Solution manual introduction to management accounting 14e by horngren ch15

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 15 COVERAGE OF LEARNING OBJECTIVES FUNDAMENTAL ASSIGNMENT MATERIAL LEARNING OBJECTIVE LO1: Read and interpret the basic financial statements LO2: Analyze typical A1, A2, B1, B2 business transactions using the balance sheet equation LO3: Distinguish between A3, B3 the accrual basis of accounting and the cash basis of accounting LO4: Relate the measurement of expenses to the expiration of assets LO5: Explain the nature of dividends and retained earnings LO6: Select relevant A2, B2 items from a set of data and assemble them into a balance sheet and an income statement LO7: Distinguish between the reporting of corporate owner’s equity and the reporting of owner’s equity for partnerships and sole proprietorships LO8: Identify how the measurement conventions of recognition, matching and cost recovery, and stable monetary unit affect financial reporting ADDITIONAL ASSIGNMENT MATERIAL 19, 20, 25, 30 36 22, 23, 26, 27 28, 29, 30, 31 36, 37 EXCEL, COLLAB., & INTERNET EXERCISES 43 41, 42 21, 36 27 42 24, 39, 40 25, 28, 30, 38 39, 40 41 43 881 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 15 Basic Accounting: Concepts, Techniques, and Conventions 15-A1 (20-30 min.) E = 155 - 120 = 35 D = 40 + 35 = 75 C = 15 because there were no additional investments by stockholders A = 80 - 15 - 40 = 25; or 80 - (15 + 40) = 25 B = 90 - 15 - 75 = 0; or 90 - (15 + 75) = K = 20 + 170 = 190 J = 50 + 20 - = 65 H = 10 + 30 = 40 F = 50 + 10 + 100 = 160 G = 275 - 65 - 40 = 170 P = 300 - 270 = 30 Q = 90 + 30 - 110 = 10 N = 85 - 35 = 50 L = 105 + 50 + 90 = 245 M = 95 + 85 + 110 = 290 This problem was designed for an equation-type solution, but some students may find a different approach more helpful in understanding the solution and its steps Such an approach can be easily developed on the board as follows, using Case as an example: 882 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Given: Beginning End Liabilities A B Paid-in capital 15 C Retained earnings 40 D Total (equal to total assets) 80 90 Revenues Expenses Net earnings Steps: A = 80 - (40 + 15) = 25 E = 155 - 120 = 35 D = 40 + 35 - = 75 C = 15 + = 15 B = 90 - (75 + 15) = 155 120 E 15-A2 (40-55 min.) See Exhibit 15-A2 on the following page KUMAR COMPANY Income Statement For the Month Ended April 30, 20X1 Sales (revenue) Deduct expenses: Cost of goods sold Wages, salaries and commissions Rent, 2,000 + 10,000 Depreciation Total expenses Net income 883 $110,000 $40,000 49,000 13,000 1,000 103,000 $ 7,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXHIBIT 15-A2 KUMAR COMPANY Analysis of Transactions for April 20X1 (in thousands of dollars) Assets = Equities MerPreEquipLiabilities Stockholders' Equity Accounts chandise paid ment and = Note Accounts Paid-in Retained Cash +Receivable +Inventory +Rent + Fixtures =Payable +Payable +Capital + Earnings +120 = +120 Description a Incorporation b Purchased merchandise -35 +35 c Purchased merchandise +25 d1.Sales +35 +75 d2 Cost of inventory sold -40 e Collections +15 -15 f Disbursements to trade creditors -18 g Purchased equipment -12 +36 h Prepaid rent -6 +6 i Rent expense -11 j Wages, etc -49 k Depreciation -1 l Rent expense -2 Balances, April 30, 20X1 +39 +60 +20 +4 +35   158 884 = = = = = +25 = = = = = = = = -18 +110(revenue) - 40(expense) +24 - 11(expense) - 49(expense) - 1(expense) - 2(expense) +24 +7 +120 +  _ 158 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com KUMAR COMPANY Balance Sheet April 30, 20X1 Liabilities and Stockholders' Equity Assets Liabilities: Cash $ 39,000 Note payable $ 24,000 Accounts receivable 60,000 Accounts payable 7,000 Merchandise Total liabilities $ 31,000 inventory 20,000 Stockholders' equity: Prepaid rent 4,000 Paid-in capital $120,000 Equipment and Retained earnings 7,000 fixtures, net 35,000 Total stockholders' equity 127,000 Total assets $158,000 Total liabilities and stockholders’ equity $158,000 Most businesses tend to have net losses during their start-up phase, so Kumar's ability to show a net income for April is good Many points can be raised, including the problem of maintaining an "optimum" cash balance so that creditors can be paid neither too quickly nor too slowly See the next solution also 885 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-A3 (5-10 min.) Revenue (cash basis): Cash sales Cash collected from credit customers Total revenue $35,000 15,000 $50,000 The accrual basis provides a more accurate measure of economic performance As long as the two recognition criteria are met (earned and realized), the $110,000 measure of revenue on the accrual basis is preferred to the $50,000 measure of revenue on the cash basis The $110,000 is the