<<

. 7
( 25)



>>


(In thousands)
Accumulated
Other
Common Common Retained Comprehensive
Shares Stock Earnings Income & Other Total
Balance at January 28, 2001 51,832 $ 85,060 $42,547 $(1,928) $125,679
Net income 26,378 26,378
Unrealized holding loss, net (111) (111)
Translation adjustment (42) (42)
Total comprehensive income 26,225
Proceeds from sale of stock 1,086 17,202 17,202
Exercise of stock options 1,183 13,678 13,678
Other 170 5,112 (229) 4,883
Balance at February 3, 2002 54,271 $121,052 $68,925 $(2,310) $187,667




The ending balances on the statement of stockholders' equity are the amounts re-
ported on the corporation's balance sheet for the same date. Compare the ending bal-
ances in each column of Exhibit 5 with the amounts in Exhibit 4. The statement of
stockholders' equity describes the events that changed Krispy Kreme™s stockholders' eq-
uity during its 2002 fiscal year.




USE FINANCIAL STATEMENTS
OF
Financial statements are a primary source of accounting information for external deci-
sion makers. External users analyze statements to evaluate the ability of an organiza-
tion to use its resources effectively and efficiently. By comparing changes in assets,
liabilities, earnings, and cash flows over time, users form expectations about return and
risk. Comparisons across companies help determine which companies are being man-
aged effectively and provide the best investment opportunities.
Later chapters of this book describe methods of analyzing and interpreting finan-
cial statements. The remainder of this chapter considers attributes of financial state-
ments that decision makers should understand when interpreting them.


Interrelationships among Financial Statements
Taken as a whole, financial statements describe business activities that changed the fi-
nancial condition of a company from the beginning to the end of a fiscal period. In-
formation on the income statement and statement of cash flows explains changes in
balance sheet accounts during a period.
The summary information presented in financial statements does not always provide
sufficient detail to explain the change in every balance sheet account. Access to individ-
ual account balances would be necessary to provide a complete explanation. Neverthe-
less, the relationships among the financial statements are important. Balance sheets for
the beginning and ending of a fiscal period reveal changes in a company's resources and
finances. The company's income statement and statement of cash flows reveal major events
F144 SECTION F1: The Accounting Information System
143
Reporting Earnings and Financial Position

that caused these changes. The relationship among financial statements in which the
numbers on one statement explain numbers on other statements is called articulation.
You should remember that a company's financial statements are not independent of each
other. They work together to explain the events that changed the company's financial con-
dition.


Limitations of Financial Statements
In spite of the abundant information financial statements provide, their usefulness is
OBJECTIVE 5
limited by certain constraints of the reporting process. Some of these limitations in-
clude:
Identify some of the
primary limitations of
1. Use of estimates and allocations
financial statements.
2. Use of historical costs
3. Omission of transactions
4. Omission of resources and costs
5. Delay in providing information
These constraints result primarily from costs associated with reporting financial infor-
mation. Information is a resource, and it is costly to provide. Its value is determined
by the benefits derived by those who use the information. For information to be valu-
able, its cost must be less than the benefits it provides to users. Therefore, the amount
and type of reported information are constrained by costs and benefits.
The following paragraphs consider these limitations. Users should keep these lim-
itations in mind when interpreting financial statement information.

Use of Estimates and Allocations. Many of the numbers reported in financial state-
ments result from estimates and allocations. For example, depreciation is the alloca-
tion of asset costs to expenses over the estimated lives of the assets. These estimates
often are not exact because the amount of the asset consumed in a particular fiscal pe-
riod is difficult to determine. Decisions about when to recognize revenues and expenses
frequently require management judgment. These subjective decisions and estimates
mean that accounting numbers are not as precise as they might appear.

Use of Historical Costs. Financial statements report primarily the historical cost of
assets and liabilities. Historical cost is the purchase or exchange price of an asset or
liability at the time it is acquired or incurred. The recorded values are not adjusted
for changes in the purchasing power of money or for changes in the current value of
the assets or liabilities. The purchasing power of money changes over time because of
inflation; for example, a dollar in 2003 buys less than a dollar bought in 1983. The cur-
rent value of an asset is the amount at which that asset, in its current condition, could
be bought or sold at the present time.
Certain assets and liabilities, particularly financial securities such as investments in
stocks, are reported at market value in the United States. We will examine these re-
porting rules in a later chapter. Some countries, such as the United Kingdom and the
Netherlands, permit plant assets and other items to be reported using current values.
In these countries, assets and liabilities are restated to approximate their market values
INTERNATIONAL
at the end of a fiscal period.

Omission of Transactions. Financial statements include the primary transactions
that occur as part of a company's business activities. Nevertheless, there is no guaran-
tee that all important transactions are fully reported in a company's financial state-
ments. Some transactions do not result from specific exchanges. They result when
revenues or expenses are allocated to fiscal periods. Accountants and managers some-
times disagree about when certain activities should be recognized. Also, they may dis-
agree about the amount that should be reported in the financial statements for these
activities. The accounting profession has debated extensively issues such as how to rec-
F145
CHAPTER F4: Reporting Earnings and Financial Position
144 Reporting Earnings and Financial Position

ognize the costs of employee retirement benefits. Today, companies report certain lia-
bilities, assets, and expenses associated with these items that were not reported 10 years
ago. Undoubtedly, other issues will arise that will alter information reported in the fi-
nancial statements.
The importance of information changes over time. Companies develop new fi-
nancing and compensation arrangements. Reporting rules for these arrangements may
not be covered by existing GAAP. If the arrangements become common and new re-
porting rules would increase the benefits of information for users, GAAP may be cre-
ated for transactions involving these new arrangements. GAAP are dynamic. They
change as the needs of users and economic activities of organizations change.

Omission of Resources and Costs. Certain types of resources and costs are not
reported in financial statements. The value of employees is not an asset listed on most
balance sheets. Nevertheless, a well-trained and stable workforce and skilled managers
may be the resource that adds the most to the value of many companies. Without skilled
labor and management, the remaining resources of a company often would have little
value. Financial statements do not report these human resources. They are not owned
by a company, and their values are difficult and costly to determine. A major portion
of the value of many companies derives from their research and development activi-
ties, which create new and improved products. The costs of these efforts are expensed
when they are incurred each fiscal period even though they may have a major effect on
the future earnings of a company. Such costs are expensed because of difficulty in iden-
tifying the timing and amount of future benefits a company will receive from these ef-
forts. Nevertheless, the economic value of a company differs from the amount reported
on its financial statements because of these measurement limitations.

