Financial Accounting for Decision Making

(FADM)

ISB 2020-21

Additional problems for sessions 1-5

1
Session – 1 Preparing financial statements

QUESTION 1

SOLUTION

a. $ millions
Assets = Liabilities + Equity
$193,694 $121,697 $71,997
b. Microsoft receives more of its financing from nonowners ($121,697 million) than from owners
($71,997 million).
c. Its owner financing comprises 37.2% of its total financing ($71,997 million / $193,694 million).
Thus, nonowners finance 62.8% of Microsoft’s total assets.

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QUESTION 2

SOLUTION

($ millions)
a. Using the accounting equation:
Assets ($103,065) = Liabilities ($41,980) + Equity (?)
Thus: $61,085 = Equity

High-tech companies must contend with a substantial amount of risk relating to changing technology.
Future cash flows are, therefore, not as certain and cannot support high levels of debt. Thus, the
company uses equity financing; 59.3% in the case of Intel.

b. Using the accounting equation at the beginning of the year:

Assets ($7,839) = Liabilities (?) + Equity ($2,529)
Thus: Beginning Liabilities = $5,310

Using the accounting equation at the end of the year:

Assets ($7,839 + $821) = Liabilities ($5,310 + $140) + Equity (?)
Thus: Ending Equity = $3,210

Alternative approach to solving part (b):

∆Assets($-1) = ∆Liabilities($-132) + ∆Equity(?)
where “∆” refers to “change in.”
Thus: ∆ Ending Equity = $821 - $140 = $681 and
Ending equity = $2,529 + $681 = $3,210

c. Retained Earnings is the balance sheet account that provides the link between the balance sheet
and the income statement. Each accounting period, Retained Earnings is updated by the net income (loss)
reported for that period (and is reduced by any dividends that are declared to shareholders). The balance
sheet and the income statement are, therefore, linked by this balance sheet account.

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QUESTION 3

SOLUTION

a. Computation of dividends
Beginning retained earnings, 2014 ......................... $ 18,832
+ Net income ............................................................. 1,384
– Cash dividends ....................................................... (?)
= Ending retained earnings, 2015 .............................. $ 18,861

b. Dividends were $1,355 million for 2015. The company paid out dividends equal to 97.9% of 2015
net income ($1,355 / $1,384).

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QUESTION 4

SOLUTION

a.
GENERAL MILLS INC.
Income Statement ($ millions)
For Year Ended May 29, 2016
Revenue $16,563.1
Cost of goods sold 10,733.6
Gross profit 5,829.5
Total expenses 4,092.7
Net income $ 1,736.8

GENERAL MILLS INC.

Balance Sheet ($ millions)
May 29, 2016
Cash $763.7 Total liabilities $16,405.2

Noncash assets 20,948.6 Stockholders’ equity 5,307.1

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Total assets $21,712.3 Total liabilities and equity $21,712.3

GENERAL MILLS INC.

Statement of Cash Flows ($ millions)
For Year Ended May 29, 2016
Cash from operating activities $2,629.8
Cash from investing activities 93.4
Cash from financing activities (2,293.7)
Net change in cash 429.5
Cash, beginning of year 334.2
Cash, ending year $ 763.7

6
QUESTION 5

SOLUTION

a.
ABERCROMBIE & FITCH
Income Statement ($ thousands)
For Year Ended January 30, 2016
Revenue ............................................................... $ 3,518,680
Cost of goods sold................................................ 1,361,137
Gross profit .......................................................... 2,157,543
Expenses .............................................................. 2,118,984
Net income .................................................... $ 38,559

ABERCROMBIE & FITCH

Balance Sheet ($ thousands)
January 30, 2016
Cash................................ $ 588,578 Total liabilities ................................ $ 1,137,317
Noncash assets ............... 1,844,461 Stockholders’ equity ....................... 1,295,722
Total assets ..................... $ 2,433,039 Total liabilities and equity .............. $ 2,433,039

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 ABERCROMBIE & FITCH
Statement of Cash Flows ($ thousands)
For Year Ended January 30, 2016
Cash from operating activities $309,941
Cash from investing activities (122,567)
Cash from financing activities (119,504)
Net change in cash 67,870
Cash, beginning year 520,708
Cash, ending year $ 588,578

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QUESTION 6

SOLUTION

9
QUESTION 7

SOLUTION

10
QUESTION 8

SOLUTION
a. Balance, January 1 = $960 + $900 − $620 = $1,240.
b. Amount of premium = $82 × 12 = $984. Therefore, five months' premium ($984 − $574 = $410) has expired
by January 31. The policy term began on September 1 of the previous year.
c. Wages paid in January = $3,200 − $700 = $2,500.
d. Monthly depreciation expense = $8,700 / 60 months = $145. Bloomfield has owned the truck for 18 months
($2,610 / $145 = 18).

