If you are thinking of purchasing Best Buy stock, or any stock, how can you decide what the shares are worth? If you manage Columbia Sportswear’s credit department, how should you determine whether to extend credit to a new customer? If you are a financial executive at Alphabet Inc. (Google), how do you decide whether your company is generating adequate cash to expand operations without borrowing? Your decision in each of these situations will be influenced by a variety of considerations. One of them should be your careful analysis of a company’s financial statements.
In this chapter, we take a closer look at the balance sheet and introduce some useful ways for evaluating the information provided by the financial statements. We also examine the financial reporting concepts underlying the financial statements. We begin by introducing the classified balance sheet.
Two early pioneers in providing investment information online to the masses were Tom and David Gardner, brothers who created an online investor website called The Motley Fool. The name comes from Shakespeare’s As You Like It. The fool in Shakespeare’s play was the only one who could speak unpleasant truths to kings and queens without being killed. Tom and David view themselves as 21st-century “fools,” revealing the “truths” of the stock market to the small investor, who they feel has been taken advantage of by Wall Street insiders.
The Motley Fool’s online bulletin board enables investors to exchange information and insights about companies. (Similar services are provided by TikTok, Twitter, Reddit, Facebook, and others.) Critics of these bulletin boards contend that they are simply high-tech rumor mills that cause investors to bid up stock prices to unreasonable levels. For example, the stock of PairGain Technologies jumped 32% in a single day as a result of a bogus takeover rumor on an investment bulletin board. Some observers are concerned that small investors—ironically, the very people the Gardner brothers are trying to help—will be hurt the most by misinformation and intentional scams.
Rather than getting swept away by rumors, investors must sort out the good information from the bad. One thing is certain—as information services such as The Motley Fool increase in number, gathering information will become even easier. Evaluating it will be the harder task.
LEARNING OBJECTIVES | REVIEW | PRACTICE |
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LO 1 Identify the sections of a classified balance sheet. |
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DO IT! 1a Assets Section of Classified Balance Sheet 1b Balance Sheet Classifications |
LO 2 Use ratios to evaluate a company’s profitability, liquidity, and solvency. |
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DO IT! 2 Ratio Analysis |
LO 3 Discuss financial reporting concepts. |
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DO IT! 3 Financial Accounting Concepts and Principles |
Go to the Review and Practice section at the end of the chapter for a targeted summary and practice applications with solutions. Visit Wiley Course Resources for additional tutorials and practice opportunities. |
A balance sheet presents a snapshot of a company’s financial position at a point in time. It lists individual asset, liability, and stockholders’ equity items. To improve users’ understanding of a company’s financial position, companies often prepare what is referred to as a classified balance sheet instead.
A classified balance sheet generally contains the standard classifications listed in Illustration 2.1.
ILLUSTRATION 2.1 Standard balance sheet classifications
Assets | Liabilities and Stockholders’ Equity | |
Current assets | Current liabilities | |
Long-term investments | Long-term liabilities | |
Property, plant, and equipment | Stockholders’ equity | |
Intangible assets |
These groupings help financial statement readers determine such things as:
Many of these groupings can be seen in the balance sheet of Franklin Corporation shown in Illustration 2.2 (see Helpful Hint). In the sections that follow, we explain each of these groupings.
Current assets are defined as follows.
For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use the supplies in operations within one year.
Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year.
Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or long-term.
ILLUSTRATION 2.2 Classified balance sheet
Franklin Corporation Balance Sheet October 31, 2025 |
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Assets | |||||
Current assets | |||||
Cash | $6,600 | ||||
Debt investments | 2,000 | ||||
Accounts receivable | 7,000 | ||||
Notes receivable | 1,000 | ||||
Inventory | 3,000 | ||||
Supplies | 2,100 | ||||
Prepaid insurance | 400 | ||||
Total current assets | $22,100 | ||||
Long-term investments | |||||
Stock investments | 5,200 | ||||
Investment in real estate | 2,000 | 7,200 | |||
Property, plant, and equipment | |||||
Land | 10,000 | ||||
Equipment | $24,000 | ||||
Less: Accumulated depreciation— equipment | 5,000 | 19,000 | 29,000 | ||
Intangible assets | |||||
Patents | 3,100 | ||||
Total assets | $61,400 | ||||
Liabilities and Stockholders’ Equity | |||||
Current liabilities | |||||
Notes payable | $11,000 | ||||
Accounts payable | 2,100 | ||||
Unearned sales revenue | 900 | ||||
Salaries and wages payable | 1,600 | ||||
Interest payable | 450 | ||||
Total current liabilities | $16,050 | ||||
Long-term liabilities | |||||
Mortgage payable | 10,000 | ||||
Notes payable | 1,300 | ||||
Total long-term liabilities | 11,300 | ||||
Total liabilities | 27,350 | ||||
Stockholders’ equity | |||||
Common stock | 14,000 | ||||
Retained earnings | 20,050 | ||||
Total stockholders’ equity | 34,050 | ||||
Total liabilities and stockholders’ equity | $61,400 | ||||
Companies list current assets in order of liquidity, that is, the order in which they expect to convert them into cash (follow this rule when doing your homework). Common types of current assets, listed in order of liquidity, are:
Why are receivables considered more liquid than inventory? Inventory must be sold before it is converted to cash (and is often sold on account), whereas receivables are converted to cash upon collection.
As explained later in the chapter, a company’s current assets are important in assessing its short-term debt-paying ability.
Long-term investments generally include the following (see Alternative Terminology).
In Illustration 2.2, Franklin Corporation reported total long-term investments of $7,200 on its balance sheet.
Property, plant, and equipment is defined as follows.
In Illustration 2.2, Franklin Corporation reported property, plant, and equipment of $29,000.
Notice that in Illustration 2.2, Franklin Corporation subtracts $5,000 in Accumulated Depreciation—Equipment from the Equipment account. Depreciation is the systematic allocation of the cost of an asset to expense over number of years (rather than expensing the full purchase price in the year of purchase). The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation, often referred to as book value. The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far in the asset’s life.
In Illustration 2.2, Franklin Corporation reported accumulated depreciation of $5,000, so the book value of the equipment is $19,000 ($24,000 – $5,000). In your homework, present each accumulated depreciation account immediately below the related plant asset, as shown in Illustration 2.2 for Franklin Corporation.
Many companies have assets that do not have physical substance and yet often are very valuable:
In Illustration 2.2, Franklin Corporation reported intangible assets of $3,100.
In the liabilities and stockholders’ equity section of the balance sheet, the first grouping is current liabilities.
In Illustration 2.2, Franklin Corporation reported five different types of current liabilities, for a total of $16,050.
Long-term liabilities (long-term debt) are:
Many companies report long-term debt maturing after one year as a single amount in the balance sheet and show the details of the debt in notes that accompany the financial statements. Others list the various types of long-term liabilities. In Illustration 2.2, Franklin Corporation reported long-term liabilities of $11,300.
Stockholders’ equity consists of two parts: common stock and retained earnings.
In Illustration 2.2, Franklin Corporation reported common stock of $14,000 and retained earnings of $20,050.
We previously introduced the four financial statements. We discussed how these statements provide information about a company’s performance and financial position. Here, we extend this discussion by showing you specific tools that you can use to analyze financial statements in order to make a more meaningful evaluation of a company.
Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. For analysis of the primary financial statements, we classify ratios as shown in Illustration 2.3.
ILLUSTRATION 2.3 Financial ratio classifications
A single ratio by itself is not very meaningful. Accordingly, in this and the following chapters, we will use various comparisons to shed light on company performance:
Next, we use some ratios and comparisons to analyze the financial statements of Best Buy.
Best Buy generates profits for its stockholders by selling electronics.
Illustration 2.4 shows a simplified income statement for Best Buy. From this income statement, we can see that Best Buy’s net income increased from $1,464 million to $1,541 million.
ILLUSTRATION 2.4 Best Buy’s income statement
Best Buy Co., Inc. Income Statements For the Year Ended February 1, 2020, and the Year Ended February 2, 2019 (in millions) |
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2020 | 2019 | |||
Revenues | ||||
Net sales and other revenue | $43,686 | $42,940 | ||
Expenses | ||||
Cost of goods sold | 33,590 | 32,918 | ||
Selling, general, and administrative expenses and other | 8,103 | 8,134 | ||
Income tax expense | 452 | 424 | ||
Total expenses | 42,145 | 41,476 | ||
Net income (loss) | $1,541 | $1,464 | ||
hhgregg was a competitor of Best Buy. hhgregg was much smaller than Best Buy. At one time, hhgregg operated 228 stores in 20 states. Then, one year it reported a net loss of $54,879,000. The next year, it filed for bankruptcy. Just because a company has a net loss does not mean it is about to go bankrupt. However, because net losses are not sustainable over the long-term, they are worthy of investigation.
