Solutions Manual for Financial
Accounting for MBAs 9th
Edition By Easton, Wild, Halsey,
McAnally (All Chapters: Module
1-13, 100% Original Verified, A+
Grade)
This is the Original Solutions
Manual for 9th Edition (2025), All
other files in the Market are
Fake/Old/Wrong Edition.
Excel Files Download Link is
Added at the End of PDF file.
MC1-1
a. Balance sheet, income sheet, statement of cash flow, statement of common stockholders' equity
b. Balance sheet, income statement, statement of cash flow, statement of retained earnings
c. Balance sheet, income statement, statement of cash flow, statement of stockholders' equity
d. Balance sheet, income sheet, statement of cash flow, statement of stockholders' equity
Explanations
Income statement is not called income SHEET & Statement of COMMON equity is incorrect
Statement of RETAINED EARNINGS is incorrect
Income statement is not called income SHEET
MC1-2
These are not forces but rather an analysis framework
a. Strengths, Weaknesses, Opportunities, Threats, Policies
b. Buyers' bargaining power, Supplier's bargaining power, Industry competition, Threat of substitution,
Threat of entry
c. Buyers' bargaining power, Supplier's barganing power, Industry composition, Threat of substitution,
Threat of entry
Industry composition is not one of the forces
d. Buyers' bargaining power, Sellers' bargaining power, Industry competition, Threat of substitution, Threat
of entry
The force arises from Suppliers and not Sellers, which could be the company itself or its suppliers.
MC1-3
a. January is after the holiday season when sales are high. Best Buy wants to include those holiday sales
in its results.
b. A non-December year end will help reduce federal income taxes.
c.
d.
In late January, inventory will be lower because of the holiday season sales and Best Buy can more
easily (and inexpensively) count its inventory.
Other retailers pick late January or early February, and so there is an industry standard that Best Buy
wants to use.
MC1-4
a.
b.
$3,306
$22,496
$12,901
c.
d. Not enough information to determine total equity.
MC1-5
a.
b.
43%
74%
26%
c.
d. Not enough information to determine the percentage of financing provided by Best Buy’s owners.
MC1-6
a.
b.
c.
d.
MC1-7
a.
b.
c.
d.
7.05%
6.95%
7.15%
3.52%
82.90%
386.34%
136.51%
68.26%
MC1-8
a. Descriptive analytics
b. Visualized analytics
c. Predictive analytics
d. Diagnostic analytics
MC1-9
a. 1, 2, 2, 4
b. 1, 2, 3, 4
c. 1, 2, 3, 3
d. 2, 2, 3, 4
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Q1-1.
Organizations undertake four major activities: planning, financing, investing, and operating. Financing is the
means a company uses to pay for resources. Investing refers to the buying and selling of resources
necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans.
Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies.
Financial accounting information provides valuable input into the planning process, and, subsequently,
reports on the results of plans so that corrective action can be taken, if necessary.
Q1-2.
An organization’s financing activities (liabilities and equity = sources of funds) pay for investing activities
(assets = uses of funds). An organization’s assets cannot be more or less than its liabilities and equity
combined. This means: assets = liabilities + equity. This relation is called the accounting equation
(sometimes called the balance sheet equation ), and it applies to all organizations at all times.
Q1-3.
The four main financial statements are: income statement, balance sheet, statement of stockholders’ equity,
and statement of cash flows. The income statement provides information about the company’s revenues,
expenses and profitability over a period of time. The balance sheet lists the company’s assets (what it owns),
liabilities (what it owes), and stockholders’ equity (the residual claims of its owners) as of a point in time. The
statement of stockholders’ equity reports on the changes to each stockholders’ equity account during the
period. The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash, that is, where
the company got its cash from and what it did with it. Together, the four statements provide a complete
picture of the financial condition of the company.
Q1-4.
The balance sheet provides information that helps users understand a company’s resources (assets) and
claims to those resources (liabilities and stockholders’ equity) as of a given point in time .
Q1-5.
The income statement covers a period of time . An income statement reports whether the business has
earned a net income (also called profit or earnings) or incurred a net loss. Importantly, the income statement
lists the types and amounts of revenues and expenses making up net income or net loss.
Q1-6.
The statement of cash flows reports on the cash inflows and outflows relating to a company’s operating,
investing, and financing activities over a period of time . The sum of these three activities yields the net
change in cash for the period. This statement is a useful complement to the income statement, which reports
on revenues and expenses, but which conveys relatively little information about cash flows.
Q1-7.
Retained earnings (reported on the balance sheet) is increased each period by any net income earned during
the period (as reported in the income statement) and decreased each period by the payment of dividends (as
reported in the statement of cash flows and the statement of stockholders’ equity). Transactions reflected on
the statement of cash flows link the previous period’s balance sheet to the current period’s balance sheet. The
ending cash balance appears on both the balance sheet and the statement of cash flows.
Q1-8.
External users and their uses of accounting information include: (a) lenders for measuring the risk and return
of loans; (b) shareholders for assessing the return and risk in acquiring shares; and (c) analysts for assessing
investment potential. Other users are auditors, consultants, officers, directors for overseeing management,
employees for judging employment opportunities, regulators, unions, suppliers, and appraisers.
Q1-9.
Managers deal with a variety of information about their employers and customers that is not generally
available to the public. Ethical issues arise concerning the possibility that managers might personally benefit
by using confidential information. There is also the possibility that their employers and/or customers might be
harmed if certain information is not kept confidential.
Q1-10.
The five forces (according to Professor Michael Porter) are (A) industry competition, (B) buyer power, (C)
supplier power, (D) product substitutes, and (E) threat of entry.
Q1-11.
W SWOT stands for Strengths and Weaknesses (both are internal factors) Opportunities and Threats (both
external factors).
Q1-12.
