Acc Chapter 2 Investing and Financing Decisions and the Balance Sheet Answers.txt

Chapter 2 Investing and Financing Decisions and the Balance Sheet ANSWERS TO QUESTIONS 3. (a) The separate-entity assumption requires that business transactions are separate from the transactions of the owners. For example, the purchase of a truck by the owner for personal use is not recorded as an asset of the business. (b) The unit-of-measure assumption requires information to be reported in the national monetary unit. That means that each business will account for and report its financial results primarily in terms of the national monetary unit, such as Yen in Japan and Australian dollars in Australia. (c) Under the continuity or going-concern assumption, businesses are assumed to operate into the foreseeable future. That is, they are not expected to liquidate. (d) The historical cost principle requires assets to be recorded at the cash- equivalent cost on the date of the transaction. Cash-equivalent cost is the cash paid plus the dollar value of all noncash considerations. 5. An account is a standardized format used by organizations to accumulate the dollar effects of transactions on each financial statement item. Accounts are necessary to keep track of all increases and decreases in the fundamental accounting model. 11. The journal entry is a method for expressing the effects of a transaction on accounts in a debits-equal-credits format. The title of the account(s) to be debited is (are) listed first and the title of the account(s) to be credited is (are) listed underneath the debited accounts. The debited amounts are placed in a left-hand column and the credited amounts are placed in a right-hand column. 13. The financial leverage ratio is computed as average total assets divided by average stockholders? equity (where ?average? is the average of the beginning and ending balances for the year). It measures the relation between total assets and the stockholders? capital that finances them. The higher the ratio, the more debt has been assumed by the company to finance its assets. MULTIPLE CHOICE 1. b 6. c 2. d 7. a 3. d 8. d 4. a 9. b 5. d 10. a EXERCISES E2?3. Account Balance Sheet Categorization Debit or Credit Balance (1) Land NCA Debit (2) Retained Earnings SE Credit (3) Taxes Payable CL Credit (4) Prepaid Expenses CA Debit (5) Contributed Capital SE Credit (6) Long-term Investments NCA Debit (7) Machinery and Equipment NCA Debit (8) Accounts Payable CL Credit (9) Short-term Investments CA Debit (10) Notes Payable (due in 3 yrs) NCL Credit E2?5. Req. 1 Event Assets = Liabilities + Stockholders? Equity a. Buildings Equipment Cash +182.0 +21.9 ? 48.1 Notes payable (long-term) +155.8 b. Cash +253.6 Contributed capital +253.6 c. Dividends payable +179.2 Retained earnings ?179.2 d. Investments (short-term) Cash +400.8 ? 400.8 e. No effects f. Cash Short-term Investments +1.4 ?1.4 Req. 2 The separate-entity assumption states that transactions of the business are separate from transactions of the owners. Since transaction (e) occurs between the owners and others in the stock market, there is no effect on the business. E2?7. Req. 1 a. Buildings (+A)...................................................................... 182.0 Equipment (+A) .................................................................. 21.9 Cash (-A)....................................................................... 48.1 Note payable (+L) .......................................................... 155.8 b. Cash (+A)............................................................................ 253.6 Contributed capital (+SE)............................................... 253.6 c. Retained earnings (-SE)..................................................... 