Solution Manual for Financial Accounting Tools For Business Decision Making 10th Edition Paul D. Kimmel, Jerry J. Weygandt, Jill E. Mitchell 2024 | All Chapters A+

Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 1 CHAPTER 1 Introduction to Financial Statements Learning Objectives 1. Identify the forms of business organization and the uses of accounting information. 2. Explain the three principal types of business activity. 3. Describe the four financial statements and how they are prepared. *4. Explain the career opportunities in accounting. ANSWERS TO QUESTIONS 1. The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and (3) corporation. LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA BC: Governance Perspective 2. Advantages of a corporation are limited liability (stockholders not being personally liable for corporate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a corporation are increased taxation and government regulations. LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA BC: Governance Perspective 3. Proprietorships and partnerships receive favorable tax treatment compared to corporations and are easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and difficulty in obtaining financing compared to corporations. LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA BC: Governance Perspective 4. Yes. Companies can choose one of the hybrid business forms, limited liability corporations (LLCs) or subchapter S corporations, which combine the tax advantages of partnerships with the limited liability of corporations. LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA BC: Governance Perspective 5. Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing financial information. Accounting provides financial information to interested users through the preparation and distribution of financial statements. LO 1 BT: C Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 6. Internal users are managers who plan, organize, and run a business. To assist management, accounting provides timely internal reports. Examples include financial comparisons of operating 2 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) alternatives, projections of income from new sales campaigns, forecasts of cash needs for the next year, and financial statements. LO 1 BT: C Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 7. External users are those outside the business who have either a present or potential direct financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regulatory agencies, labor unions, customers, and economic planners). LO 1 BT: C Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 8. The four most common types of data analytics and the basic question each addresses are: Descriptive (What happened?), Diagnostic (Why did it happen?), Predictive (What is likely to happen?), and Prescriptive (What should we do about it?). LO 1 BT: K Difficulty: E TOT: 2 min. AACSB: nowledge AICPA AC: Measurement Analysis and Interpretation Questions Chapter 1 (Continued) 9. The three types of business activities are financing activities, investing activities, and operating activities. Financing activities include borrowing money and selling shares of stock. Investing activities include the purchase and sale of property, plant, and equipment. Operating activities include selling goods, performing services, and purchasing inventory. LO 2 BT: C Difficulty: M TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting 10. (a) Income statement. (d) Balance sheet. (b) Balance sheet. (e) Balance sheet. (c) Income statement. (f) Balance sheet. LO 3 BT: K Difficulty: M TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting 11. When a company pays dividends, it reduces the amount of assets available to pay creditors. Therefore, banks and other creditors monitor dividend payments to ensure they do not put a company’s ability to make debt payments at risk. LO 3 BT: C Difficulty: M TOT: 2 min. AACSB: Knowledge AICPA AC: Measurement Anallysis and Interpretation 12. Yes. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears in the retained earnings statement—it is shown as an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company is also included in the balance sheet. It is included in the retained earnings account which appears in the stockholders’ equity section of the balance sheet. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 13. The primary purpose of the statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 3 14. The three categories of the statement of cash flows are operating activities, investing activities, and financing activities. The categories were chosen because they represent the three principal types of business activities. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 15. Retained earnings is the net income retained in a corporation. Retained earnings is increased by net income and is decreased by dividends and a net loss. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 16. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 17. (a) Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim on net assets. (b) The items that affect stockholders’ equity are issuance of common stock and the components of retained earnings (dividends, revenues, and expenses). LO 3 BT: K Difficulty: E TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting 18. The liabilities are (b) Accounts payable and (g) Salaries and wages payable. LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 19. (a) Net income from the income statement is reported as an increase to retained earnings on the retained earnings statement. (b) The ending amount on the retained earnings statement is reported as the retained earnings amount on the balance sheet. (c) The ending amount on the statement of cash flows is reported as the cash amount on the balance sheet. LO 3 BT: C Difficulty: M TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting 20. The purpose of the management discussion and analysis section is to provide management’s views on its ability to pay short-term obligations, its ability to fund operations and expansion, and its results of operations. The MD&A section is a required part of the annual report. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: Knowledge AICPA AC: Reporting 21. An unqualified opinion shows that, in the opinion of an independent auditor, the financial statements have been presented fairly, in conformity with generally accepted accounting principles. This gives investors more confidence that they can rely on the figures reported in the financial statements. LO 3 BT: C Difficulty: E TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting 4 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 22. Information included in the notes to the financial statements clarifies information presented in the financial statements and includes descriptions of accounting policies, explanations of uncertainties and contingencies, and statistics and details too voluminous to be reported in the financial statements. LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting 23. Using dollar amounts, Apple’s accounting equation (in millions) is: Assets = Liabilities + Stockholders’ Equity $323,,888 $258,549 $65,339 LO 3 BT: AP Difficulty: E TOT: 2 min. AACSB: Analytic AICPA AC: Reporting Questions Chapter 1 (Continued) 24. A critical