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NCC 5000
Financial
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Professor Robert Libby


Fall 2015
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2015
NCC 5000 FINANCIAL ACCOUNTING
ROBERT LIBBY

Packet Table of Contents*


1.
2.
3.
4.

Snyders-Lance Cases
Snyders-Lance Solutions
1st Exam Summer 1995
Other Cases

page 3
page 27
page 45
page 63

Intel (A)
Dennys
Cash Flow (B)
Intel (B)
Cash Flow (C)
Honda Motor
Kimberly-Clark (A)
Nabors Industries
Kimberly-Clark (B)

5.
6.
7.
8.

Practice Quiz 1s
Practice Old Midterms
Practice Quiz 2s
Practice Old Finals

Robert Libby

page 119
page 133
page 221
page 235

Robert Libby

Snyders-Lance Cases
Snyders Lance
Snyders Lance
Snyders Lance
Snyders-Lance
Snyders-Lance
Snyders-Lance
Snyders-Lance
Snyders-Lance
Snyders-Lance

(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)

(The solutions follow the last SnydersLance case.)

Robert Libby

Robert Libby

Robert Libby

Robert Libby

Snyders-Lance (A)

Required: Review the Snyders-Lance 2011 Annual Report. Look at the Income Statement,
Balance Sheet, and Cash Flow Statement closely and attempt to infer what kinds of information
they report. Then, answer the following questions based on the Report.
1. What types of products do they manufacture and sell?
2. Did the management think that the company had a good year?
3. On what day of the year does their fiscal year end?
4. For how many years do they present complete:
a. Balance Sheets
b. Income Statements
c. Cash Flow Statements
5. Are their financial statements audited by independent CPAs? How did you know?
6. Did their total assets increase or decrease over the last year?
7. What was the ending balance of inventories?
8. Write out their basic accounting equation in dollars at year-end.

Robert Libby

Robert Libby

Snyders-Lance (B)

Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report.

1. Between 2010 and 2011, did "Cost of Sales" increase at a faster or slower rate than "Net
Revenue?"
2. Using the Statement of Stockholders Equity, determine cash dividends declared to
stockholders during 2011. Does this differ from the cash dividends paid to stockholders
reported on the 2011 Cash Flow Statement? Why or why not?
3. The 2011 Income Statement reports "Income tax expense." What amount is reported? Is this
likely to be the same amount as that actually paid in income tax for the period? Why or why
not? (Check the Supplemental information to the cash flow statement to see if your
intuition is correct.)

Robert Libby

Robert Libby

10

Snyders-Lance (C) Accounts Receivable


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report.
Schedule II Valuation and Qualifying Accounts lists additional information on the company's
Allowance for doubtful accounts.
1. What adjusting entry did Snyders-Lance make to record bad debts at the end of 2011? What
was the effect of this entry on Income before income taxes? What was the effect on Net
cash provided by operating activities?
2. Prepare a summary entry for the write-offs of bad debts during 2011. What was the effect of
this entry on Income before income taxes? What was the effect on Net cash provided by
operating activities?
3. Did bad debt expense as a percentage of Net revenues increase or decrease between 2010 and
2011? Did management disclose any information indicating the reason for the increase or
decrease?

Robert Libby

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Robert Libby

12

Snyders-Lance (D) Inventory


Required: Answer the following questions based on the following information from SnydersLances recent annual reports. Assume a 35% marginal tax rate.
1. Its inventory note from the 2008 report is printed below:
NOTE 4. INVENTORIES
Inventories at December 27, 2008 and December 29, 2007 consisted of the following:

(in thousands)
Finished goods
Raw materials
Supplies, etc.
Total inventories at FIFO cost
Less: adjustment to reduce FIFO cost to LIFO cost
Total inventories

2008
23,227 $
11,556
15,293
50,076
(6,964)
$ 43,112 $

2007
21,910
7,701
14,297
43,908
(5,249)
38,659

If Snyders-Lance had used FIFO to value its entire inventory, how much higher or lower
would each of the following amounts have been?
a. For the year ended December 27, 2008:
a. Cost of goods sold:
b. Net income before taxes:
c. Income tax expense (provision for income taxes)
d. Net income:
e. Inventory on December 27, 2008:
b. For the life of the company as of December 27, 2008:
a. Cost of goods sold.
b. Cumulative net income before taxes:
c. Income tax expense
d. Retained earnings
2. Its inventory note from the 2009 report is printed below:
NOTE 4. INVENTORIES
Inventories at December 26, 2009 and December 27, 2008 consisted of the following:

(in thousands)
Finished goods
Raw materials
Supplies, etc.
Total inventories at FIFO cost
Less: adjustments to reduce FIFO cost to LIFO cost
Total inventories

Robert Libby

13

2009
2008
33,060 $
23,227
11,732
11,556
19,081
15,293
63,873
50,076
(5,836)
(6,964)
$ 58,037 $
43,112

If Snyders-Lance had used FIFO to value its entire inventory, how much higher or lower
would each of the following amounts have been?
a. For the year ended December 26, 2009:
a. Cost of goods sold.
b. Net income before taxes:
c. Income tax expense (provision for income taxes)
d. Net income:
e. Inventory on December 26, 2009:
b. For the life of the company as of December 26, 2009:
a. Cost of goods sold.
b. Cumulative net income before taxes:
c. Income tax expense
d. Retained earnings
3. During 2010, Snyders-Lance changed their method of accounting for the inventories previously
on the LIFO method to the FIFO method. U.S. GAAP requires that the company restate its
financial statements as if the company had always used FIFO for all years presented in the 2010
and later reports. Its explanation of the effects of the restatements is presented in its change in
accounting method note presented below.
The effect of the change on the Consolidated Statements of Income for the years ended December 26,
2009 and December 27, 2008 was as follows:
(in thousands, except share data)
Cost of sales
Income before interest and income taxes
Income tax expense
Net Income
Basic earnings per share
Diluted earnings per share

Increase/(Decrease)
2009
2008
$
1,128 $ (1,715)
(1,128)
1,715
(362)
593
(766)
1,122
(0.02)
0.03
(0.02)
0.03

The effect on the Consolidated Balance Sheet at December 26, 2009 was as follows:
(in thousands)
Inventories
Deferred income tax asset
Retained Earnings

Increase/
(Decrease)
$ 5,836
(2,013)
3,823

How do the numbers for 2009 reported in this note compare to your answers to requirement 2
above?

Robert Libby

14

Snyders-Lance (E) Long-Lived Assets


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report.
1. What was the effect of the disposal on the following financial statement values? Fill in the
amount and circle the direction.
a.

Income before income taxes


___________ increase

b.

no effect

Cash flow from operating activities


___________ increase

c.

decrease

decrease

no effect

Cash flow from investing activities


___________ increase

decrease

no effect

2. What entry did Snyders-Lance make to record impairment of long-lived assets assuming
that all were fixed assets?
3. What was the effect of the impairment on the following financial statement values? Fill in
the amount and circle the direction.
a.

Income before interest and income taxes


___________ increase

b.

decrease

no effect

Cash flow from investing activities


___________ increase

Robert Libby

no effect

Cash flow from operating activities


___________ increase

c.

decrease

decrease

no effect

15

Robert Libby

16

Snyders-Lance (F) Leases


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report. Note
15 discusses leases and other commitments.
1. Determine the present value of the minimum lease payments shown as of December 31,
2011. You may assume an interest rate of 10 percent. Snyders-Lance does not state the
payment dates for those occurring "Thereafter." To simplify the computations, assume that
they will occur, on average, in 7 years.
2. If these leases were constructively capitalized (treated as capital leases), how would the
following ratios and financial statement amounts be affected? (increase, decrease,
unaffected)
a.

Debt/Equity Ratio

b.

Cash Flow from Operations

Robert Libby

17

Robert Libby

18

Snyders-Lance (G) Debt


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report. Note
11 lists various elements of the company's debt structure.

1. Assuming that they do no additional borrowing, what will Snyders-Lance most likely list as the
current portion of its long-term debt in its 2011 Annual Report?
2. Answer the following questions related to the Private placement senior notes with $100 million
due June 2017. Assume that they pay interest semiannually on June 30 and December 31.
a) Were these notes initially recorded at par, at a discount, or at a premium?
b) What was the effective market rate at the time the notes were issued?
c) What will be the exact carrying value of the notes at the end of 2012?
d) Assume further that as of December 31, 2012, the prevailing market rate for interest
obligations similar to Snyders-Lance's Notes due 2012 was 10%. What would be the
carrying value of the Notes at the end of 2012?
e) Now assume further that Snyders-Lance redeemed these Notes from their holder at market
value at the end of 2012. Which of the company's financial statements would be affected, in
what direction, and by how much? (Ignore taxes).
3. Answer the following questions related to the Secured bank loan due October 2015.
a) What is the face value (or principle amount owed) at the end of 2011?
b) How much principle was paid during 2011?
.

Robert Libby

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Robert Libby

20

Snyders-Lance (H) Equity Method Investments

Required: Answer the following questions based on Snyders-Lance's 2011 Annual Report.
1. What entry (entries) did Snyders-Lance make in 2011 related to their investment in Late
July Snacks LLC accounted for under the equity method?

Robert Libby

21

Robert Libby

22

Snyders-Lance (I) Mergers and Acquisitions


Note 3 and the Statement of Stockholders Equity from the 2010 annual report are attached.
Answer the following questions based on that information. This is a taxable transaction, so most
intangibles including goodwill are amortized for tax purposes over 15 years straight-line.
1) The company acquired the Stella Doro brand and certain manufacturing equipment from
Stella Doro Biscuit Co., Inc. during 2009.
a) What summary journal entry did the company record for the acquisition?
b) What portion of the purchase price will be subject to depreciation and amortization for
book purposes?
c) Assuming that the equipment and customer relationships purchased also had an expected
useful life of 15 years straight-line for tax and book purposes, by how much will the
acquisition increase depreciation and amortization for book purposes during the first full
year subsequent to the acquisition?
d) Assuming a 35% marginal tax rate, by how much will depreciation and amortization
resulting from the acquisition reduce taxes paid during the first full year subsequent to the
acquisition?
2) The 2010 merger between Snyders and Lance was accounted for as an acquisition of
Snyders by Lance. Lance paid for Snyders by issuing additional stock (answers in
thousands).
a) What amounts were credited to common stock and additional paid-in capital when Lance
recorded the acquisition?
b) What amount of the net assets acquired will not be subject to amortization for book
purposes?

Robert Libby

23

NOTE 3. MERGERS & ACQUISITIONS


Merger of Equals
On December 6, 2010 (the merger date), a wholly owned subsidiary of Lance was merged with and into Snyders, with the result that
Snyders became a wholly owned subsidiary of Lance. As part of the Merger, Snyders shareholders received 108.25 shares of Lance
stock for each share outstanding as of the merger date. All of the outstanding Snyders shares and equity-based awards were exchanged
for Lance shares and equity awards as part of the Merger. Fractional shares generated by the conversion ratio were cash settled for
an immaterial amount. After the exchange was completed, pre-Merger Lance shareholders retained ownership of 49.9% of the
Company. In conjunction with consummating the Merger, the name of the Company was changed to Snyders-Lance, Inc. The results of
Snyders operations are included in the Companys consolidated financial statements as of December 6, 2010, which included
approximately $48.8 million of net revenue. The impact to net income was not material during this period.
Based on the closing price of Lances common stock on the merger date, adjusted by the amount of the special dividend received by Lance
shareholders, the consideration received by Snyders shareholders in the Merger had a value of approximately $676.2 million as detailed
below.
Conversion
Calculation

(in thousands, except share


data)
Snyders common stock outstanding as of the Merger date
Multiplied by the exchange ratio of 108.25
Multiplied by Lances special dividend-adjusted stock
price as of the merger date ($23.08-$3.75)
Fair value of vested and unvested stock options
pertaining to pre-Merger service issued to replace
existing grants at closing
Cash paid to settle fractional shares
Total fair value of consideration transferred

Fair Value

301.6
108.25
$

19.33

631,182

45,029
676,211

The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets
acquired and liabilities assumed to be recognized at their fair values as of the merger date. Since the merger occurred close to our fiscal
year-end, the initial recording of the assets and liabilities was based on preliminary valuation assessments and is subject to change. The
following tables summarized the initial estimated fair values of assets acquired and liabilities assumed as part of the Merger:
Purchase Price
Allocation
$
96,336
48,192
40,463
15,144
117,061
283,267
373,500
15,471
989,434

(in thousands)
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Fixed assets, net
Goodwill, net
Other intangible assets, net
Other noncurrent assets
Total assets acquired
Accounts payable
Other current liabilities
Current portion of long-term debt
Long-term debt
Deferred income tax liability
Other long-term liabilities
Total liabilities assumed
Less: Non-controlling interests assumed
Net assets acquired

16,100
34,360
7,806
116,661
125,616
8,672
309,215
4,008
676,211

Of the $373.5 million of acquired intangible assets, $265.4 million was assigned to the trade name and $50.6 million was assigned to
routes, neither of which are subject to amortization. The remaining acquired intangibles of $57.5 million were allocated to
customer related intangibles ,which are being amortized over the assets determinable useful life of 19 years. The goodwill from the
Merger is not deductible for income tax purposes.

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24

We incurred pre-tax Merger-related transaction and other costs in 2010 totaling $37.9 million, of which $2.4 million is included in Cost of
sales,
$35.2 million in Selling, general and administrative, $0.2 million in Other expense, net and $0.1 million in Interest expense, net. These
costs included incentive payments under the change in control provisions discussed in Note 4.
The following unaudited pro forma consolidated financial information has been prepared as if the Merger between Lance and Snyders had
taken place at the beginning of each fiscal year presented. The unaudited pro forma results include estimates and assumptions regarding
increased amortization of intangible assets related to the Merger, increased interest expense related to cash paid for Merger-related
expenses, and the related tax effects. The unaudited pro forma results for 2010 exclude $37.9 million of Merger-related transaction
and other costs described above. However, pro forma results are not necessarily indicative of the results that would have occurred if the
Merger had occurred on the date indicated, or that may result in the future.
(in thousands, except per share data)
Net sales and other operating revenue
Income before interest and income taxes
Net income attributable to Snyders-Lance, Inc.
Weighted average diluted shares
Diluted earnings per share

2010
1,585,208
87,574
49,409
65,863
0.75

2009
1,561,155
98,145
57,409
65,037
0.88

2009 Acquisition
On October 13, 2009, we completed the purchase of the Stella Doro brand and certain manufacturing equipment from Stella Doro
Biscuit Co., Inc. Stella Doro is a leading brand in the specialty cookie market. Stella Doro products include shelf stable cookies,
breakfast treats, breadsticks and biscotti that are sold in grocery stores and mass merchants throughout the United States, with
a high concentration in the Northeast and Southeast regions of the country. The Stella Doro brand enhances our portfolio of
niche snack food offerings to our customers. We manufacture the majority of the products in our Ashland, Ohio facility. We paid
approximately $23.9 million to acquire and install the Stella Doro assets, which was predominantly funded from borrowings from our
existing credit agreement. The purchase price allocation resulted in goodwill of approximately $5.7 million and identified other
intangible assets of $11.8 million. Of the $11.8 million of other identified intangible assets, $9.8 million was assigned to trademarks that
are not subject to amortization and $2.0 million was assigned to customer relationships with a useful life of 15 years. The post-acquisition
results of operations related to these assets are included in the 2009 and 2010 Consolidated Statements of Income.

Consolidated Statement of Stockholders' Equity and Comprehensive Income (Partial)


For the Fiscal Years Ended January 1, 2011
Balance, December 26, 2009
32,093,193 $
Comprehensive income:
Net income
Net unrealized gains on derivative
instruments, net of $505 tax effect
Foreign currency translation adjustment
Total comprehensive income
Stock issued in connection with Merger
32,652,949
Non-controlling interests assumed in Merger
Cash dividends paid to stockholders
Amortization of nonqualified stock options
Equity-based incentive reclassified to a
liability plan
Restricted stock units settled in common
stock, net of repurchases
172,650
Stock options exercised, including $3,199 tax
benefit
1,456,615

Robert Libby

26,743 $

60,829 $ 180,145 $

10,793 $

2,512

- $ 278,510
19

700
3,611
27,209

649,002
4,008
(142,458)
3,665

2,531
700
3,611
6,842
676,211
4,008
(142,458)
3,665

(4,199)

(4,199)

144

(3,551)

(3,407)

1,214

11,888

13,102

25

Robert Libby

26

Snyders-Lance (A)

Required: Review the Snyders-Lance 2011 Annual Report. Look at the Income Statement,
Balance Sheet, and Cash Flow Statement closely and attempt to infer what kinds of information
they report. Then, answer the following questions based on the Report.
1. What types of products do they manufacture and sell?
Pretzels, sandwich crackers, kettle chips, cookies, potato chips, tortilla chips, other salty
snacks, sugar wafers, nuts, and restaurant style crackers (from Item 1: Business).
2. Did the management think that the company had a good year?
Lance, Inc. and Snyder merged in December of 2010. This dramatically increased net
income. However, the company is also undergoing significant changes including selling
off the company-owned distribution network. Management seems to believe that these
changes are for the better and that they are proceeding as planned.
The company did have lower gross margins as a percentage of revenue, but this is
partially due to severance costs. SG&A have been decreasing as a percent of revenue,
and gross revenue is increasing. (All material from Item 7, MD&A)
3. On what day of the year does their fiscal year end?
December 31
4. For how many years do they present complete:
a. Balance Sheets -- 2
b. Income Statements -- 3
c. Cash Flow Statements 3
5. Are their financial statements audited by independent CPAs? How did you know?
Yes Report of Independent Registered Public Accounting Firm (p. 55)
6. Did their total assets increase or decrease over the last year?
Increase
7. What was the ending balance of inventories?
$106 million
8. Write out their basic accounting equation in dollars at year-end.
A
=
L
+ SE
$1,466,790 = $628,199 + $838,591

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27

Robert Libby

28

Snyders-Lance (B)

Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report.

1. Between 2010 and 2011, did "Cost of Sales" increase at a faster or slower rate than "Net
Revenue?"
Cost of sales increased faster than Net revenue.
Cost of sales
Net revenue

$1,065,107$601,015

$601,015
$1,635,036$979,835
$979,835

= 77.22%

= 66.87%

2. Using the Statement of Stockholders Equity, determine cash dividends declared to


stockholders during 2011. Does this differ from the cash dividends paid to stockholders
reported on the 2011 Cash Flow Statement? Why or why not?
$42,918. This is the same as dividends paid. The company paid all of its dividends declared
prior to year end. Note that the company had no dividends payable at the year end.
3. The 2011 Income Statement reports "Income tax expense." What amount is reported? Is this
likely to be the same amount as that actually paid in income tax for the period? Why or why
not? (Check the Supplemental information to the cash flow statement to see if your
intuition is correct.)
$21,104
No, because income tax (and in fact all) expenses are based on matching, not cash payments
which are reported in the cash flow statement. Taxes paid were $2,364 (from supplemental
information on cash flow statement).

Robert Libby

29

Robert Libby

30

Snyders-Lance (C) Accounts Receivable


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report.
Schedule II Valuation and Qualifying Accounts lists additional information on the company's
Allowance for doubtful accounts.
1. What adjusting entry did Snyders-Lance make to record bad debts at the end of 2011? What
was the effect of this entry on Income before income taxes? What was the effect on Net
cash provided by operating activities?
Bad debt expense (+E, -SE)

402

Allowance for doubtful accounts (+XA, -A)

402

Income before income taxes decreased by $402 thousand. The adjusting entry did not affect
net cash provided by operating activities. Bad debt expense is a non-cash transaction.
2. Prepare a summary entry for the write-offs of bad debts during 2011. What was the effect of
this entry on Income before income taxes? What was the effect on Net cash provided by
operating activities?
Allowance for doubtful accounts (-XA, +A)

1,417

Accounts receivable (-A)

1,417

This entry does not affect income before income taxes. Bad debt expense is estimated in the
period in which the sale occurs (matching principle). When accounts are actually deemed
uncollectable they are written off.
The entry does not affect net cash provided by operating activities. This is a non-cash
transaction.
3. Did bad debt expense as a percentage of Net revenues increase or decrease between 2010 and
2011? Did management disclose any information indicating the reason for the increase or
decrease?
Decrease.
Bad debt expense in 2011:
Bad debt expense in 2010:

$402

$1,635,036
$2,649
$979,835

= 0.025%

= 0.27%

According to management, the majority of bad debt expense in 2010 was due to a customer
bankruptcy. (See MD&A and Item 7A)

Robert Libby

31

Robert Libby

32

Snyders-Lance (D) Inventory


Required: Answer the following questions based on the following information from SnydersLances recent annual reports. Assume a 35% marginal tax rate.
1. Its inventory note from the 2008 report is printed below:
NOTE 4. INVENTORIES
Inventories at December 27, 2008 and December 29, 2007 consisted of the following:

(in thousands)
Finished goods
Raw materials
Supplies, etc.
Total inventories at FIFO cost
Less: adjustment to reduce FIFO cost to LIFO cost
Total inventories

2008
23,227 $
11,556
15,293
50,076
(6,964)
$ 43,112 $

2007
21,910
7,701
14,297
43,908
(5,249)
38,659

If Snyders-Lance had used FIFO to value its entire inventory, how much higher or lower
would each of the following amounts have been?
a. For the year ended December 27, 2008:
a. Cost of goods sold:
Beg. Lifo End. Lifo = Difference in Cost
Reserve
Reserve
of Goods Sold
Note: this is in the
$5,249 $6,964
= $1,715 (lower)
normal direction.
b. Net income before taxes:
$1,715 higher
c. Income tax expense (provision for income taxes) (35% x $1,715): $600.25 higher
d. Net income: (65% x $1,715) = $1,114.75 higher
e. Inventory on December 27, 2008: $6,964 higher
b. For the life of the company as of December 27, 2008:
a. Cost of goods sold.
$0
$6,964
=
$6,964 ($6,964 lower)
b. Cumulative net income before taxes:
$6,964 higher
c. Income tax expense (35% x $5,836):
$2,437.4 higher
d. Retained earnings (65% x $5,836):
$4,526.6 higher
2. Its inventory note from the 2009 report is printed below:
NOTE 4. INVENTORIES
Inventories at December 26, 2009 and December 27, 2008 consisted of the following:

(in thousands)
Finished goods
Raw materials
Supplies, etc.
Total inventories at FIFO cost
Less: adjustments to reduce FIFO cost to LIFO cost
Total inventories

Robert Libby

33

2009
2008
33,060 $
23,227
11,732
11,556
19,081
15,293
63,873
50,076
(5,836)
(6,964)
$ 58,037 $
43,112

If Snyders-Lance had used FIFO to value its entire inventory, how much higher or lower
would each of the following amounts have been?
a. For the year ended December 26, 2009:
a. Cost of goods sold.
Beg. Lifo End. Lifo = Difference in Cost
Reserve
Reserve
of Goods Sold
Note: this is NOT in
$6,964
$5,836
=
$1,128 ($1,128 higher)
the normal direction.
b. Net income before taxes:
$1,128 lower
c. Income tax expense (provision for income taxes) (35% x $1,128): $394.8 lower
d. Net income: (65% x $1,128) =
$733.2 lower
e. Inventory on December 26, 2009:
$5,836 higher
b. For the life of the company as of December 26, 2009:
a. Cost of goods sold.
Beg. Lifo End. Lifo = Difference in Cost
Reserve
Reserve
of Goods Sold
$0
$5,836
=
$5,836 ($5,836 lower)
b. Cumulative net income before taxes:
$5,836 higher
c. Income tax expense (35% x $5,836):
$2,042.6 higher
d. Retained earnings (65% x $5,836):
$3,793.4 higher
3. During 2010, Snyders-Lance changed their method of accounting for the inventories previously
on the LIFO method to the FIFO method. U.S. GAAP requires that the company restate its
financial statements as if the company had always used FIFO for all years presented in the 2010
and later reports. Its explanation of the effects of the restatements is presented in its change in
accounting method note presented below.
The effect of the change on the Consolidated Statements of Income for the years ended December 26,
2009 and December 27, 2008 was as follows:
(in thousands, except share data)
Cost of sales
Income before interest and income taxes
Income tax expense
Net Income
Basic earnings per share
Diluted earnings per share

Increase/(Decrease)
2009
2008
$
1,128 $ (1,715)
(1,128)
1,715
(362)
593
(766)
1,122
(0.02)
0.03
(0.02)
0.03

The effect on the Consolidated Balance Sheet at December 26, 2009 was as follows:
(in thousands)
Inventories
Deferred income tax asset
Retained Earnings

Increase/
(Decrease)
$ 5,836
(2,013)
3,823

How do the numbers for 2009 reported in this note compare to your answers to requirement 2
above?
The numbers are quite similar to those from requirement 2. The actual effect on cost of sales
was the same as the calculated effect. The lower income taxes reflects that fact that SnydersLance has a marginal tax rate of less than 35%. Their marginal tax rate in 2009 was actually
$
$ ,
32.1%. Over the life of the company the tax rate is
34.5%.
$ ,

Robert Libby

$ ,

34

Snyders-Lance (E) Long-Lived Assets


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report.
1. What was the effect of the Disposal of fixed and intangible assets on the following
financial statement values? Fill in the amount and circle the direction.
a.

Income before income taxes


1,851 decrease

From cash flow statement

b.

Cash flow from operating activities


no effect

c.

Cash flow from investing activities


4,351 increase

2. What entry did Snyders-Lance make to record impairment of fixed assets?


Impairment expense (+E, -SE)
Fixed assets (-A)

From Note 9 Fixed Assets

12,704
12,704

3. What was the effect of the impairment on the following financial statement values? Fill in
the amount and circle the direction.
a.

Income before interest and income taxes


12,704
decrease

b.

Cash flow from operating activities


no effect

c.

Cash flow from investing activities


no effect

Robert Libby

35

Robert Libby

36

Snyders-Lance (F) Leases


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report. Note
15 discusses leases and other commitments.
1. Determine the present value of the minimum lease payments shown as of December 31,
2011. You may assume an interest rate of 10 percent. Snyders-Lance does not state the
payment dates for those occurring "Thereafter." To simplify the computations, assume that
they will occur, on average, in 7 years.

Payment
2012
2013
2014
2015
2016
Thereafter

$15.9
13.6
10.4
7.1
4.2
8.4

PV
Factor
(n, i)
1, 10
2, 10
3, 10
4, 10
5, 10
7, 10

Present
Value
$14.4
11.2
7.8
4.8
2.6
4.3
45.2

2. If these leases were constructively capitalized (treated as capital leases), how would the
following ratios and financial statement amounts be affected? (increase, decrease,
unaffected)
a.

Debt/Equity Ratio
Increase because of the increase in debt

b.

Cash Flow from Operations


Increase because cash outflows would be part operating (interest) and part
financing (principal). Operating lease payments are all operating.

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37

Robert Libby

38

Snyders-Lance (G) Debt


Required: Answer the following questions based on the Snyders-Lance 2011 Annual Report. Note
11 lists various elements of the company's debt structure (round amounts and dates to 3 decimal
places).
1. Assuming that they do no additional borrowing, what will Snyders-Lance most likely list as the
current portion of its long-term debt in its 2012 Annual Report?
$3.1 million (long-term debt maturing in 2013)
2. Answer the following questions related to the Private placement senior notes with $100 million
due June 2017. Assume that they pay interest semiannually on June 30 and December 31.
a) Were these notes initially recorded at par, at a discount, or at a premium?
The notes were issued at a premium. Note that the carrying value is greater than the face
value.
b) What was the effective market rate at the time the notes were issued?
FV = -100
PV = 105.705
n =11
PMT = -2.86 (100 x 5.72%/2)
i = ? (ANS. 2.268 x 2=4.536%)
c) What will be the exact carrying value (net book value) of the notes at the end of 2012?
FV = -100; n = 9; PMT = -2.86; i = 2.268%
PV = ? (ANS. 104.770)
d) Assume further that as of December 31, 2012, the prevailing market rate for interest
obligations similar to Snyders-Lance's Notes due 2017 was 10%. What would be the
carrying value of the Notes at the end of 2012?
Same as in 2(c). Book value is unaffected by market fluctuations after issuance.
e) Now assume further that Snyders-Lance redeemed these Notes from their holder at market
value at the end of 2012. Which of the company's financial statements would be affected, in
what direction, and by how much? (Ignore taxes).
PMT = -2.86; n=9; i=5%; FV=-100; PV = ? (Ans. 84.789)
The firms Income Statement would show a gain of $19.98 (104.77-84.79.)
On the firms Balance Sheet, liabilities would decrease by $104.77, cash would decrease by
84.79, and owners equity would increase by 19.98.
The firms Statement of Stockholders Equity would show an increase in retained earnings
of $19.98.
The firms Statement of Cash Flows would show an adjustment to net income of ($19.98) in
the operating section and $84.79 as retirement of notes In the financing section.

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39

3. Answer the following questions related to the Secured bank loan due October 2015.
a) What is the face value (or principle amount owed) at the end of 2011?
$4,416 (this is variable rate debt so its face value and book value are equal)
b) How much principle was paid during 2011?
5,441 4,416 = $1,025

Robert Libby

40

Snyders-Lance (H) Equity Method Investments

Required: Answer the following questions based on Snyders-Lance's 2011 Annual Report.
1. What entry (entries) did Snyders-Lance make in 2011 related to their investment in Late
July Snacks LLC accounted for under the equity method?