To evaluate the profitability of Best Buy, we will use ratio analysis. Profitability ratios, such as earnings per share, measure the operating success of a company for a given period of time.
Earnings per share (EPS) measures the net income earned on each share of common stock (see Decision Tools). Stockholders usually think in terms of the number of shares they own or plan to buy or sell, so stating net income earned as a per share amount provides a useful perspective for determining the investment return. Advanced accounting courses present more refined techniques for calculating earnings per share.
By comparing earnings per share of a single company over time, we can evaluate its relative earnings performance from the perspective of a stockholder—that is, on a per share basis. It is very important to note that comparisons of earnings per share across companies are not meaningful because of the wide variations in the numbers of shares of outstanding stock among companies.
Illustration 2.5 shows the earnings per share calculation for Best Buy in 2020 and 2019, based on the information presented below. To simplify our calculations, we assumed that any change in the number of shares of common stock for Best Buy occurred in the middle of the year.
(in millions) | 2020 | 2019 | ||
Net income | $1,541 | $1,464 | ||
Preferred dividends | –0– | –0– | ||
Shares of common stock outstanding at beginning of year | 266 | 283 | ||
Shares of common stock outstanding at end of year | 256 | 266 |
ILLUSTRATION 2.5 Best Buy’s earnings per share
($ and shares in millions) | 2020 | 2019 | ||||
Earnings per share |
Best Buy’s earnings per share increased from $5.33 to $5.90. This increase occurred because its net income increased and its outstanding shares decreased.
You can learn a lot about a company’s financial health by also evaluating the relationship between its various assets and liabilities. Illustration 2.6 provides a simplified balance sheet for Best Buy.
ILLUSTRATION 2.6 Best Buy’s balance sheet
Best Buy Co., Inc. Balance Sheets (in millions) |
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February 1, 2020 | February 3, 2019 | |||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | $2,229 | $1,980 | ||||
Receivables | 1,149 | 1,015 | ||||
Merchandise inventories | 5,174 | 5,409 | ||||
Other current assets | 305 | 466 | ||||
Total current assets | 8,857 | 8,870 | ||||
Property and equipment | 9,228 | 9,200 | ||||
Less: Accumulated depreciation | 6,900 | 6,690 | ||||
Net property and equipment | 2,328 | 2,510 | ||||
Other assets | 4,406 | 1,521 | ||||
Total assets | $15,591 | $12,901 | ||||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities | ||||||
Accounts payable | $ 5,288 | $ 5,257 | ||||
Unredeemed gift card liabilities | 281 | 290 | ||||
Accrued compensation payable | 410 | 482 | ||||
Other current liabilities | 2,081 | 1,484 | ||||
Total current liabilities | 8,060 | 7,513 | ||||
Long-term liabilities | ||||||
Long-term debt | 1,257 | 1,332 | ||||
Other long-term liabilities | 2,795 | 750 | ||||
Total long-term liabilities | 4,052 | 2,082 | ||||
Total liabilities | 12,112 | 9,595 | ||||
Stockholders’ equity | ||||||
Common stock | 26 | 27 | ||||
Retained earnings and other | 3,453 | 3,279 | ||||
Total stockholders’ equity | 3,479 | 3,306 | ||||
Total liabilities and stockholders’ equity | $15,591 | $12,901 | ||||
Suppose you are a banker at CitiGroup considering lending money to Best Buy, or you are a sales manager at Apple interested in selling computers and cell phones to Best Buy on credit.
Working Capital One measure of liquidity is working capital, which is the difference between the amounts of current assets and current liabilities (see Illustration 2.7).
ILLUSTRATION 2.7 Working capital
Best Buy had working capital in 2020 of $797 million ($8,857 million − $8,060 million).
Current Ratio Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. One liquidity ratio is the current ratio, computed as current assets divided by current liabilities (see Decision Tools).
Illustration 2.8 shows the 2020 and 2019 current ratios for Best Buy.
What does the ratio actually mean? Best Buy’s 2020 current ratio of 1.10:1 means that for every dollar of current liabilities, Best Buy has $1.10 of current assets. Best Buy’s current ratio decreased in 2020, which suggests its liquidity declined.
One potential weakness of the current ratio is that it does not take into account the composition of the current assets.
ILLUSTRATION 2.8 Current ratio
Best Buy ($ in millions) |
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2020 | 2019 | |||
1.18:1 |
For example, suppose a company’s cash balance declined while its merchandise inventory increased substantially. If inventory increased because the company is having difficulty selling its products, then the current ratio might not fully reflect the reduction in the company’s liquidity (see Ethics Note).
Now suppose that instead of being a short-term creditor, you are interested in either buying Best Buy’s stock or extending the company a long-term loan.
Debt to Assets Ratio The debt to assets ratio is one measure of solvency. It is calculated by dividing total liabilities (both current and long-term) by total assets. It measures the percentage of total financing provided by creditors rather than stockholders (see Helpful Hint).
The higher the percentage of total liabilities (debt) to total assets, the greater the risk that the company may be unable to pay its debts as they come due. Illustration 2.9 shows the debt to assets ratios for Best Buy.
ILLUSTRATION 2.9 Debt to assets ratio
Best Buy ($ in millions) |
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2020 | 2019 | |||
74% |
The 2020 ratio of 78% means that every dollar of assets was financed by 78 cents of debt. The higher the ratio, the more reliant the company is on debt financing.
The adequacy of this ratio is often judged in light of the company’s earnings. At one time, Best Buy and its competitor hhgregg relied on debt financing in a roughly equal fashion, but hhgregg went bankrupt. This is largely explained by the fact that hhgregg’s income was insufficient to pay its debt obligations as they came due. Generally, companies with relatively stable earnings, such as public utilities, can support higher debt to assets ratios than can cyclical companies with widely fluctuating earnings, such as many high-tech companies. In later chapters, you will learn additional ways to evaluate solvency.
You have learned about the four financial statements and some basic ways to interpret those statements. In this section, we discuss concepts that underlie these financial statements. It would be unwise to make business decisions based on financial statements without understanding the implications of these concepts.
How does Best Buy decide on the type of financial information to disclose? What format should it use? How should it measure assets, liabilities, revenues, and expenses? Accounting professionals at Best Buy and all other U.S. companies get guidance from a set of accounting standards that have authoritative support, referred to as generally accepted accounting principles (GAAP).
Standard-setting bodies, in consultation with the accounting profession and the business community, determine these accounting standards.
ILLUSTRATION 2.10 World view of the standard-setting environment
The FASB and IASB use a conceptual framework to serve as the basis for future accounting standards. The framework begins by stating that the primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. According to the FASB, useful information should possess two fundamental qualities, relevance and faithful representation, as shown in Illustration 2.11.
ILLUSTRATION 2.11 Fundamental qualities of useful information
In addition to the two fundamental qualities of relevance and faithful representation, the FASB also describes a number of enhancing qualities of useful information. These include comparability, consistency, verifiability, timeliness, and understandability, as shown in Illustration 2.12.
ILLUSTRATION 2.12 Enhancing qualities of useful information
To develop accounting standards, the FASB relies on some key assumptions, as shown in Illustration 2.13 (see Ethics Note). These include assumptions about the monetary unit, economic entity, periodicity, and going concern.
ILLUSTRATION 2.13 Key assumptions in financial reporting
GAAP generally uses one of two measurement principles, the historical cost principle or the fair value principle. Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation.
Historical Cost Principle The historical cost principle (or cost principle) dictates that companies record assets at their cost. This is true not only at the time the asset is purchased but also over the time the asset is held. For example, if land that was purchased for $30,000 increases in value to $40,000, it continues to be reported at $30,000.
Fair Value Principle The fair value principle indicates that assets and liabilities should be reported at fair value (the price that would be received if an asset was sold or the amount that would be required to be paid to settle a liability). Fair value information may be more useful than historical cost for certain types of assets and liabilities. For example, certain investment securities are reported at fair value because market price information is often readily available for these types of assets.
In choosing between cost and fair value, the FASB uses two qualities that make accounting information useful for decision-making—relevance and faithful representation.