audit matter is an audit issue that was material in size and that involved challenging, subjective, or complex auditor judgement. LO 3 BT: K Difficulty: E TOT: 2 min. AACSB: Knowledge AICPA AC: Research SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1.1 (a) P Shared control, tax advantages, increased skills and resources. (b) SP Simple to set up and maintains control with owner. (c) C Easier to transfer ownership and raise funds, no personal liability. LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA BC: Governance Perspective BRIEF EXERCISE 1.2 (a) 4 Investors in common stock (b) 3 Marketing managers (c) 2 Creditors (d) 5 Chief Financial Officer (e) 1 Internal Revenue Service LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA AC: Measurement Analysis and Interpretation Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 5 BRIEF EXERCISE 1.3 O (a) Cash received from customers. F (b) Cash paid to stockholders (dividends). F (c) Cash received from issuing new common stock. O (d) Cash paid to suppliers. I (e) Cash paid to purchase a new office building. LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA AC: Measurement Analysis and Interpretation & Reporting BRIEF EXERCISE 1.4 E (a) Advertising expense R (b) Service revenue E (c) Insurance expense E (d) Salaries and wages expense D (e) Cash distributed to stockholders. R (f) Rent revenue E (g) Utilities expense NSE (h) Cash purchase of equipment C (i) Cash received from investors. LO 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: Knowledge AICPA AC: Measurement Analysis and Interpretation & Reporting BRIEF EXERCISE 1.5 KAROL COMPANY Balance Sheet December 31, 2025 Assets Cash ................................................................................. $22,000 Accounts receivable....................................................... 71,000 Total assets ..................................................................... $93,000 Liabilities and Stockholders‘ Equity Liabilities Accounts payable ................................................... $65,000 Stockholders‘ equity Common stock ........................................................ $18,000 6 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) Retained earnings ................................................... 10,000 Total stockholders‘ equity.............................................. 28,000 Total liabilities and stockholders‘ equity...................... $93,000 LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA AC: Reporting BRIEF EXERCISE 1.6 IS (a) Income tax expense BS (b) Inventory BS (c) Accounts payable BS (d) Retained earnings BS (e) Equipment IS (f) Sales revenue IS (g) Cost of goods sold BS (h) Common stock BS (i) Accounts receivable IS (j) Interest expense LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Knowledge AICPA AC: Reporting BRIEF EXERCISE 1.7 IS (a) Revenue during the period. BS (b) Supplies on hand at the end of the year. SCF (c) Cash received from issuing new bonds during the period. BS (d) Total debts outstanding at the end of the period. LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting BRIEF EXERCISE 1.8 (a) $90,000 + $230,000 = $320,000 (Total assets) (Liabilities + Stockholders‘ equity = Assets) ($90,000 + $230,000 = $320,000) (b) $170,000 – $80,000 = $90,000 (Total liabilities) (Assets – Stockholders‘ equity = Liabilities) ($170,000 – $80,000 = $90,000) (c) $800,000 – 0.25($800,000) = $600,000 (Stockholders‘ equity) (Assets – (0.25 × Assets) = Stockholders‘ equity) Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 7 [$800,000 – (0.25 × $800,000) = $600,000] LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA: AC: Measurement Analysis and Interpretation BRIEF EXERCISE 1.9 (a) ($800,000 + $150,000) – ($500,000 – $80,000) = $530,000 (Stockholders‘ equity) [(Assets ± Change in assets) – (Liabilities ± Change in liabilities) = Stockholders‘ equity] [($800,000 + $150,000) – ($500,000 – $80,000) = $530,000] (b) ($500,000 + $100,000) + [($800,000 – $500,000) – $70,000] = $830,000 (Assets) [(Liabilities ± Change in liabilities) + (Stockholders‘ equity ± Change in stockholders‘ equity) = Assets] [($500,000 + $100,000) + [($800,000 – $500,000) – $70,000] = $830,000] (c) ($800,000 – $80,000) – [($800,000 – $500,000) + $110,000] = $310,000 (Liabilities) [(Assets ± Change in assets) – (Stockholders‘ equity ± Change in stockholders‘ equity) = Liabilities] [($800,000 – $80,000) – [($800,000 – $500,000) + $110,000] = $310,000] LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA AC: Measurement Analysis and Interpretation BRIEF EXERCISE 1.10 A (a) Accounts receivable L (b) Salaries and wages payable A (c) Equipment A (d) Supplies SE (e) Common stock L (f) Notes payable LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Knowledge AICPA AC: Reporting BRIEF EXERCISE 1.11 (d) All of these are required. 8 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting SOLUTIONS TO DO IT! EXERCISES DO IT! 1.1a (a) Easier to transfer ownership: corporation (b) Easier to raise funds: corporation (c) More owner control: sole proprietorship (d) Tax advantages: sole proprietorship and partnership (e) No personal legal liability: corporation LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: Kowledge AICPA BC: Governance Perspective DO IT! 1.1b _3_ (a) Accounting _5_ (b) Internal users of financial information _2_ (c) Element of Sarbanes-Oxley Act _1_ (d) External users of financial information _4_ (e) Steps in solving an ethical dilemma LO 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting DO IT! 1.2 (a) Issuance of ownership shares is classified as common stock. (b) Land purchased is classified as an asset. (c) Amounts owed to suppliers are classified as liabilities. (d) Bonds payable are classified as liabilities. (e) Amount recorded from selling a product is classified as revenue. (f) Cost of advertising is classified as expense. LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 9 DO IT! 1.3a GRAY CORPORATION Income Statement For the Year Ended December 31, 2025 Revenues Service revenue............................................. $25,000 Expenses Rent expense................................................. $10,000 Advertising expense ..................................... 4,000 Supplies expense.......................................... 1,700 Total expenses ................................... 15,700 Net income ............................................................ $ 9,300 [Serv. rev.– Tot. expenses = Net inc. or (loss)] [$25,000 – ($10,000 + $4,000 + $1,700) = $9,300] GRAY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2025 Retained earnings, January 1 .................................. $ –0– Add: Net income...................................................... 9,300 9,300 Less: Dividends ........................................................ 2,500 Retained earnings, December 31............................. $6,800 (Beg. ret. earn. + Net inc. – Div.= End. ret. earn.) ($0 + $9,300 – $2,500 = $6,800) GRAY CORPORATION Balance Sheet December 31, 2025 Assets Cash ............................................................................ $ 3,100 Accounts receivable.................................................. 2,000 Supplies...................................................................... 