000 cash. (Volz
Cleaning is a corporation because it issues stock. Par value is $2.00
per share; $6,000 common stock amount divided by 3,000 shares
issued equals $2.00 per share).
2 Purchased a delivery truck for $35,000; paid $8,000 cash and gave a
$27,000 long-term note payable for the balance.
3 Loaned $2,000 cash; borrower signed a short-term note for this
amount.
4 Purchased short-term investments for $7,000 cash.
5 Sold short-term investments at cost for $3,000 cash.
6 Purchased computer equipment for $4,000 cash.

Req. 2
Volz Cleaning, Inc.
Balance Sheet
At March 31

Assets Liabilities
Current Assets Notes payable $27,000
Cash $27,000 Total Liabilities 27,000
Investments 4,000
Notes receivable 2,000
Total Current Assets 33,000 Stockholders’ Equity
Common stock 6,000
Computer equipment 4,000 Additional paid-in capital 39,000
Delivery truck 35,000 Total Stockholders’ Equity 45,000
Total Liabilities &
Total Assets $72,000 Stockholders’ Equity $72,000

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E2–13.

a. Cash (+A) ........................................................................... 70,000

Building (+A) ....................................................................... 250,000
Common stock (+SE) .................................................. 5,000
Additional paid-in capital (+SE)………………………….. 315,000

b. No transaction has occurred because there has been no

exchange or receipt of cash, goods, or services.

c. Cash (+A) ........................................................................... 18,000

Notes payable (long-term) (+L) ................................... 18,000

d. Equipment (+A) ................................................................... 11,000

Cash (A) .................................................................... 1,500
Notes payable (short-term) (+L) .................................. 9,500

e. Notes receivable (short-term) (+A) ..................................... 2,000

Cash (A) .................................................................... 2,000

f. Store fixtures (+A) ............................................................... 15,000

Cash (A) .................................................................... 15,000

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E2–14.

(in millions)
a. Cash (+A) ........................................................................... 202
Common stock (+SE) .................................................. 8
Additional paid-in capital (+SE) .................................. 194

b. No transaction has occurred because there has been no exchange or receipt of cash,
goods, or services.

c. Cash (+A) ........................................................................... 1,419

Note receivable (A) ................................................... 1,419

d. Cash (+A) ........................................................................... 4,291

Notes payable (+L) ...................................................... 4,291

e. Cash (+A) ........................................................................... 73,959

Short-term investments (A)........................................ 73,959

f. Equipment (+A) ................................................................... 6,540

Cash (A) .................................................................... 6,540

g. Treasury stock (SE) .......................................................... 4,846

Cash (A) .................................................................... 4,846

h. Notes payable (L) ............................................................. 4,377

Cash (A) .................................................................... 4,377

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E2–15.

Req. 1

Assets $ 10,500 = Liabilities $ 3,000 + Stockholders’ Equity $ 7,500

Req. 2

a. Cash (+A) 4,000

Notes payable (noncurrent) (+L) 4,000

b. Cash (+A) 1,500

Short-term investments (A) 1,500

c. Cash (+A) 1,500

Property and equipment (A) 1,500

d. Retained earnings (SE) 800

Dividends payable (+L) 800

e. Dividends payable (L) 800

Cash (A) 800

Req. 3
Short-Term Property and Equipment
Cash Investments
Beg. 5,000 Beg. 2,500 Beg. 3,000
(a) 4,000 1,500 (b) 1,500 (c)
(b) 1,500
(c) 1,500 800 (e)
End. 11,200 End. 1,000 End. 1,500

Notes Payable Dividends Notes Payable

(current) Payable (noncurrent)
2,200 Beg. 0 Beg.
(e) 800 800 (d) 4,000 (a)
2,200 End. 0 End. 4,800 End.

Common Stock Additional Paid-in Capital Retained Earnings

500 Beg. 4,000 Beg. 3,000 Beg.
(d) 800
500 4,000 2,200
Financial Accounting, 11/e 2-27
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E2–15. (continued)

Req. 4

Higgins Company
Trial Balance
For the Year Ended December 31
Debit Credit
Cash 11,200
Short-term investments 1,000
Property and equipment 1,500
Notes payable (current) 2,200
Dividends payable 0
Notes payable (noncurrent) 4,800
Common stock 500
Additional paid-in capital 4,000
Retained earnings 2,200
Totals 13,700 13,700

Req. 5
Higgins Company
Balance Sheet
At December 31
Assets
Current Assets:
Cash $11,200
Short-term investments 1,000
Total current assets 12,200
Property and equipment 1,500
Total assets $13,700

Liabilities and Stockholders’ Equity

Current Liabilities:
Notes payable $ 2,200
Total current liabilities 2,200
Notes payable 4,800
Total liabilities 7,000
Stockholders’ Equity
Common stock 500
Additional paid-in capital 4,000
Retained earnings 2,200
Total stockholders’ equity 6,700
2-28 Solutions Manual
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 Total liabilities and stockholders’ equity $13,700

E2–15. (continued)

Req. 6

Current Current Assets $11,200 + $1,000 $12,200

= = = = 5.55
Ratio Current Liabilities $2,200 $2,200

This ratio indicates that, for every $1 of current liabilities, Higgins maintains approximately
$5.55 of current assets. Higgins’ ratio is higher than the industry average of 1.50, indicating
that Higgins maintains a lower level of short-term debt compared to its current assets and
has higher liquidity. However, maintaining such a high current ratio also suggests that the
company may not be using its resources efficiently. Increasing short-term obligations would
lower Higgins’ current ratio, but this strategy alone would not help its efficiency. Higgins
should consider investing more of its cash in order to generate future returns.

