Full file at https://testbanku.

eu/
Solution Manual for Accounting Tools for
Business Decision Makers 4th Edition by
Kimmel
Complete downloadable file at:
https://testbanku.eu/Solution-Manual-for-Accounting-
Tools-for-Business-Decision-Makers-4th-Edition-by-
Kimmel

EXERCISE 1-1B

LAVER CO.
Income Statement
For the Year Ended December 31, 2012

Revenues
Service revenue....................................................... $68,000
Expenses
Salaries expense..................................................... $40,000
Rent expense...........................................................  11,400
Utilities expense......................................................   3,400
Advertising expense...............................................   2,800
Total expenses.................................................  54,600
Net income....................................................................... $13,400

LAVER CO.
Retained Earnings Statement
For the Year Ended December 31, 2012

Retained earnings, January 1........................................................... $74,000

Add: Net income..............................................................................  13,400
 87,400
Less: Dividends................................................................................   6,000
Retained earnings, December 31..................................................... $81,400

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-1
EXERCISE 1-2B

(a) MERCK and CO.

Income Statement
For the Year Ended December 31, 2009
(in millions)

Revenues
Sales revenue.......................................................... $27,428.3
Other revenue.......................................................... 12,904.5
 Total revenue........................................................ 40,332.8
Expenses
Marketing and administrative expense.................. $8,543.2
Materials and production expense......................... 9,018.9
Research and development expense..................... 5,845.0
Tax expense............................................................. 2,267.6
 Total expenses.....................................................  25,674.7
Net income....................................................................... $14,658.1

MERCK and CO.

Retained Earnings Statement
For the Year Ended December 31, 2009
(in millions)

Retained earnings, January 1........................................ $41,404.9

Add: Net income............................................................. 14,658.1
56,063.0
Less: Dividends.............................................................. 3,125.0
Retained earnings, December 31................................... $52,938.0

(b) The short-term implication would be a decrease in expenses of $2,922.5

($5,845 X 50%) resulting in a corresponding increase in income (ignoring
income taxes). If all other revenues and expenses remain unchanged,
decreasing research and development expenses would produce 20.3%
more net income ($2,922.5 ÷ $14,404.9).

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EXERCISE 1-2B (Continued)

The long-term implications would be more difficult to quantify but it is

safe to predict that a reduction in research and development expenses
would probably result in lower sales revenues in the future. Pharma-
ceutical companies are usually able to charge higher prices for newly
developed products while lower cost generic versions usually replace
older products. Decreasing research and development activities will
probably mean fewer new products.

The stock market’s initial reaction might be positive since Merck’s net
income would increase dramatically. Such a reaction would probably
be very short-lived as more knowledgable investors reviewed Merck’s
financial statements and discovered the cause of the increase.

EXERCISE 1-3B

JOSE BARBOSAC INC.

Retained Earnings Statement
For the Year Ended December 31, 2012

Retained earnings, January 1.................................. $140,000

Add: Net income......................................................  240,000*
 380,000
Less: Dividends........................................................   92,000
Retained earnings, December 31............................. $288,000

*Revenue from legal services.................................. $420,000

*Total expenses.........................................................  180,000
*Net income............................................................... $240,000

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-3
EXERCISE 1-4B

RICARDO INC.
Income Statement
For the Year Ended December 31, 2012

Revenues
Sales revenue...................................................................... $693,485
Franchising revenues......................................................... 8,998
 Total revenues.................................................................. 702,483
Expenses
Cost of goods sold.............................................................. 483,854
Selling, general and administrative expenses.................. 125,000
Interest expense.................................................................. 994
 Total expenses................................................................. 609,848
Net income.................................................................................. $ 42,635

EXERCISE 1-5B

First note that the retained earnings statement shows that (b) equals $29,000.

Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders’ equity

$15,000 + a + $34,000 = $72,000

a + $49,000 = $72,000
a = $23,000

Beginning retained earnings + Net income – Dividends = Ending retained earnings

$15,000 + e – $5,000 = $34,000

$10,000 + e = $34,000
e = $24,000

From above, we know that net income (d) equals $24,000.

