,Solution manual For Financial Accounting in an
Economic Context, 11th Edition by Jamie Pratt
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,PRATT & PETERS, FINANCIAL ACCOUNTING, 11E
SOLUTIONS MANUAL CHAPTER 1:
FINANCIAL ACCOUNTING IN AN ECONOMIC CONTEXT
ISSUES FOR DISCUSSION
ID1.1
Equity analysts and shareholders: These users would use financial statements to try to estimate
the future earnings and cash flow potential of the company, which would be used to calculate a
value for the company’s stock.
Bank loan officers: These users would use the financial statements to determine the ability of a
company to repay loans to the bank.
A company’s customers and suppliers: These users would use financial statements to determine
whether to extend credit to the company (suppliers) or whether to rely upon the company to be
a supplier (customers). Both suppliers and customers would also use the financial statements
to monitor the company’s profit margins.
Public utilities: This group would use the financial statements to determine the company’s growth
rate and how that might impact upon the company’s utility needs. Also, they would evaluate the
company’s ability to pay its bills.
Labor unions: These groups would use the financial statements to monitor the profitability of the
company to help determine the amount of pay raises and benefits that it will negotiate for from
the company.
A company’s managers: The company’s managers will use the financial statements to assess
the overall financial health of the company. This could impact the managers in many ways:
raises, promotion opportunities, performance of other departments, etc.
LO: 1 BT: K; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.2
The board of directors serves various functions for a company. One is to represent and protect
the interests of the shareholders who are not on the board. Another is to provide oversight and
input to management. The managers are involved in running the business on a day-to-day basis
whereas the board is more focused on the bigger, long-term picture. A weak board may not ask
probing questions of management but instead may take everything at face value and believe
anything that management says to them. A healthy management team would want a strong
board that delivers valuable input. A management team that wants a weak board of directors
may be trying to hide something (management fraud).
Auditors are concerned with management fraud because, if there is a problem, the auditors may
be sued by the shareholders on the basis that the auditors should have detected the fraud.
LO: 5 BT: K; Difficulty: Easy; Total Time: 10 minutes; AACSB: Ethics; AICPA: Reporting
1-1
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
,ID1.3
The function of the audit committee of the board of directors is to provide a channel whereby the
auditors can report their findings and concerns. Typically there are outside members of the board
that are on the audit committee so that if the auditors have concerns about management’s
financial statements or activities, then the auditors have a way to communicate directly to the
board of directors.
The auditors are in a sensitive position because they audit financial statements and activities
that are prepared by the same people who hire and pay them. Therefore, the auditors may be
reluctant to jeopardize their relationship with the company by being too negative.
LO: 5 BT: E; Difficulty: Easy; Total Time: 10 minutes; AACSB: Ethics; AICPA: Reporting
ID1.4
Banks make loans to customers and depend on those customers to repay the loans (called the
“principal”) plus interest for the banks to earn a profit. If customers are not able to pay the
interest, the banks cannot make a profit; further, if the customers are not able to repay the
principal, the banks will show a loss that reduces the equity on the balance sheet. Banks look
at many factors, both “macro” and “micro” in nature. Banks will look at the overall strength of the
economy and the likelihood for future growth; these are the macro issues a bank considers.
Banks will also examine the specifics of a company’s individual performance within the economy;
these micro issues often are seen in the financial statements of companies. Issues such as the
amount of debt, the level of profits, the amount of cash on hand and the amount of cash
generated by the business, and the quality and size of the assets can all be seen from the
financial reporting system. Banks require borrowers to submit financial statements to show these
performance measures. During the 2008-2009 recession and related credit crunch, banks were
concerned about the macro issues shown in general economic data, as well as the micro issues
shown in companies’ individual financial reports. The reluctance of banks to lend has been cited
as one of the reasons for the length of the economic downturn.
LO: 4 BT: AN; Difficulty: Medium; Total Time: 10 minutes; AACSB: Analytic; AICPA: Risk
ID1.5
Sales for Home Depot increased during this period because of improvements in the economy
and housing market. As conditions improved, homeowners and homebuilders purchased more
materials from Home Depot to improve and construct houses. Profits increased because the
bump in sales was not offset with an equal increase in expenses, probably due to some
economies of scale experienced by the large hardware retailer. Assets and shareholders’ equity
decreased due to the company returning cash to shareholders (which is reflected by the
decrease in financing activities of $12.4 billion). Finally, the cash balance decreased moderately
because the decrease in investing and financing activities slightly offset the increase operating
activities.