1,900 10 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) Equipment.................................................................. 26,800 Total assets................................................................ $33,800 Liabilities and Stockholders‘ Equity Liabilities Notes payable..................................................... $ 7,000 Account payable ................................................ 5,000 Total liabilities ......................................... $12,000 Stockholders‘ equity Common stock ................................................... 15,000 Retained earnings.............................................. 6,800 Total stockholders‘ equity ..................... 21,800 Total liabilities and stockholders‘ equity................ $33,800 (Assets = Liabl. + SE) [($3,100 + $2,000 + $1,900 + $26,800) = (($7,000 + $5,000) + ($15,000 + $6,800))] LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA AC: Reporting DO IT! 1.3b (a) Description of ability to pay near-term obligations: MD&A (b) Unqualified opinion: auditor‘s report (c) Details concerning liabilities, too voluminous to be included in the statements: notes to the financial statements (d) Description of favorable and unfavorable trends: MD&A (e) Certified Public Accountant (CPA): auditor‘s report (f) Descriptions of significant accounting policies: notes to the financial statements LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Knowledge AICPA AC: Reporting SOLUTIONS TO EXERCISES EXERCISE 1.1 (a) 8. Auditor‘s opinion (b) 1. Corporation (c) 6. Common stock (d) 7. Accounts payable (e) 3. Accounts receivable (f) 2. Creditor (g) 9. Hybrid form of organization Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 11 (h) 5. Stockholder (i) 4. Partnership LO 1-3 BT: K Difficulty: Easy TOT: 2 min. AACSB: Knowledge AICPA AC: Measurement Analysis and Interpretation, Reporting EXERCISE 1.2 Sole Proprietorship Partnership Corporation 1. No personal liability. F F T 2. Owners pay personal income tax on company income. T T F 3. Generally the easiest form of organization to raise capital. F F T 4. Ownership indicated by shares. F F T 5. Owned by one person. T F F 6. Limited life. T T F 7. Usually easiest form of organization to set up. T F F LO 1 BT: C Difficulty: Medium TIME: 10 min. AACSB: Knowledge AICPA BC: Governance Perspective 12 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.3 (a) Type of Evaluation (b) Type of User Investor 5 External Marketing manager 4 Internal Creditor 1 External Chief financial officer 6 Internal Internal revenue service 2 External Labor union 3 External LO 1 BT: C Difficulty: Easy TIME: 5 min. AACSB: Knowledge AICPA AC: Reporting EXERCISE 1.4 a. 8 Assets = Liabilities + Stockholders‘ Equity. b. 1 An individual who has met certain criteria and is thus allowed to perform audits of corporations. c. 4 Payments of cash from a corporation to its stockholders. d. 9 The cost of assets consumed or services used in the process of generating revenues. e.10 Amounts owed to creditors in the form of debts and other obligations. f. 2 A section of the annual report that presents management‘s views on the company‘s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations. g. 6 The amount by which expenses exceed revenues. h. 3 The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business. i. 11 Regulations passed by Congress to reduce unethical corporate behavior. j. 7 A business owned by one person. k. 5 The owner‘s claim to assets. LO 1-3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Knowledge AICPA AC: Measurement Analysis and Interpretation, Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 13 EXERCISE 1.5 (a) Answers will vary. Financing Investing Operating Abitibi-Consolidated Inc. Sale of stock Purchase long-term investments Sale of newsprint California State University—Northridge Student Union Borrow money from a bank Purchase office equipment Payment of wages and benefits Oracle Corporation Sale of bonds Purchase other companies Payment of research expenses Aquilini Investment Group Payment of dividends to stockholders Purchase hockey equipment Payment for ice rink rentals Grant Thornton LLP Distribute earnings to partners Purchase computers Bill clients for professional services Southwest Airlines Sale of stock Purchase airplanes Payment for jet fuel (b) Financing Sale of stock is common to all corporations. Borrowing from a bank is common to all businesses. Distribution of earnings to partners would only be common to partnerships. Payment of dividends is common to all corporations. Sale of bonds is common to large corporations. Investing Purchase and sale of property, plant, and equipment would be common to all businesses—the types of assets would vary according to the type of business and some types of businesses require a larger investment in long-lived assets. A new business or expanding business would be more apt to acquire property, plant, and equipment while a mature or declining business would be more apt to sell it. Purchase of long-term investments and other companies would be common to all businesses. Operating The general activities identified would be common to most businesses, although the service or product would differ. LO 2 BT: C Difficulty: Medium TOT: 10 min. AACSB: Knowledge AICPA AC: Measurement Analysis and Interpretation, Reporting EXERCISE 1.6 14 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 1. O 2. I 3. O 4. F 5. F 6. F 7. O 8. F LO 2 BT: K Difficulty: Easy TIME: 5 min. AACSB: Knowledge AICPA AC: Reporting EXERCISE 1.7 Accounts payable L Accounts receivable A Equipment A Sales revenue R Service revenue R Inventory A Mortgage payable L Supplies expense E Rent expense E Salaries and wages expense E LO 2, 3 BT: C Difficulty: Easy TOT: 3 min AACSB: Knowledge AICPA AC:, Reporting EXERCISE 1.8 1. IS 9. BS 2. BS, SCF 10. IS 3. SCF 11. IS 4. IS 12. SCF 5. BS 13. BS 6. RE 14. BS 7. RE 15. BS 8. BS LO 3 BT: K Difficulty: Easy TIME: 10 min. AACSB: Knowledge AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 15 EXERCISE 1.9 BENSER CO. Income Statement For the Year Ended December 31, 2025 Revenues Service revenue ....................................................... $58,000 Expenses Salaries and wages expense .................................. $30,000 Rent expense............................................................ 10,400 Utilities expense....................................................... 2,400 Advertising expense................................................ 1,800 Total expenses ................................................. 44,600 Net income ....................................................................... $13,400 (Serv. rev. – Tot. exp. = Net inc.) [$58,000 – ($30,000 + $10,400 + $2,400 + $1,800) = $13,400] BENSER CO. Retained Earnings Statement For the Year Ended December 31, 2025 Retained earnings, January 1 ........................................................... $67,000 Add: Net income............................................................................... 13,400 80,400 Less: Dividends ................................................................................. 