Share of net loss of equity companies (E)


Investments in Equity Cos. (A)

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41

100.0
100.0

Robert Libby

42

Snyders-Lance (I) Mergers and Acquisitions


Note 3 and the Statement of Stockholders Equity from the 2010 annual report are attached.
Answer the following questions based on that information. This is a taxable transaction, so most
intangibles including goodwill are amortized for tax purposes over 15 years straight-line.
1) The company acquired the Stella Doro brand and certain manufacturing equipment from
Stella Doro Biscuit Co., Inc. during 2009.
a) What summary journal entry did the company record for the acquisition?
Goodwill (+A)
5.7
Trademarks (+A)
9.8
Customer relationships (+A)
2.0
Equipment (+A)
6.4
Cash (-A)
23.9
b) What portion of the purchase price will be subject to depreciation and amortization for
book purposes?
Of the purchase price, only the $2.0 million assigned to customer relationships and $6.4
million assigned to Equipment is subject to depreciation and amortization for book
purposes. The remaining amount is not subject to amortization.
c) Assuming that the equipment and customer relationships purchased also had an expected
useful life of 15 years straight-line for tax and book purposes, by how much will the
acquisition increase depreciation and amortization for book purposes during the first full
year subsequent to the acquisition?
6.4/15 = .427 from the equipment.
2.0/15 = .133 from the customer relationships.
Total of $.560 million.
d) Assuming a 35% marginal tax rate, by how much will depreciation and amortization
resulting from the acquisition reduce taxes paid during the first full year subsequent to the
acquisition?
23.9/15 = 1.593 x 35% = $.558 million.
2) The 2010 merger between Snyders and Lance was accounted for as an acquisition of
Snyders by Lance. Lance paid for Snyders by issuing additional stock (answers in
thousands).
a) What amounts were credited to common stock and additional paid-in capital when Lance
recorded the acquisition?
Common Stock
Additional Paid-in Capital
(S/E and Note 3)

Robert Libby

27,209
649,002

43

b) What amount of the net assets acquired will not be subject to amortization for book
purposes?
Goodwill
Trade name
Routes
Total

Robert Libby

283,267
265,400
50,600
599,267

44

1st Exam Summer 1995

Robert Libby

45

Robert Libby

46

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University
First Examination
NCC 510
Financial Accounting
Summer 1995

NAME ___________________________
Instructions:
This open book examination consists of two problems. Both are required. The problems can be
worked in any order. Please show all calculations. Record your answers on the exam in the space
provided. You may use whatever books, notes and calculators you wish.
You may want to separate the pages while you work. Please restaple them in the correct order when
you return the examination. A stapler will be available. There are 13 pages to this exam including
the cover.
Please read and sign the following statement:
Academic integrity is expected of all students of Cornell University at all times,
whether in the presence or absence of members of the faculty.
Understanding this, I declare I shall not give, use or receive unauthorized aid in this
examination.
______________________________
Signature

Points
Assigned

Points Assigned and Suggested Times

Suggested
Times

Problem I Gannett

80

60 minutes

Problem II Ford

20

15 minutes

100

75 minutes

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47

Problem I -- Gannett -- 80 points


Gannett is a large publisher of newspapers (USA Today and Ithaca Journal) and operator of
broadcasting stations. Their 1992 and 1993 Balance Sheets, 1993 Statement of Income, and a partial
1993 Cash Flow Statement are presented on the following pages. Treat each item below
independently and ignore tax effects. Watch the dates on the statements. Note that 1993 means
the 1993 fiscal year ended December 26, 1993. Like the statements, all numbers are in thousands
of dollars.
Required:
Complete the following in the space provided.
1)

What were dividends declared during 1993?

2)

Non-cash purchases of property Plant and Equipment amounted to $49,533 during 1993.
What was the net book value of Property Plant and Equipment which was sold during 1993?
(Assume that all other purchases of new property plant and equipment and sales of old
property plant and equipment were for cash.)?

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48

3) (a) Assume that all of Gannetts sales to customers are on account. Its 10-K indicates that
$19,304 bad (trade) accounts receivable were written-off in 1993 and there were no
reinstatements. Bad debt expense for the period were recorded by debiting "Selling, General
and Administrative" and crediting the "Allowance for doubtful accounts." What amount of
bad debt expense was recorded in 1993?

(b) Assuming all sales revenues were on account, what were collections on (trade) accounts
receivable during the 1993?

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49

4)

Assume that Gannett failed to record the expiration of prepaid rent of $700 for office
buildings during the last month of the fiscal year.

(a) Compute the amount that should have been reported as Income before income taxes for 1993.

(b) Compute the amount that should have been reported as Total assets at the end of 1993.

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50

5) Assuming that Gannett makes adjusting entries at the end of each month and that all accrued
compensation is paid within 2 weeks of month end. What entry did Gannett make for accrued
compensation at the end of the year 1993?

6) What were the proceeds from long-term debt issued during 1993?

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51

7) Complete the "Operating Activities" section of the Statement of Cash Flows for the year ended
December 26, 1993 using the indirect method. Assume that depreciation expense was Gannetts
only "revenue and expense that does not affect operating assets or liabilities."
Cash Flow from Operating Activities
Net Income

___________
Cash provided by operating activities

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52

8)

Assuming that Gannett had done each of the following in preparation of its 1993 statements,
and no adjustments to correct any errors were made, what would be the effect of each on a)
Current liabilities on December 26, 1993, b) Net income for 1993, c) Cash flow from
operations for 1993, and d) Retained earnings on December 26, 1993? Circle U/S for
understate, O/S for overstate, or NE for no effect. Treat each item independently and ignore
income taxes.
a)

The company incorrectly recorded a $100 Deferred income related to subscriptions


received in advance as Subscriptions revenue at the end of 1993. No subsequent
adjustment was made.

a) Current liabilities
on Dec. 31, 1993

U/S O/S NE

b) Net income
for 1993

U/S O/S NE

c) Cash flow
from operations
for 1993

U/S O/S NE

d) Retained earnings U/S O/S NE


on Dec. 31, 1993

b)

On the last day of the year, a $2,000 prepayment of insurance (for 1994) was recorded
using the following entry:
Accrued liabilities - other
Cash

200
200

No subsequent adjustment was made.

a) Current liabilities
on Dec. 31, 1993

U/S O/S NE

b) Net income
for 1993

U/S O/S NE

c) Cash flow
from operations
for 1993

U/S O/S NE

d) Retained earnings U/S O/S NE


on Dec. 31, 1993

Robert Libby

53

Robert Libby

54

Robert Libby

55

Robert Libby

56

Robert Libby

57

Problem 2 - Ford Motor Company-- 20 points


The following note was contained in a recent Ford annual report:
Inventory Valuation--Automotive. Inventories are stated at the lower of cost or market. The
cost of most US inventories is determined by the last-in, first-out ("LIFO") method. The cost of
the remaining inventories is determined substantially by the first-in, first-out ("FIFO") method.
If FIFO were the only method of inventory accounting used by the company,
inventories would have been $1,235 million higher than reported this year and $1,246 million
higher than reported last year.
The major classes of inventory for the company's Automotive business segment at December 31 were as
follows:
Inventory (in $ millions)
Current Year
Previous Year
Finished products
$3,413.8
$3,226.7
Raw material and work in process
2,983.9
2,981.6
Supplies
419.1
429.9
Total
$6,816.8
$6,638.2

1.

Determine the ending inventory that would have been reported in the current year if Ford had
used only FIFO.

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58

2.

The cost of goods sold reported by Ford for the current year was $74,315 million. Determine the
cost of goods sold that would have been reported if Ford had used only FIFO for both years.

Robert Libby

59

Robert Libby

60

NCC 510 Financial Accounting Midterm Solution

Problem 1
1

RE
2,158,583 beginning bal.
190,089 397,752 net income
2,366,246 ending bal.

divs. decl.*

2
PPE (net)
beginning bal. 1,475,291
cash purch
132,122 164,420 depr. exp.
non-cash purch
49,533
14,257 disposals*
ending bal.
1,478,269
3a
writeoffs
3b
beginning bal.
sales
ending bal.
4a

Allowance for D.A.


12,241 beginning bal.
19,304
20,978 bad debt exp.*
13,915 ending bal.
A/ R
443,534

19,304 writeoffs
3,641,621 3,602,873 collections*
462,978

Income before income taxes


less added rent expense
Corrected amount

4b Total assets
less expired prepaid rent
5 Compensation expense
53,922
Accrued compensation liab.
6

668,452
-700
667,752
3,823,798
-700
3,823,098

Summer 1995

7 Net income
Depr exp
A/R
Other rec.
Inventories
Prepaid expenses
A/P
Accrued liabs
Income tax pay
Deferred income
Def. income taxes
Post-retire. Medical
Cash flow from ops.

8a Subscr. revenue (R)


100
Deferred income (L)
a) U/S
b) O/S
c) NE
8b Prepaid ins (A)
Accrued liab (L)
Cash (A)
a) U/S
b) NE

53,922

61

100
d) O/S

2,000

c) O/S

Problem 2
1
Lifo ending inventory
Difference
Fifo ending inventory

525,000 From cash flow statement

Robert Libby

397,752 Note change


164,420 in solution
(17,770)
(112,028)
(5,007)
10,461
3,622
32,539
(20,077)
5,429
111,875
3,161
574,377

BI + P - EI = CGS
CGS LIFO
+change in Beg inv
-change in End inv
CGS FIFO

200
1,800
d) NE

6,816.8
1,235.0
8,051.8

74,315.0
1,246.0
(1,235.0)
74,326.0

Robert Libby

62

Other Cases
Intel (A)
Dennys
Cash Flow (B)
Intel (B)
Cash Flow (C)
Honda Motor
Kimberly-Clark (A)
Nabors Industries
Kimberly-Clark (B)

NCC5000 Robert Libby

63

ROBERT LIBBY

Robert Libby

64

Intel (A)
According to their annual report, Intel is the worlds largest semiconductor chip maker,
supplying advanced technology solutions for the computing and communications industries. Its
comparative balance sheet and income statement and property, plant, and equipment note are
shown on pages that follow. All numbers in the case and statements are in millions Treat each
item independently. Watch the dates on the statements.
1)

Intel reports on its cash flow statement that it purchased $5,207 of Property, Plant and
Equipment during 2010. What was the original cost of Property Plant and Equipment
sold (disposed of) during 2010?

2)

Intel reports Depreciation Expense of $4,398 on its 2010 cash flow statement. What was
the Accumulated Depreciation on the Property Plant and Equipment sold (disposed of)
during 2010?

Robert Libby

65

3)

Are Intel's Property, Plant, and Equipment more or less than half way through their
useful lives on average? How did you know?

4)

Compute the cash collected from customers during 2010. State the assumptions you
found necessary in performing the computation.

Robert Libby

66

5)

Assume that the company had done each of the following in preparation of its statements
for the year ended December 25, 2010, and no adjustments were made. What would be
the effect of each event on the following amounts? Circle US for understate, OS for
overstate, or NE for no effect. Treat each item independently and ignore income tax
effects.

a)

b)

Robert Libby

The company failed to record receipt of $10 payment on account from a customer.
No adjustment was made.
a) Total liabilities
at year end

US OS NE

b) Income before income


taxes for the year

US OS NE

c) Total assets

US OS NE

d) Shareholders equity
at year end

US OS NE

No entry for accrued interest earned of $4 on debt securities in "Short-term


investments" was made. No adjustment was made.
a) Total liabilities
at year end

US OS NE

b) Income before income


taxes for the year

US OS NE

c) Total assets

US OS NE

d) Shareholders equity
at year end

US OS NE

67

c)

Robert Libby

Insurance of $60 was prepaid on December 1, 2010 for the six months beginning
December 1 and recorded as "Insurance expense." No adjustment was made.
a) Total liabilities
at year end

US OS NE

b) Income before income


taxes for the year

US OS NE

c) Total assets

US OS NE

d) Shareholders equity
at year end

US OS NE

68

INTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 25, 2010 and December 26, 2009
2010
2009
(In MillionsExcept Par Value)
Assets
Current assets:
Cash and cash equivalents
$ 5,498 $ 3,987
Short-term investments
11,294
5,285
Trading assets
5,093
4,648
Accounts receivable, net of allowance for doubtful accounts of $36 ($28 in
2010)
2,867
2,273
Inventories
3,757
2,935
Deferred tax assets
1,488
1,216
Other current assets
1,614
816
Total current assets
31,611 21,157
Property, plant and equipment, net
17,899 17,225
Marketable equity securities
1,008
773
Other long-term investments
3,026
4,179
Goodwill
4,531
4,421
Identified intangible assets, net
5,111
5,340
Total assets
$63,186 $53,095
Liabilities and stockholders equity
Current liabilities:
Short-term debt
$
38 $ 172
Accounts payable
2,290
1,883
Accrued compensation and benefits
2,888
2,448
Accrued advertising
1,007
773
Deferred income
622
593
Other accrued liabilities
2,482
1,722
Total current liabilities
9,327
7,591
Long-term income taxes payable
190
193
Long-term debt
2,077
2,049
Long-term deferred tax liabilities
926
555
Other long-term liabilities
1,236
1,003
Commitments and contingencies (Notes 23 and 29)
Stockholders Equity
Preferred stock, $0.001 par value, 50 shares authorized; none issued

Common stock, $0.001 par value, 10,000 shares authorized; 5,000 issued and
outstanding (5,581 issued and 5,551 outstanding in 2010) and capital in
excess of par value
16,178 14,993
Accumulated other comprehensive income (loss)
333
393
Retained earnings
32,919 26,318
Total stockholders equity
49,430 41,704
Robert Libby

69

Total liabilities and stockholders equity

$63,186 $53,095

INTEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Years Ended December 25, 2010
(In MillionsExcept Per Share Amounts)
Net revenue
Cost of sales
Gross margin
Research and development
Marketing, general and administrative
Restructuring and asset impairment charges
Amortization of acquisition-related intangibles
Operating expenses
Operating income
Gains (losses) on equity method investments, net
Gains (losses) on other equity investments, net
Interest and other, net
Income before taxes
Provision for taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares outstanding: Basic
Weighted average common shares outstanding: Diluted

2010
$ 43,623
15,132
28,491
6,576
6,309

18
12,903
15,588
348
231
109
16,045
4,581
$ 11,464
$ 2.06
$ 2.01
5,555
5,696

2009
$ 35,127
15,566
19,561
5,653
7,931
231
35
13,850
5,711
(147)
(23)
163
5,704
1,335
$ 4,369
$ 0.79
$ 0.77
5,557
5,645

2008
$ 37,586
16,742
20,844
5,722
5,452
710
6
11,890
8,954
(170)
(376)
488
7,686
2,394
$ 5,292
$ 0.93
$ 0.92
5,663
5,748

See accompanying notes.

INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment, net at fiscal year-ends was as follows:
(In Millions)
Land and buildings
Machinery and equipment
Construction in progress
Total property, plant and equipment, gross
Less accumulated depreciation
Total property, plant and equipment, net

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70

2010
$ 17,421
30,421
2,639
50,481
(32,582)
$ 17,899

2009
$ 16,687
28,339
2,796
47,822
(30,597)
$ 17,225

Solution
Intel (A)
According to their annual report, Intel is the worlds largest semiconductor chip maker,
supplying advanced technology solutions for the computing and communications industries. Its
comparative balance sheet and income statement and property, plant, and equipment note are
shown on pages that follow. All numbers in the case and statements are in millions Treat each
item independently. Watch the dates on the statements.
1)

Intel reports on its cash flow statement that it purchased $5,207 of Property, Plant and
Equipment during 2010. What was the original cost of Property Plant and Equipment
sold (disposed of) during 2010?

Beg
Purchases
End
2)

P&E (Gross)
47,822
5,207
2,548 Disposals
50,481

Intel reports Depreciation Expense of $4,398 on its 2010 cash flow statement. What was
the Accumulated Depreciation on the Property Plant and Equipment sold (disposed of)
during 2010?

Disposals

Acc. Depr. (XA)


30,597 Beg
2,413
4,398 Depr. Exp.
32,582 End

3)
Are Intel's Property, Plant, and Equipment more or less than half way through their
useful lives on average? How did you know?

Aproximately 64.5% (Accum. Depr./Orig. Cost)


through their useful life (assuming no salvage value
and straight line method-see chapter 8).

Robert Libby

71

4)

Compute the cash collected from customers during 2010. Ignore bad debts (see chapter
6). State the assumptions you found necessary in performing the computation.

Beg
Sales
End
5)

Accounts Rec. (A)


2,273
43,029 Cash collected
43,623
2,867

Assume that the company had done each of the following in preparation of its statements
for the year ended December 25, 2010, and no adjustments were made. What would be
the effect of each event on the following amounts? Circle US for understate, OS for
overstate, or NE for no effect. Treat each item independently and ignore income tax
effects.

a)

The company failed to record receipt of a $10 payment on account from a


customer. No adjustment was made.

DONE
Nothing
SHOULD BE:
Cash (A)
Accounts Receivable (A)
CORRECTION
Cash (A)
Accounts Receivable (A)

a) Total liabilities
at year end

US OS NE

b) Income before income


taxes for the year

US OS NE

c) Total assets

US OS NE

d) Shareholders equity
at year end

US OS NE

NE; NE; NE; NE

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72

b)

No entry for accrued interest earned of $4 on debt securities in "Short-term


investments" was made. No adjustment was made.

DONE
Nothing
SHOULD BE:
Accrued Interest Rec. (A)
Interest Revenue (R)
CORRECTION
Accrued Interest Rec. (A)
Interest Revenue (R)

a) Total liabilities
at year end

US OS NE

b) Income before income


taxes for the year

US OS NE

c) Total assets

US OS NE

d) Shareholders equity
at year end

US OS NE

NE; US; US; US

c)

Insurance of $60 was prepaid on December 1, 2010 for the six months beginning
December 1 and recorded as "Insurance expense." No adjustment was made.

DONE
Insurance expense (E) 60
Cash (A)
60
SHOULD BE:
Insurance expense (E) 10
Prepaid insurance (A) 50
Cash (A)
60
CORRECTION
Prepaid insurance. (A) 50
Insurance expense (E)
50

a) Total liabilities
at year end

US OS NE

b) Income before income


taxes for the year

US OS NE

c) Total assets

US OS NE

d) Shareholders equity
at year end

US OS NE

NE; US; US; US

Robert Libby

73

Robert Libby

74

Dennys Case
This assignment includes a total of 8 pages.
Dennys Corporation develops, operates and franchises 1,658 family restaurants located throughout
the United States. Their 2009 and 2010 Balance Sheets, 2008, 2009, and 2010 Statements of
Income, a partial Statement of Cash Flows for 2010, and selected notes are presented on the
following pages. Treat each item independently and ignore tax effects. All numbers in the
statements and problem are in Thousands (000s). Watch the dates on the statements.
Required:
Complete the following in the space provided.
1)

What was the net book value of property, net sold during 2010.

2)

No stock was retired during 2010. What entry did the company make for issuance of
common stock during 2010?

Robert Libby

75

3)

Assume the only revenues and expenses that did not affect operating assets or liabilities were
Depreciation and amortization expense and Share-based compensation of $2,840. Assume
that Other current liabilities are all related to operating activities. Liabilities for insurance
claims are payable to employees and customers.
Prepare the "Operating Activities" section of the Statement of Cash Flows for the year ended
December 29, 2010 using the indirect method.

4)

Dennys paid $268,769 of principal on long-term debt and $25,277 of interest during 2010.
Dennys also took out a $246,250 long-term cash loan. Assuming that there were no other
financing activities during 2010, prepare the Financing Activities section of the Cash Flow
Statement for 2010.

Robert Libby

76

5) Assume that Dennys sold $100 in gift certificates to customers and recorded them as
Restaurant sales revenue.
(a) Compute the amount that should have been reported as Total Liabilities at year-end 2010.

(b) Compute the amount that should have been reported as Net Income before Income Taxes for
2010.

6) (a) Assume that no advertising expenses are prepaid. Which was higher during 2010 (check
one)?
Advertising expense __________
Advertising paid __________
(b) How did you know?

Robert Libby

77

7)

Assuming that Dennys had done each of the following in preparation of its 2010 statements,
and no adjustments to correct any errors were made, what would be the effect of each on a)
Current assets on December 29, 2010, b) Net income for 2010, c) Cash flow from operations
for 2010, and d) Shareholders equity on December 29, 2010? Circle U/S for understate, O/S
for overstate, or NE for no effect. Treat each item independently and ignore income taxes.
a)

b)

Robert Libby

The company failed to record depreciation of $2,000 on an office building for 2010.
No subsequent adjustment was made.
a) Current assets
on Dec. 29, 2010

U/S O/S NE

b) Net income
for 2010

U/S O/S NE

c) Cash flow
from operations
for 2010

U/S O/S NE

d) Shareholders equity
on Dec. 29, 2010

U/S O/S NE

Assume that Accrued salaries was properly recorded at the end of 2009. When
Dennys paid the Accrued salaries at the beginning of 2010, they made the
following entry. No subsequent adjustment was made.
Compensation Expense (E)
Cash (A)
a) Current assets
on Dec. 29, 2010

U/S O/S NE

b) Net income
for 2010

U/S O/S NE

c) Cash flow
from operations
for 2010

U/S O/S NE

d) Shareholders equity
on Dec. 29, 2010

U/S O/S NE

78

Dennys Financial Statements

Robert Libby

79

Dennys Corporation and Subsidiaries


Consolidated Balance Sheets
December 29,
December 30,
2010
2009
(In thousands)
Assets
Current Assets:
Cash and cash equivalents
Receivables, less allowance for doubtful accounts of $207 and $171, respectively
Inventories
Assets held for sale
Prepaid and other current assets
Total Current Assets

29,074
17,280
4,037
1,933
10,162
62,486

26,525
18,106
4,165

9,549
58,345

Property, net of accumulated depreciation of $247,492 and $258,695, respectively

129,518

131,484

Other Assets:
Goodwill
Intangible assets, net
Other noncurrent assets
Total Assets

31,308
52,054
35,840
311,206

32,440
55,110
35,248
312,627

Liabilities
Current Liabilities:
Current maturities of notes and debentures
Current maturities of capital lease obligations to finance company
Accounts payable
Other current liabilities
Total Current Liabilities

Long-Term Liabilities:
Notes and debentures, less current maturities, net of discount of $3,455 and $0, respectively
Capital lease obligations to finance company, less current maturities
Liability for insurance claims, less current portion
Deferred income taxes
Other noncurrent liabilities and deferred credits
Total Long-Term Liabilities
Total Liabilities

2,583
4,109
25,957
57,685
90,334

900
3,725
22,842
64,641
92,108

234,143
18,988
18,810
13,339
39,304
324,584
414,918

254,357
19,684
21,687
13,016
39,273
348,017
440,125

1,001
548,490
(630,114)
(19,199)
(99,822)
(3,890)
(103,712)
311,206

966
542,576
(652,827)
(18,213)
(127,498)

(127,498)
312,627

Commitments and contingencies


Shareholders' Deficit
Common stock $0.01 par value; shares authorized - 135,000; issued and outstanding: 2010 100,073;
2009 96,613
Paid-in capital
Deficit
Accumulated other comprehensive loss, net of tax
Treasury stock, at cost, 1,037 and 0 shares, respectively
Total Shareholders' Deficit
Total Liabilities and Shareholders' Deficit

Robert Libby

80

Dennys Corporation and Subsidiaries


Consolidated Statements of Cash Flows

Noncash investing activities:


Non-cash purchase of property

Robert Libby

81

December 29,
2010

Fiscal Year Ended


December 30,
2009

December 31
2008

1,953

908

1,011

Robert Libby

82

Solution
Dennys Case Solution
This assignment includes a total of 8 pages.
Dennys Restaurant Group, Inc. develops, operates and franchises 341 family restaurants located in
the south and midwest. Their 2009 and 2010 Balance Sheets, 2008, 2009, and 2010 Statements of
Income, a partial Statement of Cash Flows for 2010, and selected notes are presented on the
following pages. Treat each item independently and ignore tax effects. All numbers in the
statements and problem are in Thousands (000s). Watch the dates on the statements.
Required:
Complete the following in the space provided.
1)

What was the net book value of property, net sold during 2010.

Property (net) (A)


beginning bal. 131,484
cash purch
27,381 24,500 depr. exp.
Non-cash purch
1,953
6,800 disposals*
ending bal. 129,518

2)

No stock was retired during 2010. What entry did the company make for issuance of
common stock during 2010?

Cash (+A)
5,949
Common Stock (+SE) (1,001 - 966)
35
Paid-in Capital (+SE) (548,490 - 542,576)
5,914

Robert Libby

83

3)

Assume the only revenues and expenses that did not affect operating assets or liabilities were
Depreciation and amortization expense and Share-based compensation of $2,840. Assume
that Other current liabilities are all related to operating activities. Liabilities for insurance
claims are payable to employees and customers.
Prepare the "Operating Activities" section of the Statement of Cash Flows for the year ended
December 29, 2010 using the indirect method.
Cash Flow from Operating Activities

Net income
Depreciation and Amortization
Share-based compensation
Receivables
Inventories
Prepaid and other current assets
A/P
Other current liabilities
Liab. for insurance claims less curr.
Deferred income taxes
Cash flow from ops.
4)

22,713
29,637
2,840
826
128
(613)
3,115
(6,956)
(2,877)
323
49,136

Dennys paid $268,769 of principal on long-term debt and $25,277 of interest during 2010.
Dennys also took out a $246,250 long-term cash loan. Assuming that there were no other
financing activities during 2010, prepare the Financing Activities section of the Cash Flow
Statement for 2010.

Long term debt retired


Issuance of long term debt
Net cash used in financing
activities

Robert Libby

84

(268,769)
246,250
(22,519)

5) Assume that Dennys sold $100 in gift certificates to customers and recorded them as
Restaurant sales revenue.
(a) Compute the amount that should have been reported as Total Liabilities at year-end 2010.

2. Restaurant sales revenue (R)


Customer Advance (L)
a. Reported
plus:
Revised

100
100

414,918
100
415,018

(b) Compute the amount that should have been reported as Net income before income taxes for
2010.

b. Reported
less:
Revised

24,094
100
23,994

6) (a) Assume that no advertising expenses are prepaid. Which was higher during 2010 (check
one)?
Advertising expense __ x________
Advertising paid __________
(b) How did you know?

Because Accrued Advertising increased.

Robert Libby

85

7)

Assuming that Dennys had done each of the following in preparation of its 2010 statements,
and no adjustments to correct any errors were made, what would be the effect of each on a)
Current assets on December 29, 2010, b) Net income for 2010, c) Cash flow from operations
for 2010, and d) Shareholders equity on December 29, 2010? Circle U/S for understate, O/S
for overstate, or NE for no effect. Treat each item independently and ignore income taxes.
a)

The company failed to record depreciation of $2,000 on an office building for 2010.
No subsequent adjustment was made.
a) Current assets
on Dec. 29, 2010

U/S O/S NE

b) Net income
for 2010

U/S O/S NE

c) Cash flow
from operations
for 2010

U/S O/S NE

d) Shareholders equity
on Dec. 29, 2010

U/S O/S NE

Depr. Expense (+E,-SE) 2,000


Accum. Depr.(+XA)
a) NE b) O/S
c) NE
b)

2,000
d) O/S

Assume that Accrued salaries was properly recorded at the end of 2009. When
Dennys paid the Accrued salaries at the beginning of 2010, they made the
following entry. No subsequent adjustment was made.
Compensation Expense (+E,-SE)
Cash (-A)
a) Current assets
on Dec. 29, 2010

U/S O/S NE

b) Net income
for 2010

U/S O/S NE

c) Cash flow
from operations
for 2010

U/S O/S NE

d) Shareholders equity
on Dec. 29, 2010

U/S O/S NE

3b Accrued Salaries(-L)
Compensation Expense(-E,+SE)

a) NE

Robert Libby

b) U/S

86

c) NE

d) U/S

Cash Flow (B)

A simplified statement of cash flows reflecting the "indirect method" is presented below. Each
of the 10 lines is numbered and the direction of its effect on cash is indicated. Assume that a
cash flow statement has been completed except for the impact of each of the listed transactions.
For each of the listed January transactions, indicate which line(s) are affected by the recording
each of the transactions, the amount, and in the case of line (1) and 11, the direction of the effect
on the Statement of Cash Flows for the month of January. The best approach to this problem is
to complete the journal entry for each transaction and then determine which lines are affected.
Remember that line 11 is affected only if you see "Cash" in the transaction. The solution for the
first transaction is completed as an illustration.

Operations:
Net Income
(1)
Add Expenses and Losses not affecting Operating Assets & Liabilities
+(2)
Subtract Revenues and Gains not affecting Operating Assets & Liabilities
-(3)
Add Net Decreases in Operating Assets other than cash and Increases
in Operating Liabilities
+(4)
Subtract Net Increases in Operating Assets other than cash and Decreases
in Operating Liabilities
-(5)
Cash Flow From Operations
Subtotal
Investing:
Acquisition of property, plant, and equipment
and investments for cash
Cash proceeds from disposal of property, plant,
and equipment and investments
Cash Flow From Investing

+(7)
Subtotal

Financing:
Dividends paid
Cash proceeds from issuance of debt or stock
Cash paid to retire debt or stock
Cash Flow From Financing

-(8)
+(9)
-(10)
Subtotal

-(6)

Increase (Decrease) in Cash for the Period

(11)

a. Collected $40,000 from the organizers of the company and issued shares of common stock.
a.

Cash

+(11) 40,000
Common Stock

+(9) 40,000

b. Paid $6,000 for three months rent in advance for a warehouse building.

Robert Libby

87

c. Used but was not billed for $1,000 worth of electricity during the month of January.

d. Purchased $12,000 worth of store fixtures for cash.

e. Borrowed $10,000 cash from the bank due in 90 days with interest of 12%.

f. Purchased $15,000 of inventory with payment due in 30 days.

g. Purchased $3,000 of inventory for cash.

h. Sales revenues of $15,000, of which $4,000 was collected in cash.

i. Received a computer system from an investor in exchange for issuing $6,000 worth of
additional capital stock.

j. $1,000 worth of inventory and a $500 store fixture are destroyed by water leaking from the
roof. Both losses are uninsured.

k. A store fixture originally costing $500 is sold to another company for $500 cash. (Ignore
depreciation.)

l. Depreciation expense on the store fixtures and computer of $200 is recorded.

m. Paid for $5,000 of the inventory acquired in f.

n. Paid the store clerks wages of $4,000 through January 27. In addition, the clerks have earned
$500 which will be paid in February.