LO: 4; BT: AN; Difficulty: Medium; Total Time: 15 minutes; AACSB: Analytic; AICPA: Measurement
ID1.6
Creditors would impose these types of restrictions on United Continental so that the creditors
would be protected for their loans. These types of restrictions are common and act as a trip wire
to warn the creditors that business may not be going well. The cash restriction would force United
Continental to have enough cash to pay the interest on the debt and the minimum cash flow
1-2
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, coverage assures that the airline’s operations are functioning well enough to generate sufficient
cash flow to meet obligations.
These restrictions act as trip wires in that as soon as a restriction is violated the creditors can
call the debt and force the company to pay back the loans. It is more typical for the loans to be
restructured. This usually means higher interest rates and fees to do the restructuring. These
restrictions put the creditors in a better position to protect their loans.
LO: 4 BT: AP; Difficulty: Medium; Total Time: 10 minutes; AACSB: Analytic; AICPA: Measurement
ID1.7
Companies would usually engage in this type of behavior to try to improve their stock price. By
showing higher revenues or lower expenses investors are more likely to reward the company
with a higher stock price. Companies that have negative cash flow are under a lot of pressure
to maintain a high stock price since selling stock is the primary way to fund the business. This
type of incentive can lead to questionable behavior.
The ethical implications are significant because if investors lose faith in the financial statements,
it will severely impact the stock market. A strong driver to a robust economy is access to capital
(stock markets). If this source is reduced because investors do not believe the numbers that are
reported, a very bad impact on the overall economy would result.
LO: 4 BT: E; Difficulty: Easy; Total Time: 10 minutes; AACSB: Ethical; AICPA: Reporting
ID1.8
This is the normal statement that an auditor would make about a company whose books it had
audited and found no significant problems. This would be part of what is called a “non-qualified
opinion”. If there was a particular item that the auditors did not agree with, they would issue a
“qualified opinion”, in this case, they would agree with everything except the qualified item that
would be identified.
“In our opinion”, shows that the statement represents the auditor’s opinion and not a fact; “fairly,
in all material respects” means that the auditors cannot say that every single number is exactly
accurate to the penny but that the numbers are generally accurate. This reflects the concept of
materiality; the auditors believe that all material items have been presented accurately. Finally,
“in conformity with accounting principles generally accepted in the United States of America”
means that the financial statements have been compiled in a way that meets all of the
accounting principles that are called GAAP in the U.S but not necessarily in conformance with
international standards.
LO: 3 BT: E; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.9
Corporate governance describes the relationship among the stakeholders of a company, mainly
the shareholders, the Board of Directors, management and the company’s auditors. Corporate
governance mechanisms encourage management and the Board of Directors to act in the best
interest of the shareholders and to provide the shareholders with accurate and timely financial
information. The Sarbanes-Oxley Act was passed to upgrade the financial transparency of
corporate operations, requiring increased financial disclosures and management responsibilities
to help assure the integrity of the financial statements. Improved information provided to
shareholders and other providers of capital will strengthen the confidence in the financial system,
ultimately benefitting both providers and users of capital.
1-3
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, LO: 5 BT: C; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.10
Management is charged with the responsibility to benefit the shareholders’ investment in the
company. Choosing investments that will boost the short-term results of the company in lieu of
long-term gains does not meet this requirement. While satisfying the expectations of Wall Street
analysts for short-term results, a management decision to forego larger long-term returns violates
the relationship between the owners of the company and the management of the company.
Many observers feel that short-term profit pressures from analysts have caused management to
ignore its responsibility to work for the long-term benefit of the shareholder.
LO: 5 BT: AP; Difficulty: Medium; Total Time: 10 minutes; AACSB: Ethics; AICPA: Measurement
ID1.11
Financial analysts are charged with the task of following companies in specified industries and
evaluating the past financial performance of those companies, as well as providing guidance for
expectations for future financial performance. Until financial reporting is consistent across global
lines, analysts must be able to understand, interpret, analyze, and forecast financial performance
using different financial systems. An analyst following the pharmaceutical industry needs to
understand how companies compare against each other, how Novartis stacks up against
Johnson & Johnson. Now, not only does an analyst have to understand two sets of financial
reporting systems (IFRS and GAAP), but that analyst then has to perform some type of
conversion, so the companies can be compared under the same (“apples to apples”) basis.
