Principles of accounting by libby libby and phillips

Principles of accounting by libby libby and phillips Principles of accounting by libby libby and phillips Principles of accounting by libby libby and phillips Principles of accounting by libby libby and phillips Principles of accounting by libby libby and phillips

Confirming Pages PRINCIPLES OF Accounting www.mhhe.com/LLPW1e Patricia A Libby Ithaca College Robert Libby Cornell University Fred Phillips University of Saskatchewan Stacey Whitecotton Arizona State University Boston Burr Ridge, IL Dubuque, IA New York San Francisco St Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto lib26843_fm_i-1.indd i 11/19/08 12:59:34 PM Confirming Pages PRINCIPLES OF ACCOUNTING Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020 Copyright © 2009 by The McGraw-Hill Companies, Inc All rights reserved No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN-13: 978-0-07-352684-3 (combined edition) ISBN-10: 0-07-352684-3 (combined edition) ISBN-13: 978-0-07-327395-2 (volume 1, chapters 1–12) ISBN-10: 0-07-327395-3 (volume 1, chapters 1–12) ISBN-13: 978-0-07-327396-9 (volume 2, chapters 12–25) ISBN-10: 0-07-327396-1 (volume 2, chapters 12–25) ISBN-13: 978-0-07-327408-9 (principles of financial accounting, chapters 1–17) ISBN-10: 0-07-327408-9 (principles of financial accounting, chapters 1–17) Vice president and editor-in-chief: Brent Gordon Editorial director: Stewart Mattson Publisher: Tim Vertovec Senior sponsoring editor: Alice Harra Senior developmental editor: Kimberly D Hooker Executive marketing manager: Sankha Basu Manager of photo, design & publishing tools: Mary Conzachi Full service project manager: Elm Street Publishing Services Senior production supervisor: Debra R Sylvester Interior designer: Pam Verros Senior photo research coordinator: Jeremy Cheshareck Photo researcher: Editorial Image, LLC Senior media project manager: Susan Lombardi Cover design: Cara Hawthorne Compositor: Laserwords Private Limited Printer: R R Donnelley Library of Congress Cataloging-in-Publication Data Principles of accounting / Patricia A Libby [et al.] p cm Includes index ISBN-13: 978-0-07-352684-3 (combined edition : alk paper) ISBN-10: 0-07-352684-3 (combined edition : alk paper) ISBN-13: 978-0-07-327395-2 (volume 1, ch 1–12 : alk paper) ISBN-10: 0-07-327395-3 (volume 1, ch 1–12 : alk paper) [etc.] Accounting Accounting—Textbooks I Libby, Patricia A HF5636.P75 2009 657—dc22 2008038810 www.mhhe.com lib26843_fm_i-1.indd ii 11/19/08 12:59:47 PM Confirming Pages DEDICATION Herman and Doris Hargenrater, Laura Libby, Oscar and Selma Libby –Patricia and Robert Libby To the best teachers I’ve ever had: my Mom and Dad, Barb, Harrison, and Daniel –Fred Phillips This book is dedicated to Mark, Riley, and Carley Drayna Thanks for all your love and support –Stacey Whitecotton iii lib26843_fm_i-1.indd iii 11/19/08 12:59:47 PM Confirming Pages MEET THE AUTHORS Patricia A Libby Patricia Libby is Associate Professor of Accounting at Ithaca College, where she teaches the undergraduate Principles of Accounting course She previously taught graduate and undergraduate Principles of Accounting at Eastern Michigan University and the University of Texas Before entering academe, she was an auditor with Price Waterhouse (now PricewaterhouseCoopers) and a financial administrator at the University of Chicago She is also faculty adviser to Beta Alpha Psi, Ithaca College Accounting Association, and Ithaca College National Association of Black Accountants She received her B.S from Pennsylvania State University, her M.B.A from DePaul University, and her Ph.D from the University of Michigan; she is also a CPA Pat conducts research on using cases in the introductory course and other parts of the accounting curriculum She has published articles in The Accounting Review, Issues in Accounting Education, and The Michigan CPA Robert Libby Robert Libby is the David A Thomas Professor of Accounting at Cornell University, where he teaches the introductory Principles of Accounting course He previously taught at the University of Illinois, Pennsylvania State University, the University of Texas at Austin, the University of Chicago, and the University of Michigan He received his B.S from Pennsylvania State University and his M.A.S and Ph.D from the University of Illinois; he is also a CPA Bob is a widely published author and researcher specializing in behavioral accounting He was selected as the American Accounting Association (AAA) Outstanding Educator in 2000, received the AAA Outstanding Service Award in 2006, and received the AAA Notable Contributions to the Literature Award in 1985 and 1996 He is the only person to have received all three of the Association’s highest awards for teaching, service, and research He has published numerous articles in The Accounting Review; Journal of Accounting Research; Accounting, Organizations, and Society; and other accounting journals He has held a variety of offices including Vice President of the American Accounting Association and is a member of the American Institute of CPAs and the editorial boards of The Accounting Review; Accounting, Organizations, and Society; Journal of Accounting Literature; and Journal of Behavioral Decision Making iv lib26843_fm_i-1.indd iv 11/19/08 12:59:48 PM Confirming Pages Fred Phillips Fred Phillips is Professor and the George C Baxter Scholar at the University of Saskatchewan, where he teaches introductory Principles of Accounting He also has taught introductory accounting at the University of Texas at Austin and the University of Manitoba Fred has an undergraduate accounting degree, a professional accounting designation, and a Ph.D from the University of Texas at Austin He previously worked as an audit manager at KPMG Fred’s main interest is accounting education He has won 11 teaching awards, including three national case-writing competitions Recently, Fred won the 2007 Alpha Kappa Psi Outstanding Professor award at The University of Texas at Austin, and in 2006 he was awarded the title Master Teacher at the University of Saskatchewan He has published instructional cases and numerous articles in journals such as Issues in Accounting Education, Journal of Accounting Research, and Organizational Behavior and Human Decision Processes He received the American Accounting Association Outstanding Research in Accounting Education Award in 2006 and 2007 for his articles Fred is a past Associate Editor of Issues in Accounting Education and a current member of the Teaching, Lear ning & Curriculum and Two-Year College sections of the American Accounting Association In his spare time, he likes to work out, play video games, and drink iced cappuccinos Stacey Whitecotton Stacey Whitecotton is Associate Professor in the School of Accountancy at Arizona State University She received her Ph.D and Masters of Accounting from The University of Oklahoma and her B.B.A from Texas Tech University Stacey teaches managerial accounting topics at the undergraduate level and in the MBA