Robert Libby

88

Cash Flow (B)

A simplified statement of cash flows reflecting the "indirect method" is presented below. Each
of the 10 lines is numbered and the direction of its effect on cash is indicated. Assume that a
cash flow statement has been completed except for the impact of each of the listed transactions.
For each of the listed January transactions, indicate which line(s) are affected by the recording
each of the transactions, the amount, and in the case of line (1) and 11, the direction of the effect
on the Statement of Cash Flows for the month of January. The best approach to this problem is
to complete the journal entry for each transaction and then determine which lines are affected.
Remember that line 11 is affected only if you see "Cash" in the transaction.

Operations:
Net Income
(1)
Add Expenses and Losses not affecting Operating Assets & Liabilities
+(2)
Subtract Revenues and Gains not affecting Operating Assets & Liabilities
-(3)
Add Net Decreases in Operating Assets other than cash and Increases
in Operating Liabilities
+(4)
Subtract Net Increases in Operating Assets other than cash and Decreases
in Operating Liabilities
-(5)
Cash Flow From Operations
Subtotal
Investing:
Acquisition of property, plant, and equipment
and investments for cash
Cash proceeds from disposal of property, plant,
and equipment and investments
Cash Flow From Investing

+(7)
Subtotal

Financing:
Dividends paid
Cash proceeds from issuance of debt or stock
Cash paid to retire debt or stock
Cash Flow From Financing

-(8)
+(9)
-(10)
Subtotal

-(6)

Increase (Decrease) in Cash for the Period

(11)

a. Collected $40,000 from the organizers of the company and issued shares of common stock.
a.

Cash

+(11) 40,000
Common Stock

Robert Libby

+(9) 40,000

89

b. Paid $6,000 for three months rent in advance for a warehouse building.
b.

Prepaid Rent
Cash

-(5) 6,000
-(11) 6,000

-ORRent Expense
Cash

-(1) 6,000
-(11) 6,000

c. Used but was not billed for $1,000 worth of electricity during the month of January.
c.

Utilities Expense
Utilities Payable

-(1) 1,000
+(4) 1,000

d. Purchased $12,000 worth of store fixtures for cash.


d.

Store Fixtures
Cash

-(6) 12,000
-(11) 12,000

e. Borrowed $10,000 cash from the bank due in 90 days with interest of 12%.
e.

Cash

+(11) 10,000
Notes Payable

+(9) 10,000

f. Purchased $15,000 of inventory with payment due in 30 days.


f.

Inventory

-(5) 15,000
Accounts Payable

+(4) 15,000

g. Purchased $3,000 of inventory for cash.


g.-

Inventory

-(5) 3,000
Cash

-(11) 3,000

h. Sales revenues of $15,000, of which $4,000 was collected in cash.


h.

Cash
Accounts Receivable
Sales

+(11) 4,000
-(5) 11,000
+ (1) 15,000

i. Received a computer system from an investor in exchange for issuing $6,000 worth of
additional capital stock.
i

Equipment
Common Stock

6,000
6,000

No effect on any of the line items. This is a non-cash investing and financing activity to be
reported as a supplement at the end of the Statement of Cash Flows.

j. $1,000 worth of inventory and a $500 store fixture are destroyed by water leaking from the
roof. Both losses are uninsured.
j.

Loss (from damage)


Inventory
PPE

Robert Libby

-(1) 1,500
+(4) 1,000
+(2) 500

90

k. A store fixture originally costing $500 is sold to another company for $500 cash. (Ignore
depreciation.)
k.

Cash

+(11) 500
Store Fixtures

+(7) 500

l. Depreciation expense on the store fixtures and computer of $200 is recorded.


1.

Depreciation Expense
-(1) 200
Accumulated Depreciation

+(2) 200

Recording depreciation expense affects two line items: it reduces net income -(1) and it is
added back +(2) to produce no net effect (except for taxes) on cash flows from operations.

m. Paid for $5,000 of the inventory acquired in f.


m.

Accounts Payable
Cash

-(5) 5,000
-(11) 5,000

n. Paid the store clerks wages of $4,000 through January 27. In addition, the clerks have earned
$500 which will be paid in February.
n.

Salaries Expense
Salaries Payable
Cash

Robert Libby

-(1) 4,500
+ (4) 500
-(11) 4,000

91

Robert Libby

92

Intel (B)
Assume that the company had done each of the following in preparation of its statements for
the year ended December 31, 2011, and no adjustments were made. What would be the effect
of each event on the following amounts? Circle US for understate, OS for overstate, or NE
for no effect. Treat each item independently and ignore income tax effects.
a)

b)

c)

Robert Libby

The company failed to record receipt of $10 payment on account from a


customer. No adjustment was made.
a) Income before income
taxes for the year

US OS NE

b) Cash flow from


operations for the year

US OS NE

No entry for accrued interest earned of $4 on debt securities in "Short-term


investments" was made. No adjustment was made.
a) Income before income
taxes for the year

US OS NE

b) Cash flow from


operations for the year

US OS NE

Insurance of $60 was prepaid on December 1, 2011 for the six months
beginning December 1 and recorded as "Insurance expense." No adjustment
was made.
a) Income before income
taxes for the year

US OS NE

b) Cash flow from


operations for the year

US OS NE

93

Robert Libby

94

Solution
Intel (B)
Assume that the company had done each of the following in preparation of its statements for
the year ended December 31, 2011, and no adjustments were made. What would be the effect
of each event on the following amounts? Circle US for understate, OS for overstate, or NE
for no effect. Treat each item independently and ignore income tax effects.
a)

The company failed to record receipt of $10 payment on account from a


customer. No adjustment was made.

DONE
Nothing
SHOULD BE:
Cash (+A)
Accounts Receivable (-A)
CORRECTION
Cash (+A)
Accounts Receivable (-A)

a) Income before income


taxes for the year

US OS NE

b) Cash flow from


operations for the year

US OS NE

NE; US
b)

No entry for accrued interest earned of $4 on debt securities in "Short-term


investments" was made. No adjustment was made.

DONE
Nothing
SHOULD BE:
Accrued Interest Rec. (+A)
Interest Revenue (+R,+SE)
CORRECTION
Accrued Interest Rec. (+A)
Interest Revenue (+R,+SE)

a) Income before income


taxes for the year

US OS NE

b) Cash flow from


operations for the year

US OS NE

US; NE
c)

Insurance of $60 was prepaid on December 1, 2011 for the six months
beginning December 1 and recorded as "Insurance expense." No adjustment
was made.

DONE
Insurance expense (+E,-SE) 60
Cash (-A)
60
SHOULD BE:
Insurance expense (+E,-SE) 10
Prepaid insurance (+A)
50
Cash (-A)
60
CORRECTION
Prepaid insurance. (+A) 50
Insurance expense (-E,+SE) 50

a) Income before income


taxes for the year

US OS NE

b) Cash flow from


operations for the year

US OS NE

US; NE
Robert
Libby in accruals and deferrals do
95 not affect cash flow from operations!
NOTE:
Errors

Robert Libby

96

Cash Flow (C)

A simplified statement of cash flows reflecting the "indirect method" is presented in "Cash Flow
(B)" respectively. Each of the 10 lines is numbered and the direction of its effect on cash is
indicated. For each of the listed January transactions, indicate which line(s) are affected by the
recording of the transaction, the amount, and in the case of line 11, the direction of the effect on
the Statement of Cash Flows for the month of January for the indirect method.

a. Accounts receivable in the amount of $4,000 are written off. The company uses the
allowance method of accounting for bad debts.
b. At the end of January, an entry is made to increase the allowance for uncollectible accounts
by $5,000. The company uses the allowance method of accounting for bad debts.
c. On January 30, the company records $600 in accrued interest income on a note receivable
from a customer.

Robert Libby

97

Robert Libby

98

Solution
Cash Flow (C)

A simplified statement of cash flows reflecting the "indirect method" is presented in "Cash Flow
(B)" respectively. Each of the 10 lines is numbered and the direction of its effect on cash is
indicated. For each of the listed January transactions, indicate which line(s) are affected by the
recording of the transaction, the amount, and in the case of line 11, the direction of the effect on
the Statement of Cash Flows for the month of January for the indirect method.

a. Accounts receivable in the amount of $4,000 are written off. The company uses the
allowance method of accounting for bad debts.
A. Indirect - None.
Allowance for Doubtful Accounts (XCA)
A/R (CA)

4,000
4,000

b. At the end of January, an entry is made to increase the allowance for uncollectible accounts
by $5,000.The company uses the allowance method of accounting for bad debts.
B. Indirect -(1) 5,000; +(4) 5,000.
Bad debt expense (E)
Allowance for Doubtful Accounts (XCA)

5,000
5,000

c. On January 30, the company records $600 in accrued interest income on a note receivable
from a customer.
C. Indirect +(1) 600; -(5) 600.
Interest Receivable (CA)
Interest Revenue (OE-R)

Robert Libby

600
600

99

Robert Libby

100

Honda Motor Case


Honda Motor Company is the worlds largest manufacturer of motorcycles and a leading manufacturer of
automobiles. Excerpts from its income statement and its inventory footnote provided below.
Consolidated Statements of Income
Years ended March 31, 2009, 2010 and 2011
Yen
2009
Net sales and other operating revenue (notes 2&6) Y 10,011 Y
Cost of sales (notes 1(u)&2)
7,420
Selling, general and administrative (note 1(u))
1,839
Research and development
563

(billions)
2010
2011
8,579 Y 8,937
6,415
6,497
1,337
1,383
463
488

(5) Inventories
Inventories at March 31, 2010 and 2011 are summarized as follows:
Yen (billions)
2010
2011
Finished goods
Y 560
Y 531
Work in process
36
50
Raw materials
340
319
Total
936
900

Required:
1. Compute the total additions or costs added to inventory during the year ended March 31, 2011.

2. Compute the transfers of Work-in-process to Finished goods during year ended March 31, 2011.

Robert Libby

101

3. Assume that the company had done each of the following in preparation of its statements for the
year ended March 31, 2011, and no adjustments were made. What would be the effect of each
event on the following amounts? Circle U/S for understate, O/S for overstate, or NE for no effect.
Treat each item independently and ignore income tax effects.
a. Direct factory wages of 10 related to goods which had been completed but were still in
inventory were earned and not paid for in March, but no related entry(s) were made. No
adjustment was made.
a) Cash flow from
operations for the year

U/S O/S NE

b) Income before income


taxes for the year

U/S O/S NE

c) Current assets
at year end

U/S O/S NE

d) Shareholders equity
at year end

U/S O/S NE

b. Depreciation of factory equipment for 200 was not recorded. The related goods were sold
in March. No adjustment was made.

Robert Libby

a) Cash flow from


operations for the year

U/S O/S NE

b) Income before income


taxes for the year

U/S O/S NE

c) Non-current assets
at year end

U/S O/S NE

d) Shareholders equity
at year end

U/S O/S NE

102

Solution
Honda Motor Case
Honda Motor Company is the worlds largest manufacturer of motorcycles and a leading manufacturer of
automobiles. Excerpts from its income statement and its inventory footnote provided below.
Consolidated Statements of Income
Years ended March 31, 2009, 2010 and 2011
Yen
2009
Net sales and other operating revenue (notes 2&6) Y 10,011 Y
Cost of sales (notes 1(u)&2)
7,420
Selling, general and administrative (note 1(u))
1,839
Research and development
563

(billions)
2010
2011
8,579 Y 8,937
6,415
6,497
1,337
1,383
463
488

(5) Inventories
Inventories at March 31, 2010 and 2011 are summarized as follows:
Yen (billions)
2010
2011
Finished goods
Y 560
Y 531
Work in process
36
50
Raw materials
340
319
Total
936
900

Required:
1. Compute the total additions or costs added to inventory during the year ended March 31, 2011.

Beginning
Additions
Ending

Inventory
936
6,461
6,497 Cost of good sold
900

2. Compute the transfers of Work-in-process to Finished goods during year ended March 31, 2011.

Finished Goods Inventory


Beginning
560
6,468
6,497 Cost of good sold
Transfers
Ending
531

Robert Libby

103

3. Assume that the company had done each of the following in preparation of its statements for the
year ended March 31, 2011, and no adjustments were made. What would be the effect of each
event on the following amounts? Circle US for understate, OS for overstate, or NE for no effect.
Treat each item independently and ignore income tax effects.
a. Direct factory wages of 10 related to goods which had been completed but were still in
inventory were earned and not paid for in March, but no related entry(s) were made. No
adjustment was made.
a) Cash flow from

US OS NE

DONE
operations for the year
Nothing
b) Income before income
US OS NE
SHOULD BE:
taxes for the year
WIP Inventory (+A)
c) Current assets
US OS NE
Accrued Wages Payable (+L)
at year end
Finished Goods Inventory (+A)
WIP Inventory (-A)
d) Shareholders equity
US OS NE
at
year
end
CORRECTION
Finished Goods Inventory (+A)
NE; NE; US; NE
Accrued Wages Payable (+L)
What if sold:
Cost of Goods Sold (+E,-SE)
Accrued Wages Payable (+L)
NE; O/S; NE; O/S
b. Depreciation of factory equipment for 200 was not recorded. The related goods were sold
in March. No adjustment was made.
a) Cash flow from
operations for the year

US OS NE

b) Income before income


taxes for the year

US OS NE

DONE
c) Non-current assets
at year end
Nothing
SHOULD BE:
d) Shareholders equity
WIP Inventory (+A)
at year end
Accum. Depr. (+XA,-A)
Finished Goods Inventory (+A)
WIP Inventory (-A)
CGS Exp. (+E,-SE)
Finished Goods Inventory (-A)
CORRECTION
CGS Exp. (+E,-SE)
Accum. Depr. (+XA.-A)
NE; OS; OS; OS
Robert Libby

104

US OS NE
US OS NE

Kimberly-Clark (A) Stockholders Equity

Required: Answer the following questions based on the partial Statement of Stockholders Equity
and Cash Flow Statement from Kimberly-Clarks Annual Report.
1) What was the average acquisition cost of the treasury shares issued for stock-based awards
exercised or vested during 2011?

2) Was this acquisition cost greater or smaller than the cash received from the exercise or vesting
of stock-based awards during 2011? By how much?

3) Cash dividends are not necessarily paid immediately. Ignore dividends to non-controlling
interests. Provide the 2011 values for:
a) Cash dividends declared
b) Cash dividends paid
c) Portion of cash dividends declared but not paid

4) What entry was made for the recognition of stock-based compensation during 2011? Ignore
taxes.

5) Assume that on January 1, 2011, Kimberly-Clark declared and distributed a 2 for 1 stock split
accounted for as a stock dividend. There was no change in par value of the shares and all
amounts and numbers of shares presented were retroactively restated to reflect the split.
a) What dollar amount would have been reported as Common Stock on December 31, 2010 in
the 2010 annual report?

b) What journal entry would they likely have recorded on January 1, 2011 for the stock split?

Robert Libby

105

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES


CONSOLIDATED CASH FLOW STATEMENT
Year Ended December 31

2011

(Millions of dollars)

Financing Activities
Cash dividends paid
Net increase (decrease) in short-term debt
Proceeds from issuance of long-term debt
Repayments of long-term debt
Redemption of redeemable preferred securities
of subsidiary
Cash paid on redeemable preferred securities of
subsidiary
Proceeds from exercise of stock options
Acquisitions of common stock for the treasury
Other
Cash Used for Financing

Robert Libby

106

(1,099)
13
839
(107)
(500)
(57)
435
(1,246)
(19)
(1,741)

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Common Stock
Issued
Shares
Amount

Balance at December 31, 2010


Net income
Other comprehensive income
Unrealized translation
Employee postretirement
benefits, net of tax
Other
Stock-based awards
exercised or vested
Income tax benefits
on stock-based compensation
Shares repurchased
Shares retired
Recognition of stock-based
compensation
Dividends declared
Other
Balance at December 31, 2011

Robert Libby

478,597
-

Additional
Paid-in
Capital

598
-

425
-

Retained
Treasury Stock
Shares
Amount
Earnings
(Dollars in millions, shares in thousands)

Accumulated
Other
Comprehensive Noncontrolling
Income (Loss)
Interests

71,741
-

(4,726)
-

11,086
1,591

(236)

(13)

(133)
(31)

(1)
1

(47)

(7,924)

490

(50,000)

(62)

10
-

19,120
(50,000)

(1,247)
3,378

(3,316)

428,597

536

48
4
440

32,937

(2,105) $

(1,107)
(10)
8,244 $

107

(1,466)
-

(1,866) $

285
39

(29)
(2)
280

Robert Libby

108

SOLUTION
Kimberly-Clark (A) Stockholders Equity

Required: Answer the following questions based on the partial Statement of Stockholders Equity
and Cash Flow Statement from Kimberly-Clarks Annual Report.
1) What was the average acquisition cost of the treasury shares issued for stock-based awards
exercised or vested during 2011?
$490 million/7.924 million shares = $61.84 per share
2) Was this acquisition cost greater or smaller than the cash received from the exercise or vesting
of stock-based awards during 2011? By how much?
The acquisition cost of Treasury stock exceeded the cash received from the exercise of stock
options and stock awards by $47 million. (note the debit of $47 million to Additional Paid-In
Capital in the Statement of Stockholders Equity).
Cash (A)
443
Additional paid-in capital (SE)
47
Treasury Stock (XSE)
490
3) Cash dividends are not necessarily paid immediately. Ignore dividends to non-controlling
interests. Provide the 2011 values for:
a) Cash dividends declared

$1,107 million (Statement of S/E)

b) Cash dividends paid $1,099 million (Cash Flow Statement)


c)

Portion of cash dividends declared but not paid $8 million (Difference between
dividends declared and dividends paid. Also on B/S as increase in Dividends payable)

4) What entry was made for the recognition of stock-based compensation during 2011? Ignore
taxes.
Compensation Expense (+E,-SE)
48
Additional Paid-in Capital (+SE)
48
5) Assume that on January 1, 2011, Kimberly-Clark declared and distributed a 2 for 1 stock split
accounted for as a stock dividend. There was no change in par value of the shares and all
amounts and numbers of shares presented were retroactively restated to reflect the split.
a) What dollar amount would have been reported as Common Stock on December 31, 2010 in
the 2010 annual report?
$598 million / 2 = $299 million.
b) What journal entry would they likely have recorded on January 1, 2011 for the stock split?
Retained Earnings or APIC (-SE)
299
Common Stock (+SE)
299

Robert Libby

109

Robert Libby

110

Nabors Case
Nabors Industries is the largest oil and gas land drilling contractor in the world. They also have
a large portfolio of available for sale securities. Their investments footnote and statement of
stockholders equity for a recent year are attached. Answer the following questions based on this
information. Note that all dollar amounts in the statements are in thousands ($000). Prepare
your answers in thousands also.
1. What adjusting entry did Nabors make at the end of 2012 to adjust available-for-sale
securities to market?

2. What journal entries did Nabors make related to the sale of available-for-sale securities
during 2012?

Robert Libby

111

3. INVESTMENTS
Certain information regarding our debt and equity securities is presented below:
Year Ended December 31,
2011
(In thousands)

2012

Available-for-sale
Proceeds from sales and maturities
Realized gains (losses), net

$
$

24,010
13,405

$
$

12,672
3,036

2010

$
$

13,062
1,694

NABORS INDUSTRIES LTD. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
2011
(In thousands)

2012

Net income (loss) attributable to Nabors


Other comprehensive income (loss), before tax:
Translation adjustment attributable to Nabors
Unrealized gains/(losses) on marketable securities
Less: reclassification adjustment for (gains)/losses
included in net income (loss)
Unrealized gains/(losses) on marketable securities
Pension liability amortization
Unrealized gains/(losses) on cash flow hedges
Other comprehensive income (loss), before tax
Income tax expense (benefit) related to items of other
comprehensive income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income (loss) attributable to Nabors
Net income (loss) attributable to noncontrolling interest
Translation adjustment attributable to noncontrolling
interest
Comprehensive income (loss) attributable to
noncontrolling interest
Comprehensive income (loss)

Robert Libby

164,034

112

94,695

21,073
98,138

(20,257)
5,356

60,897
278

(13,405)
84,733
(324)
702
106,184

(3,036)
2,320
(5,391)
763
(22,565)

(1,694)
(1,416)
(376)
(5,282)
53,823

(4,147)
110,331
274,365
621

(1,777)
(20,788)
222,891
1,045

4,477
49,346
144,041
85

(185)

723

311

243,679

2010

932
275,297

860
223,751

808
144,849

SOLUTION
Nabors Case
Nabors Industries is the largest oil and gas land drilling contractor in the world. They also have
a large portfolio of available for sale securities. Their investments footnote and statement of
stockholders equity for a recent year are attached. Answer the following questions based on this
information.Note that all dollar amounts in the statements are in thousands ($000). Prepare
your answers in thousands also.
1. What adjusting entry did Nabors make at the end of 2012 to adjust available-for-sale
securities to market?

Investment in AFS (+A)


Net unrealized losses/gains on AFS (+OCI, +SE)

98,138
98,138

2. What journal entries did Nabors make related to the sale of available-for-sale securities
during 2012?

Cash (+A)
Investment in AFS (-A)
Net unrealized losses/gains on AFS (-OCI, -SE)
Gain on sale (+R, +SE)

Robert Libby

113

24,010
24,010
13,405
13,405

Robert Libby

114

Kimberly-Clark (B)
Equity Method Investments

Required: Answer the following questions based on the attached excerpts from Kimberly-Clark's
2011 Annual Report.
1. What entry did Kimberly-Clark make in 2011 to record income from affiliates accounted for
under the equity method?

2. What entry did Kimberly-Clark make in 2011 to record dividends received from affiliates
accounted for under the equity method?

Robert Libby

115

Robert Libby

116

SOLUTION

Kimberly-Clark (B) Equity Method Investments

Required: Answer the following questions based on Kimberly-Clark's 2011 Annual Report.
1. What entry did Kimberly-Clark make in 2011 to record income from affiliates accounted for
under the equity method?

Investments in Equity Cos. (A)


161.0
Share of net income of equity companies (R)

161.0

(From the income statement)

2. What entry did Kimberly-Clark make in 2011 to record dividends received from affiliates
accounted for under the equity method?

Cash (A) (161 - 23)


Investment in Equity Cos. (A)

138.0
138.0

(From income statement and operating activities section of cash flow


statement.)

Robert Libby

117

Robert Libby

118

Practice Quiz 1s
Summer 2005
Summer 2008

Robert Libby

119

Robert Libby

120

NCC 500 Quiz 1


Summer 2005

Name ________________________

Urban Outfitters is a major clothing retail chain. Its balance sheet, income statement, and
selected notes are presented on the following pages. Treat each item below independently and
ignore taxes. Watch the dates on the statements. Like the statements, all numbers are in
thousands of dollars.
Required:
Complete the following in the space provided.
1. What were dividends declared during the year ended January 31, 2004?

2. No common stock was repurchased. Record the journal entry for any issuance of their
common stock during the year ended January 31, 2004?

Robert Libby

121

3. What was cash collected from customers during the year ended January 31, 2004?

4. If rent expense for the year ended January 31, 2004 was $53,782, what amount of cash
was paid for rent during the year? Note that some rent is paid at the beginning of each
month and some rent is accrued at the end of the month and paid in the following month.
No rent is prepaid.

Robert Libby

122

URBAN OUTFITTERS, INC.


CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

January 31,
2004
2003
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable
Inventories
Prepaid expenses and other current assets
Deferred taxes

$ 67,194
19,979
6,711
63,247
13,872
4,832

$ 72,127
7,379
3,262
50,006
8,633
4,358

175,835

145,765

121,919
52,315
9,526
$359,595

108,847
15,640
8,925
$279,177

$ 27,353
7,756
22,653

$ 19,186
5,197
19,870

Total current liabilities


Other liabilities

57,762
11,703

44,253
10,539

Total liabilities

69,465

54,792

5
83,282
204,905
1,938

4
67,160
156,529
692

290,130
$359,595

224,385
$279,177

Total current assets


Property and equipment, net
Marketable securities
Deferred income taxes and other assets

LIABILITIES AND SHAREHOLDERS EQUITY


Current liabilities:
Accounts payable
Accrued compensation
Accrued expenses and other current liabilities

Commitments and contingencies (see Note 10)


Shareholders equity:
Preferred shares; $.0001 par value, 10,000,000 shares authorized, none issued
Common shares;
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders equity

Robert Libby

123

URBAN OUTFITTERS, INC.


CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)

Fiscal Year Ended January 31,


2004
2003
2002
$ 548,361
$ 422,754
$ 348,958

Net sales
Cost of sales, including certain buying, distribution and
occupancy costs
Gross profit
Selling, general and administrative expenses

334,888

271,963

235,311

213,473
132,767

150,791
105,392

113,647
88,149

Income from operations


Interest income
Other expenses, net

80,706
1,524
(926)

45,399
1,497
(823)

25,498
318
(594)

Income before income taxes


Income tax expense

81,304
32,928

46,073
18,660

25,222
10,215

Net income
Net income per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted

48,376

27,413

15,007

$
$

1.23
1.20

$
$

0.73
0.71

$
$

0.44
0.43

39,267,463
40,415,569

37,776,456
38,776,904

34,537,230
34,876,914

Selected Notes:
5.

Accrued Expenses and Other Current Liabilities


Accrued expenses and other current liabilities consist of the following:
January 31,
2004
2003

Accrued sales taxes


Accrued rent expense
Gift certificates and merchandise credits
Accrued income taxes
Other current liabilities

$ 1,880
2,840
5,712
2,610
9,611

$ 1,095
2,867
3,523
4,379
8,006

Total

$22,653

$19,870

Robert Libby

124

NCC 500 Quiz 1


Summer 2005

Name ____SOLUTION_________

Urban Outfitters is a major clothing retail chain. Its balance sheet, income statement, and
selected notes are presented on the following pages. Treat each item below independently and
ignore taxes. Watch the dates on the statements. Like the statements, all numbers are in
thousands of dollars.
Required:
Complete the following in the space provided.
1. What were dividends declared during the year ended January 31, 2004?

Div. Declared

Retained Earnings (SE)


156,529 Beg
0
48,376 Net earnings
204,905 End

2. No common stock was repurchased. Record the journal entry for any issuance of their
common stock during the year ended January 31, 2004?

Cash (+A)
16,123
Common Stock (+SE) (5 - 4)
Additional Paid-in Capital (+SE) (83,282 - 67,160)

1
16,122

3. What was cash collected from customers during the year ended January 31, 2004?

Beg
Sales
End

Accounts Rec. (A)


3,262
548,361
544,912 Collections
6,711

4. If rent expense for the year ended January 31, 2004 was $53,782, what amount of cash
was paid for rent during the year? Note that some rent is paid at the beginning of each
month and some rent is accrued at the end of the month and paid in the following month.
No rent is prepaid.

Rent paid

Robert Libby

Accrued rent expense (L)


2,867 Beg
53,809
53,782 Rent expense
2,840 End

125

Robert Libby

126

NCC 500 Quiz 1


Summer 2008

Name ________________________

Campbell Soup Company is a major player in soups and sauces (Campbells and Prego) and biscuits
and confectionery (Pepperidge Farm and Godiva). Its 1997 and 1996 Balance Sheets, 1997 Statement
of Income, and selected notes are presented on the following pages. When I refer to 1997, I mean the
fiscal year ended August 3, 1997. Treat each item below independently. Watch the dates on the
statements. Like the statements, all numbers are in millions of dollars.
Required:
Complete the following in the space provided.
1)

What was the amount of total dividends declared during 1997?

2)

Assume that all Other Liabilities are deferred revenues. Advance payments from
customers were $972 during the year. Prepare the adjusting journal entry for the total amount
of revenues recognized during 1997 from goods delivered to customers that had paid in
advance.

Robert Libby

127

3)

Assuming that Campbell had done each of the following in preparation of its 1997
statements, and no adjustments to correct any errors were made, what would be the effect of
each on a) Total liabilities on August 3, 1997, b) Net Income for 1997, c) Current assets on
August 3, 1997, and d) Stockholders equity on August 3, 1997? Circle U/S for understate,
O/S for overst ate, or NE for no effect. Ignore income taxes.
The company failed to make the necessary end-of-period adjustment to record accrued
interest expense. No subsequent adjustment was made.

a) Total liabilities
on August 3, 1997

U/S O/S NE

b) Net Income
for 1997

U/S O/S NE

c)Current assets
U/S O/S NE
on August 3, 1997
d) Stockholders
U/S O/S NE
equity on August 3, 1997

4)

Assume that the company failed to record depreciation expense of $50 on a newly acquired
piece of equipment. No subsequent adjustment was made. Ignore taxes.
What amounts would they have reported on August 3, 1997 if any needed adjustment had
been made for:
Total Assets ______________________

Total Stockholders Equity __________________________

Robert Libby

128

CAMPBELL SOUP CO
Consolidated Balance Sheet

In Millions For Period Ended


CURRENT ASSETS
Cash and cash equivalents
Accounts receivable (Note 9)
Inventories (Note 10)
Other current assets (Note 11)
Total current assets
Plant assets, net of depreciation (Note 12)
Intangible assets, net of amortization (Note 13)
Other assets (Note 14)
Total assets
CURRENT LIABILITIES
Notes payable (Note 15)
Payable to suppliers and others
Accrued liabilities
Dividend payable
Accrued income taxes
Total current liabilities
LONG-TERM DEBT (NOTE 15)
NONPENSION POSTRETIREMENT BENEFITS (NOTE 7)
OTHER LIABILITIES (NOTE 16)
Total liabilities
SHAREOWNERS' EQUITY (NOTE 18)
Preferred stock; authorized 40 shares; none issued
Capital stock, $.0375 par value; authorized 560 shares; issued 542
shares
Capital surplus
Earnings retained in the business
Capital stock in treasury, 84 shares in 1997 and 48 shares in 1996,
at cost
Cumulative translation adjustments
Total shareowners' equity
Total liabilities and shareowners' equity
The accompanying Summary of Significant Accounting Policies and
Notes on pages 39 to 46 are an integral part of the financial statements.