The full disclosure principle requires that companies disclose sufficient details regarding circumstances and events that would make a difference to financial statement users. If an important item cannot reasonably be reported directly in one of the four types of financial statements, then it should be discussed in notes that accompany the statements.
Providing information is costly. In deciding whether companies should be required to provide a certain type of information, accounting standard-setters consider the cost constraint. It weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.
Illustration 2.14 summarizes aspects of the conceptual framework.
ILLUSTRATION 2.14 Summary of conceptual framework
Objective of Financial Reporting | |||||
To provide financial information that is useful to existing and potential investors and creditors in making decisions about providing resources to the company. | |||||
Qualitative Characteristics of Useful Financial Information | |||||
Fundamental Qualitative Characteristics | Enhancing Qualitative Characteristics | ||||
1. Relevance
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2. Faithful representation
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Assumptions | Principles | ||||
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Cost Constraint |
In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; and intangibles. They classify liabilities as either current or long-term. A stockholders’ equity section shows common stock and retained earnings.
Ratio analysis expresses the relationship among selected items of financial statement data. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time.
Liquidity ratios, such as the current ratio, measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency ratios, such as the debt to assets ratio, measure the ability of a company to survive over a long period.
Generally accepted accounting principles are a set of rules and practices recognized as a general guide for financial reporting purposes. The basic objective of financial reporting is to provide information that is useful for decision-making.
To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, useful information is comparable, consistent, verifiable, timely, and understandable.
The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The periodicity assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments.
The historical cost principle states that companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The full disclosure principle requires that companies disclose sufficient details regarding circumstances and events that would make a difference to financial statement users.
The cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.
Decision Checkpoints | Info Needed for Decision | Tool to Use for Decision | How to Evaluate Results |
How does the company’s earnings performance compare with that of previous years? | Net income available to common stockholders and weighted-average common shares outstanding | A higher measure suggests improved performance, although the number is subject to manipulation. Values should not be compared across companies. | |
Can the company meet its near-term obligations? | Current assets and current liabilities | Higher ratio suggests favorable liquidity. | |
Can the company meet its long-term obligations? | Total liabilities and total assets | Lower value suggests favorable solvency. |
1. (LO 1) In a classified balance sheet, assets are usually classified as:
d. Assets are classified as current assets; long-term investments; property, plant and equipment; and intangible assets. The other choices are incorrect because (a) long-term assets includes long-term investments; property, plant, and equipment; and intangible assets; (b) common stock refers to the equity of the firm and is not an asset; and (c) while tangible assets describes property, plant, and equipment, it is better to use the more common terminology of property, plant, and equipment.
2. (LO 1) Current assets are listed:
a. Current assets should be listed by order of expected conversion to cash (liquidity), not (b) by importance, (c) by longevity, or (d) alphabetically.
3. (LO 1) The correct order of presentation in a classified balance sheet for the following current assets is:
c. The correct order of presentation for current assets is cash, accounts receivable, inventory, and then prepaid insurance. The other choices are therefore incorrect.
4. (LO 1) A company has purchased a tract of land. It expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. The land should be reported as:
c. Land or buildings that are currently not used in operations are considered to be long-term investments. The other choices are incorrect because (a) this classification is for property, plant, and equipment used in operations; (b) land is never expensed; and (d) intangible assets have no physical existence and are used in the production of income.
5. (LO 1) The balance in retained earnings is not affected by:
c. Issuance of common stock has no impact on retained earnings. The other choices are incorrect because (a) net income increases retained earnings, (b) net loss decreases retained earnings, and (d) dividends decrease retained earnings.
6. (LO 2) Which is an indicator of profitability?
b. Earnings per share is a measure of profitability. The other choices are incorrect because (a) the current ratio is a measure of liquidity, (c) the debt to assets ratio is a measure of solvency, and (d) total assets is a measure of size.
7. (LO 2) For 2025, Spanos Corporation reported net income $26,000, net sales $400,000, and weighted-average common shares outstanding 4,000. There were preferred dividends of $2,000. What was the 2025 earnings per share?
a. Earnings per share = Net income ($26,000) less Preferred dividends ($2,000) divided by Weighted-average common shares outstanding (4,000) = $6.00 per share, not (b) $6.50, (c) $99.50, or (d) $100.00.
8. (LO 2) Which of these measures is an evaluation of a company’s ability to pay current liabilities?
b. The current ratio measures liquidity. Higher current ratios indicate higher liquidity. The other choices are incorrect because (a) earnings per share is a measure of a firm’s profitability, not its ability to pay its current liabilities; (c) one of these answers is incorrect; and (d) there is a correct answer.
9. (LO 2) The following ratios are available for Reilly Inc. and O’Hare Inc.
Current Ratio | Debt to Assets Ratio | Earnings per Share | ||||
Reilly Inc. | 2:1 | 75% | $3.50 | |||
O’Hare Inc. | 1.5:1 | 40% | $2.75 |
Compared to O’Hare Inc., Reilly Inc. has:
d. Reilly Inc. has higher liquidity as it has a higher current ratio, and lower solvency due to its higher debt to assets ratio. However, profitability cannot be compared across companies using earnings per share because of the wide variations in the number of shares of common stock of different companies. The other choices are therefore incorrect.
10. (LO 2) Companies that can support higher debt to assets ratios are characterized by having:
a. In order to meet debt payments as they come due, a company must have a stable earnings stream. The other choices are incorrect as they do not address the ability to meet debt payments as they come due.
11. (LO 3) Generally accepted accounting principles are:
a. All U.S. companies get guidance from a set of rules and practices that have authoritative support, referred to as generally accepted accounting principles (GAAP). Standard-setting bodies, in consultation with the accounting profession and the business community, determine these accounting standards. The other choices are incorrect because GAAP is (b) not established by the Internal Revenue Service, (c) not intended to provide guidance in resolving ethical dilemmas, or (d) created by people and can evolve over time, unlike laws of nature, such as those in physics and chemistry.
12. (LO 3) What organization issues U.S. accounting standards?
a. The Financial Accounting Standards Board (FASB) is the organization that issues U.S. accounting standards, not the (b) International Accounting Standards Committee or (c) International Auditing Standards Committee. Choice (d) is wrong as there is a correct answer.
13. (LO 3) What is the primary criterion by which accounting information can be judged?
c. Usefulness for decision-making is the primary criterion by which accounting information can be judged. The other choices are incorrect because (a) consistency, (b) predictive value, and (d) comparability all help to make accounting information more useful but are not the primary criterion by which accounting information is judged.
14. (LO 3) Neutrality is an ingredient of:
Faithful Representation | Relevance | |
a. | Yes | Yes |
b. | No | No |
c. | Yes | No |
d. | No | Yes |
c. Neutrality is an ingredient of faithful representation but not relevance. The other choices are therefore incorrect.
15. (LO 3) The characteristic of information that evaluates whether omitting or misstating an item could influence the decision of a financial statement user.
b. Materiality evaluates whether omitting or misstating an item could influence the decision of a financial statement user, not (a) comparability, (c) cost, or (d) consistency.
Prepare the current assets section of a balance sheet.
1. (LO 1) A list of financial statement items for Miguel Company includes the following: Accounts Receivable $25,000, Prepaid Insurance $7,000, Cash $8,000, Supplies $11,000, and Stock Investments (short-term) $14,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
Miguel Company Balance Sheet (partial) |
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Current assets | ||||
Cash | $ 8,000 | |||
Stock investments | 14,000 | |||
Accounts receivable | 25,000 | |||
Supplies | 11,000 | |||
Prepaid insurance | 7,000 | |||
Total current assets | $65,000 |
Classify accounts on balance sheet.
2. (LO 1) The following are the major balance sheet classifications:
Current assets (CA) | Current liabilities (CL) |
Long-term investments (LTI) | Long-term liabilities (LTL) |
Property, plant, and equipment (PPE) | Common stock (CS) |
Intangible assets (IA) | Retained earnings (RE) |
Match each of the following accounts to its proper balance sheet classification.
_____Prepaid insurance | _____Unearned service revenue |
_____Notes payable (short-term) | _____Debt investments (short-term) |
_____Equipment | _____Accumulated depreciation—equipment |
_____Mortgage payable | _____Stock investments (long-term) |
_____Copyrights | _____Salaries and wages payable |
CA Prepaid insurance | CL Unearned service revenue |
CL Notes payable (short-term) | CA Debt investments (short-term) |
PPE Equipment | PPE Accumulated depreciation—equipment |
LTL Mortgage payable | LTI Stock investments (long-term) |
IA Copyrights | CL Salaries and wages payable |
Calculate liquidity and solvency ratios.