Delay in Providing Information. Financial statement information is not always
timely. Annual financial statements may lag actual events by a year or more; even
monthly statements may lag events by several weeks. While such delays may not be a
problem for certain types of decisions, they may be critical for others. Users often need
more timely sources. Managers, in particular, may need information on an ongoing ba-
sis to make effective decisions. Traditional financial statements are only one type of ac-
counting information. Because financial statements are costly to produce and distribute,
external reporting is limited to distinct fiscal periods. In addition to annual financial
reports, major corporations provide quarterly reports to stockholders. As information
technology reduces the cost of reporting, more frequent reporting to external users may
become feasible.
Though a variety of problems impair their usefulness, financial statements continue
to be a primary source of information for managers and external users about a com-
pany's activities. But these problems mean that considerable care is needed to under-
stand accounting information and to use it correctly in making decisions.




3 SELF-STUDY PROBLEM A series of financial statement items is listed below.

Accounts payable Notes payable
Accounts receivable Patents
Buildings Prepaid insurance
Common stock Retained earnings
Cost of goods sold Sales revenue
Depreciation expense Stock issued
Dividends Stock repurchased
Interest expense Supplies
Interest payable Wages expense
Merchandise Wages payable
F146 SECTION F1: The Accounting Information System
145
Reporting Earnings and Financial Position

Required For each account, indicate the financial statement (income statement, bal-
ance sheet, or statement of stockholders' equity) on which the account would appear.
The solution to Self-Study Problem 3 appears at the end of the chapter.



REVIEW SUMMARY of IMPORTANT CONCEPTS


1. Financial statements report business activities.
a. Financial statements include the balance sheet, the income statement, the statement
of cash flows, and the statement of stockholders' equity.
b. The income statement reports on the accrual basis the results of a company's opera-
tions for a fiscal period. It reports information about the creation and consumption
of resources in producing and selling goods and services.
c. A balance sheet identifies asset, liability, and owners' equity account balances at the
end of a fiscal period. Balance sheets classify accounts into current and long-term
asset and liability categories. Comparative balance sheets report account balances
for more than one fiscal period.
d. The statement of stockholders' equity describes the results of transactions that have
changed the amount of stockholders' equity of a corporation during a fiscal period.

2. The interrelated financial statements, as a set, describe the financial effects of business
activities of a company from the beginning to the end of a fiscal period.

3. Consolidated financial statements report the economic activities of a parent and its
subsidiaries as though they were one business entity.

4. Financial statements have limitations that affect the usefulness of the information the
statements report. These limitations include the need for estimates of financial results,
the use of historical costs for representing asset values, and incomplete measures for
some resources or transactions that might affect a company's value.



DEFINE TERMS and CONCEPTS DEFINED in this CHAPTER


amortization expense (F134) intangible assets (F138)
articulation (F144) liquid assets (F136)
common stock (F132) long-term intangible assets (F137)
comprehensive income (F140) long-term investments (F138)
consolidated financial statements (F134) long-term liabilities (F137)
cost of services sold (F131) operating expenses (F131)
current assets (F136) operating income (F131)
current liabilities (F137) parent (F134)
current ratio (F137) plant assets (F137)
depletion (F137) property and equipment (F137)
dividends (F130) statement of stockholders' equity (F130)
earnings per share (F132) subsidiaries (F134)
fixed assets (F137) total revenue (F134)
goodwill (F138) working capital (F137)
gross profit (F131) working capital ratio (F137)
historical cost (F144)
F147
CHAPTER F4: Reporting Earnings and Financial Position
146 Reporting Earnings and Financial Position


SELF-STUDY PROBLEM SOLUTIONS
(Answers in millions except numbers of shares)
SSP-1
1. Revenue from sale of computers $33,392
2. Other operating revenue:
Services $34,956
Software 12,939
Financing 3,426
Enterprise investments and other 1,153
Total $52,474
3. Gross profit $31,782
4. Interest expense* $238
5. Number of shares outstanding ($7,723 net income
$4.45 basic earnings per share) 1,736 million shares
6. Total product costs $54,084
7. Net income $7,723
8. Net cash from operations cannot be determined from the
income statement.
*Other (income) and expense of $(361) may or may not be from non-operating activities. The
notes to the income statement would provide more information.

1. Gross profit:
SSP-2
Sales revenue $357,000
Cost of goods sold 146,000
Gross profit $211,000
2. Income from operations:
Gross profit $211,000
General and administrative expenses 96,000
Selling expenses 47,000
Income from operations $ 68,000
3. Net income:
Income from operations $ 68,000
Interest expense 25,000
Income tax expense 14,000
Net income $ 29,000
4. Earnings per share:
Net income shares of common stock ($29,000 10,000) $2.90
5. Current assets:
Cash $ 16,000
Accounts receivable 11,000
Merchandise inventory 62,000
Supplies 13,000
Prepaid insurance 7,000
Current assets $109,000
6. Land, buildings, and equipment:
Land $ 35,000
Buildings 412,000
Equipment 245,000
Accumulated depreciation (164,000)
Land, buildings, and equipment $528,000
7. Other assets:
Long-term investments $ 35,000
Goodwill 13,000
Other assets $ 48,000
F148 SECTION F1: The Accounting Information System
147
Reporting Earnings and Financial Position

8. Total assets:
Current assets $109,000
Land, buildings, and equipment 528,000
Other assets 48,000
Total assets $685,000
9. Current liabilities:
Accounts payable $ 22,000
Wages payable 18,000
Interest payable 14,000
Income tax payable 6,000
Notes payable, current portion 10,000
Current liabilities $ 70,000
10. Total liabilities:
Current liabilities $ 70,000
Notes payable, long-term 278,000
Total liabilities $348,000
11. Retained earnings, October 31, 2004:
Retained earnings, October 31, 2003 $ 25,000
Net income 29,000
Dividends (17,000)
Retained earnings, October 31, 2004 $ 37,000
12. Total stockholders' equity:
Common stock $300,000
Retained earnings 37,000
Stockholders' equity $337,000
13. Total liabilities and stockholders' equity:
Total liabilities $348,000
Stockholders' equity 337,000
Total liabilities and stockholders' equity $685,000



SSP-3
Item Financial Statement
Accounts payable Balance sheet
Accounts receivable Balance sheet
Buildings Balance sheet
Common stock Balance sheet and statement of stockholders' equity
Cost of goods sold Income statement
Depreciation expense Income statement
Dividends Statement of stockholders' equity
Interest expense Income statement
Interest payable Balance sheet
Merchandise Balance sheet
Notes payable Balance sheet
Patents Balance sheet
Prepaid insurance Balance sheet
Retained earnings Balance sheet and statement of stockholders' equity
Sales revenue Income statement
Stock issued Statement of stockholders' equity
Stock repurchased Statement of stockholders' equity
Supplies Balance sheet
Wages expense Income statement
Wages payable Balance sheet
F149
CHAPTER F4: Reporting Earnings and Financial Position
148 Reporting Earnings and Financial Position


Thinking Beyond the Question
How do we report earnings and financial position to stockholders?