Robert Libby

129

8/03/97
--

7/28/96
--

26
633
762
162
$1,583
2,560
1,793
523
$6,459
--

34
618
739
227
$1,618
2,681
1,808
525
$6,632
--

1,506
608
642
88
137
$2,981
1,153
442
463
$5,039
---

865
568
593
86
117
$2,229
744
452
465
$3,890
---

20
338
3,571

20
228
3,211

(2,459)
(50)
$1,420
6,459

(779)
62
$2,742
6,632

--

CAMPBELL SOUP CO
Consolidated Statements of Income

In Millions Except Per Share Amounts For Period Ended


53 weeks 52 weeks 52 weeks
NET SALES
Costs and expenses
Cost of products sold
Marketing and selling expenses
Administrative expenses
Research and development expenses
Other expense (Note 4)
Restructuring charge (Note 3)
Total costs and expenses
EARNINGS BEFORE INTEREST AND TAXES
Interest expense (Note 5)
Interest income
Earnings before taxes
Taxes on earnings (Note 8)
NET EARNINGS
EARNINGS PER SHARE (NOTE 18)
WEIGHTED AVERAGE SHARES OUTSTANDING

Robert Libby

130

8/03/97
-7,964
-4,305
1,636
324
77
140
216
$6,698
1,266
167
8
$1,107
394
$713
1.51
472

8/03/96
-7,678
-4,363
1,499
343
84
72
-$6,361
1,317
126
6
$1,197
395
$802
1.61
498

8/03/95
-7,250
-4,255
1,371
326
88
63
-$6,103
1,147
115
10
$1,042
344
$698
1.40
498

NCC 500 Quiz 1


Summer 2008

Name ____SOLUTION________

Campbell Soup Company is a major player in soups and sauces (Campbells and Prego) and biscuits
and confectionery (Pepperidge Farm and Godiva). Its 1997 and 1996 Balance Sheets, 1997 Statement
of Income, and selected notes are presented on the following pages. When I refer to 1997, I mean the
fiscal year ended August 3, 1997. Treat each item below independently. Watch the dates on the
statements. Like the statements, all numbers are in millions of dollars.
Required:
Complete the following in the space provided.
1)

What was the amount of total dividends declared during 1997?


RE
divs. decl.

2)

353

3,211 beginning bal.


713 net income
3,571 ending bal.

Assume that all Other Liabilities are deferred revenues. Advance payments from
customers were $972 during the year. Prepare the journal entry for the total amount of
revenues recognized during 1997 from goods delivered to customers that had paid in
advance.
2)

Other Liabs
Revenues

974

Other liabilities or def. rev. (L)


Revenues (R)

Robert Libby

131

465 beginning bal.


972 Adv. payments
463 ending bal.
974
974

Robert Libby

132

Practice Old Midterms (and other


practice questions)
Fall 2001 (Chap. 1-7, 13)
Summer 2004 (Chap. 1-6, 13)
Summer 2009 (Chap. 1-7, 13)
Summer 2010 (Chap. 1-6, 8, 13)
Extra Chap. 6, 7, and 8 questions

NCC5000 Robert Libby

133

ROBERT LIBBY

Robert Libby

134

JOHNSON GRADUATE SCHOOL OF MANAGEMENT

Cornell University

First Examination
NCC 500

FINANCIAL ACCOUNTING
Fall200l

NAME:

-----------------------------

Cornell ID: ______

Instructions:
This open book examination consists of one problem. The questions can be worked in any order.
Please show all calculations. Record your answers on the exam in the space provided. You may use
whatever books, notes and calculators you wish.
You may want to separate the pages while you work. Please re-staple them in the correct order when
you return the examination. A stapler will be available. There are 10 pages to this exam including
the cover.
Please read and sign the following statement:
Academic integrity is expected of all students of Cornell University at all times,
whether in the presence or absence of members of the faculty.
Understanding this, I declare I shall not give, use or receive unauthorized aid in this
examination.

Signature----------------

Points Assigned and Suggested Times

Points
Assigned

Suggested
Times

Problem I American Eagle Outfitters

104

104 minutes

16

16 minutes

Problem ll Gateway Computers


Review

15 minutes

135 minutes

Robert Libby

135

Problem I - American Eagle Outfitters


Answer the following questions using the attached financial statements and selected footnotes from
American Eagle Outfitters (AEOS) 2000 ArulUal Report. Before answering the questions, take a few
minutes to review the fmancial statements and footnotes. Familiarity with the available information
will likely save you some time and mistakes. Note that all numbers in the statements and problems
are in thousands ($000). Treat each question independently and watch the dates on the statements.
The year 2000 means fiScal year ended Feb. 3, 2001.

I. What were dividends declared for 2000? (8 points)

2. (a) Which was higher during the 2000: sales or redemptions of "stored value cards and gift
certificates"? (Note that "redemption" means that customers exchange the cards or gift
certificates for merchandise.) (circle one) (8 points)
Sales

Redemptions

(b) How did you know?

1_,
I

Robert Libby

136

3. How much more or less did AEOS pay in interest than they recognized as interest expense in
2000 (fill in the appropriate blank)? (8 points)

Paid _ _ _ _ more than recognized


Paid _ _ _ _ less than recognized

4. What mistake(s) did AEOS make in preparing the investing section of its Cash Flow
Statement for 2000? (Note that AEOS did not actually make these mistakes. They were
inserted into the statements.) (8 points)

Robert Libby

137

5. What was the accumulated depreciation on property and equipment disposed of during 2000? (8
points)

6. Assume that AEOS s borrowing on the notes payable took place on the last day of the fiscal
year, and no payments on th~ notes payable were made during 2000. What amounts were
borrowed on the notes payable during 2000? (8 points)

Robert Libby

138

7. Accrued rent relates to additional payments made to mall owners as a percentage of sales
when sales exceed specified levels. The amount payable is determined on the last day of the
fiscal year and is paid within 30 days of that date. What adjusting entry did AEOS make at the
end of2000 related to the additional rent. (8 points)

Robert Libby

139

8. Prepare the operating section of AEOS's Statement of Cash Flows for the year 2000 using the
indirect method. Stock compensation to employees was $6,952. Depreciation and
amortization expense was the only other revenue or expense that did not affect operating
assets or liabilities. Income taxes paid were $37,362. (14 points)

Cash Flow From Operating Activities:

Cash provided by operating activities:

Robert Libby

140

9. Assume that at the end of2000, AEOS received $3,000 from customers for "Stored value
cards and gift certificates," and recorded the transaction by debiting cash and crediting sales
revenue. They also failed to make any entry related to accrued compensation of $2,800 for
services rendered but not paid. No adjusting entry related to either transaction was performed
at year end.
(a) Compute the amount that should have been reported as ''operating income" for 2000. (5
points)

(b) Compute the corrected amount of''working capital" at the end of2000. (7 points)

Robert Libby

141

10. Assume that AEOS had done each of the following in preparation of its 2000 statements, and
no adjustments were made. What would be the effect of each event on the following
amounts? Circle U/S for understate, 0/S for overstate, or NE for no effect. Treat each item
independently and ignore income tax effects.
(a)

AEOS failed to recognize $30 of accrued rent during 2000. No subsequent entry was
made. (8 points)

(b)

Robert Libby

(a)

Current liabilities
at year-end

U/S

0 /S

NE

(b)

Net income for the


year

U/S

0/S

NE

(c)

Cash flow from


Operations for the
year

U/S

0/S

NE

(d)

Total assets
at year-end

U/S

0 /S

NE

AEOS incorrectly recorded a $100 payment on account to one of its suppliers in the

following manner.
Prepaid expenses
I0
Cash
10
No correcting entry was made. (8 points)

U/S

0 /S

NE

U/S

0/S

NE

(c)

Operating income for U/S


the year

0/S

NE

(d)

Total assets
at year-end

0/S

NE

(a)

Cunent liabilities
at year-end

(b)

Cash flow from


operations for the
year

142

lJ/S

(c)

At the end of 2000, AEOS failed to record amortization of an intangible of $300. No


subsequent adjusting entry was made. (8 points)
(a)

Current assets
at year-end

U/S

O/S

NE

(b)

Operating income for U/S


the year

O/S

NE

(c)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(d)

Robert Libby

Retained earnings
at year-end

143

Problem II - Gateway Computers


Answer the following questions using the attached income statement and selected footnotes from
Gateway Computer's 2000 Annual Report. Before answering the questions, take a few minutes to
review the footnotes. Familiarity with the available infonnation will likely save you some time and
mistakes. Note that aU numbers in the statements and problems are in thousands ($000). Treat
each question independently and watch the dates on the statements.
1. Assume that for 2000, Gateway estimated that bad debt expense related to sales in 2000
would equal 1% of net sales, and that they had underestimated bad debt expense in 1999 by
$1,000. Assume also that they made the appropriate adjusting entry at the end of the period
for these amounts. What were writ~offs of bad debts during 2000? (8 points)

2. Assume that Gateway did the following in preparation of its 2000 statements, and no
adjustments were made. What would be the effect of the event on the following amounts?
Circle U/S for understate, 0 /S for overstate, or NE for no effect. Ignore income tax effects.

Gateway recorded factory utilities paid by debiting "Selling, general, and administrative
expenses" (and crediting cash). The related goods produced were in "components and
subassemblies inventory'' at the end of the 2000. No subsequent adjustment was made. (8
points)

Robert Libby

(a)

Current assets
at year-end

U/S

0/S

NE

(b)

Net income for the


year

U/ S

0/S

NE

(c)

Cash flow from


operations for the
year

U/S

0/S

NE

(d)

Stockholders' equity U/S


at year-end

0/S

NE

144

Financial Statements and Notes

First Examination
NCC 500 Financial Accounting
Fall2001
i

There are 8 pages to this booklet.

Robert Libby

145

Robert Libby

146

AMERICAN EAGLE
OUTFITTERS INC

AMERICAN EAGLE OUTFITTERS INC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)


For the Years Ended
------------------------------------February
January
January
3,
29,
30,
2001
2000
1999
----------- ---------- ----------Net sales

Cost of sales
Gross profit
Selling, general and administrative
expenses
Depreciation and amortization expense
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares
outstanding -- basic
Weighted average common shares
outstanding -- diluted

1,093,477 $

587,600

657,252
----------436,225

475,596
---------356,508

353,089
----------234,511

266,474

194,795

138,847

23,200
12,199
8,611
----------- ---------- ----------146,551
149,514
87,053
623
5,626
(160)
2,436
----------- ---------- ----------151,554
149,354
89,489
57,796
58,694
35,371
----------- ---------- ----------$
93,758 $
90,660 $
54,118
----------- ---------- ----------$
1.35 $
1.30 $
0.80
----------- ---------- ----------$
1.30 $
1.24 $
0.75
----------- ---------- ----------69,652
69,555
67,921
----------- ---------- ----------72,132
73,113
71,928
----------- ---------- -----------

See Notes to Consolidated Financial Statements

Robert Libby

832,104 $

147

AMERICAN EAGLE
OUTFITTERS INC

AMERICAN EAGLE OUTFITTERS INC


Consolidated Statements of Cash Flows
In Thousands For Period Ended
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
OMITTED
Net cash provided by operating activities
Investing activities:
Capital expenditures
Purchase of Blue Star Imports Company for cash
Purchase of Dylex Company for American Eagle Outfitters stock
Purchase of short-tenn investments
Sale of short-term investments
Dividends received on short-term investments
Other investing activities
Net cash used for investing activities
Financing activities:
OMITTED
Net cash provided by financing activities
Effect of exchange rates on cash
Net increase in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period

Robert Libby

148

02103/01

93,758

01/29/00 01130/99

90,660

54,118

(87,825) (45,556) (24 ,913)


(8,500)
(78,184)
(46,421 ) (124,166) (54,559)
111,620
38,775 41 ,199
1,258
(1,397)
$( 109,449)$( 130, 947) $(38,273)
$15,302
421
$56,865
76,581
133,446

$2,676

$2,033

$4,641 $23,581
71 ,940 48,359
76,581 71 ,940

AMERICAN EAGLE
OUTFITTERS INC
AMERICAN EAGLE OUTFITTERS INC
Consolidated Balance Sheet
In Thousands For Period Ended
Current assets:
Cash and cash equivalents
Short-term investments
Merchandise inventory
Accounts and note receivable, including related
party
Prepaid expenses and other
Deferred income taxes
Total current assets
Property and equipment, at cost, net of
accumulated depreciation and amortization
Goodwill, net of accumulated amortization
Deferred income taxes
Other assets, net of accumulated amortization
Total assets
Current liabilities:
Accounts payable
Current portion of note payable
Accrued compensation and payroll taxes
Accrued rent
Accrued income and other taxes
Unredeemed stored value cards and gift
certificates
Other liabilities and accrued expenses
Total current Uabilities
Non-current liabilities:
Commitments and contingencies
Note payable
Other non-current liabilities
Total non-current liabilities
Contributed capital
Retained earnings
Stockholders' equity
Total liabilities and stockholders' equity

Robert Libby

149

02103101

01129/00

01/30199

133,446
27,927
84,064
29,466

76,581
91,911
60,375
13,471

71,940
13,360
49,688
8,560

18,864
24.894
$318,661

6,640
13,584
$262,562

2,757
8,199
$154,504

183,373
23,780
10,129
7,103
$543,046

84,926

53,370

4,029
3,111
$354,628

2,200
874
$210,948

42,038
4,300
25,549
22,577
29,719

30,700

18,551

21,307
17,755
7,927

17,739
13,042
4,773

13,085
11,879
$149,147

7,703
3,033
$88,425

3,372
2,274
$59z?51

24,889
1,315
$26,204
93,403
2741292
367.695
$543.046

1,702
$1,702
83,967
180,534
264,501
$3541628

61,323
89.874
151 ,197
$210,948

AMERICAN EAGLE
OUTFITTERS INC
2.

Summary.of Significant Accounting Policies

Revenue Recognition
Revenue is recorded upon purchase of merchandise by customers. In
connection with stored value cards and gi ft certificates, a deferred
revenue amount is established upon purchase of the card by the customer and
revenue is recognized upon redemption and purchase of the merchandise.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expens e is
summarized as follows:
(In
thousands)

For the Years Ended


February 3,

January 29,

2001

Advertising
expense

January 30,
1999

2000
36,262

27,243

16,431

Supplemental Disclosures of Cash Flow Information


(In thousands)

For the Years Ended


February 3,

January 29,

2001

January 30,

2000

1999

Cash paid during


the periods for :
Income
taxes

37, 362

Interest

607

45,741

Noncash Investing and Financing Activities:


OMITTED

Robert Libby

150

41,706

AMERICAN EAGLE
OUTFITTERS INC
6. Property and Equipment
Property and equipment consists of the following:
February
3,
2001

(In thousands)

January
2000

--------Land
Buildings
Leasehold improvements
Fixtures and equipment

Net property and equipment

--------

1,855
10,266
134,930
93,186

70 ,4 03
52,336

46,996
36, 30 7

--------

122 ,739
(37,813)

(56, 864)

----------

--------240,237

Less: Accumulated depreciation and


amortization

January
30,
1999

29,

---------83,303

(29, 933)

-------- -----------------183,373 $ 84,926 $


53, 37 0
--------- -------- ----------

Depreciation expense is summarized as follows:


( In thousands)

Depreciation expense

Robert Libby

For the Years Ended


February 3,
January 30,
January 29,
2001
2000
1999
$

21,472

151

11, 782

8,215

Gateway

GATEWAY INC
Consolidated Statements of Income

In Thousands Except Per Share Amounts For


Period Ended
Net sales
Cost of goods sold
Gross profit
Selling, general and Administrative expenses
Operating income
Other income (loss}, net
Income before Income taxes
Provision for income taxes
Net income before cumulative effect of change in
accounting principle
Cumulative effect of change in accounting principle,
net of tax
Net income
Net income per share before cumulative effect of
change in accounting principle:
Basic
Diluted
Net income per share after cumulative effect of
change in accounting principle:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted

Robert Libby

152

12131/2000

9,600,600
7,541,606
2,058,994
1,547,701
is11 ,29~
(102,693)
$408,600
1~5,26~

12131/1999

8,964,900
7,127,678
1,837,222
1,241,552
$59~.670
67.si59
$663,479
23~.535

12131/1998

7,703,279
6,290,227
1,413,052
918,825
$494,227
47,021
1541,248
194,849

$253,334

$427,944

$346,399

(11,851l
$241,483

$42,,944

$346,399

0.79
0.76

1.36
1.32

1.11
1.09

0.75
0.73

1.36
1.32

1.11
1.09

321,742
331,320

313,974
324,421

311,084
317,857

IGateway
GATEWAY INC

11.

SELECTED BALANCE SHEET INFORMATION:

(in thousands)

2000

Accounts receivable, net:


Accounts receivable
Allowance for uncollectible accounts

Inventory:
Components and subassemblies
Finished goods

Property, plant and equipment, net:


Land
Leasehold improvements
Buildings
Construction in progress
Internal use software
Office and production equipment
Furniture and fixtures
Vehicles
Accumulated depreciation and amortization

Intangibles:
Intangibles
Accumulated amortization

Other assets:
Financing receivables, net of allowance for losses
Longterm investments
Deferred Income taxes
Other
Less other current assets

Robert Libby

153

1999

557,479
(12,724}
544,755

662,811
(16,472)
646,339

252,085
62,984
315,069

183,321
8,549
191,870

18,766
169,715
202,100
159,386
250,775
348,742
134,009
25,203
1,308,696
(411,282)
897,414

18,758
107,317
202,102
158,305
172,501
319,585
99,959
13,477
1,092,004
(346,344)
745,660

226,702
(60,788)
165,914

91,220
(38,918}
52,302

701,659
339,143
290,596
283,924
1,615,322
(793,166)

295,812
212,865
211,921
261 ,548
982,146
(522,225)

.
Robert Libby

154

Fall2001
First Examination Solution

I!'

.; '"';{

American Eagi8 Outflli"ars


Reta ined earnings
(9} Sales revenue (R)
180,534 Beg
-2
Unredeemed stored ... (l)
93,758 Net income
-2
Compensaton expense (E)
-2
Accrued compensation (l)
274,292 End

(1) (6poims)

-4
(2) Sold more than they redeemed
Because the ending balance in the liability (13,085} is larger than the -4
beginning balance (7,703)
(8poinrs)
607
623

(3} Interest paid (cash flow note}


Interest expense (income statement)
Paid Ius than recognized

j16J

(-4 sign, -4 amount: 8 points)


(4} Purchase of Oylex for stock should be omitted (in note only)
Dividends received on short-term investments should be omitted
(they are Operating} (10 poitlls}
(-5 extras)

AID on disp.

-5
-5 (10a)

Accum. Depreciation
37,813 Beg
-2
2,421
21 .472 Depreciation Exp. -2 (10b)
56,864 End
-2

Repayment

0 Beg

-2

29,189 Borrowing

-4
-2 (10c)

29,1 89 End
(-4 if missing current or non-current)

or4300+24889
-4
-4
(7)
Rent expense (SG&A) (E) (-2)
Accrued rent (L) (-2)
(8 points)

22.577

2000

-4

146,551 -2
(3,000) -2
(2,800) -2
140.751
169,514 -2
(3.000) -2
(2,800} -2
163,714

(a) U/S (b) 0/S (c) NE (d) NE


Correcting Entry:
Rent expense (E)
30
Accrued rent (l)
(a)O/S (b) 0/S (c) NE (d) 0/S
Correcting Entry:
Accounts payable (L)
100
Prepaid expenses (A)
Cash (A}
(a} NE (b) 0/S (c) NE (d) 0/S
Correcting Entry:
Amoritzation expense (E) 300
Intangibles, net (A)

(-2 each)
(8 poillls)
30

(-2 each)
(8 points)
10
90

(-2 each)
(8points)
300

Gat:iwa'Y: C<lml)(lter ~
(8 points)

Writeoffs

93,758
23,200
6,952
(23,689)
(15,995)
(12,224)
(11,310)
(6,100)
11,338
4,242
4,822
21,792
5,382
8,846
111,014

155

':...~

-;

16,472 Beginning

100,754

-I

97,006 Expense*

12,724 End
*( (.01 X 9,600,600) + 1,000 = 97,006)
-3
-3
(2)

~ 1~

Allowance for DA (XA)

1999

Depr & Amort


StockComp.
60,375
Merchandise inventory
84,064
29,466
13,471
Accounts and note receivable
Prepaid expenses and olher
18,864
6,640
24,894
13,584
Deferrecl income taxes
4,029
Deferred income taxes
10,129
Accounts payable
42,038
30,700
Accrued compensation and p.
25,549
21,307
Accrued rent
22,577
17,755
Accrued income and olher Ia>
29,719
7,927
Unrecleemed stored value cat
13,085
7,703
11,879
Other liabiliUes and accrued e
3,033
Net Cash provided by operating activities
(-I each t:xtra or omirted or wrong sign to -I 4)

Robert Libby

2,800

2.2 ,577
(1)

(8) (14 points~


Net income

2,800

(a} Operating income (as reported)


Reduce sales revenue
Increase compensation expense
Operating income (corrected)
(6 points)
(b) Working capital (as reported)
Increase unredeemed stored ..
Increase accrued compensation
Working capital (corrected}
(6 points}

Notes Pay CL &NCL)

(6) (8 points)

3,000

Div. Declared

(5) (2 poinrs)

3,000

(a) U/S (b) UIS (c) NE {d) U/S


Correcting Entry:
Inventory (A)
S,G&A expense (E)

(2 each)
(8points)

-1

Robert Libby

156

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University

First Examination
NCC 500
FINANCIAL ACCOUNTING
Summer 2004

NAME:___________________________________

Cornell ID: ____________

Instructions:
This open book examination consists of one problem. The questions can be worked in any order.
Please show all calculations. Record your answers on the exam in the space provided. You may use
whatever books, notes and calculators you wish.
You may want to separate the pages while you work. Please re-staple them in the correct order when
you return the examination. A stapler will be available. There are 10 pages to this exam including
the cover.
Please read and sign the following statement:
Academic integrity is expected of all students of Cornell University at all times,
whether in the presence or absence of members of the faculty.
Understanding this, I declare I shall not give, use or receive unauthorized aid in this
examination.
Signature

Points Assigned and Suggested Times


Problem I Fountain Powerboats

Points
Assigned

Suggested
Times

120

120 minutes

Review

45 minutes
120

Robert Libby

157

165 minutes

Problem I Fountain Powerboats-- 50 points


Fountain Powerboats manufactures high-performance sport boats, fishing boats, and racing boats. Its
fiscal year ends June 30, and the year 2003 refers to the year ended June 30, 2003. Its 2003 and
2002 Balance Sheets, 2003 Statement of Income, partial 2003 Cash Flow Statement, and selected
notes are presented on the following pages. Treat each item below independently. Watch the dates
on the statements.
Required:
Complete the following in the space provided.
1) What was the total amount of dividends paid during 2003?

2) What was the net book value of Property, plant, and equipment sold during 2003?

Robert Libby

158

3)

a. Which was larger during 2003 (circle one)? Fountain Powerboats:


Purchases on account

Payments on account

b. How did you know?

4) Accrued expenses are recorded at the end of the current month and paid during the next month.
What was the journal entry to record accrued expenses at the end of June 2003?

Robert Libby

159

5) Additional Customer deposits received during 2003 were $487,000. What was revenue
recognized during 2003 from customers who had paid in advance?

6) What were Proceeds from long-term debt for 2003?

Robert Libby

160

7) Prepare the Cash flow from operating activities section of the 2003 Cash Flow Statement.
Consider the following additional information. Stock compensation was $148,312.
Payments for interest were $1,035,553. Other assets relate to intangibles (trademarks)
which are not amortized. (Note: Do not try to reconcile your answer for cash flow from
operating activities with the change in cash.)

Robert Libby

161

8) What was the effect of properly recording the following item on "income before income taxes,"
"cash flow from operating activities," and "cash flow from investing activities" for 2003?
Indicate the direction ("+" for increase, "-" for decrease, and "NE" for no effect) and amount
of the effect. Ignore tax effects.
The company paid the CFO her 2003 bonus in the form of a boat with a cost of production of
$50,000:
Income before income taxes
+___________

-_____________

NE

Cash flow from operating activities


+___________

-_____________

NE

Cash flow from investing activities


+___________

Robert Libby

-_____________

NE

162

9)

a. Which were larger during 2003 (circle one)?


Prepayments of expenses

Expiration of prepaid expenses

b. How did you know?

10) What was the adjusting journal entry to record warranty expense during 2003?

Robert Libby

163

11) Assuming Fountain repurchased none of its outstanding common stock during 2003, what
journal entry summarizes the issuance of common stock during 2003? (Ignore treasury stock and
stock-based compensation for this question.)

12) Assume that Fountain had done each of the following in preparation of its 2003 financial
statements. Indicate the effect of each on the listed items. Circle U/S for understate, O/S for
overstate, or NE for no effect. Treat each item independently and ignore income taxes.
(a) They recorded the purchase of $100 of plant and equipment with a useful life of 5 years for
cash as a General and administrative expense at the beginning of 2003.
a) Total assets
on June 30, 2003

U/S O/S NE

b) Net Income
for 2003

U/S O/S NE

c) Cash flow
from operations
for 2003

U/S O/S NE

d) Stockholders
U/S O/S NE
equity on June 30, 2003

Robert Libby

164

(b) They recorded $10 cash received on July 1, 2002 related to accrued interest revenue (that was
properly recorded during fiscal 2002) by making the following entry:
Cash
10
Interest revenue
10
a) Working capital
on June 30, 2003

U/S O/S NE

b) Net Income
for 2003

U/S O/S NE

c) Cash flow
from operations
for 2003

U/S O/S NE

d) Stockholders
U/S O/S NE
equity on June 30, 2003

(c) They recorded $10,000 depreciation on newly purchased equipment as $1,000 during 2003.
a) Current assets
on June 30, 2003

U/S O/S NE

b) Cash flow
U/S O/S NE
from investing
activities for 2003
c) Cash flow
from operations
for 2003

U/S O/S NE

d) Stockholders
U/S O/S NE
equity on June 30, 2003

Robert Libby

165

Chap. 6
(d) They failed to record $1,000 in bad debt expense during 2003.
a) Total assets
on June 30, 2003

U/S O/S NE

b) Cash flow
U/S O/S NE
from financing
activities for 2003
c) Cash flow
from operations
for 2003

U/S O/S NE

d) Stockholders
U/S O/S NE
equity on June 30, 2003

Robert Libby

166

Financial Statements and Notes

First Examination
NCC 500 Financial Accounting
Summer 2004

There are 6 pages to this booklet.

Robert Libby

167

FOUNTAIN POWERBOAT INDUSTRIES INC


Consolidated Statements of Income
For Period Ended Jun 30, 2003
REVENUES:
NET SALES
COST OF SALES
Gross Profit
EXPENSES:
Selling expense
General and administrative
Impairment of long-lived assets
Total expenses
OPERATING INCOME (LOSS)
NON-OPERATING INCOME (EXPENSE):
Other income (expense)
Interest expense
Gain (loss) on disposal of assets

6/30/2003
-52,557,084
(44,037,957)
$8,519,127
-4,609,253
1,820,764
-$6,430,017
2,089,110
-5,567
(1,037,002)
(8,378)
$(1,039,813)
1,049,297
569,944
$479,353

INCOME (LOSS) BEFORE INCOME TAXES


DEFERRED TAX EXPENSE (BENEFIT)
NET INCOME (LOSS)

Robert Libby

168

FOUNTAIN POWERBOAT INDUSTRIES INC


Consolidated Statements of Cash Flows
For Period Ended Jun 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)

06/30/03
-479,353

CASH FLOWS FROM INVESTING ACTIVITIES:


Proceeds from sale of equipment
Purchase of property, plant and equipment
(Increase) decrease in other assets
Net Cash (Used) by Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt
Proceeds from issuance of common stock
Payments of long-term debt
Net Cash Provided (Used) by Financing Activities
Net increase (decrease) in cash & cash equivalents
Beginning cash & cash equivalents balance
Ending cash & cash equivalents balance

-153,810
(1,325,262)
(390,199)
$(1,561,651)
-omitted
omitted
(1,265,529)
omitted
895,295
329,640
1,224,935

Supplemental Disclosures of Cash Flow Information:


Cash paid during the period for year ended June 30:
2003
Interest
$ 1,035,553 $
Income taxes
$
- $

2002
798,700
45,424

$
$

2001
709,585
12,016

Supplemental Schedule of Non-cash Investing and Financing Activities:


For the year ended June 30, 2003:
There were no non-cash investing and financing activities for the year ended
June 30, 2003

Robert Libby

169

FOUNTAIN POWERBOAT INDUSTRIES INC


Consolidated Balance Sheet
For Period Ended
CURRENT ASSETS:
Cash & cash equivalents
Accounts receivable, less allowance for doubtful accounts of
$27,841 for 2003 and 2002
Inventories
Prepaid expenses
Current deferred tax assets
Total Current Assets
PROPERTY, PLANT AND EQUIPMENT, net
INVESTMENTS
OTHER ASSETS
CURRENT LIABILITIES:
Current maturities of long-term debt
Accounts payable
Accrued expenses
Dealer incentives
Customer deposits
Allowance for boat repurchases
Warranty reserve
Total Current Liabilities
LONG-TERM DEBT, less current maturities
DEFERRED TAX LIABILITY
COMMITMENTS AND CONTINGENCIES (See Note 9)
Total Liabilities
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 200,000,000 shares
authorized, 4,757,608 shares issued and outstanding
Additional paid-in capital
Retained earnings (deficit)
Less: Treasury Stock, at cost, 15,000 shares
Deferred compensation for stock options issued

Robert Libby

170

06/30/03
-1,224,935

06/30/02
-329,640

2,015,371
3,460,286
644,581
807,315
$8,152,488
16,165,684
1,378,626
736,288
$26,433,086
-1,080,562
7,667,805
1,317,398
190,010
290,658
200,000
900,000
$11,646,433
9,010,527
1,207,958
-21,864,918
--

3,003,992
3,090,451
328,783
1,132,181
$7,885,047
17,114,661
1,179,223
355,765
$26,534,696
-934,856
7,024,628
1,193,672
921,707
631,090
200,000
870,000
$11,775,953
9,827,161
962,880
-22,565,994
--

47,576
10,436,551
(5,801,326)
$4,682,801
(110,748)
(3,885)
$4,568,168
26,433,086

47,326
10,343,935
(6,280,679)
$4,110,582
(110,748)
(31,132)
$3,968,702
26,534,696

Note 1.

