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SOLUTIONS TO ANALYZE, THINK, COMMUNICATE –
CHAPTER 2
ATC
2-1 (All dollar amounts are in
millions.)
1. Target’s
accrual accounts are: Credit card
receivables, Accounts payable, Accrued and other current liabilities, and
Income taxes payable. The Deferred
income taxes account shown under Liabilities is probably best classified as an
accrual account, but students will probably think it is a deferral account.
2. Target’s
deferral accounts are: Inventories,
Buildings and improvements, Fixtures and equipment, Computer hardware and
software, and construction in progress. Students might also list the Deferred
income taxes account shown under Liabilities.
3. Net income for 2008 was $2,214
Cash provided by operating activities
for 2008 was $4,430
Thus,
cash flow from operating activities exceeded net income by $2,216.
4. Net
income decreased by $635 from 2007 to 2008 ($2,214 - $2,849). Cash provided by operating activities increased
by $305 from 2007 to 2008 ($4,430 - $4,125).
Therefore, the change in net income was the greatest, but students might
be surprised that cash flows increased even as net income was decreasing. A quick scan shows that this was mainly
because of depreciation and bad debt expense addbacks which will be covered in
later chapters.
ATC
2-2
a.
1. (in millions)
|
|
2008
|
2007
|
2006
|
|
Revenue
|
$
97,354
|
$ 93,469
|
$ 88,182
|
|
Less:
Operating Costs
|
( 80,470)
|
( 77,891)
|
(
74,809)
|
|
Net
Income
|
$16,884
|
$15,578
|
$13,373
|
|
|
|
|
|
2. The balance in Retained earnings is
affected as follows:
2008 - retained earnings increased by
$16,884 million.
2007 - retained earnings increased by
$15,578 million.
2006 - retained earnings increased by
$13,373 million.
3. Growth rates for net earnings are:
2008: ($16,884 - $15,578) ¸ $15,578 = 8.4%
2007: ($15,578 - $13,373) ¸ $13,373 = 16.5%
2006: ($13,373 - $
7,397) ¸
$ 7,397 = 80.8%
ATC
2-3
Dollar
amounts are in thousands.
a.
|
|
2007
|
2008
|
|
Revenues
|
$ 2,351,576
|
$ 2,384,521
|
|
Expenses
|
(2,189,511)
|
(2,318,968)
|
|
Net
income
|
$ 162,065
|
$ 65,553
|
|
|
|
|
|
Beg.
retained earnings
|
$
302,245
|
$ 449,402
|
|
+
Net income
|
162,065
|
65,553
|
|
-
Dividends
|
(
14,908)
|
(
16,504)
|
|
End.
Retained earnings
|
$ 449,402
|
$ 498,451
|
b.
Revenue increased by 1.4%
($ 2,384,521 - $ 2,351,576) ¸ $ 2,351,576
= 1.4%
Net income decreased by 59.6%
($65,553 - $162,065 ) ¸
$162,065 = (59.6%)
c. 2007:
$162,065 ¸ $ 2,351,576
= 6.9%
2008:
$ 65,553 ¸
$ 2,384,521 = 2.7%
d. Although revenues increased in 2008, net
income decreased, so 2007 appears to have been a better year for Cracker Barrel
than was 2008.
ATC 2-4
Dollar
amounts in thousands.
a.
and c.
|
|
2007
|
2008
|
|
Revenues
|
$329,652
|
$422,417
|
|
Expenses
|
309,998
|
397,982
|
|
Net
income
|
$
19,654
|
$
24,435
|
|
|
|
|
|
|
|
|
|
Cash
from operating activities
|
$ 43,579
|
$
66,107
|
|
Cash
from investing activities
|
(54,687)
|
(60,134)
|
|
Cash
from financing activities
|
873
|
853
|
|
Net
change in cash
|
(10,235)
|
6,826
|
|
+
Beg. cash balance
|
11,756
|
1,521
|
|
=
End. Cash balance
|
$ 1,521
|
$ 8,347
|
|
|
|
|
b. For Buffalo Wild Wings,
cash flows from operating activities were greater than net income for both
years.
d. Negative cash flows
from investing activities is most likely an indication that the company is
growing, which is not a negative situation.
But, at a quick glance, American Eagle’s liabilities are 25% of total
assets and Aeropostale’s liabilities are 50% of total assets. So the Net Income to Revenue difference is negligible
when looking at other items. The debt
ratio and other areas of analysis will be covered in later chapters. This is an indication that upon futher
investigation, American Eagle’s strategy may be a more successful one.
ATC
2-5
Dollar
amounts are in thousands.
a.
|
|
Aeropostale
|
American
Eagle Outfitters
|
|
Revenues
|
$ 1,885,531
|
$ 2,988,866
|
|
Expenses
|
(1,736,109)
|
(2,809,805)
|
|
Net
income
|
$ 149,422
|
$
179,061
|
|
|
|
|
|
Beg.
retained earnings
|
$ 543,911
|
$
1,601,784
|
|
+
Net income
|
149,422
|
179,061
|
|
-
Dividends
|
0
|
(82,394)
|
|
End.