179.2 Dividends payable (+L).................................................. 179.2 d. Investments (+A)................................................................. 400.8 Cash (-A)....................................................................... 400.8 e. No journal entry required. f. Cash (+A)............................................................................ 1.4 Investments (-A)............................................................ 1.4 Req. 2 The separate-entity assumption states that transactions of the business are separate from transactions of the owners. Since transaction (e) occurs between the owners and others in the stock market, there is no effect on the business. E2?13. Req. 1 Assets $ 7,500 = Liabilities $ 500 + Stockholders? Equity $ 7,000 Req. 2 Cash Short-Term Investments Property & Equipment Beg. 3,000 Beg. 2,000 Beg. 2,500 (a) 2,000 1,000 (b) 1,250 (c) (b) 1,000 (c) 1,250 300 (d) End. 6,950 End. 1,000 End. 1,250 Short-Term Notes Payable Long-Term Notes Payable 200 Beg. 300 Beg. 2,000 (a) 200 End. 2,300 End. Contributed Capital Retained Earnings 5,000 Beg. 2,000 Beg. (d) 300 5,000 End. 1,700 End. Req. 3 Assets $ 9,200 = Liabilities $ 2,500 + Stockholders? Equity $ 6,700 Req. 4 Financial = Average Total Assets = ($7,500+$9,200) / 2 = $8,350 = 1.22 Leverage Average Stockholders? Equity ($7,000+$6,700) / 2 $6,850 This ratio indicates that, for every $1 of equity investment, Massimo maintains $1.22 of assets. Massimo?s ratio is lower than the industry average of 2.00, indicating that Massimo maintains a lower debt level and follows a less risky financing strategy than does the average firm in the industry. As such, Massimo can finance expansion by borrowing without taking on excessive debt compared to the industry average. E2?19. Hilton Hotels Corporation Partial Statement of Cash Flows For the year ended December 31, 2011 Investing Activities Purchase of investments $(139) Purchase and renovation of properties (370) Sale of property 230 Receipt of payment from note receivable 125 Cash flow from investing activities (154) Financing Activities Additional borrowing from banks 992 Payment of debt (24) Issuance of stock 6 Cash flow from financing activities 974 PROBLEMS P2?2. Req. 1 Cornell Home Healthcare Services was organized as a corporation. Only a corporation issues shares of capital stock to its owners in exchange for their investment, as Cornell did in transaction (a). Req. 2 (On next page) Req. 3 The transaction between the two stockholders (Event d) was not included in the tabulation. Since the transaction in (d) occurs between the owners, there is no effect on the business due to the separate-entity assumption. Req. 4 (a) Total assets = $111,500 + $18,000 + $5,000 + $510,500 + $160,000 + $65,000 = $870,000 (b) Total liabilities = $280,000 (c) Total stockholders? equity = Total assets ? Total liabilities = $870,000 ? $280,000 = $590,000 (d) Cash balance = $50,000 + $90,000 ? $9,000 ? $18,000 ? $5,000 + $3,500 = $111,500 (e) Total current assets = $111,500 + $18,000 + $5,000 = $134,500 Req. 5 Financial = Average Total Assets = ($700,000+$870,000) / 2 = $785,000 = 1.44 Leverage Average Stockholders? Equity ($500,000+$590,000) / 2 $545,000 This suggests that Cornell uses significantly more equity than debt to finance the company?s assets. P2?2. (continued) Req. 2 Assets = Liabilities + Stockholders' Equity Cash Short-term Investments Notes Receivable Land Building Equipment Notes Payable Contributed Capital Retained Earnings Beg. 50,000 500,000 100,000 50,000 = 200,000 100,000 400,000 (a) +90,000 = +90,000 (b) ?9,000 +14,000 +60,000 +15,000 = +80,000 (c) ?18,000 +18,000 = (d) No effect (e) ?5,000 +5,000 = (f) +3,500 ?3,500 = +111,500 +18,000 +5,000 +510,500 +160,000 +65,000 = +280,000 +190,000 +400,000 $870,000 $280,000 $590,000 P2?3. Req. 1 and 2 Cash Investments (short-term) Accounts Receivable Beg. 21,000 Beg. 2,000 Beg. 3,000 (c) 12,000 7,000 (a) (e) 9,000 (d) 12,000 6,000 (b) (h) 1,000 9,000 (e) End. 11,000 End. 3,000 3,000 (g) 9,000 (i) Inventory Notes Receivable (long-term) Beg. 24,000 Beg. 1,000 (a) 7,000 End. 12,000 End. 24,000 End. 8,000 Equipment Factory Building Intangibles Beg. 48,000 Beg. 90,000 Beg. 3,000 (b) 18,000 1,000 (h) (i) 25,000 (g) 3,000 End. 65,000 End. 115,000 End. 6,000 Accounts Payable Accrued Liabilities Payable Notes Payable (short-term) 15,000 Beg. 2,000 Beg. 7,000 Beg. 12,000 (b) 12,000 (d) 15,000 End. 2,000 End. 31,000 End. Long-Term Notes Payable Contributed Capital Retained Earnings 48,000 Beg. 90,000 Beg. 30,000 Beg. 16,000 (i) 12,000 (c) 64,000 End. 102,000 End. 30,000 End. P2?3. (continued) Req. 3 No effect was recorded for (f). The agreement in (f) involves no exchange or receipt of cash, goods, or services and thus is not a transaction. Req. 4 Injection Plastics Company Balance Sheet At December 31, 2011 Assets Liabilities Current Assets Current Liabilities Cash $ 12,000 Accounts payable $ 15,000 Investments 11,000 Accrued liabilities payable 2,000 Accounts receivable 3,000 Notes payable 31,000 Inventory 24,000 Total Current Liabilities 48,000 Total Current Assets 50,000 Long-term notes payable 64,000 Total Liabilities 112,000 Notes receivable 8,000 Equipment 65,000 Stockholders? Equity Factory building 115,000 Contributed capital 102,000 Intangibles 6,000 Retained earnings 30,000 Total Stockholders? Equity 132,000 Total Assets $244,000 Total Liabilities & Stockholders? Equity $244,000 Req. 5 Financial = Average Total Assets = ($192,000+$244,000) / 2 = $218,000 = 1.73 Leverage Average Stockholders? Equity ($120,000+$132,000) / 2 $126,000 This ratio indicates that, for every $1 of equity investment, Injection Plastics maintains $1.73 of assets, with the additional $0.73 of assets financed by debt. The company utilizes more equity than debt to finance assets. CASES AND PROJECTS CP2?8. Req. 1 McDonald?s Corporation Balance Sheets At December 31, 2001 and December 31, 2010 (in millions of dollars) 2011 2010 Assets Current Assets: Cash and equivalents $ 299.2 $ 341.4 Accounts and notes receivable 609.4 483.5 Inventories 77.3 70.5 Prepaid expenses and other current assets 323.5 246.9 Total current assets 1,309.4 1,142.3 Property and equipment, net 16,041.6 14,961.4 Intangible assets 973.1 827.5 Investments in and advances to affiliates 854.1 634.8 Notes receivable due after one year 67.9 67.0 Other noncurrent assets 538.3 608.5 Total Assets $19,784.4 $18,241.5 Liabilities Current Liabilities: Accounts payable $ 621.3 $ 650.6 Accrued liabilities 783.3 503.5 Taxes payable 237.7 201.0 Notes payable 686.8 1,293.8 Current maturities of long-term debt 168.0 335.6 Total current liabilities 2,497.1 2,984.5 Long-term debt 6,188.6 4,834.1 Other long-term liabilities 1,574.5 1,491.0 Total Liabilities 10,260.2 9,309.6 Stockholders? Equity Contributed capital 1,065.3 787.8 Retained earnings 8,458.9 8,144.1 Total Stockholders? Equity 9,524.2 8,931.9 Total Liabilities and Stockholders? Equity $19,784.4 $18,241.5 CP2?8. (continued) Req. 2 Financial = Average Total Assets = ($18,241.5+$19,784.4) / 2 = $19,012.95 = 2.06 Leverage Average Stockholders? Equity ($8,931.9+$9,524.2) / 2 $9,228.05 Req. 3 For every $1 of equity investment, McDonald?s maintains $2.06 of assets, with the additional $1.06 financed by debt. This ratio indicates that McDonald?s utilizes debt financing slightly more than equity financing, and that McDonald?s utilizes debt financing more than the average company in the restaurant industry (with a ratio of 1.72 as indicated in the chapter).