Nature of the Business and Significant Accounting Policies.

Nature of the Business: Fountain Powerboat Industries, Inc.


and
Subsidiary (the Company) manufacture high-performance sport boats,
sport wide beam cruisers, wide beam fishing boats, sport fishing boats,
and custom offshore racing boats. These boats are sold worldwide to a
network of approximately 47 dealers.
The Company's offices
and
manufacturing facilities are located in Washington, North Carolina and
the Company has been in business since 1979.
The Company employs
approximately 350 people and is an equal opportunity, affirmative
action employer.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Fountain Powerboats, Inc. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Fiscal Year: The Company's fiscal year-end is June 30th, which
natural business year-end.

is

its

Revenue
Recognition: The Company generally sells boats only
to
authorized dealers and to the U.S. Government. A sale is recorded when
a boat is shipped to a dealer or to the Government, legal title and all
other incidents of ownership have passed from the Company to the dealer
or to the Government, and an account receivable is recorded or payment
is received from the dealer, from the Government, or from the dealer's
third-party commercial lender. This is the method of sales recognition
in use by most boat manufacturers.
The Company has developed criteria for determining whether a shipment
should be recorded as a sale or as a deferred sale (a balance sheet
liability).
The criteria for recording a sale are that the boat has
been completed and shipped to a dealer or to the Government, that title
and all other incidents of ownership have passed to the dealer
or to
the Government (title passes at the point of shipment), and that there
is no direct or indirect commitment to the dealer or to the Government
to repurchase the boat or to pay floor plan interest for the dealer
beyond the normal, published sales program terms.
Advertising Cost: Cost incurred in connection with advertising and
promotion of the Company's products are expensed as incurred.
Such
costs amounted to $1,031,661, $775,524 and $1,123,976 for the years
ended 2003, 2002 and 2001, respectively.
Warranties: The Company warrants the entire deck and hull, including
its supporting bulkhead and stringer system, against defects
in
materials and workmanship for a period of six years. The Company has
accrued a reserve for these anticipated future warranty costs.

Robert Libby

171

Note 3.

Property, Plant, and Equipment.

Property, plant, and equipment consists of the following:


Estimated
June 30,
Useful Lives __________________________
in Years
2003
2002
____________ ____________ ____________
Land and related improvements
10-30
$ 4,564,523 $ 4,544,278
Buildings
and
related improvements
10-30
8,827,731
8,748,746
Construction-in-progress
N/A
486,966
117,673
Production molds and related plugs
8-10
20,655,432
19,967,872
Machinery and equipment
3-5
6,030,902
5,958,160
Furniture and fixtures
5
790,518
771,133
Transportation equipment
5
320,711
537,926
Racing boats
N/A
242,095
____________ ____________
$ 41,676,783 $ 40,887,883
Accumulated depreciation
(25,511,099) (23,773,222)
____________ _____________
$ 16,165,684 $ 17,114,661
____________ _____________
Depreciation expense was $2,112,051 and $2,294,254 in 2003 and 2002,
respectively.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Fiscal 2003
Valuation and Qualifying
Account Description
___________________________

Balance Charge to Payments/


Balance
June 30, Expense
Deductions
June 30,
2002 Adjustments
2003
_______________________________________

Allowance for Doubtful accounts


Inventory Valuation Reserve
Deferred Tax Valuation Allowance
Warranty Expense
Allowance for Boat Repurchases

27,841
307,393
257,393
2,599,979
130,287
870,000 1,182,573 1,152,573
200,000
-

Robert Libby

172

27,841
50,000
2,730,266
900,000
200,000

Fountain Powerboats
Retained earnings
(9) (8 points) (a) prepayments
-4
Beg 6,280,679.0
-2
(b) Prepaid expenses increased during 2003
-4
Div. Declared
0.0
479,353 Net income
-4
End
5,801,326
-2 (10) Warranty expense (E) -2
1,182,573
(-3 for number)
no beginning dividends payable so dividends paid equals 0.0
Warranty reserve (L) -2
1,182,573
(or no dividends paid in cash flow statement)
(7 points)
(8 points)
P&E (Net)
Beg 17,114,661
2,112,051 Depr. Exp.
-2 (11) Cash (A)
92,866
Purchases
1,325,262
162,188 Disposals
Common Stock (SE)
250
End 16,165,684
Additional paid-in capital (SE)
92,616
(or solve for P&E gross and subtract Acc depr; -4 each)
(6 points; -1 each account and amount)

(1) (8 points)

(2)
-2
-2
-2

(3) Purchases on account


Because the ending balance in the liability is larger than the
beginning balance
(8 points)

-4 (12a)
-4

1,317,398
(-3 for number)
(4) Various expenses (E) (-2)
Accrued expenses (L) (-2)
1,317,398
(7 points) (the ending balance in "Accrued expenses")
(5) (8 points)
Revenues

(6) (8 points)

Customer deposits
631,090 Beg
827,432
487,000 Deposits
290,658 End

-2
-4
-2 (12c)

LT Debt incl. cur. Mat. (L)

10,762,017 Beg
594,601 Proceeds
10,091,089 End
(* -1.5 for each missing element of beginning and ending)
-2

(12b)

Payments

-3*

(a)O/S (b) O/S (c) NE (d) O/S


Correcting Entry:
Interest revenue (R)
10
Accrued interest rev (A)

(-2 each)
(8 points)
100
20
(-2 each)
(8 points)
10

(a) NE (b) NE (c) NE (d) O/S


Correcting Entry:
Depreciation exp. (E)
9,000
Accum. Depr (XA)

(-2 each)
(8 points)
9,000

1,265,529

-3* (12d)

(7) (11 points)


2003
2002
Net income
479,353
Depreciation
2,112,051
Stock compensation
148,312
Accounts receivable, net
2,015,371
3,003,992
988,621
Inventories
3,460,286
3,090,451
(369,835)
Prepaid expenses
644,581
328,783
(315,798)
Current deferred tax assets
807,315
1,132,181
324,866
Accounts payable
7,667,805
7,024,628
643,177
Accrued expenses
1,317,398
1,193,672
123,726
Dealer incentives
190,010
921,707
(731,697)
Customer deposits
290,658
631,090
(340,432)
Allowance for boat repurchase
200,000
200,000
0
Warranty reserve
900,000
870,000
30,000
Deferred tax liability
1,207,958
962,880
245,078
Cash flow from operations
3,337,422
(-1 each extra or omitted to -11)
(loss on disposal of assets should be added, no points taken off since chapter 8)
(8) G&A Expense (E)
50,000
Inventory (A)
50,000
Income before income taxes
-50,000
-3
Cash flow from operating activities NE
NE
-3
Cash flow from investing activites NE
NE
-3
(9 points)

Robert Libby

(a) U/S (b) U/S (c) U/S (d) U/S


Correcting Entry:
Plant and Equipment (A)
100
G&A expense (E)
Depreciation exp. (E)
20
Accumulated depr. (XA)

173

(a) O/S (b) NE (c) NE (d) O/S


(-2 each)
Correcting Entry:
(8 points)
Bad debt expense (E)
1,000
Allow for DA (XA)
1,000

(-1 math)

Robert Libby

174

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University

First Examination
NCC 5000
FINANCIAL ACCOUNTING
Summer 2009

NAME:___________________________________

Cornell ID: ____________

Instructions:
This open book examination consists of one problem. The questions can be worked in any order.
Please show all calculations. Record your answers on the exam in the space provided. You may use
whatever books, notes and calculators you wish. You may not use a computer, PDA, cell phone, or
similar device. You have 2 hours and 45 minutes to complete the exam.
You may want to separate the pages while you work. Please re-staple them in the correct order when
you return the examination. A stapler will be available. There are 10 pages to this exam including
the cover.
Please read and sign the following statement:
Academic integrity is expected of all students of Cornell University at all times,
whether in the presence or absence of members of the faculty.
Understanding this, I declare I shall not give, use or receive unauthorized aid in this
examination.
Signature

Points Assigned and Suggested Times


Problem I Microsoft Corp

Points
Assigned

Suggested
Times

120

120 minutes

Review

45 minutes
120

Robert Libby

175

165 minutes

Problem I Microsoft Corp


Answer the following questions using the attached financial statements and selected footnotes from
Microsofts 2003 Annual Report. Before answering the questions, take a few minutes to review the
financial statements and footnotes. Familiarity with the available information will likely save you
some time and mistakes. Note that all numbers in the statements and problems are in millions
($000,000). Treat each question independently and watch the dates in the questions and on the
statements. The year 2003 means the year ended June 30, 2003.

1. What were dividends declared for 2003?

2.

How much higher or lower were Advance payments from customers than Revenue
recognized on sales to customers that paid in advance, during 2003? (circle one and fill in the
blank if appropriate)?
Advance payments were ____________ higher than Revenue recognized.
Advance payments were ____________ lower than Revenue recognized.
There was no difference between Advance payments and Revenue recognized.

Robert Libby

176

3. What was the Accumulated depreciation on property and equipment disposed of during
2003?

4. The following information includes all of Microsofts investing transactions during 2003, as
well as some non-investing transactions. Based on this information only, prepare the investing
section of the 2003 cash flow statement. The transactions are cash transactions unless
otherwise indicated. Do not try to reconcile these amounts to the cash flow statement
presented.
Acquisitions of companies, net of cash acquired
Acquisition of Navision, Inc. for Microsoft stock
Additions to property and equipment
Dividends paid on common stock
Dividends received on investments
Purchases of investments
Maturities of investments
Sales of investments

Robert Libby

177

(1,063)
(803)
(891)
(857)
1,266
(89,621)
9,205
75,157

5. During 2003, Microsoft engaged in a variety of transactions that affected the common stock
and paid-in capital account. What journal entry did they make to record the issuance of their
common stock for cash? (Note that Microsoft combines common stock and paid-in capital
into a single account called common stock and paid-in capital because they have no
economic meaning as separate accounts. You should do the same in this problem.)

6. Assume that all Compensation is accrued at the end of the current month and paid at the
beginning of the following month. What journal entry did Microsoft make for the payment of
compensation at the beginning of the first month of fiscal year 2003?

Robert Libby

178

7. Prepare the operating section of Microsofts Statement of Cash Flows for the year 2003 using
the indirect method. Assume that Depreciation expense is the only expense that did not affect
operating assets and liabilities. Income taxes paid were $1,300. Other long term assets are
long term receivables from customers. Other long term liabilities are owed to employees.
(Note: Your computation will not reconcile with the cash flow statement information in the
Financial Statements and Notes package.)
Cash Flow from Operating Activities:

Robert Libby

179

8. Assume that other current assets consist of prepaid expenses related to research and
development, and that all research and development expenses are paid for in advance.
What were total cash payments made for research and development during 2003?

9. Assume that for 2003, Microsoft estimated that bad debt expense related to sales in 2003
would equal .5% of net sales, and that they had overestimated bad debt expense in 2002 by
$10. Assume also that they made the appropriate adjusting entry at the end of the period for
these amounts. What were write-offs of bad debts during 2003? (Round to the nearest
Chap. 6
million.)

Robert Libby

180

10. What was the effect of properly recording the following items on the listed financial statement
amounts for 2003? Indicate the direction ("+" for increase, "-" for decrease, and "NE" for no
effect) and amount of the effect. Ignore tax effects.
a. The company paid the CEO his 2003 bonus in the form of stock with a market value of
$50:
Income before income taxes
+___________

-_____________

NE

Cash flow from operating activities


+___________

-_____________

NE

Cash flow from financing activities


+___________

-_____________

NE

b. At the end of the period, the company determined that inventory with a cost of $300 had a
replacement cost of $270:
Chap. 7
Income before income taxes
+___________

-_____________

NE

Cash flow from operating activities


+___________

-_____________

NE

-_____________

NE

Total assets
+___________

Robert Libby

181

11. Assume that on June 1, 2003, Microsoft recorded an advance payment from a customer of $10
by debiting cash and crediting revenue for $10. The goods and services will be delivered on
October 30, 2003. Further assume that on June 30, 2003, it failed to make an adjusting entry
for depreciation of factory equipment of $6. The related goods were still in inventory at year
end. No adjusting entry related to either transaction was performed at year end. Ignore taxes.
(a) Compute the amount that should have been reported as Net Income for 2003.

(b) Compute the corrected amount of working capital at the end of 2003.

Robert Libby

182

12. Assume that Microsoft had done each of the following in preparation of its 2003 statements,
and no adjustments were made. What would be the effect of each event on the following
amounts? Circle U/S for understate, O/S for overstate, or NE for no effect. Treat each item
independently and ignore income tax effects.
(a)

Microsoft accidentally recorded a $50 payment for sales and marketing expenses (E) for
the month of June by making the following entry:
Chap. 7
Inventory
50
Cash
50
The related goods were still in inventory. No subsequent adjusting entry was made.
(a)

Total assets
at year-end

U/S

O/S

NE

(b)

Net income for


the year

U/S

O/S

NE

(c)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(d)

(b)

Microsoft estimated and recorded the ending balance in Lifo Reserve as $20 when it
should have been $15. The beginning balance was correct. No correcting entry was made.
Chap. 7
(a)
Total assets
U/S O/S NE
at year-end
(b)

Robert Libby

Retained earnings
at year-end

Total liabilities
At year-end

U/S

O/S

NE

(c)

Net income for


the year

U/S

O/S

NE

(d)

Stockholders equity U/S


at year-end

O/S

NE

183

(c)

On June 30, 2003, Microsoft received an advance payment from a customer of $50 and
recorded the following entry:
Cash
50
Revenue
50
The goods will be delivered in 2005. No subsequent adjusting entry was made.
(a)

Current liabilities
at year-end

U/S

O/S

NE

(b)

Net income for


the year

U/S

O/S

NE

(c)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(d)

Robert Libby

Retained earnings
at year-end

184

Financial Statements and Notes

First Examination
NCC 5000 Financial Accounting
Summer 2009

There are 5 pages to this booklet including the cover.

Robert Libby

185

INCOME STATEMENTS
(In millions, except earnings per share)
Year Ended June 30
Revenue
Operating expenses:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total operating expenses
Operating income
Losses on equity investees and other
Investment income/(loss)
Income before income taxes
Provision for income taxes
Income before accounting change
Cumulative effect of accounting change (net of income taxes
of $185)
Net income
Basic earnings per share(1):
Before accounting change
Cumulative effect of accounting change

2001
$25,296
3,455
4,379
4,885
857
13,576
11,720
(159)
(36)
11,525
3,804
7,721

2002
$28,365
5,191
4,307
5,407
1,550
16,455
11,910
(92)
(305)
11,513
3,684
7,829

2003
$32,187
5,686
4,659
6,521
2,104
18,970
13,217
(68)
1,577
14,726
4,733
9,993

(375)
$ 7,346

$ 7,829

$ 9,993

0.72
(0.03)
$ 0.69

0.72

0.72

0.70

0.70

0.93

0.93

(1)

Diluted earnings per share :


Before accounting change
Cumulative effect of accounting change

0.69
(0.03)
$ 0.66

0.92

0.92

(1)

Weighted average shares outstanding :


Basic
Diluted

10,683
11,148

See accompanying notes.

Robert Libby

186

10,811
11,106

10,723
10,882

BALANCE SHEETS
(In millions)
June 30
Assets
Current assets:
Cash and equivalents
Short-term investments
Total cash and short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Other
Total current assets
Property and equipment, net
Equity and other investments
Goodwill
Intangible assets, net
Other long-term assets
Total assets

2002

Liabilities and stockholders equity


Current liabilities:
Accounts payable
Accrued compensation
Income taxes
Short-term unearned revenue
Other
Total current liabilities
Long-term unearned revenue
Deferred income taxes
Other long-term liabilities
Commitments and contingencies
Stockholders equity:
Common stock and paid-in capital shares authorized 24,000;
Shares issued and outstanding 10,718 and 10,771
Retained earnings
Total stockholders equity
Total liabilities and stockholders equity
See accompanying notes.

Robert Libby

187

2003

3,016 $
35,636
38,652
5,129
673
2,112
2,010
48,576
2,268
14,191
1,426
243
942
67,646 $

6,438
42,610
49,048
5,196
640
2,506
1,583
58,973
2,223
13,692
3,128
384
1,171
79,571

1,208 $
1,145
2,022
5,920
2,449
12,744
1,823
398
501

1,573
1,416
2,044
7,225
1,716
13,974
1,790
1,731
1,056

31,647
20,533
52,180
67,646 $

35,344
25,676
61,020
79,571

CASH FLOWS STATEMENTS


(In millions)
Year Ended June 30
Operations
Net income

2001

2002

2003

7,346 $

7,829 $

9,993

Net cash from operations


Financing
Common stock issued
Common stock repurchased

1,620
(6,074)

1,497
(6,069)

2,120
(6,486)

(5,586)

(4,572)

(5,223)

Omitted
Net cash used for financing
Investing

Omitted
Net cash used for investing
Net change in cash and equivalents
Effect of exchange rates on cash and equivalents
Cash and equivalents, beginning of year
Cash and equivalents, end of year

Robert Libby

188

(898)
(26)
4,846
3,922 $

(908)
2
3,922
3,016 $

3,361
61
3,016
6,438

Note 1Accounting Policies


Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the
account receivable balance. We determine the allowance based on known troubled accounts,
historical experience, and other currently available evidence. Activity in the allowance for doubtful
accounts is as follows:
(In millions)
Year Ended
June 30
2001
2002
2003

Balance at
beginning of period
$ 186
174
209

Charged to costs
and expenses
$ 157
192
omitted

Write-offs
and other
$ 169
157
omitted

Balance at
end of period
$ 174
209
242

Note 7Property and Equipment


(In millions)
June 30
Land
Buildings
Computer equipment and software
Other
Property and equipment at cost
Accumulated depreciation
Property and equipment net

2002
197
1,701
2,621
1,372
5,891
(3,623)
$ 2,268
$

2003
248
1,854
2,464
1,512
6,078
(3,855)
$ 2,223
$

During 2001, 2002, and 2003, depreciation expense, the majority of which related to computer
equipment, was $764 million, $820 million, and $929 million.

Robert Libby

189

Robert Libby

190

Summer 2009
First Examination Solution

(1) (8 points)
Div. Declared

Retained earnings
20,533 Beg
4,850
9,993 Net income
25,676 End

Microsoft
(9)
-2
-3
-2

[(.005 x 32187) -10 =


Allow for DA (XA)
209
Writeoffs
118
151
242

(8 points)

(2) (8 points)
Current
Noncurrent
Total
7,225
1,790
9,015 -3 (10a) Income before income taxes
Ending
Beginning
5,920
1,823
7,743 -3
Cash flow from operating activities
Increase
1,272
Cash flow from financing activities
Advance payments were 1,272 higher
Compensation expense (E)
50
(-2 for direction)
CS and PIC (SE)
(-3 for leaving out current or non-current or reversing years)
(6 points)
Acc. Depr. (XA)
(10b) Income before income taxes
(3) (8 points)
3,623 Beg
-2
Cash flow from operating activities
Disposals
697
929 Depr. Exp.
-3
Total assets
CGS (E)
30
3,855 End
-2

(5) Cash (A) (from cash flow statement) (-2)


2,120
Common Stock and Paid-in Capital (SE) (-2)

-2

Beg
Payments
End

Robert Libby

Prepaid Expenses (Other CA) (A)


2,010
4,232
4,659 R&D exp.
1,583

-2

-50
NE
NE

-2
-2
-2

-2

-30
NE
-30

-2
-2
-2
30

(1,063)
(891)
(89,621)
9,205
75,157
(7,213)

(11) (a) Net Income as reported


Reduce revenue
Net Income corrected
(b) Working capital as reported
minus: increase st unearned rev
plus: increase Inventory
-3
Working capital corrected
2,120
(-2 any extra correction)

(12a) (a) O/S (b) O/S (c) NE (d) O/S


Correcting Entry:
50
Sales and marketing exp. (E)
Inventory (CA)

9,993
929
(67)
33
(394)
427
(229)
365
271
22
1,305
(733)
(33)
1,333
555
13,777

(12b) (a)U/S (b) NE (c) U/S (d) U/S


Correcting Entry:
Lifo Reserve (XA)
5
CGS (E)
(12c)

(a) NE (b) O/S (c) NE (d) O/S


Correcting Entry:
Revenue (R)
Long-term unearned revenue (NCL)

(-1 year flip up to -5)


(-1 math)
-4

191

9,993
(10)
9,983
44,999
(10)
6
44,995

Revenue (R)
10
Short-term unearned revenue (CL)
Inventory (CA)
6
Accumulated Depreciation (XA)
(12 points)

(6) Accrued Compensation (L) (-2)


1,145
-3
Cash (A) (-2)
1,145
(7 points) (the beginning balance in "Accrued Compensation")

(8) (8 points)
-2

Beginning
Expense
Ending

(6 points)

(7 points)

(7) (12 points)


2003
2002
Net income
Depreciation
Accounts receivable
5,196
5,129
640
673
Inventories
2,506
2,112
Deferred income taxes
1,583
2,010
Other CA
1,171
942
Other long-term assets
Accounts payable
1,573
1,208
Accrued compensation
1,416
1,145
2,044
2,022
Income taxes
7,225
5,920
Short-term unearned revenue
Other CL
1,716
2,449
1,790
1,823
Long-term unearned revenue
Deferred income taxes
1,731
398
1,056
501
Other long-term liabilities
Cash Flow from Operations
(-1 each extra or omitted to -12; if years consistently reversed -3)

-4

50

Inventory (A)
(4) (-2 points each missing or extra to -8)
Acquisitions of companies, net of cash acquired
Additions to property and equipment
Purchases of investments
Maturities of investments
Sales of investments
Cash flow from investing

150.935

10
6

(-2 each)
(8 points)
50
(-2 each)
(8 points)
5
(-2 each)
(8 points)
50
50

-3
-3
-2
-2
-2

Robert Libby

192

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University

Midterm Examination
NCC 5000
FINANCIAL ACCOUNTING
Summer 2010

Cornell NetID (e-mail address) _________

Name: _________________________

Instructions:
This open book examination consists of multiple questions. (Be sure that your examination contains 10
pages, including this page.) All questions are based on the information in the financial statements and
notes packet you were given. Questions can be worked in any order. For partial credit, please show all
calculations and state any assumptions you make. Record your answers on the exam in the space
provided. You may use whatever books, notes, and calculators (without spreadsheet capabilities) you
wish. No communications devices may be used. You have 2 hours and 45 minutes to complete this
exam.
By completing this exam, I acknowledge that I have read and agreed to abide by the School Honor
Code.

Points Assigned and Suggested Times


Problem I Green Mountain Coffee Roasters

Points
Assigned

Suggested
Times

120

140 minutes

Review

25 minutes
120

Robert Libby

193

165 minutes

Problem I Green Mountain Coffee Roasters


Answer the following questions using the attached financial statements and selected footnotes from
Green Mountains Annual Report. Green Mountain Coffee Roasters, Inc. is a leader in the specialty
coffee industry. The majority of Green Mountain Coffee's revenue is derived from over 8,000
wholesale customer accounts located primarily in the Eastern United States. Its 2006 and 2005
Balance Sheets, 2006 Statement of Income, partial 2006 Cash Flow Statement, and selected notes are
presented on the following pages. Before answering the questions, take a few minutes to review the
financial statements and notes. Familiarity with the available information will likely save you some
time and mistakes. Note that all dollar amounts in the statements and problems are in thousands
($000). Treat each question independently and watch the dates on the statements. The year 2006
refers to the year ended September 30, 2006. The year 2007 refers to the year ended September 30,
2007.
1) What were dividends paid during 2006?

2) What were proceeds from issuance of long-term debt during 2006?

Robert Libby

194

3) Prepare the Cash flow from operating activities section of the 2006 Cash Flow Statement.
Consider the following additional information. Depreciation and Amortization of Fixed Assets was
$7,906, Amortization of Intangibles was $1,402, Income Taxes Paid was $5,487, Gain on Disposal
of Fixed Assets was $31, and Other Long-Term Assets are receivables from customers. (Note:
Your computation will not reconcile with the cash flow statement information in the
Financial Statements and Notes package.)

Robert Libby

195

4) All interest is recorded when paid or accrued at the end of the year (no interest is prepaid). What
journal entry did Green Mountain make for all interest during 2006?

5) What was the total amount of cash paid for advertising during 2006?

Robert Libby

196

6) What was the accumulated depreciation on fixed assets disposed of during 2006?

7) What journal entry for the write-off of bad debts was made during 2006?

Robert Libby

197

8) Assume that other current assets are Prepaid Expenses. How much higher or lower were
Prepayments of expenses than Expirations of prepaid expenses during 2006? (circle one and fill in
the blank if appropriate)?
Prepayments were ____________ higher than Expirations.
Prepayments were ____________ lower than Expirations.
There was no difference between Prepayments and Expirations.

9) Assume that there were no stock repurchases during 2006. What entry was made for stock
issuances during 2006?

Robert Libby

198

10) Assume that on September 30, 2006, the company recorded a purchase of $10 of inventory by
debiting Fixed Assets and crediting Cash for $10. Further assume that at the end of 2006, it failed
to make an adjusting entry for accrued interest revenue of $6. No adjusting entry related to either
transaction was performed at year end. Ignore taxes.
(a) Compute the amount that should have been reported as Net Income for 2006.

(b) Compute the corrected amount of working capital at the end of 2006.

Robert Libby

199

11) What were the effects of correctly recording the following item? Indicate the direction ("+" for
increase, "-" for decrease, and "NE" for no effect) and amount of the effect. Ignore tax effects.
During 2007, the company discovered that it had underestimated bad debt expense by $20 for
2006:
Chap. 6
Income before income taxes for 2007
+___________

-_____________

NE

Cash flow from operating activities for 2007


+___________

-_____________

NE

Total assets at year end 2007


+___________

-_____________

NE

12) Assume that the company had done each of the following in preparation of its 2006 statements, and
no adjustments were made. What would be the effect of each event on the following amounts?
Circle U/S for understate, O/S for overstate, or NE for no effect. Treat each item independently
and ignore income tax effects.
(a)

At year end, the company recorded interest (paid in cash) related to construction in progress
by making the following entry. No correcting entry was made.
Chap. 8
Interest expense
Cash

Robert Libby

10
10
(a)

Total assets
at year-end

(b)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(c)

Net income for


the year

U/S

O/S

NE

(d)

Cash flow from


U/S
investing activities
for the year

O/S

NE

200

(b) The company recorded an advance payment from a customer by making the following
entry.
Cash
Sales revenue
No correcting entry was made.
(a)

Total liabilities
at year-end

(b)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(c)

Net income for


the year

U/S

O/S

NE

(d)

Retained earnings
at year-end

U/S

O/S

NE

(c) During January of 2006, $10 of interest on a 6 month certificate of deposit (purchased on
July 1, 2005) was received and recorded as follows:
Cash
10
Interest revenue
10
No correcting entry was made.

Robert Libby

(a)

Total assets
at year-end

(b)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(c)

Net income for


the year

U/S

O/S

NE

(d)

Stockholders equity U/S


at year-end

O/S

NE

201

(d)

Robert Libby

Sales on account from the first quarter of 2007 were accidentally recorded in the fourth
quarter of 2006. Cost of Sales was recorded in the proper period. No subsequent adjusting
entry was made.
(a)

Net income for


the year 2006

(c)

Cash flow from


operations for the
year 2006

U/S

O/S

NE

U/S

O/S

NE

(d)

Net income for


the year 2007

U/S

O/S

NE

(a)

Retained earnings
at year-end 2007

U/S

O/S

NE

202

10

Financial Statements and Notes

Midterm
NCC 5000 Financial Accounting
Summer 2010

There are 6 pages to this booklet.