more accurate measure of accomplishments for April 15-B1 (10-15 min.) This is straightforward Computations are in millions of dollars A = 7,760.0 - (4,725.1+889.7) = 2,145.2 B = 4,880.2 - 188.0 = 4,692.2 C = 889.7 + 188.0 – 0.0 = 1,077.7 D = 4,725.1 + 43.9 = 4,769.0 E = 2,159.6 + 4,769.0 + 1,077.7 = 8,006.3 Instructors may wish to comment about the $43.9 million additional investments by stockholders; many companies have stock purchase plans for employees and/or stockholders 15-B2 (30-40 min.) See Exhibit 15-B2 on the following page 886 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXHIBIT 15-B2 PACCAR Analysis of Transactions for January 2006 (in millions of dollars) Assets Transaction Balances 1/1/06 a1 a2 b c d e f g h Balances, 1/31/03 = Equities Prepaid Exp & Property, Liabilities Stockholders' Equity Accounts Inven- Other Plant, & =Accounts Other Paid-in Capital & Cash +Receivable + tories + Assets + Equip =Payable +Liabilities Retained Earnings +1,699 +7,845 +495 +1,143 + 2,533= +1,152 +8,662 +3,901 +160 +500 = +660(increase revenue) -390 = -390(increase expense) +500 = +500 +300 -300 = -250 + 250 = -450 = -450 -100 = -100(increase expense) - 90 = - 90(increase expense) - 20 = - 20(increase expense) +1,359 +8,045 +605 +1,123 +2,693= +1,202 +8,662 +3,961  _   +13,825 +13,825 887 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com PACCAR Statement of Earnings For the Month Ended January 31, 2006 (in millions) Sales Deduct expenses: Cost of goods sold Selling and administrative expenses Rent and insurance expense Depreciation Total expenses Net earnings $660 $390 100 90 20 600 $ 60 PACCAR Balance Sheet January 31, 2006 (in millions) Liabilities and Stockholders' Equity Assets Cash $1,359 Accounts receivable 8,045 Inventories 605 Property, plant, and equipment, net 1,123 Prepaid expenses and other assets 2,693 Total $13,825 888 Accounts payable Other liabilities Stockholders’ equity Total $1,202 8,662 3,961 $13,825 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-B3 (5-10 min.) Revenue (cash basis): Cash sales $160,000,000 Collections from credit customers 300,000,000 Total revenue $460,000,000 The accrual basis provides a more accurate measure of economic performance As long as both recognition criteria are met (earned and realized), the $660 million measure of revenue on the accrual basis is preferred to the $460 million measure of revenue on the cash basis The $660 million is the more accurate measure of accomplishments for January 15-1 The income statement answers questions about financial performance over a span of time The balance sheet answers questions about financial status at a point in time 15-2 Assets are economic resources that a company owns and expects to benefit future activities Liabilities are a company’s obligations to nonowners 15-3 The income statement is a link between two balance sheets The income statement provides details about how stockholders’ equity, specifically retained earnings, changes over a period of time 15-4 This statement is fallacious because it does not take into consideration withdrawals (dividends) or increases in ownership investment, both of which affect the ownership capital account but not net income 889 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-5 Under the accrual basis, companies recognize revenue as it is earned and realized (or realizable) and record expenses in the period when costs are incurred In contrast, the companies using the cash basis recognize revenue when they collect cash and record most expenses when they pay out cash 15-6 Adjusting entries differ from routine entries in that they deal with implicit transactions in contrast to the explicit transactions that trigger nearly all the day-to-day routine entries 15-7 When managers acquire goods and services that have future value, they record the cost as an asset and charge it to expense as they use the asset When assets are used almost simultaneously with their acquisition, the cost becomes an immediate expense Research and development costs generally have future value Thus, they might qualify as assets However, the FASB in the U.S has determined that the future value is so uncertain that it might be misleading to show R&D costs as assets Thus, companies must expense R&D costs as incurred 15-8 It is preferable to refer to the costs rather than the values of assets such as plants or inventory because the word value has many meanings and is more vague than the word cost Cost explicitly recognizes that balance sheet amounts are based on the amounts spent on assets, not their current values 15-9 Yes Depreciation is simply the allocation of the acquisition cost of assets over the periods that benefit from the asset's use It is not a measure of the changes in market value of an