Fluency in GAAP is not sufficient; an analyst must also speak the language of IFRS and be able
to translate back and forth between the two systems.
LO: 6 BT: C; Difficulty: Easy; Total Time: 10 minutes; AACSB: Diversity; AICPA: Measurement
ID1.12
Managerial accounting is the accounting system that generates information that is used
primarily by the managers of the company. Financial accounting refers to the financial
statements that are prepared and are available to be distributed outside of the company.
So, in many cases management accounting information is the operational information used
by the managers of the company. This information is often proprietary to the company and
so is not made available to the public. Management accounting numbers are not subject to
audit and therefore are prepared in whatever form is helpful to the manager.
Financial accounting information is audited and therefore must follow GAAP. Its primary
purpose is to be used by people outside of the company.
LO: 1,7 BT: C; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.13
a. Disney is primarily a service business but also has retail operations, providing entertainment
services and selling merchandise associated with their brand.
b. The firm of PricewaterhouseCoopers audits the financial statements of Disney. The audit report
states what years and financial statements were audited and therefore being commented upon
1-4
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, by the auditor. The second paragraph explains what an audit is intended to do and how the
company has gone about doing this audit. The company’s internal control procedures are
discussed. The audit report devotes some space toward the critical audit matters; that is, those
matters which required more attention and did not have an easy, identifiable solution. Finally,
the report states the auditors’ opinion regarding the financial statements that have been audited.
The auditors do not evaluate the financial strength of the company; the auditor states that the
financial statements “present fairly” the position of Disney; it is up to the user of the financial
statements to analyze the company’s performance.
c. Net income in 2017 was $8,980,000,000, 2018 net income was $12,598,000,000 and for 2019
net income was $11,054,000,000.
d. The amounts shown below are in millions:
2019 2018
Total liabilities $100,095 $45,766
Total assets $193,984 98,598
TL/TA (%) 51.60% 46.42%
Total liabilities include both Current and Long-Term liabilities. From 2018 to 2019 Disney
increased the percentage of its assets that were financed by liabilities. This increase was likely
due to the significant acquisition it made during the 2019 fiscal year. Of course, it also means
that the company decreased the percentage of its assets that were financed by equity.
e. Cash from operating activities was $12,343,000,000 in 2017, $14,295,000,000 in 2018, and
$5,984,000,000 in 2019.
f. From 2017 through 2018, Disney increased its profitability (in dollar terms) but also as a
percentage of revenue (see below chart). The increase in the popularity of certain movies and
merchandise (e.g. Frozen, Marvel Superheroes) might be one explanation. The company
showed a decrease in net income in both dollars and as a percentage of revenue from 2018 to
2019. Despite this decrease, the company is quite strong and well positioned for the future.
2019 2018 2017
Total net income (TNI) $11,054 $12,598 $ 8,980
Total revenues (TR) $69,570 $59,434 $55,137
TNI/TR (%) 15.89% 21.20% 16.28%
LO: 3 BT: AN; Difficulty: Medium; Total Time: 25 minutes; AACSB: Analytic; AICPA: Research
DATA AND ANALYTICS
DA1.1
Ford 2019 2018 2017
Sales $155,900 $160,338 $156,776
Total assets $258,537 $256,540 $258,496
Growth rate - Sales (2.8%) * 2.3%*
Growth rate – Total assets 0.8% ** (0.8%) **
1-5
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, GM 2019 2018 2017
Sales $137,237 $147,049 $145,588
Total assets $228,037 227,339 212,482
Growth rate - Sales (6.7%) * 1.0%*
Growth rate – Total assets 0.3% ** 7.0%**
From 2017 to 2018 both companies experienced growth in sales (Ford by 2.3% and GM by
1.0%), while only GM recorded growth in assets (7%). From 2017 to 2018 Ford’s total assets
decreased by a little less than 1%. From 2018 to 2019, both GM and Ford reported a decrease in
sales – 2.8% decrease for Ford and 6.7% decrease for GM. From 2018 to 2019, both companies
recorded a very small growth in total assets; specifically, a 0.8% growth for Ford and 0.3%
growth for GM.