Robert Libby

203

GREEN MOUNTAIN COFFEE ROASTERS INC


Consolidated Balance Sheet
In Thousands For Period Ended
Current assets:
Cash and cash equivalents
Receivables, less allowances of $1,021 and $544 at September 30,
2006, and September 24, 2005, respectively
Inventories
Other current assets
Income tax receivable
Deferred income taxes, net
Total current assets
Fixed assets, net
Investment in Keurig, Inc.
Intangibles, net
Goodwill
Other long-term assets
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued compensation costs
Accrued expenses
Other short-term liabilities
Income tax payable
Total current liabilities
Long-term revolving line of credit
Long-term debt
Deferred income taxes
Commitments and contingencies (Note 17)
Stockholders' equity:
Common stock, $0.10 par value: Authorized 20,000,000 shares;
Issued - 8,786,505 and 8,638,281 shares at September 30, 2006
and September 24, 2005, respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity

Robert Libby

204

09/30/06
-1,274

09/24/05
-6,450

30,071
31,796
2,816
618
1,384
$67,959
48,811
-39,019
75,305
2,912
$234,006

16,548
14,072
1,274
-1,346
$39,690
39,507
9,765
-1,446
739
$91,147

97
23,124
5,606
9,108
874
-$38,809
102,800
71
17,386
---

3,530
11,228
1,929
5,054
60
717
$22,518
-5,218
3,019
---

879
27,923
46,138
$74,940
$234,006

864
21,833
37,695
$60,392
$91,147

GREEN MOUNTAIN COFFEE ROASTERS INC


Consolidated Statements of Income
30-Sep-06
In Thousands Except Per Share Amounts For Period
Net sales
Cost of sales
Gross profit
Selling and operating expenses
General and administrative expenses
Operating income
Other income (losses)
Interest expense
Income before income taxes
Income tax expense
Net income

Robert Libby

205

9/30/2006
$225,323
143,289
82,034
46,808
17,112
18,114
(761)
(2,261)
15,092
(6,649)
$8,443

GREEN MOUNTAIN COFFEE ROASTERS INC


Consolidated Statements of Cash Flows
30-Sep-06
In Thousands For Period Ended Sep 30, 2006
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:

09/30/06
--

--

Omitted
Net cash provided by operating activities
Cash flows from investing activities:

--

Expenditures for fixed assets


Proceeds from disposals of fixed assets
Net cash used for investing activities

(13,613)
493

Cash flows from financing activities:


Net change in revolving line of credit
Repayment of long-term debt

-102,800
(8,580)

Omitted

Omitted

Net cash provided by (used for) financing activities


Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes

Robert Libby

206

(5,176)
6,450
1,274
-2,235
5,487

Green Mountain Coffee Roasters, Inc.


Notes to Consolidated Financial Statements
2. Significant Accounting Policies
Impairment of Long-Lived Asset
When facts and circumstances indicate that the carrying values of long-lived
assets, including fixed assets, investments in other companies, may be
impaired, an evaluation of recoverability is performed by comparing the
carrying value of the assets to projected future cash flows in addition to
other quantitative and qualitative analyses. Upon indication that the carrying
value of such assets may not be recoverable, the Company recognizes an
impairment loss as a charge against current operations. Long-lived assets to be
disposed of are reported at the lower of the carrying amount or fair value,
less estimated costs to sell. The Company makes judgments related to the
expected useful lives of long-lived assets and its ability to realize
undiscounted cash flows in excess of the carrying amounts of such assets which
are affected by factors such as the ongoing maintenance and improvements of the
assets, changes in economic conditions and changes in operating performance. As
the Company assesses the ongoing expected cash flows and carrying amounts of
its long-lived assets, these factors could cause the Company to realize a
material impairment charge.

Provision for Doubtful Accounts


Periodically, management reviews the adequacy of its provision for doubtful
accounts based on historical bad debt expense results and current economic
conditions using factors based on the aging of its accounts receivable.
Additionally, the Company may identify additional allowance requirements based
on indications that a specific customer may be experiencing financial
difficulties. Actual bad debt results could differ materially from these
estimates.

Advertising costs
The Company expenses the costs of advertising the first time the advertising
takes place, except for direct mail campaigns targeted directly at consumers,
which are expensed over the period during which they are expected to generate
sales. At September 30, 2006 and September 24, 2005, prepaid advertising costs
of $113 and $138, respectively, were recorded in other current assets
in the accompanying consolidated balance sheet. Advertising expense totaled
$9,132, $5,609, and $5,194, for the years ended September 30, 2006,
September 24, 2005, and September 25, 2004, respectively.

Robert Libby

207

4. Fixed Assets
Fixed assets consist of the following:

Production equipment
Equipment on loan to wholesale
customers
Computer equipment and software
Building
Furniture and fixtures
Vehicles
Leasehold improvements

Useful Life in
Years
1 - 15
3 - 7
2 - 10
30
1 - 10
4 - 5
1 - 11 or
remaining life of
the lease,
whichever is less

Construction-in-progress
Total fixed assets
Accumulated depreciation

September 30, September 24,


2006
2005
$ 37,177
$ 28,169
12,294
11,263
13,932
5,455
3,414
915
2,093

11,241
5,455
3,214
898
1,861

4,433
79,713
(30,902)
$ 48,811

1,684
63,785
(24,278)
$ 39,507

Total depreciation and amortization expense relating to all fixed assets was
$7,906, $6,048, $4,674 for fiscal 2006, 2005, and 2004, respectively.
Assets classified as construction-in-progress are not depreciated, as they are
not ready for production use. All assets classified as construction-in-progress
on September 30, 2006 are expected to be in production use before the end of
fiscal 2007.
The Company regularly undertakes a review of its fixed assets records. In
fiscal 2006, 2005 and 2004, the Company recorded impairment charges related to
obsolete equipment amounting to $23, $126 and $23, respectively. In
fiscal 2006, the impairment was recorded under the "GMCR" segment of the
Company.

7. Valuation and Qualifying Accounts


Allowance for doubtful accounts:
for the fiscal years ended
September 30, 2006, September 24, 2005, and September 25, 2004

Description

Allowance for doubtful


accounts:
Fiscal 2006
Fiscal 2005
Fiscal 2004

Robert Libby

Additions
Balance at Charged to Charged to Deductions Balance at
Beginning of Costs and
Other
End of
Period
Expenses
Accounts
Period

$ 544
$ 481
$ 439

$ 577
$ 315
$ 253

208

----

$
?
$ 252
$ 211

$ 1,021
$ 544
$ 481

Summer 2010 Midterm (with chapter 8)

Retained earnings
37,695
Div. Declared
0
8,443
46,138
Since no dividends payable, Dividends paid = 0
8 (2) (8 points)
Current
Noncurrent
97
71
Ending
Beginning
3,530
5,218
Long-term debt (L)
(8 points)
8,748
-4
Repayment
8,580
0
168
(-4 for leaving out current or non-current,
-3 additional item or reversing years)
12 (3) (12 points)
2006
2005
Net income
Depreciation and amort of FA
Amort of Intangibles
Gain on Disposal of FA
Accounts receivable
30,071
16,548
Inventories
31,796
14,072
Other current assets
2,816
1,274
Income tax receivable
618
0
Deferred income taxes
1,384
1,346
Other long-term assets
2,912
739
Accounts payable
23,124
11,228
Accrued compensation
5,606
1,929
6 (1) (6 points)

Green Mountain Coffee


(9) Cash (A)
6105
Beg
-2
Common Stock (SE)
Net income
-2
Paid-in Capital (SE)
End
-2
(-1 for each account and amount; 6 points)
Total

168
8,748
Beg
Issuance
End

Accrued expenses
9,108
5,054
874
60
Other short-term liabilities
Income taxes payable
0
717
Deferred income taxes
17,386
3,019
Cash Flow from Operations
(-1 each extra or omitted to -11; if years consistently reversed -3)
(including impairment loss ok)
9 (4) 9 points)
Interest Expense
2,261
Cash
2,235
Accrued interest (L)
26
(-1 each account and -2 each amount)
7 (5) (7 points)
Beg
-2
Payments
-2
End
7 (6) (7 points)
Disposals

8 (7) (8 points)
Writeoffs
Allowance for DA
Accounts Rec.

6
15
6090

(10) (a) Net Income as reported


Increase interest revenue
-2
Net Income corrected
(b) Working capital as reported
plus: increase inventory
plus: increase accrued rev.
Working capital corrected
Inventory (CA)
10
Fixed Assets (NCA)
Accrued revenues (CA)
6
Interest revenue (R)
(10 points)
(-2 for extra amounts also)

-2

8,443
7,906
1,402
(31)
(13,523)
(17,724)
(1,542)
(618)
(38)
(2,173)
11,896
3,677

(11) (9 points)
Income before income taxes
Cash flow from operating activities
Total assets
Bad debt exp (E)
20
Allow for Bad debts (XA)

4,054
814
(717)
14,367
16,193

Prepaid Advertising (A)


138
9,107
9,132 Adv. Exp.
113
Acc. Depr. (XA)
24,278 Beg
1,282
7,906 Depr. Exp.
30,902 End
Allowance for DA (XA)
544 Beg
100
577 Bad Debt Exp.
1,021 End
100
100

8,443 -2 10
6 -2
8,449
29,150 -2
10 -2
6 -2
29,166
10
6

9
-20
NE
-20

-3
-3
-3
20

(12a)

(a) U/S (b) U/S (c) U/S (d) O/S


Correcting Entry:
Plant and equip (+A)
Interest exp (-E)

(-2 each)
(8 points)

(12b)

(a)U/S (b) NE (c) O/S (d) O/S


Correcting Entry:
Sales revenue (R)
Deferred revenues (L)

(-2 each)
(8 points)

(12c)

(a) O/S (b) NE (c) O/S (d) O/S


Correcting Entry:
Interest revenue (R)
Accrued interest rec. (A)

(-2 each)
(8 points)

5
5

-3
(12d)

-2
-3
-2

(a) O/S (b) NE (c) U/S (d) NE


2006 Sales revenue (R)
Accounts Rec. (A)
2007 Accounts Rec. (A)
Sales revenue (R)

(-2 each)
(8 points)

-1
-2
-1

(-2 for each account, -4 for the amount as indicated above)


(-1 math)
6 (8)

1,542 Higher
(-3 amount and -3 direction)

120

63

Robert Libby

57

209

Robert Libby

210

Extra Chapter 6, 7, and 8 Questions

Name ________________________

Eli Lilly is engaged in the discovery, development, manufacture, and sale of products and
the provision of services in the Life Sciences industry. Its 1995 and 1994 Balance Sheets, 1995
Statement of Income, and selected notes are presented on the following pages. Treat each item
below independently. Watch the dates on the statements. All numbers in the statements and in
the questions are in $millions.
1. a) Bad debt expense was $28 during 1995. What was the amount of write-offs of bad debts in
1995? There were no reinstatements.
Chap. 6

b) What was the effect of the entries to record these write-offs on Cash Flow from
Operations (ignoring the income tax effect) for 1995? Indicate the direction and amount.

______________ Increase

Robert Libby

______________ Decrease

211

No Effect

2. a) Lilly uses LIFO to account for a portion of its inventory. If it had always used FIFO to
account for all inventories, what amount would it have reported for 1995 Income from
Chap. 7
continuing operations before income taxes and cumulative effect of change in accounting
principle?

b) Did Lilly pay more or less or no difference in income taxes in 1995 as a result of using LIFO
instead of FIFO for these inventory items (circle one)?

Paid more in taxes

Robert Libby

Paid less in taxes

212

No difference in taxes

3. If Lilly reduced the useful lives of some equipment for book purposes only in 1994:

Chap. 8

a) What would be the effect on 1994 net income before taxes (circle one)?
Increase

Decrease

No Effect

b) What would be the effect on 1994 cash flow from operations (circle one)?
Increase

Robert Libby

Decrease

No Effect

213

Consolidated Statements of Income


ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Year Ended December 31
1995
1994
1993
------------------------------------------------------------------Net sales......................
Cost of sales..................
Research and development.......
Acquired research (Note 2).....
Marketing and administrative...
Restructuring and special charges
(Note 3)....................
Interest expense...............
Other income--net..............

Income from continuing operations


before income taxes and cumulative
effect of change in accounting
principle......................
Income taxes (Note 10).........

$6,763.8

$5,711.6

$5,198.5

1,885.7
1,042.3
1,854.0

1,679.7
838.7
58.4
1,398.3

1,448.0
755.0
1,332.4

286.3
(70.1)
------4,998.2
-------

66.0
103.8
(131.9)
-----4,013.0
-------

1,032.6
70.6
(102.9)
-----4,535.7
-------

1,765.6

1,698.6

662.8

459.0
-------

Income from continuing operations


before cumulative effect of change in
accounting principle...........
1,306.6
Discontinued operations, net of tax
(Note 4)......................

Income before cumulative effect of


change in accounting principle...
Cumulative effect of change in
accounting principle - net of tax
(Note 5)........................

Net income.......................

513.5
-------

1,185.1

984.3
-------

101.0
-------

198.0
-------

464.8

26.3
-------

2,290.9

1,286.1

491.1

-------

------

(10.9)
------

$2,290.9
=======

$1,286.1
=======

$480.2
=====

See notes to consolidated financial statements.

Robert Libby

214

Consolidated Balance Sheets


ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

December 31
1995
1994
------------------------------------------------------------Assets
Current Assets
Cash and cash equivalents..........
$ 999.5
Short-term investments.............
84.6
Accounts receivable, net of allowances of
$55.1 (1995) and $46.6 (1994)....
1,520.5
Other receivables..................
287.9
Inventories (Note 1)...............
839.6
Deferred income taxes (Note 10)....
259.2
Prepaid expenses...................
147.3
------Total current assets............
4,138.6

Other Assets
Prepaid retirement (Note 11).......
Investments (Note 6)...............
Goodwill and other intangibles, net of
allowances for amortization of $192.2
(1995) and $326.2 (1994) (Note 2)
Sundry...................................

Property and Equipment (Note 1)

215

536.9
209.8

1,550.2
284.4
968.9
245.0
167.1
-----3,962.3

484.2
573.8

411.9
464.1

4,105.2
871.4
------6,034.6

4,411.5
846.1
------6,133.6

4,239.3
-------

$14,412.5
========

Robert Libby

4,411.5
-------

$14,507.4
========

Consolidated Balance Sheets


ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

December 31
1995
1994
---------------------------------------------------------------Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings (Note 7)
Accounts payable
Employee compensation
Dividends payable
Income taxes payable (Note 10)
Other liabilities
Total current liabilities
Other Liabilities
Long-term debt (Note 7)
Deferred income taxes (Note 10)
Retiree medical benefit obligation
(Note 11)
Other noncurrent liabilities

$1,908.8
1,018.0
316.0
189.1
660.5
874.6
------4,967.0

$2,724.4
878.2
304.6
188.8
508.4
1,065.1
------5,669.5

2,592.9
295.5

2,125.8
188.9

147.8
976.7
------4,012.9

170.5
997.1
------3,482.3

Commitments and contingencies (Note 12)

355.6
418.3
6,484.3
(199.5)
(0.6)
------7,058.1

183.0
421.7
5,062.1
(218.2)
(38.0)
------5,410.6

Shareholders' Equity (Notes 8 and 9)


Common stock--no par value
Authorized shares: 800,000,000
Issued shares:
568,902,054
Additional paid-in capital
Retained earnings
Deferred costs--ESOP
Currency translation adjustments

Less cost of common stock in treasury:


1995 -- 18,149,494 shares
1994 -871,514 shares

1,625.5
55.0
-------------5,432.6
5,355.6
-------------$14,412.5 $14,507.4
======== ========

See notes to consolidated financial statements.

Robert Libby

216

Notes
Inventories: The company states all its inventories at the
lower of cost or market. The company uses the last-in, firstout (LIFO) method for substantially all its inventories
located in the continental United States, or approximately 54
percent of its total inventories.
Other inventories are
valued by the first-in, first-out (FIFO) method. Inventories
at December 31 consisted of the following:

Finished products
Work in process
Raw materials and supplies

Less reduction to LIFO cost


$

Robert Libby

217

1995
---273.8
446.4
154.0
----874.2
34.6
----839.6
=====

1994
---$ 288.0
515.1
239.0
------1,042.1
73.2
------$ 968.9
=======

Extra Chapter 6, 7, and 8 Questions

Name ____Solution____________

Eli Lilly is engaged in the discovery, development, manufacture, and sale of products and
the provision of services in the Life Sciences industry. Its 1995 and 1994 Balance Sheets, 1995
Statement of Income, and selected notes are presented on the following pages. Treat each item
below independently. Watch the dates on the statements. All numbers in the statements and in
the questions are in $millions.
1. a) Bad debt expense was $28 during 1995. What was the amount of write-offs of bad debts in
1995? There were no reinstatements.

writeoffs

Allow. for DA
46.6beginning bal.
19.5
28Bad debt exp
55.1ending bal.

b) What was the effect of the entries to record these write-offs on Cash Flow from
Operations (ignoring the income tax effect) for 1995? Indicate the direction and amount.

______________ Increase

______________ Decrease

No effect (because cash is unaffected)


Allow for DA
AR

Robert Libby

218

No Effect

19.5

19.5

2. a) Lilly uses LIFO to account for a portion of its inventory. If it had always used FIFO to
account for all inventories, what amount would it have reported for 1995 Income from
continuing operations before income taxes and cumulative effect of change in accounting
principle?

Change in Beg. Inv.


-Change in End. Inv.
Change in CGS
ICOBITCE (LIFO)
Change in income
ICOBITCE (FIFO)

73.2
34.6
38.6
1765.6
-38.6
1727.0

b) Did Lilly pay more or less or no difference in income taxes in 1995 as a result of using LIFO
instead of FIFO for these inventory items (circle one)?

Paid more in taxes

Paid less in taxes

No difference in taxes

Paid more (because income before taxes


and taxable income higher)

Robert Libby

219

3. If Lilly reduced the useful lives of some equipment for book purposes only in 1994:
b) What would be the effect on 1994 net income before taxes (circle one)?
Increase

Decrease

No Effect

Decrease (because depreciation exp. would be higher)

c) What would be the effect on 1994 cash flow from operations (circle one)?
Increase

Decrease

No Effect

No effect (because cash is uneffected by deprec.


expense journal entry--depreciation for tax purposes
affects cash)

Robert Libby

220

10

Practice Quiz 2s
Fall 2003 (Chapters 6, 7, 8, 9, 10)
Fall 2008 (Chapters 7, 8, 9, 10)

Robert Libby

221

Robert Libby

222

NCC 500 Quiz 2


Fall 2003

Name _____________________

This quiz contains 4 pages. Peet's Coffee & Tea, Inc. is a specialty coffee roaster and marketer of
branded fresh roasted whole bean coffee. Its Income Statement and Statement of Cash Flows for
the year ended December 31, 2002 and selected notes are presented on the following pages.
Treat each item below independently. Watch the dates on the statements. Like the statements, all
numbers in the problem are in thousands of dollars.
1. Assume that Peets adjusts the books at the end of each year. What adjusting journal entry for
bad debt expense did Peets record on December 31, 2002?

2. What was the net book value of property and equipment sold during 2002?

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223

3. Assume that the following bond was issued on January 1, 2002. The bond has a face value of
$500, a coupon rate of 6% paid semiannually, and a maturity date of December 31, 2005. The
market rate on the date of issuance was 5%. What would be the net book value of the bond on
December 31, 2002 after the interest payment was recorded?

4. During 2002, Peets recorded depreciation on a factory building by debiting operating


expenses and crediting accumulated depreciation. By December, the goods associated
with that depreciation had been sold.

Robert Libby

a) Cash flow from


operations for 2002

U/S O/S NE

b) Net Income for 2002

U/S O/S NE

c) Non-current assets
on Dec. 31, 2002

U/S O/S NE

d) Shareholders equity
on Dec. 31, 2002

U/S O/S NE

224

PEET S COFFEE & TEA INC


Consolidated Statements of Cash Flows
For Period Ended Dec 31, 2002
In Thousands
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Tax benefit from exercise of stock options
Deferred income taxes
Gains and losses on sales of investments
Loss on disposition of property and equipment
Changes in other assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other
Other assets
Accounts payable, accrued liabilities and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sales of property and equipment
Additions to intangible assets
Purchase of long term U.S. Government & Agency securities, net
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from borrowings
Repayments of debt
Payments of stock offering costs (completed in January 2001)
Net proceeds from issuance of common stock
Net cash provided by financing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period

Robert Libby

225

-4,657
-5,251
1,543
1,274
406
11
-(1,956)
(2,062)
(211)
(1,530)
4,419
$11,802
-(9,316)
17
(35)
(27,875)
$(37,226)
-46,258
(2,484)
(1,082)
44,862
$42,378
16,954
2,718
19,672

PEET S COFFEE & TEA INC


Consolidated Statements of Income
For Period Ended Dec 31, 2002
In Thousands Except Per Share Amounts
Net revenue
Operating expenses:
Cost of sales and related occupancy expenses
Operating expenses
Marketing and advertising
Depreciation and amortization
General and administrative expenses
Total operating costs and expenses
Income (loss) from operations
Interest income
Interest expense
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)

104,073
-48,146
33,221
4,554
4,568
6,732
$97,221
6,852
660
(120)
$7,392
2,735
$4,657

Selected Notes
A summary of the allowance for
doubtful accounts is as follows (in
thousands)
BALANCE AT
BEGINNING
OF PERIOD
Allowance for doubtful accounts:
Year ended December 31, 2000
Year ended December 31, 2001
Year ended December 31, 2002

Robert Libby

$61
69
58

226

ADDITIONS
CHARGES TO
EXPENSE
$23
30
162

WRITEOFFS
$15
41
145

BALANCE
AT END OF
PERIOD
$69
58
75

Name ____Solution___________

NCC 500 Quiz 2


Fall 2003

This quiz contains 4 pages. Peet's Coffee & Tea, Inc. is a specialty coffee roaster and marketer of
branded fresh roasted whole bean coffee. Its Income Statement and Statement of Cash Flows for
the year ended December 31, 2002 and selected notes are presented on the following pages.
Treat each item below independently. Watch the dates on the statements. Like the statements, all
numbers in the problem are in thousands of dollars.
1. What adjusting journal entry for bad debt expense did Peets record on December 31, 2002?

Bad Debt Expense (E)


Allowance for Doubtful Accounts (XA)

162
162

(9 points: -3 each account and amount)


2. What was the net book value of property and equipment sold during 2002?

Proceeds NBV = Gain (Loss)


Proceeds Gain (+ Loss) = NBV
17 +
11
= 28
(-4)
(-4)
(8 points total, -2 if subtract instead of add)
3. The following bond was issued on January 1, 2002? The bond has a face value of $500, a
coupon rate of 6% paid semiannually, a maturity date of December 31, 2005. The market rate
on the date of issuance was 5%. What would be the net book value of the bond on December
31, 2002 after the interest payment was recorded?

(FV=500; PMT=15; i=2.5, n=6) PV = 513.77


(8 points; -2 each input)
4. During 2002, Peets recorded depreciation on a factory building by debiting operating
expenses and crediting accumulated depreciation. By December, the goods had been sold.

Cost of sales (E)


Operating expenses (E)
NE; NE; NE; NE

Robert Libby

a) Cash flow from


operations for 2002
b) Net Income for 2002

U/S O/S NE

c) Non-current assets
on Dec. 31, 2002
d) Shareholders equity
on Dec. 31, 2002

U/S O/S NE

227

U/S O/S NE

U/S O/S NE

Robert Libby

228

NCC 5000 Quiz 2


Fall 2008

Student Number ____________________

Maytag was a major manufacturer of home appliances. Its partial balance sheet and selected
notes are presented on the following pages. Treat each item below independently and ignore
taxes. Watch the dates on the statements. Like the statements, all numbers are in thousands of
dollars.
Required:
Complete the following in the space provided.
1) Assume that no interest was accrued or prepaid. What entry did Maytag make for interest
paid in 2002?

2) Assume that the companys long-term debt includes $100 face value of 10% semiannual
Bonds due December 31, 2002 that had been issued on January 1, 1996 when the
effective market rate was 9.5%. The prevailing market rate for similar obligations on
December 31, 1998 was 11%. What was the book value of the bonds on December 31,
1998?

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229

3) How much higher or lower would Net Income Before Income Taxes have been at the end of
2002 had Maytag used FIFO to value all of its inventory? (Fill in the blank and circle
the appropriate direction.)
___________________

higher

lower

4) Assume that at the beginning of 2002, Maytag entered into new 5-year capital leases. They
incorrectly accounted for these capital leases as operating leases. What would be the
effects on each of the following?
a) Income before income
taxes for the year 2002

U/S O/S NE

b) Non-current assets
at year end 2002

U/S O/S NE

c) Non-current liabilities
at year end 2002

U/S O/S NE

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230

December 31
2002
2001
In thousands,
except share data
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts (2002$24,451;
2001$24,121)
Inventories
Deferred income taxes
Other current assets
Discontinued current assets
Total current assets
Noncurrent assets
Deferred income taxes
Prepaid pension cost
Intangible pension asset
Goodwill, less allowance for amortization (2002$120,929;
2001$120,929)
Other intangibles, less allowance for amortization (2002$3,574;
2001$2,466)
Other noncurrent assets
Discontinued noncurrent assets

8,106

$ 109,370

586,447
468,433
66,911
116,803
76,899

618,101
447,866
63,557
40,750
89,900

1,323,599

1,369,544

190,726
1,677
79,139

202,867
1,532
101,915

280,952

260,401

35,573
65,270
61,205

36,508
62,548
60,001

Total noncurrent assets


Property, plant and equipment
Land
Buildings and improvements
Machinery and equipment
Construction in progress

714,542

725,772

24,532
383,146
1,992,357
94,873

20,854
352,447
1,812,446
146,335

Less accumulated depreciation

2,494,908
1,428,800

2,332,082
1,296,347

Total property, plant and equipment

1,066,108

1,035,735

$3,104,249

$3,131,051

Total assets

Robert Libby

231

Inventories
Inventories consisted of the following:
December 31

Raw materials
Work in process
Finished goods
Supplies
Total FIFO cost
Less excess of FIFO cost over LIFO
Inventories

2002
2001
In thousands
71,563 $
62,587
51,919
76,524
422,309
382,925
8,736
9,659
554,527
531,695
86,094
83,829
468,433 $
447,866

Inventory costs are determined by the last-in, first-out (LIFO) method for approximately 92 percent and 91
percent of the Companys inventories at December 31, 2002 and 2001, respectively.

Long-Term Debt
Long-term debt consisted of the following:
December 31
2002

2001

In thousands

Omitted

934,079
195,312
$ 738,767

Less current portion of long-term debt


Long-term debt

1,065,651
133,586
$ 932,065

$68.2 million of the $652.2 medium-term notes grant the holders the right to require the Company to
repurchase all or any portion of these notes at 100 percent of the principal amount thereof, together with
accrued interest, following the occurrence of both a change of Company control and a credit rating
decline to below investment grade.
Interest paid during 2002, 2001 and 2000 was $72.5 million, $70.1 million and $66.1 million,
respectively. When applicable, the Company capitalizes interest incurred on funds used to construct
property, plant and equipment. Interest capitalized during 2002 and 2001 was $1.1 million and $1.1
million, respectively and was not significant in 2000.
The aggregate maturities of long-term debt in each of the next five years and thereafter are as follows (in
thousands): 2003$195,312; 2004$25,940; 2005$3,928; 2006$420,670; 2007$8,000;
thereafter$280,229.

Robert Libby

232

NCC 5000 Quiz 2


Fall 2008

Student Number ____________________

Maytag was a major manufacturer of home appliances. Its partial balance sheet and selected
notes are presented on the following pages. Treat each item below independently and ignore
taxes. Watch the dates on the statements. Like the statements, all numbers are in thousands of
dollars.
Required:
Complete the following in the space provided.
1) Assume that no interest was accrued or prepaid. What entry did Maytag make for interest
paid in 2002?
(LTD note in paragraph form)
Interest expense (E)
71.4
Plant and equipment or Const. in Prog. (A) 1.1
Cash (A)
72.5
2) Assume that the companys long-term debt includes $100 face value of 10% semiannual
Bonds due December 31, 2002 that had been issued on January 1, 1996 when the
effective market rate was 9.5%. The prevailing market rate for similar obligations on
December 31, 1998 was 11%. What was the book value of the bonds on December 31,
1998?
N=8, I=4.75, PMT=5,000, FV=100,000; PV=101,632 (or 101.632)
(there are 4 years left on December 31, 1998 and semiannual, so N = 8)
3) How much higher or lower would Net Income Before Income Taxes have been at the end of
2002 had Maytag used FIFO to value all of its inventory? (Fill in the blank and circle
the appropriate direction.)
_______________$2,265____

higher

lower

(CGS = 83,829 86,094 = -2,265; if CGS lower, NIBT higher)


4) Assume that at the beginning of 2002, Maytag entered into new 5-year capital leases. They
incorrectly accounted for these capital leases as operating leases. What would be the
effects on each of the following?
a) Income before income
taxes for the year 2002

U/S O/S NE

b) Non-current assets
at year end 2002

U/S O/S NE

c) Non-current liabilities
at year end 2002

U/S O/S NE

Robert Libby

233

(See classnotes: Same


total expense, capitalize
more early. Capitalized
only record asset and
liability.)

Robert Libby

234

Practice Old Finals


Fall 2003
Summer 2005
Fall 2006
Summer 2012

NCC5000 Robert Libby

235

ROBERT LIBBY

Robert Libby

236

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University

Final Examination
NCC 500
FINANCIAL ACCOUNTING
Fall 2003

NAME: ___________________________________

Cornell ID: _____________

Instructions:
This open book examination consists of two parts with multiple questions. (Be sure that your
examination contains 11 pages, including this page.) All questions are based on the information
in the financial statements and notes packet you were given. Questions can be worked in any
order. For partial credit, please show all calculations and state any assumptions you make.
Record your answers on the exam in the space provided. You may use whatever books, notes,
and calculators you wish. You have 180 minutes to complete this exam.
Please read and sign the following statement:
Academic integrity is expected of all students of Cornell University at all times, whether
in the presence or absence of members of the faculty.
Understanding this, I declare I shall not give, use, or receive unauthorized aid in this
examination.
__________________________________
Signature
Points
Assigned

Points Assigned and Suggested Times

Suggested
Times

Problem I Brunswick

72

90 minutes

Problem II Starbucks

48

60 minutes

Review

30 minutes
120

Robert Libby

237

180 minutes

Problem I Brunswick
Answer the following questions using the attached financial statements and selected footnotes
from Brunswicks Annual Report. Brunswick is a leading manufacturer of powerboats and other
recreational equipment. Before answering the questions, take a few minutes to review the
financial statements and footnotes. Familiarity with the available information will likely save
you some time and mistakes. Note that all dollar amounts in the statements and problems are
in millions ($000,000). Treat each question independently and watch the dates on the
statements. The year 2002 refers to the fiscal year ended December 31, 2002.
1. What was the journal entry recorded for aggregate write-offs of bad debts during 2002?