Seagate’s independent auditor is EY LLP. The auditor expressly states that “our responsibility is to express an
opinion on these financial statements based on our audits.” The auditor also states that “these financial
statements are the responsibility of the company’s management.” Thus, the auditor does not assume
responsibility for the financial statements.
Q1-13.
While firms acknowledge the increasing need for more complete disclosure of financial and nonfinancial
information, they have resisted these demands to protect their competitive position. Corporate executives
must weigh the benefits they receive from the financial markets as a result of more transparent and revealing
financial reporting against the costs of divulging proprietary information to competitors and others.
Q1-14.
Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices, and other
procedures that have evolved over time in response to the need to regulate the preparation of financial
statements. They are primarily set by the Financial Accounting Standards Board (FASB), a private sector
entity with representatives from companies that issue financial statements, accounting firms that audit those
statements, and users of financial information. Other bodies that contribute to GAAP are the AICPA, the
EITF, and the SEC.
Q1-15.
Corporate governance is the system of policies, procedures and mechanisms that protect the interests of
stakeholders in the business. These stakeholders include investors, creditors, regulatory bodies, and
employees, to name a few. Sound corporate governance involves the maintenance of an effective internal
auditing function, an independent and effective external auditing function, an informed and impartial board of
directors, governmental oversight (such as from the SEC), and the oversight of the courts.
Q1-16.
The auditor’s primary function is to express an opinion as to whether the financial statements fairly present
the financial condition of the company and are free from material misstatements. Auditors do not prepare the
financial statements; they only audit them and issue their opinion on them. The auditors provide no
guarantees about the financial statements or about the company’s continued performance.
Q1-17.
Financial accounting information is frequently used in order to evaluate management performance. The return
on equity (ROE) and return on assets (ROA) provide useful measures of financial performance as they
combine elements from both the income statement and the balance sheet. Financial accounting information
is also frequently used to monitor compliance with external contract terms. Banks often set limits on such
items as the amount of total liabilities in relation to stockholders’ equity or the amount of dividends that a
company may pay. Audited financial statements provide information that can be used to monitor compliance
with these limits (often called covenants ). Regulators and taxing authorities also utilize financial information
to monitor items of interest.
Q1-18.
Managers are vitally concerned about disclosing proprietary information that might benefit the company’s
competitors. Of most concern, is the “cost” of losing some competitive advantage. There traditionally has
been tension between companies and the financial professionals (especially investment analysts) who press
firms for more and more financial and nonfinancial information.
Q1-19.
Net income is an important measure of financial performance. It indicates that the market values the
company’s products or services, that is, it is willing to pay a price for the products or services enough to cover
the costs to bring them to market and to provide the company’s investors with a profit. Net income does not
tell the whole story, however. A company can always increase its net income with additional investment in
something as simple as a bank savings account. A more meaningful measure of financial performance
comes from measuring the level of net income relative to the investment made. One investment measure is
the balance of stockholders’ equity, and the comparison of net income to average stockholders’ equity (ROE)
is a fundamental measure of financial performance.
The SEC file for Seagate is located at: https://www.sec.gov/ix?doc=/Archives/edgar/data/1137789/000113778922000055/stx-20220701.htm
Q1-20.
Borrowed money must be repaid, both the principal amount borrowed, as well as interest on the borrowed
funds. These payments have contractual due dates. If payments are not prompt, creditors have powerful legal
remedies, including forcing the company into bankruptcy. Consequently, when comparing two companies
with the same return on equity, the one using less debt would generally be viewed as a safer (less risky)
investment.
M1-21. (10 minutes)
AT&T
All three types of business activities will be affected.
Investing: Additional CAPEX of $40 billion will create a cash outflow for investing activities. The company will
acquire additional property and equipment.
Operating: Ongoing operating activities will likely increase because the additional equipment is to either
expand or improve on the company’s footprint. All things equal, this will increase the number of customers or
perhaps increase revenue per customer.
Financing: The financing effects are indirect -- cash inflow from financing will likely increase. The additional
CAPEX will need to be financed either by owners or nonowners.
M1-22. (10 minutes)
Financial-statement users
Questions
A. Current shareholders
2. Will the company have enough cash to pay dividends?
B. Company CEO
4. Will there be sufficient profits and cash flow to pay bonuses?
C. Banker
5. Will the company have enough cash to repay its loans?
D. Equity analyst
1. What is expected net income for next quarter?
E. Supplier
3. Has the company paid for inventory purchases promptly in the past?
M1-23. (10 minutes)
Information in the problem for Microsoft Corporation
$ millions
Assets
=
364,840
a.
Liabilities =
Liabilities
?
+
Equity
166,542
198,298
b. Financing from owners =
Financing from nonowners =
166,542
198,298
Microsoft receives more financing from nonowners
because liabilities are greater than equity.
c. % financing from owners =
% financing from nonowners =
45.6%
54.4%
M1-24. (10 minutes)
Information provided in the problem for Best Buy
$ millions
Assets
$15,803
=
Liabilities
$13,008
+
Equity
??
a.
There are a number of reasons for a January 28 year end date
including the following:
January 28 is after the holiday season when sales are high. Best
Buy wants to include those holiday sales in its results.
In late January, inventory will be lower because of the holiday
season sales and Best Buy can more easily (and inexpensively)
Other retailers pick late January or early February, and so there is
an industry standard that Best Buy wants to use.
b.
Equity =
c.
Financing from owners =
Financing from nonowners =
$2,795
$2,795
$13,008
Best Buy receives more financing from nonowners because
liabilities are greater than equity.
d.
% financing from owners =
% financing from nonowners =
17.7%
82.3%
M1-25. (15 minutes)
Hewlett-Packard / General Mills / Target ($ millions)
$ millions
Assets
=
Liabilities
+
Equity
Hewlett-Packard
106,882
78,731
28,151
General Mills
21,712
16,405
5,307
Target
40,262
27,305
12,957
Levels of Owner vs. Nonowner Financing. The percent of owner financing for each company
is calculated as Equity (Col F) / Assets (Col B)
Owner
Financing
Nonowner
Financing
Hewlett-Packard
26.34%
73.66%
General Mills
24.44%
75.56%
Target
32.18%
67.82%
Target has the highest percentage of owner financing. General Mills and HP are financed with
roughly the same proportions of nonowner financing, with General Mills having slightly more.