program She was recognized as the Outstanding Undergraduate Teacher by the School of Accountancy and Information Management in 1999 and was awarded the John W Teets Outstanding Graduate Teacher award in 2000–2001 She is currently serving as the faculty director for the W P Carey Online MBA program Stacey’s research interests center around the use of decision aids to improve the decision-making behavior of financial analysts, managers, and auditors Her research has been published in The Accounting Review, Organizational Behavior and Human Decision Processes, Behavioral Research in Accounting, Auditing: A Journal of Practice and Theory, and The Journal of Behavioral Decision Making Stacey and her husband Mark enjoy traveling and the many outdoor activities Arizona has to offer with their two kids, Riley and Carley v lib26843_fm_i-1.indd v 11/19/08 12:59:50 PM Confirming Pages What Does Pizza Have to Do with Accounting? Teaching challenge: Motivating students to read the book The number one challenge we hear from faculty is how to motivate students to read their textbook Students taking Principles of Accounting don’t yet know why accounting matters in their lives, so they aren’t naturally drawn to reading their text However, most students know about eating pizza, drinking Starbucks or their favorite coffee, shopping at retail stores like American Eagle, and shipping packages with UPS Once they read about how these activities relate to accounting, they begin to see that accounting is in their everyday lives In addition, many of your students imagine themselves starting and running a business someday (or helping with a family business) So, our Principles of Accounting book opens with a novel idea: Chapters 1–4 are written around the true story of Mauricio Rosa, an immigrant from El Salvador who started Pizza Aroma, a small gourmet pizza restaurant in Ithaca, New York Mauricio’s actual experiences and decisions provide a consistent story line and create a framework for learning about accounting In Chapter 1, Mauricio and his CPA discuss plans for starting his business, addressing topics such as The building cover has a busy marketplace that depicts the essence of business, accounting, free enterprise, etc., and the crowd rushing off to wherever indicates that business is alive and well —Judy Daulton, Piedmont Technical College choice of organizational form, accounting information needs, and financial statement reporting In Chapter 2, Mauricio actually establishes Pizza Aroma by contributing capital, obtaining a bank loan, and investing in restaurant equipment He learns how these activities affect Pizza Aroma’s financial condition and how they are reported in the balance sheet In Chapter 3, Pizza Aroma begins to earn revenue and incur expenses He learns how these operating transactions affect the balance sheet and the income statement The examples follow through is an excellent case of how to close the books of accounts The classifications of accounts make sense with easy understanding for the class The accounting cycle is clearly explained and easy to understand for the class.—Shafi Ullah, Broward College Finally, in Chapter 4, Mauricio learns how the accounting records are adjusted prior to determining whether Pizza Aroma has been profitable The dialogue between Mauricio and Laurie in the first chapter invites students into a discussion like one they may have someday Through this true story that The presentation of the pizza case is awesome it lends itself to a mystery and drives you to find out the ending excellent .—David Laurel, South Texas College vi lib26843_fm_i-1.indd vi 11/19/08 12:59:52 PM Confirming Pages Libby/ Libby/ Phillips/ Whitecotton (LLPW) is the only book to use a true story to introduce students to accounting and the accounting cycle with a running case about a pizzeria “Others outside your business will also need financial information about your restaurant For example, where will the money come from to start your business?” “I’ll contribute $30,000 from personal savings But I’ll still need to ask the bank for a $20,000 loan to buy equipment What will the bank want to know?” continues in the entire first chapters (the accounting cycle), students see the relationship between accounting and business, and they get a mini-manual for how to start their own businesses Students get captivated by the story and may not realize they are learning accounting principles in (Chapter One) is engaging with the interview approach The business owner is at the same level of accounting knowledge as the students and asks the questions that are surely running through the students’ minds —Patricia Walczak, Lansing Community College the process The choice of Pizza Aroma is purposeful: Students love pizza, they connect accounting to something in their everyday lives More important, they learn to make the connection in the Since many (of my students) have worked in fast-food establishments and certainly all have eaten pizza, I think this should make it more interesting and understandable to them.—Sandra Augustine, Hilbert College first few weeks that accounting can help them be successful When students understand why accounting matters to them, they want to read more Introducing balance sheet accounts in Chapter and, exclusively, income accounts in Chapter is a dynamic idea that makes sense! The focus on a proprietorship selling pizza through the first chapters is a topic students can identify with.—Marcia Sandvold, Des Moines Area Community College Pizza Aroma: It’s a true story Pizza Aroma, Ithaca, NY Author Patricia Libby and Owner Mauricio Rosa Gourmet Pizza vii lib26843_fm_i-1.indd vii 11/19/08 12:59:58 PM Confirming Pages How Can LLPW Ensure Students Will Master the Accounting Cycle? Teaching challenge: Students struggle with the accounting cycle Faculty understand that mastering the accounting cycle is essential to success in Principles of Accounting courses The authors agree They believe students struggle with the accounting cycle when transaction analysis is covered in one chapter Students are often overwhelmed when they are exposed to the accounting equation, journal entries, and T-accounts for both balance sheet and income statement accounts in a single chapter Slowing down the material by breaking transaction analysis into two chapters is an excellent idea, which I think will help students greatly That is one of my biggest complaints about my current text; it goes too fast.