This chapter describes important rules for corporations and other businesses
when they report financial information to external users. We considered the need
for separating ordinary revenues and expenses from those, such as interest rev-
enue or expense, that are secondary to a business's primary purpose. Corpo-
rations report corporate taxes and earnings per share as part of their income
statements. Balance sheets should distinguish between current and long-term
assets and liabilities and should report details about common stock issued by
a corporation. Changes in stockholders' equity should be described in the state-
ment of stockholders' equity.
Why is it important for businesses to follow specific rules and use common
formats in reporting their business activities? What would be the consequences
for businesses and the economy if individual companies were permitted to se-
lect their own reporting rules?




QUESTIONS
Are dividends an expense? Sometimes? Always? Never? Explain.
Q4-1
Obj. 1
Q4-2 Identify three questions that can be answered by reviewing a firm's income statement but that
cannot be answered by reviewing the firm's balance sheet or statement of stockholders' eq-
Obj. 1
uity. Be specific.
Identify three questions that can be answered by reviewing a firm's balance sheet but that can-
Q4-3
not be answered by reviewing the firm's income statement or statement of stockholders' eq-
Obj. 1
uity. Be specific.
Why are there so many different sections of information on an income statement?
Q4-4
Obj. 2

Why does a parent company prepare consolidated financial statements?
Q4-5
Obj. 2

A friend says, "The income statement doesn't reveal anything about the amount of cash that
Q4-6
was received from sales during a fiscal period." Do you agree with this statement? Why or why
Obj. 2
not?
Explain the difference between a classified balance sheet and a comparative balance sheet.
Q4-7
Obj. 3

In what way are the depreciation of plant, property, and equipment and the amortization of
Q4-8
intangible assets alike? In what way are they different?
Obj. 3

Assume you are reviewing a balance sheet that has assets listed on the left side and liabilities
Q4-9
and owners' equity on the right side. What question or questions are answered by looking at
Obj. 3
the information on the left side of the balance sheet? What question or questions are answered
by looking at the information on the right side of the balance sheet?
If all of the stockholders' equity accounts are reported on the balance sheet, why is the state-
Q4-10
ment of stockholders' equity necessary?
Obj. 4

The statement of stockholders' equity can be thought of as a bridge between the income state-
Q4-11
ment and the balance sheet? Why?
Obj. 4

What does the term articulation mean as applied to accounting and financial reporting?
Q4-12
Obj. 4
F150 SECTION F1: The Accounting Information System
149
Reporting Earnings and Financial Position

How do the purpose of the income statement, the purpose of the balance sheet, and the pur-
Q4-13
pose of the statement of stockholders' equity differ?
Objs. 3, 4

Why is the use of historical cost information a limitation of financial statements?
Q4-14
Obj. 5

It is often said that measuring performance for a fiscal period requires periodic measurement
Q4-15
and the use of estimates and approximations. Do you agree that this is true? Why or why not?
Obj. 5




If your instructor is using Personal Trainer in this course, you may complete online the assign-
EXERCISES ments identified by .
E4-1 Write a short definition for each of the terms listed in the Terms and Concepts Defined in this
Chapter section.
A list of information contained in financial statements is provided below. For each item, in-
E4-2
dicate which financial statement provides the information.
Obj. 1

a. Changes in a corporation's stockholders' equity for a fiscal period
b. The dollar amount of resources available at a particular date
c. The amount of credit sales not yet collected
d. Accrual-based operating results for a fiscal period
e. The cost of resources consumed in producing revenues for a period
f. The sources of finances used to acquire resources
g. The effect of issuing stock on the amount of contributed capital during a period
h. The amount of profit earned during a period
i. Revenues generated during a fiscal period
For each of the items listed below, indicate the financial statement (or statements) for which
E4-3
the information is true. Use I to indicate income statement, B to indicate balance sheet, and
Obj. 1
SE to indicate statement of stockholders' equity. If the item below is not true for any of the
three financial statements, indicate with an N.
1. The statement provides information about resources consumed during an accounting
period.
2. The portion of profits that were distributed to owners of the firm is disclosed.
3. The current market value of the firm's resources is reported.
4. The statement is dated as of a specific point in time.
5. The amounts that are owed to other organizations or individuals are reported.
6. The total amount of capital that has been contributed to the organization is reported.
7. The amount of capital that has been contributed to the organization during the ac-
counting period just ended is reported.
8. Information is reported regarding the rewards that have been earned from serving cus-
tomers during the accounting period just ended.
9. The statement is not as of a specific date, but covers a period of time.
10. Reports information that has been developed on the accrual basis.
11. The statement contains information about the financial sacrifices that were made to ac-
quire resources.
12. The statement contains information concerning contributed capital.
13. The statement contains information concerning the results of operating activities.
14. The amount of stock sold during the accounting period just ended is disclosed.
15. The information provided links two other statements.

Alex didn't study very hard when he took accounting because he thought he wouldn't ever
E4-4
use it on the job at Valentine Company. Yesterday, after preparing all end-of-the-month ad-
Obj. 2
justing entries, both of the company's accounting staff became ill. The company owner, know-
ing that Alex had taken accounting as part of his college major, asked him to finish the job by
preparing the financial statements. The owner needs the statements tomorrow to present to
her banker. Alex isn't sure that his income statement is prepared properly.
F151
CHAPTER F4: Reporting Earnings and Financial Position
150 Reporting Earnings and Financial Position


Valentine Company
Income Statement
at September 30, 2004

Sales revenue $48,500
Wages expense 11,369
Operating income 37,131
Operating expenses:
Advertising 3,133
Cost of goods sold 30,070
Insurance 670
Interest expense 240
Utilities 1,250
Gross profit 1,768
Depreciation expense 282
Pretax income 1,486
Income tax expense 519
Net income $ 967