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M1.26 (20 minutes)
Information provided in the problem for OMV Group (€ millions) / Ericsson (SEK millions) / BAE Systems (₤ millions)
a.
(currency in millions)
OMV Group
Ericsson
BAE Systems
b.
=
Liabilities
Equity
€ 36,961
€ 21,619
€ 15,342
SEK 180,991.00
SEK 87,770.00
£30,364.00
£24,746.00
£5,618.00
41.51%
32.66%
18.50%
BAE Systems has the highest proportion of financing from nonowners.
Nonowner Financing = Liabilities / Assets
OMV Group (Austria) Euros millions
Ericsson (Sweden) SEK millions
BAE Systems (UK) pounds millions
+
SEK 268,761.00
OMV Group has the highest proportion of financing from owners.
Owner Financing = Equity / Assets
OMV Group (Austria) Euros millions
Ericsson (Sweden) SEK millions
BAE Systems (UK) pounds millions
c.
Assets
58.49%
67.34%
81.50%
M1-27. (15 minutes)
Adobe, Inc ($ millions)
a.
Assets
27,165
b.
Assets =
Liabilities + Equity =
27,165
27,165
c.
% financed by owners =
51.7%
=
Liabilities
13,114
+
Equity
14,051
M1-28. (20 minutes)
Sysco Corporation
Change in Retained Earnings
For Year Ended July 2, 2022
Balance, beginning of year
$10,151,706
Net income (loss)
1,358,768
Cash dividends
(970,752)
Balance, end of year
$10,539,722
M1-29. (20 minutes)
a.
b.
c.
d.
e.
f.
g.
h.
i.
BS and SCF
IS
BS
BS and SE
SCF
BS and SE
SCF and SE
SCF and SE
IS
M1-30. (10 minutes)
There are many stakeholders impacted by this business decision, including the following (along with a
description of how):
• You as a Manager—your reputation, self-esteem, and potentially your livelihood could be negatively
impacted.
• Creditors and Bondholders—credit decisions based on inaccurate information could occur.
• Shareholders—buying or selling shares based on inaccurate information could occur.
• Management and other Employees of your company—repercussions of your decision extend to all
other employees. Also, a decision to record these revenues suggests an environment condoning
dishonesty.
Indeed, your decisions can affect many more parties than you might initially realize. The short-term
benefit of meeting Wall Street’s expectations could have serious long-term ramifications.
M1-31. (15 minutes)
Apple—product differentiation and barriers to entry due to technological advantages and
legal
Walmart—buyer power due to size and cost leader
Pfizer—product differentiation arising from specific compounds and barriers to entry due to
technological advantages and legal protections (afforded by patents).
Uber—none, low barriers to entry and product is essentially undifferentiated
American Airlines—some competitive advantage due to barriers to entry arising from
significant capital expenditures and government regulation
UPS—none, product is essentially undifferentiated
McDonald’s—buyer power due to size and cost leader
M1-32. (25 minutes)
Boston Scientific / Medtronic ($ millions)
a.
Medtronic
Boston Scientific
Total assets, start of fiscal year
$93,083
$32,229
Total assets, end of fiscal year
90,981
32,469
Average total assets
92,032
32,349
Net income (consolidated)
5,062
698
Revenue
31,686
12,682
b.
Medtronic
Boston Scientific
Return on assets (ROA)
5.50%
2.16%
Profit margin (PM)
15.98%
5.50%
Asset turnover (AT)
0.34
0.39
c. Medtronic’s ROA is 5.5% which is more than twice that of Boston Scientific.
d. As compared to Boston Scientific, Medtronic has a much stronger profit margin but a slightly weaker asset turnover.
M1-33. (10 minutes)
Internal controls are designed for the following purposes:
• Monitoring an organization’s activities to promote efficiency and to prevent wrongful
use of its resources
• Ensuring the validity and credibility of external accounting reports
• Promoting effective operations
• Ensuring reliable internal reporting
Congress has a special interest in internal controls and reports about them. Specifically,
the absence or failure of internal controls can adversely affect the effectiveness of
domestic and global financial markets.
E1-34. (15 minutes)
Target Corporation
a. Target’s inventories consist of the product lines it carries: clothing, electronics, home furnishings, food products, and
so forth.
b. Target’s Property and Equipment assets consist of land, buildings, store improvements such as lighting, flooring,
HVAC, store shelving, shopping carts, and cash registers.
c. Although Target sells some of its merchandise via its Website, the majority of its sales activity is conducted in its
retail locations. These stores represent a substantial and necessary capital investment for its business model.
E1-35. (20 minutes)
($ millions)
a.
Advanced Micro Devices
Intel Corp
Assets,
start of year
$3,552
$123,249
Assets,
end of year
$4,556
$127,963
Calculations
AMD Asset increase during the year
AMD Liability increase during the year
$1,004
$334
Intel Asset increase during the year
Intel Liability decrease during the year
$4,714
$830
b. AMD Average Assets
Intel Average Assets
$4,054
$125,606
c. Intel has the larger proportion of assets financed by owners.
AMD
Intel
27.8%
58.3%
Liabilities
start of year
$2,956
$54,230
Liabilities
end of year
$3,290
$53,400
Stockholders' Equity,
end of year
$1,266
$74,563
E1-36. (10 minutes)
a.
Norfolk Southern Inc.