6,000 Retained earnings, December 31...................................................... $74,400 (Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($67,000 + $13,400 – $6,000 = $74,400) LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA AC: Reporting 16 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.10 (a) MERCK AND CO. Income Statement For the Year Ended December 31, 2025 (in millions) Revenues Sales revenue .................................................. $38,576.0 Expenses Cost of goods sold.......................................... $ 9,018.9 Selling and administrative expenses ............ 8,543.2 Research and development expense............ 5,845.0 Income tax expense ........................................ 2,267.6 Total expenses............................................. 25,674.7 Net income ................................................................ $12,901.3 (Sales rev. – Tot. exp. = Net inc.) [$38,576.0 – ($9,018.9 + $8,543.2 + $5,845.0 + $2,267.6) = $12,901.3] MERCK AND CO. Retained Earnings Statement For the Year Ended December 31, 2025 (in millions) Retained earnings, January 1 ................................. $43,698.8 Add: Net income .................................................... 12,901.3 56,600.1 Less: Dividends ....................................................... 3,597.7 Retained earnings, December 31............................ $53,002.4 (Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($43,698.8 + $12,901.3 – $3,597.7 = $53,002.4] Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 17 EXERCISE 1.10 (Continued) (b) The short-term implication would be a decrease in expenses of $2,922.5 ($5,845 × 50%) resulting in a corresponding increase in income (ignoring income taxes). If all other revenues and expenses remain unchanged, decreasing research and development expenses would produce 22.7% more net income ($2,922.5 ÷ $12,901.3). The long-term implications would be more difficult to quantify but it is safe to predict that a reduction in research and development expenses would probably result in lower sales revenues in the future. Pharmaceutical companies are usually able to charge higher prices for newly developed products while lower cost generic versions usually replace older products. Decreasing research and development activities will probably mean fewer new products. The stock market‘s initial reaction might be positive since Merck‘s net income would increase significantly. Such a reaction would probably be very short-lived as more knowledgeable investors reviewed Merck‘s financial statements and discovered the cause of the increase. LO 3 BT: AP Difficulty: Hard TOT: 8 min. AACSB: Analytic AICPA AC: Reporting 18 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.11 ZHENG INC. Retained Earnings Statement For the Year Ended December 31, 2025 Retained earnings, January 1 .................................. $130,000 Add: Net income...................................................... 225,000* 355,000 Less: Dividends........................................................ 65,000 Retained earnings, December 31............................. $290,000 *Service revenue ....................................................... $400,000 *Total expenses ......................................................... 175,000 *Net income................................................................ $225,000 (Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) [$130,000 + ($400,000 – $175,000) – $65,000 = $290,000] LO 3 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA AC: Reporting EXERCISE 1.12 RANDALL INC. Balance Sheet December 31, 2025 Assets Cash............................................................................ $ 6,250 Accounts receivable ................................................. 2,400 Inventory .................................................................... 2,840 Supplies...................................................................... 3,760 Equipment (net) ......................................................... 108,200 Total assets............................................................ $123,450 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 19 EXERCISE 1.12 (Continued) Liabilities and Stockholders‘ Equity Liabilities Notes payable ................................................ $ 31,500 Accounts payable.......................................... 3,700 Interest payable ............................................. 580 Salaries and wages payable......................... 745 Unearned service revenue............................ 850 Total liabilities................................................... $37,375 Stockholders‘ equity Common stock............................................... 50,700 Retained earnings**....................................... 35,375 Total stockholders‘ equity* ............................. 86,075 Total liabilities and stockholders‘ equity........... $123,450 *Tot. assets – Total liabl. = Total SE $123,450 – $37,375 = $86,075 **Tot. SE – Common stk. = Ret. earn. $86,075 – $50,700 = $35,375 LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA AC: Reporting EXERCISE 1.13 (a) Lee Corporation is distributing nearly all of this year‘s net income as dividends. This suggests that Lee is not pursuing rapid growth. Companies that have a lot of opportunities for growth pay low dividends. (b) Steele Corporation is not generating sufficient cash provided by operating activities to fund its investing activities. Instead it generates additional cash through financing activities. This is common for companies in their early years of existence. LO 3 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA AC: Reporting 20 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.14 (a) A Cash SE Retained earnings E Cost of goods sold E Salaries and wages expense A Prepaid insurance A Inventory A Accounts receivable R Sales revenue L Notes payable L Accounts payable R Service revenue E Interest expense (b) LONYEAR INC. Income Statement For the Year Ended December 31, 2025 Revenues Sales revenue ....................................... $584,951 Service revenue .................................... 4,806 Total revenues................................... $589,757 Expenses Cost of goods sold............................... 438,458 Salaries and wages expense............... 115,131 Interest expense ................................... 1,882 Total expenses.................................. 555,471 Net income .................................................... $ 34,286 [Tot. rev. – Tot. exp. = Net inc.] [($584,951 + $4,806) – ($438,458 + $115,131 + $1,882) = $34,286] LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA AC: Measurement Analysis and Interpretation, Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 21 EXERCISE 1.15 (a) E Interest expense A Equipment, net L Interest payable E Depreciation expense L Notes payable A Supplies R Sales revenue SE Common stock A Cash E Supplies expense E Salaries and wages expense (b) FAMILIA INC. Income Statement For the Year Ended December 31, 2025 Revenues Sales revenue....................................... $44,300 Expenses Salaries and wages expense.............. $15,600 Depreciation expense ......................... 3,200 Interest expense .................................. 2,200 Supplies expense ................................ 900 Total expenses................................. 21,900 Net income.……………………………………. $22,400 [Tot. rev. – Tot. exp. = Net inc.] [$44,300 – ($15,600 + $3,200 + $2,200 + $900) = $22,400] LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA AC: Reporting 22 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.16 First note that the retained earnings statement shows that (b) equals $27,000. Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders‘ equity $5,000 + a + $27,000 = $62,000 a + $32,000 = $62,000 a = $30,000 Common stock Beginning retained earnings + Net income – Dividends = Ending retained earnings $12,000 + e – $5,000 = $27,000 $7,000 + e = $27,000 e = $20,000 Net income From above, we know that net income (d) equals $20,000. Revenues – Cost of goods sold – Salaries and wages expense = Net income $85,000 – c – $10,000 = $20,000 $75,000 – c = $20,000 c = $55,000 Cost of goods sold LO 3 BT: AN Difficulty: Hard TOT: 7 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 23 EXERCISE 1.17 (c) $37,000 (given) (d) $97,000 = ($22,000 + $38,000 + $37,000) (b) $97,000 (See (d)) (a) $3,000 = ($97,000 – $29,000 – $65,000) (e) $17,000 = [$53,000 – ($25,000 + $1,000 + $10,000)] (g) $25,000 (given) (f) $18,000 = ($37,000 + $6,000 – $25,000) LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA AC: Reporting EXERCISE 1.18 (a) Service revenue ............................................. $132,000 Sales revenue................................................. 25,000 Total revenues........................................ $157,000 Expenses ........................................................ 126,000 Net income...................................................... $ 31,000 (Tot. rev. – Exp. = Net inc.) [($132,000 + $25,000) – $126,000 = $31,000] (b) OTAY LAKES PARK Retained Earnings Statement For the Year Ended December 31, 2025 Retained earnings, January 1.................................................. $ 5,000 Add: Net income ..................................................................... 31,000 36,000 Less: Dividends ....................................................................... 9,000 Retained earnings, December 31 ............................................ $27,000 (Beg. ret. earn. + Net inc. – Div. = End. ret. earn.) ($5,000 + $31,000 – $9,000 = $27,000) 24 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.18 (Continued) OTAY LAKES PARK Balance Sheet December 31, 2025 Assets Cash ...................................................................... $ 8,500 Supplies................................................................ 5,500 Equipment ............................................................ 114,000 Total assets.......................................................... $128,000 Liabilities and Stockholders‘ Equity Liabilities Notes payable............................................... $50,000 Accounts payable ........................................ 11,000 Total liabilities ...................................... $ 61,000 Stockholders‘ equity Common stock............................................. 40,000 Retained earnings........................................ 27,000 Total stockholders‘ equity .................. 67,000 Total liabilities and stockholders‘ equity.......... $128,000 (Assets = Liabl. + SE) [($8,500 + $5,500 + $114,000) = (($50,000 + $11,000) + ($40,000 + $27,000))] (c) The income statement indicates that revenues from the general store were only about 16% ($25,000 ÷ $157,000) of total revenues which tends to support Walt‘s opinion. In order to decide if the store is ―more trouble than it is worth,‖ I would need to know the amount of expenses attributable to the general store. The income statement reports all expenses in a single category rather than separating them into camping and general store expenses to correspond with revenues. A break down into two categories would help me decide if the general store is generating a profit or loss. Even if the general store is operating at a loss, I might recommend retaining it if campers indicated that the convenience of having a general store on site was an important amenity in selecting a campground. LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 25 EXERCISE 1.19 (a) SE Retained earnings E Cost of goods sold E Selling and administrative expenses A Cash L Notes payable E Interest expense L Bonds payable A Inventory R Sales revenue L Accounts payable SE Common stock E Income tax expense (b) KELLOGG COMPANY Income Statement For the Year Ended December 31, 2025 (in millions) Revenues Sales revenue ............................................. $12,575 Expenses Cost of goods sold .................................... $7,184 Selling and administrative expenses....... 3,390 Income tax expense................................... 498 Interest expense......................................... 295 Total expenses ................................... 11,367 Net income.......................................................... $ 1,208 [Sales rev. – Tot. exp. = Net inc.] [$12,575 – ($7,184 + $3,390 + $498 + $295) = $1,208] LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA AC: Reporting 26 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.20 (a) WILLIAMS CORPORATION Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Cash received from customers ....................... $ 50,000) Cash paid to suppliers ..................................... (16,000) Net cash provided by operating activities ..... $ 34,000) Cash flows from investing activities Cash paid for new equipment.......................... (28,000) Net cash used by investing activities............. (28,000) Cash flows from financing activities Cash received from lenders............................. 20,000 Cash dividends paid......................................... (8,000) Net cash provided by financing activities...... 12,000 Net increase in cash ................................................. ) 18,000 Cash at beginning of period .................................... 12,000 Cash at end of period ............................................... $ 30,000 (Cash flows from oper., invest., and fin. act. = Net change in cash) [($50,000 – $16,000) – $28,000 + ($20,000 – $8,000) = $18,000] (b) As a creditor, I would feel reasonably confident that Williams has the ability to repay its lenders. During 2025, Williams generated $34,000 of cash from its operating activities. This amount more than covered its expenditures for new equipment but not both equipment purchases and dividends. LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 27 EXERCISE 1.21 (a) SOUTHWEST AIRLINES Statement of Cash Flows For the Year Ended December 31, 2025 (in millions) Cash flows from operating activities Cash received from customers .......................... $9,823 Cash paid for goods and services ..................... (6,978) Net cash provided by operating activities......... $2,845 Cash flows from investing activities Cash paid for property and equipment.............. (1,529) Net cash used by investing activities ................ (1,529) Cash flows from financing activities Cash received from issuance of long-term debt................................................... 500 Cash received from issuance of common stock .................................................. 144 Cash paid for repurchase of common stock...... (1,001) Cash paid for repayment of debt......................... (122) Cash paid for dividends....................................... (14) Net cash used by financing activities................. (493) Net increase in cash ................................................... 823 Cash at beginning of period ...................................... 