* Growth rate - Sales:
Ford 2018: ($160,338 – $156,776) / $156,776 = 2.3%
GM 2018: ($147,049 – $145,558) / $145,558 = 1.0%
Ford 2019: ($155,900– $160,338) / $160,338 = (2.8%)
GM 2019: ($137,237– $147,049) / $147,049 = (6.7%)
** Growth rate – Total Assets:
Ford 2018: ($256,540 – $258,496) / $258,496 = (0.8%)
GM 2018: ($227,339 – $212,482) / $212,482 = 7.0%
Ford 2019: ($258,537– $256,540) / $256,540 = 0.8%
GM 2019: ($228,037– $227,339) / $227,339 = 0.3%
LO: 7; BT: AN; Difficulty: Moderate; Total Time: 15 minutes; AACSB: Technology;
AICPA: Leverage Technology
1-6
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
,PRATT & PETERS, FINANCIAL ACCOUNTING, 11E
SOLUTIONS MANUAL CHAPTER 2:
THE FINANCIAL STATEMENTS
BRIEF EXERCISES
BE2.1
2019 2019
Beginning Ending
Retained 2019 2019 2019 Retained
Earnings + Revenues – Expenses – Dividends = Earnings
$59.9 + $67.2 – $59.9 – X = $61.9
X = $5.3
2019 Dividends as a percentage of 2019 net income:
LO: 2 BT: AN; Difficulty: Medium; Total Time: 15 minutes; AACSB: Analytic; AICPA: Measurement
BE2.2
(1) Current Liabilities financed $27 billion of the assets.
Current Liabilities divided by Total assets = $27/$78 = 34.6%
(2) Long-term debt financed $36 billion of the assets.
Long-term debt divided by total assets = $36/$78 = 46.2 %
(3) Shareholders’ equity financed $15 billion of the assets.
Shareholders’ equity divided by total assets = $15/$78= 19.2%
LO: 1 BT: AP; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Measurement
BE2.3
(a) Working capital = current assets – current liabilities. Caterpillar’s current assets total $39
billion, less $27 billion of current liabilities, gives the company about $12 billion of assets
over liabilities. In addition, current assets divided by current liabilities or $39 billion divided
by $27 billion = 1.44. Both measures indicate that Caterpillar appears to have reasonable
ability to satisfy its current liabilities. Current assets are sufficient to cover current liabilities.
(b) No, Caterpillar has $26.2 billion of liquid current assets (cash, short term investments, and
accounts receivable) but it has $27 billion of current liabilities.
2-1
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, (c) No, Caterpillar would be less solvent if accounts receivable were $11.1 billion and
inventory was $17.9 billion. Accounts receivable are closer to cash than inventory.
When inventory is sold, it often becomes accounts receivable prior to being converted
to cash. As a result, accounts receivable is one step closer to cash than inventory.
Thus, if reversed, Caterpillar would be less likely to meet its current liabilities.
LO: 4 BT: AP; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA:
Measurement
BE2.4
2019 2018 2017
Net cash flow from operating activities............ $ 48,668** $ 43,602 $ 38,010
Net cash flow from investing activities............. (16,690) (63,145) (18,943)
Net cash flow from financing activities............. ( 25,083) (25,989)* 25,930
Net change in cash.......................................... $ 6,895* $(45,532)** $ 44,997*
Cash at beginning of period............................. 5,400 50,932*** 5,935**
Cash at end of period ...................................... $ 12,295 $ 5,400 $ 50,932
2019
* $6,895 = $12,295 - $5,400
**x + ($16,690) + ($25,083) = $6,895; x = $48,668
2018
* $43,602 + ($63,145) + x = ($45,532); x = $(25,989)
**($45,532) = $5,400 - $50,932
***Cash at end of 2017 is same as cash at beginning of 2018.
*** ($45,532)) + $50,932 = x
X = $5,400
2017
* x = $38,010 + ($18,943) + $25,930; x = $44,997
** $5,935 = $50,932 - $44,997
AT&T’s cash management activities over the three-year period of 2017-2019 appear to be extremely strong.
The company is generating significant amounts of cash flow from operating activities, with all three years
showing amounts greater than $38 billion. AT&T is then able to reinvest substantial amounts in its asset
base. At the same time, AT&T is also able to fund its financing activities from its operating cash flow. The
large amount of funds being used in investing activities indicates that AT&T is growing its capital-intensive
business.