Revenue – Cost of goods sold – Administrative expenses = Net income

$90,000 – c – $15,000 = $24,000

$75,000 – c = $24,000
c = $51,000

1-4 Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only)
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EXERCISE 1-6B

(a) Camping fee revenue............................................................... $148,000

General store revenue............................................................. 35,000
Total revenue....................................................................  183,000
Expenses................................................................................... 135,000
Net income................................................................................ $ 48,000

(b) COZY BEAR

Retained Earnings Statement
For the Year Ended December 31, 2012

Retained earnings, January 1.................................................. $15,000

Add: Net income.....................................................................  48,000
 63,000
Less: Dividends.......................................................................   9,000
Retained earnings, December 31............................................ $54,000

COZY BEAR
Balance Sheet
December 31, 2012

Assets
Cash..................................................................... $ 18,500
Supplies...............................................................    12,500
Equipment...........................................................  129,000
Total assets.................................................. $160,000

Liabilities and Stockholders’ Equity

Liabilities
Notes payable.............................................. $50,000
Accounts payable........................................  16,000
Total liabilities...................................... $ 66,000
Stockholders’ equity
Common stock............................................  40,000
Retained earnings.......................................  54,000   94,000
Total liabilities and stockholders’
equity................................................. $160,000

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-5
EXERCISE 1-6B (Continued)

(c) The income statement indicates that revenues from the general store
were only about 19.1% ($35,000 ÷ $183,000) of total revenue which
tends to support Terry’s opinion. In order to decide if the store is “more
trouble than it is worth,” I would need to know the amount of expenses
attributable to the general store. The income statement reports all
expenses in a single category rather than separating them into camping
and general store expenses to correspond with revenues. A break
down into two categories would help me decide if the general store is
generating a profit or loss.

Even if the general store is operating at a loss, I might recommend

retaining it if campers indicated that the convenience of having a general
store on site was an important amenity in selecting a camp ground.

EXERCISE 1-7B

KELLOGG COMPANY
Income Statement
For the Year Ended December 31, 2009
(in millions)

Revenues
Net sales................................................................. $12,575
Expenses
Cost of goods sold................................................. $7,184
Selling and administrative expenses................... 3,390
Income tax expense...............................................    476
Interest expense.....................................................    295
Other expense........................................................      22
Total expenses.................................................. 11,367
Net income..................................................................... $ 1,208

1-6 Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only)
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EXERCISE 1-8B

(a) BIRCH CORPORATION

Statement of Cash Flows
For the Year Ended December 31, 2012

Cash flows from operating activities

Cash received from customers............................ $60,000)
Cash paid to suppliers.......................................... (14,000)
Net cash provided by operating activities.......... $46,000
Cash flows from investing activities
Cash paid for new equipment.............................. (30,000)
Net cash used by investing activities.................. (30,000)
Cash flows from financing activities
Cash received from lenders................................. 30,000
Cash dividends paid............................................. (6,000)
Net cash provided by financing activities........... 24,000
Net increase in cash.................................................... ) 40,000
Cash at beginning of period........................................ 22,000
Cash at end of period................................................... $62,000

(b) As a creditor, I would feel confident that Birch has the ability to repay
its lenders. During 2012, Birch generated $46,000 of cash from its
operating activities. This amount more than covered its expenditures
for new equipment and dividends. The excess could have been used to
repay debt.

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-7
EXERCISE 1-9B

(a) SOUTHWEST AIRLINES

Statement of Cash Flows
For the Year Ended December 31, 2009
(in millions)

Cash flows from operating activities

Cash received from customers.............................. $10,350
Cash paid for goods and services......................... (9,365)
Net cash provided by operating activities............ $ 985
Cash flows from investing activities
Cash paid for property and equipment................. (585)
Cash proceeds from short-term investments....... (984)
Net cash provided by investing activities............. (1,569)
Cash flows from financing activities
Cash paid for repayment of debt............................ (86)
Cash paid for dividends..........................................  (13)
Cash paid to short-term creditors..........................   (26)
Cash received from issuance of long-term debt. . . 455
Net cash provided by financing activities.............. 330
Net change in cash and cash equivalents................... ($254)
Cash and cash equivalents at beginning of period...... 1,368
Cash and cash equivalents at end of period................. $1,114

(b) Southwest reported $985,000,000 cash from operating activities but

spent $585,000,000 to invest in new property and equipment. Its cash
from operating activities was sufficient to finance its investing activities,
Southwest supplemented the cash from operating activities by issuing
long-term debt.

