CHAPTER 2 Financial Statements and the Annual Report LO 3,5,7 EXERCISE 2-9 FINANCIAL STATEMENT CLASSIFICATION BS = Balance sheet; IS = Income statement; RE = Retained earnings statement 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Accounts payable—BS Accounts receivable—BS Advertising expense—IS Bad debts expense—IS Bonds payable—BS Buildings—BS Cash—BS Common stock—BS Deferred income taxes—BS Depreciation expense—IS Dividends—RE 12. Land held for future 13. 14. 15. 16. 17. 18. 19. 20. expansion—BS Loss on the sale of equipment—IS Office supplies—BS Organizational costs—IS Patent amortization expense—IS Retained earnings—BS, RE Sales—IS Unearned revenue—BS Utilities expense—IS LO 2 PROBLEM 2-1A MATERIALITY 1. The pattern of long distance calls might point to alternative long-distance plans with one of the many carriers now in this business. For example, some companies might give a discount for calls made in off-peak hours. The analysis might point to misuse by certain employees (overuse, personal use, etc.), a situation that could be corrected by talking to the employees who are misusing the long distance service. 2. This question deals with the concept of materiality. It would be difficult to decide which of the two types of companies, a realtor or a hardware store, would make more long distance calls. A realtor might make a large number of long distance calls if it deals with out-of-state clients. The hardware store might regularly order inventory from vendors outside of its area code. LO 2,4 PROBLEM 2-11A COMPARING GATEWAY AND DELL 1. Current assets – Current liabilities = Working capital (In thousands for Gateway and millions for Dell) Gateway: ($197,817 + $465,603 + $88,761 + $602,073 + $601,118) – ($278,609 + $364,741 + $56,684 + $240,315) = $1,955,372 – $940,349 = $1,015,023 Dell: ($2,586 + $4,232 + $306 + $1,394 + $406) – ($5,989 + $2,944) = $8,924 – $8,933 = $(9) Gateway: $1,955,372/$940,349 = 2.08:1 Dell: $8,924/$8,933 = 1.00:1 1. Gateway’s cash and cash equivalents make up 24% of its total current assets and marketable securities comprise another 31% of the total. Thus, these very liquid assets together make up 55% of Gateway’s current assets. Those same categories, cash and short-term investments, are 47% and 5% respectively of Dell’s current assets. For Dell, these two most liquid assets make up 52% of current assets. Therefore, even though Dell does not appear as liquid as Gateway, it does have a slightly higher percentage of its current assets in cash and marketable securities. 2. Based on both the amount of working capital and the current ratio, Gateway appears to be more liquid than Dell. Dell’s working capital is negative, meaning that it has more current liabilities than it does current assets. The difference is minimal, however, resulting in a current ratio that is 1.00 to 1 when rounded