LO: 3 BT: AN; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Measurement
2-2
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
Economic Context, 11th Edition by Jamie Pratt
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
,PRATT & PETERS, FINANCIAL ACCOUNTING, 11E
SOLUTIONS MANUAL CHAPTER 1:
FINANCIAL ACCOUNTING IN AN ECONOMIC CONTEXT
ISSUES FOR DISCUSSION
ID1.1
Equity analysts and shareholders: These users would use financial statements to try to estimate
the future earnings and cash flow potential of the company, which would be used to calculate a
value for the company’s stock.
Bank loan officers: These users would use the financial statements to determine the ability of a
company to repay loans to the bank.
A company’s customers and suppliers: These users would use financial statements to determine
whether to extend credit to the company (suppliers) or whether to rely upon the company to be
a supplier (customers). Both suppliers and customers would also use the financial statements
to monitor the company’s profit margins.
Public utilities: This group would use the financial statements to determine the company’s growth
rate and how that might impact upon the company’s utility needs. Also, they would evaluate the
company’s ability to pay its bills.
Labor unions: These groups would use the financial statements to monitor the profitability of the
company to help determine the amount of pay raises and benefits that it will negotiate for from
the company.
A company’s managers: The company’s managers will use the financial statements to assess
the overall financial health of the company. This could impact the managers in many ways:
raises, promotion opportunities, performance of other departments, etc.
LO: 1 BT: K; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.2
The board of directors serves various functions for a company. One is to represent and protect
the interests of the shareholders who are not on the board. Another is to provide oversight and
input to management. The managers are involved in running the business on a day-to-day basis
whereas the board is more focused on the bigger, long-term picture. A weak board may not ask
probing questions of management but instead may take everything at face value and believe
anything that management says to them. A healthy management team would want a strong
board that delivers valuable input. A management team that wants a weak board of directors
may be trying to hide something (management fraud).
Auditors are concerned with management fraud because, if there is a problem, the auditors may
be sued by the shareholders on the basis that the auditors should have detected the fraud.
LO: 5 BT: K; Difficulty: Easy; Total Time: 10 minutes; AACSB: Ethics; AICPA: Reporting
1-1
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
,ID1.3
The function of the audit committee of the board of directors is to provide a channel whereby the
auditors can report their findings and concerns. Typically there are outside members of the board
that are on the audit committee so that if the auditors have concerns about management’s
financial statements or activities, then the auditors have a way to communicate directly to the
board of directors.
The auditors are in a sensitive position because they audit financial statements and activities
that are prepared by the same people who hire and pay them. Therefore, the auditors may be
reluctant to jeopardize their relationship with the company by being too negative.
LO: 5 BT: E; Difficulty: Easy; Total Time: 10 minutes; AACSB: Ethics; AICPA: Reporting
ID1.4
Banks make loans to customers and depend on those customers to repay the loans (called the
“principal”) plus interest for the banks to earn a profit. If customers are not able to pay the
interest, the banks cannot make a profit; further, if the customers are not able to repay the
principal, the banks will show a loss that reduces the equity on the balance sheet. Banks look
at many factors, both “macro” and “micro” in nature. Banks will look at the overall strength of the
economy and the likelihood for future growth; these are the macro issues a bank considers.
Banks will also examine the specifics of a company’s individual performance within the economy;
these micro issues often are seen in the financial statements of companies. Issues such as the
amount of debt, the level of profits, the amount of cash on hand and the amount of cash
generated by the business, and the quality and size of the assets can all be seen from the
financial reporting system. Banks require borrowers to submit financial statements to show these
performance measures. During the 2008-2009 recession and related credit crunch, banks were
concerned about the macro issues shown in general economic data, as well as the micro issues
shown in companies’ individual financial reports. The reluctance of banks to lend has been cited
as one of the reasons for the length of the economic downturn.
LO: 4 BT: AN; Difficulty: Medium; Total Time: 10 minutes; AACSB: Analytic; AICPA: Risk
ID1.5
Sales for Home Depot increased during this period because of improvements in the economy
and housing market. As conditions improved, homeowners and homebuilders purchased more
materials from Home Depot to improve and construct houses. Profits increased because the
bump in sales was not offset with an equal increase in expenses, probably due to some
economies of scale experienced by the large hardware retailer. Assets and shareholders’ equity
decreased due to the company returning cash to shareholders (which is reflected by the
decrease in financing activities of $12.4 billion). Finally, the cash balance decreased moderately
because the decrease in investing and financing activities slightly offset the increase operating
activities.