1,390 Cash at end of period ................................................. $2,213 (Cash flows from oper., invest., and fin. act. = Net change in cash) [($9,823 – $6,978) – $1,529 + ($500 + $144 – $1,001 – $122 – $14) = $823] (b) Southwest reported $2,845,000,000 cash from operating activities but spent $1,529,000,000 to invest in new property and equipment. Its cash from operating activities was sufficient to finance its investing activities. Southwest supplemented the cash from operating activities by issuing long-term debt and additional shares of common stock. It used excess cash to repurchase stock, pay down debt, and pay dividends. In total, it generated more cash from operating activities than it paid for investing and financing activities resulting in a net increase in cash for 2025. LO 3 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analytic AICPA AC: Reporting 28 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.22 BEESON COMPANY Balance Sheet December 31, 2025 Assets Cash................................................................................. $18,000 Accounts receivable ...................................................... 12,000 Supplies........................................................................... 9,500 Equipment....................................................................... 40,000 Total assets..................................................................... $79,500 Liabilities and Stockholders‘ Equity Liabilities Accounts payable................................................... $16,000 Stockholders‘ equity Common stock........................................................ $40,000 Retained earnings .................................................. 23,500* Total stockholders‘ equity............................................. 63,500 Total liabilities and stockholders‘ equity..................... $79,500 *$31,500 – $8,000 (Assets = Liabl. + SE) [($18,000 + $12,000 + $9,500 + $40,000) = ($16,000 + ($40,000 + ($31,500 – $8,000)))] LO 3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 29 EXERCISE 1.23 All dollars are in millions. (a) Assets Cash ............................................................................................. $ 2,291.1 Accounts receivable................................................................... 2,883.9 Inventory...................................................................................... 2,357.0 Equipment ................................................................................... 1,957.7 Buildings...................................................................................... 3,759.9 Total assets ................................................................................. $13,249.6 Liabilities Notes payable.............................................................................. $ 342.9 Accounts payable ....................................................................... 2,815.8 Mortgage payable ....................................................................... 1,311.5 Income taxes payable................................................................. 86.3 Total liabilities ............................................................................. $ 4,556.5 Stockholders‘ Equity Common stock ............................................................................ $ 2,874.2 Retained earnings....................................................................... 5,818.9 Total stockholders‘ equity ......................................................... $ 8,693.1 (b)   Assets Liabilities Stockholders‘ Equity $13,249.6 $4,556.5 $8,693.1 (c) Nike has relied more heavily on equity than debt to finance its assets. Debt (liabilities) financed 34% of its assets ($4,556.5 ÷ $13,249.6) compared to equity financing of 66% ($8,693.1 ÷ $13,249.6). LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA AC: Reporting 30 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.24 (a) Assets = Liabilities + Stockholders‘ Equity $110,000 = $70,000 + (a) (a) = $40,000 (b) Assets = Liabilities + Stockholders‘ Equity (b) = $120,000 + $60,000 (b) = $180,000 (c) Beginning + Revenues – Expenses – Dividends = Ending Stockholders‘ Stockholders‘ Equity Equity $40,000(a) + $215,000 – $165,000 – (c) = $60,000 $ 90,000 – (c) = $60,000 (c) = $30,000 (d) Assets = Liabilities + Stockholders‘ Equity $150,000 = (d) + $70,000 (d) = $80,000 (e) Assets = Liabilities + Stockholders‘ Equity $180,000 = $ 55,000 + (e) (e) = $125,000 (f) Beginning + Revenues – Expenses – Dividends = Ending Stockholders‘ Stockholders‘ Equity Equity $70,000 + (f) – $80,000 – $5,000 = $125,000(e) (f) = $140,000 LO 3 BT: AN Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA AC: Reporting EXERCISE 1.25 (a) Financial statements (b) Auditor‘s opinion (c) Notes to the financial statements (d) Financial statements (e) Management discussion and analysis (f) Not disclosed LO 3 BT: K Difficulty: Easy TOT: 3.0 min. AACSB: Knowledge AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 31 EXERCISE 1.26 (a) L Accounts payable A Accounts receivable A Buildings A Cash SE Common stock A Equipment, net L Income taxes payable A Inventory A Land L Mortgage payable L Notes payableSE Retained earnings A Supplies (b) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts. 32 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) EXERCISE 1.26 (Continued) AVENTURA INC. Balance Sheet November 30, 2025 Assets Cash $ 20,000 Accounts receivable 19,500 Inventory 18,000 Supplies 700 Land 44,000 Buildings 100,000 Equipment,, net 30,000 Total assets $232,200 Liabilities and Stockholders‘ Equity Liabilities Accounts payable $ 26,200 Income taxes payable 6,000 Notes payable 34,000 Mortgage payable 97,500 Total liabilities $163,700 Stockholders‘ equity Common stock 20,000 Retained earnings 48,500 Total stockholders‘ equity 68,500 Total liabilities and stockholders‘ equity $232,200 (Assets = Liabilities + Stockholders’ equity) LO 3 BT: AP Difficulty: Medium TIME: 20 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 33 SOLUTIONS TO PROBLEMS PROBLEM 1.1 (a) The concern over legal liability would make the corporate form a better choice over a partnership. Also, the corporate form will allow the business to raise cash more easily, which may be of importance in a rapidly growing industry. (b) Bob should run his business as a sole proprietor. He has no real need to raise funds, and he doesn‘t need the expertise provided by other partners. The sole proprietorship form would provide the easiest form. One should avoid a more complicated form of business unless the characteristics of that form are needed. (c) The fact that the combined business expects that it will need to raise significant funds in the near future makes the corporate form more desirable in this case. (d) It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contributing equally to the firm. Service firms, like consulting businesses, are frequently formed as partnerships. (e) One way to ensure control would be for Don to form a sole proprietorship. However, in order for this business to thrive it will need a substantial investment of funds early. This would suggest the corporate form of business. In order for Don to maintain control over the business he would need to own more than 50 percent of the voting shares of common