Alex is confident that each revenue account and expense account balance is correct because
those were determined by the accounting staff. He is unsure, however, that he has organized
them properly on the income statement. Therefore, he is unsure about the summary amounts
listed in bold-faced print on the statement.
Rearrange the accounts into proper income statement format. Be sure to date the state-
ment correctly.
Slotnick Company sells, rents, and services ski equipment. Information about the company's
E4-5
financial performance for a recent fiscal period is provided below.
Obj. 2
Average shares outstanding 20,000
Cost of goods sold $34,000
Debt outstanding 65,000
General and administrative expenses 12,000
Income tax expense 20,000
Interest expense 8,000
Payments to owners 30,000
Rental revenue 45,000
Sales revenue 79,000
Selling expense 27,000
Service revenue 23,000
From the information provided, compute the following amounts for the period:
a. Gross profit
b. Operating expenses
c. Income from operations
d. Pretax income
e. Net income
f. Earnings per share
Flowers by Freddie presented the income statement below for its most recent fiscal year. The
E4-6
items have been numbered for convenience in analysis.
Obj. 2
(1) Sales revenue $371,923
(2) Cost of goods sold 201,668
(3) Gross profit 170,255
(4) Operating expenses 72,853
(5) Operating income 97,402
(6) Other revenues 538
(7) Other expenses (13,227)
(8) Pretax income 84,713
(9) Income taxes 29,650
(Continued)
(10) Net income $ 55,063
F152 SECTION F1: The Accounting Information System
151
Reporting Earnings and Financial Position

Answer the following questions. Be specific. Give examples to clarify.
a. What is the difference between the revenue listed in item 1 and that listed in item 6?
b. What does item 3 represent, and why is it important?
c. What do items 2, 4, and 7 have in common?
d. How are items 2, 4, and 7 different from one another?
e. How is item 9 similar to items 2, 4, and 7?
f. Why do you think items 2, 4, 7, and 9 are listed separately on an income statement
rather than being lumped together as one item?

An income statement for Delta Air Lines, Inc., for a recent fiscal year is provided below:
E4-7
Obj. 2

Delta Air Lines, Inc.
Consolidated Statements of Operations
For the Year Ended December 31, 2001

(In millions, except per share data)
OPERATING REVENUES:
Passenger $12,964
Cargo 506
Other, net 409
Total operating revenues 13,879
OPERATING EXPENSES:
Salaries and related costs 6,124
Aircraft fuel 1,817
Depreciation and amortization 1,283
Passenger commissions 540
Contracted services 1,016
Landing fees and other rents 780
Aircraft rent 737
Aircraft maintenance materials and outside repairs 801
Passenger service 466
Other 1,917
Total operating expenses 15,481
OPERATING INCOME (LOSS) (1,602)
OTHER INCOME (EXPENSE):
Interest expense, net (410)
Other income 148
LOSS BEFORE INCOME TAXES (1,864)
INCOME TAX BENEFIT 648
NET LOSS $ (1,216)
BASIC EARNINGS (LOSS) PER SHARE $(9.99)
DILUTED EARNINGS (LOSS) PER SHARE $(9.99)

Note: Modifications have been made to the statement to simplify the presentation.



Use this income statement to answer the following questions:
a. What was Delta's primary source of revenue?
b. What percentage of Delta's revenue came from this source?
c. What were its largest expenses?
d. How much revenue did Delta earn from transporting passengers?
e. How much revenue did it earn from operating activities other than transporting passengers?
f. How much revenue did it earn from nonoperating activities?
g. How much operating income did Delta earn (or lose)?
h. How much expense did it incur for nonoperating activities?
i. Approximately how many shares of stock did Delta have outstanding during the year?
j. How much profit or loss did Delta report during the fiscal year?
F153
CHAPTER F4: Reporting Earnings and Financial Position
152 Reporting Earnings and Financial Position

A recent income statement for Applebees International (a restaurant chain) is provided be-
E4-8
low. It operates both company-owned and franchised restaurants.
Obj. 2



Applebees International, Inc.
Income Statement
For the Year Ended December 30, 2001

(Dollars in thousands except per share amounts.)
Revenues:
Company restaurant sales $651,119
Franchise income 93,225
Total operating revenues 744,344
Cost of company restaurant sales:
Food and beverage 175,977
Labor 208,996
Direct and occupancy 164,965
Pre-opening expense 1,701
Total cost of company restaurant sales 551,639
Operating expenses:
General and administrative expenses 72,935
Amortization of intangible assets 5,851
Loss on disposition of restaurants and equipment 1,492
Operating earnings 112,427
Other income (expense):
Investment income 1,650
Interest expense (7,456)
Other expense (3,993)
Total other expense (9,799)
Earnings before income taxes 102,628
Income taxes 38,227
Net earnings $ 64,401
Basic net earnings per common share $1.74
Diluted net earnings per common share $1.70


Use this financial statement to answer the following questions:
a. How much revenue did Applebees earn from food and drinks?
b. How much revenue did it earn from other operating activities?
c. How much revenue did it earn from nonoperating activities?
d. What amount of gross profit did Applebees earn? Express your answer both in dollars
and as a percentage of total revenues.
e. How much expense did it incur for nonoperating activities?
f. Approximately how many shares of stock did Applebees have outstanding during the year?
g. How much operating income and net income did Applebees earn during the fiscal
year? Express your answers both in dollars and as a percentage of total revenues.
h. Can the amount of cash Applebees received from its operating activities during the year
be determined from the income statement? If so, what is that amount? If not, why not?
F154 SECTION F1: The Accounting Information System
153
Reporting Earnings and Financial Position

SuperQuick Computer Corporation reported the following income statement for a recent
E4-9
quarter.
Obj. 2



Consolidated Statement of Income
For the Quarter Ended December 31, 2004

Sales $719,150
Cost of sales 549,313
169,837
Research and development costs 16,900
Selling general and administrative expense 83,771
Other income and expense, net 7,685
108,356
Income before income taxes 61,481
Provision for income taxes 15,451
Net income $ 46,030
Earnings per share $0.93
Assume that Other Income and Expense are nonoperating.



a. What was the company's gross profit for the quarter?
b. What was the amount of the company's product costs expensed during the quarter?
c. What was the amount of its operating expenses?
d. What was the amount of its operating income?
e. What was the amount of its nonoperating income or expense?