LO: 4; BT: AN; Difficulty: Medium; Total Time: 15 minutes; AACSB: Analytic; AICPA: Measurement
ID1.6
Creditors would impose these types of restrictions on United Continental so that the creditors
would be protected for their loans. These types of restrictions are common and act as a trip wire
to warn the creditors that business may not be going well. The cash restriction would force United
Continental to have enough cash to pay the interest on the debt and the minimum cash flow
1-2
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, coverage assures that the airline’s operations are functioning well enough to generate sufficient
cash flow to meet obligations.
These restrictions act as trip wires in that as soon as a restriction is violated the creditors can
call the debt and force the company to pay back the loans. It is more typical for the loans to be
restructured. This usually means higher interest rates and fees to do the restructuring. These
restrictions put the creditors in a better position to protect their loans.
LO: 4 BT: AP; Difficulty: Medium; Total Time: 10 minutes; AACSB: Analytic; AICPA: Measurement
ID1.7
Companies would usually engage in this type of behavior to try to improve their stock price. By
showing higher revenues or lower expenses investors are more likely to reward the company
with a higher stock price. Companies that have negative cash flow are under a lot of pressure
to maintain a high stock price since selling stock is the primary way to fund the business. This
type of incentive can lead to questionable behavior.
The ethical implications are significant because if investors lose faith in the financial statements,
it will severely impact the stock market. A strong driver to a robust economy is access to capital
(stock markets). If this source is reduced because investors do not believe the numbers that are
reported, a very bad impact on the overall economy would result.
LO: 4 BT: E; Difficulty: Easy; Total Time: 10 minutes; AACSB: Ethical; AICPA: Reporting
ID1.8
This is the normal statement that an auditor would make about a company whose books it had
audited and found no significant problems. This would be part of what is called a “non-qualified
opinion”. If there was a particular item that the auditors did not agree with, they would issue a
“qualified opinion”, in this case, they would agree with everything except the qualified item that
would be identified.
“In our opinion”, shows that the statement represents the auditor’s opinion and not a fact; “fairly,
in all material respects” means that the auditors cannot say that every single number is exactly
accurate to the penny but that the numbers are generally accurate. This reflects the concept of
materiality; the auditors believe that all material items have been presented accurately. Finally,
“in conformity with accounting principles generally accepted in the United States of America”
means that the financial statements have been compiled in a way that meets all of the
accounting principles that are called GAAP in the U.S but not necessarily in conformance with
international standards.
LO: 3 BT: E; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.9
Corporate governance describes the relationship among the stakeholders of a company, mainly
the shareholders, the Board of Directors, management and the company’s auditors. Corporate
governance mechanisms encourage management and the Board of Directors to act in the best
interest of the shareholders and to provide the shareholders with accurate and timely financial
information. The Sarbanes-Oxley Act was passed to upgrade the financial transparency of
corporate operations, requiring increased financial disclosures and management responsibilities
to help assure the integrity of the financial statements. Improved information provided to
shareholders and other providers of capital will strengthen the confidence in the financial system,
ultimately benefitting both providers and users of capital.
1-3
© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, LO: 5 BT: C; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.10
Management is charged with the responsibility to benefit the shareholders’ investment in the
company. Choosing investments that will boost the short-term results of the company in lieu of
long-term gains does not meet this requirement. While satisfying the expectations of Wall Street
analysts for short-term results, a management decision to forego larger long-term returns violates
the relationship between the owners of the company and the management of the company.
Many observers feel that short-term profit pressures from analysts have caused management to
ignore its responsibility to work for the long-term benefit of the shareholder.
LO: 5 BT: AP; Difficulty: Medium; Total Time: 10 minutes; AACSB: Ethics; AICPA: Measurement
ID1.11
Financial analysts are charged with the task of following companies in specified industries and
evaluating the past financial performance of those companies, as well as providing guidance for
expectations for future financial performance. Until financial reporting is consistent across global
lines, analysts must be able to understand, interpret, analyze, and forecast financial performance
using different financial systems. An analyst following the pharmaceutical industry needs to
understand how companies compare against each other, how Novartis stacks up against
Johnson & Johnson. Now, not only does an analyst have to understand two sets of financial
reporting systems (IFRS and GAAP), but that analyst then has to perform some type of
conversion, so the companies can be compared under the same (“apples to apples”) basis.