3. (LO 2) Maison Inc. reported the following selected information at December 31.
2025 | |
Total current assets | $ 45,584 |
Total assets | 278,000 |
Total current liabilities | 32,560 |
Total liabilities | 189,040 |
Calculate (a) the current ratio and (b) the debt to assets ratio for December 31, 2025.
Prepare assets section of a classified balance sheet.
1. (LO 1) Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company—famous for ketchup and other fine food products—for the year ended April 30, 2025.
Prepaid insurance | $ 168,182 | Buildings | $4,344,269 |
Land | 56,007 | Cash | 617,687 |
Goodwill | 4,411,521 | Accounts receivable | 1,161,481 |
Trademarks | 723,243 | Accumulated depreciation—buildings | 2,295,563 |
Inventory | 1,378,216 |
Instructions
Prepare the assets section of a classified balance sheet, listing the items in proper sequence and including a statement heading.
H. J. Heinz Company Balance Sheet (partial) April 30, 2025 (in thousands) |
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Assets | |||||
Current assets | |||||
Cash | $617,687 | ||||
Accounts receivable | 1,161,481 | ||||
Inventory | 1,378,216 | ||||
Prepaid insurance | 168,182 | ||||
Total current assets | $ 3,325,566 | ||||
Property, plant, and equipment | |||||
Land | 56,007 | ||||
Buildings | $4,344,269 | ||||
Less: Accumulated depr.—buildings | 2,295,563 | 2,048,706 | 2,104,713 | ||
Intangible assets | |||||
Goodwill | 4,411,521 | ||||
Trademarks | 723,243 | 5,134,764 | |||
Total assets | $10,565,043 |
Compute and interpret various ratios.
2. (LO 2) Suppose the following data were taken from the 2025 and 2024 financial statements of American Eagle Outfitters. (All dollars are in thousands.)
2025 | 2024 | |
Current assets | $1,020,834 | $1,189,108 |
Total assets | 1,867,680 | 1,979,558 |
Current liabilities | 376,178 | 464,618 |
Total liabilities | 527,216 | 562,246 |
Net income | 400,019 | 387,359 |
Dividends paid on common stock | 80,796 | 61,521 |
Weighted-average common shares outstanding | 216,119 | 222,662 |
Instructions
Perform each of the following.
2025 | 2024 | |||||
a. | Current ratio | |||||
b. | Earning per share | |||||
c. | Debt to assets ratio | |||||
d. | American Eagle’s debt to assets ratio decreased slightly from 28.4% for 2024 to 28.2% for 2025, indicating a very small increase in solvency for 2025. |
Prepare financial statements.
(LO 1) Listed here are items taken from the income statement and balance sheet of Bargain Electronics, Inc. for the year ended December 31, 2025. Certain items have been combined for simplification. (Amounts are given in thousands.)
Notes payable (due in 3 years) | $50.5 |
Cash | 141.1 |
Salaries and wages expense | 2,933.6 |
Common stock | 454.9 |
Accounts payable | 922.2 |
Accounts receivable | 723.3 |
Accumulated depreciation—equipment | 110.0 |
Equipment | 1,031.0 |
Cost of goods sold | 9,501.4 |
Income taxes payable | 7.2 |
Interest expense | 1.5 |
Mortgage payable | 451.5 |
Retained earnings (December 31, 2025) | 1,336.3 |
Inventory | 1,636.5 |
Sales revenue | 12,456.9 |
Debt investments (short-term) | 382.6 |
Income tax expense | 30.5 |
Goodwill | 202.7 |
Notes payable (due in 6 months) | 784.6 |
Instructions
Prepare an income statement and a classified balance sheet using the items listed. Do not use any item more than once.
Bargain Electronics, Inc. Income Statement For the Year Ended December 31, 2025 (in thousands) |
||||
Revenues | ||||
Sales revenue | $12,456.9 | |||
Expenses | ||||
Cost of goods sold | $9,501.4 | |||
Salaries and wages expense | 2,933.6 | |||
Interest expense | 1.5 | |||
Income tax expense | 30.5 | |||
Total expenses | 12,467.0 | |||
Net loss | $(10.1) |
Bargain Electronics, Inc. Balance Sheet December 31, 2025 (in thousands) |
||||
Assets | ||||
Current assets | ||||
Cash | $141.1 | |||
Debt investments | 382.6 | |||
Accounts receivable | 723.3 | |||
Inventory | 1,636.5 | |||
Total current assets | $2,883.5 | |||
Property, plant and equipment | ||||
Equipment | 1,031.0 | |||
Less: Accumulated depreciation—equipment | 110.0 | 921.0 | ||
Intangible assets | ||||
Goodwill | 202.7 | |||
Total assets | $4,007.2 | |||
Liabilities and Stockholders’ Equity | ||||
Current liabilities | ||||
Notes payable | $784.6 | |||
Accounts payable | 922.2 | |||
Income taxes payable | 7.2 | |||
Total current liabilities | $1,714.0 | |||
Long-term liabilities | ||||
Mortgage payable | 451.5 | |||
Notes payable | 50.5 | 502.0 | ||
Total liabilities | 2,216.0 | |||
Stockholders’ equity | ||||
Common stock | 454.9 | |||
Retained earnings | 1,336.3 | |||
Total stockholders’ equity | 1,791.2 | |||
Total liabilities and stockholders’ equity | $4,007.2 |
1. What is meant by the term operating cycle?
2. Define current assets. What basis is used for ordering individual items within the current assets section?
3. Distinguish between long-term investments and property, plant, and equipment.
4. How do current liabilities differ from long-term liabilities?
5. Identify the two parts of stockholders’ equity in a corporation and indicate the purpose of each.
6.
7. Name ratios useful in assessing (a) liquidity, (b) solvency, and (c) profitability.
8. Tom Dawes, the founder of Footwear Inc., needs to raise $500,000 to expand his company’s operations. He has been told that raising the money through debt will increase the riskiness of his company much more than issuing stock. He doesn’t understand why this is true. Explain it to him.
9. What do these classes of ratios measure?
10. Holding all other factors constant, indicate whether each of the following signals generally good or bad news about a company.
11. Which ratio or ratios from this chapter do you think should be of greatest interest to:
12.
13.
14. Merle Hawkins, the president of Pathway Company, is pleased. Pathway substantially increased its net income in 2025 while keeping its unit inventory relatively the same. Jon Dietz, chief accountant, cautions Merle, however. Dietz says that since Pathway changed its method of inventory valuation, there is a consistency problem and it is difficult to determine whether Pathway is better off. Is Dietz correct? Why or why not?
15. What is the distinction between comparability and consistency?
16. Describe the constraint inherent in the presentation of accounting information.
17. Your roommate believes that accounting standards are uniform throughout the world. Is your roommate correct? Explain.
18. Wanda Roberts is president of Best Texts. She has no accounting background. Wanda cannot understand why fair value is not used as the basis for all accounting measurement and reporting. Discuss.
19. What is the economic entity assumption? Give an example of its violation.
20. What was Apple’s largest current asset, largest current liability, and largest item under “Assets” at September 26, 2020?
Classify accounts on balance sheet.
BE2.1 (LO 1), K The following are the major balance sheet classifications:
Current assets (CA) | Current liabilities (CL) |
Long-term investments (LTI) | Long-term liabilities (LTL) |
Property, plant, and equipment (PPE) | Common stock (CS) |
Intangible assets (IA) | Retained earnings (RE) |
Match each of the following accounts to its proper balance sheet classification.
_____Accounts payable | _____Buildings |
_____Accounts receivable | _____Cash |
_____Accumulated depreciation | _____Goodwill |
_____Income taxes payable | _____Inventory |
_____Investment in long-term bonds | _____Patents |
_____Land | _____Supplies |
Identify the order of asset classifications.
BE2.2 (LO 1), K Place a number, 1 through 7, in front of each of the following balance sheet categories to designate the order in which they are to be presented in a classified balance sheet.
_____Long-term investments | _____Current assets |
_____Current liabilities | _____Long-term liabilities |
_____Stockholders’ equity | _____Property, plant, and equipment |
_____Intangible assets |
Prepare the current assets section of a balance sheet.
BE2.3 (LO 1), AP A list of financial statement items for Chin Company includes the following: accounts receivable $14,000, prepaid insurance $2,600, cash $10,400, supplies $3,800, and debt investments (short-term) $8,200. Prepare the current assets section of the balance sheet listing the items in the proper sequence.
Compute earnings per share.
