Solution manual introduction to management accounting 14e by horngren ch16

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 16 COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVE LO1: Recognize and define the main types of assets in the balance sheet of a corporation LO2: Recognize and define the main types of liabilities in the balance sheet of a corporation LO3: Recognize and define the main elements of the stockholders’ equity section of the balance sheet of a corporation LO4: Recognize and define the principal elements in the income statement of a corporation LO5: Recognize and define the elements that cause changes in retained earnings LO6: Identify activities that affect cash, and classify them as operating, investing, or financing activities LO7: Assess financing and investing activities using the statement of cash flows LO8: Use both the direct method and the indirect method to explain cash flows from operating activities LO9: Explain the role of depreciation in the statement of cash flows LO10: Describe and assess the effects of the four main methods of accounting for inventories (Appendix 16A) EXCEL, COLLAB., & INTERNET EXERCISES 74, 75 FUNDAMENTAL ASSIGNMENT MATERIAL A1, B1 ADDITIONAL ASSIGNMENT MATERIAL 36, 37, 41, 42 59, 61, 62, 63 A1, B1 42, 60, 61, 62 74, 75 A1, B1 42, 61, 62 74, 75 A1 36, 37, 38, 42 63, 72 74, 75 61, 72 A2, B2 43, 44, 45, 46, 49, 52, 53, 64, 65, 72 A2, B2 39, 49, 52, 53 A2, A3, A4, B2, B3 43, 44, 45, 46, 75 47, 48, 49, 50, 52, 53, 65, 66, 67 36, 51 54, 55, 56, 57, 73, 75 58, 68, 69, 70, 71 918 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 16 Understanding Corporate Annual Reports: Basic Financial Statements 16-A1 (20-25 min.) LORING COMPANY Balance Sheet December 31, 20X0 ASSETS: Current assets: Cash and equivalents Accounts receivable, net Inventories Prepaid expenses Total current assets Noncurrent assets: Property, plant, and equipment, at cost Less: Accumulated depreciation Property, plant, and equipment, net Goodwill, patents, and trademarks Other long-term assets Total noncurrent assets Total assets 919 $ 44,000 48,000 36,000 15,000 143,000 580,000 170,000 410,000 75,000 110,000 595,000 $738,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Notes payable $ 40,000 Accounts payable 43,000 Income taxes payable 37,000 Current portion of long-term debt 16,000 Total current liabilities 136,000 Noncurrent liabilities: Long-term debt, excluding current portion 210,000 Deferred income tax liability 44,000 Total noncurrent liabilities 254,000 Shareholders' equity: Common stock (50,000 shares @ $.50) 25,000 Additional paid-in capital 121,000* Retained earnings 202,000 Total shareholders' equity 348,000 Total liabilities and shareholders' equity $738,000 * To determine the amount of additional paid-in capital, you must begin by computing total liabilities and shareholders' equity = total assets = $738,000 Then: Total shareholders' equity Additional paid-in capital = $738,000 - current liab - noncurrent liab = $738,000 - $136,000 - $254,000 = $348,000 = shareholders' equity - common stock - retained earnings = $348,000 - $25,000 - $202,000 = $121,000 920 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LORING COMPANY Income Statement For the Year Ended December 31, 20X0 Revenues Cost of sales Gross profit Selling and administrative expenses Income from operations Other income (expense): Interest expense Interest income Total other income (expense) Income before income taxes Provision for income taxes Net income Earnings per share ($90,000 ÷ 50,000) 921 $800,000 460,000 $340,000 150,000 $190,000 $ (55,000) 15,000 $ (40,000) $150,000 60,000 $ 90,000 $1.80 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-A2 (15-20 min.) Although the requirements not call for it, many students will find it useful to prepare a balance sheet equation (without beginning balances, which are not given) Comparing the entries in the Cash column to those in the Retained Earnings column shows why net income differs from cash provided by operations This understanding is necessary to interpret (or prepare) the schedule that reconciles net income to net cash provided by operating activities (see 16-A3) WONG FURNITURE COMPANY Statement of Cash Flows For the Year Ended December 31, 20X1 (in thousands) Cash flows from operating activities Cash collections from customers Cash payments: To suppliers To employees For other expenses For interest For income taxes Cash disbursed for operating activities Net cash provided by operating activities $ 1,350 $(775) (180) (100) (11) (30) (1,096) 254 Cash flows from investing activities: Purchase of plant and facilities Cash flows