Fluency in GAAP is not sufficient; an analyst must also speak the language of IFRS and be able
to translate back and forth between the two systems.
LO: 6 BT: C; Difficulty: Easy; Total Time: 10 minutes; AACSB: Diversity; AICPA: Measurement
ID1.12
Managerial accounting is the accounting system that generates information that is used
primarily by the managers of the company. Financial accounting refers to the financial
statements that are prepared and are available to be distributed outside of the company.
So, in many cases management accounting information is the operational information used
by the managers of the company. This information is often proprietary to the company and
so is not made available to the public. Management accounting numbers are not subject to
audit and therefore are prepared in whatever form is helpful to the manager.
Financial accounting information is audited and therefore must follow GAAP. Its primary
purpose is to be used by people outside of the company.
LO: 1,7 BT: C; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Reporting
ID1.13
a. Disney is primarily a service business but also has retail operations, providing entertainment
services and selling merchandise associated with their brand.
b. The firm of PricewaterhouseCoopers audits the financial statements of Disney. The audit report
states what years and financial statements were audited and therefore being commented upon
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© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, by the auditor. The second paragraph explains what an audit is intended to do and how the
company has gone about doing this audit. The company’s internal control procedures are
discussed. The audit report devotes some space toward the critical audit matters; that is, those
matters which required more attention and did not have an easy, identifiable solution. Finally,
the report states the auditors’ opinion regarding the financial statements that have been audited.
The auditors do not evaluate the financial strength of the company; the auditor states that the
financial statements “present fairly” the position of Disney; it is up to the user of the financial
statements to analyze the company’s performance.
c. Net income in 2017 was $8,980,000,000, 2018 net income was $12,598,000,000 and for 2019
net income was $11,054,000,000.
d. The amounts shown below are in millions:
2019 2018
Total liabilities $100,095 $45,766
Total assets $193,984 98,598
TL/TA (%) 51.60% 46.42%
Total liabilities include both Current and Long-Term liabilities. From 2018 to 2019 Disney
increased the percentage of its assets that were financed by liabilities. This increase was likely
due to the significant acquisition it made during the 2019 fiscal year. Of course, it also means
that the company decreased the percentage of its assets that were financed by equity.
e. Cash from operating activities was $12,343,000,000 in 2017, $14,295,000,000 in 2018, and
$5,984,000,000 in 2019.
f. From 2017 through 2018, Disney increased its profitability (in dollar terms) but also as a
percentage of revenue (see below chart). The increase in the popularity of certain movies and
merchandise (e.g. Frozen, Marvel Superheroes) might be one explanation. The company
showed a decrease in net income in both dollars and as a percentage of revenue from 2018 to
2019. Despite this decrease, the company is quite strong and well positioned for the future.
2019 2018 2017
Total net income (TNI) $11,054 $12,598 $ 8,980
Total revenues (TR) $69,570 $59,434 $55,137
TNI/TR (%) 15.89% 21.20% 16.28%
LO: 3 BT: AN; Difficulty: Medium; Total Time: 25 minutes; AACSB: Analytic; AICPA: Research
DATA AND ANALYTICS
DA1.1
Ford 2019 2018 2017
Sales $155,900 $160,338 $156,776
Total assets $258,537 $256,540 $258,496
Growth rate - Sales (2.8%) * 2.3%*
Growth rate – Total assets 0.8% ** (0.8%) **
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© 2021 John Wiley & Sons, Inc. or the author, All rights reserved. Pratt, Financial Accounting, 11e, Solutions Manual (For Instructor Use Only)
, GM 2019 2018 2017
Sales $137,237 $147,049 $145,588
Total assets $228,037 227,339 212,482
Growth rate - Sales (6.7%) * 1.0%*
Growth rate – Total assets 0.3% ** 7.0%**
From 2017 to 2018 both companies experienced growth in sales (Ford by 2.3% and GM by
1.0%), while only GM recorded growth in assets (7%). From 2017 to 2018 Ford’s total assets
decreased by a little less than 1%. From 2018 to 2019, both GM and Ford reported a decrease in
sales – 2.8% decrease for Ford and 6.7% decrease for GM. From 2018 to 2019, both companies
recorded a very small growth in total assets; specifically, a 0.8% growth for Ford and 0.3%
growth for GM.