Financial Accounting, 11/e 2-29

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E2–16.

Req. 1a.

Short-Term
Cash Notes Receivable Land
Beg. 0 Beg. 0 Beg. 0
(a) 40,000 4,000 (c) (e) 4,000 (b) 16,000 4,000 (e)
1,000 (d)
35,000 4,000 12,000

Short-Term Long-Term
Equipment Notes Payable Notes Payable
Beg. 0 0 Beg. 0 Beg.
(c) 20,000 16,000 (b) 16,000 (c)
(d) 1,000
21,000 16,000 16,000

Common Stock Additional Paid-in Capital

0 Beg. 0 Beg.
10,000 (a) 30,000 (a)

10,000 30,000

Req. 1b.

Transaction (f) is not recorded by Bailey Delivery Company because it violates the separate
entity assumption that states that transactions of the business are to be kept separate from
transactions of the owners. Helen Bailey purchase the lot for her personal use; the business
is not involved.

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E2–16. (continued)

Req. 2

Bailey Delivery Company, Inc.

Trial Balance
December 31, 2021

Debit Credit
Cash 35,000
Short-term notes receivable 4,000
Land 12,000
Equipment 21,000
Short-term notes payable 16,000
Long-term notes payable 16,000
Common stock 10,000
Additional paid-in capital 30,000
Totals 72,000 72,000

Req. 3
Bailey Delivery Company, Inc.
Balance Sheet
At December 31, 2021
Assets Liabilities
Current Assets Current Liabilities
Cash $35,000 Short-term notes payable $16,000
Short-term notes receivable 4,000 Total Current Liabilities 16,000
Total Current Assets 39,000 Long-term notes payable 16,000
Total Liabilities 32,000
Land 12,000
Equipment 21,000 Stockholders’ Equity
Common stock 10,000
Additional paid-in capital 30,000
Total Stockholders’ Equity 40,000
Total Liabilities &
Total Assets $72,000 Stockholders’ Equity $72,000

Financial Accounting, 11/e 2-31

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E2–16. (continued)

Req. 4
Current Assets ÷ Current Liabilities = Current Ratio
2021 $39,000 ÷ $16,000 = 2.44
2022 $52,000 ÷ $23,000 = 2.26
2023 $47,000 ÷ $40,000 = 1.18

The current ratio has decreased over the years, suggesting that the company’s liquidity is
decreasing. Although the company still maintains sufficient current assets to settle the short-
term obligations, this steep decline in the ratio may be of concern – it may be indicative of
more efficient use of resources or it may suggest the company is having cash flow problems.

Req. 5
The management of Bailey Delivery Company has already been financing the company’s
development through additional short-term debt, from $16,000 in 2021 to $40,000 in 2023.
This suggests the company is taking on increasing risk. Additional lending to the company,
particularly short-term, may be too much risk for the bank to absorb. Should the bank lend
the $50,000, Bailey Delivery Company’s current ratio would be 1.08 ( 97,000 ÷ 90,000)
immediately after the financing. Based solely on the current ratio, the bank’s vice president
should consider not providing the loan to the company as it currently stands. Of course,
additional analysis would provide better information for making a sound decision.

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E2–17.

Transaction Brief Explanation

(a) Issued 100,000 shares of common stock (par value $0.02 per share) to
shareholders in exchange for $20,000 cash and $5,000 of tools and
equipment.
(b) Loaned $1,800 cash; borrower signed a note receivable for this
amount.
(c) Purchased a building for $40,000; paid $10,000 cash and signed a
$30,000 note payable for the balance.
(d) Sold tools and equipment for $900 cash (their original cost).

E2–18.

Req. 1
Increases with… Decreases with…
Equipment Purchases of equipment Sales of equipment
Notes receivable Additional loans to others Collection of loans
Notes payable Additional borrowings Payments of debt

Req. 2
Equipment Notes Receivable Notes Payable
1/1 500 1/1 150 100 1/1
250 650 245 225 110 170
12/31 100 12/31 170 160 12/31

Beginning + “+”  “” = Ending

balance balance
Equipment $500 + $250  $? = $100
? = 650
Notes receivable 150 + ?  225 = 170
? = 245
Notes payable 100 + 170  ? = 160
? = 110

Financial Accounting, 11/e 2-33

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2-34 Solutions Manual
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E2–19.

Activity Type of Effect on

Activity Cash
(a) Capital expenditures I 
(b) Repurchases of common stock from investors F 
(c) Sale of short-term investments I +
(d) Issuance of common stock F +
(e) Purchases of short-term investments I 
(f) Dividends paid on common stock. F 

E2–20.
Activity Type of Effect on
Activity Cash
(a) Additional borrowing from banks F +
(b) Purchase of investments I 
(c) Sale of assets and investments (assume sold at cost) I +
(d) Issuance of stock F +
(e) Purchases of property, plant, and equipment I 
(f) Payment of debt principal F 
(g) Dividends paid F 
(h) Receipt of principal payment on a note receivable I +

E2–21.

