E1-5

Assets
$
160,000.00
$
95,000.00
$
675,000.00

=
=
=
=

Liabilities
$ 70,000.00
$ 77,000.00
$ 227,000.00

+
+
+
+

Stockholders' Equity
$
90,000.00
$
18,000.00
$
448,000.00

E1-12
No.
1
2
3
4
5
6
7
8
9
10

Description
Amounts due from customers
Amounts owned suppliers
Cash on hand
Cash paid to stockholders
Cash sales
Equipment
Note payable owned to the bank
Rent paid for the month
Sales commissions paid to salespersons
Wages paid to employees

Classification
Asset
Liability
Asset
Divident
Revenue
Asset
Liability
Expense
Expense
Expense

E1-13
Retained earnings statement
Retained earnings, June 1, 20Y7:
Increase:
Decrease:
Retained earnings, June 30, 20Y7:

$
$
$
$

615,000.00
230,000.00
(45,000.00)
800,000.00

E1-14
Income statement for the month end February 28, 20Y5
Fees earned
Operating expenses
Wage expense
Rent expense
Supplies expense
Miscellaneous expense
Total operating expenses
Net income

Chapter 1

$
$
$
$

925,000.00

(530,000.00)

395,000.00

(400,000.00)
(92,000.00)
(13,000.00)
(25,000.00)

E1-16.a
Balance sheet as of
Assets
Cash
Account receivebale
Supplies
Total assets

$
$
$
$

110,000.00
75,000.00
15,000.00
200,000.00

November 30, 20Y8

$
$
$
$

140,000.00
118,000.00
20,000.00
278,000.00

Liabilities
Account payable

40,000.00 $

65,000.00

Stockholders' Equity
Capital stock
Retained earnings

$
$

60,000.00 $
100,000.00 $

60,000.00
153,000.00

Total liabilities and stockholders equity

200,000.00 $

278,000.00

E1-16.b
Retained earnings statement as of November 30,20Y8
Opening balance
$ 100,000.00
Increase
$ 53,000.00
Decrease
0
Closing balance
$ 153,000.00
Conclusion: The net income for November is: $53,000
E1-16.b
Retained earnings statement as of November 30,20Y8
Opening balance
$ 100,000.00
Increase
$ 73,000.00
Decrease
$ (20,000.00)
Closing balance
$ 153,000.00
Conclusion: The net income for November is: $73,000

Chapter 1

October 31, 20Y8

E1-20
Statement of Cash Flows, For the Month Ended July 31, Year 1
Cash flows from operating activities
Cash received from customers
$
Cash paid out for expenses
$
Net cash flows from operating activities

600,000.00
(380,000.00)
$

220,000.00

(95,000.00)

250,000.00

$
$

375,000.00
375,000.00

800,000.00

Total expenses

(517,000.00)

Net income before taxes

Income tax expense

$
$

283,000.00
(53,000.00)

Net income after taxes

230,000.00

Cash flows from investing activities

Cash paid out for purchase of equipment
Cash flows from financing activities
Cash received from sale of capital stock
Cash received from note payable
Cash paid as dividends
Net cash flows from financing activities

$
$
$

200,000.00
75,000.00
(25,000.00)

Net increase in cash

July 1, Year 1 cash balance
July 31, Year 1 cash balance
P1-5.a
Income statement for the year ended December 31, 2013.
Revenue:
Sales
Expenses:
Cost of sales
Selling and administrative expenses
Interest expense

$
$
$

(435,000.00)
(80,000.00)
(2,000.00)

P1-5.b
Retained earnings statement for the year ended December 31, 2013
Opening balance
$
Increase
$
230,000.00
Decrease
$
(30,000.00)
Closing balance
$
200,000.00

Chapter 1

P1-5.c
Balance sheet as of December 31, 2013.
Assets
Cash
Accounts receivable
Inventories
Property, plant, and equipment
Total assets

$
$
$
$
$

40,000.00
110,000.00
115,000.00
265,000.00
530,000.00

Liabilities
Accounts payable
Income taxes payable
Note payable (due in 2019)
Total liabilities

$
$
$
$

20,000.00
8,000.00
50,000.00
78,000.00

Stockholders Equity
Capital stock
Retained earnings
Total stockholders equity

$
$
$

252,000.00
200,000.00
452,000.00

Total liabilities and stockholders equity

530,000.00

P1-5.d
Statement of Cash Flows, For the Year Ended December 31, Year 1
Cash flows from operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash flows from operating activities