* Growth rate - Sales:
Ford 2018: ($160,338 – $156,776) / $156,776 = 2.3%
GM 2018: ($147,049 – $145,558) / $145,558 = 1.0%
Ford 2019: ($155,900– $160,338) / $160,338 = (2.8%)
GM 2019: ($137,237– $147,049) / $147,049 = (6.7%)
** Growth rate – Total Assets:
Ford 2018: ($256,540 – $258,496) / $258,496 = (0.8%)
GM 2018: ($227,339 – $212,482) / $212,482 = 7.0%
Ford 2019: ($258,537– $256,540) / $256,540 = 0.8%
GM 2019: ($228,037– $227,339) / $227,339 = 0.3%
LO: 7; BT: AN; Difficulty: Moderate; Total Time: 15 minutes; AACSB: Technology;
AICPA: Leverage Technology
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,PRATT & PETERS, FINANCIAL ACCOUNTING, 11E
SOLUTIONS MANUAL CHAPTER 2:
THE FINANCIAL STATEMENTS
BRIEF EXERCISES
BE2.1
2019 2019
Beginning Ending
Retained 2019 2019 2019 Retained
Earnings + Revenues – Expenses – Dividends = Earnings
$59.9 + $67.2 – $59.9 – X = $61.9
X = $5.3
2019 Dividends as a percentage of 2019 net income:
LO: 2 BT: AN; Difficulty: Medium; Total Time: 15 minutes; AACSB: Analytic; AICPA: Measurement
BE2.2
(1) Current Liabilities financed $27 billion of the assets.
Current Liabilities divided by Total assets = $27/$78 = 34.6%
(2) Long-term debt financed $36 billion of the assets.
Long-term debt divided by total assets = $36/$78 = 46.2 %
(3) Shareholders’ equity financed $15 billion of the assets.
Shareholders’ equity divided by total assets = $15/$78= 19.2%
LO: 1 BT: AP; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Measurement
BE2.3
(a) Working capital = current assets – current liabilities. Caterpillar’s current assets total $39
billion, less $27 billion of current liabilities, gives the company about $12 billion of assets
over liabilities. In addition, current assets divided by current liabilities or $39 billion divided
by $27 billion = 1.44. Both measures indicate that Caterpillar appears to have reasonable
ability to satisfy its current liabilities. Current assets are sufficient to cover current liabilities.
(b) No, Caterpillar has $26.2 billion of liquid current assets (cash, short term investments, and
accounts receivable) but it has $27 billion of current liabilities.
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, (c) No, Caterpillar would be less solvent if accounts receivable were $11.1 billion and
inventory was $17.9 billion. Accounts receivable are closer to cash than inventory.
When inventory is sold, it often becomes accounts receivable prior to being converted
to cash. As a result, accounts receivable is one step closer to cash than inventory.
Thus, if reversed, Caterpillar would be less likely to meet its current liabilities.
LO: 4 BT: AP; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA:
Measurement
BE2.4
2019 2018 2017
Net cash flow from operating activities............ $ 48,668** $ 43,602 $ 38,010
Net cash flow from investing activities............. (16,690) (63,145) (18,943)
Net cash flow from financing activities............. ( 25,083) (25,989)* 25,930
Net change in cash.......................................... $ 6,895* $(45,532)** $ 44,997*
Cash at beginning of period............................. 5,400 50,932*** 5,935**
Cash at end of period ...................................... $ 12,295 $ 5,400 $ 50,932
2019
* $6,895 = $12,295 - $5,400
**x + ($16,690) + ($25,083) = $6,895; x = $48,668
2018
* $43,602 + ($63,145) + x = ($45,532); x = $(25,989)
**($45,532) = $5,400 - $50,932
***Cash at end of 2017 is same as cash at beginning of 2018.
*** ($45,532)) + $50,932 = x
X = $5,400
2017
* x = $38,010 + ($18,943) + $25,930; x = $44,997
** $5,935 = $50,932 - $44,997
AT&T’s cash management activities over the three-year period of 2017-2019 appear to be extremely strong.
The company is generating significant amounts of cash flow from operating activities, with all three years
showing amounts greater than $38 billion. AT&T is then able to reinvest substantial amounts in its asset
base. At the same time, AT&T is also able to fund its financing activities from its operating cash flow. The
large amount of funds being used in investing activities indicates that AT&T is growing its capital-intensive
business.
LO: 3 BT: AN; Difficulty: Easy; Total Time: 10 minutes; AACSB: Analytic; AICPA: Measurement
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