Changes In Retained Income
Beginning Balance at Dec. 31, FY1
Net income
Dividends on Common Stock
Share repurchases
Other
Ending Balance at Dec. 31, FY2
Net income
Dividends on Common Stock
Share repurchases
Other
Ending Balance at Dec. 31, FY3
Net income
Dividends on Common Stock
Share repurchases
Other
Ending Balance at Dec. 31, FY4
13,207
2,013
(960)
(1,373)
(4)
12,883
3,005
(1,028)
(3,271)
(3)
11,586
3,270
(1,167)
(2,989)
(3)
$10,697
b. It is true, the company has repurchased shares each year over the past three fiscal years.
E1-37. (20 minutes)
Information provided in the exercise for Norfolk Southern
a.
($ millions)
Profiitability (Net income / Sales)
Productivity (Sales / Average assets)
FY4
25.7%
0.329
FY3
27.0%
0.291
Profiit Margin
FY4
25.7%
FY3
27.0%
SC: I rounded these numbers so they appear exactly as they do in the text; this will minimize confusion when students compare these numbers to what's in MBC.
MLM: perfect.
Yes. Norfolk Southern was profitable during FY4 as evidenced by its positive profit
margin of 25.7%.
b. The company was more profitable in FY3, when the profit margin was 27.0% as
compared to the FY4 margin of 25.7%.
c.
Productivity (Sales / Average assets)
FY4
0.329
FY3
0.291
The change in productivity is a positive development. Norfolk Southern’s
productivity measure (asset turnover) increased from 0.291 in FY3 to 0.329 in FY4.
This indicates that assets are generating a slightly higher level of sales than in the
prior year.
d.
Profiit Margin
Asset Turnover
ROA = Profit margin × Asset turnover.
FY4
25.7%
0.329
8.5%
FY3
27.0%
0.291
7.9%
e. Number 2 is the best explanation for the change in ROA during FY4.
We do not have sufficient information to assess 3 and 4 so they are not true.
Productivity improved in FY4 so 1 is false. Number 2 is correct because FY4 PM is
slightly lower in FY4 but asset turnover increased, more than compensating for the
PM decline.
E1-38. (15 minutes)
Nordstrom ($ millions)
Net income
Total assets, start of fiscal year
Total assets, end of fiscal year
Return on assets (ROA)
564
8,115
7,886
7.05%
E1-39. (20 minutes)
a.
Creditors are an important group of external stakeholders. They are primarily interested in the ability of the company to
generate sufficient cash flow in order to repay the amounts owed. Stockholders are another significant stakeholder in
the company. They are primarily interested in the company’s ability to effectively raise capital and to invest that capital
in projects with a rate of return in excess of the cost of the capital raised, that is, to increase the value of the firm.
Regulators such as the SEC and the tax authorities, including the IRS and state and local tax officials, are important
constituents that are interested in knowing whether the company is complying with all applicable laws and regulations.
b. Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices, and other procedures
that have evolved over time in response to the need to regulate the preparation of financial statements. They are
primarily set by the Financial Accounting Standards Board (FASB), a private sector entity with representatives from
companies that issue financial statements, accounting firms that audit those statements, and users of financial
information. Other bodies that contribute to GAAP are the AICPA, the EITF, and the SEC.
c. Financial information provides users with information that is useful in assessing the financial performance of
companies and, therefore, in setting stock and bond prices. To the extent that these prices are accurate, the costs of
the funds that companies raise will accurately reflect their relative efficiency and risk of operations. Companies that
can utilize capital more effectively will be able to obtain that capital at a reasonable cost and society’s financial
resources will be effectively allocated.
d. First, the preparation of financial statements involves an understanding of complex accounting rules and significant
assumptions and considerable estimation. Second, GAAP allows for differing accounting treatments for the same
transaction. And third, auditors are at a relative information disadvantage vis-à-vis company accountants. As the
capital markets place increasing pressures on companies to perform, accountants are often placed in a difficult ethical
position to use the flexibility given to them under GAAP in order to bias the financial results or to use their inside
information to their advantage.
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E1-40. (20 minutes)
Information provided in the exercise for Adobe Inc.
($ millions)
Net income
Stockholders' equity, start of year
Stockholders' equity, end of year
4,756
14,051
14,797
a.
Net income
Average stockholders' equity
ROE
4,756
14,424
33.0%
b.
Stock repurchases typically increase ROE. Repurchases affect both the numerator and the
denominator in the ROE ratio. Denominator effect: The repurchase of common stock
reduces the denominator (average stockholders’ equity). Numerator effect: The outflow of
cash for the repurchase reduces net income by the foregone return on the cash. Generally,
the denominator effect is greater than the numerator effect and consequently ROE
increases. That is one of the reasons cited for share repurchases.
c.
Stockholders' equity, end of year
Share repurchases
Stockholders's equity, recalculated
Average stockholders' equity, recalculated
ROE
14,797
6,550
21,347
17,699
26.9%
P1-41. (40 minutes)
Information provided in the problem for Meta Platforms, Inc..
FY3
FY2
FY1
($ millions)
Total Assets
$185,727
$165,987
$159,316
Net Income
$23,200
$39,370
$26,146
Sales
$116,609
$117,929
$85,965
Equity
$125,713
$124,879
$128,290
a.
ROE is calculated as Net Income / Average Equity
FY3
FY2
Net income
23,200.0
39,370.0
Average equity
125,296.0
126,584.5
ROE
18.5%
31.1%
b.
ROA is calculated as Net Income / Average Total Assets
FY3
FY2
Net income
23,200.0
39,370.0
Average total assets
175,857.0
162,651.5
ROA
13.2%
24.2%
c.
PM is calculated as Net Income / Sales
FY3
Net income
23,200.0
Sales
116,609.0
PM
19.9%
d.
AT is calculated as Total Revenue / Average Total Assets
FY3
FY2
Sales
116,609.0
117,929.0
Average total assets
175,857.0
162,651.5
AT
0.663
0.725
e.