from financing activities: Issued debt Paid dividends Net cash provided by financing activities Net decrease in cash Cash, December 31, 20X0 Cash, December 31, 20X1 922 (335) 110 (39) $ 71 (10) 50 40 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-A3 (10-15 min.) WONG FURNITURE COMPANY Supporting Schedule to Statement of Cash Flows Reconciliation of Net Income to Net Cash Provided by Operating Activities For the Year Ended December 31, 20X1 (in thousands) Net income $361* Adjustments to reconcile net income to net cash provided by operating activities: Add: Depreciation, which was included in computing computing net income but does not affect cash 48 Deduct: Increase in accounts receivable (250) [1,600-1,350] Deduct: Increase in inventory (50) [900-850] Add: Increase in accounts payable 125 [900-775] Add: Increase in salaries and wages payable 10 [190-180] Add: Increase in income taxes payable 10 [40-30] Net cash provided by operating activities $254 * Sales revenues Less expenses: Cost of goods sold Salaries & wages Depreciation Interest expense Other expenses Income before income taxes Income taxes Net income $1,600 $850 190 48 11 100 923 1,199 $401 40 $361 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-A4 (10 min.) Sales Nondepreciation expenses [600,000-90,000] Depreciation Net income Add back depreciation Net cash provided by operating activities $695,000 (510,000) (90,000) $ 95,000 90,000 $185,000 Sales Nondepreciation expenses [600,000-90,000] Depreciation Net income (loss) Add back depreciation Net cash provided by operating activities $ 695,000 (510,000) (270,000) $ (85,000) 270,000 $ 185,000 Notice that the additional depreciation expense did not affect net cash provided by operating activities The direct method clearly shows this phenomenon: Direct method: Sales for cash Operating expenses in cash Net cash provided by operating activities 924 $ 695,000 (510,000) $ 185,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-B1 (15-20 min.) INTEL Balance Sheet December 31, 2005 (in millions) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets Total current assets Property, plant, and equipment, at cost Accumulated depreciation Long-term investments Goodwill Other assets Total assets $ 7,324 5,448 3,914 3,126 1,382 $21,194 $44,132 (27,021) 17,111 4,672 3,873 1,464 $48,314 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short-term debt $ 313 Accounts payable 2,249* Accrued compensation and benefits 2,110 Deferred income on shipments to distributors 632 Other accrued liabilities 1,970 Income taxes payable 1,960 Total current liabilities $ 9,234* Long-term debt 2,106 Deferred tax liabilities 703 Other long-term liabilities 89 Common shareholders' equity: Common stock and capital in excess of par value $ 6,245 Retained earnings 29,937 36,182 Total liabilities and shareholders' equity $48,314 *Total Current Liabilities = $48,314 - $36,182 - $2,106 - $703 - $89 = $9,234 Accounts Payable = $9,234 - $313 - $2,110 - $632 - $1,970 - $1,960 = $2,249 925 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-B2 (25 min.) This is a good exercise in recognizing items that fit in a Statement of Cash Flows and placing them in the proper section of the statement Three items listed in the problem not appear in a Statement of Cash Flows: net sales, retained earnings, and total assets WALGREEN COMPANY Statement of Cash Flows For the Year Ended August 31, 2005 (in millions) Cash flows from operating activities: Net earnings Adjustments to reconcile net earning to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Other non-cash expenses Changes in current assets and liabilities: Increases in inventories Increases in trade accounts payable Increases in accrued expenses and other liabilities Increases in accounts receivable Increases in other current assets Increases in income taxes payable Net cash provided by operating activities Cash (Used for) Provided by Investing Activities: Purchases of short-term investments Proceeds from sale of short-term investments Additions to property and equipment Disposition of property and equipment Proceeds from the surrender of corporate owned life insurance Net cash used for investment activities Cash (Used for) Provided by Financing Activities: Stock purchases for treasury stock Cash dividends paid Net proceeds from employee stock plans Other cash provided by financing activities Net cash used for financing activities Changes in Cash and Cash Equivalents: Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 926 $ 1,559.5 482.1 (70.8) 108.4 (854.0) 276.7 97.8 (224.9) (8.6) 5.0 1,371.2 (10,742.0) 11,519.9 (1,237.5) 15.5 10.1 (434.0) (781.8) (214.5) 177.5 