1-8 Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only)
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EXERCISE 1-10B

EATON COMPANY
Balance Sheet
December 31, 2012

Assets
Cash................................................................................ $28,500
Accounts receivable......................................................  22,000
Supplies..........................................................................   4,500
Equipment......................................................................  30,000
Total assets............................................................ $85,000

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable.................................................. $ 6,000
Stockholders’ equity
Common stock....................................................... $49,000
Retained earnings..................................................  30,000*  64,000
Total liabilities and stockholders’ equity..... $85,000

*$40,000 – $10,000

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-9
EXERCISE 1-11B

All dollars are in millions.

(a) Assets
Cash............................................................................................ $ 5,146
Accounts receivable..................................................................  2,898
Inventories..................................................................................  2,040
Property, plant, and equipment................................................  1,932
Other assets...............................................................................   2,403
Total assets.................................................................... $14,419

Liabilities
Notes payable............................................................................. $   446
Accounts payable......................................................................  3,218
Income taxes payable................................................................     855
Other liabilities...........................................................................   362
Total liabilities................................................................ $ 4,881

Stockholders’ Equity
Common stock........................................................................... $ 3,443
Retained earnings......................................................................   6,095
Total stockholders’ equity............................................ $ 9,538

(b) Assets Liabilities Stockholders’ Equity

= +
$12,594.8 $4,561.9 $8,032.9
$14,419 = $4,881 + $9,538

(c) Nike has relied more heavily on equity than debt to finance its assets.
Debt (liabilities) financed 33.8% of its assets ($4,881 ÷ $14,419)
compared to equity financing of 66.2% ($9,538 ÷ $14,419).

1-10 Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only)
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EXERCISE 1-12B

(a) Assets = Liabilities + Stockholders’ Equity

$140,000 = $24,000 + (a)
(a) = $116,000

(b) Assets = Liabilities + Stockholders’ Equity

(b) = $ 24,000 + $126,000
(b) = $150,000

(c) Beginning + Revenues – Expenses – Dividends = Ending

Stockholders’ Stockholders’
Equity Equity
$126,000(a) + $300,000 – $200,000 – (c) = $136,000
$216,000 – (c) = $136,000
(c) = $80,000

(d) Assets = Liabilities + Stockholders’ Equity

$230,000 = (d) + $110,000
(d) = $130,100

(e) Assets = Liabilities + Stockholders’ Equity

$280,000 = $140,000 + (e)
(e) = $140,000

(f) Beginning + Revenues – Expenses – Dividends = Ending

Stockholders’ Stockholders’
Equity Equity
$100,000 + (f) – $100,000 – $10,000 = $140,000(e)
(f) = $150,000

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-11
 SOLUTIONS TO PROBLEMS—SET C

PROBLEM 1-1C

(a) Randy should run his business as a sole proprietor. He has no real
need to raise funds, and he doesn’t need the expertise provided by
other partners. The sole proprietorship form would provide the easiest
form. One should avoid a more complicated form of business unless
the characteristics of that form are needed.

(b) The fact that the combined business expects that it will need to raise
significant funds in the near future makes the corporate form more
desirable in this case.

(c) The concern over legal liability would make the corporate form a better
choice over a partnership. Also, the corporate form will allow the busi-
ness to raise cash more easily, which may be of importance in a rapidly
growing industry.

(d) One way to ensure control would be for Marty to form a sole
proprietorship. However, in order for this business to thrive it will need
a substantial investment of funds early. This would suggest the corpo-
rate form of business. In order for Marty to maintain control over the
business she would need to own more than 50 percent of the voting
shares of common stock. In order for the business to grow, she may
have to be willing to give up some control.

(e) It is likely that this business would form as a partnership. Its needs for
additional funds would probably be minimal in the foreseeable future.
Also, the two know each other well and would appear to be contribut-
ing equally to the firm. Service firms, like consulting businesses, are
frequently formed as partnerships.

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PROBLEM 1-2C

(a) In purchasing an investment that will be held for an extended period,

the investor must try to predict the future performance of 24/7 Fitness.
The income statement provides the most useful information for
predicting future performance.

(b) In deciding whether to extend credit for 60 days Xerox would be most
interested in the balance sheet because the balance sheet shows the
assets on hand that would be available for settlement of the debt in the
near-term.

(c) The president would probably be most interested in the statement of

cash flows since it shows how much cash the company generates and
how that cash is used. The statement of cash flows can be used to
predict the company’s future cash-generating ability.