Choice 1 is correct
Profit in dollar terms fell and PM decreased from 33% to 20%, which is a considerable decrease
proportionately (about 40%). Asset productivity (AT) weakened but not considerably (about 9%), making
choice 2 incorrect. The level of revenue and assets is a factor but not the best explanation, making choices
3 and 4 incorrect.
FY2
39,370.0
117,929.0
33.4%
P1-42. (30 minutes)
Information provided in the problem for General Mills
($ millions)
Cost of goods sold (COGS)
Cash for investing activities
Cash, end of year
Income tax expense
Revenue
Total expenses, other than COGS and income tax
Cash from operating activities
Noncash assets, end of year
Cash for financing activities
Total assets, start of year
Total liabilities, end of year
Equity, end of year
a.
General Mills
Income Statement ($ millions)
Revenues
Cost of goods sold
Gross profit
Expenses
Income before taxes
Income tax expense
Net income
b.
Cash
Noncash assets
Total assets
c.
12,590.6
(1,690.7)
569.4
586.3
18,992.8
3,080.9
3,316.1
30,520.7
(2,561.2)
31,841.9
20,302.1
10,788.0
18,992.8
12,590.6
6,402.2
3,080.9
3,321.3
586.3
2,735.0
General Mills
Balance Sheet ($ millions)
569.4 Liabilities
30,520.7 Stockholders' equity
31,090.1 Total liabilities and equity
General Mills
Statement of Cash Flow ($ millions)
Cash from operating activities
3,316.1
Cash for investing activities
(1,690.7)
Cash for financing activities
(2,561.2)
Net increase (decrease) in cash
(935.8)
Cash, beginning year
1,505.2
Cash, ending year
569.4
20,302.1
10,788.0
31,090.1
d. Net income
Average total assets
Return on assets (ROA)
2,735.0
31,466.0
8.7%
e. Net income
Revenue
Profit margin (PM)
2,735.0
18,992.8
14.4%
f. Revenue
Average total assets
Asset turnover (AT)
18,992.8
31,466.0
0.60
P1-43. (30 minutes)
Data provided in the problem for J.M. Smucker Company, Inc.
($ millions)
Current assets, end of year
Cash, end of year
Cash for investing activities
Cost of products sold
Total liabilities, end of year
Cash for financing activities
2,010.1
169.9
(355.5)
5,298.2
7,914.9
(945.2)
8,124.8
Stockholders' equity, beginning of year
Long-term liablities, end of year
Stockholders' equity, end of year
Cash from operating activites
Total assets, beginning of year
Revenue
Total expenses, other than cost of
products sold
Dividends paid
a.
5,962.1
8,140.1
1,136.3
16,284.2
7,998.9
2,069.0
(418.1)
J.M. Smucker Company, Inc.
Income Statement ($ millions)
Revenues
Cost of goods sold
Gross profit
Other expenses
Net income
b.
Cash
Other current assets
Total current assets
Noncurrent assets
Total assets
c.
7,998.9
5,298.2
2,700.7
2,069.0
631.7
J.M. Smucker Company, Inc.
Balance Sheet ($ millions)
169.9 Current liabilities
1,840.2 Long-term liablities
2,010.1 Total liabilities
14,044.9 Stockholders' equity
16,055.0 Total liabilities and equity
J.M. Smucker Company, Inc.
Statement of Cash Flow ($ millions)
Cash from operating activities
Cash for investing activities
Cash for financing activities
Net increase (decrease) in cash
Cash, beginning year
Cash, ending year
1,136.3
(355.5)
(945.2)
(164.4)
334.3
169.9
1,952.8
5,962.1
7,914.9
8,140.1
16,055.0
d. Net income
Average total assets
Return on assets (ROA)
631.7
16,169.6
3.9%
e. Net income
Revenue
Profit margin (PM)
631.7
7,998.9
7.9%
f. Revenue
Average total assets
Asset turnover (AT)
7,998.9
16,169.6
0.49
g. Net income
Average equity
Return on equity (ROE)
631.7
8,132.5
7.8%
P1-44. (15 minutes)
Crocker Corporation
Statement of Stockholders’ Equity
Start of year
Issuance of common stock
Net income
Cash dividends
End of year
Contributed
Capital
120,000
30,000
150,000
Retained
Earnings
30,000
50,000
(25,000)
55,000
Stockholders’
Equity
150,000
30,000
50,000
(25,000)
205,000
P1-45. (20 minutes)
Information provided in the problem for Winnebago Industries, Inc.
($ thousands)
Contributed capital, start of fiscal year
Treasury stock, start of fiscal year
Retained earnings, start of fiscal year
Accumulated other comprehensive loss,
start of fiscal year
Issuance of stock
Repurchase of stock for resale, net
Net income
Dividends declared
Other comprehensive income (loss)
244,378
(359,940)
1,172,996
(491)
37,734
196,242
390,636
26,101
37
Winnebago Industries, Inc.
Statement of Stockholders’ Equity
$ thousands
Start of fiscal year
Issuance of stock
Repurchase of stock
Net income
Other comp. income (loss)
Dividends declared
End of fiscal year
Contributed
Capital
244,378
37,734
282,112
Treasury Stock
(359,940)
(196,242)
(556,182)
Retained
Earnings
1,172,996
390,636
(26,101)
1,537,531
Accum. Other
Comp. Income
(491)
37
(454)
Total
Stockholders’
Equity
1,056,943
37,734
(196,242)
390,636
37
(26,101)
1,263,007
P1-46. (30 minutes)
Information provided in the problem for Logitech International
($ thousands)
Sales
Net income
Total assets
Total equity
FY3
5,481,101
644,513
4,035,405
2,398,738
FY2
5,252,279
947,257
4,142,378
2,261,789
Net income
Average Total assets
ROA = Net income / Average Total assets
FY3
644,513
4,088,892
15.76%
FY2
947,257
3,252,926
29.12%
Net income
Sales
Profit margin = Net income / Sales
FY3
644,513
5,481,101
11.76%
FY2
947,257
5,252,279
18.04%
Sales
Average Total assets
Asset turnover = Sales / Average Total assets
FY3
5,481,101
4,088,892
1.34
FY2
5,252,279
3,252,926
1.61
a.
b.
c.