asset 15-10 Companies that receive payment in advance of delivering goods or services will show unearned revenue on their balance sheets Examples include newspaper and magazine companies 890 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The picture in this set of financial statements is not unusual for new businesses Some of the liabilities are very current: accounts payable, $23,000 and accrued wages, $7,000 Yet there is a small amount of cash Unless much of the accounts receivable can either be collected or discounted (sold to a bank or other lender) the company may be unable to meet its payroll and pay its bills on time Moreover, the inventory badly needs replenishment if sales are to continue at their current pace Payment of a $5,000 dividend may not have been wise Many new businesses can show a respectable net income but simultaneously be at the brink of financial disaster because they are "under-capitalized." That is, there is insufficient long-term investment capital to sustain a smooth growth Too often, creditors and employees need cash far in advance of when customers provide the cash to the business This may be such a case, unless customers pay promptly 904 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-35 (30 min.) DR D D SANCHEZ, DENTIST Income Statement For the Year Ended December 31, 20X1 Cash Basis $81,000 Fee revenue Expenses: Rent Utilities Salaries Depreciation Total expenses Operating income $ 7,500 700 16,000 $24,200 $56,800 Accrual Basis $99,0001 $ 6,000 800 17,000 13,000 $36,800 $62,200 $81,000 collected - $2,000 unearned + $20,000 receivable $7,500 - $1,500 applicable to the first quarter of 20X2 $700 + $100 owed $16,000 + $1,000 owed $78,000  = $13,000 The term “cash basis” is ambiguous A strict interpretation of cash basis would permit deducting the full $78,000 paid for equipment as an expense in 20X1 Operating income would be $56,800 - $78,000 paid for equipment = a loss of $21,200 905 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The accrual basis provides a better measure of economic performance because it encompasses all assets and liabilities arising from operations rather than their immediate cash effects alone For example, the $2,000 advance payment has not yet been earned and therefore represents an obligation of Dr Sanchez However, the $20,000 fees billed have been earned and represent a legitimate economic resource of that magnitude (unless their full collectibility is in doubt) The government permits the cash basis primarily to ease the cash demands on taxpayers and to ease the record keeping tasks of small businesses In short, if you extend credit to your customers, the government does not feel it equitable to demand payment for taxes if you have not yet received your cash Remember, therefore, that income measurement may legitimately differ for different purposes In this case, the cash basis may be the preferable way to measure income for tax purposes But to measure her own economic performance as a dentist, Dr Sanchez would probably prefer the accrual basis This is a major point there is nothing inherently evil about having "two sets of books." 15-36 (5 min.) Cr Dr Cr Cr Dr Cr Cr Cr 906 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-37 (10 min.) The following statements are true: 5, 8, Explanations for the false statements follow: Decreases in liability accounts should be on the left (or decreases in asset accounts should be on the right) The first sentence is correct However, credit entries always must be on the right Amounts borrowed are debited to Cash and credited to Notes Payable Decreases in assets are shown on the credit side, but decreases in liabilities and stockholders’ equity are shown on the debit side All credits are on the right Payments on mortgages are credited to cash and debited to Mortgage Payable 10 Purchases of inventory should be debited to Inventory and credited to Accounts Payable 15-38 (10-15 min.) and These accounts will generally have a beginning balance The balances are omitted in the following T-accounts Cash a 500 b 150 d 200 Dues Receivable a 500 Equipment c 160 b 350 Accounts Payable c 160 907 Accounts Receivable b 200 d 200 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-39 (20-30 min.) See Exhibit 15-39 on the next page 15-40 (20-40 min.) See Exhibit 15-40 on the page after next 15-41 (10-15 min.) The bank's assets (cash) and liabilities (deposits) would each increase by $5,000 Your mix of personal assets would change, but your total assets and your liabilities and owners’ equity would not, assuming that the cash on hand had already been recorded as, say, cash on hand (asset) and personal capital (owners’ equity) If the latter recording had been made, the deposit would merely represent the transforming