—Amy Haas, Kingsborough Community College The Libby/Libby/Phillips/Whitecotton approach covers transaction analysis over two chapters so that students have the time to master the material In Chapter of Principles of Accounting, students are introduced to the accounting equation and transaction analysis for investing and financing transactions that affect only balance sheet accounts This provides students the opportunity to learn the basic structure and tools used in accounting in a simpler setting than usual Chapter introduces operating transactions that affect income statement accounts As a result of this slower building-block approach to transaction analysis, students are better prepared to learn adjustments, financial statement preparation, and more advanced topics It is presented in a very organized manner The students are presented the journalizing/posting information (Chapters and 3) at a slower pace, giving them the opportunity to absorb and comprehend this difficult information Chapter then wraps up the entire cycle all at once, instead of presenting adjusting entries in one chapter and then ending the accounting cycle in another In other words, in a more efficient and easily understandable manner.—Carol Pace, Grayson Community College The concentration and reinforcement of the basic accounting equation allow the student to master the equation before introducing the income statement concepts Excellent idea —Patricia Holmes, Des Moines Area Community College viii lib26843_fm_i-1.indd viii 11/19/08 1:00:10 PM Confirming Pages LLPW is the only book offering a more patient, “building-block” approach to the accounting cycle, covering transaction analysis in chapters instead of The following grid provides a detailed comparison of the Libby/Libby/Phillips/Whitecotton approach with the approach of other principles of accounting texts Accounting Cycle Chapter LLPW Approach Other Approaches Overview of Financial Statements and Users, Transaction Analysis with Accounting Equation Overview of Financial Statements and Users, Transaction Analysis with Accounting Equation Journal Entries and T-Accounts with Transactions affecting Balance Sheet Accounts only Journal Entries and T-Accounts with Transactions affecting both Balance Sheet and Income Statement Accounts Journal Entries and T-Accounts with Transactions affecting both Balance Sheet and Income Statement Accounts Adjusting Entries, Financial Statement Preparation Adjusting Entries, Financial Statement Preparation, Closing Process, (Worksheet) Closing Process, Worksheet, (Reversing Entries), Financial Statement Preparation First introducing income accounts in chapter is great I don’t know any other text to this.—Jeannie Harrington, Middle Tennessee State University Learning accounting is like learning a foreign language where practice of new terms and concepts is essential By taking a progressive building-block approach to Chapters and 3, students have more time to master transaction analysis, which is the foundation for the rest of the course Students have more time to practice and feel less overwhelmed It caught my attention from page and I wanted to read on and find out how Pizza Aroma was going to The first four chapters simplify the accounting process and explain accounting on an entry level for first time accounting students Great Job!!!—Susan Logorda, Lehigh Carbon Community College ix lib26843_fm_i-1.indd ix 11/19/08 1:00:12 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com stock options also include performance options which vest on the later of the first anniversary date of the grant and the date the closing price of the Company's common stock has been 25% greater than the exercise price of the options for 30 consecutive trading days The Company recognized $61 million, $148 million and $117 million of stock-based compensation expense in fiscal 2007, 2006 and 2005, respectively, related to stock options Under the Plans, as of February 3, 2008, the Company had issued 16 million shares of restricted stock, net of cancellations (the restrictions on million shares have lapsed) Generally, the restrictions on the restricted stock lapse according to one of the following schedules: (1) the restrictions on 100% of the restricted stock lapse at 3, or years, (2) the restrictions on 25% of the restricted stock lapse upon the third and sixth year anniversaries of the date of issuance with the remaining 50% of the restricted stock lapsing upon the associate's attainment of age 62, or (3) the restrictions on 25% of the restricted stock lapse upon the third and sixth year anniversaries of the date of issuance with the remaining 50% of the restricted stock lapsing upon the earlier of the associate's attainment of age 60 or the tenth anniversary date The restricted stock also includes the Company's performance shares, the payout of which is dependent on the Company's total shareholders return percentile ranking compared to the performance of individual companies included in the S&P 500 index at the end of the three-year performance cycle Additionally, certain awards may become non-forfeitable upon the attainment of age 60, provided the associate has had five years of continuous service The fair value of the restricted stock is expensed over the period during which the restrictions lapse The Company recorded stock-based compensation expense related to restricted stock of $122 million, $95 million and $32 million in fiscal 2007, 2006 and 2005, respectively In fiscal 2007, 2006 and 2005, there were 593,000, 417,000 and 461,000 deferred shares, respectively, granted under the Plans Each deferred share entitles the associate to one share of common stock to be received up to five years after the vesting date of the deferred shares, subject to certain deferral rights of the associate The Company recorded stock-based compensation expense related to deferred shares of $10 million, $37 million and $10 million in fiscal 2007, 2006 and 2005, respectively As of February 3, 2008, there were 2.5 million non-qualified stock options outstanding under non-qualified stock option plans that are not part of the Plans The Company maintains two ESPPs (U.S and non-U.S plans) The plan for U.S associates is a tax-qualified plan under Section 423 of the Internal Revenue Code The non-U.S plan is not a Section 423 plan The ESPPs allow associates to purchase up to 152 million shares of common stock, of which 128 million shares have been purchased from inception of the plans The purchase price of shares under the ESPPs is equal to 85% of the stock's fair market value on the last day of the purchase period During fiscal 2007, there were million shares purchased under the ESPPs at an average price of $28.25 Under the outstanding ESPPs as of February 3, 2008, employees have contributed $8 million to purchase shares at 85% of the stock's fair market value on the last day (June 30, 2008) of the purchase period The Company had 24 million shares available for issuance under the ESPPs at February 3, 2008 The Company recognized $14 million, $17 million and $16 million of stockbased compensation in fiscal 2007, 2006 and 2005, respectively, related to the ESPPs In total, the Company recorded stock-based compensation expense, including the expense of stock options, ESPPs, restricted stock and deferred stock units, of $207 million, $297 million and $175 million, in fiscal 2007, 2006 and 2005, respectively 54 2007 ANNUAL REPORT lib26843_annualreport_001-080.in69 69 03 9/22/08 3:06:43 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The following table summarizes stock options