Retained earnings
|
$ 693,333
|
$ 1,698,451
|
b. Aeropostale: $149,422
¸ $ 1,885,531 = 7.9%
American Eagle: $
179,061 ¸ $ 2,988,866 = 6.0%
c. Although American Eagle had higher net
income than Aeropostale, it had lower income as a percentage of
revenue. Therefore, based on this
information alone, it might be argued that Aeropostale had the better
performance in 2008.
ATC 2-6
Dollar
amounts in thousands.
a.
and c.
|
|
H&R
Block
|
Jackson Hewitt
|
|
Revenues
|
$4,403,877
|
$
278,505
|
|
Expenses
|
(4,712,524)
|
(246,078)
|
|
Net
income
|
$
(308,647)
|
$
32,427
|
|
|
|
|
|
Cash
from operating activities
|
$ 215,787
|
$ 33,949
|
|
Cash
from investing activities
|
1,147,289
|
(31,048)
|
|
Cash
from financing activities
|
(1,558,069)
|
0
|
|
Net
change in cash
|
( 194,993)
|
2,901
|
|
+
Beg. cash balance
|
921,838
|
1,693
|
|
=
End. Cash balance
|
$
726,845
|
$
4,594
|
|
|
|
|
b. Cash flows from operating activities were
higher than the net income for both companies.
d. Negative cash flows
from investing activities is most likely an indication that the company is
growing, which is not a negative situation.
e. Negative cash flows
from financing activities is not as common as are negative cash flows from
investing activities. However, negative
cash flow from financing activities is usually the result of the company paying
off some of its debt, which is not a negative situation. It can also relult from the company buying
back its own stock, but students are unlikely to think of this as a cause.
ATC 2-7
a.
|
|
Income
Statement
|
|
Balance Sheet
|
|
|||||
|
|
|
|
|
|
|
|
|
||
|
|
Service Revenue
|
$120,000
|
|
Assets:
|
|
$167,000
|
|
||
|
|
Operating Exp.
|
(40,000)
|
|
|
|
|
|
||
|
|
Net Income
|
$ 80,000
|
|
Liabilities:
|
|
$ 5,000
|
|
||
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
||
|
|
|
|
|
Common Stock
|
|
82,000
|
|
||
|
|
|
|
|
Retained Earnings
|
|
80,000
|
|
||
|
|
|
|
|
Total Liab.
|
|
162,000
|
|
||
|
|
|
|
|
Total Liab. and
Stk. Equity
|
|
$167,000
|
|
||
|
|
|
|
|
|
|
|
|
||
Computations for
Income Statement Items:
Revenue: $38,000+$82,000 = $120,000
Operating
Expense: $70,000 - $30,000 =
$40,000
Computations for
Balance Sheet Items:
Assets: $85,000+$82,000 = $167,000
Liabilities: $35,000 - $30,000 = $5,000
Retained
Earnings: ($32,000) + $82,000 + $30,000
= $80,000
Comment: Negotiations are not reportable events. The potential $82,000 should not be
reported. The employees did perform
services and the expense needs to be currently recognized.
b. Willful deception is an act of fraud and
punishable under the law. Good
intentions are not sufficient justification for breaking the law. Students should learn to avoid operating
under an ends justifies the means philosophy.
Suppose the unexpected happens in this case. Glenn fails to obtain the contract and is
forced to declare bankruptcy after having manipulated the statements. He would not only stand to lose the friend
that he deceived, but also may be convicted of a felony on charges of
fraudulent reporting.
ACT 2-7 (cont.)
c. The auditing profession has identified
three elements that are typically present when fraud occurs. They are: (1) the availability of an
opportunity, (2) the existence of some form of pressure leading to an incentive,
and (3) the capacity for rationalization.
Glenn had the opportunity to record the questionable adjustments because
he was the owner and could make whatever adjustments he deemed
appropriate. Glenn’s existence of
pressure is the fact that he needs the financial statements to look good in
order to obtain the loan. Because Glenn
was confident that the contracts would be approved, he was able to rationalize
making the adjustments. All three of the
factors of ethical misconduct are present in this case.
ATC 2-8
This solution is
based on Reader’s Digest’s 2008 financial report.
a. Reader’s
Digest’s accrual accounts are:
Accounts
receivable, net
Accounts
payable
Accrued
expenses
Income
taxes payable
Other current liabilities (possibly,
depending on the nature of the liability)
Accrued
pension (long-term)
b. Reader’s
Digest’s deferral accounts are:
Inventories (Technically a deferral if
the inventory was paid for in cash, but students will probably not think of
this as an accrual.)
Prepaid and deferred promotion costs
Prepaid expenses and other current
assets
Property, plant and equipment, net
Other intangible assets, net
Prepaid pension assets
Other noncurrent assets (possibly,
depending on the nature of the asset)
Unearned revenues (current)
Unearned revenues (long-term)
For This And Any Other test Bnaks,
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