1. Current assets In the asset section of a classified balance sheet.

2. Debt principal repaid In the financing activities section of the statement of
cash flows.
3. Significant accounting policies Usually the first note after the financial statements.
4. Cash received from sales of In the investing activities section of the statement of
noncurrent assets cash flows.
5. Dividends paid In the financing activities section of the statement of
cash flows.
6. Short-term obligations In the current liabilities section of a classified
balance sheet.
7. Date of the statement of In the heading of the balance sheet.
financial position
Financial Accounting, 11/e 2-35
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PROBLEMS

P2–1.
Balance Debit or
Sheet Credit
Classification Balance
(1) Notes and Loans Payable (short-term) CL Credit
(2) Materials and Supplies CA Debit
(3) Common Stock SE Credit
(4) Intangible Assets NCA Debit
(5) Income Taxes Payable CL Credit
(6) Long-Term Debt NCL Credit
(7) Property, Plant, and Equipment NCA Debit
(8) Retained Earnings SE Credit
(9) Notes and Accounts Receivable (short-term) CA Debit
(10) Investments (long-term) NCA Debit
(11) Cash and Cash Equivalents CA Debit
(12) Accounts Payable and Accrued Liabilities CL Credit
(13) Crude Oil, Products and Merchandise CA Debit
(14) Additional Paid-in Capital SE Credit

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P2–2.

Req. 1

East Hill Home Healthcare Services was organized as a corporation. Only a corporation
issues shares of common stock to its owners in exchange for their investment, as in
transaction (a).

Req. 2 (On next page)

Req. 3

The transaction between the two stockholders (Event e) was not included in the tabulation.
Since the transaction in (e) occurs between the owners, there is no effect on the business
due to the separate entity assumption.

Req. 4

(a) Total assets = $119,500 + $18,000 + $5,000 + $510,500 + $160,000 + $65,000

= $878,000

(b) Total liabilities = $108,000 + $180,000

= $288,000

(c) Total stockholders’ equity = Total assets – Total liabilities

= $878,000 – $288,000 = $590,000

(d) Cash balance = $50,000 + $90,000 – $9,000 + $3,500 – $18,000 – $5,000 + 8,000
= $119,500

(e) Total current assets = Cash $119,500 + Short-Term Investments $18,000 + Notes
Receivable $5,000 = $142,500

Req. 5

Current Current Assets $119,500+$18,000+$5,000 $142,500

= = = = 1.32
Ratio Current Liabilities $108,000 108,000

For every $1 in current liabilities, East Hill maintains approximately $1.32 in current assets.
The ratio suggests that East Hill is likely maintaining adequate liquidity and using resources
efficiently.

Financial Accounting, 11/e 2-37

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 P2–2. (continued)

Req. 2

Assets = Liabilities + Stockholders' Equity

Additional
Short-Term Notes ST Notes LT Notes Common Paid-in Retained
Cash Investments Receivable Land Buildings Equipment Payable Payable Stock Capital Earnings
Beg. 50,000 500,000 100,000 50,000 = 100,000 20,000 80,000 400,000
100,000
(a) +90,000 = +9,000 +81,000
(b) –9,000 +14,000 +60,000 +15,000 = +80,000
(c) +3,500 –3,500 =
(d) –18,000 +18,000 =
(e) No effect
(f) –5,000 +5,000 =
(g) +8,000 = +8,000
+119,500 +18,000 +5,000 +510,500 +160,000 +65,000 = +108,000 +180,000 +29,000 +161,000 +400,000

$878,000 $288,000 $590,000

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P2–3.

Req. 1 and 2
Cash Investments (short-term) Accounts Receivable
Beg. 22,000 Beg. 3,000 Beg. 3,000
(e) 11,000 10,000 (a) (a) 10,000
(f) 9,000 5,000 (b)
(i) 1,000 5,000 (c) 13,000 3,000
3,000 (g)
8,000 (h) Inventory Notes Receivable (long-term)
Beg. 20,000 Beg. 1,000
(b) 5,000
12,000 20,000 6,000

Equipment Factory Building Operating Lease ROU Assets

Beg. 50,000 Beg. 90,000 Beg. 140,000
1,000 (i) (h) 24,000 (c) 18,000

End. 49,000 End. 114,000 End. 158,000

Intangible Assets Accounts Payable Accrued Liabilities Payable

Beg. 5,000 15,000 Beg. 4,000 Beg.
(g) 3,000
8,000 15,000 4,000
Notes Payable (current) Notes Payable (noncurrent) Long-term Lease Liabilities
7,000 Beg. 87,000 Beg. 63,000 Beg.
9,000 (f) 16,000 (h) 13,000 (c)
16,000 103,000 76,000

Common Stock Additional Paid-in Capital Retained Earnings

10,000 Beg. 117,000 Beg. 31,000 Beg.
1,000 (e) 10,000 (e)

11,000 127,000 31,000

Financial Accounting, 11/e 2-39

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P2–3. (continued)

Req. 3

No effect was recorded for (d). The agreement in (d) involves no exchange or receipt of
cash, goods, or services and thus is not a transaction.