outstanding at February 3, 2008, January 28, 2007 and January 29, 2006, and changes during the fiscal years ended on these dates (shares in thousands): Weighted Average Exercise Price Number of Shares Outstanding at January 30, 2005 86,394 Granted Exercised Canceled $ 36.12 17,721 (11,457) (8,626) Outstanding at January 29, 2006 84,032 Granted Exercised Canceled 37.96 28.83 38.65 $ 37.24 257 (10,045) (8,103) Outstanding at January 28, 2007 66,141 Granted Exercised Canceled 39.53 28.69 40.12 $ 38.20 2,926 (6,859) (9,843) Outstanding at February 3, 2008 52,365 37.80 28.50 40.68 $ 38.98 The total intrinsic value of stock options exercised during fiscal 2007 was $63 million As of February 3, 2008, there were approximately 52 million stock options outstanding with a weighted average remaining life of five years and an intrinsic value of $30 million As of February 3, 2008, there were approximately 42 million options exercisable with a weighted average exercise price of $39.43 and an intrinsic value of $28 million As of February 3, 2008, there were approximately 51 million shares vested or expected to ultimately vest As of February 3, 2008, there was $84 million of unamortized stock-based compensation expense related to stock options which is expected to be recognized over a weighted average period of two years The following table summarizes restricted stock outstanding at February 3, 2008 (shares in thousands): Weighted Average Grant Date Fair Value Number of Shares Outstanding at January 29, 2006 5,308 Granted Restrictions lapsed Canceled $ 7,575 (1,202) (1,551) Outstanding at January 28, 2007 10,130 Granted Restrictions lapsed Canceled 41.37 38.03 39.00 $ 7,091 (2,662) (2,844) Outstanding at February 3, 2008 11,715 35.76 39.20 39.10 39.01 39.37 $ 39.14 As of February 3, 2008, there was $267 million of unamortized stock-based compensation expense related to restricted stock which is expected to be recognized over a weighted average period of three years 55 lib26843_annualreport_001-080.in70 70 9/22/08 3:06:44 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LEASES The Company leases certain retail locations, office space, warehouse and distribution space, equipment and vehicles While most of the leases are operating leases, certain locations and equipment are leased under capital leases As leases expire, it can be expected that, in the normal course of business, certain leases will be renewed or replaced Certain lease agreements include escalating rents over the lease terms The Company expenses rent on a straight-line basis over the life of the lease which commences on the date the Company has the right to control the property The cumulative expense recognized on a straight-line basis in excess of the cumulative payments is included in Other Accrued Expenses and Other Long-Term Liabilities in the accompanying Consolidated Balance Sheets The Company has a lease agreement under which the Company leases certain assets totaling $282 million This lease was originally created under a structured financing arrangement and involves two special purpose entities The Company financed a portion of its new stores opened in fiscal years 1997 through 2003 under this lease agreement Under this agreement, the lessor purchased the properties, paid for the construction costs and subsequently leased the facilities to the Company The Company records the rental payments under the terms of the operating lease agreements as SG&A in the accompanying Consolidated Statements of Earnings The $282 million lease agreement expires in fiscal 2008 with no renewal option The lease provides for a substantial residual value guarantee limited to 79% of the initial book value of the assets and includes a purchase option at the original cost of each property During fiscal 2005, the Company committed to exercise its option to purchase the assets under this lease for $282 million at the end of the lease term in fiscal 2008 In the first quarter of fiscal 2004, the Company adopted the revised version of FASB Interpretation No 46(R), "Consolidation of Variable Interest Entities" ("FIN 46") FIN 46 requires consolidation of a variable interest entity if a company's variable interest absorbs a majority of the entity's expected losses or receives a majority of the entity's expected residual returns, or both In accordance with FIN 46, the Company was required to consolidate one of the two aforementioned special purpose entities that, before the effective date of FIN 46, met the requirements for non-consolidation The second special purpose entity that owns the assets leased by the Company totaling $282 million is not owned by or affiliated with the Company, its management or its officers Pursuant to FIN 46, the Company was not deemed to have a variable interest, and therefore was not required to consolidate this entity FIN 46 requires the Company to measure the assets and liabilities at their carrying amounts, which amounts would have been recorded if FIN 46 had been effective at the inception of the transaction Accordingly, during the first quarter of fiscal 2004, the Company recorded Long-Term Debt of $282 million and Long-Term Notes Receivable of $282 million on the Consolidated Balance Sheets During fiscal 2007, the liability was reclassified to Current Installments of Long-Term Debt as it is due in fiscal 2008 The Company continues to record the rental payments under the operating lease agreements as SG&A in the Consolidated Statements of Earnings The adoption of FIN 46 had no economic impact on the Company Total rent expense, net of minor sublease income for fiscal 2007, 2006 and 2005 was $824 million, $768 million and $720 million, respectively Certain store leases also provide for contingent rent payments based on percentages of sales in excess of specified minimums Contingent rent expense for fiscal 2007, 2006 and 2005 was approximately $6 million, $9 million and $9 million, respectively Real estate taxes, insurance, maintenance and operating expenses applicable to the leased property are obligations of the Company under the lease agreements 56 2007 ANNUAL REPORT lib26843_annualreport_001-080.in71 71 03 9/22/08 3:06:46 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The approximate future minimum lease payments under capital and all other leases at February 3, 2008 were as follows (in millions): Capital Leases Fiscal Year 2008 2009 2010 2011 2012 Thereafter through 2097 $ 79 80 82 82 82 882 $ 802 716 644 582 523 5,664 1,287 $ 8,931 Less imputed interest 872 Net present value of capital lease obligations Less current installments 415 15 Long-term capital lease obligations, excluding current installments $ Operating Leases 400 Short-term and long-term obligations for capital leases are included in the accompanying Consolidated Balance Sheets in Current Installments of Long-Term Debt and Long-Term Debt, respectively The assets under capital leases recorded in Property and Equipment, net of amortization, totaled $327 million and $340 million at February 3, 2008 