of one asset (cash on hand) into another (cash in bank); there would be no effect on liabilities or owners’ equities The bank's total assets and liabilities would be unaffected The only change would be in the form of assets Cash would decrease by $800,000, and notes receivable would increase by the same amount Personal cash (asset) would increase, and personal liabilities (note payable) would increase 908 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXHIBIT 15-39 Amounts are in thousands of dollars (a) (d1) (e) Bal Cash 120 (b) 35 (f) 15 (g) (h) (i) (j) 39 35 18 12 11 49 Accounts Receivable (d1) 75 (e) 15 Merchandise Inventory (b) 35 (d2) 40 (c) 25 Note Payable (g) 24 Paid-in Capital (a) 120 Accounts Payable (f) 18 (c) 25 Retained Earnings Net Inc Cost of Goods Sold (d2) 40 (i) (l) Rent Expense 11 Sales (d1) 110 Wages, Sal., & Comm (j) 49 Prepaid Rent (h) (l) Depreciation Expense (k) Equipment and Fixtures (g) 36 (k) *Details of the revenue and expense accounts appear in the income statement Their net income effect appears in Retained Earnings in the balance sheet Note: Ending balances should be drawn for each account, but they are not shown here because they can be computed mentally 909 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXHIBIT 15-40 Cash 30,000 10,000 (d2) (a) (e1) Note Payable (b) 20,000 (c1)1,000 6,000 (h) 5,000 4,000 1,510 1,000 5,000 (b) 20,000 (d1)3,000 Accr Interest Payable (i) 40 Accounts Payable Paid- in Capital Bal (f1) (g) (h) (k) 1,490 Acc Wages & Sal Payable (f2)7,000 Accounts Receivable (e1) 50,000 (b) (c1) Inventory 40,000 Prepaid Rent 1,000 (a) 30,000 Retained Earnings (k) 5,000 Inc 7,900 Cost of Goods Sold (e2) 30,000 (c2) Rent Expense 500 (e1) (e2)30,000 Advertising Expense (d1) 3,000 (d2) 6,000 (c2)500 Fixtures and Equipment (h) 6,000 (j) 50 Sales Wages & Sal Expense (f1) 4,000 (f2) 7,000 910 (j) 60,000 Depreciation Expense 50 Interest Expense (i) Miscellaneous Expense (g) 1,510 40 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Note: Ending balances should be drawn for each account, but they are not shown here because they can be computed mental 911 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-42 (20 min.) KELLOGG COMPANY Balance Sheet July1, 2006 (in millions of dollars) Assets Liabilities and Stockholders' Equity* Cash and cash equivalents$ 315.1 Accounts payable $ 2,317.8 Accts receivable 1,057.4 Accrued liabilities 681.7 Inventory 719.7a Long-term liabilities 4,507.0 Property, net of Other liabilities 1,219.6 accum depreciation 2,661.6 Total liabilities c 8,726.1 Other assets 6,141.3 Common stock $ 173.2 Retained earnings 1,995.8 Total stockholders' equity 2,169.0b Total assets $10,895.1 Total liab and stk Equity** $10,895.1 *This is the heading used in most actual annual reports **Same amount as total assets (a) $10,895.1 - $315.1 - $1,057.4 - $2,661.6 - $6,141.3 = $719.7 (b) $173.2 + $1,995.8 = $ 2,169.0 (c) $10,895.1 - $2,169.0 = $8,726.1 or $2,317.8 + $681.7 + $4,507.0 + $1,219.6= $8,726.1 Note that net sales is not a balance sheet account 912 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-43 (20-25 min.) The following statements follow the general format used by Disney Obviously, various alternatives are possible The Cash account is a balance sheet account and thus is irrelevant to this problem WALT DISNEY COMPANY Income Statement For Fiscal Year 2005 (in millions) Revenues Operating Costs and expenses Operating income Other income, net Net interest expense Income before taxes Income taxes Net income $ 31,944 (27,837) 4,107 264 (597) 3,774 1,241 $ 2,533 WALT DISNEY COMPANY Changes in Retained Earnings For Fiscal Year 2005 (in millions of dollars) Balance at beginning of year Net income for the year Dividends paid Balance at end of year * $15,732 + $2,533 – Dividends = $17,775 Dividends = $490 913 $15,732 2,533 (490)* $17,775 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The cash dividend is $490 ÷ $2,533 = 19% of net income This is about average for Disney dividends across time Until recently, Disney’s cash dividends were generally less than 20% of net income because the company financed much of its growth from profits reinvested in the business In 2001 through 2003 the cash dividend was a much higher percentage of net income Why? Because profits were low, and Disney wanted to avoid reducing its dividend In fact, in 2001 Disney paid more in dividends than it made in net income By 2004 and 2005 net income had rebounded, and Disney was able to maintain and even increase its dividends and still pay out less than 20% of net income 914 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-44 (15-25 min.) The following is Colgate-Palmolive's statements Students may use other acceptable formats Accounts payable and cash are irrelevant