14.4 (804.4) $ 132.8 444.0 576.8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-B3 (10-15 min.) All of the items listed, except provision for income taxes and interest expense, are additions to (or deductions from) net income that are required in computing net cash flow from operating activities The main problem is to decide whether each one should be added to or deducted from net income TARGET CORPORATION Supporting Schedule to Statement of Cash Flows Reconciliation of Net Income to Net Cash Provided by Operating Activities For the Year Ended January 28, 2006 (in millions) Net earnings Add non-cash expenses: Depreciation and amortization Other non-cash charges $2,408 1,409 457 Deduct increases in non-cash current assets: Accounts receivable Inventories Other assets (244) (454) (52) Add increases in operating current liabilities: Accrued liabilities Accounts payable Income taxes payable Other operating cash inflows 351 489 70 17 Net cash provided by operating activities $4,451 The net cash from operating activities exceeds net income by $4,451 - $2,408 = $2,043 million, primarily due to the add back of $1,409 + $457 = $1,866 of depreciation and other non-cash expenses 927 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-59 (10-15 min.) (a) Operating income was lower by the $1,073 million, because R&D must be charged to expense (b) Operating income would be $6,399 + $1,073 = $7,472 million (c) There would be no balance-sheet asset if R&D were expensed However, if patents were purchased instead of Dow itself conducting the R&D (as in requirement (b)), assets would be higher by $1,073 million, the cost of the patents $50 million ÷ = $12.5 million The balance in pre-opening costs decreased by $2,390,000 $1,840,000 = $550,000 Because the addition to this account was $2,200,000, the deduction must have been $2,200,000 + $550,000 = $2,750,000 Thus, this $2,750,000 must have been amortized Let x = amortization for 2006 Look at the account Preopening costs: 12/31/05 balance Additions Subtractions ( 12/31/06 balance 2,390,000 2,200,000 x) 1,840,000 2,390,000 + 2,200,000 - x = 1,840,000 x = 2,750,000 $13 billion - $2 billion = $11 billion of goodwill The goodwill would remain on Philip Morris’s books unless management determines that its value has fallen below the amount initially recorded At that time, it would be written down (or written off entirely if its value had fallen to zero) 958 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-60 (15-20 min.) Cash or accounts receivable and sales would increase by $5,000,000 Warranty expense and liability for warranties would rise by 032 x $5,000,000 = $160,000 Liability for warranties and cash would decrease by $120,000 Cash and the liability account called Deposits on Bottles would be increased by $98,000 In turn, both accounts would be decreased by $93,000 Cash and the liability account called Deposits would be increased by $2,000 on April On June 30, Interest Expense and Deposits would be increased by 3/12 x 05 x $2,000 = $25 On July 1, Cash and Deposits would be decreased by $2,000 + $25 = $2,025 (a) Cash and the liability, Unearned Sales Revenue, would be increased by $180,000 on December 31 for the ticket sales (b) On January 31, Unearned Sales Revenue would be decreased by $180,000 ÷ = $45,000 On the income statement, Sales would be increased by $45,000 959 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-61 (15 min.) 2005 accounts receivable was $342,121,000 + $1,837,000 + $1,330,000 = $345,288,000 2005 liabilities for warranties was $19,291,000 - $40,997,000 + $58,746,000 = $37,040,000 2005 retained earnings (accumulated deficits) were: ($694,047,000) + $6,161,000 = ($687,886,000) 16-62 (10-15 min.) The framework of assets = liabilities + stockholders’ equity has been changed to assets – liabilities = stockholders’ equity Thus, the bottom line of the balance sheet is assets – liabilities, which equals stockholders’ equity Further, the accounts are presented in different orders with different subtotals Consider first the assets: ► Fixed assets are listed first, whereas in the U S., current assets would be first ► Inventories are called “stocks.” ► Accounts receivable and short-term debt are combined and called “debtors,” with both those due within a year and those due in more than a year classified as current assets ► Cash is listed last instead of first among the current assets, and cash equivalents are not included ► Current liabilities are called “creditors.” ► Current liabilities are subtracted from current assets to give a subtotal for net current liabilities (would be net current assets if current assets exceeded current