and January 28, 2007, respectively EMPLOYEE BENEFIT PLANS The Company maintains active defined contribution retirement plans for its employees ("the Benefit Plans") All associates satisfying certain service requirements are eligible to participate in the Benefit Plans The Company makes cash contributions each payroll period up to specified percentages of associates' contributions as approved by the Board of Directors The Company also maintains a restoration plan to provide certain associates deferred compensation that they would have received under the Benefit Plans as a matching contribution if not for the maximum compensation limits under the Internal Revenue Code The Company funds the restoration plan through contributions made to a grantor trust, which are then used to purchase shares of the Company's common stock in the open market The Company's contributions to the Benefit Plans and the restoration plan were $152 million, $135 million and $122 million for fiscal 2007, 2006 and 2005, respectively At February 3, 2008, the Benefit Plans and the restoration plan held a total of 22 million shares of the Company's common stock in trust for plan participants 57 lib26843_annualreport_001-080.in72 72 9/22/08 3:06:48 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10 BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES The reconciliation of basic to diluted weighted average common shares for fiscal 2007, 2006 and 2005 is as follows (amounts in millions): Fiscal Year Ended February 3, 2008 January 28, 2007 January 29, 2006 Weighted average common shares Effect of potentially dilutive securities: Stock Plans 1,849 2,054 2,138 Diluted weighted average common shares 1,856 2,062 2,147 Stock plans include shares granted under the Company's employee stock plans as described in Note to the Consolidated Financial Statements Options to purchase 43.4 million, 45.4 million and 55.1 million shares of common stock at February 3, 2008, January 28, 2007 and January 29, 2006, respectively, were excluded from the computation of Diluted Earnings per Share because their effect would have been anti-dilutive 11 COMMITMENTS AND CONTINGENCIES At February 3, 2008, the Company was contingently liable for approximately $730 million under outstanding letters of credit and open accounts issued for certain business transactions, including insurance programs, trade contracts and construction contracts The Company's letters of credit are primarily performance-based and are not based on changes in variable components, a liability or an equity security of the other party The Company is a defendant in numerous cases containing class-action allegations in which the plaintiffs are current and former hourly associates who allege that the Company forced them to work "off the clock" or failed to provide work breaks, or otherwise that they were not paid for work performed The complaints generally seek unspecified monetary damages, injunctive relief or both Class or collective-action certification has yet to be addressed in most of these cases The Company cannot reasonably estimate the possible loss or range of loss which may arise from these lawsuits These matters, if decided adversely to or settled by the Company, individually or in the aggregate, may result in a liability material to the Company's consolidated financial condition or results of operations The Company is vigorously defending itself against these actions 58 2007 ANNUAL REPORT lib26843_annualreport_001-080.in73 73 03 9/22/08 3:06:49 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12 QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly consolidated results of operations from continuing operations for the fiscal years ended February 3, 2008 and January 28, 2007 (dollars in millions, except per share data): Net Sales Fiscal Year Ended February 3, 2008: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Fiscal Year Ended January 28, 2007: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Basic Earnings per Share from Continuing Operations Earnings from Continuing Operations Gross Profit Diluted Earnings per Share from Continuing Operations $ 18,545 22,184 18,961 17,659 $ 6,263 7,341 6,339 6,054 $ 947 1,521 1,071 671 $ 0.48 0.78 0.59 0.40 $ 0.48 0.77 0.59 0.40 $ 77,349 $ 25,997 $ 4,210 $ 2.28 $ 2.27 $ 19,378 22,592 19,648 17,404 $ 6,636 7,456 6,604 5,850 $ 1,391 1,701 1,333 841 $ 0.66 0.82 0.65 0.42 $ 0.66 0.82 0.65 0.42 $ 79,022 $ 26,546 $ 5,266 $ 2.56 $ 2.55 Note: The quarterly data may not sum to fiscal year totals 59 lib26843_annualreport_001-080.in74 74 9/22/08 3:06:50 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Item Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None Item 9A Controls and Procedures Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of the end of the period covered by this report Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective Internal Control Over Financial Reporting There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d15(e) under the Securities Exchange Act) during the fiscal quarter ended February 3, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting Management's Report on Internal Control over Financial Reporting The information required by this item is incorporated by reference to Item "Financial Statements and Supplementary Data" of this report Item 9B Other Information The following disclosure would otherwise have been filed on Form 8-K under Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers: On April 3, 2008, the Company announced that Robert P DeRodes, Executive Vice President – Chief Information Officer, has decided to leave the Company at the end of the year A copy of this announcement is attached hereto as Exhibit 99.1 60 2007 ANNUAL REPORT lib26843_annualreport_001-080.in75 75 03 9/22/08 3:06:51 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10-Year Summary of Financial and Operating Results The Home Depot, Inc and Subsidiaries amounts in millions, except where noted 10-Year Compound Annual Growth Rate 2007 (1) 2006 2005 STATEMENT OF EARNINGS DATA (2) Net sales Net sales increase (%) Earnings before provision for income taxes Net earnings Net earnings increase (%) Diluted earnings per share ($) Diluted earnings per share increase (%) Diluted weighted average number of common shares Gross margin – % of sales Total operating expenses – % of sales Net interest expense (income) – % of sales Earnings before provision for income taxes – % of sales Net earnings – % of sales 12.3% — 13.3 13.8 — 15.9 — (2.1) — — — — — $ 77,349 (2.1) 6,620 4,210 (20.1) 2.27 (11.0) 1,856 33.6 24.3 0.8 8.6 5.4 $ 79,022 2.6 8,502 5,266 (6.6) 2.55 (3.0) 2,062 33.6 22.4 0.5 10.8 6.7 $ 77,019 8.3 8,967 5,641 14.6 2.63 18.5 2,147 33.7 21.9 0.1 11.6 7.3 BALANCE SHEET DATA AND FINANCIAL RATIOS (3) Total assets Working capital Merchandise inventories Net property and equipment Long-term debt Stockholders' equity Book value per share ($) Long-term debt-to-equity (%) Total debt-to-equity (%) Current ratio 14.7% (0.2) 12.5 15.5 24.2 9.6 12.5 — — — $ 