COLGATE-PALMOLIVE COMPANY Statement of Earnings Year Ended December 31, 2005 (in millions) Net sales Cost of sales Gross profit Selling, general, and administrative expenses Interest expense Other expenses Earnings before income taxes Income taxes Net earnings $11,396.9 5,191.9 6,205.0 3,920.8 136.0 69.2 9,317.9 2,079.0 727.6 $ 1,351.4 COLGATE-PALMOLOVE COMPANY Changes in Retained Earnings Year Ended December 31, 2005 (in millions) Balance at beginning of year Net earnings Dividends to shareholders Balance at end of year $8,223.9 1,351.4 (607.2) $8,968.1 915 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-45 (15-25 min.) Percentage increase in total assets: ($9,869.6 ÷ $8,793.6) – = 12.2% Percentage increase in revenues: ($14,954.9 ÷ $13,739.7) – = 8.8% Total assets increased by 3.4 percentage points more than revenues Assets = Liabilities + Shareholders’ Equity $9,869.6 = $3,584.1 + $6,285.5 Beginning retained earnings Net income Dividends Repurchase of common stock Other changes in retained earnings Ending retained earnings $4,396.5 1,392.0 (304.9) (769.9) (0.3) $4,713.4 Percentage growth in net income, fiscal 2006: ($1,392.0 ÷ $1,211.6) – = 14.9% Percentage growth in net income, fiscal 2005: ($1,211.6 ÷ $945.6) – = 28.1% The large percentage growth experienced in fiscal 2005 was cut in half in fiscal 2006 Although the nearly 15% growth rate in 2006 was less than that in 2005, it is still a healthy growth rate in net income 15-46 (45-60 min.) For the solution, see the Prentice Hall Web site, www.prenhall.com/ 916 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-47 (20 – 30 min.) The purpose of this game is to help students identify different types of implicit transactions Usually implicit transactions are harder for students to understand than explicit transactions, and this game makes students identify and classify a large number of implicit transactions The game has an element of chance because of the roll of the die, and there is competition both within groups and between groups The game will become more interesting and more challenging when the examples in the text have all been used and students must come up with their own examples Students with experience in business will have an advantage in the competition, but it is also a good chance for students without such experience to learn from those with it 15-48 (15-25 min.) NOTE TO INSTRUCTOR This solution is based on the web site as it was in early 2007 and is based on the 2006 financial statements Be sure to examine the current web site before assigning this problem, as the information there may have changed McDonalds’ largest asset is property and equipment, comprising about 78% of the company’s assets This and other assets such as inventories and prepaid expenses are unexpired costs Accruals of unrecorded expenses include accrued interest, income taxes (payable), and accrued payroll and other liabilities One measure of the size of a company is its total assets McDonalds’ total assets decreased almost 4%, from $30.0 billion to $29.0 billion This is shown on the balance sheet 917 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com McDonalds’ total revenues grew about 9%, from $19.8 billion to $21.6 billion Meanwhile, net income increased from $2.6 billion to $3.5 billion, a growth of almost 35% It is a good sign that income grew faster than revenues Each of the basic financial statements includes clues that McDonalds is a corporation Most obvious is that each statement is labeled “consolidated.” The Income Statement shows information about the earnings and dividends per share and the number of shares outstanding The balance sheet reports Shareholder’s Equity The Statement of Shareholders’ Equity shows why the amounts in the various shareholders’ investment accounts on the balance sheet changed Both the “Report of Independent Auditors” and the “Management Report” indicate that McDonalds’ financial statements comply with GAAP The notes to the financial statements also make many references to GAAP standards McDonalds uses accrual accounting This is evident from the inclusion of accounts such as prepaid expenses and accrued liabilities on the balance sheet 918 ... an "optimum" cash balance so that creditors can be paid neither too quickly nor too slowly See the next solution also 885 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... 1,077.7 = 8,006.3 Instructors may wish to comment about the $43.9 million additional investments by stockholders; many companies have stock purchase plans for employees and/or stockholders 15-B2 (30-40... (all assets converted to cash to be distributed to claimants), the creditors' general claims must be satisfied before the owners get one dollar Thus, the stockholders are said to have residual claim