Req. 4

Jaguar Plastics Company

Trial Balance
At December 31

Debit Credit
Cash 12,000
Investments (short-term) 13,000
Accounts receivable 3,000
Inventory 20,000
Notes receivable (long-term) 6,000
Equipment 49,000
Factory building 114,000
Operating lease right-of-use assets 158,000
Intangible assets 8,000
Accounts payable 15,000
Accrued liabilities payable 4,000
Notes payable (short-term) 16,000
Notes payable (long-term) 103,000
Long-term lease liabilities 76,000
Common stock 11,000
Additional paid-in capital 127,000
Retained earnings 31,000
Totals 383,000 383,000

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P2–3. (continued)
Req. 5
Jaguar Plastics Company
Balance Sheet
At December 31
Assets
Current Assets
Cash $ 12,000
Investments 13,000
Accounts receivable 3,000
Inventory 20,000
Total Current Assets 48,000
Notes receivable 6,000
Equipment 49,000
Operating lease right-of-use assets 158,000
Factory building 114,000
Intangible assets 8,000
Total Assets $383,000

Liabilities
Current Liabilities
Accounts payable $ 15,000
Accrued liabilities payable 4,000
Notes payable 16,000
Total Current Liabilities 35,000
Notes payable 103,000
Long-term lease liabilities 76,000
Total Liabilities 214,000
Stockholders’ Equity
Common stock 11,000
Additional paid-in capital 127,000
Retained earnings 31,000
Total Stockholders’ Equity 169,000
Total Liabilities & Stockholders’ Equity $383,000

Req. 6
Current Current Assets $48,000
= = = 1.37
Ratio Current Liabilities $35,000

Financial Accounting, 11/e 2-41

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This ratio indicates that Jaguar Plastics has sufficient liquidity to pay short-term
liabilities with current assets. For every $1 of current liabilities, Jaguar Plastics
maintains $1.37 of current assets.

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P2–4.

Transaction Type of Activity Effect on Cash

(a) I –
(b) I –
(c) I –
(d) NE NE
(e) F +
(f) F +
(g) I –
(h) I –
(i) I +

P2–5. (dollars in millions)

Req. 1

a. Cash (+A) ............................................................................ 18,266

Long-term debt (+L) ..................................................... 18,266

b. Long-term investments (+A) ................................................ 4,200

Short-term investments (+A) ............................................... 16,800
Cash (A) ..................................................................... 21,000

c. Property, plant, and equipment (+A) ................................... 10,981

Cash (A) ..................................................................... 9,571
Short-term debt (+L) ..................................................... 1,410

d. Cash (+A) ............................................................................ 1,469

Common stock (+SE) ................................................... 1
Additional paid-in capital (+SE) ................................... 1,468

e. Cash (+A) ............................................................................ 18,810

Short-term investments (A) ........................................ 18,810

f. Retained earnings (SE) ..................................................... 11,126

Dividends payable (+L) ................................................ 11,126

Financial Accounting, 11/e 2-43

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P2–5. (continued)

Req. 2
Short-Term
Cash Investments Accounts Receivable
Beg. 48,844 Beg. 51,713 Beg. 22,926
(a) 18,266 21,000 (b) (b) 16,800 18,810 (e)
(d) 1,469 9,571 (c) 49,703 22,926
(e) 18,810
56,818
Inventories Other Current Assets
Beg. 4,106 Beg. 35,230
4,106 35,230

Long-Term Property, Plant, and Other

Investments Equipment Noncurrent Assets
Beg. 105,341 Beg. 37,378 Beg. 32,978
(b) 4,200 (c) 10,981
109,541 48,359 32,978

Accounts Accrued Unearned

Payable Expenses Revenue
46,236 Beg. 43,700 Beg. 5,522 Beg.
46,236 43,700 5,522

Dividends
Short-term Debt Payable
10,260 0 Beg.
1,410 (c) 11,126 (f)
11,670 11,126

Other
Long-term Debt Noncurrent Liabilities
91,807 Beg. 50,503 Beg.
18,266 (a)
110,073 50,503

Common Additional Retained

Stock Paid-in Capital Earnings
1 Beg 45,173 Beg. 45,314 Beg.
1 (d) 1,468 (d) (f) 11,126
2 46,641 34,188
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P2–5. (continued)

Req. 3

Apple Inc.
Trial Balance
At September 26, 2020
(in millions)

Debit Credit
Cash 56,818
Short-term Investments 49,703
Accounts receivable 22,926
Inventories 4,106
Other current assets 35,230
Long-term investments 109,541
Property, plant, and equipment 48,359
Other noncurrent assets 32,978
Accounts payable 46,236
Accrued expenses 43,700
Unearned revenue 5,522
Dividends payable 11,126
Short-term debt 11,670
Long-term debt 110,073
Other noncurrent liabilities 50,503
Common stock 2
Additional paid-in capital 46,641
Retained earnings 34,188
Totals 359,661 359,661

Financial Accounting, 11/e 2-45

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P2–5. (continued)

Req. 4
Apple Inc.
Balance Sheet
At September 26, 2020
(in millions)
ASSETS
Current Assets:
Cash $ 56,818
Short-term investments 49,703
Accounts receivable 22,926
Inventories 4,106
Other current assets 35,230
Total current assets 168,783
Long-term investments 109,541
Property, plant, and equipment, net 48,359
Other noncurrent assets 32,978
Total assets $359,661
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $ 46,236
Accrued expenses 43,700
Unearned revenue 5,522
Dividends payable 11,126
Short-term debt 11,670
Total current liabilities 118,254
Long-term debt 110,073
Other noncurrent liabilities 50,503
Total liabilities 278,830
Stockholders’ Equity:
Common stock 2
Additional paid-in capital 46,641
Retained earnings 34,188
Total stockholders’ equity 80,831
Total liabilities and stockholders’ equity $359,661

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P2–5. (continued)

Req. 5
Current Current Assets $168,783
= = = 1.43
Ratio Current Liabilities $118,254

For every $1 of short-term liabilities, Apple Inc. has approximately $1.43 of current
assets. This suggests that Apple has sufficient current resources to pay current
liabilities. Apple has a very efficient cash management system and keeps its current
resources at lower levels to maximize investment opportunities.