FY1
2,975,851
449,723
2,363,474
1,489,268
d. Profit Margin
Logitech’s ROA dropped significantly in FY3 from 29.12% to 15.76% in FY2. This is
attributable to a lower profit margin and a lower asset turnover. The company was less
profitable and less efficient with its assets in FY3 as compared to FY2.
e.
Net income
Average Total equity
ROE = Net income / Average Total equity
FY3
644,513
2,330,264
27.66%
FY2
947,257
1,875,529
50.51%
f. Stock repurchases during the year INCREASED the company's ROE. The repurchase of
common stock reduces both the numerator (net income) and denominator (stockholders’
equity) of the return on equity calculation. Repurchases reduce net income by the forgone
profit on the cash that is used to buy the stock on the open market. This is likely very small
because excess cash earns a modest return.Generally, the denominator effect dominates: its
reduction is greater than the reduction of the numerator. Therefore, it is reasonable to predict
that Logitech’s stock repurchase increased ROE during the year.
g.
Net income
FY3
644,513
FY2
Total equity, as reported
Stock repurchases
Total equity, adjusted
Average Total equity, adjusted
ROE = Net income / Average Equity
2,398,738
412,022
2,810,760
2,536,275
25.41%
2,261,789
2,261,789
P1-47. (20 minutes)
Information provided in the problem for Capri Holdings Ltd. and Five Below
Sales
Cost of sales
Net income
Average equity
Capri Holdings ($ millions)
Current Year
Prior Year
4,718.6
4,493.7
1,859.3
1,832.3
592.1
551.5
1,805.0
1,794.0
Five Below ($ thousands)
Current Year
Prior Year
1,559,563
1,278,208
994,478
814,795
149,645
102,451
536,826
394,982
Sales
Cost of sales
Gross profit
Capri Holdings ($ millions)
Current Year
Prior Year
4,718.6
4,493.7
1,859.3
1,832.3
2,859.3
2,661.4
Five Below ($ thousands)
Current Year
Prior Year
1,559,563
1,278,208
994,478
814,795
565,085
463,413
Gross profit (from part a)
Sales
Gross profit margin %
Capri Holdings ($ millions)
Current Year
Prior Year
2,859.3
2,661.4
4,718.6
4,493.7
60.6%
59.2%
Five Below ($ thousands)
Current Year
Prior Year
565,085
463,413
1,559,563
1,278,208
36.2%
36.3%
Net income
Average equity
ROE
Capri Holdings ($ millions)
Current Year
Prior Year
551.5
592.1
1,805.0
1,794.0
32.8%
30.7%
Five Below ($ thousands)
Current Year
Prior Year
149,645
102,451
536,826
394,982
27.9%
25.9%
a.
b.
c.
d. Choice 3 is correct. Michael Kors / Jimmy Choo / Versace brand loyalty and the nature of luxury goods, in
general, create the opportunity for Capri to premium price its clothing and accessories. While costs of these
goods is not low, the mark up can be significant because the consumer is willing to pay for the brand name
and the perceived status that comes from wearing the labels.
P1-48. (30 minutes)
Information provided in the problem for 3M Corporation
Total Assets
44,659
47,344
47,072
46,455
Net Income
4,529
5,453
5,929
5,791
Sales
32,136
32,184
35,355
34,229
Net income
Average Total assets
Return on assets (ROA)
FY4
5,791
46,763.5
12.4%
FY3
5,929
47,208.0
12.6%
FY2
5,453
46,001.5
11.9%
Net income
Sales
Profit margin (PM)
FY4
5,791
34,229
16.9%
FY3
5,929
35,355
16.8%
FY2
5,453
32,184
16.9%
Sales
Average Total assets
Asset turnover (AT)
FY4
34,229
46,763.5
0.732
FY3
35,355
47,208.0
0.749
FY2
32,184
46,001.5
0.700
($ millions)
FY1
FY2
FY3
FY4
a.
b.
c.
d. The increase in ROA from FY2 (11.9%) to FY3 (12.6%) is due to an increase
is AT from 0.7 to 0.749. This was large enough to offset the slight drop in
PM from 16.9% to 16.8% during the year.
e. The decrease in ROA from FY3 (12.6%) to FY4 (12.4%) is due to a decrease
is AT from 0.749 to 0.732. This was large enough to offset the slight
increase in PM from 16.8% to 16.9% during the year.
P1-49 (25 minutes)
Rivian Automotive, Inc.
a. The audit report is addressed to Rivian’s board of directors and shareholders.
Auditors work for the benefit of the shareholders and report directly to the board of directors, the
elected representatives of the shareholders whose job it is to protect shareholder interests. It
would not be appropriate for the external auditors to report directly to management because the
auditors are examining management’s activities as described in the company’s financial
statements. Reporting to the board preserves the auditor’s independence.
b. Statements 1 and 4 are TRUE.
Statement 1 is TRUE because the nature of the independent auditors’ opinion is that the
financial statements “present fairly, in all material respects, the financial condition of the
company.” Because this is standard audit-report language, any deviations should raise a flag.
“Present fairly” does not mean absolute assurance that the financials are error-free. It means
that a reasonable person would conclude that the financial statements reasonably describe the
financial condition of the company.
Statement 2 is FALSE because auditors are not responsible for detecting fraud. While audit
procedures might detect fraud, the auditors do not express an opinion about fraud existence.
Statement 3 is FALSE. The statement would be true if the word “misstatements” had read
“material misstatements”
Statement 4 is TRUE – PwC also rendered an opinion on the company’s system of internal
controls. Internal controls are designed to insure the integrity of the financial reporting system
and the preservation of the company’s assets. A well-functioning internal control system is a
critical component of the company’s overall corporate governance system.
