Ch. 1 Questions
8. A. Income statement: The purpose is to show a firm’s net income or loss from operations during the accounting period.
B. A balance sheet is a snapshot of a firm at that moment. The balance sheet is meant to show what a firm “has” in terms of assets, liabilities, and owner’s equity at that exact point in time.
C. The statement of cash flows shows cash inflows and outflows for the accounting period. It gives the reader an idea of how much cash the company started with, where it went, where it came in from, and how much is left over.
D. Statement of retained earnings shows what happened to stockholder’s equity during the accounting period. It outlines how much profit (if any) was reinvested into the business during the accounting period.
9. The balance sheet is a snapshot of the company at the time it was written. It is not meant to show any historic activity. The income statement and statement of cash flows are reports that span the entire accounting period.
12. The income statement equation is Revenues – Expenses = Net Income. Take what came in as revenue, subtract what went out as expenses, and the remainder is the amount of profit or loss for the business for that accounting period. Revenues, expenses, and net income makeup the three components for the income statement.
13. The balance sheet equation consists of assets = liabilities + owner’s equity. In order to have a proper balance sheet, the two sides of the equation must be the same. That is, the grand total for assets must equal the grand total of liabilities plus owner’s equity. These also make up the three components of the balance sheet.
18. In any company, it is the job of management to ensure that the financial statements they create are as accurate as possible. These financial statements may be used for a variety of reasons, including reporting to the government or making future business decisions and projections. If management creates faulty documents, then this will impact the operation of the business. Independent auditors help this process by being a disinterested third party. They are hired to double check the work of management, and ensure that the financial accounting is accurate.
Ch. 1 Exercises
E1-2
__L___ Accounts payable
__A___ Accounts receivable
__A___ Cash
__L___ Cost of goods sold
__A___ Property, plant, and equipment
__E___ Income taxes
__E___ Interest expense
__A___ Inventories
__A___ Land
__E___ Marketing, admin, other expenses
__E___ Long-term debt
__R___ Net sales
__L___ Notes payable
__SE___ Retained earnings
__L___ Taxes payable
CP1 – 2
- The company primarily sells men’s, women’s, and children’s clothing. These products are sold through retail stores, via the internet, and through catalogs.
- Yes. Store openings were up as were profits.
- January 31st
- a. Balance sheet: 2 years.
b. Income statement: 3 years.
c. Cash flow: 3 years
- Yes. On page 17 there is a statement affirming the accuracy of this report by PricewaterhouseCoopers LLP.
- Total assets increased.
- 120,997
- 587,516 = 164,816 + 422,700
CP1 – 3
- Price / Earnings Ratio :
American Eagle: 38.58 / 1.35 = 28.5
Abercrombie: 31.31 / 1.58 = 19.8
- American Eagle.
- As newer companies, any market share they capture will be at the expense of the more established outfits. Furthermore, they have more room to grow and be aggressive as opposed to other well established companies.
CP1 – 8
- No conflict. The number of shares the auditor owns is miniscule compared to the outstanding number of the company. Furthermore 10 shares won’t make a difference to the auditor’s personal finances should the stock go up or down.
- No conflict. She does not directly control the mutual fund’s stock ownership. Furthermore, the fund is diversified to where the impact on the individual is not as great in the event of a sudden stock change.
- There is a conflict. The amount of stock involved rises to a significant financial level for the owner. Furthermore, he is in a position to have access to information before the general markets. Thus he will know if something good or bad is about to be released and he can act on it unfairly.
- Possible conflict. While she no longer works there, she does have a friend in management. This could give the friend undue influence while the audit is underway.
- No conflict. The relationship that the auditor entered into is one of creditor – debtor. No matter what happens on the audit, he must still continue to make his payments on the note.