Financial Accounting, 11/e 2-47

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ALTERNATE PROBLEMS

AP2–1.
Balance Debit or
Sheet Credit
Classification Balance
(1) Prepaid Expenses CA Debit
(2) Inventories CA Debit
(3) Accounts Receivable CA Debit
(4) Long-Term Debt NCL Credit
(5) Treasury Stock SE Debit
(6) Right-of-Use Assets NCA Debit
(7) Accounts Payable CL Credit
(8) Income Taxes Payable CL Credit
(9) Property, Plant, and Equipment NCA Debit
(10) Retained Earnings SE Credit
(11) Additional Paid-in Capital SE Credit
(12) Noncurrent Lease Liabilities NCL Credit
(13) Accrued Liabilities CL Credit
(14) Common Stock SE Credit

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AP2–2.

Req. 1

Russeck Incorporated was organized as a corporation. Only a corporation issues

shares of common stock to its owners in exchange for their investment, as Russeck did
in transaction (c).

Req. 2 (On next page)

Req. 3

Since the transaction in (g) occurs between the owners and others outside the
company, there is no effect on the business due to the separate entity assumption.

Req. 4

(a) Total assets = $56,000 + $2,000 + $85,000 + $110,000 + $310,000 = $563,000

(b) Total liabilities = $32,000 + $211,000 = $243,000

(c) Total stockholders’ equity = Total assets – Total liabilities

= $563,000 – $243,000 = $320,000

(d) Cash balance = $120,000 + $11,000 – $3,000 + $20,000 – $5,000 – $2,000

– $85,000 = $56,000

(e) Total current assets = $56,000 + $2,000 = $58,000

Req. 5

Current Current Assets $56,000 + $2,000 $58,000

= = = = 1.81
Ratio Current Liabilities $32,000 $32,000

This suggests that Russeck has sufficient liquidity to cover its current obligations. For
every $1 of current liabilities, Russeck has $1.81 in current assets.

Financial Accounting, 11/e 2-49

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 AP2–2. (continued)

Req. 2

Assets = Liabilities + Stockholders' Equity

Short-Term Short-Term Long-Term Additional
Notes Long-Term Notes Notes Common Paid-in Retained
Cash Receivable Investments Equipment Buildings Payable Payable Stock Capital Earnings
Beg. 120,000 70,000 310,000 = 200,000 20,000 200,000 80,000
(a) +11,000 = +11,000
(b) –3,000 +30,000 = +27,000
(c) +20,000 = +10,000 +10,000
(d) –5,000 +10,000 = +5,000
(e) –2,000 +2,000 =
(f) –85,000 +85,000 =
(g) No effect =
+56,000 +2,000 +85,000 +110,000 +310,000 = +32,000 +211,000 +30,000 +210,000 +80,000

$563,000 $243,000 $320,000

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AP2–3. (dollars in thousands)

Req. 1 and 2
Cash Accounts Receivable Inventories
Beg. 20,824 Beg. 14,247 Beg. 162,389
(a) 1,020 3,400 (b)
(d) 4,020 2,980 (e) 14,247 162,389
(g) 310 1,830 (f)
Prepaid Expenses and
Other Current Assets
Beg. 18,830
17,964 18,830

Property, Plant Intangible Long-Term

and Equipment Assets Investments
Beg. 245,246 Beg. 45,128 Beg. 2,108
(f) 11,230 4,020 (d) (b) 3,400 (e) 2,980
252,456 48,528 5,088

Other Accounts Unearned

Assets Payable Revenue
Beg. 1,579 35,485 Beg. 56,714 Beg.
310 (g)
1,269 35,485 56,714

Accrued Expenses Dividends

Payable Payable
30,077 Beg. 0 Beg.
300 (h)
30,077 300

Long-Term Debt Other Long-Term Common

(current portion is $550) Liabilities Stock
1,066 Beg. 23,080 Beg. 491 Beg.
9,400 (f) 16 (a)
10,466 23,080 507

Additional Treasury Retained

Paid-in Capital Stock* Earnings
377,913 Beg. Beg. 656,597 642,122 Beg.
1,004 (a) (h) 300
378,917 656,597 641,822

* Reported as a reduction in Stockholders’ Equity (similar to Chipotle in Exhibit 2.1).

Financial Accounting, 11/e 2-51
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AP2–3. (continued)

Req. 3

No effect was recorded for (c). Ordering goods involves no exchange or receipt of
cash, goods, or services and thus is not a transaction.

Req. 4

Ethan Allen Interiors Inc.