Statement 5 is FALSE because it would be impossible for PwC to examine MOST of the
transactions. Instead, they audit critical areas and then use statistical techniques to look at a
representational sample of transactions.
c. KPMG's audit report was "adverse." Additional background, not required in the problem:The
auditors noted that "material weaknesses were identified as of December 31, 2022 and included
in management’s report on internal control over financial reporting. The description of the
material weaknesses states that the Company’s risk assessment process was not effective in
implementing controls on a timely basis in response to changes to the business operations,
personnel and other factors affecting certain financial reporting processes and related
information technology systems. As a result, the Company had ineffective information
technology general controls (ITGCs) related to certain systems, applications, and tools used for
financial reporting; and the Company did not establish effective user access and segregation of
duties controls across financially relevant functions."
The implications of an adverse Internal Controls audit report are not as significant as an
adverse opinion on the fairness of the financial statements themselves. KPMG could not rely
on the company's internal controls and thus, had to do additional substantive audit work. This
likely increased the cost of the audit to Rivian. More important consequences would include
increased risk assessment by investors and other stakeholders which could increase the cost of
capital or cause loss of investor confidence.
d. Choice d. is correct.
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P1-50 (20 minutes)
Rivian Automotive, Inc.
a.
Robert Scaringe made assertions that the Sarbanes-Oxley Act requires all CEOs and CFOs to make. In
essence, Scaringe certified that:
• He has read the financial reports.
• The financial reports do not contain any significant (material) misstatement or omit to state a significant
fact that should have been included. The financial reports are, therefore, complete.
• The financial reports fairly present the financial condition of the company in all material respects
b.
Congress passed the Sarbanes-Oxley Act following a spate of corporate accounting scandals in the early
2000s. The impetus for the legislation was the belief that some CEOs and CFOs no longer assumed
responsibility for the financial reporting of their companies. By requiring these high-ranking executives to
personally certify to the items referenced in part a above, Congress wanted to encourage closer scrutiny of
the financial reporting process at the highest levels of the company.
c.
The Sarbanes-Oxley Act prescribes significant penalties for falsely certifying to the completeness and
correctness of the financial reports. CEOs and CFOs face fines of up to $5 million and prison terms of up to
20 years. Additionally, should the company later restate its financial statements as a result of wrongful false
reporting, the CEOs and CFOs may be required to forfeit any profits earned as a result of that reporting.
This forfeiture has been labeled “disgorgement” in the financial press.
P1-51. (30 minutes)
General Electric, Inc.
Following is part of the statement of corporate governance from GE’s site.
https://www.ge.com/sites/default/files/ge_proxy2023.pdf
a. 18 Key Corporate Governance Practices
9 out of 10 director nominees are independent
Annual election of all directors by majority vote
No supermajority vote provisions in governing documents
Annual review of Board leadership structure
Annual Board and committee self-evaluations
Board-level oversight of ESG matters
Strong lead director with clearly delineated duties
Dual-pronged Board refreshment mechanisms (age & term limits)
Regular executive sessions of independent directors
Board and committees may hire outside advisors independently of management
Proactive year-round shareholder engagement program
Clawback policy that applies to all cash and equity incentive awards
Prohibition on hedging & pledging
Strong stock ownership guidelines and retention provisions
“Overboarding” limits for directors
No poison pill or dual-class shares
Shareholder right to call special meetings (at 10%)
Proxy access by-law provisions on market terms
b. Six Board skills and Experience
Industry and operations experience
Finance and accounting experience
Investor experience
Technology experience
Risk management experience
Global experience
The board scores well on all dimensions except investor and technology experience.
Score out of 10
9
9
4
4
10
10
P1-52. (25 minutes)
Information provided in the problem for LVMH Group
a.
b.
c.
€ millions
Sales
Net profit (Consolidated)
Total assets
FY4
79,184
14,751
134,646
FY3
64,215
12,698
125,311
FY2
44,651
4,955
108,671
Net profit (Consolidated)
Average Total assets
Return on assets (ROA)
FY4
14,751
129,978.5
11.3%
FY3
12,698
116,991.0
10.9%
FY2
4,955
102,585.5
4.8%
Net profit (Consolidated)
Sales
Profit margin (PM)
FY4
14,751
79,184
18.6%
FY3
12,698
64,215
19.8%
FY2
4,955
44,651
11.1%
Sales
Average Total assets
Asset turnover (AT)
FY4
79,184
129,978.5
0.609
FY3
64,215
116,991.0
0.549
FY2
44,651
102,585.5
0.435
d. Both. LVMH's ROA increased from 4.8% to 10.9% in FY3 because
profitability (PM) increased during the year (from 11.1% to 19.8%).
Compounding this was the increase in asset productivity (AT) (from 0.435 to
0.549). Thus, both factors increased the group's ROA for the year.
e. Asset turnover. LVMH's ROA increased from 10.9% in FY3 to 11.3% in
FY4. Profit margin (PM) was down slightly from 19.8% to 18.6% which
decreased ROA. However the group's asset turnover increased from 0.549
to 0.609. The net effect was a slight increase in ROA for the year.
FY1
96,500
MA1-53. (30 minutes)
Financing can come from a number of sources, including operating creditors, borrowed funds, and
the sale of stock. Each has its strengths and weaknesses.
Operating creditors
Operating creditors are merchandise and service suppliers, including employees. Generally, these
liabilities are non-interest bearing. As a result, companies typically use this source of credit to the
fullest extent possible, often stretching payment times. However, abuse of operating creditors has a
significant downside. The company may be unable to supply its operating needs and the damage to
employee morale might have significant repercussions. Operating credit must, therefore, be used
with care.
Borrowed funds
Borrowed money typically carries an interest rate. Because interest expense is deductible for tax
purposes, borrowed funds reduce income tax expense. The taxes saved are called the “tax shield.”