liabilities), to which the statement adds fixed assets to get a subtotal called total assets less current liabilities 960 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ► The statement next deducts long-term liabilities (creditors) to give a subtotal for total net assets, which will equal the subtotal for stockholders’ equity ► The main title for stockholders’ equity is “capital and reserves,” and it includes two accounts called “reserves.” ► Retained earnings is called “profit and loss account.” ► Called up capital and share premium account refer to paidin capital ► Minority interest is listed after “total shareholders’ funds” ► The bottom line in equity is “total capital employed,” which equals “total net assets.” Although J Sainsbury’s financial statements contain most of the same basic information that U S statements contain, the format is quite different 16-63 (10-20 min.) A lively discussion usually ensues This problem can be the basis for a discussion of the strengths and weaknesses of accounting theory There would be a "gain from insurance on crashed airplane" recognized on the income statement: Insurance payments received Book value of airplane Gain from insurance on crashed airplane $6,500,000 962,000 $5,538,000 Total recorded value of the assets would increase by $5,538,000, the amount of the gain The fleet of airplanes would be the essentially same as before the crash, except that a 727 with a book value of $6.5 million has replaced a similar 727 with a book value of only $962,000 961 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for casualties is very controversial It gets to the heart of the question of what is income and what is capital Does the $6.5 million represent a return of capital or a payment of both capital and income? The traditional accounting model ignores changes in general purchasing power and intervening changes in specific prices while an asset is held When an asset is disposed of, the gain or loss is measured in nominal dollars (almost always without regard to the intended use of the proceeds) Many theorists and practitioners (as explained much more fully in Appendix 17 on inflation accounting) define the income of a going concern to be a function of whether the proceeds will be reinvested in the same types of assets These individuals maintain that no gain is realized on the airplane crash, because the $6.5 million is really a return of capital (where capital is thought of in physical terms as airplanes, inventories, etc.) Thus, the "gain" would not be shown in the income statement Instead, it would appear as a special balance sheet item called Revaluation Equity, or some similar title 962 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-64 (5-10 min.) a b c Financing Investing Operating * d e f Financing Financing Investing g h i Investing Operating * Operating * * Only on a statement of cash flows when using the indirect method 16-65 (10-15 min.) The only line for interest on the statement of cash flows will be under operating activities: Cash payments for interest ($29,374,000) The decrease of $29,374,000 - $24,026,000 = $5,348,000 in interest payable would be deducted from net income in computing net cash provided by operating activities Why? Because the interest expense of $24,026,000 was deducted in computing net income, but the cash payment of $29,374,000 million, $5,348,000 more, should be deducted in computing cash flow 963 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-66 (30 min.) RECREATIONAL EQUIPMENT, INC (REI) Statement of Cash Flows From Operating Activities (Indirect Method) For the Year Ended December 31, 2005 (in thousands) Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Other noncash revenues and gains, net Decrease in receivables Increase in inventories Increase in prepaids and other current assets Increase in payables and other accrued expenses Net cash provided by operating activities $32,726 30,652 (7,215) 989 (14,584) (639) 38,497 $80,426 RECREATIONAL EQUIPMENT, INC (REI) Statement of Cash Flows From Operating Activities (Direct Method) For the Year Ended December 31, 2005 (in thousands) Cash collections from customers (1,022,326 + 989) $1,023,315 Cash payments to suppliers (573,307 + 14,584 - 38,497) (549,394) Cash payment for operating expenses (363,053 – 30,652 + $7,215 + 639) (340,255) Cash payments for income taxes (19,169) Cash payments for other expenses (34,071) Net cash provided by operating activities $ 80,426 964 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-67 (25-35 min.) NORDSTROM, INC Cash Flows from Operating Activities For the Year Ended January 28, 2006 (in millions) Cash collections