44,324 1,968 11,731 27,476 11,383 17,714 10.48 64.3 75.8 1.15:1 $ 52,263 5,069 12,822 26,605 11,643 25,030 12.71 46.5 46.6 1.39:1 $ 44,405 2,563 11,401 24,901 2,672 26,909 12.67 9.9 15.2 1.20:1 Inventory turnover (2) Return on invested capital (%) (2) STATEMENT OF CASH FLOWS DATA Depreciation and amortization Capital expenditures Payments for businesses acquired, net Cash dividends per share ($) — 4.2x 4.5x 4.7x — 13.9 16.8 20.4 21.0% 9.3 (14.3) 30.5 STORE DATA Number of stores Square footage at fiscal year-end Increase in square footage (%) Average square footage per store (in thousands) $ 13.6% 13.5 — (0.1) 1,906 3,558 13 0.900 $ 2,234 235 4.9 105 1,886 3,542 4,268 0.675 $ 2,147 224 4.2 105 1,579 3,881 2,546 0.400 2,042 215 7.0 105 STORE SALES AND OTHER DATA Comparable store sales increase (decrease) (%) (4)(5) Weighted average weekly sales per operating store (in thousands) Weighted average sales per square foot ($) Number of customer transactions Average ticket ($) — (2.3)% (2.0) 9.3 2.8 Number of associates at fiscal year-end (3) 10.3 (1) (2) (3) $ (6.7) 658 332 1,336 57.48 331,000 $ (2.8) 723 358 1,330 58.90 364,400 $ 3.1 763 377 1,330 57.98 344,800 Fiscal years 2007 and 2001 include 53 weeks; all other fiscal years reported include 52 weeks Fiscal years 2003 through 2007 include Continuing Operations only The discontinued operations prior to 2003 were not material Fiscal year 2007 amounts include Continuing Operations only Fiscal years 1998-2006 amounts include discontinued operations, except as noted F-1 lib26843_annualreport_001-080.in76 76 9/22/08 3:06:52 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2004 STATEMENT OF EARNINGS DATA (2) Net sales Net sales increase (%) Earnings before provision for income taxes Net earnings Net earnings increase (%) Diluted earnings per share ($) Diluted earnings per share increase (%) Diluted weighted average number of common shares Gross margin – % of sales Total operating expenses – % of sales Net interest expense (income) – % of sales Earnings before provision for income taxes – % of sales Net earnings – % of sales BALANCE SHEET DATA AND FINANCIAL RATIOS (3) Total assets Working capital Merchandise inventories Net property and equipment Long-term debt Stockholders' equity Book value per share ($) Long-term debt-to-equity (%) Total debt-to-equity (%) Current ratio 2000 1999 1998 71,100 $ 11.7 7,790 4,922 15.7 2.22 19.4 2,216 33.4 22.4 — 11.0 6.9 63,660 $ 9.3 6,762 4,253 16.1 1.86 19.2 2,289 31.7 21.1 — 10.6 6.7 58,247 $ 8.8 5,872 3,664 20.4 1.56 20.9 2,344 31.1 21.1 (0.1) 10.1 6.3 53,553 $ 17.1 4,957 3,044 17.9 1.29 17.3 2,353 30.2 20.9 — 9.3 5.7 45,738 $ 19.0 4,217 2,581 11.3 1.10 10.0 2,352 29.9 20.7 — 9.2 5.6 38,434 $ 27.2 3,804 2,320 43.7 1.00 40.8 2,342 29.7 19.8 — 9.9 6.0 30,219 25.1 2,654 1,614 31.9 0.71 29.1 2,320 28.5 19.7 — 8.8 5.3 $ 39,020 $ 3,818 10,076 22,726 2,148 24,158 11.06 8.9 8.9 1.37:1 34,437 $ 3,774 9,076 20,063 856 22,407 9.93 3.8 6.1 1.40:1 30,011 $ 3,882 8,338 17,168 1,321 19,802 8.38 6.7 6.7 1.48:1 26,394 $ 3,860 6,725 15,375 1,250 18,082 7.71 6.9 6.9 1.59:1 21,385 $ 3,392 6,556 13,068 1,545 15,004 6.46 10.3 10.3 1.77:1 17,081 $ 2,734 5,489 10,227 750 12,341 5.36 6.1 6.1 1.75:1 13,465 2,076 4,293 8,160 1,566 8,740 3.95 17.9 17.9 1.73:1 4.9x 5.0x 5.3x 5.4x 5.1x 5.4x 5.4x 19.9 19.2 18.8 18.3 19.6 22.5 19.3 (2) STATEMENT OF CASH FLOWS DATA Depreciation and amortization Capital expenditures Payments for businesses acquired, net Cash dividends per share ($) 2001 (1) 2002 $ Inventory turnover (2) Return on invested capital (%) 2003 $ STORE DATA Number of stores Square footage at fiscal year-end Increase in square footage (%) Average square footage per store (in thousands) 1,319 $ 3,948 727 0.325 1,076 $ 3,508 215 0.26 903 $ 2,749 235 0.21 764 $ 3,393 190 0.17 601 $ 3,574 26 0.16 463 $ 2,618 101 0.11 373 2,094 0.08 1,890 201 9.8 106 1,707 183 10.2 107 1,532 166 14.1 108 1,333 146 18.5 109 1,134 123 22.6 108 930 100 23.5 108 761 81 22.8 107 5.1 3.7 (0.5) — 10 766 $ 375 1,295 54.89 763 $ 371 1,246 51.15 772 $ 370 1,161 49.43 812 $ 394 1,091 48.64 864 $ 415 937 48.65 876 $ 423 797 47.87 STORE SALES AND OTHER DATA Comparable store sales increase (decrease) (%) (4)(5) Weighted average weekly sales per operating store (in thousands) Weighted average sales per square foot ($) Number of customer transactions Average ticket ($) Number of associates at fiscal year-end (3) (4) (5) $ 2007 ANNUAL REPORT 323,100 298,800 03 280,900 256,300 227,300 201,400 844 410 665 45.05 156,700 Includes Net Sales at locations open greater than 12 months, including relocated and remodeled stores Stores become comparable on the Monday following their 365 th day of operation Comparable store sales is intended only as supplemental information and is not a substitute for Net Sales or Net Earnings presented in accordance with generally accepted accounting principles Comparable store sales in fiscal years prior to 2002 were reported to the nearest percent F-2 lib26843_annualreport_001-080.in77 77 9/22/08 3:06:59 PM First Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Corporate and Shareholder Information STORE SUPPORT CENTER The Home Depot, Inc 2455 Paces Ferry Road, NW Atlanta, GA 30339-4024 Telephone: (770) 433-8211 FINANCIAL AND OTHER COMPANY INFORMATION Our Annual Report on Form 10-K for the fiscal year ended February 3, 2008 is available on our web site at www homedepot.com under the Investor Relations section In addition, financial reports, filing with the Securities and Exchange Commission, news releases and other information are available on The Home Depot web site THE HOME DEPOT WEB SITE www.homedepot.com TRANSFER AGENT AND REGISTRAR Computershare Trust Company, N.A P.O Box 43078 Providence, RI 02490-3078 Telephone: (800) 577-0177 Internet address: www.computershare.com/investor INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP Suite 2000 303 Peachtree Street, NE Atlanta, GA 30308 The Home Depot, Inc has included as exhibits to its Annual Report on Form 10-K for the fiscal year ended February 3, 2008 certifications of The Home Depot’s Chief Executive Officer and Chief Financial Officer The Home Depot’s Chief Executive Officer has also submitted to the New York Stock Exchange (NYSE) a certificate certifying that he is not aware of any violations by The Home Depot of the NYSE corporate governance listing standards QUARTERLY STOCK PRICE RANGE First Second Third Fourth Quarter Quarter Quarter Quarter STOCK EXCHANGE LISTING New York Stock Exchange Trading symbol – HD ANNUAL MEETING The Annual Meeting of Shareholders will be held at a.m., Eastern Time, May 22, 2008, at Cobb Galleria Centre in Atlanta, Georgia NUMBER OF SHAREHOLDERS As of March 24, 2008, there were approximately 160,000 shareholders of record and approximately 1,400,000 individual shareholders holding stock under nominee security posting listings Fiscal 2007 High Low $41.76 $36.74 $40.94 $36.75 $38.31 $30.70 $31.51 $24.71 Fiscal 2006 High Low $43.95 $38.50 $41.61 $32.85 $38.24 $33.07 $41.84 $35.77 Concept