The deductibility of interest reduces the effective cost of borrowing. The downside of debt is that the
company must make principal and interest payments as scheduled. Failure to make payments on
time can result in severe consequences – creditors have significant legal remedies, including
forcing the company into bankruptcy and requiring its liquidation. The lower cost of debt must be
balanced against the fixed payment obligations.
Sale of stock
Companies can sell various classes of stock to investors. Some classes of stock have mandatory
dividend payments. On other classes of stock, dividends are not a legal requirement until declared
by the board of directors. Consequently, unlike debt payments, some dividends can be curtailed in
business downturns. The downside of stock issuance is its cost. Because equity is the most
expensive source of capital, companies use it sparingly.
MA1-54. (30 minutes)
Each of the three primary financial statements provides a different perspective on the company’s
financial performance and condition.
1. Income statement.
The income statement provides information on the company’s sales, expenses, and net income or
loss. Profitability indicates that the company’s goods or services are valued by the market, that is,
customers are willing to pay a price that is sufficient to cover the costs of providing those goods
and/or services together with an adequate return on invested capital. Further, the income statement
is prepared on an accrual basis, where revenues are recognized when “earned” and expenses when
“incurred.” Accountants do not wait for cash to be received or paid to record revenues and expenses.
Consequently, management is able to communicate some of its private information about expected
cash inflows or outflows through its recording of revenues and expenses. Presumably this information
is valuable to financial statement readers because the income statement provides information about
the economic profit of the company.
2. Balance sheet.
The balance sheet reports the resources available to the company and how the company obtained
those resources (the sources). The balance sheet also reveals asset categories (providing insight into
management’s investment philosophy) and the manner in which management has financed its
operations (the relative use of debt versus equity). Efficient management of the balance sheet is
critical to financial performance and careful analysis of the balance sheet can provide clues into the
effectiveness of the company’s management team and the viability of the company within the context
of its industry.
3. Statement of cash flows.
Cash is important to a company’s continued operations. Debts must be paid in cash and employees
typically only accept cash in payment of their services. Companies must generate positive cash flow
over the long run in order to survive. The income statement, prepared on an accrual basis, does not
directly provide information about cash flows. But the statement of cash flows does, and, for that
reason, it is a critical financial statement. The statement of cash flows tells us the sources of cash
and how cash has been used. In particular, the statement reports operating, investing and financing
cash flows. From the statement we can infer whether the company’s sources of cash are long-term
or transitory. This is important to forecasting future cash flows. In addition, the uses of cash provide
insight into management’s investment philosophy, which can be a valuable input into our evaluation of
management and valuation of the company.
MA1-55. (30 minutes)
Transparency is the degree to which the financial statements accurately and completely portray the
financial condition of the company and the results of its operating activities. Transparent financial
statements are timely and provide all the information required to effectively evaluate the financial
performance of the company. Accuracy, timeliness, and completeness are important to financial
statement readers who seek financial information that is relevant and reliable. Transparency became
a central issue in financial reporting following the accounting scandals of the early 2000s, when
analysts believed too many financial statements lacked transparency.
Balancing companies’ desire to issue transparent financial statements is their need to protect
proprietary information. Markets are very competitive, and the information disclosed to investors and
creditors is also disclosed to the company’s competitors. Most critical is information relating to the
company’s strategic direction. Even historical information, however, provides insight into the relative
profitability of the company’s operating units that can be effectively utilized by future competitors.
There has traditionally been tension between companies and the financial professionals (especially
investment analysts) who press firms for more and more financial and nonfinancial information.
MA1-56. (30 minutes)
Accounting measures other than net income have become commonplace in corporate press releases. By their
use, companies seek to redefine the benchmark the market uses to evaluate the companies’ performance. These
non-GAAP income metrics often create a lower bar that companies can more easily reach. By touting non-GAAP
performance measures, companies hope to improve the market’s assessment of performance.
The SEC will not accept non-GAAP financial statements for quarterly and annual financial reporting. In fact,
auditors must cite GAAP exceptions in their audit opinion, which creates a significant red flag. Companies are
allowed to use non-GAAP measures in press releases, provided that they also reconcile the non-GAAP numbers
to GAAP numbers in the same press release.
It is a criminal offense to issue false or misleading financial statements for the purpose of influencing security
prices. Also, most companies have developed and published to employees, codes of conduct that prohibit the
falsification of financial reporting for the purpose of job retention, promotion, or compensation. Officially, senior
management believes that false financial reports pose significant ethical issues that must be clearly
communicated to all employees. Nonetheless, we continue to witness corporate executives doing a “perp walk” on
national TV as they are escorted to jail by federal authorities.
Condoning exceptions to financial reporting implicitly condones theft in all of its forms, and the corporate culture
quickly deteriorates. Proper corporate governance requires the communication of clear guidelines about what
information may be communicated in press releases and how internal performance measures are to be
constructed. These must be enforced to the letter.
MA1-57.B (30 minutes)
The SEC has voiced its concern over the perceived lack of independence of auditors, and
Congress has passed legislation to define the activities that auditors may and may not perform for
their clients. The issue of independence first arose when auditors faced no controls. In response to
declining audit fees, public accounting firms sought to bolster their income with management
consulting engagements, such as software development, M&A assistance, internal audit
outsourcing, supply chain management, and a host of other services.
As management consulting revenues and profits grew disproportionately compared to traditional
audit revenues and profit, the SEC became concerned that auditors might be unduly influenced to
issue biased audit reports rather than risk losing lucrative management consulting fees from the
same client. In response, the SEC compelled public accounting firms to divest their management
consulting subsidiaries. Further, firms were limited as the types of non-audit engagements they
could perform for clients.
Auditors are an important component of the corporate governance system, and their effectiveness
is lessened if their independence is compromised. The board of directors (specifically, the audit
committee) must continually evaluate the independence of the company’s auditors.
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