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QUESTION 9

12
SOLUTION

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QUESTION 10

SOLUTION
a. The T-accounts follow the journal entries in part b, below.
(In this problem we have credited depreciation to a contra asset (XA) account titled Accumulated Depreciation.
Crediting the asset would not be incorrect, but reporting the contra asset account provides more information to
financial statement users.)

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b.

Date Description Debit Credit

Apr. 1 Cash 11,500
Common stock 11,500
Owner invested cash.
Apr. 2 Truck 6,100
Cash 6,100
Purchased used truck for $6,100 cash.
Apr. 2 Equipment 6,200
Cash 1,000
Accounts payable 5,200
Purchased equipment.
Apr. 3 Prepaid insurance 2,880
Cash 2,880
Paid two-year premium on insurance policy.
Apr. 5 Supplies 1,200
Accounts payable 1,200
Purchased supplies on account.
Apr. 5 Cash 1,800
Unearned roofing fees 1,800
Received advance payment for services.
Apr. 12 Accounts receivable 5,500
Roofing fees earned 5,500
Billed customers for services.
Apr. 18 Cash 4,900
Accounts receivable 4,900
Collection on account from customers.
Apr. 29 Fuel expense 675
Cash 675
Paid truck fuel bill for April.
Apr. 30 Advertising expense 100
Cash 100
Paid for April newspaper advertising.
Apr. 30 Wages expense 4,500
Cash 4,500
Paid wages.
Apr. 30 Accounts receivable 4,000
Roofing fees earned 4,000
Recorded fees earned.

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QUESTION 11

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SOLUTION

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Session 2 – Statement of cash flows

QUESTION 1

SOLUTION
a. Cash inflow from an operating activity.
b. Cash inflow from an investing activity.
c. Cash outflow from an investing activity.
d. Cash outflow from an operating activity.
e. Cash inflow from a financing activity.
f. Cash outflow from a financing activity.
g. Cash outflow from an investing activity.

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QUESTION 2

SOLUTION
a. Rent Expense $ 65,000
– Prepaid Rent Decrease (3,000)
= Cash Paid for Rent $ 62,000

b. Interest Income $ 15,500

– Interest Receivable Increase (800)
= Cash Received as Interest $ 14,700

c. Cost of Goods Sold $ 87,000

+ Inventory Increase 4,000
+ Accounts Payable Decrease 3,000
= Cash Paid for Merchandise Purchased $94,000
QUESTION 3

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SOLUTION

a. Net income computation

Service revenue (record when earned) ........................................... $200,000
Wages expense (record when incurred, even if unpaid)................... (40,000) ($25,000 + $15,000)
Net income ....................................................................................... $160,000

b. Net cash flow computation

Cash inflow from services rendered ............................................ $50,000 ($30,000 + $20,000)
Cash outflow for wages paid ....................................................... (25,000)
Net cash inflow ........................................................................... $25,000

Cash inflow from services rendered will be $150,000 less than service revenue per the income statement
because Penno only collected $50,000 of revenues in cash but reported $200,000 as revenue. Cash outflow
for wages paid will be $15,000 less than wages expense on the income statement because $15,000 remained
unpaid at year-end. The combined effects of these two items yields an overall difference of $135,000 between
net income and net cash inflow [$160,000 net income and $25,000 net cash inflows].

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QUESTION 4

SOLUTION

LUND CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2017
Operating Activities
Net Income $76,000
Add (Deduct) Items to Convert Income to Cash Basis
Depreciation 29,000
Amortization 6,000
Gain on Sale of Equipment (4,000)
Accounts Receivable Increase (4,000)
Inventory Decrease 13,000
Prepaid Expenses Increase (2,000)
Accounts Payable Increase 9,000
Accrued Liabilities Decrease (3,000)
Net Cash Provided by Operating Activities $120,000
Investing Activities
Sale of Equipment 17,000
Purchase of Land (90,000)
Net Cash Used by Investing Activities (73,000)
Financing Activities
Issuance of Common Stock 35,000
Retirement of Bonds Payable (60,000)

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 Payment of Dividends (29,000)
Net Cash Used by Financing Activities (54,000)
Net Decrease in Cash (7,000)
Cash at Beginning of Year 22,000
Cash at End of Year $ 15,000

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QUESTION 5

SOLUTION

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a. Cash, December 31, 2017 ................................................ $11,000
Cash, December 31, 2016 ................................................ 5,000
Cash increase during 2017 ............................................... $ 6,000

b. (Indirect Method)
WOLFF COMPANY
Statement of Cash Flows
For Year Ended December 31, 2017
Net Cash Flow from Operating Activities
Net Income $56,000
Add (Deduct) Items to Convert Net Income to Cash Basis
Depreciation 17,000
Accounts Receivable Increase (9,000)
Inventory Increase (30,000)
Prepaid Insurance Decrease 2,000
Accounts Payable Decrease (3,000)
Wages Payable Increase 3,000
Income Tax Payable Decrease (1,000)
Net Cash Provided by Operating Activities $35,000
Cash Flows from Investing Activities
Purchase of Plant Assets (55,000)
Cash Flows from Financing Activities
Issuance of Bonds Payable 55,000
Payment of Dividends (29,000)
Net Cash Provided by Financing Activities 26,000

