BRIEF EXERCISE 2-2
GEORGES COMPANY
Partial Balance Sheet
Current assets
Cash .........................................................................................
Short-term investments ..........................................................
Accounts receivable ...............................................................
Supplies ...................................................................................
Prepaid insurance ...................................................................
Total current assets.........................................................
Order based on liquidity.
$10,400
8,200
14,000
3,800
2,600
$39,000
BRIEF EXERCISE 2-3
Earnings per share =
=
Net income-Preferred stock dividends
Average common shares outstanding
$220 million – $0
= $.66 per share
333 million shares
EPS is a required disclosure on all income statements.
BRIEF EXERCISE 2-4
ICS
DRE
IRE
DRE
Issued new shares of common stock
Paid a cash dividend
Reported net income of $75,000
Reported net loss of $20,000
BRIEF EXERCISE 2-9
(a) Relevant.
(b) Faithful representation.
(c) Consistency.
BRIEF EXERCISE 2-10
(a)
(b)
(c)
(d)
1.
2.
3.
4.
Predictive value.
Neutral.
Verifiable.
Timely.
DO IT! 2-4
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Monetary unit assumption
Faithful representation
Economic entity assumption
Cost constraint
Consistency
Cost principle
Relevance
Periodicity assumption
Full disclosure principle
Materiality constraint
Going concern assumption
Comparability
EXERCISE 2-1
CL
CA
PPE
PPE
CA
CL
IA
CL
Accounts payable
CA
Accounts receivable
LTI
Accumulated depreciation—equipment PPE
Buildings
LTL
Cash
CA
Interest payable
PPE
Goodwill
CA
Income taxes payable
Inventory
Investments
Land
Mortgage payable
Supplies
Equipment
Prepaid rent
EXERCISE 2-2
CA
PPE
IA
CL
Prepaid advertising
Equipment
Trademarks
Salaries and wages payable
IA
LTL
SE
PPE
Patents
Bonds payable
Common stock
Accumulated
CL
SE
CA
LTI
Income taxes payable
Retained earnings
Accounts receivable
Land held for future use
depreciation—equipment
CL Unearned sales revenue
CA Inventory
EXERCISE 2-5
VICTORY COMPANY
Balance Sheet
December 31, 2012
Assets
Current assets
Cash ....................................................
Accounts receivable ..........................
Prepaid insurance ..............................
Total current assets....................
Property, plant, and equipment
Land ....................................................
Buildings .............................................
$105,800
Less: Accumulated depreciation—
buildings ..................................
45,600
Equipment ..........................................
82,400
Less: Accumulated depreciation—
equipment ...............................
18,720
Total Property, plant and equipment
Total assets .................................
$11,840
12,600
3,200
$ 27,640
61,200
60,200
63,680
185,080
$212,720
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ..............................
Current maturity of note payable ........
Total current liabilities ...............
Long-term liabilities
Note payable ($93,600 – $13,600) ......
Total liabilities .............................
Stockholders’ equity
Common stock ...................................
Retained earnings
($40,000 + $6,020*) ...........................
Total stockholders’ equity .........
Total liabilities and
stockholders’ equity ................
9,500
13,600Interest payable
26,700
80,000
106,700
60,000
46,020
106,020
$212,720
*Net income = $14,700 – $780 – $5,300 – $2,600 = $6,020
EXERCISE 2-12
(a)
(b)
(c)
(d)
(e)
(f)
2
6
3
4
5
1
Going concern assumption
Economic entity assumption
Monetary unit assumption
Periodicity assumption
Cost principle
Full disclosure principle
BYP 2-2
(a)
COMPARATIVE ANALYSIS PROBLEM
($ in thousands)
Hershey Foods
Tootsie Roll
1. Working capital
$1,385,434 – $910,628 = $474,806
$211,878 – $56,066 = $155,812
2. Current ratio
$1,385,434 ÷ $910,628 = 1.5:1
$211,878 ÷ $56,066 = 3.8:1
3. Debt to total assets
ratio
$2,914,692
$185,762 *
5. Earnings per share
$435,994 – 0
= 79.3%
$3,675,031
227,517
= 22.2%
$838,247
= $1.92
$53,475 – 0
= $0.95
56,072
*$56,066 + $129,696
(b) Liquidity
Hershey Foods appears more liquid since it has about $319 million
more working capital than Tootsie Roll. But, looking at the current
ratios, we see that Tootsie Roll’s ratio is more than two and a half
time greater than Hershey’s. Both seem solid regarding liquidity.
Solvency
Based on the debt to total assets ratio, Tootsie Roll is more
solvent. Tootsie Roll’s debt to total assets ratio is significantly
lower than Hershey’s and, therefore, Tootsie Roll would be
considered better able to pay its debts as they come due.
Profitability
While earnings per share cannot be used to compare profitability
between companies, net income can. Hershey’s net income is
more than 8-times as great as Tootsie Roll but it is three times as
large in regard to assets.