BioTek's 2005 annual report included the following income statement information.
E4-10
Obj. 2

(In millions, except earnings per share)
Year Ended June 30 2003 2004 2005
Revenue $8,671 $11,358 $14,484
Operating expenses:
Cost of revenue 1,188 1,085 1,197
Research and development 1,432 1,925 2,502
Acquired in-process technology 0 0 296
Sales and marketing 2,657 2,856 3,412
General and administrative 316 362 433
Other expenses 19 259 230
Total operating expenses 5,612 6,487 8,070
Operating income 3,059 4,871 6,414
Interest income 320 443 703
Income before income taxes 3,379 5,314 7,117
Provision for income taxes 1,184 1,860 2,627
Net income $2,195 $ 3,454 $ 4,490
Earnings per share $0.86 $1.32 $1.67


Ratios often are used to assess changes in financial statement information over time. Use
Bio-Tek's income statements to answer the following questions. Express your answers as per-
centages.
a. What was the ratio of net income to net revenues each year?
b. What was the ratio of cost of revenues (cost of goods sold) to net revenues each year?
c. What was the ratio of operating expenses to net revenues each year?
d. What was the percentage change in net income between 2003 and 2004 and between
2004 and 2005? (Hint: Divide the increase in net income from one year to the next by
the net income for the earlier year.)
e. Did Bio-Tek's operating results improve between 2003 and 2005? Explain your answer.
F155
CHAPTER F4: Reporting Earnings and Financial Position
154 Reporting Earnings and Financial Position

Listed below are selected account balances for Hemmingway Company for June 30, 2004.
E4-11
Obj. 3
Accounts payable $95,300 Land $250,000
Accounts receivable 78,100 Merchandise inventory 390,000
Accumulated depreciation 318,000 Notes payable, current portion 50,000
Buildings 750,000 Notes payable, long-term 571,300
Cash 34,500 Prepaid insurance 38,000
Contributed capital 700,000 Retained earnings 279,000
Cost of goods sold 840,000 Supplies on hand 52,000
Equipment 450,000 Trademarks 45,000
Interest payable 38,000 Wages expense 375,000
Wages payable 36,000

Determine each of the following amounts. (Hint: Not all items will be used.)
a. Current assets
b. Current liabilities
c. Property, plant, and equipment
d. Total assets
e. Long-term liabilities
f. Total liabilities
g. Stockholders' equity
h. Total liabilities and stockholders' equity
i. Working capital

Styles Unlimited reported the following information at January 31.
E4-12
Obj. 3
Accounts payable $ 250
Accounts receivable 1,057
Accrued expenses (current) 348
Cash and equivalents 321
Contributed capital 319
Deferred income taxes (liabilities) 275
Income taxes payable (current) 93
Inventories 734
Long-term debt 650
Other current assets 109
Other current liabilities 16
Other long-term assets 248
Other long-term liabilities 61
Property and equipment, net of depreciation 1,667
Retained earnings, net of adjustments 2,124
Accrued expenses are current liabilities. Deferred income taxes are long-
term liabilities.

Use the information provided to prepare a balance sheet for Styles Unlimited in good form.
The accounting staff at Marvelous Enterprises prepares monthly financial statements. At the
E4-13
end of April, the company's ledger accounts have the following balances. All adjusting entries
Obj. 3
have been made and the next step is to prepare the financial statements. The company has
18,200 shares of stock outstanding.




(Continued)
F156 SECTION F1: The Accounting Information System
155
Reporting Earnings and Financial Position

Accounts payable $17,000 Land $45,000
Accounts receivable 14,700 Long-term notes payable 33,000
Accumulated depreciation 13,100 Merchandise inventory 12,480
Buildings 50,000 Notes payable, current portion 14,200
Cash 10,360 Patents 3,300
Contributed capital 38,770 Prepaid insurance 1,100
Copyrights and trademarks 5,000 Retained earnings, March 31 8,400
Cost of goods sold 15,050 Sales revenue 26,000
Depreciation expense 1,100 Supplies 3,570
Dividends declared 1,200 Supplies expense 1,300
Income tax expense 1,060 Wage expense 1,500
Insurance expense 550 Wages payable 17,700
Interest expense 900

Prepare a classified balance sheet in proper format. (Show land separately.) Use a three-
line heading on the statement that includes (1) the name of the company, (2) the name of the
statement, and (3) the appropriate date. Explain how you determined the April 30 balance in
Retained Earnings.
Jenny didn't study very hard when she took accounting because she thought she would never
E4-14
use it on the job at Tech-Noid Company. Yesterday, after preparing all end-of-the-month ad-
Obj. 3
justing entries, the company's accountant became ill. The company asked Jenny to finish the
job by preparing the financial statements. The owner needs the statements tomorrow to pre-
sent to his banker. Jenny is having trouble getting the balance sheet to balance.



Tech-Noid Company
Balance Sheet
January 31, 2004

Assets Liabilities and Stockholders' Equity
Current assets: Current liabilities:
Inventory $1,121 Accounts payable $ 231
Interest payable 100 Accounts receivable 691
Land 2,200 Wages payable 636
Noncurrent assets: Long-term liabilities:
Buildings and equipment 4,990 7%, 10-year note payable 2,000
Retained earnings 1,398 Accumulated depreciation 531
Stockholders' equity:
Contributed capital 4,230
Cash 124
Total assets $9,809 Total liabilities and equity $8,443



(a) Help Jenny by making a list of the five account categories that are printed in bold-face
type on the balance sheet. Leave three lines between each category listed. For each category,
write the names of Tech-Noid's accounts that should be reported under it on the balance sheet.
(b) Determine the correct balance sheet amounts for:
1. total current assets
2. total noncurrent assets
3. total assets
4. total current liabilities
5. total long-term liabilities
6. total stockholders' equity
7. total liabilities and equity
F157
CHAPTER F4: Reporting Earnings and Financial Position
156 Reporting Earnings and Financial Position

E4-15 Listed below are account balances and other data for Hands & Eyes, Inc., a company that sells
crafts and decorative supplies, for the fiscal year ended December 31, 2004.
Objs. 2, 3

Accounts payable $ 41,000 Land $ 65,000
Accounts receivable 29,000 Long-term investments 46,000
Accumulated depreciation 180,000 Merchandise inventory 79,000
Buildings 430,000 Notes payable, current portion 25,000
Cash 35,000 Notes payable, long-term 307,000
Contributed capital 315,000 Prepaid insurance 22,000
Cost of goods sold 130,000 Retained earnings,
Dividends (declared and paid) 22,000 Dec. 31, 2003 19,000
Equipment 262,000 Sales revenue 373,000
General and administrative Selling expenses 34,000
expenses 98,000 Supplies 25,000
Income tax expense 8,000 Trademarks 31,000
Income tax payable 22,000 Wages payable 36,000
Interest expense 33,000 Interest payable 31,000
Shares of common stock
outstanding: 20,000