Net Increase in Cash 6,000

Cash at Beginning of Year 5,000
Cash at End of Year $11,000

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Session 3 – Revenue recognition

QUESTION 1

SOLUTION
Company Revenue recognition
a. GAP The performance obligation is fulfilled when the customer takes the merchandise and
the right of return period has expired or costs of returns can be reasonably estimated.

b. Merck The performance obligation is fulfilled when the customer takes delivery of the
merchandise and the right of return period, if any, has expired or costs of returns can be
reasonably estimated. The company will also establish a reserve and recognize expense
for uncollectible accounts receivable when revenue is recognized.

c. Deere & Co. The performance obligation is fulfilled when the customer takes the merchandise and
the right of return period, if any, has expired or costs of returns can be reasonably
estimated. The company will also establish a reserve and recognize expense for
uncollectible accounts receivable and anticipated warranty costs at the time the sale is
recorded. Revenues for financial or insurance services are recognized when the services
are provided.

d. Bank of The performance obligation is fulfilled with the passage of time. Interest is earned by
America the passage of time. Each period Bank of America accrues income on each of its loans
and establishes an account receivable on its balance sheet.

e. Johnson The performance obligation is to build and complete projects. Revenue is recognized for
Controls long-term construction contracts under the percentage-of-completion method, typically
using cost-to-cost method to identify the percentage of the project that is complete.

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Session 4 – Assets part 1 - Accounts receivable

QUESTION 1

SOLUTION

c. Accounts receivable, net = $200,000 - $6,900 = $193,100

Reported in the balance sheet as follows:
Accounts receivable, net of allowance of $6,900 $193,100

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QUESTION 2

SOLUTION
The ending balance of Penman’s accounts receivable and allowance accounts are as follows.

Accounts receivable $385,700

Less allowance for uncollectible accounts 23,767 $361,933

Computations
Allowance for
Accounts Receivable Uncollectible Accounts
Beginning balance $ 356,000 $ 21,400
Sales 2,008,000
Collections (1,963,000)
Write-offs* (15,300) (15,300)
Bad debts expense** ________ 17,667
Ending balance $ 385,700 $ 23,767

* Write offs = $8,200 + $4,800 + $2,300 = $15,300

** Bad debts expense = $1,963,000 × 0.9% = $17,667

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Session 5 – Assets part 2- Inventory and PP&E

QUESTION 1

SOLUTION
a. FIFO cost of goods sold = 400 @ $12 + 200 @ $14 = $7,600
FIFO ending inventories = $14,600 – $7,600 = $7,000
b. LIFO cost of goods sold = 600 @ $14 = $8,400
LIFO ending inventories = $14,600 – $8,400 = $6,200
c. Average cost of goods sold = 600 @ $14,600 / 1,100 = $7,964
Average cost ending inventories = $14,600 – $7,964 = $6,636

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QUESTION 2

SOLUTION
a. Straight-line: ($37,000 – $2,900) / 5 years = $6,820 for both years

b. Double-declining-balance: Twice straight-line rate = 2 × 1/5 = 40%

1st year: $37,000 × 0.40 = $14,800
2nd year: ($37,000 – $14,800) × 0.40 = $8,880

Notice that, over the first two years, the company reports $13,640 ($6,820 x 2) of depreciation expense under the
straight-line method and $23,680 ($14,800 + $8,880) of depreciation expense under the double-declining balance
method.

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QUESTION 3

SOLUTION
a. GE’s 2015 balance sheet reports $22,449, which is the LIFO inventory value.

b. GE’s 2015 balance sheet would have reported $22,243, which is the FIFO inventory value.

c. Cumulative pretax income (as of the end of fiscal 2015) has been increased by $206 million
($22,449 million - $22,243 million) since GE initially adopted LIFO inventory costing. LIFO
matches more current inventory costs against current selling prices. For 2015, the LIFO reserve
was “negative,” meaning that LIFO inventory > LIFO inventory. This implies that cumulative LIFO
COGS < FIFO COGS, which means that cumulative LIFO income and taxes paid > FIFO income
and taxes paid. The reverse was true as of fiscal year-end 2014.

d. Pretax income has been increased by $206 million (see part c). Assuming a 35% tax rate, taxes
have been increased by $206 × 0.35 = $72.1 million. Since adopting LIFO method, GE has paid
$72.1 million more in total taxes compared to taxes the company would have paid had it used the
FIFO method all along.

e. For 2015 only, the LIFO reserve decreased by $268 million, computed as $(62) million - $206
million. Consequently, 2015 LIFO pretax income is $268 million higher than under the FIFO
method. This means that LIFO income taxes are higher by $93.8 million, computed as $268 million
× 0.35. In sum, for fiscal 2015, the use of LIFO inventory costing did not save taxes for GE.

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