$
$
$

690,000.00
(657,000.00)
33,000.00

Cash flows from investing activities

Cash paid out for purchase of PPE

(265,000.00)

Cash flows from financing activities

Cash received from sale of capital stock
Cash received from note payable
Cash paid as dividends
Net cash flows from financing activities

$
$
$
$

252,000.00
50,000.00
(30,000.00)
272,000.00

Net increase in cash

July 1, Year 1 cash balance
July 31, Year 1 cash balance
Check

$
$
$
$

40,000.00
40,000.00
-

Chapter 1

FA1-4.1
Rate of returt

No1
Exxon Mobil

No2
Cocal-cola

No3
Walmart

FA1-4.2
Income before taxes and interest
Total assets at the beginning of the year
Total assets at the end of the year

Exxon Mobil Cocal-cola

$ 73,504.00 $
11,856.00 $
$ 302,510.00 $
72,921.00 $
$ 331,052.00 $
79,974.00 $

Rate of return

23.2%

Walmart
26,720.00
180,782.00
193,406.00

15.5%

14.3%

FA1-4.3
ExxonMobil has the highest rate of return on total assets of 23.2%. This is due to the high demand for
petroleum based products. At the same time, Exxon-Mobils operations have the most risks

FA1-5

Income before taxes and interest

Total assets at the beginning of the year
Total assets at the end of the year
Rate of return
a( Walmart) / a(Target)
(b+c of Walmart) / (b+c of Target)

Target Corporation
$
5,325.00 $
$
43,705.00 $
$
46,630.00 $

a
b
c

11.8%

Walmart
26,720.00
180,782.00
193,406.00
14.3%

5.02
4.14

Analysis:
1. The Rate of return (RoR) of Walmart (14.3%) is higher than RoR of Target (11.8%). Since two companies
operate in the same industry, this ratio comparision may suggest that Walmart generates more profit than
Target for the same amount of assets
2. When we conpare two elements of RoR, including (1) income before taxes and interest and (2) total
assets, the figures show that:
- Walmar'size of assets is 4 times bigger than Target. This may indicate that Walmart may gain higher
benefits from economy of scales than Target
- While assets is 4 times biggers, Walmar can even generate more income before taxes and interest (5
times bigger than Target's amount). This fact suggests Walmart is more profitable than Target

Case 1 - 2.1

Chapter 1

By omitting the other financial statement to conceal a net loss during the past year, Loretta has violated the
ethis and professional conduct in business. The bank needs to review all important information regarding
the financial statements of applicant. Based on the information provided, bank may perform some analysis
and assessement of risks related to the loan application. Since making net loss in last year is a significant
information. Loretta may need to prepare some clearly explanations for that result, and what can be done
to improve the performance of the company

Chapter 1

Case 1 - 2.2.a
Owners are generally willing to provide bankers with information about the operating and financial
condition of the business, such as the following:
Operating Information:
description of business operations
results of past operations
preliminary results of current operations
plans for future operations
Financial Condition:
list of assets and liabilities (balance sheet)
estimated current values of assets
stockholders investment in the business
stockholders commitment to invest additional funds in the business
Owners are normally reluctant to provide proprietary operating information to bankers. Such information,
which could hurt the business if it becomes known by competitors, might include special processes used by
the business or future plans to expand operations into areas that are not currently served by a competitor
Case 1 - 2.2.b
Bankers typically want as much information as possible about the ability of the business to repay the loan
with interest. Examples of such information are described in the preceding answer
Case 1 - 2.2.c
Both bankers and business owners share the common interest of the business doing well and being
successful. If the business is successful, the bankers will receive their loan payments on time with interest
and the owners (and stockholders) will be rewarded
Case 1 - 4.2
The difference in the two bank balances, $175,000 ($215,000 $40,000), may not be pure profit from an
accounting perspective. To determine the accounting profit for the 8-month period, the revenues for the
period would need to be matched with the related expenses. The revenues minus the expenses would
indicate whether the business generated net income (profit) or a net loss for the period. Using only the
difference between the two bank account balances ignores such factors as amounts due from customers
(receivables), liabilities (accounts pay-able) that need to be paid for wages or other operating expenses,
additional investments that Dr. Tempkin may have made in the business during the period, or dividends
paid during the period.
Some businesses that have few, if any, receivables or payables may use a cash basis of accounting. The
cash basis of accounting ignores receivables and pay-ables because they are assumed to be insignificant in
amount. However, even with the cash basis of accounting, additional investments during the period and any
dividends during the period have to be considered in determining the net
income (profit) or net loss for the period

Chapter 1