From the data presented above, determine the amount of each of the items that follow. (Hint:
Pretax income for the year 2004 $78,000.)
1. Gross profit
2. Operatintg income
3. Net income
4. Earnings per share
5. Current assets
6. Property, plant, and equipment
7. Other assets
8. Total assets
9. Current liabilities
10. Working capital and working capital ratio
11. Total liabilities
12. Retained earnings, December 31, 2004
13. Total stockholders' equity
14. Total liabilities and stockholders' equity
Listed below are typical accounts or titles that appear on financial statements. For each item,
E4-16
identify the financial statement(s) on which it appears.
Objs. 2, 3, 4

a. Loss on sale of equipment
b. Taxes payable
c. Trademark
d. Accumulated other comprehensive income
e. Current assets
f. Investments
g. Rental revenue
h. Gross profit
i. Earnings per share
j. Accumulated depreciation
k. Net income
l. Minority interest
m. Contributed capital
n. Operating income
o. Common stock issued during year


A list of financial statement items is given below.
E4-17
Objs. 2, 3, 4
1. Accounts receivable
2. Rent payable (Continued)
F158 SECTION F1: The Accounting Information System
157
Reporting Earnings and Financial Position

3. Retained earnings
4. Cost of sales
5. Prepaid rent
6. Supplies expense
7. Equipment
8. Dividends
9. Depreciation expense
10. Copyrights
11. Accrued liabilities
12. Wages payable
13. Land
14. Notes payable
15. Service revenue
16. Inventory
17. Advertising expense
18. Common stock
Use the format shown below. (a) For each account, indicate the financial statement on which
the account would appear. (b) Identify the information provided by the account. The first
item is completed as an example:
Item Financial Statement Information Provided
1. Accounts receivable Balance sheet Cash to be received in the future
from prior sales
Listed below are financial statements for the Sunflower Company.
E4-18
Obj. 4

Income Statement
For the Year Ended December 31, 2004

Sales revenue $ 20,000
Cost of sales (12,000)
Gross profit 8,000
Operating expenses (4,000)
Selling and administrative expenses (3,000)
Net income $ 1,000




Statement of Stockholders' Equity
For the Year Ended December 31, 2004

Contributed Retained
Capital Earnings Total
Balance at December 31, 2003 $5,000 $13,000 $18,000
Common stock issued 2,000 2,000
Net income 1,000 1,000
Dividends (4,000) (4,000)
Balance at December 31, 2004 $7,000 $10,000 $17,000




Balance Sheet
as of December 31, 2004

Assets: Liabilities and Stockholders' Equity
Cash $ 9,000 Accounts payable $ 5,000
Accounts receivable 3,000 Notes payable 8,000
Inventory 2,000 Common stock 7,000
Land 16,000 Retained earnings 10,000
Total $30,000 Total $30,000
F159
CHAPTER F4: Reporting Earnings and Financial Position
158 Reporting Earnings and Financial Position

(a) Describe what is meant by the term articulation. (b) What evidence of articulation is there
in this set of financial statements?
Crane Pool Corporation reported the following selected information for its 2004 fiscal year.
E4-19
Obj. 4

Contributed capital at June 30, 2003 $ 657
Retained earnings at June 30, 2003 1,536
Dividends 222
Net income 953
Common stock issued 243


Use this information to prepare a statement of stockholders' equity for Crane Pool for the
year ended June 30, 2004.
Use the information provided in Exercise 4-13.
E4-20
Objs. 2, 4
a. Prepare an income statement following the format shown in Exhibit 1. (List expenses
separately.)
b. Prepare a statement of stockholders' equity in good form.
(Hint: There was no change in contributed capital during the month.) For each state-
ment, use a three-line heading on the statement that includes (1) the name of the company,
(2) the name of the statement, and (3) the appropriate time period or date.




If your instructor is using Personal Trainer in this course, you may complete online the assign-
PROBLEMS ments identified by .

Identifying the Purpose of Financial Statements
P4-1
Obj. 1 Assume you are a financial manager with a U.S. corporation. A. Suliman is a recently em-
ployed manager in the Middle Eastern division of your corporation and a visitor to the United
States. He has little familiarity with financial reporting practices in the United States. Your
boss has given you the responsibility of explaining financial reports to Mr. Suliman.

Required Write a short report describing each of the four basic corporate financial state-
ments for Suliman. Make sure you are clear about the purpose of each statement, its contents,
and its relationships to the other financial statements.

Ethical Issues in Financial Reporting
P4-2
Obj. 1 Flower Childs is a regional sales manager for Green-Grow, Inc., a producer of garden sup-
plies. The company's fiscal year ends on April 30. In mid-April, Flower is contacted by the
president of Green-Grow. He indicates that the company is facing a financial problem. Two
years ago, the company borrowed heavily from several banks to buy a competing company
and to increase production of its primary products: insecticides and fertilizers. As a part of
the loan agreement, Green-Grow must maintain a working capital ratio of 1.5 to 1 and earn
a net income of at least $2 per share. If the company fails to meet these requirements, as re-
flected in its annual financial statements, the banks can restrict future credit for the company
or require early payment of its loans, potentially forcing the company into bankruptcy.
The president explains that this fiscal year has been a difficult one for Green-Grow. Sales
have slipped because of increased competition, and the rising prices of chemicals have in-
creased the company's production costs. The company is in danger of not meeting the loan
requirements. The company could be forced to make drastic cuts or to liquidate its assets.
The president informs Flower that her job could be in danger. The president asks her to help
with the problem by dating all sales invoices that clear her office during the first half of May
as though the sales had been made in April. May is a month of heavy sales volume for the
company as retail stores stock up for the coming season. The president believes that the added
sales would be sufficient to get the company past the loan problem. He explains that this pro-
cedure will be used only this one time. By next year, the company will be in better shape be-
cause of new products it is developing. Also, he reminds Flower that her bonus for the year
F160 SECTION F1: The Accounting Information System
159
Reporting Earnings and Financial Position

will be higher because of the additional sales that will be recorded for April. He points out
that the company is fundamentally in sound financial shape, and that he would hate to see
its future jeopardized by a minor bookkeeping problem. He is asking for the cooperation of
all of the regional sales managers. He argues that the stockholders, employees, and managers
will all be better off if the sales are predated. He wants Flower's assurance that she will co-
operate.

Required
A. What effect will predating the sales have on Green-Grow's balance sheet, income state-
ment, and statement of cash flows? Be specific about which accounts will be affected
and why.
B. How will this practice solve the company's problem with the banks?
C. What would be the appropriate behavior for the company president under the circum-
stances the company is facing?
D. What would be the appropriate behavior for Flower?

Identifying and Correcting Errors in an Income Statement
P4-3
Obj. 2 Just after preparing the adjusting entries for the year, the long-time controller at Parrot Com-
pany took a leave of absence. Her inexperienced assistant did his best to prepare financial
statements from the information the controller had left behind. He had particular difficulty
with the income statement.
The item labeled sales expense is the sum of the amounts charged customers during the
year for goods and services provided.