Trial Balance
At September 30
(in thousands of dollars)

Debit Credit
Cash 17,964
Accounts receivable 14,247
Inventories 162,389
Prepaid expenses and other current assets 18,830
Property, plant and equipment 252,456
Intangible assets 48,528
Long-term investments 5,088
Other assets 1,269
Accounts payable 35,485
Unearned revenue 56,714
Accrued expenses payable 30,077
Dividends payable 300
Long-term debt (current portion, $550) 10,466
Other long-term liabilities 23,080
Common stock 507
Additional paid-in capital 378,917
Treasury stock 656,597
Retained earnings 641,822
Totals 1,177,368 1,177,368

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AP2–3. (continued)

Req. 5
Ethan Allen Interiors Inc.
Balance Sheet
At September 30
(in thousands of dollars)
Assets
Current assets
Cash $ 17,964
Accounts receivable 14,247
Inventories 162,389
Prepaid expenses and other current assets 18,830
Total current assets 213,430
Property, plant and equipment 252,456
Intangible assets 48,528
Long-term investments 5,088
Other assets 1,269
Total Assets $520,771
Liabilities
Current liabilities
Accounts payable $ 35,485
Unearned revenue 56,714
Accrued expenses payable 30,077
Dividends payable 300
Current portion of long-term debt 550
Total current liabilities 123,126
Long-term debt 9,916
Other long-term liabilities 23,080
Total liabilities 156,122
Stockholders’ Equity
Common stock ($0.01 par value) 507
Additional paid-in capital 378,917
Treasury stock (656,597)
Retained earnings 641,822
Total Stockholders’ Equity 364,649
Total Liabilities and Stockholders’ Equity $520,771

Req. 6
Current Total Current Assets $213,430
= = = 1.733
Ratio Total Current Liabilities $123,126

Ethan Allen maintains a relatively high current ratio, indicating that the company has
almost $2 in current assets to pay each dollar of current obligations.
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AP2–4. (dollars in thousands)

Transaction Type of Activity Effect on Cash

(a) F +1,020
(b) I 3,400
(c) NE NE
(d) I +4,020
(e) I 2,980
(f) I 1,830
(g) I +310
(h) NE NE

AP2-5
Req. 1

a. Cash (+A) ............................................................................ 18,296

Long-term debt (+L) ..................................................... 18,296

b. Long-term investments (+A) ................................................ 4,760

Short-term investments (+A) ............................................... 19,040
Cash (A) ..................................................................... 23,800

c. Property, plant, and equipment (+A) ................................... 11,043

Cash (A) ..................................................................... 9,603
Short-term notes payable (+L) ..................................... 1,440

d. Cash (+A) ............................................................................ 1,500

Common stock (+SE) ................................................... 1
Additional paid-in capital (+SE) ................................... 1,499

e. Cash (+A) ............................................................................ 19,038

Short-term investments (A) ........................................ 19,038

f. Retained earnings (SE) ..................................................... 11,156

Dividends payable (+L) ................................................ 11,156

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AP2–5. (continued)

Req. 2
Short-Term
Cash Investments Accounts Receivable
Beg. 14,004 Beg. 11,361 Beg. 17,656
(a) 18,296 23,800 (b) (b) 19,040 19,038 (e)
(d) 1,500 9,603 (c) 11,363 17,656
(e) 19,038
19,435
Inventories Other Current Assets
Beg. 2,131 Beg. 24,107
2,131 24,107

Long-Term Property, Plant, and Other

Investments Equipment Noncurrent Assets
Beg. 131,546 Beg. 20,844 Beg. 12,658
(b) 4,760 (c) 11,043
136,306 31,887 12,658

Accounts Accrued Unearned

Payable Expenses Revenue
30,520 Beg. 18,653 Beg. 8,587 Beg.
30,520 18,653 8,587

Short-term Dividends
Notes Payable Payable
6,376 0 Beg.
1,440 (c) 11,156 (f)
7,816 11,156

Other
Long-term Debt Noncurrent Liabilities
29,303 Beg. 28,157 Beg.
18,296 (a)
47,599 28,157

Common Additional Retained

Stock Paid-in Capital Earnings
1 Beg 25,112 Beg. 87,598 Beg.
1 (d) 1,499 (d) (f) 11,156
2 26,611 76,442
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AP2–5. (continued)

Req. 3

Kiwi Inc.
Trial Balance
At June 30, 2023
(in thousands)

Debit Credit
Cash 19,435
Short-term Investments 11,363
Accounts receivable 17,656
Inventories 2,131
Other current assets 24,107
Long-term investments 136,306
Property, plant, and equipment 31,887
Other noncurrent assets 12,658
Accounts payable 30,520
Accrued expenses 18,653
Unearned revenue 8,587
Short-term notes payable 7,816
Dividends payable 11,156
Long-term debt 47,599
Other noncurrent liabilities 28,157
Common stock 2
Additional paid-in capital 26,611
Retained earnings 76,442
Totals 255,543 255,543

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AP2–5. (continued)

Req. 4
Kiwi Inc.
Balance Sheet
At June 30, 2023
(in thousands)
ASSETS
Current assets:
Cash $ 19,435
Short-term investments 11,363
Accounts receivable 17,656
Inventories 2,131
Other current assets 24,107
Total current assets 74,692
Long-term investments 136,306
Property, plant, and equipment 31,887
Other noncurrent assets 12,658
Total assets $255,543
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 30,520
Accrued expenses 18,653
Unearned revenue 8,587
Dividends payable 11,156
Short-term notes payable 7,816
Total current liabilities 76,732
Long-term debt 47,599
Other noncurrent liabilities 28,157
Total liabilities 152,488
Stockholders’ equity:
Common stock 2
Additional paid-in capital 26,611
Retained earnings 76,442
Total stockholders’ equity 103,055
Total liabilities and stockholders’ equity $255,543

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AP2–5. (continued)

Req. 5
Current Current Assets $74,692
= = = 0.97
Ratio Current Liabilities $76,732

For every $1 of short-term liabilities, Kiwi Inc. has approximately $0.97 of current
assets. This suggests that Kiwi has nearly sufficient current resources to pay current
liabilities. It is likely that Kiwi has a very efficient cash management system and keeps
its current resources at lower levels to maximize investment opportunities.