stock. In order for the business to grow, he may have to be willing to give up some control. LO 1 BT: C Difficulty: Medium TOT: 20 min. AACSB: Knowledge AICPA BC: Governance Perspective 34 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) PROBLEM 1.2 (a) In deciding whether to extend credit for 30 days, The North Face would be most interested in the balance sheet because the balance sheet shows the assets on hand that would be available for settlement of the debt in the near-term. (b) In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of A. The income statement provides the most useful information for predicting future performance. (c) In extending a loan for a relatively long period of time, the lender is most interested in the probability that the company will generate sufficient income to meet its interest payments and repay its principal. The lender would therefore be interested in predicting future net income using the income statement. It should be noted, however, that the lender would also be very interested in both the balance sheet and statement of cash flows—the balance sheet because it would show the amount of debt the company had already incurred, as well as assets that could be liquidated to repay the loan. And the company would be interested in the statement of cash flows because it would provide useful information for predicting the company‘s ability to generate cash to repay its obligations. (d) The president would probably be most interested in the statement of cash flows since it shows how much cash the company generates and how that cash is used. The statement of cash flows can be used to predict the company‘s future cash-generating ability. LO 3 BT: C Difficulty: Medium TOT: 15 min AACSB: Knowledge AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 35 PROBLEM 1.3 (a) ELITE SERVICE CO. Income Statement For the Month Ended June 30, 2025 Revenues Service revenue ................................................ $7,500 Expenses Salaries and wages expense........................... $1,400 Supplies expense ............................................. 1,000 Maintenance and repairs expense.................. 600 Advertising expense ........................................ 400 Utilities expense ............................................... 300 Total expenses.......................................... 3,700 Net income ................................................................. $3,800 (Serv. rev. – Tot. exp. = Net inc.) [$7,500 – ($1,400 + $1,000 + $600 + $400 + $300) = $3,800] ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2025 Retained earnings, June 1......................................................... $ 0 Add: Net income ...................................................................... 3,800 3,800 Less: Dividends......................................................................... 1,400 Retained earnings, June 30....................................................... $2,400 (Beg. ret. earn. – Net inc. – Div. = End. ret. earn.) ($0 + $3,800 – $1,400 = $2,400) 36 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) PROBLEM 1.3 (Continued) ELITE SERVICE CO. Balance Sheet June 30, 2025 Assets Cash............................................................................. $ 4,600 Accounts receivable .................................................. 4,000 Supplies....................................................................... 2,400 Equipment................................................................... 26,000 Total assets................................................................. $37,000 Liabilities and Stockholders‘ Equity Liabilities Notes payable ..................................................... $12,000 Accounts payable............................................... 500 Total liabilities............................................. $12,500 Stockholders‘ equity Common stock.................................................... 22,100 Retained earnings .............................................. 2,400 Total stockholders‘ equity......................... 24,500 Total liabilities and stockholders‘ equity.................... $37,000 (Assets = Liabl. + SE) [($4,600 + $4,000 + $2,400 + $26,000) = (($12,000 + $500) + ($22,100 + $2,400))] (b) Elite had a very successful first month, earning $3,800 or about 51% of service revenues ($3,800 ÷ $7,500). Its net income represents a little over 17% return on the initial investment ($3,800 ÷ $22,100). (c) Distributing a dividend after only one month of operations is probably unusual. Most new businesses choose to build up a cash balance to provide for future operating and investing activities or pay down debt. Elite distributed approximately 37% ($1,400 ÷ $3,800) of its first month‘s income but it had adequate cash to do so and still showed a significant increase in retained earnings. LO 3 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 37 PROBLEM 1.4 REESE INC. Income Statement For the Month Ended October 31, 2025 Revenues: Service revenue................................................... $20,920 Expenses: Salaries and wages expense ............................. $2,500 Interest expense.................................................. 410 Supplies expense................................................ 380 Depreciation expense ......................................... 270 Total expense .................................................. 3,560 Net Income…………………………………………. $17,360 (Serv. rev. – Tot. exp. = Net inc.) [$20,920 – ($2,500 + $410 + $380 + $270) = $17,360] REESE INC. Retained Earnings Statement For the Month Ended October 31, 2025 Retained earnings, October 1.................................. $ 0 Add: Net income ....................................................... 17,360 Retained earnings, October 31………………………. $17,360 (Beg. ret. earn. + Net inc. = End. ret. earn.) ($0 + $17,360 = $17,360) 38 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) PROBLEM 1.4 (Continued) REESE INC. Balance Sheet October 31, 2025 Assets Cash........................................................................... $ 3,950 Accounts receivable................................................. 1,300 Supplies..................................................................... 2,460 Equipment (net) ........................................................ 48,200 Total assets............................................................... $55,910 Liabilities and Stockholders‘ Equity Liabilities Bonds payable..................................................... $21,500 Accounts payable................................................ 3,300 Unearned service revenue ................................. 4,065 Salaries and wages payable............................... 445 Interest payable ................................................... 140 Total liabilities ............................................ $29,450 Stockholders‘ Equity Common stock .................................................... 9,100 Retained earnings ............................................... 17,360 Total stockholders‘ equity ........................ 26,460 Total liabilities and stockholders‘ equity................ $55,910 (Assets = Liabl. + SE) [($3,950 + $1,300 + $2,460 + $48,200) = (($21,500 + $3,300 + $4,065 + $445 + $140) + ($9,100 + $17,360))] LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 39 PROBLEM 1.5 (a) ROJO CORPORATION Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Cash received from customers ......................... $132,000) Cash paid to suppliers........................................ (104,000) Net cash provided by operating activities........ $28,000) Cash flows from investing activities Cash paid to purchase equipment .................... (12,000) Net cash used by investing activities ............... (12,000) Cash flows from financing activities Cash received from issuing common stock .... 22,000) Cash dividends paid ........................................... (7,000) Net cash provided by financing activities ........ 15,000) Net increase in cash.................................................. 31,000) Cash at beginning of period ..................................... 9,000 Cash at end of period................................................ $40,000 (Cash flows from oper., invest., and fin. act. = Net change in cash) [($132,000 – $104,000) – $12,000 + ($22,000 – $7,000) = $31,000] (b) Rojo Corporation‘s operating activities provided $28,000 of cash which was adequate to fund its investing activities $12,000 and make $7,000 of dividend payments. LO 3 BT: AP Difficulty: Medium TOT: 30 min. AACSB: Analytic AICPA AC: Reporting 40 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) PROBLEM 1.6 (a) 1. Since the boat actually belongs to Miko Liu—not to Micado Corporation—it should not be reported on the corporation‘s balance sheet. Likewise, the boat loan is a personal loan of Miko‘s—not a liability of Micado Corporation. 2. The inventory should be reported at $25,000, the amount paid when it was purchased. Micado Corporation will record $36,000 as revenues when the inventory is sold. 3. The $10,000 receivable is not an asset of Micado Corporation—it is a personal asset of Miko Liu. (b) MICADO CORPORATION Balance Sheet December 31, 2025 Assets Cash ............................................................................ $20,000* Accounts receivable.................................................. 40,000* Inventory..................................................................... 25,000* Total assets................................................................ $85,000* Liabilities and Stockholders‘ Equity Liabilities Notes payable........................................................ $15,000 * Accounts payable ................................................. 30,000 Total liabilities............................................................ $45,000* Stockholders‘ equity ................................................. 40,000** Total liabilities and stockholders‘ equity................ $85,000* **$50,000 – $10,000 **$85,000 – $45,000 (Total assets minus total liabilities) (Assets = Liabl. + SE) [($20,000 + ($50,000 – $10,000) + $25,000) = (($15,000 + $30,000) + ($85,000 – $45,000))] LO 3 BT: AN Difficulty: Medium TOT: 40 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 41 CC1 CONTINUING CASE: COOKIE CREATIONS (a) Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is easier to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation would limit her liability to her investment in the business. Organizing as a corporation would also allow Natalie to seek investors in her business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly. Also, her taxes would be higher if she incorporates (since the net income of the corporation would be taxed and any dividends Natalie receives would also be taxed). (b) Yes, Natalie will need accounting information to help her operate her business. She will need information concerning her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish her prices. She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis. If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business. Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because they are more timely, but they are also more work to prepare. (c) Assets: Cash, Accounts Receivable, Supplies, Equipment, Prepaid Insurance Liabilities: Accounts Payable, Unearned Service Revenue, Notes Payable Revenue: Service Revenue Expenses: Advertising Expense, Supplies Expense, Travel Expense, Utilities Expense, Insurance Expense 42 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) CC1 (Continued) (d) Natalie should have a separate bank account. This will make it easier to prepare financial statements for her business. Regardless of the organizational form of the business it will be a separate entity from Natalie and must be accounted for separately. (e) I recommend that Natalie keep the car as a personal asset and pay for all costs personally. She should keep track of how many miles she drives for business purposes versus personal use and determine the percentage of business use versus personal use. She should keep track of all costs of owning and operating her car including such things as fuel, insurance, registration, and repairs and maintenance. Then she can multiply the percentage of business use by the total cost of owning and operating her car to calculate the amount of expense the business can record for travel. The business will record this as an expense. Natalie can either reimburse herself for these business expenses by taking cash out of the business to pay for these costs or she can treat it as an investment in the business. [Note to instructors: This last question is fairly complex and there are income tax considerations. This suggested solution does not cover all of the issues that should be considered. The intent is just to ensure students begin to think about how to deal with a fairly common issue for self-employed people.] Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 43 CT1.1 FINANCIAL REPORTING PROBLEM (a) Apple‘s total assets at September 26, 2020 were $323,888 million and at September 28, 2019 were $338,516 million. (b) Apple had $38,016 million of cash and cash equivalents at September 26, 2020. (c) Apple had accounts payable totaling $42,296 million on September 26, 2020 and $46,236 million on September 28, 2019. (d) Apple reported net sales in 2020 of $274,515 million, in 2019 of $260,174 million, and in 2018 of $265,595 million. (e) Apple‘s net income increased by $2,155 million from 2019 to 2020, from $55,256 million to $57,411 million. LO 3 BT: AN Difficulty: Medium TOT: 5.0 min. AACSB: Analytic AICPA AC: Reporting 44 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) CT1.2 COMPARATIVE ANALYSIS PROBLEM (a) (amounts in thousands) Columbia Sportswear Company Under Armour, Inc. 1. Total liabilities 2. Net property, plant and equipment 3. Net cash provided (used) by investing activities. 4. Net income(loss) $1,003,800 $309,792 $(27,171) $108,013 $3,354,635 $ 658,678 $66,345 $(549,177) (b) Columbia is profitable, while Under Armour is not. Under Armour‘s net property, plant, and equipment and total liabilities suggest that it is substantially bigger than Columbia. Under Armour‘s liabilities are more than three times as big as Columbia‘s. LO 3 BT: AN Difficulty: Medium TOT: 8.0 min. AACSB: Analytic AICPA AC: Reporting Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 45 CT1.3 COMPARATIVE ANALYSIS PROBLEM (a) (in millions) A Walmart, Inc. 1. Total assets $321,195 $252,496 2. Accounts receivable (net) $24,542 $6,516 3. Net sales $215,915 $555,233 4. Net income (loss) $21,331 $13,510 (b) Amazon‘s total assets are a