and Design: Sagepath (www.sagepath.com) Photography: Doug Coulter, Craig Bromley, Kim Steele Printer: Cenveo DIVIDENDS DECLARED PER COMMON SHARE First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal 2007 Fiscal 2006 $0.225 $0.150 $0.225 $0.150 $0.225 $0.225 $0.225 $0.225 New investors may make an initial investment, and shareholders of record may acquire additional shares, or our common stock trough our direct stock purchase and dividend reinvestment plan Subject to certain requirements, initial cash investments, cash dividends and/or additional optional cash purchases may be invested through this plan To obtain enrollment materials including the prospectus, access The Home Depot web site, or call (877) HD-SHARE or (877) 437-4273 For all other communications regarding these services, contact Computershare lib26843_annualreport_001-080.in78 78 9/22/08 3:07:03 PM To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com This page intentionally left blank Confirming Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER Problems—Set C Completion of the Accounting Cycle Available with McGraw-Hill’s Homework Manager LO2 PC4-1 Recording Adjusting Journal Entries McKechnie Towing Company, a sole proprietorship owned by Don McKechnie, is at the end of its accounting year, December 31, 2010 The following data that must be considered were developed from the company’s records and related documents: a On July 1, 2010, a three-year insurance premium on equipment in the amount of $600 was paid and debited in full to Prepaid Insurance on that date Coverage began on July b At the beginning of 2010, the Supplies account balance was $200 During 2010, the company purchased $800 of supplies A physical count of supplies on December 31, 2010, indicated supplies costing $300 were still on hand c On December 31, 2010, YY’s Garage completed repairs on one of the company’s trucks at a cost of $800 The amount is not yet recorded It will be paid during January 2011 d In December, the 2010 property tax bill for $1,600 was received from the city The taxes, which have not been recorded, will be paid on February 15, 2011 e On December 31, 2010, the company completed a contract for an out-of-state company for $7,900 payable by the customer within 30 days No cash has been collected, and no journal entry has been made for this transaction f On July 1, 2010, the company purchased a new hauling van Depreciation for July–December 2010 estimated to total $2,750 has not been recorded g As of December 31, the company owes $500 interest on a bank loan taken out on October 1, 2010 The interest will be paid when the loan is repaid on September 30, 2011 No interest has been recorded yet Required: Following the steps outlined in the chapter, for each transaction: Identify the type of adjustment (unearned revenue, accrued revenue, prepaid expense, or accrued expense) Determine the amount of revenue or expense to be recorded Record the adjusting journal entry at December 31, 2010 LO2 PC4-2 Determining Financial Statement Effects of Adjusting Journal Entries Refer to PC4-1 Required: Using the following headings, indicate the effect and amount of each adjusting journal entry Use + for increase, – for decrease, and NE for no effect BALANCE SHEET Transaction Assets Liabilities Owner’s Equity INCOME STATEMENT Revenues Expenses Net Income a b c etc PC4-3 Recording Adjusting Journal Entries LO2 Ainslie Physical Therapy Services, a sole proprietorship owned by Inga Ainslie, is at the end of its accounting year, December 31, 2011 The following data that must be considered were developed from the company’s records and related documents: a On February 14, 2010, the company purchased a new series of physical therapy exercise machines Depreciation for 2011, estimated to total $1,900, has not been recorded b As of December 31, the company owes interest of $820 on a bank loan The interest will be paid when the loan is repaid on March 31, 2012 No interest has been recorded yet c On October 1, 2011, a one-year insurance premium in the amount of $1,000 was paid and debited in full to Prepaid Insurance on that date Coverage began on October lib26843_prob04.indd 10/2/08 1:42:04 AM Confirming Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER Completion of the Accounting Cycle d e f g The December utility bill for $930 was received The bill, which has not been recorded, will be paid on January 15, 2012 On December 31, 2011, Cuddy Plumbing Service repaired a broken water pipe in the company’s building at a cost of $1,310 The amount is not yet recorded It will be paid during January 2012 On December 31, 2011, the company completed physical therapy services for patients for $6,400 The client’s insurance companies will be billed in January No cash has been collected, and no journal entry has been made for this transaction At the beginning of 2011, the Supplies account balance was $850 During 2011, the company purchased $4,300 of supplies A count of supplies on December 31, 2011, indicated supplies costing $790 were still on hand Required: Following the steps outlined in the chapter for each transaction: LO2 Identify the type of adjustment (unearned revenue, accrued revenue, prepaid expense, or accrued expense) Determine the amount of revenue or expense to be recorded Record the adjusting journal entry at December 31, 2011 PC4-4 Determining Financial Statement Effects of Adjusting Journal Entries Refer to PC4-3 Required: Using the following headings, indicate the effect of each adjusting journal entry and the amount of the effect Use + for increase, – for decrease, and NE for no effect BALANCE SHEET Transaction Assets Liabilities Owner’s Equity INCOME STATEMENT Revenues Expenses Net Income a b etc LO3 PC4-5 Analyzing a Student’s Business and Preparing an Adjusted Income Statement During the summer between her junior and senior years, Susan Irwin needed to earn enough money for the coming academic year Unable to obtain a job with a reasonable salary, she decided to try the lawn care business for three months After a survey of the market potential, Susan bought a used pickup truck on June for $1,500 On each door she painted “Susan’s Lawn Service, Phone 555-4487.” She also spent $900 for mowers, trimmers, and tools To acquire these items, she borrowed $2,500 cash by signing a note payable promising to pay the $2,500 plus interest of $75 at the end of the three months (ending August 31) At the end of the summer, Susan realized that she had done a lot of work, and her bank account looked good This fact made her think about how much profit the business had earned A review of the check stubs showed the following: Bank deposits of collections from customers totaled $12,600 The following checks had been written: gas, oil, and lubrication, $920; pickup repairs, $210; mower repair, $75; miscellaneous supplies used, $80; helpers, $4,500; payroll taxes, $175; payment for assistance in preparing payroll tax forms, $25; insurance, $125; telephone, $110; and $2,575 to pay off the note including interest (on August 31) A notebook kept in the pickup, plus some unpaid bills, reflected that customers still owed her $800 for lawn services provided and that she owed $200 for gas and oil (credit card charges) She estimated that the depreciation on the truck and the other equipment amounted to $500 for three months Required: lib26843_prob04.indd Prepare an accrual basis income statement for Susan’s Lawn Service covering the quarter from June through August 31, 2010 Assume that the business is a sole proprietorship and is not subject to income tax Assuming that Susan’s Lawn Service remains in business, you see a need for one or more additional financial reports for this company for 2010 and thereafter? Explain 10/2/08 1:42:05 AM Confirming Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER Completion of the Accounting Cycle PC4-6 Analyzing a Student’s Business and Preparing an Adjusted Income Statement LO3 Before she could start college, Kelly Gordon needed to make some money She was talented at using presentation software and other cutting-edge graphics software, so she thought the best way to make some money would be to develop some fun applications that her high school teachers could use in their classes She created a business called Gordon’s Flash, a sole proprietorship On July 1, 2009, Kelly began her business by investing $1,000 of her own money in the company and by having her mother invest an additional $3,000 in it She immediately used some of this money to buy computer hardware and software at a total cost of $3,000 She then rented space in a small building, sent a flyer to her former teachers, and began work creating a Web site and several sample applications In no time, several of her teachers contacted her and agreed to purchase her services After a couple of months of working hard, Kelly’s business teacher asked her how things were going She told him that she had enough work to keep busy every single minute of her life, but her company’s bank account did not seem to be reflecting that Her teacher suggested that she prepare an income statement to determine whether her business was profitable With his help, she gathered the following data for the three months ended September 30, 2009: The company’s bank account showed deposits totaling $3,000 that Kelly had collected for preparing computer-based presentations The following checks had been written: assistant’s pay, $1,800; payroll taxes, $60; computer supplies purchased and used on jobs, $200; insurance, $165; rent, $400; utilities, telephone, and cable modem, $325; and miscellaneous expenses (including advertising), $800 Also, uncollected bills to customers for software programming services amounted to $1,400 The $200 rent for September had not been paid Kelly estimated that depreciation on the computer hardware and software during the three months was $450 Required: Prepare a quarterly income statement for Gordon’s Flash for the three months July through September 2009 Do you think that Kelly may need one or more additional financial reports for 2009 and thereafter? Explain LO2, PC4-7 Adjusting an Income Statement and Balance Sheet: Critical Thinking Pirate Pete Moving Company has been in operation since January 1, 2010 It is now December 31, 2010, the end of the annual accounting period The company has not done well financially during the first year although revenue has been fairly good The owner, Pete Sommers, hired a manager to run the business, and he has not given much attention to recordkeeping In view now of a serious cash shortage, Pete has applied to your bank for a $20,000 loan As a loan officer, you requested a complete set of financial statements The company’s office staff prepared the following 2010 annual financial statements Pirate Pete Moving Company Income Statement For the Period Ended December 31, 2010 Transportation Revenue Expenses Salaries Expense Supplies Expense Other Expenses Total expenses Net income Pirate Pete Moving Company Balance Sheet At December 31, 2010 Assets $85,000 17,000 12,000 18,000 47,000 $38,000 Cash Receivables Supplies Equipment Prepaid Insurance Remaining Assets Total assets Liabilities Accounts Payable Unearned Transportation Revenue Owner’s Equity P Sommers, Capital Total liabilities and owner’s equity lib26843_prob04.indd $ 2,000 3,000 6,000 40,000 4,000 27,000 $82,000 $ 9,000 7,000 66,000 $82,000 10/2/08 1:42:06 AM Confirming Pages To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER Completion of the Accounting Cycle After briefly reviewing the statements and “looking into the situation,” you requested that the statements be redone (with some expert help) to “incorporate depreciation, accruals, supply counts, and so on.” As a result of a review of the records and supporting documents, the following additional information was developed: a b c d e The Supplies account of $6,000 shown on the balance sheet has not been adjusted for supplies used during 2010 A count of the supplies on hand on December 31, 2010 showed $1,800 The insurance premium paid in 2010 was for years 2010 and 2011 The total insurance premium was debited in full to Prepaid Insurance when paid in 2010, and no adjustment has been made The equipment cost $40,000 when purchased January 1, 2010 It had an estimated annual depreciation of $8,000 No depreciation has been recorded for 2010 Unpaid (and unrecorded) salaries at December 31, 2010, amounted to $2,200 At December 31, 2010, transportation revenue collected in advance amounted to $7,000 This amount was credited in full to Unearned Transportation Revenue when the cash was collected earlier during 2010 Of the amount, $1,000 was earned in 2010 Required: Prepare the adjusting journal entries required on December 31, 2010, based on the preceding additional information You may need to create new accounts not yet included in the income statement or balance sheet Redo the preceding statements after considering the adjusting journal entries One way to organize your response follows: CHANGES Items Amounts Reported Plus Minus Corrected Amounts (List here each item from the two statements) lib26843_prob04.indd The effects of recording the adjusting journal entries were to a Overstate or understate (select one) Net income by $ b Overstate or understate (select one) Total assets by $ Write a letter to the company explaining the results of the adjustments and your preliminary analysis 10/2/08 1:42:07 AM ... Laura Libby, Oscar and Selma Libby –Patricia and Robert Libby To the best teachers I’ve ever had: my Mom and Dad, Barb, Harrison, and Daniel –Fred Phillips This book is dedicated to Mark, Riley, and. .. Association and is a member of the American Institute of CPAs and the editorial boards of The Accounting Review; Accounting, Organizations, and Society; Journal of Accounting Literature; and Journal of. .. Review; Journal of Accounting Research; Accounting, Organizations, and Society; and other accounting journals He has held a variety of offices including Vice President of the American Accounting Association