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CONTINUING PROBLEM
CON2–1.

Req. 1

Debit Credit
a. Cash (+A) 25,000
………………………………………………….
Equipment (+A) …………………………………………. 36,000
Common stock (+SE)……………………. 200
Additional paid-in capital (+SE)………… 60,800

b. Land (+A)………………………………………… 18,000

Buildings 72,000
(+A)……………………………………..
Cash (A)…………………………………. 10,000
Notes payable (noncurrent) (+L)…..…… 80,000

c. Equipment (+A)…………………………………. 6,500

Cash (A)…………………………………. 2,500
Notes payable (current) (+L)……………. 4,000

d. No transaction – no exchange; just a promise of service by the

receptionist for a promise to pay cash for the service by PPSS.

e. Notes payable (noncurrent) (L)…..…………... 1,000

Cash (A)………………………………… 1,000

f. Short-term investments (+A)…………………… 5,000

Cash (A)…………………………………. 5,000

g. No transaction – ordering goods involves no exchange or receipt of

cash, goods, or services (a promise to deliver for a promise to pay
when delivered – an exchange of promises is not a transaction).

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CON2–1. (continued)

Req. 2

Cash Short-term Investments Equipment

Beg. 0 Beg. 0 Beg. 0
(a) 25,000 10,000 (b) (f) 5,000 (a) 36,000
2,500 (c) 5,000 (c) 6,500
1,000 (e) 42,500
5,000 (f)
6,500

Land Buildings
Beg. 0 Beg. 0
(b) 18,000 (b) 72,000
18,000 72,000

Notes Payable Notes Payable

(current) (noncurrent)
0 Beg. 0 Beg.
4,000 (c) (e) 1,000 80,000 (b)
4,000 79,000

Common Stock Additional Paid-in Capital

0 Beg. 0 Beg.
200 (a) 60,800 (a)
200 60,800

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CON2–1. (continued)

Req. 3

Penny’s Pool Service & Supply, Inc.

Trial Balance
March 31

Debit Credit
Cash 6,500
Short-term investments 5,000
Equipment 42,500
Land 18,000
Buildings 72,000
Notes payable (current) 4,000
Notes payable (noncurrent) 79,000
Common stock 200
Additional paid-in capital 60,800
Totals 144,000 144,000

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CON2–1. (continued)

Req. 4

Penny’s Pool Service & Supply, Inc.

Balance Sheet
March 31
Assets
Current Assets:
Cash $ 6,500
Short-term investments 5,000
Total current assets 11,500
Equipment 42,500
Land 18,000
Buildings 72,000
Total assets $144,000

Liabilities and Stockholder’s Equity

Current Liabilities:
Notes payable $ 4,000
Total current liabilities 4,000
Notes payable 79,000
Total liabilities 83,000
Stockholder’s Equity:
Common stock ($0.05 par value) 200
Additional paid-in capital 60,800
Total stockholder’s equity 61,000
Total liabilities and stockholder’s equity $144,000

Req. 5
Type of Activity Effect on Cash Flows
(I, F, or NE) (+ or - and amount)
(a) F + 25,000
(b) I - 10,000
(c) I - 2,500
(d) NE NE
(e) F - 1,000
(f) I - 5,000
(g) NE NE

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CON2–1. (continued)

Req. 6

Current Assets ÷ Current Liabilities = Current Ratio

On March 31 $11,500 ÷ $4,000 = 2.875

With a current ratio of 2.875, PPSS has liquidity with sufficient current assets to settle
short-term obligations. However, this may change as the inventory is received in April
and operations begin requiring paying cash for inventory purchases from suppliers,
advertising, utilities, employee salary, and other operating needs, and paying notes
payable when due. One of the most significant problems for new small businesses is
generating sufficient cash from operations to pay obligations and maintain liquidity.

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CASES AND PROJECTS

ANNUAL REPORT CASES

CP2-1.

1. b.
2. d.
3. b.
4. c.
5. c.

CP2–2.

1. $282
2. $164,965
3. 0.97
4. No
5. b.

CP2–3.

1. Current ratios  Target = 1.03 Walmart = 0.97

2. b.
3. a.
4. c.
5. d.

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FINANCIAL REPORTING AND ANALYSIS CASES

CP2–4.

Dollars are in thousands:

1. (a) Chipotle’s total assets for the quarter ended June 30, 2020 are $5,370,129.

(b) Current liabilities increased over six months from $666,593 at December 31,
2019, to $723,178 on June 30, 2020.

(c) Current = Current Assets = $1,150,343 = 1.591

Ratio at Current Liabilities $723,178
6/30/20

Chipotle’s current ratio decreased from the level of 1.609 on December 31, 2019
(as discussed in the chapter) to 1.591 on June 30, 2020. This indicates that,
between December 31, 2019, and June 30, 2020, Chipotle decreased its
liquidity slightly. Current assets increased by 7.3% while current liabilities
increased by a greater percentage of 8.5%. When the denominator increases at
a higher rate that the numerator, the ratio decreases.

2. (a) For the six months ended June 30, 2020, Chipotle spent $165,455 on the
purchase of leasehold improvements, property, and equipment.

(b) The total cash flows used in financing activities was a cash outflow of $104,203,
over half of which was from the $54,501 repurchase of Chipotle’s stock from
investors (called “treasury stock”).

CP2–5.