BE2.4 (LO 2), AP The following information (in millions of dollars) is available for L Brands for a recent year: sales revenue $9,043, net income $220, preferred dividend $0, and weighted-average common shares outstanding 333 million. Compute the earnings per share for L Brands.
Calculate liquidity ratios.
BE2.5 (LO 2), AP These selected condensed data are taken from a recent balance sheet of Bob Evans Farms (in millions of dollars).
Cash | $29.3 |
Accounts receivable | 20.5 |
Inventory | 28.7 |
Other current assets | 24.0 |
Total current assets | $102.5 |
Total current liabilities | $201.2 |
Compute working capital and the current ratio.
Calculate liquidity and solvency ratios.
BE2.6 (LO 2), AP Ross Music Inc. reported the following selected information at March 31.
2025 | |
Total current assets | $262,787 |
Total assets | 439,832 |
Total current liabilities | 293,625 |
Total liabilities | 376,002 |
Calculate (a) the current ratio and (b) the debt to assets ratio for March 31, 2025.
Recognize generally accepted accounting principles.
BE2.7 (LO 3), K Indicate whether each statement is true or false. If false, indicate how to correct the statement.
Identify characteristics of useful information.
BE2.8 (LO 3), K The accompanying chart shows the qualitative characteristics of useful accounting information. Fill in the blanks.
Identify characteristics of useful information.
BE2.9 (LO 3), K Given the characteristics of useful accounting information, complete each of the following statements.
Identify characteristics of useful information.
BE2.10 (LO 3), K Here are some qualitative characteristics of useful accounting information:
Match each qualitative characteristic to one of the following statements.
Define full disclosure principle.
BE2.11 (LO 3), K The full disclosure principle dictates that:
Prepare assets section of balance sheet.
DO IT! 2.1a (LO 1), AP Mylar Corporation has collected the following information related to its December 31, 2025, balance sheet.
Accounts receivable | $22,000 | Equipment | $180,000 |
Accumulated depreciation—equipment | 50,000 | Inventory | 58,000 |
Cash | 13,000 | Supplies | 7,000 |
Stock investments (long-term) | 1,900 | Goodwill | 4,100 |
Prepare the assets section of Mylar Corporation’s balance sheet.
Classify financial statement items by balance sheet classification.
DO IT! 2.1b (LO 1), AP The following financial statement items were taken from the financial statements of Gomez Corp.
____Trademarks | ____Inventory |
____Notes payable (current) | ____Accumulated depreciation |
____Interest revenue | ____Land |
____Income taxes payable | ____Common stock |
____Debt investments (long-term) | ____Advertising expense |
____Unearned sales revenue | ____Mortgage payable (due in 3 years) |
Match each of the financial statement items to its proper balance sheet classification. (See E2.1 for a list of the balance sheet classifications.) If the item would not appear on a balance sheet, use “NA.”
Compute ratios and analyze.
DO IT! 2.2 (LO 2), AP The following information is available for Nguoi Corporation.
2025 | 2024 | |
Current assets | $ 54,000 | $ 36,000 |
Total assets | 240,000 | 205,000 |
Current liabilities | 22,000 | 30,000 |
Total liabilities | 72,000 | 100,000 |
Net income | 80,000 | 40,000 |
Preferred dividends | 6,000 | 6,000 |
Common dividends | 3,000 | 1,500 |
Common shares outstanding at beginning of year | 40,000 | 30,000 |
Common shares outstanding at end of year | 75,000 | 40,000 |
Identify financial accounting concepts and principles.
DO IT! 2.3 (LO 3), K The following characteristics, assumptions, principles, and constraint guide the FASB when it creates accounting standards.
Relevance | Periodicity assumption |
Faithful representation | Going concern assumption |
Comparability | Historical cost principle |
Consistency | Full disclosure principle |
Monetary unit assumption | Materiality |
Economic entity assumption | Cost constraint |
Match each item above with a description below.
Classify accounts on balance sheet.
E2.1 (LO 1), AP The following are the major balance sheet classifications.
Current assets (CA) | Current liabilities (CL) |
Long-term investments (LTI) | Long-term liabilities (LTL) |
Property, plant, and equipment (PPE) | Stockholders’ equity (SE) |
Intangible assets (IA) |
Instructions
Classify each of the following financial statement items taken from Ming Corporation’s balance sheet.
____ Accounts payable | ____ Income taxes payable |
____ Accounts receivable | ____ Inventory |
____ Accumulated depreciation—equipment | ____ Stock investments (to be sold in 7 months) |
____ Land | |
____ Buildings | ____ Mortgage payable |
____ Cash | ____ Supplies |
____ Interest payable | ____ Equipment |
____ Goodwill | ____ Prepaid rent |
Classify financial statement items by balance sheet classification.
E2.2 (LO 1), AP The major balance sheet classifications are listed in E2.1.
Instructions
Classify each of the following financial statement items based upon the major balance sheet classifications listed in E2.1.
____ Prepaid advertising | ____ Patents |
____ Equipment | ____ Bonds payable |
____ Trademarks | ____ Common stock |
____ Salaries and wages payable | ____ Accumulated depreciation—equipment |
____ Income taxes payable | |
____ Retained earnings | ____ Unearned sales revenue |
____ Accounts receivable | ____ Inventory |
____ Land (held for future use) |
Classify items as current or noncurrent, and prepare assets section of balance sheet.
E2.3 (LO 1), AP Suppose the following items were taken from the December 31, 2025, assets section of the Boeing Company balance sheet. (All dollars are in millions.)
Inventory | $16,933 | Patents | $12,528 |
Notes receivable—due after December 31, 2026 | 5,466 | Buildings | 21,579 |
Cash | 9,215 | ||
Notes receivable—due before December 31, 2026 | 368 | Accounts receivable | 5,785 |
Debt investments (short-term) | 2,008 | ||
Accumulated depreciation—buildings | 12,795 |
Instructions
Prepare the assets section of a classified balance sheet, listing the current assets in order of their liquidity.
Prepare assets section of a classified balance sheet.
E2.4 (LO 1), AP Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company—famous for ketchup and other fine food products—at April 30, 2025.
Prepaid insurance | $ 125,765 | Buildings | $4,033,369 |
Land | 76,193 | Cash | 373,145 |
Goodwill | 3,982,954 | Accounts receivable | 1,171,797 |
Trademarks | 757,907 | Accumulated depreciation—buildings | 2,131,260 |
Inventory | 1,237,613 |
Instructions
Prepare the assets section of a classified balance sheet, listing the items in proper sequence and including a statement heading.
Prepare a classified balance sheet.
E2.5 (LO 1), AP These items are taken from the financial statements of Longhorn Co. at December 31, 2025.
Buildings | $105,800 |
Accounts receivable | 12,600 |
Prepaid insurance | 3,200 |
Cash | 11,840 |
Equipment | 82,400 |
Land | 61,200 |
Insurance expense | 780 |
Depreciation expense | 5,300 |
Interest expense | 2,600 |
Common stock | 60,000 |
Retained earnings (January 1, 2025) | 40,000 |
Accumulated depreciation—buildings | 45,600 |
Accounts payable | 9,500 |
Notes payable | 93,600 |
Accumulated depreciation—equipment | 18,720 |
Interest payable | 3,600 |
Service revenue | 14,700 |
Instructions
Prepare a classified balance sheet. Assume that $13,600 of the note payable will be paid in 2026.
Prepare a classified balance sheet.
E2.6 (LO 1), AP The following items are taken from the financial statements of Carmen Co. at December 31, 2025.
Land | $195,600 |
Accounts receivable | 21,700 |
Supplies | 9,200 |
Cash | 11,840 |
Equipment | 82,400 |
Buildings | 261,200 |
Land improvements | 45,780 |
Notes receivable (due in 2026) | 5,300 |
Accumulated depreciation—land improvements | 12,600 |
Common stock | 75,000 |
Retained earnings (December 31, 2025) | 495,000 |
Accumulated depreciation—buildings | 32,600 |
Accounts payable | 9,500 |
Mortgage payable | 93,600 |
Accumulated depreciation—equipment | 18,720 |
Interest payable | 3,600 |
Income taxes payable | 14,700 |
Patents | 46,700 |
Investments in stock (long-term) | 71,500 |
Debt investments (short-term) | 4,100 |
Instructions
Prepare a classified balance sheet. Assume that $9,100 of the mortgage payable will be paid in 2026.
Prepare a classified balance sheet.