Income Statement
December 31, 2004

Sales expense $260,722
Cost of goods sold 102,690
Net profit $158,032
Operating expenses:
Wages $59,780
Utilities 9,002
Interest 14,420
Depreciation 13,510
Total operating expense 97,712
Operating income $ 60,320
Advertising expense 9,968
Pretax income $ 50,352
Income tax expense 13,150
Net income $ 63,502
Earnings per share of common stock
($64,502 15,000 shares) $4.30



Required
A. Identify and list the errors in the income statement above.
B. Prepare a corrected income statement.

Interpreting an Income Statement
P4-4
Obj. 2 Microsoft Corporation's 2002 annual report included the following income statement infor-
mation.
F161
CHAPTER F4: Reporting Earnings and Financial Position
160 Reporting Earnings and Financial Position


Microsoft Corporation
Income Statements

(In millions, except earnings per share)
Year Ended June 30 2000 2001 2002
Revenue $22,956 $25,296 $28,365
Operating expenses:
Cost of revenue 3,002 3,455 5,191
Research and development 3,772 4,379 4,307
Sales and marketing 4,126 4,885 5,407
General and administrative 1,050 857 1,550
Total operating expenses 11,950 13,576 16,455
Operating income 11,006 11,720 11,910
Losses on equity investees and other (57) (159) (92)
Investment income (loss) 3,326 (36) (305)
Income before income taxes 14,275 11,525 11,513
Provision for income taxes 4,854 3,804 3,684
Income before accounting change 9,421 7,721 7,829
Cumulative effect of accounting change
(net of income taxes of $185) (375)
Net income $ 9,421 $ 7,346 $ 7,829
Basic earnings per share:
Before accounting change $ 1.81 $ 1.45 $ 1.45
Cumulative effect of accounting change (0.07)
$ 1.81 $ 1.38 $ 1.45
Diluted earnings per share:
Before accounting change $ 1.70 $ 1.38 $ 1.41
Cumulative effect of accounting change (0.06)
$ 1.70 $ 1.32 $ 1.41
Weighted average shares outstanding:
Basic 5,189 5,341 5,406
Diluted 5,536 5,574 5,553



Required Ratios often are used to assess changes in financial statement information over
time. Use Microsoft's income statements to answer the following questions. Express your an-
swers as percentages.
A. What was the ratio of net income to net revenues each year?
B. What was the ratio of cost of revenues (cost of goods sold) to net revenues each year?
C. What was the ratio of operating expenses to net revenues each year?
D. What was the percentage change in net income between 2000 and 2001, and between
2001 and 2002? (Hint: Divide the increase in net income from 2000 and 2001 by the
net income for 2000.)
E. Did Microsoft's operating results improve between 2000 and 2001? Between 2001 and
2002? Explain your answers.

Comprehensive Income
P4-5
Objs. 2, 3, 4 The Lo Company imports and sells Chinese furniture in the United States. Its new accoun-
tant has been assigned the task of preparing the income statement. She knows that the FASB
is now requiring that certain unrealized gains and losses be reported as part of comprehen-
sive income. She has the following information available for the year just ended.
1. Loss on cumulative effect of change of depreciation method, net of tax $ 840
2. Gain from disposal of discontinued operations, net of tax 3,500
3. Cost of goods sold 180,000
4. Revenue received in advance 2,500
5. Work in process inventory 135,000
6. Interest expense 4,000
(Continued)
F162 SECTION F1: The Accounting Information System
161
Reporting Earnings and Financial Position

7. Provision for income tax 11,700
8. Sale of treasury stock at a price greater than cost 5,050
9. Sales revenue 250,000
10. Unrealized gain on increase of market value of investment 1,240
11. Sale of stock to investors 60,300
12. General and administrative expense 27,000
13. Extraordinary gain on retirement of debt, net of tax 4,200
14. Unrealized loss on foreign currency translation
(regarding foreign subsidiary) 3,600
15. Cash received from customers 75,000
16. Dividends paid to shareholders 8,000

Required
A. From the information given above, decide which items should appear in the income
statement, which would appear on a separate statement of comprehensive income, and
which would not appear on either. If an item does not appear on either statement, in-
dicate where it would be found. Also indicate which are transactions with owners.
B. Using the information above, prepare an income statement and a separate statement of
comprehensive income.

Reading and Interpreting a Balance Sheet
P4-6
Obj. 3 A recent balance sheet for Walt Disney Company is provided below.


Walt Disney Company
Consolidated Balance Sheets

(In millions, except per share data)
September 30 2001 2000
ASSETS
Current Assets
Cash and cash equivalents $ 618 $ 842
Receivables 3,343 3,599
Inventories 671 702
Television costs (current) 1,175 1,162
Other assets 1,222 1,258
Total current assets 7,029 7,563
Film and television costs 5,235 5,339
Investments 2,061 2,270
Parks, resorts and other property, at cost
Attractions, buildings and equipment 20,635 19,202
Accumulated depreciation (7,728) (6,892)
12,907 12,310
Intangible assets, net 14,540 16,117
Other assets 1,927 1,428
Total assets $43,699 $45,027

(Continued)
F163
CHAPTER F4: Reporting Earnings and Financial Position
162 Reporting Earnings and Financial Position


September 30 2001 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and other accrued liabilities $ 4,603 $ 5,161
Current portion of borrowings 829 2,502
Unearned royalties and other advances 787 739
Total current liabilities 6,219 8,402
Borrowings 8,940 6,959
Other noncurrent liabilities 5,486 5,210
Minority interests 382 356
Stockholders' Equity
Common stock 12,096 12,101
Retained earnings 12,171 12,767
Adjustments (1,595) (768)
Total stockholders' equity 22,672 24,100
Total liabilities and stockholders' equity $43,699 $45,027
Note: Slight modifications have been made to the format of the statement to simplify the presentation.



Required Respond to the following questions.
A. Do you agree that Disney's balance sheet is both classified and comparative? Explain
why or why not.
B. At year-end 2001, what percentage of total assets was composed of current assets? Had
this percentage increased or decreased since year-end 2000?
C. What was Disney's amount of working capital at year-end 2001? Did it change signifi-
cantly from year-end 2000?
D. Compute the working capital ratio at year-end 2001 and year-end 2000. Did it improve
or deteriorate between 2000 and 2001?
E. Film and television costs is the amount paid to produce movies or television shows.
Explain why it appears in two places on the balance sheet.
F. What were the amounts of total assets, total liabilities, and stockholders' equity at year-
end 2001 and year-end 2000?
G. Did Disney's overall financial position improve between 2000 and 2001? Explain.