The major deficiency in this balance sheet is the inclusion of the owner’s personal
residence as a business asset. Under the separate entity assumption, each business
must be accounted for as an individual organization, separate and apart from its
owners. The improper inclusion of this asset as part of Frances Sabatier’s business:
 Overstates total assets by $300,000; total assets should be $105,000 rather
than $405,000, and
 Overstates stockholders’ equity that should be only $5,000, rather than
$305,000.
Since current assets and current liabilities were not affected, the current ratio remains
the same. However, other ratios involving long-term assets and/or stockholders’
equity will be affected.

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CP2–6.

Dollars are in thousands:

1. The company is a corporation because its owners are referred to as “stockholders.”

2. Assets = Liabilities + Stockholders’ Equity

$12,703,389 = $3,999,003 + $8,704,386

3. Current Assets ÷ Current Liabilities = Current Ratio

2019 $7,620,075 $ 832,476 9.154
2018 $7,111,036 $1,516,311 4.690

In 2019, for every $1 of current liabilities, Twitter maintained approximately $9.15 of

current assets, suggesting that Twitter is highly liquid and has the ability to pay its
short-term obligations with current assets in the upcoming year. Since 2018, the
current ratio has increased from 4.69. The interpretation of this ratio would be more
useful given information on the company’s current ratio compared to the current
ratio for the industry and/or competitors and additional years of data to observe
trends.

4. Accounts payable (L) ........................................................

161,148
Cash (A) .................................................................... 161,148

5. Until 2019, Twitter reported an Accumulated Deficit, suggesting that the company
was not profitable through 2018. It appears that Twitter was profitable in 2019,
based on a positive amount in Retained Earnings of $11,586. Note that the
Accumulated Deficit account in 2018 represented the cumulative losses of the firm
since the business began, assuming no dividends were declared (likely given its
deficit position). The current year’s retained earnings represents the cumulative
earnings of the company that are not distributed to the stockholders and are
reinvested in the business.

In addition, Twitter appears profitable in the most recent year because the
company’s Accumulated Deficit became retained earnings (due to further profits). It
is possible to determine the amount of net income by using the following equation,
assuming no dividends were declared:

(in thousands)
Beginning For the Year Ending
Accum. Deficit + Net Income(Loss) – Dividends declared = Retained Earnings
$(1,454,073) + $ ? – $ 0 = $11,586

Thus, net income for the most recent year was $1,465,659.

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CRITICAL THINKING CASES

CP2–7.

Req. 1
LettuceDoThis.Com, Inc.
Balance Sheet
December 31
Assets
Current Assets:
Cash $ 1,000
Accounts receivable 8,000
Inventory 8,000
Total current assets 17,000
Furniture and fixtures 52,000
Delivery truck (net) 12,000
Buildings (net) 60,000
Total assets $141,000

Liabilities
Current Liabilities:
Accounts payable $ 16,000
Payroll taxes payable 13,000
Total current liabilities 29,000
Notes payable (due in three years) 15,000
Mortgage payable 50,000
Total liabilities 94,000

Stockholders' Equity
Common stock 4,000
Additional paid-in capital 76,000
Accumulated deficit (33,000)
Total stockholders' equity 47,000
Total liabilities and stockholders' equity $141,000

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CP2–7. (continued)

Req. 2

Dear ___________,

I corrected the balance sheet for LettuceDoThis.Com, Inc. Primarily, I reduced

the amount reported for buildings to $60,000, which is the historical cost less any
depreciation. Estimated market value is not a generally accepted accounting principle
for recording property, plant, and equipment. The $38,000 difference ($98,000 –
$60,000) reduces total assets and reduces retained earnings. In fact, retained
earnings becomes negative suggesting that there may have been several years of
operating losses.
Before making a final decision on investing in this company, you should examine
the past three years of audited income statements and the past two years of audited
balance sheets to identify positive and negative trends for this company. You can also
compare this company's current ratio to that of the industry to assess trends in liquidity,
and compare how this company’s long-term debt as a proportion of stockholders’ equity
has changed over time. You should also learn as much about the industry as you can
by reviewing recent articles on economic and technological trends that may have an
impact on this company.

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CP2–8.

1. The most obvious parties harmed by the fraud at Celadon Group, Inc., were the
stockholders and creditors. Stockholders were purchasing shares of stock that
were inflated due to the fraud. Creditors were lending funds to the company based
on inflated income statement and balance sheet information. When the fraud was
discovered, the stock price dropped causing the stockholders to lose money on their
investments. In addition, the creditors have a lower probability of receiving full
payment on their loans.
Those who were helped initially by the fraud included the former executives who
were able to receive substantial bonuses based on the inflated results of
operations. However, several of the top executives at Celadon and its subsidiaries
have been charged with fraud and other violations.

2. Celadon likely set certain financial goals and tied the former executives’ bonuses to
meeting the goals. Adopting targets is a good tool for monitoring progress toward
goals and identifying problem areas, such as rising costs or sagging sales. Better
decision making can result by heading off potential problems before they grow too
large. However, setting unrealistic financial targets, especially in poor economic
times, can result in those responsible for meeting the targets circumventing
appropriate procedures and policies for their own benefit.

YOU AS ANALYST: ONLINE COMPANY RESEARCH (an individual or team project)

CP2–9.

The solution to this project will depend on the company(ies) and/or accounting
period selected for analysis.

BUSINESS ANALYTICS AND DATA VISUALIZATION IN EXCEL AND

TABLEAU

The solutions to these exercises are auto graded on Connect, as assigned by the
instructor.

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