from customers ($7,723 - $15) Other income, net Total cash receipts Cash payments: To suppliers of goods (4,888 + 21 -32) For selling, general, and administrative expenses (2,101 - 276 - 31 + 11 + 32 + 1) For interest (45) For income taxes (334 + 34) Cash disbursed for operating activities Net cash provided by operating activities 965 $7,708 196 $7,904 $4,877 1,838 45 368 7,128 $ 776 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-68 (30-40 min.) Unisys used the terminology given here regarding sales and cost of goods sold Amounts are in millions Revenue (150 @ $16 + 160 @ $16) Deduct cost of revenue: Inventory, December 31, 2005, 100 @ $8 Purchases (200 @ $10 + 140 @ $12) Cost of goods available for sale Deduct: Inventory, June 30, 2006, 130 units: 130 @ $12 or 100 @ $8 + 30 @ $10 or 130 @ ($4,480 ÷ 440) or 130 @ 10.18 or 80 @ $8 + 50 @ $10 Cost of sales of products Gross margin Specific Weighted IdentifiFIFO LIFO Average cation $4,960 $4,960 $4,960$4,960 800 800 800 800 3,680 3,680 3,680 3,680 4,480 4,480 4,480 4,480 1,560 1,100 1,324 1,140 2,920 3,380 3,156 3,340 $2,040 $ 1,580 $1,804$1,620 2a Income before income taxes will be lower under LIFO: $2,040 - $1,580 = $460 The income tax will be lower by 40 x $460 = $184 2b Income before income taxes will be lower under LIFO: $1,804 - $1,580 = $224 The income tax will be lower by 40 x $224 = $89.60 966 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-69 (20-30 min.) This problem explores the effects of LIFO layers There would be no effect on gross margin, income taxes, or net income under FIFO The balance sheet would show a higher inventory by $840 A detailed income statement would show both purchases and ending inventory as higher by $840, so the net effect on cost of goods sold would be zero LIFO would show a lower gross margin, $1,340, as compared with $1,580, a decrease of $240 Hence, the impact of the late purchase would be a savings of income taxes of 40% of $240 = $96 For details, see the accompanying tabulation Without Late Purchase $4,960 Net sales of products, as before Deduct cost of sales of products: Inventory, December 31, 2002, 100 @ $8 $ 800 Purchases, 340 units, as before, and 400 units 3,680 Available for sale $4,480 Ending inventory: First layer ,100 @ $8 $800 Second layer, 30 @ $10 300 1,100 First layer, 100 @ $8 $800 Second layer, 90 @ $10 900 Cost of sales of products 3,380 Gross margin $ 1,580 *340 units, as before $3,680 60 units @ $14 840 $4,520 967 With Late Purchase $4,960 $ 800 4,520* $5,320 1,700 3,620 $ 1,340 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Although purchases are $840 higher than before, the new LIFO ending inventory is only $1,700 - $1,100 = $600 higher The cost of sales is $3,620 - $3,380 = $240 higher To see this another way, compare the ending inventories: Late purchase added to cost of goods available for sale: 60 @ $14 Deduct 60-unit increase in ending inventory: Second layer is 90 - 30 = 60 units higher @ $10 Cost of sales is higher by 60 @ ($14 - $10) $840 600 $240 16-70 (15 min.) Inventory would have increased by $.4 billion less under LIFO than under FIFO Therefore, cost of merchandise sold would have been $.4 billion higher, and operating income would have been $.4 billion lower Cost of Merchandise Sold = $54.2 billion + $.4 billion = $54.6 billion Operating Income = $9.4 billion - $.4 billion = $9.0 billion, or 4.3% less At a tax rate of 40%, the $.4 billion reduction in income would result in a tax savings of $.4 x 40% = $.16 billion (or $160 million) Prices were rising during fiscal 2006 The most recent prices must be higher than the beginning prices because the ending inventory under FIFO (which contains the most recent prices) is greater than the ending inventory under LIFO (which contains older layers of inventory) Alternatively, the cost of merchandise sold under LIFO (which contains the most recent prices) is higher than the cost of merchandise sold under FIFO (which includes older prices) 968 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-71 (20 min.) The inventory method determines how costs will be divided between ending inventory and cost of goods sold Under the FIFO method, inventory would have increased by $17 million (that is, $62 million - $45 million) more than it did under LIFO (in millions): 2006 2005 Increase in inventory LIFO $1,055 1,037 $ 18 FIFO $1,055 + $62 =$1,117 1,037 + 45 = 1,082 $ 35 Therefore, cost of goods sold would have been $17 million lower under the FIFO method Operating income would have been $17 million higher: $1,567 million + $17 million = $1,584 million Total inventory under FIFO would have exceeded that under LIFO by $62 