E2.7 (LO 1), AP Suppose the following items were taken from the 2025 financial statements of Texas Instruments, Inc. (All dollars are in millions.)
Common stock | $2,826 | Accumulated depreciation—equipment | $3,547 |
Prepaid rent | 164 | Accounts payable | 1,459 |
Equipment | 6,705 | Patents | 2,210 |
Stock investments (long-term) | 637 | Notes payable (long-term) | 810 |
Debt investments (short-term) | 1,743 | Retained earnings | 6,896 |
Income taxes payable | 128 | Accounts receivable | 1,823 |
Cash | 1,182 | Inventory | 1,202 |
Instructions
Prepare a classified balance sheet in good form as of December 31, 2025.
Prepare liabilities and stockholders’ equity sections.
E2.8 (LO 1), AP Randal Inc.’s balance sheet, dated October 28, 2025, includes the following liabilities and stockholders’ equity items (in millions).
Accounts payable | $431.6 | Long-term debt | $1,209.8 |
Common stock | 642.4 | Other long-term liabilities | 122.6 |
Current portion of long-term debt | 254.9 | Retained earnings | 979.8 |
Income taxes payable | 14.8 | Unearned sales revenue | 16.0 |
Instructions
Prepare the liabilities and stockholders’ equity sections of the balance sheet.
Prepare a balance sheet.
E2.9 (LO 1), AP The financial statements of Summit Ltd. includes the following items at December 31, 2025.
Accounts payable | $ 21,050 | Income tax expense | $ 5,200 |
Accounts receivable | 20,780 | Interest expense | 4,550 |
Accumulated depreciation—buildings | 50,600 | Interest payable | 2,100 |
Land | 194,000 | ||
Accumulated depreciation—equipment | 21,470 | Long-term investments | 28,970 |
Mortgage payable | 104,000 | ||
Buildings | 133,800 | Operating expenses | 158,680 |
Cash | 24,040 | Prepaid insurance | 1,420 |
Common stock | 140,000 | Retained earnings, January 1 | 116,520 |
Equipment | 66,100 | Service revenue | 183,040 |
Supplies | 1,240 |
Instructions
Prepare financial statements.
E2.10 (LO 1), AP The following financial statement items are for Batra Corporation at year-end, July 31, 2025.
Operating expenses | $ 32,500 | Interest payable | $ 1,000 |
Salaries and wages expense | 44,700 | Supplies expense | 900 |
Unearned sales revenue | 12,000 | Dividends declared | 12,000 |
Utilities expense | 2,600 | Depreciation expense | 3,000 |
Equipment | 62,900 | Retained earnings, August 1, 2024 | 17,940 |
Accounts payable | 4,220 | Rent expense | 10,800 |
Service revenue | 113,600 | Income tax expense | 5,000 |
Rent revenue | 18,500 | Supplies | 1,500 |
Common stock | 25,000 | Debt investments (short-term) | 20,000 |
Cash | 5,060 | Bank loan payable (due December 31, 2025) | 21,800 |
Accounts receivable | 17,100 | ||
Accumulated depreciation—equipment | 6,000 | Interest expense | 2,000 |
Instructions
Prepare an income statement, retained earnings statement, and balance sheet for the year.
Compute and interpret profitability ratio.
E2.11 (LO 2), AP Suppose the following information is available for Callaway Golf Company for the years 2025 and 2024. (Dollars are in thousands, except share information.)
2025 | 2024 | |
Net sales | $ 1,117,204 | $ 1,124,591 |
Net income (loss) | 66,176 | 54,587 |
Total assets | 855,338 | 838,078 |
Share information | ||
Common shares outstanding at year-end | 64,507,000 | 66,282,000 |
Preferred dividends | –0– | –0– |
There were 73,139,000 shares of common stock outstanding at the end of 2023.
Instructions
Prepare financial statements.
E2.12 (LO 1, 2), AP These financial statement items are for Fairview Corporation at year-end, July 31, 2025.
Salaries and wages payable | $ 2,080 |
Salaries and wages expense | 57,500 |
Supplies expense | 15,600 |
Equipment | 18,500 |
Accounts payable | 4,100 |
Service revenue | 66,100 |
Rent revenue | 8,500 |
Notes payable (due in 2028) | 1,800 |
Common stock | 16,000 |
Cash | 29,200 |
Accounts receivable | 9,780 |
Accumulated depreciation—equipment | 6,000 |
Dividends | 4,000 |
Depreciation expense | 4,000 |
Retained earnings (beginning of the year) | 34,000 |
Instructions
Compute liquidity ratios and compare results.
E2.13 (LO 2), AP Nordstrom, Inc. operates department stores in numerous states. Selected financial statement data (in millions of dollars) for a recent year follow.
Beginning of Year | End of Year | |
Cash and cash equivalents | $358 | $72 |
Receivables (net) | 1,788 | 1,942 |
Merchandise inventory | 956 | 900 |
Other current assets | 259 | 303 |
Total current assets | $3,361 | $3,217 |
Total current liabilities | $1,635 | $1,601 |
Instructions
Compute liquidity measures and discuss findings.
E2.14 (LO 2), AP The chief financial officer (CFO) of Myeneke Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2025, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows.
Myeneke Corp. Balance Sheet December 30, 2025 |
|||||
Current assets | Current liabilities | ||||
Cash | $25,000 | Accounts payable | $ 20,000 | ||
Accounts receivable | 30,000 | Salaries and wages payable | 10,000 | $ 30,000 | |
Prepaid insurance | 5,000 | $ 60,000 | Long-term liabilities | ||
Equipment (net) | 200,000 | Notes payable | 80,000 | ||
Total assets | $260,000 | Total liabilities | 110,000 | ||
Stockholders’ equity | |||||
Common stock | 100,000 | ||||
Retained earnings | 50,000 | 150,000 | |||
Total liabilities and stockholders’ equity | $260,000 |
Instructions
Compute and interpret solvency ratios.
E2.15 (LO 2), AP Suppose the following data were taken from the 2025 and 2024 financial statements of American Eagle Outfitters. (All numbers, including share data, are in thousands.)
2025 | 2024 | |
Current assets | $ 925,359 | $1,020,834 |
Total assets | 1,963,676 | 1,867,680 |
Current liabilities | 401,763 | 376,178 |
Total liabilities | 554,645 | 527,216 |
Net income | 179,061 | 400,019 |
Dividends paid on common stock | 82,394 | 80,796 |
Weighted-average common shares outstanding | 205,169 | 216,119 |
Instructions
Perform each of the following.
Identify qualitative characteristics.
E2.16 (LO 3), K Here are some fundamental and enhancing qualitative characteristics of financial information.
Instructions
Match each of the above characteristics to one of the following statements, using the numbers 1 to 12.
Identify accounting assumptions and principles.
E2.17 (LO 3), K Presented below are the assumptions and principles discussed in this chapter.
Instructions
Identify by number the accounting assumption or principle that is described below. Do not use a number more than once.
Identify accounting terminology.
E2.18 (LO 1, 2, 3), K The following list of terms or phrases are discussed in this chapter.
Instructions
Match each term or phrase to its description below.
Identify the assumption or principle that has been violated.
E2.19 (LO 3), C Lopez Co. had three major business transactions during 2025.
Instructions
In each situation, identify the assumption or principle that has been violated, if any, and discuss what the company should have done.
Prepare a classified balance sheet.
P2.1 (LO 1), AP Suppose the following items are taken from the 2025 balance sheet of Verizon Communications. (All dollars are in millions.)
Goodwill | $3,927 |
Common stock | 6,283 |
Equipment | 1,737 |
Accounts payable | 152 |
Patents | 234 |
Stock investments (long-term) | 3,247 |
Accounts receivable | 1,061 |
Prepaid rent | 233 |
Debt investments (short-term) | 1,160 |
Retained earnings | 6,108 |
Cash | 2,292 |
Notes payable (long-term) | 734 |
Unearned sales revenue | 413 |
Accumulated depreciation—equipment | 201 |
Instructions
Prepare a classified balance sheet for Verizon Communications as of December 31, 2025.
Tot. current assets | $4,746 |
Tot. assets | $13,690 |
Prepare financial statements.
P2.2 (LO 1), AP These items are taken from the financial statements of Martin Corporation for 2025.