Identifying and Correcting Errors in a Balance Sheet
P4-7
Obj. 3 Ceramics, Inc. reported the following balance sheet for the year 2004.


Balance Sheet
For the year ending December 31, 2004

Assets:
Cash $ 2,000
Accounts payable 500
Inventory 900
Equipment 1,000
Land 1,500
Total assets $ 6,000
Liabilities:
Accounts receivable $ 3,000
Accrued liabilities 1,000
Total liabilities 4,000
Stockholders' equity:
Common stock 1,800
Retained earnings 5,100
Total stockholders' equity 6,900
Total liabilities and stockholders' equity $10,900

(Continued)
F164 SECTION F1: The Accounting Information System
163
Reporting Earnings and Financial Position

Required
A. Identify and list the errors in the balance sheet above.
B. Prepare a corrected balance sheet.

Interpreting an Income Statement
P4-8
Obj. 2 A recent Consolidated Statement of Income for the Coca-Cola Company and Subsidiaries is
presented below.


Consolidated Statements of Income
The Coca-Cola Company and Subsidiaries

Year Ended December 31 2001 2000 1999
(In millions except per share data)
NET OPERATING REVENUES $20,092 $19,889 $19,284
Cost of goods sold 6,044 6,204 6,009
GROSS PROFIT 14,048 13,685 13,275
Selling, administrative and general expenses 8,696 8,551 8,480
Other operating charges 0 1,443 813
OPERATING INCOME 5,352 3,691 3,982
Interest income 325 345 260
Interest expense (289) (447) (337)
Other income (loss) 282 (190) (86)
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5,670 3,399 3,819
Income taxes 1,691 1,222 1,388
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 3,979 2,177 2,431
Cumulative effect of accounting change,
net of income taxes (10) 0 0
NET INCOME $ 3,969 $ 2,177 $ 2,431

BASIC NET INCOME PER SHARE
Before accounting change $1.60 $0.88 $0.98
Cumulative effect of accounting change 0.00 0.00 0.00
$1.60 $0.88 $0.98
DILUTED NET INCOME PER SHARE
Before accounting change $1.60 $0.88 $0.98
Cumulative effect of accounting change 0.00 0.00 0.00
$1.60 $0.88 $0.98
AVERAGE SHARES OUTSTANDING 2,487 2,477 2,469
Dilutive effect of stock options 0 10 18
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,487 2,487 2,487
Note: Slight modifications have been made to the statement to simplify the presentation.



Required
A. What is the amount of cost of goods sold for 1999, 2000, and 2001? What kinds of
costs are included in cost of goods sold?
B. What does gross profit represent? Calculate gross profit as a percentage of net operat-
ing revenues for each year. What do you observe?
C. How does gross profit differ from operating income?
D. Is Coca-Cola more profitable in 2001 than in 1999? Explain.


Understanding Working Capital and Long-Term Debt
P4-9
Obj. 3 A recent Consolidated Balance Sheet for the Coca-Cola Company and Subsidiaries is presented
on the following page.
F165
CHAPTER F4: Reporting Earnings and Financial Position
164 Reporting Earnings and Financial Position

Required
A. Is Coca-Cola a larger or smaller company in 2001 than in 2000? Explain.
B. What is the total amount of long-term debt? Explain why Coca-Cola classifies long-
term debt into two categories.
C. What is working capital?
D. How much working capital does Coca-Cola report in 2001 and 2000? What conclu-
sions can you make as a result of your calculations? (Note: This problem takes an in-
teresting twist. Think about the implication of your calculations.)



Consolidated Balance Sheets
The Coca-Cola Company and Subsidiaries

December 31 2001 2000
ASSETS
CURRENT
Cash and cash equivalents $ 1,866 $ 1,819
Marketable securities 68 73
1,934 1,892
Trade accounts receivable, less allowances of
$59 in 2001 and $62 in 2000 1,882 1,757
Inventories 1,055 1,066
Prepaid expenses and other assets 2,300 1,905
TOTAL CURRENT ASSETS 7,171 6,620
INVESTMENTS AND OTHER ASSETS
Investments 5,422 5,765
Other assets 2,792 2,364
8,214 8,129
PROPERTY, PLANT AND EQUIPMENT
Land 217 225
Buildings and improvements 1,812 1,642
Machinery and equipment 4,881 4,547
Containers 195 200
7,105 6,614
Less allowances for depreciation 2,652 2,446
4,453 4,168
TRADEMARKS AND OTHER INTANGIBLE ASSETS 2,579 1,917
$22,417 $20,834
(Continued)
F166 SECTION F1: The Accounting Information System
165
Reporting Earnings and Financial Position


December 31 2001 2000
LIABILITIES AND SHARE-OWNERS' EQUITY
CURRENT
Accounts payable and accrued expenses $ 3,679 $ 3,905
Loans and notes payable 3,743 4,795
Current maturities of long-term debt 156 21
Accrued income taxes 851 600
TOTAL CURRENT LIABILITIES 8,429 9,321
LONG-TERM DEBT 1,219 835
OTHER LIABILITIES 961 1,004
DEFERRED INCOME TAXES 442 358
SHARE-OWNERS' EQUITY
Common stock, $.25 par value; Authorized: 5,600,000,000
shares; Issued: 3,491,465,016 shares in 2001;
3,481,882,834 shares in 2000 873 870
Capital surplus 3,520 3,196
Reinvested earnings 23,443 21,265
Accumulated other comprehensive income and unearned
compensation on restricted stock (2,788) (2,722)
25,048 22,609
Less treasury stock, at cost (1,005,237,693 shares in 2001;
997,121,427 shares in 2000) 13,682 13,293
11,366 9,316
$22,417 $20,834
Note: Slight modifications have been made to the statement for purposes of simplifying the presen-
tation.




P4-10 Using the Balance Sheet to Determine Asset Composition
Obj. 3
Recent Balance Sheets for Microsoft Corporation are presented below.



Microsoft Corporation
Balance Sheets
(In millions)

June 30 2001 2002
Assets
Current assets:
Cash and equivalents $ 3,922 $ 3,016
Short-term investments 27,678 35,636
Total cash and short-term investments 31,600 38,652
Accounts receivable, net 3,671 5,129
Inventories 83 673
Deferred income taxes 1,522 2,112
Other 2,334 2,010
Total current assets 39,210 48,576
Property and equipment, net 2,309 2,268
Equity and other investments 14,361 14,191
Goodwill 1,511 1,426
Intangible assets, net 401 243
Other long-term assets 1,038 942

<<

. 7
( 25)



>>