million Therefore, cumulative operating income would have been $62 million higher under FIFO 969 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-72 (25-30 min.) Nike’s principal business activity is “the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products.” About 47% of its sales are in the United States Nike’s net income increased from $1,211.6 million in fiscal 2005 to $1,392.0 million in fiscal 2006, a 15% increase Nike’s total assets grew ($9,869.6 million ÷ $8,793.6 million) - = 12%, which is less than the 15% increase in net income Nike generated $1,667.9 million from its operating activities, but it used $1,276.6 million for investing activities and $850.9 million for financing activities A minor effect was the $25.7 million increase in cash from exchange rate changes, a topic beyond the scope of this text Nike declared dividends on common stock of $1.18 per share or $304.9 million This information is found on the statement of shareholders’ equity, and the dividends per share are also found on the income statement 16-73 (30-40 min.) For the solution, see the Prentice Hall Web site, www.prenhall.com/ 970 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 16-74 (30 min.) The purpose of this exercise is to learn which accounts belong to the income statement and which to the balance sheet Doing the exercise in teams of two persons each allows each student to recall income statement and balance sheet accounts himself or herself and also to react to accounts listed by someone else Discussion of those accounts for which there is disagreement should generate consideration of what criteria make an account an income statement account or a balance sheet account It also forces consideration of the labels put on accounts and how well they identify the nature of the account 16-75 (15-25 min.) NOTE TO INSTRUCTOR This solution is based on the web site as it was in early 2007 The financial statements are for the year ended February 3, 2006 Be sure to examine the current web site before assigning this problem, as the information there may have changed Lowe’s is the world’s second largest home improvement retailer Lowe’s business is “helping our customers improve the places they call home.” The company operates 1,234 stores in 49 states Lowe’s calls its income statement a “Consolidated Statement of Earnings.” It uses a multiple-step format, with subtotals for gross profit and pretax earnings However, there is no subtotal for operating income The company had a net income of $2,771 million in fiscal 2006, after a profit of $2,176 million in 2005, a growth of 27% 971 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Lowe’s largest current asset is merchandise inventory, and its largest current liability is accounts payable This is a common case for retail companies Lowe’s original cost of its property is $21,419 million, accumulated depreciation is $5,065 million, leaving a net book value of $16,354 Since accumulated depreciation is only $5,065 million ÷ $21,419 million = 24% of the original cost, most of Lowe’s assets are relatively new Lowe’s retained earnings is its largest stockholders’ equity account, comprising $12,234 ÷$14,339 = 85% of its stockholders’ equity This implies strong profitability in the past because the retained earnings is the summation of past profits less dividends Lowe’s cash flow from operations is $3,843 million – $2,771 million = $1,072 million more than its net income The main factor explaining this is the add-back of depreciation and amortization Although much cash was used to increase inventories, this was nearly offset by a large increase in accounts payable and other operating liabilities In total cash and cash equivalents decreased by $107 million in fiscal 2006 because the cash used for investing and financing activities exceeded that generated by operating activities Lowe’s spent much more ($3,379 million) for fixed assets than it charged in depreciation and amortization ($1,051 million) This is the common case for a growing company such as Lowe’s 972 ... ¥373,000 *To compute the amount for long-term investments, recognize that total assets must be ¥373,000 (equal to total liabilities and stockholders' equity) Then: Total noncurrent assets = Total... manipulation of this number by management that has led to the conservative policy of expensing R&D for financial reporting purposes But to make informed decisions, managers need to estimate the future... activities Cash (Used for) Provided by Financing Activities: Stock purchases for treasury stock Cash dividends paid Net proceeds from employee stock plans Other cash provided by financing activities Net