Retained earnings (beginning of year) | $31,000 |
Utilities expense | 2,000 |
Equipment | 66,000 |
Accounts payable | 18,300 |
Cash | 10,100 |
Salaries and wages payable | 3,000 |
Common stock | 22,800 |
Dividends | 12,000 |
Supplies | 3,100 |
Debt investment (long-term) | 5,700 |
Trademarks | 2,000 |
Service revenue | 68,000 |
Prepaid insurance | 3,500 |
Maintenance and repairs expense | 1,800 |
Depreciation expense | 3,600 |
Accounts receivable | 11,700 |
Insurance expense | 2,200 |
Salaries and wages expense | 37,000 |
Accumulated depreciation—equipment | 17,600 |
Instructions
Prepare an income statement, a retained earnings statement, and a classified balance sheet as of December 31, 2025.
Net income | $21,400 |
Tot. assets | $84,500 |
Prepare financial statements.
P2.3 (LO 1), AP You are provided with the following information for Lazuris Enterprises, effective as of its April 30, 2025, year-end.
Accounts payable | $834 |
Accounts receivable | 810 |
Accumulated depreciation—equipment | 670 |
Cash | 1,270 |
Common stock | 16,900 |
Cost of goods sold | 1,060 |
Depreciation expense | 335 |
Dividends | 325 |
Equipment | 2,420 |
Goodwill | 1,800 |
Income tax expense | 165 |
Income taxes payable | 135 |
Insurance expense | 210 |
Interest expense | 400 |
Inventory | 967 |
Investment in land | 14,200 |
Land | 3,100 |
Mortgage payable (long-term) | 3,500 |
Notes payable (short-term) | 61 |
Prepaid insurance | 60 |
Retained earnings (beginning) | 1,600 |
Salaries and wages expense | 700 |
Salaries and wages payable | 222 |
Sales revenue | 5,100 |
Stock investments (short-term) | 1,200 |
Instructions
a. | Net income | $2,230 |
b. | Tot. current assets | $4,307 |
Tot. assets | $25,157 |
Compute ratios; comment on relative profitability, liquidity, and solvency.
P2.4 (LO 2), AN Comparative financial statement data for Loeb Corporation and Bowsh Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2025.
Loeb Corporation | Bowsh Corporation | |||
Net sales | $1,800,000 | $620,000 | ||
Cost of goods sold | 1,175,000 | 340,000 | ||
Operating expenses | 283,000 | 98,000 | ||
Interest expense | 9,000 | 3,800 | ||
Income tax expense | 85,000 | 36,000 | ||
Current assets | 407,200 | 190,336 | ||
Plant assets (net) | 532,000 | 139,728 | ||
Current liabilities | 66,325 | 33,716 | ||
Long-term liabilities | 108,500 | 40,684 | ||
Dividends paid on common stock | 36,000 | 15,000 | ||
Weighted-average common shares outstanding | 80,000 | 50,000 |
Instructions
Compute and interpret liquidity, solvency, and profitability ratios.
P2.5 (LO 2), AP The following are financial statements of Ohara Company.
Ohara Company Income Statement For the Year Ended December 31, 2025 |
|
Net sales | $2,218,500 |
Cost of goods sold | 1,012,400 |
Selling and administrative expenses | 906,000 |
Interest expense | 78,000 |
Income tax expense | 69,000 |
Net income | $153,100 |
Ohara Company Balance Sheet December 31, 2025 |
|
Assets | |
Current assets | |
Cash | $60,100 |
Debt investments | 84,000 |
Accounts receivable (net) | 169,800 |
Inventory | 145,000 |
Total current assets | 458,900 |
Plant assets (net) | 575,300 |
Total assets | $1,034,200 |
Liabilities and Stockholders’ Equity | |
Current liabilities | |
Accounts payable | $ 160,000 |
Income taxes payable | 35,500 |
Total current liabilities | 195,500 |
Bonds payable | 200,000 |
Total liabilities | 395,500 |
Stockholders’ equity | |
Common stock | 350,000 |
Retained earnings | 288,700 |
Total stockholders’ equity | 638,700 |
Total liabilities and stockholders’ equity | $1,034,200 |
Additional information: The weighted-average common shares outstanding during the year was 50,000.
Instructions
Compute and interpret liquidity, solvency, and profitability ratios.
P2.6 (LO 2), AP Condensed balance sheet and income statement data for Danke Corporation are presented as follows.
Danke Corporation Balance Sheets December 31 |
||
2025 | 2024 | |
Assets | ||
Cash | $28,000 | $20,000 |
Receivables (net) | 70,000 | 62,000 |
Other current assets | 90,000 | 73,000 |
Long-term investments | 62,000 | 60,000 |
Property, plant, and equipment (net) | 510,000 | 470,000 |
Total assets | $760,000 | $685,000 |
Liabilities and Stockholders’ Equity | ||
Current liabilities | $75,000 | $70,000 |
Long-term liabilities | 80,000 | 90,000 |
Common stock | 330,000 | 300,000 |
Retained earnings | 275,000 | 225,000 |
Total liabilities and stockholders’ equity | $760,000 | $685,000 |
Danke Corporation Income Statements For the Years Ended December 31 |
||
2025 | 2024 | |
Sales revenue | $750,000 | $680,000 |
Cost of goods sold | 440,000 | 400,000 |
Operating expenses (including income taxes) | 240,000 | 220,000 |
Net income | $ 70,000 | $ 60,000 |
Additional information:
Dividends paid | $20,000 | $15,000 |
Weighted-average common shares outstanding | 33,000 | 30,000 |
Instructions
Compute these values and ratios for 2024 and 2025.
Compute ratios and compare liquidity and solvency for two companies.
P2.7 (LO 2), AP Selected financial data of two competitors, Target and Walmart, are presented here. (All dollars are in millions.) Suppose the data were taken from the 2025 financial statements of each company.
Target (1/31/25) | Walmart (1/31/25) | |||
Income Statement Data for Year | ||||
Net sales | $64,948 | $401,244 | ||
Cost of goods sold | 44,157 | 306,158 | ||
Selling and administrative expenses | 16,389 | 76,651 | ||
Interest expense | 894 | 2,103 | ||
Other income | 28 | 4,213 | ||
Income taxes | 1,322 | 7,145 | ||
Net income | $ 2,214 | $ 13,400 | ||
Balance Sheet Data (End of Year) | ||||
Current assets | $17,488 | $ 48,949 | ||
Noncurrent assets | 26,618 | 114,480 | ||
Total assets | $44,106 | $163,429 | ||
Current liabilities | $10,512 | $ 55,390 | ||
Long-term liabilities | 19,882 | 42,754 | ||
Total stockholders’ equity | 13,712 | 65,285 | ||
Total liabilities and stockholders’ equity | $44,106 | $163,429 | ||
Weighted-average common shares outstanding (millions) | 774 | 3,951 |
Instructions
For each company, compute these values and ratios.
Comment on the objectives and qualitative characteristics of financial reporting.
P2.8 (LO 3), E A friend of yours, Saira Ortiz, recently completed an undergraduate degree in science and has just started working with a biotechnology company. Saira tells you that the owners of the business are trying to secure new sources of financing which are needed in order for the company to proceed with development of a new healthcare product. Saira said that her boss told her that the company must put together a report to present to potential investors.
Saira thought that the company should include in this package the detailed scientific findings related to the Phase I clinical trials for this product. She said, “I know that the biotech industry sometimes has only a 10% success rate with new products, but if we report all the scientific findings, everyone will see what a sure success this is going to be! The president was talking about the importance of following some set of accounting principles. Why do we need to look at some accounting rules? What they need to realize is that we have scientific results that are quite encouraging, some of the most talented employees around, and the start of some really great customer relationships. We haven’t made any sales yet, but we will. We just need the funds to get through all the clinical testing and get government approval for our product. Then these investors will be quite happy that they bought in to our company early!”
Instructions
(Note: This is a continuation of the Cookie Creations from Chapter 1.)
CCC2 After investigating the different forms of business organization, Natalie Koebel decides to operate her business as a corporation, Cookie Creations Inc., and she begins the process of getting her business running.
While at a trade show, Natalie is introduced to Gerry Richards, operations manager of “Biscuits,” a national food retailer. After much discussion, Gerry asks Natalie to consider being Biscuits’ major supplier of oatmeal chocolate chip cookies. He provides Natalie with the most recent copy of the financial statements of Biscuits. He expects that Natalie will need to supply Biscuits’ Watertown warehouse with approximately 1,500 dozen cookies a week. Natalie is to send Biscuits a monthly invoice, and she will be paid approximately 30 days from the date the invoice is received in Biscuits’ Chicago office.
Natalie is thrilled with the offer. However, she has recently read in the newspaper that Biscuits has a reputation for selling cookies and donuts with high amounts of sugar and fat, and as a result, consumer demand for the company’s products has decreased.