2. Which was larger during 2002 (Circle one)?


Product warranties expenses recorded

Cash payments for product warranties

How did you know?

Robert Libby

238

3. (a) What would the Retained Earnings on December 31, 2002 have been had Brunswick
always used FIFO for all of its inventory? Assume a 35% tax rate.

(b) What would Inventory on December 31, 2002 have been had Brunwick used FIFO for all
of its inventory?

Robert Libby

239

4. What were total additions to Work-in-process Inventory during 2002?

5. Had all of Brunswicks operating leases been accounted for as capital leases, what would
have been the amount reported as the non-current liability Capital lease liability less current
maturities at the end of 2002? Assume that the appropriate interest rate is 6%.

Robert Libby

240

6. (a) Assume that Brunswicks Notes, 6.75% due 2006 have a maturity date of December 31
and pay interest annually on December 31. What was the market interest rate on these notes
on the date of issuance? Round to two decimal places.

(b) What will be Interest expense on these notes for 2005?

(c) If these these notes were retired when the market price was 255 on December 31, 2004
(immediately after the 2004 interest payment), what would be the effect on (indicate amount
and direction and ignore taxes):
Net income after extraordinary items__________ increase decrease
Cash flow from operations

__________ increase decrease

Cash flow from financing __________ increase

Robert Libby

241

decrease

no effect

no effect
no effect

7. What was the average cost per share of the total Treasury stock balance on December 31,
2002?

8. What journal entry did Brunswick record for the issuance of shares for Compensation plans
and other for 2002?

Robert Libby

242

9. What end of period adjusting entry did Brunswick make to adjust securities available for sale
to market for 2002?

10. What was the amount of Goodwill added to the balance sheet as a result of acquisitions
during 2002?

Robert Libby

243

Problem II Starbucks
Answer the following questions using the attached financial statements and selected footnotes
from Starbucks Annual Report. Before answering the questions, take a few minutes to review
the financial statements and footnotes. Familiarity with the available information will likely save
you some time and mistakes. Note that all dollar amounts in the statements and problems are
in thousands ($000). Treat each question independently and watch the dates on the statements.
The year 2002 refers to the fiscal year ended September 29, 2002.

1. In the fiscal 2000 financial statements, what was the number of shares listed as
outstanding on Starbucks balance sheet?

2. What was the net book value of the equity method investments sold during 2002?

Robert Libby

244

3. What journal entries did Starbucks make related to equity method investments during 2002
for:
(a) Income from equity investees?

(b) Dividends from equity investees?

4. If the company did the following in the current year, what would be the most likely effect on
each of the following for the current year? Ignore taxes. (Circle increase, decrease, or no
effect.)
(a) Record a write-down of inventory to lower of cost or market.
Net income

increase

decrease

no effect

Cash flow from operations

increase

decrease

no effect

Robert Libby

245

(b) Record a 50% stock dividend.


Stockholders equity

increase

decrease

no effect

Earnings per share

increase

decrease

no effect

(c) Acquire equipment through a capital lease instead of an operating lease.


Total liabilities

increase

decrease

no effect

Cash flow from operations

increase

decrease

no effect

Robert Libby

246

10

5. During 2002, Starbucks recorded wages paid to office workers by making the following
entry:
Work-in-process inventory
Cash
By the end of 2002, the goods had been sold. No additional adjustments had been made.
What would be the effect on each of the following?
a) Net income for 2002

U/S O/S NE

b) Current assets
at year end 2002

U/S O/S NE

c) Stockholders equity
at year end 2002

U/S O/S NE

d) Cash flow from


operations for 2002

U/S O/S NE

6. During 2001, Starbucks recorded interest on debt used to finance construction of plant and
equipment by debiting Interest expense and crediting Cash. The plant and equipment
was placed in service January 1, 2002 and was expected to have a useful life of 10 years. No
additional adjustments had been made. What would be the effect on each of the following
(watch the dates)?
a) Cash flow from
U/S O/S NE
investing activities for the year 2001

Robert Libby

b) Income before income


taxes for the year 2002

U/S O/S NE

c) Non-current assets
at year end 2002

U/S O/S NE

d) Shareholders equity
at year end 2002

U/S O/S NE

247

Financial Statements and Notes

Final Examination
NCC 500 Financial Accounting
Fall 2003

There are 14 pages to this booklet.

Robert Libby

248

BRUNSWICK

BRUNSWICK CORP
Consolidated Statements of Income

In Millions Except Per Share Amounts For Period Ended Dec 31, 2002
NET SALES
Cost of sales
Selling, general and administrative expense
Research and development expense
Unusual charges
OPERATING EARNINGS
Interest expense
Other income (expense)
EARNINGS BEFORE INCOME TAXES
Income tax provision
EARNINGS FROM CONTINUING OPERATIONS
Cumulative effect of change in accounting principle, net of tax
NET EARNINGS (LOSS)

Robert Libby

249

3711.9
2852.0
560.5
102.8
-196.6
(43.3)
8.3
161.6
58.1
103.5
(25.1)
78.4

BRUNSWICK
BRUNSWICK CORP
Consolidated Statements of Cash Flows
31-Dec-02
In Millions For Period Ended Dec 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)
Depreciation and amortization
Change in accounting principle, net of tax
Changes in noncash current assets and current liabilities
Change in accounts and notes receivable
Change in inventory
Change in prepaid expenses
Change in accounts payable
Change in accrued expense
Income taxes
Antitrust litigation settlement payments
Other, net
NET CASH PROVIDED BY CONTINUING OPERATIONS
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Investments
Acquisitions of businesses, net of debt and cash acquired
Proceeds on the sale of property, plant and equipment
Other, net
NET CASH USED FOR CONTINUING OPERATIONS
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
NET CASH USED FOR INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Net issuances (repayments) of commercial paper and other short-term debt
Payments of long-term debt including current maturities
Cash dividends paid
Stock repurchases
Stock options exercised
NET CASH USED FOR FINANCING ACTIVITIES
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
CASH AND CASH EQUIVALENTS AT DECEMBER 31
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid
Income taxes paid (received), net
Treasury stock issued for compensation plans and other

Robert Libby

250

12/31/02
-78.4
148.4
25.1
-(35.1)
35.1
(9.7)
71.0
29.5
64.3
(0.2)
6.2
413.0
-413.0
-(112.6)
(8.9)
(21.2)
13.2
(0.2)
(129.7)
-(129.7)
-(9.4)
(26.2)
(45.1)
-40.3
(40.4)
242.9
108.5
351.4
-43.3
(6.2)
56.0

BRUNSWICK
BRUNSWICK CORP
Consolidated Balance Sheet
In Millions For Period Ended Dec 31, 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost, which approximates market
Accounts and notes receivable, less allowances of $31.8 and $26.1
Inventories
Finished goods
Work-in-process
Raw materials
Net inventories
Prepaid income taxes
Prepaid expenses
Income tax refunds receivable
CURRENT ASSETS
PROPERTY
Land
Buildings and improvements
Equipment
Total land, buildings and improvements and equipment
Accumulated depreciation
Net land, buildings and improvements and equipment
Unamortized product tooling costs
NET PROPERTY
OTHER ASSETS
Goodwill
Other intangibles
Investments
Other long-term assets
OTHER ASSETS
TOTAL ASSETS
CURRENT LIABILITIES
Short-term debt, including current maturities of long term debt
Accounts payable
Accrued expenses
CURRENT LIABILITIES
LONG-TERM DEBT
Notes, mortgages and debentures
DEFERRED ITEMS
Income taxes
Postretirement and postemployment benefits
Other
DEFERRED ITEMS
COMMON SHAREHOLDERS' EQUITY
102,538,000 shares
Additional paid-in capital
Retained earnings
Treasury stock, at cost: 12,377,000 and 14,739,000 shares
Unamortized ESOP expense and other
Accumulated other comprehensive loss:
Foreign currency translation
Minimum pension liability
Unrealized investment gains (losses)
Unrealized losses on derivatives
Total accumulated other comprehensive loss
COMMON SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Robert Libby

251

12/31/02
--

12/31/01
--

351.4
401.4

108.5
361.9

--

--

272.5
201.6
72.8
546.9
305.1
49.5
5.9
1660.2
-68.3
478.2
998.2
1544.7
(871.0)
673.7
119.0
792.7
-452.8
117.5
95.4
288.5
954.2
3407.1
-28.9
291.2
685.5
1005.6
-589.5
-144.1
399.3
166.8
710.2
-76.9
308.9
1112.7
(228.7)
(22.2)
-(9.9)
(136.5)
2.7
(2.1)
(145.8)
1101.8
3407.1

317.2
180.9
59.3
557.4
307.5
38.9
26.7
1400.9
-68.4
460.0
964.8
1493.2
(803.8)
689.4
116.2
805.6
-474.4
128.9
80.4
267.3
951.0
3157.5
-40.0
214.5
648.2
902.7
-600.2
-185.2
216.1
142.4
543.7
-76.9
316.2
1079.4
(289.8)
(27.1)
-(20.0)
(20.8)
(1.7)
(2.2)
(44.7)
1110.9
3157.5

BRUNSWICK
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
ACCUMULATED
ADDITIONAL
OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK
INCOME (LOSS)
TOTAL
BALANCE, DECEMBER 31, 1999...
$76.90 $265.00 $1,181.50
($214.00)
($9.20) $1,300.20
COMPREHENSIVE INCOME
Net loss...................
-(95.8)
--(95.8)
Currency translation adjustments..............
---(8.3)
(8.3)
Unrealized losses on investments..............
---(3.9)
(3.9)
Minimum pension liability adjustment...............
---(6.0)
(6.0)
Total comprehensive income -- 2000..................
-(95.8)
-(18.2)
(114.0)
Stock repurchased............
--(87.1)
-(87.1)
Dividends ($0.50 per common share).................
-(44.3)
--(44.3)
Compensation plans and other......................
-7.6
-4.7
-12.3
BALANCE, DECEMBER 31, 2000...
$76.9
$272.6
$1,041.4
($296.4)
($27.4) $1,067.1
COMPREHENSIVE INCOME
Net earnings...............
-81.8
--81.8
Currency translation adjustments..............
---(5.0)
(5.0)
Unrealized gains on investments..............
---4.4
4.4
Unrealized losses on derivative instruments...
---(2.1)
(2.1)
Minimum pension liability adjustment...............
---(14.6)
(14.6)
Total comprehensive income -- 2001..................
-81.8
-(17.3)
64.5
Dividends ($0.50 per common share).................
-(43.8)
--(43.8)
Compensation plans and other......................
-16.5
-6.6
-23.1
BALANCE, DECEMBER 31, 2001...
$76.9
$289.1
$1,079.4
($289.8)
($44.7) $1,110.9
COMPREHENSIVE INCOME
Net earnings...............
-78.4
--78.4
Currency translation adjustments..............
---10.1
10.1
Unrealized gains on investments..............
---4.4
4.4
Unrealized gains on derivative instruments...
---0.1
0.1
Minimum pension liability adjustment...............
---(115.7)
(115.7)
Total comprehensive income -- 2002..................
-78.4
-(101.1)
(22.7)
Dividends ($0.50 per common share).................
-(45.1)
--(45.1)
Compensation plans and other......................
-(2.4)
-61.1
-58.7
BALANCE, DECEMBER 31, 2002...
$76.9
$286.7
$1,112.7
($228.7)
($145.8) $1,101.8

Robert Libby

252

BRUNSWICK
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.

SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable and Allowance for Doubtful Accounts. The Company


carries its accounts receivable at their face amounts less an allowance for
doubtful accounts. On a regular basis, the Company records an allowance for
uncollectible receivables based upon past transaction history with customers,
customer payment practices and economic conditions. Actual collection experience
may differ from the current estimate of net receivables. A change to the
allowance for uncollectible amounts may be required if a future event or other
change in circumstances results in a change in the estimate of the ultimate
collectibility of a specific account.
Inventories. Inventories are valued at the lower of cost or market, with
market based on replacement cost or net realizable value. Approximately 63
percent of the Company's inventories were determined by the first-in, first-out
method (FIFO). Inventories valued at the last-in, first-out method (LIFO) were
$85.7 million and $83.6 million lower than the FIFO cost of inventories at
December 31, 2002 and 2001, respectively. Inventory cost includes material,
labor and manufacturing overhead.
Property. Property, including major improvements and product tooling
costs, is recorded at cost. Product tooling costs principally comprise the cost
to acquire and construct various long-lived molds, dies and other tooling owned
by the Company and used in its manufacturing processes. Design and prototype
development costs associated with product tooling are expensed as incurred.
Maintenance and repair costs are also expensed as incurred. Depreciation is
recorded over the estimated service lives of the related assets, principally
using the straight-line method. Buildings and improvements are depreciated over
a useful life of five to forty years. Equipment is depreciated over a useful
life of two to twenty years. Product tooling costs are amortized over the
shorter of the useful life of the tooling or the useful life of the applicable
product, for a period not to exceed eight years. Gains and losses recognized on
the sale of property are included in selling,general and administrative (SG&A)
expenses. The amount of gains and losses included in SG&A as of December 31 were
as follows (in millions):

Gains on the sale of property...............................


Losses on the sale of property..............................
Net gains (losses) on sale of property....................

2002
-----

2001
-----

2000
----

$ 1.5
(2.0)
----$(0.5)
=====

$16.9
(4.2)
----$12.7
=====

$7.2
(0.1)
---$7.1
====

The gains on the sale of property in 2001 included gains recognized on the
sale of a marine engine testing facility for $10.6 million. Gains on the
divestiture of certain bowling centers were $2.7 million and $6.0 million in
2001 and 2000, respectively.
Goodwill and Other Intangibles. Goodwill and other intangible assets
generally result from business acquisitions. The excess of cost over net assets
of businesses acquired is recorded as goodwill.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," which requires that, effective
January 1, 2002, goodwill and certain other intangible assets deemed to have an
indefinite useful life are no longer amortized. SFAS No. 142 does not require

Robert Libby

253

BRUNSWICK
retroactive restatement for all periods presented; however, the comparative pro
forma information below for 2001 and 2000 assumes that SFAS No. 142 was in
effect beginning January 1, 2000.
PRO FORMA INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
---------------------2002
2001
2000
-------------(IN MILLIONS,
EXCEPT PER SHARE DATA)
Reported net earnings (loss)................................
Goodwill and indefinite-lived intangible amortization.......
Adjusted net earnings (loss)................................
BASIC EARNINGS PER COMMON SHARE:
Reported net earnings (loss)................................
Goodwill and indefinite-lived intangible amortization.......
Adjusted net earnings (loss)................................
DILUTED EARNINGS PER COMMON SHARE:
Reported net earnings (loss)................................
Goodwill and indefinite-lived intangible amortization.......
Adjusted net earnings (loss)................................

$78.4
-----$78.4
=====

$81.8
10.8
----$92.6
=====

$(95.8)
9.6
-----$(86.2)
======

$0.87
-----$0.87
=====

$0.93
0.12
----$1.05
=====

$(1.08)
0.11
-----$(0.97)
======

$0.86
-----$0.86
=====

$0.93
0.12
----$1.05
=====

$(1.08)
0.11
-----$(0.97)
======

Under SFAS No. 142, while amortization of goodwill and certain other
intangible assets is no longer permitted, these accounts must be reviewed
annually for impairment. The impairment test for goodwill is a two-step process.
The first step is to identify when goodwill impairment has occurred by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
If the fair value of a reporting unit exceeds its carrying amount, goodwill of
the reporting unit is not considered impaired. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill test
should be performed to measure the amount of the impairment loss, if any. In
this second step, the implied fair value of the reporting unit's goodwill is
compared with the carrying amount of the goodwill. If the carrying amount of the
reporting unit's goodwill exceeds the implied fair value of that goodwill, an
impairment loss should be recognized in an amount equal to that excess, not to
exceed the carrying amount of the goodwill.
The Company completed both steps of the process described above in the
second quarter of 2002 and recorded a one-time, non-cash charge of $29.8 million
pre-tax to reduce the carrying amount of its goodwill effective January 1, 2002.
Such charge is reflected as a cumulative effect of change in accounting principle
in the accompanying Consolidated Statements of Income. In calculating the
impairment charge, the fair value of the impaired reporting units underlying the
segments was estimated using a discounted cash flow methodology.
Investments. The Company accounts for its long-term investments that
represent less than 20 percent ownership using SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Company has investments
in certain equity securities that have readily determinable market values and
are being accounted for as Available-for-Sale equity investments in accordance
with SFAS No. 115. Therefore, these investments are recorded at market value
with changes reflected in other comprehensive income, a component of

Robert Libby

254

BRUNSWICK
shareholders' equity, on an after-tax basis.
Other investments for which the Company does not have the ability to
exercise significant influence and for which there is not a readily determinable
market value are accounted for under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments and, at December
31, 2002 and 2001, such investments were recorded at the lower of cost or fair
value.
For investments in which the Company owns or controls from 20 percent to 50
percent of the voting shares, the equity method of accounting is used. The
Company's share of net earnings or losses from equity method investments is
outlined in NOTE 17, INVESTMENTS, and is included in the Consolidated Statements
of Income.
9.

ACCRUED EXPENSES
Accrued expenses at December 31 were as follows (in millions):
2002
-----Accrued compensation and benefit plans...................... $158.9
Product warranties..........................................
139.6
Dealer allowances and discounts.............................
111.3
Insurance reserves..........................................
71.3
Environmental reserves......................................
61.7
Other.......................................................
142.7
-----Total accrued expenses.................................... $685.5

2001
-----$127.2
138.7
114.3
68.0
62.6
137.4
-----$648.2

10.

DEBT
Short-term debt at December 31 consisted of the following (in millions):
2002
2001
----------Notes payable............................................... $ 4.1
$ 13.6
Current maturities of long-term debt........................
24.8
26.4
----------Total short-term debt..................................... $ 28.9
$ 40.0
======
======
Long-term debt at December 31 consisted of the following (in millions):
2002
2001
----------Notes, 6.75% due 2006, net of discount of $0.9 and $1.1..... $249.1
$248.9
Notes, 7.125% due 2027, net of discount of $1.2.............
198.8
198.8
Debentures, 7.375% due 2023, net of discount of $0.6 and
$0.7......................................................
124.4
124.3
Guaranteed ESOP debt, 8.13% payable through 2004............
15.5
24.9
Notes, 3.17% to 4.50% payable through 2004..................
14.1
29.3
Fair value adjustments and other............................
12.4
0.4
----------614.3
626.6
Current maturities..........................................
(24.8)
(26.4)
----------Long-term debt.............................................. $589.5
$600.2
======
======
Scheduled maturities
2004...................................................... $ 5.6
2005......................................................
0.1
2006......................................................
260.6
2007......................................................
-Thereafter................................................
323.2
-----Total................................................ $589.5
======

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255

BRUNSWICK
15.

LEASES

The Company has various lease agreements for offices, branches, factories,
distribution and service facilities, certain Company-operated bowling centers,
fitness retail locations, and certain personal property. The longest of these
obligations extends through 2025. Most leases contain renewal options and some
contain purchase options. Many leases for Company-operated bowling centers
contain escalation clauses, and many provide for contingent rentals based on
percentages of gross revenue. No leases contain restrictions on the Company's
activities concerning dividends, additional debt or further leasing. Rent
expense consisted of the following (in millions):
Basic expense...............................................
Contingent expense..........................................
Sublease income.............................................
Rent expense, net...........................................

2002
----$42.5
1.9
(1.1)
----$43.3
=====

2001
----$40.3
1.0
(1.4)
----$39.9
=====

2000
----$37.5
0.3
(2.1)
----$35.7
=====

Future minimum rental payments at December 31, 2002, under agreements


classified as operating leases with non-cancelable terms in excess of one year,
were as follows (in millions):
2003........................................................
2004........................................................
2005........................................................
2006........................................................
2007........................................................
2008........................................................
Total..............................................

Robert Libby

256

$ 28.7
23.4
19.8
15.8
11.8
35.4
-----$134.9
======

BRUNSWICK

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS


(IN MILLIONS)
ALLOWANCES FOR
POSSIBLE LOSSES ON
AT
RECEIVABLES
OF
-----------------2002..........................
2001..........................
2000..........................

Robert Libby

BALANCE AT
BEGINNING

CHARGES TO

OF PERIOD

PROFIT AND LOSS

WRITE-OFFS

RECOVERIES

OTHER

YEAR END

----------

---------------

----------

----------

-----

----------

$26.1
=====
$21.2
=====
$18.4
=====

$10.8
=====
$13.7
=====
$11.4
=====

$ (6.6)
======
$(13.1)
======
$ (8.9)
======

$0.8
====
$0.5
====
$1.0
====

$(0.7)
=====
$ 3.8
=====
$(0.7)
=====

257

BALANCE

$31.8
=====
$26.1
=====
$21.2
=====

STARBUCKS

STARBUCKS CORP
Consolidated Statements of Income
29-Sep-02
In Thousands Except Per Share Amounts For Period Ended Sep 29, 2002
Net revenues:
Retail
Specialty
Total net revenues
Cost of sales and related occupancy costs
Store operating expenses
Other operating expenses
Depreciation and amortization expenses
General and administrative expenses
Income from equity investees
Operating income
Interest and other income, net
Internet-related investment losses
Gain on sale of equity investment
Earnings before income taxes
Income taxes
Net earnings
Net earnings per common share - basic
Net earnings per common share - diluted
Weighted average shares outstanding:
Basic
Diluted

Robert Libby

258

9/29/2002
-2,792,904
496,004
$3,288,908
1,350,011
1,121,108
127,178
205,557
202,161
35,832
$318,725
9,300
-13,361
$341,386
126,313
$215,073
0.56
0.54
-385,575
397,526

STARBUCKS
STARBUCKS CORP
Consolidated Statements of Cash Flows
In Thousands For Period Ended Sep 29, 2002
OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Gain on sale of equity investment
Provision for impairment and asset disposals
Deferred income taxes, net
Excess of dividends received over equity in income of investees
Tax benefit from exercise of non-qualified stock options
Cash provided/(used) by changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued compensation and related costs
Accrued occupancy costs
Accrued taxes
Deferred revenue
Other accrued expenses
Net cash provided by operating activities
INVESTING ACTIVITIES:
Net purchases of trading securities
Purchase of available-for-sale securities
Maturity of available-for-sale securities
Sale of available-for-sale securities
Additions to equity and other investments
Proceeds from sale of equity investment
Additions to property, plant and equipment
Additions to other assets
Net cash used by investing activities
FINANCING ACTIVITIES:
Increase/(decrease) in cash provided by checks drawn in excess of bank balances
Proceeds from sale of common stock under employee stock purchase plan
Proceeds from exercise of stock options
Principal payments on long-term debt
Repurchase of common stock
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes

Robert Libby

259

09/29/02
-215,073
-221,141
(13,361)
26,852
(6,088)
862
44,199
-(6,703)
(41,379)
(12,460)
5,463
24,087
15,343
(16,154)
15,321
34,022
$506,218
-(5,699)
(339,968)
78,349
144,760
(6,137)
14,843
(375,474)
(24,547)
$(513,873)
-12,908
16,191
91,276
(697)
(52,248)
$67,430
1,560
$61,335
-113,237
174,572
--303
105,339

STARBUCKS
STARBUCKS CORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands, except share data
---------------------------------------------------------------------------------------------------------------------------------Accumulated
Additional
Other
Common Stock
Paid-In
Retained
Comprehensive
Shares
Amount
Capital
Earnings
Income/(Loss)
Total
---------------------------------------------------------------------------------------------------------------------------------Balance, October 3, 1999
Net earnings
Unrealized holding losses, net
Translation adjustment

366,564,190
----

366
----

Comprehensive income

650,654
----

313,939
94,564
---

(3,946)
-(163)
(6,867)

961,013
94,564
(163)
(6,867)
-----------87,534
------------

Exercise of stock options,


including tax benefit of $31,131
8,943,570
9
89,585
--89,594
Sale of common stock
807,542
1
10,257
--10,258
---------------------------------------------------------------------------------------------------------------------------------Balance, October 1, 2000
376,315,302
376
750,496
408,503
(10,976)
1,148,399
Net earnings
---181,210
-181,210
Unrealized holding gains, net
----2,087
2,087
Translation adjustment
----3,481
3,481
-----------Comprehensive income
186,778
-----------Exercise of stock options,
including tax benefit of $ 30,899
6,289,892
6
77,555
--77,561
Sale of common stock
813,848
1
12,976
--12,977
Repurchase of common stock
(3,375,000)
(3)
(49,785)
--(49,788)
---------------------------------------------------------------------------------------------------------------------------------Balance, September 30, 2001
380,044,042
380
791,242
589,713
(5,408)
1,375,927
Net earnings
---215,073
-215,073
Unrealized holding losses, net
----(1,509)
(1,509)
Translation adjustment
----(1,664)
(1,664)
-----------Comprehensive income
211,900
-----------Equity adjustment related to equity
investee transaction
--39,393
--39,393
Exercise of stock options,
including tax benefit of $44,199
9,830,136
10
135,465
--135,475
Sale of common stock
991,742
1
16,190
--16,191
Repurchase of common stock
(2,637,328)
(3)
(52,245)
--(52,248)
---------------------------------------------------------------------------------------------------------------------------------Balance, September 29, 2002
388,228,592
$
388
$
930,045
$
804,786
$
(8,581) $ 1,726,638
----------------------------------------------------------------------------------------------------------------------------------

Robert Libby

260

STARBUCKS
STARBUCKS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 29, 2002, September 30, 2001, and October 1, 2000
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stock Split
On April 27, 2001, the Company effected a two-for-one stock split of its $0.001
par value common stock for holders of record on March 30, 2001. All applicable
share and per-share data in these consolidated financial statements have been
restated to give effect to this stock split.

Robert Libby

261

Robert Libby

262

NCC 500 Fall 2003


Final Exam Solution

Part I - Brunswick
1) Allowance for doubtful accounts (XA)
6.6
Accounts receivable (A)
6.6
(-2 each account and the amount)
2) Product warranties expenses recorded
Because the accrued expenses for product warranties went up.
(-3 each)
3a) Change in Cost of Goods Sold
-85.7
Change in Cumulative NIBT
85.7
Change in taxes to date
(.35 * 85.7)
30.0
Change in Retained Earnings
(.65 * 85.7)
55.7
RE (LIFO) + 55.7 =RE (FIFO)
(-2) (-2)
1,112.7+55.7=
1168.4
(-1)
(If also use beginning inventory, -2. 1114.06)
3b) Ending Inventory Lifo
546.9 (-1)
Ending Lifo reserve
85.7 (-1 sign, amt))
Ending Inventory Fifo
632.6
6
4)
(-1) beg
transfers from WIP
(-1) end

FG Inventory
317.2
2807.3
2852.0 CGS (-2)
272.5

or n=5, PV=248.9, FV=-250, PMT=-16.875

120
Robert Libby

i=6.86

58.7 (-1 each amount and account)


2.4
61.1

8) Cash or Comp. expense


Additional PIC
Treasury Stock

9) Investment in SAS (A)


4.4
Unrealized gains on investments (SE)
(or Accum other comp. income (SE)
(-2 for each account and the amount)
(4.5 is -1)
10)
(-2) beg
acquisitions
(-2) end

Goodwill (A)
474.4
8.2
452.8

4.4

29.8 writeoffs (-2)

72

Part II - Starbucks
1) 376,315,302/ 2= 188,157,651
(-3
-3)
2) Proceeds - NBV = Gain (Loss)
14,843 - x = 13,361
NBV =
(-3)
(-3)

WIP Inventory
(-1) beg
180.9
additions to WIP
2828.0
2807.3 transfers from WIP (-2)
(-1) end
201.6
(watch for carryforward)
5) year
amount
n
PV
2004............ 23.4
2
$20.83 -1 each
2005............ 19.8
3
$16.62
2006............ 15.8
4
$12.52
2007............ 11.8
5
$8.82
2008............ 35.4
6
$24.96
$83.74
(-1 if 2003 included, -3 if 88.77)
6a) n=4, PV=249.1, FV=-250, PMT=-16.875

3a) Investments in equity investees (A)


Income from equity investees (R)
(-1 each amount and account)
3b) Cash (A)
(35,832 + 862)
Investments in equity investees (A)
(-1 each amount and account)

4a) CGS (E)


Inventory (A)
decrease, no effect

1,482

35,832
35,832
36694
36694

(-3 each)

4b) RE or APIC (SE) or no entry


CS (SE)
no effect; decrease
(-3 each)

4c) Plant and Equip. (A)


Lease liability (L)
increase; decrease

-1 each

6b) n=2, FV=-250, PMT=-16.875, i=6.856


PV= 249.52
-1 each
.0686 *249.52= 17.12
(note 249.75 is n = 1)
(-2)
(look for rounding differences and carryforwards)
6c) NBV
249.5
Retirement price
255.0
Gain (Loss)
(5.5)
NI
5.5
decrease -1 each direction and
CFO
NE
amount
CFF
255
decrease
(look for rounding differences and carryforwards)
7) 228.7/12.377=
18.48
(-3
-3)
(-3 if reversed)

5) SG&A expense (E)


CGS (E)
NE, NE, NE, NE

(and some of payment is financing)


(-3 each)

(-1.5 each )
(-1 math)

48
263

6) In 2001
P&E (A)
Interest expense (E)
In 2002
Depr. Expense (E)
Acc. Depr. (XA)
OS, OS, US, US

(-1.5 each )

Robert Libby

264

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University

Final Examination
NCC 500
FINANCIAL ACCOUNTING
Summer 2005

NAME: ___________________________________

Cornell ID: _____________

Instructions:
This open book examination consists of two parts with multiple questions. (Be sure that your
examination contains 11 pages, including this page.) All questions are based on the information
in the financial statements and notes packet you were given. Questions can be worked in any
order. For partial credit, please show all calculations and state any assumptions you make.
Record your answers on the exam in the space provided. You may use whatever books, notes,
and calculators you wish. You have 180 minutes to complete this exam.
Please read and sign the following statement:
Academic integrity is expected of all students of Cornell University at all times, whether
in the presence or absence of members of the faculty.
Understanding this, I declare I shall not give, use, or receive unauthorized aid in this
examination.
__________________________________
Signature
Points
Assigned

Points Assigned and Suggested Times

Suggested
Times

Problem I Tommy Hilfiger

60

80 minutes

Problem II Dow Chemical

60

80 minutes

Review

20 minutes
120

Robert Libby

265

180 minutes

Problem I Tommy Hilfiger


Answer the following questions using the attached financial statements and selected footnotes
from Tommy Hilfiger Corp.s (a designer and distributor of clothing) Annual Report. Before
answering the questions, take a few minutes to review the financial statements and footnotes.
Familiarity with the available information will likely save you some time and mistakes. Note
that all numbers in the statements and problems are in thousands ($000). Treat each question
independently and watch the dates on the statements. Their fiscal year ends March 31.