(d) In extending a loan for a relatively long period of time the lender is most
interested in the probability that the company will generate sufficient
income to meet its interest payments and repay its principal. The lender
would therefore be interested in predicting future income using the
income statement. It should be noted, however, that the lender would
also be very interested in both the balance sheet and the statement of
cash flows—the balance sheet because it would show the amount
of debt the company had already incurred, as well as assets that could
be liquidated to repay the loan. And the company would be interested
in the statement of cash flows because it would provide useful informa-
tion for predicting the company’s ability to generate cash to repay its
obligations.

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-13
 PROBLEM 1-3C

(a) SHAW’S GARDEN

Income Statement
For the Month Ended May 31, 2010

Revenues
Service revenue................................... $10,400
Expenses
Maintenance and repairs expense..... $2,100
Salaries and wages expense..............  1,900
Advertising expense...........................  1,800
Insurance expense..............................    400
Total expenses..............................   6,200
Net income................................................... $ 4,200

SHAW’S GARDEN
Retained Earnings Statement
For the Month Ended May 31, 2010

Retained earnings, May 1.......................................................... $    0

Add: Net income.......................................................................  4,200
 4,200
Less: Dividends.........................................................................  1,600
Retained earnings, May 31........................................................ $2,600

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PROBLEM 1-3C (Continued)

SHAW’S GARDEN
Balance Sheet
May 31, 2010

Assets
Cash......................................................................... $10,800
Accounts receivable...............................................  8,400
Equipment................................................................  58,800
Total assets...................................................... $78,000

Liabilities and Stockholders’ Equity

Liabilities
Notes payable................................................... $26,000
Accounts payable............................................   4,400
Total liabilities......................................... $30,400
Stockholders’ equity
Common stock.................................................  45,000
Retained earnings............................................   2,600  47,600
Total liabilities and stockholders’
    equity.................................................... $78,000

(b) Shaw’s Garden was very profitable during its first month of operations.
Net income of $4,200 represents an 9.3% return on the $45,000 invest-
ment as well as 40.4% of service revenues ($4,200 ÷ $10,400).

(c) Many companies choose to “reinvest” in themselves by building up a

larger balance in retained earnings rather than distributing dividends as
soon as income is earned so Shaw’s Garden decision might be seen as
risky. Lenders might view such an action negatively since Shaw’s
Garden owes $26,000 in notes payable. On the other hand, the company
still “retained” more than 62% of its earnings ($4,200) and it had
adequate cash to cover the $1,600 dividend.

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-15
 PROBLEM 1-4C

(a) Rowe Corporation should include the following items in its statement
of cash flows:

Cash paid to suppliers

Cash dividends paid
Cash paid to purchase equipment
Cash received from customers
Cash received from issuing bonds payable

PREACHER CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2010

Cash flows from operating activities

Cash received from customers........................ $162,000
Cash paid to suppliers...................................... 154,000
Net cash provided by operating activities....... $8,000
Cash flows from investing activities
Cash paid to purchase equipment................... (20,000)
Net cash used by investing activities.............. (20,000)
Cash flows from financing activities
Cash received from issuing bonds payable.... 40,000
Cash dividends paid.......................................... (2,000)
Net cash provided by financing activities....... 36,000
Net increase in cash................................................. $24,000

(b) Operating activities provided $8,000 cash which was not adequate to
cover $20,000 needed for investing activities and $2,000 of dividend
payments. Preacher issued $40,000 of bonds payable to fund these
cash payments and increase its year-end cash balance.

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PROBLEM 1-5C

(a) 1. The $3,000 of revenue that the company earned in 2011 should not
be included in the 2010 revenues. Instead, the $3,000 should be
added to the beginning balance of retained earnings to correct for
the omission in 2009.

2. Since the corporation did not incur or pay the $10,000 of rent ex-
pense, it should not be included in the income statement. Including
the $10,000 as an expense misstates the corporation’s net income
and presents misleading results.

3. Including the $6,000 as vacation expense misstates the corporation’s

net income.

(b) WALTERS CORPORATION

Income Statement
For the Year Ended December 31, 2010

Revenue ($40,000 – $3,000)*..................................................... $37,000

Expenses
Insurance expense.............................................................   7,000
Net income.................................................................................. $30,000

*John incorrectly included revenue of $3,000 in 2010. This revenue

should have been reported in 2009.

Copyright © 2011 John Wiley & Sons, Inc.   Kimmel Accounting, 4/e Exercise B/Problem Set C   (For Instructor Use Only) 1-17