Instructions
Natalie has several questions. Answer the following questions for Natalie.
CT2.1 The financial statements of Apple Inc. are presented in Appendix A.
Instructions
Answer the following questions using the financial statements and the notes to the financial statements.
CT2.2 The financial statements of Columbia Sportswear Company are presented in Appendix B. Financial statements of Under Armour, Inc. are presented in Appendix C. Assume Columbia’s weighted-average common shares outstanding was 69,683,000, and Under Armour’s was 416,103,000.
Instructions
CT2.3 Amazon.com, Inc.’s financial statements are presented in Appendix D. Financial statements of Walmart Inc. are presented in Appendix E.
Instructions
CT2.4 Suppose the following information was reported by Gap, Inc.
2025 | 2024 | 2023 | 2022 | 2021 | |
Total assets (millions) | $7,065 | $7,985 | $7,564 | $7,838 | $8,544 |
Working capital | $1,831 | $2,533 | $1,847 | $1,653 | $2,757 |
Current ratio | 1.87:1 | 2.19:1 | 1.86:1 | 1.68:1 | 2.21:1 |
Debt to assets ratio | .42:1 | .39:1 | .42:1 | .45:1 | .39:1 |
Earnings per share | $1.89 | $1.59 | $1.35 | $1.05 | $0.94 |
CT2.5 You can use the Internet to identify summary liquidity, solvency, and profitability information about companies, and compare this information across companies in the same industry.
Instructions
Select a well-known company and then go to the Yahoo! Finance website to locate information to answer the following questions.
CT2.6 The Feature Story described the dramatic effect that investor bulletin boards are having on the investment world. This exercise will allow you to evaluate a bulletin board discussing a company of your choice.
Instructions
Go to the Yahoo! Finance website. Type in a company name (or use the index to find it) and then use the Conversations tab to answer the following questions.
CT2.7 As a financial analyst in the planning department for Erin Industries, Inc., you must develop ratios from the comparative financial statements. This information is to be used to convince creditors that, despite a slight decline in sales, Erin Industries, Inc. is liquid, solvent, and profitable, and that it deserves their continued support. Lenders are particularly concerned about the company’s ability to continue as a going concern.
Here are the data requested and the computations developed from the financial statements:
2025 | 2024 | |
Current ratio | 3.1 | 2.1 |
Working capital | Up 22% | Down 7% |
Debt to assets ratio | 0.60 | 0.70 |
Net income | Up 32% | Down 8% |
Earnings per share | $2.40 | $1.15 |
Instructions
Erin Industries, Inc. asks you to prepare brief comments stating how each of these items supports the argument that its financial health is improving. The company wishes to use these comments to support presentation of data to its creditors. With the class divided into groups, prepare the comments as requested, giving the implications and the limitations of each item regarding Erin’s financial well-being.
CT2.8 B. P. Palmer is the chief executive officer of Future Products. Palmer is an expert engineer but a novice in accounting.
Instructions
Write a letter to B. P. Palmer that explains (a) the three main types of ratios; (b) examples of each, how they are calculated, and what they measure; and (c) the bases for comparison in analyzing Future Products’ financial statements.
CT2.9 At one time, Boeing closed a giant deal to acquire another manufacturer, McDonnell Douglas. Boeing paid for the acquisition by issuing shares of its own stock to the stockholders of McDonnell Douglas. In order for the deal not to be revoked, the value of Boeing’s stock could not decline below a certain level for a number of months after the deal.
During the first half of the year, Boeing suffered significant cost overruns because of inefficiencies in its production methods. Had these problems been disclosed in the quarterly financial statements during the first and second quarters of the year, the company’s stock most likely would have plummeted, and the deal would have been revoked. Company managers spent considerable time debating when the bad news should be disclosed. One public relations manager suggested that the company’s problems be revealed on the date of either Princess Diana’s or Mother Teresa’s funeral, in the hope that it would be lost among those big stories that day. Instead, the company waited until October 22 of that year to announce a $2.6 billion write-off due to cost overruns. Within one week, the company’s stock price had fallen 20%, but by this time the McDonnell Douglas deal could not be reversed.
Instructions
Answer the following questions.
CT2.10 Every company needs to plan in order to move forward. Its top management must consider where it wants the company to be in three to five years. Like a company, you need to think about where you want to be three to five years from now, and you need to start taking steps now in order to get there.
Instructions
Provide responses to each of the following items.
CT2.11 If your school has a subscription to the FASB Codification, log in and prepare responses to the following.
Instructions
CT2.12 Auditors provide a type of certification of corporate financial statements. Certification is used in many other aspects of business as well. For example, it plays a critical role in the sustainability movement. An article by Angus Chen, entitled “Do Sustainable Certifications for Coffee Really Help the Coffee Growers,” discusses the role of certification in the coffee business.
Instructions
Search and read the article online, and then answer the following questions.
The classified balance sheet, although generally required internationally, contains certain variations in format when reporting under IFRS. The following are the key similarities and differences between GAAP and IFRS related to the financial statements.
IFRS has many differences in terminology from what are shown in your text. For example, in the following sample statement of financial position, notice in the investment category that stock is called shares.
Franklin Corporation Statement of Financial Position October 31, 2025 |
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Assets | ||||||
Intangible assets | ||||||
Patents | $3,100 | |||||
Property, plant, and equipment | ||||||
Land | $10,000 | |||||
Equipment | $24,000 | |||||
Less: Accumulated depreciation | 5,000 | 19,000 | 29,000 | |||
Long-term investments | ||||||
Share investments | 5,200 | |||||
Investment in real estate | 2,000 | 7,200 | ||||
Current assets | ||||||
Prepaid insurance | 400 | |||||
Supplies | 2,100 | |||||
Inventory | 3,000 | |||||
Notes receivable | 1,000 | |||||
Accounts receivable | 7,000 | |||||
Debt investments | 2,000 | |||||
Cash | 6,600 | 22,100 | ||||
Total assets | $61,400 | |||||
Equity and Liabilities | ||||||
Equity | ||||||
Share capital | $20,050 | |||||
Retained earnings | 14,000 | $34,050 | ||||
Non-current liabilities | ||||||
Mortgage payable | 10,000 | |||||
Notes payable | 1,300 | 11,300 | ||||
Current liabilities | ||||||
Notes payable | 11,000 | |||||
Accounts payable | 2,100 | |||||
Salaries and wages payable | 1,600 | |||||
Unearned service revenue | 900 | |||||
Interest payable | 450 | 16,050 | ||||
Total equity and liabilities | $61,400 |
1. A company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:
2. Current assets under IFRS are listed generally:
3. Companies that use IFRS:
4. Companies that follow IFRS to prepare a statement of financial position generally use the following order of classification:
IFRS2.1 In what ways does the format of a statement of financial of position under IFRS often differ from a balance sheet presented under GAAP?
IFRS2.2 What term is commonly used under IFRS in reference to the balance sheet?
IFRS2.3 The statement of financial position for Sundell Company includes the following accounts (in British pounds): Accounts Receivable £12,500, Prepaid Insurance £3,600, Cash £15,400, Supplies £5,200, and Debt Investments (short-term) £6,700. Prepare the current assets section of the statement of financial position, listing the accounts in proper sequence.
IFRS2.4 The following information is available for Lessila Bowling Alley at December 31, 2025.
Buildings | $128,800 | Share Capital | $100,000 | ||||
Accounts Receivable | 14,520 | Retained Earnings (beginning) | 15,000 | ||||
Prepaid Insurance | 4,680 | Accumulated Depreciation—Buildings | 42,600 | ||||
Cash | 18,040 | Accounts Payable | 12,300 | ||||
Equipment | 62,400 | Notes Payable | 97,780 | ||||
Land | 64,000 | Accumulated Depreciation—Equipment | 18,720 | ||||
Insurance Expense | 780 | Interest Payable | 2,600 | ||||
Depreciation Expense | 7,360 | Bowling Revenues | 14,180 | ||||
Interest Expense | 2,600 |
Prepare a classified statement of financial position. Assume that $13,900 of the notes payable will be paid in 2023.
IFRS2.5 The complete annual report of Louis Vuitton, including the notes to its financial statements, is available at the company’s website.
Identify five differences in the format of the statement of financial position used by Louis Vuitton compared to a company, such as Apple, that follows GAAP. (Apple’s financial statements are available in Appendix A.)
Answers to IFRS Self-Test Questions
1. d2. b3. c4. c