1. What was the amount of cash paid for advertising during the year ended March 31, 2002?

2. a) Was the date of issuance market rate of interest higher or lower than the coupon rate on the
companys 2003 notes (payable)? (Circle one.)
Higher

Lower

b) How did you know?

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266

3. a) On average, have the market interest rates for debt similar to the companys 2003 and
2008 notes and 2031 bonds (payable) risen or fallen since the issuance of the debt? (Circle
one.)
Risen
Fallen

b) How did you know?

4. What was the date of issuance market rate for the April 1, 2008 notes? These notes pay an
annual coupon (interest payment).

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267

5. What was the amount of the discount on the 6.5% notes payable (due April 1, 2003) that was
amortized during the year ended March 31, 2002?

6. a) What amount for Goodwill did the company record related to the July 5, 2001
acquisition of T. H. International?

b) What amount will be recorded for the amortization of this goodwill during the year ended
March 31, 2003 under the current rules?

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268

7. What was the total amount of intangible assets acquired during the year ended March 31,
2002?

8. If the company did the following in the current year, what would be the most likely effect on
each of the following ratios or financial statement amounts for the current year? Use
definitions from chapter 5 and the notes. Ignore taxes. (Circle increase, decrease, or no
effect.)
(a) Make an end of period adjustment to write down inventory to lower of cost or market.
Cash flow from operations

increase

decrease

no effect

Cash flow from investing

increase

decrease

no effect

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269

(b) Paid cash in the current year for ordinary and routine maintenance on equipment. The
equipment had a remaining useful life of 4 years.
Cash flow from operations

increase

decrease

no effect

Non-current assets

increase

decrease

no effect

(c) Sold equipment which had a net book value of $10,000 for $12,000 cash on December
31.
Net income

increase

decrease

no effect

Non-current assets

increase

decrease

no effect

Robert Libby

270

Problem II Dow Chemical


Answer the following questions using the attached financial statements and selected footnotes
from Dow Chemicals (a manufacturer or chemical products) Annual Report. Before answering
the questions, take a few minutes to review the financial statements and footnotes. Familiarity
with the available information will likely save you some time and mistakes. Note that all
numbers in the statements and problems are in millions of dollars ($000,000) except share
amounts. Treat each question independently and watch the dates on the statements.

1. What was cash collected from customers for 2001?

2. What would Net Income have been for the year ended December, 31, 2001 had Dow
accounted for their entire inventory using FIFO? Assume a 30% tax rate.

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271

3. What journal entry did Dow make for the 3 for 1 stock split recorded during 2000?

4. Assume that Dow neither purchased nor sold Investments classified as available for sale
during 2001. What adjusting journal entry did Dow make at the end of 2001 related to
Investments classified as available for sale?

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272

5. Assuming that all sales of nonconsolidated affiliates were for book value and no
nonconsolidated affiliates paid dividends, what was the total income (loss) recognized from
nonconsolidated affiliates during 2001?

6. What was the average price per share paid for shares in treasury at the end of 2001?

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273

7. Assume that the company had done each of the following in preparation of its 2001
statements, and no adjustments were made. What would be the effect of each event on the
following amounts? Circle U/S for understate, O/S for overstate, or NE for no effect. Treat
each item independently and ignore income tax effects.
(a) During 2001, Dow recorded depreciation on an office building by debiting work-inprocess inventory and crediting accumulated depreciation. By December, the
goods had been sold and the sales and cost of sales had been recorded. No
additional adjustments had been made.
a) Cash flow from
operations for the year

U/S O/S NE

b) Income before income


taxes for the year

U/S O/S NE

c) Non-current assets
at year end

U/S O/S NE

d) Shareholders equity
at year end

U/S O/S NE

(b) During 2001, Dow realized that the useful life of certain office equipment used in the
accounting department which had an original estimated useful life of 6 years,
would only last for 5 years. No changes were made in the recording of
depreciation of this equipment for book purposes for 2001. No additional
adjustments had been made.

Robert Libby

a) Cash flow from


operations for the year

U/S O/S NE

b) Income before income


taxes for the year

U/S O/S NE

c) Non-current assets
at year end

U/S O/S NE

d) Shareholders equity
at year end

U/S O/S NE

274

(c) During 2001, Dow capitalized $1 of interest paid as part of Property that should
have been recorded as interest expense. No additional adjustments had been
made.
a) Cash flow from
operations for the year

U/S O/S NE

b) Income before income


taxes for the year

U/S O/S NE

c) Non-current assets
at year end

U/S O/S NE

d) Shareholders equity
at year end

U/S O/S NE

8. What would be the effect of properly recording the reissuance of treasury shares for $251
cash which was $26 in excess of their repurchase on "earnings before taxes," "cash flow from
operations," and "cash flow from financing activities" for 2000? Indicate the direction ("+"
for increase, "-" for decrease, and "NE" for no effect) and amount of the effect. Ignore tax
effects.
Earnings before taxes
+___________

-_____________

NE

Cash flow from operating activities


+___________

-_____________

NE

Cash flow from financing activities


+___________

Robert Libby

-_____________

NE

275

Financial Statements and Notes

Final Examination
NCC 500 Financial Accounting
Summer 2005

There are 13 pages to this booklet.

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276

Tommy Hilfiger

TOMMY HILFIGER CORP


Consolidated Balance Sheet

In Thousands
Current assets
Cash and cash equivalents
Accounts receivable
Inventories
Deferred tax and other current assets
Total current assets
Property and equipment, at cost, net of accumulated depreciation and
amortization
Intangible assets, net of accumulated amortization of $135,794 and
$101,262 respectively
Other assets
Total Assets
Current liabilities
Short-term borrowings
Current portion of long-term debt
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt
Deferred tax liability
Other liabilities
Commitments and contingencies
Shareholders' equity
Ordinary Shares, $.01 par value-shares authorized 150,000,000;
issued 96,031,167 and 95,169,402 respectively
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income (loss)
Treasury shares, at cost: 6,192,600 Ordinary Shares
Total shareholders' equity
Total Liabilities and Shareholders' Equity

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03/31/02
-387,247
224,395
184,972
97,274
$893,888

03/31/01
-318,431
237,414
205,446
90,353
$851,644

302,937

281,682

1,390,092
7,534
$2,594,451
-62,749
698
28,980
210,270
$302,697
575,287
214,964
4,041
---

1,206,358
2,872
$2,342,556
--50,000
38,628
171,640
$260,268
529,495
202,123
2,077
---

960
598,527
956,776
2,430
(61,231)
$1,497,462
2,594,451

952
589,184
822,231
(2,543)
(61,231)
$1,348,593
2,342,556

Tommy Hilfiger

TOMMY HILFIGER CORP


Consolidated Statements of Income

In Thousands Except Per Share Amounts For Period Ended


Net revenue
Cost of goods sold
Gross profit
Depreciation and amortization
Other selling, general and administrative expenses
Total operating expenses
Income from operations
Interest expense
Interest income
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic earnings per share
Weighted average shares outstanding
Diluted earnings per share
Weighted average shares and share equivalents outstanding

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278

3/31/2002
1,876,721
1,073,089
803,632
114,129
503,774
$617,903
185,729
41,177
10,062
$154,614
20,069
$134,545
-1.50
89,430
1.49
90,000

Tommy Hilfiger

TOMMY HILFIGER CORP


Consolidated Statements of Cash Flows
31-Mar-02
In Thousands For Period Ended
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization
Deferred taxes
Provision for special charges
Changes in operating assets and liabilities
Decrease (increase) in assets
Accounts receivable
Inventories
Other assets
Increase (decrease) in liabilities
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Acquisition of businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds of long-term debt
Payments on long-term debt
Proceeds from the exercise of stock options
Purchase of treasury shares
Short-term bank borrowings (repayments), net
Net cash provided by (used in) financing activities
Net increase in cash
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period

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279

03/31/02
-134,545
-117,326
(6,771)
---29,963
51,016
(4,138)
-(15,613)
46,972
$353,300
-(96,923)
(205,061)
$(301,984)
-144,921
(155,538)
7,997
-20,120
$17,500
68,816
318,431
387,247

Tommy Hilfiger
TOMMY HILFIGER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
(l)

Advertising Costs

Advertising costs are charged to operations when incurred. Advertising expense


totaled $44,841, $56,329 and $57,141 during the years ended March 31, 2002, 2001 and
2000, respectively. Also, included in other current assets is $6,832 and $4,299
of prepaid advertising costs at March 31, 2002 and 2001, respectively.
Note 2 - Acquisition of European Licensee
On July 5, 2001, the Company acquired all of the issued and outstanding
shares of capital stock of T.H. International N.V., the owner of Tommy Hilfiger
Europe B.V. ("TH Europe"), the Company's European licensee, for a purchase price
of $206,789 (such transaction being referred to herein as the "TH Europe
Acquisition"). The TH Europe Acquisition was funded using available cash.
The TH Europe Acquisition has been accounted for under the purchase
method of accounting and, accordingly, the operating results of the acquired
companies are included in the consolidated results of the Company from the date
of the acquisition. At the time of the acquisition, the market value of the identifiable
assets and liabilities were $81,583 and $76,633, respectively.
The Company has applied the provisions of SFAS 141 and SFAS 142 [the new merger
accounting rules] to the TH Europe Acquisition..
Note 4 - Financial Instruments
Fair Value of Other Financial Instruments
The fair value of the Company's cash and cash equivalents is equal to
their carrying value at March 31, 2002. The fair value of the Company's 2003 and
2008 Notes and the 2031 Bonds, having a face value of $575,000, is approximately
$534,573 based on quoted market prices as of March 31, 2002. The fair value of
the Company's other monetary assets and liabilities approximate carrying value
due to the relatively short-term nature of these items.
Note 5 - Property and Equipment
Property and equipment consists of the following:
March 31,
-----------------------2002
2001
--------------Furniture and fixtures ......... $268,136
$273,687
Buildings and land .............
111,407
105,770
Leasehold improvements .........
91,208
51,456
Machinery and equipment ........
44,618
31,246
--------------515,369
462,159
Less: accumulated depreciation
and amortization .............
212,432
180,477
--------------$302,937
$281,682
========
========

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280

Tommy Hilfiger
Note 7 - Long-Term Debt
Long-term debt consists of the following:

Unsecured 9.00% bonds due December 1, 2031 .....


Unsecured 6.85% notes due April 1, 2008,
less unamortized discount of $298 at
March 31, 2002 ...............................
Unsecured 6.50% notes due April 1, 2003,
less unamortized discount of $82 at
March 31, 2002 ...............................
Term and revolving credit facilities at a
weighted average interest rate of
approximately 6.33% at March 31, 2001 ........
Obligation under capital lease .................

Less current maturities ........................

March 31,
----------------------------2002
2001
------------------------$ 150,000
$
--

199,702

199,663

224,918

224,842

-1,365
------------575,985
(698)
-------------

154,090
-------------579,495
(50,000)
-------------

$ 575,287
=============

$ 529,495
=============

Note 8 - Commitments and Contingencies


Leases
The Company leases office, warehouse and showroom space, retail stores
and office equipment under operating leases, which expire not later than 2022.
The Company normalizes fixed escalations in rental expense under its operating
leases. Minimum annual rentals under non-cancelable operating leases, excluding
operating cost escalations and contingent rental amounts based upon retail
sales, are payable as follows:
Fiscal Year Ending March 31,
--------------------------2003 .............. $ 43,396
2004 ..............
41,933
2005 ..............
35,683
2006 ..............
29,151
2007 ..............
25,771
Thereafter ........ 123,213
Rent expense, including operating cost escalations and contingent
rental amounts based upon retail sales, was $34,781, $22,561 and $20,092 for the
years ended March 31, 2002, 2001 and 2000, respectively.

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281

Tommy Hilfiger
Note 9 - Income Taxes
The components of the provision for income taxes are as follows:
Fiscal Year Ended March 31,
-------------------------------2002
2001
2000
--------------------Current:
U.S. Federal .................
State and Local ..............
Non-U.S. .....................

Deferred:
U.S. Federal .................
State and Local ..............
Non-U.S. .....................

Provision for income taxes .....

$ 3,445
(222)
23,617
------26,840
-------

$18,320
270
14,824
------33,414
-------

(3,750)
(3,021)
-------(6,771)
------$20,069
=======

12,640
(3,557)
-------9,083
------$42,497
=======

$ 92,332
25,850
16,779
------134,961
------(55,683)
(24,105)
-------(79,788)
------$55,173
=======

Significant components of the Company's deferred tax assets and


liabilities are summarized as follows:
March 31,
-------------------------2002
2001
----------------Deferred tax assets - current:
Inventory costs ............................
Non-deductible accruals ....................
Accrued compensation .......................
Other items, net ...........................

Deferred tax assets (liabilities) non-current:


Depreciation and amortization ..............
Intangible assets, other than
goodwill .................................
Net operating loss carry forwards ..........
Other, net .................................
Subtotal ...................................
Valuation allowance ........................
Total deferred tax assets
(liabilities) - non-current ..............
Total net deferred tax liabilities ...........

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282

6,406
38,002
11,734
5,324
--------61,466
---------

19,996

9,479
37,125
10,391
7,801
--------64,796
---------

12,740

(242,790)
19,788
(958)
--------(203,964)
(11,000)
---------

(237,129)
14,561
10,705
--------(199,123)
(3,000)
---------

(214,964)
--------$(153,498)
=========

(202,123)
--------$(137,327)
=========

DOW CHEMICAL CO

DOW CHEMICAL CO
Consolidated Balance Sheet
In Millions
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable: Trade (net of allowance for doubtful
Receivables 2001: $123; 2000: $103)
Other
Inventories:
Finished and work in process
Materials and supplies
Deferred income tax assetscurrent
Total current assets
Investments
Investment in nonconsolidated affiliates
Other investments
Noncurrent receivables
Total investments
Property
Property
Less accumulated depreciation
Net property
Other Assets
Goodwill (net of accumulated amortization 2001: $569; 2000: $459)
Deferred income tax assets noncurrent
Deferred charges and other assets
Total other assets
Total Assets

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283

12/31/01

12/31/00

220
44

278
163

2,868
2,230

3,655
2,764

3,569
871
506
$10,308

3,396
817
250
$11,323

1,581
1,663
802
$4,046

2,096
2,528
674
$5,298

35,890
22,311
$13,579

34,852
21,141
$13,711

3,130
2,248
2,204
$7,582
$35,515

1,928
1,968
1,763
$5,659
$35,991

DOW CHEMICAL CO

DOW CHEMICAL CO
Consolidated Balance Sheet (cont.)
In Millions except share amounts
Current Liabilities
Notes payable
Long-term debt due within one year
Accounts payable:
Trade
Other
Income taxes payable
Deferred income tax liabilities current
Dividends payable
Accrued and other current liabilities
Total current liabilities
Long-Term Debt
Other Noncurrent Liabilities
Deferred income tax liabilities noncurrent
Pension and other postretirement benefits noncurrent
Other noncurrent obligations
Total other noncurrent liabilities
Minority Interest in Subsidiaries
Preferred Securities of Subsidiaries
Stockholders' Equity
Common stock (authorized 1,500,000,000 shares of $2.50 par value
each; issued 981,377,562)
Additional paid-in capital
Unearned ESOP shares
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost (shares 2001: 76,540,276; 2000: 84,280,041)
Net stockholders' equity
Total Liabilities and Stockholders' Equity

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284

12/31/01

12/31/00

1,209
408

2,519
318

2,713
926
$190
236
323
2,120
$8,125
9,266

2,975
1,594
$258
35
217
2,257
$10,173
6,613

760
2,475
3,539
$6,774
357
1,000

1,165
2,238
3,012
$6,415
450
500

2,453

2,453

(90)
11,112
(1,070)
(2,412)
$9,993
35,515

(103)
12,675
(560)
(2,625)
$11,840
35,991

DOW CHEMICAL CO

The Dow Chemical Company and Subsidiaries


Consolidated Statements of Income

(In millions, except per share amounts)


For the years ended December 31
-----------------------------------------Net Sales
Cost of sales

2001
------$27,805
------23,652

OMITTED

------$ (385)

Net Income

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285

DOW CHEMICAL CO

DOW CHEMICAL CO
Consolidated Statements of Cash Flows
In Millions For Period Ended
Operating Activities:
OMITTED

Investing Activities
Capital expenditures
Proceeds from sales of property and businesses
Acquisitions of businesses, net of cash received
Investments in nonconsolidated affiliates
Proceeds from sales of nonconsolidated affiliates
Purchases of investments
Proceeds from sales of investments
Cash used in investing activities
Financing Activities
OMITTED
Effect of Exchange Rate Changes on Cash
Summary Increase (Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

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12/31/01

12/31/00

-(1,587)
153
(2,098)
(92)
181
(2,561)
3,330
$(2,674)
--

-(1,808)
166
(857)
(186)
47
(3,074)
4,618
$(1,094)
--

(4)
$(58)
278
220

(9)
$(269)
547
278

DOW CHEMICAL CO

The Dow Chemical Company and Subsidiaries


Consolidated Statements of Stockholders' Equity
In millions on 31-Dec
2001
Common Stock
Balance at beginning of year
$2,453
3-for-1 stock split
-Balance at end of year
2,453

$818
1,635
2,453

Additional Paid-in Capital


Balance at beginning of year
3-for-1 stock split
Issuance of treasury stock at more than cost
Other
Balance at end of year

------

165
(184)
-19
--

(103)
-13
(90)

(57)
(64)
18
(103)

12,675
(385)
-(1,162)
(16)
11,112

13,357
1,675
(1,451)
(906)
-12,675

325
(319)
6

298
27
325

Other at beginning of year


Adjustments
Balance at end of year
Total accumulated other comprehensive loss

(885)
(191)
(1,076)
(1,070)

(709)
(176)
(885)
(560)

Treasury Stock
Balance at beginning of year
Purchases
Issuance to employees and employee plans
Balance at end of year

(2,625)
(5)
218
(2,412)

(2,932)
(4)
311
(2,625)

Net Stockholders' Equity

$9,993

$11,840

Unearned ESOP Shares


Balance at beginning of year
Transfer from temporary equity
Shares allocated to ESOP participants
Balance at end of year
Retained Earnings
Balance at beginning of year
Net income (loss)
3-for-1 stock split
Common stock dividends declared
Other
Balance at end of year
Accumulated Other Comprehensive Income (loss)
Unrealized Gains on Investments at beginning of year
Unrealized gains (losses)
Balance at end of year

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287

2000

DOW CHEMICAL CO

The Dow Chemical Company and Subsidiaries


Notes to the Consolidated Financial Statements
Dollars in millions, except as noted

Inventories
The reserves required to adjust inventories from the first-in,
first-out ("FIFO") basis to the last-in, first-out ("LIFO") basis amounted
to a decrease of $146 at December 31, 2001, and a decrease of $682 at
December 31, 2000. The inventories that were valued on a LIFO basis,
principally hydrocarbon and U.S. chemicals and plastics product
inventories, represented 36 percent of the total inventories at
December 31, 2001, and 38 percent of the total inventories at December 31,
2000.

Significant Nonconsolidated Affiliates and Related Company Transactions


The Company's investments in related companies accounted for by the
equity method ("nonconsolidated affiliates") were $1,581 at December 31,
2001, and $2,096 at December 31, 2000. These amounts approximate the
Company's proportionate share of the underlying net assets of the companies
accounted for by the equity method. Differences between the Company's
investments in nonconsolidated affiliates and its share of the investees'
net assets (exclusive of Dow Corning) are amortized over the estimated
useful lives.

Other Supplementary Information

Cash payments for interest


Cash payments for income taxes
Provision (expense) for doubtful receivables

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288

2001
----$ 711
278
39

2000
---$705
730
24

1999
---$630
710
52

NCC 500 Summer 2005


Final Exam Solution

Part I - Tommy Hilfiger


6

Part II - Dow Chemical

1)

1)

Prepaid Adv. (A)


beg
4,299
cash paid
47,374
44,841 adv. expense
end
6,832
(-2 each input)
2) a) higher
-3
b) Because there is a discount
-3

3) a) Risen
b) Because the market value is less than
the book value.
(if increase in rates, -2)

-3
-3

4) PV = 199,702; n = 6; FV = -200,000; PMT = -13,700

i = 6.881

5)

(-1 1/2 each input)


224,918 -3
224,842 -3
76
or
Interest expense (E) (.065386 x 224842)
Discount (XL)
Cash (A) (.065 x 225,000)

2) Change in beginning
Change in ending
Change in CGS
Change in NIBT
Change in tax expense
Change in NI
Net Income LIFO
Net Income FIFO
3) Additional PIC
Retained earnings
Common Stock

14,702

(-3)
(-3)

6) a) $206,789 - (81583 - 76633) =

$201,839 -3

b) None (new rules) (if tax amort. mentioned ok)


6

7)
beg
Purchases
end

Intangibles (gross)
1,307,620
218,266
1,525,886

beg
Purchases
end

Intangibles (net)
(-1.5 each input)
1,206,358
34,532 amort
218,266
sales
1,390,092

8a) CGS (E)


Finished Goods Inventory

8b) Maint exp (E)


Cash (A)

8c) Cash (A)


P&E (net) (A)
Gain on sale (R)

-3

-1.5
-1.5

(.3*536) (-1.5)
-1.5

184 (-1 each amount and account)


1451
1635

Investments in Noncon. Affiliates (A)


beg
2,096
Purchases
92
181 Sales
%NI
(426)
Dividends received
end
1,581
(-1.5 each input)

(-2 each input)


sales

no effect, no effect
(-3 each)
decrease; no effect
(-3 each)

12,000

682
146
536
-536
160.8
-375.2
-385
-760.2

4) Net Unrealized loss (SE)


319
Valuation allowance SAS (A)
319
(-2 if reversed) (-2 each account and the amount)

77
14,625

5)
6

A/R (net)
beg
3,655
39 Provision for bad debts
Net Sales
27,805
28,553 Cash collections
end
2,868
(-2 each input)

increase; decrease
10,000 (-3 each)
2,000

6) 2,412,000,000 / 76,540,276 =
31.51282 (0.000032)
(-3)
(-3)
(if 31.73, -2)
7a) a) NE; b) NE; c) NE; d) NE
Depreciation expense (E)
(-1.5 each)
Cost of goods sold (E)
(b) a) NE; b) O/S; c) O/S; d) O/S
Depreciation expense (E)
Accum Depreciation (XNCA)

(-1.5 each)

(c) a) O/S; b) O/S; c) O/S; d) O/S


Interest expense (E)
Property (A)

(-1.5 each)

8) Earnings before taxes


CFO
CFF

6
6

NE
(-2)
NE
(-2)
+251
(-2)(-1 for sign and amount)

(-1 each math error)


60

Robert Libby

60

289

Robert Libby

290

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University

Final Examination
NCC 500
FINANCIAL ACCOUNTING
Fall 2006

NAME: ___________________________________

Cornell ID: _____________

Instructions:
This open book examination consists of multiple questions. (Be sure that your examination
contains 10 pages, including this page.) All questions are based on the information in the
financial statements and notes packet you were given. Questions can be worked in any order.
For partial credit, please show all calculations and state any assumptions you make. Record your
answers on the exam in the space provided. You may use whatever books, notes, and calculators
you wish. You have 180 minutes to complete this exam.
Please read and sign the following statement:
Academic integrity is expected of all students of Cornell University at all times, whether
in the presence or absence of members of the faculty.
Understanding this, I declare I shall not give, use, or receive unauthorized aid in this
examination.
__________________________________
Signature

Points Assigned and Suggested Times


Problem I Nabors

Points
Assigned

Suggested
Times

120

150 minutes

Review

30 minutes
120

Robert Libby

291

180 minutes

Problem I Nabors
Answer the following questions using the attached financial statements and selected footnotes
from the Nabors Industries Ltd. Annual Report. Nabors is the largest oil and gas land drilling
contractor in the world. Before answering the questions, take a few minutes to review the
financial statements and footnotes. Familiarity with the available information will likely save
you some time and mistakes. Note that all dollar amounts in the statements and problems are
in thousands ($000). Treat each question independently and watch the dates on the statements.
The year 2005 refers to the year ended December 31, 2005.
1. Were new deferred revenues recorded more than or less than deferred revenues recognized
during 2005? How much was the difference? (Indicate the amount and circle one
direction.) (6 points)
New deferred revenues recorded were _______________ more
revenues recognized during 2005.

(less)

than deferred

2. (a)What was the effect of book depreciation and amortization expense on cash flow from
operations for 2005? (Check one.) (3 points)

Increase

Decrease

No effect

(b) What was the effect of tax depreciation and amortization expense on cash flow from
operations for 2005? (Check one.) (3 points)

Increase

Robert Libby

Decrease

292

No effect

3. What journal entries did Nabors make related to earnings and dividends from affiliated
companies accounted for under the equity method in 2005? (8 points)

4. Assume that their interest rate for similar obligations is 10%. If Naborss capitalized its noncancelable operating lease obligations, what would be the amount of total current liabilities
reported on the balance sheet at the end of 2005? (8 points)

Robert Libby

293

5. Assume that Nabors failed to record the end of period adjustment for accrued compensation
at the end of 2005. What is the most likely effect of this mistake on the following amounts?
Circle U/S if the amount is understated, O/S if overstated, or NE if there is no effect. (6
points)

(a)

Working capital

(b)

Cash flows from operating


activities (year ended 12/31/2005)

(c)

(12/31/2005)

U/S

O/S

NE

U/S

O/S

NE

U/S

O/S

NE

Net income
(year ended 12/31/2005)

6. On December 13, 2005, Nabors Board of Directors approved a two-for-one stock split on
common shares to be effectuated in the form of a stock dividend on April 17, 2006 to
shareholders of record on March 31, 2006. What journal entry will most likely be made in
2006 for this transaction? Assume that, on the date the split is recorded, the same number of
shares are issued and outstanding as on December 31, 2005. (6 points)

Robert Libby

294

7. By how much did the acquisition of businesses affect the following during 2005? (Circle the
direction and fill in the amount.) (8 points)
a) Total assets

Increase

Decrease

No Effect

b) Total liabilities

Increase

Decrease

No Effect

8. What was the accumulated depreciation and amortization on property, plant and equipment
disposed of during 2005? All depreciation and amortization relates to property, plant and
equipment. (7 points)

Robert Libby

295

9. This question relates to the 4.875% senior notes. Assume the notes were issued on January 1
and require annual interest payments on December 31.
What was the market interest rate on the date of issuance? (4 points)

10. This question relates to the 5.375% senior notes. Assume the notes were issued on January 1
and require annual interest payments on December 31.
(a) Has the market rate of interest increased, decreased or stayed the same since issuance?
(Circle one). (2 points)
Increased

Decreased

Same

(b) How did you know? (2 points)

(c) What was the market rate of interest on these notes on December 31, 2005? (4 points)

(d) What journal entry would Nabors have made if they repurchased the notes for market
value on December 31, 2005, after the 2005 interest payment was made? (7 points)

Robert Libby

296

11. What was the journal entry made for the issuance of common shares during 2005? (9 points)

12. If the company did the following in the current year, what would be the most likely effect on
each of the following ratios or financial statement amounts for the current year 2005? Use
definitions from chapter 5 and the notes. Ignore taxes. (Circle increase, decrease, or no
effect.) (6 points)
(a) Repurchased common shares for cash at the end of the current year. (6 points)
Earnings per share 2005

increase

decrease

no effect

Stockholders equity (ending)

increase

decrease

no effect

Robert Libby

297

(b) Recorded an impairment loss on depreciable equipment at the end of the previous year
(2004). (6 points)
Net income 2005

increase

decrease

no effect

Cash flow from investing activities 2005

increase

decrease

no effect

(c) Recorded the end of period adjustment for bad debt expense for the current year. (6
points)
Cash flow from operations 2005

increase

decrease

no effect

Net income 2005

increase

decrease

no effect

Robert Libby

298

(d) Recorded the write down of inventory to lower of cost or market during the current year.
(6 points)
Cash flow from operations 2005

increase

decrease

no effect

Net income 2005

increase

decrease

no effect

(e) Recorded the write-up of available-for-sale securities to market at the end of the current
year. (6 points)
Stockholders equity 12/31/2005

increase

decrease

no effect

Gross profit 2005

increase

decrease

no effect

(f) Recorded the sale of available-for-sale securities with a net book value of $1,000 and a
cost of $900 for $950 at the end of the current year. (3 points)
Net Income 2005

Robert Libby

increase

299

decrease

no effect

13. Assume that Nabors incurred $300 in cash costs during 2005 to refurbish equipment with
four years remaining in its useful life. The refurbishing increased the effectiveness of the
equipments operations beyond that expected given normal maintenance. They recorded the
transaction with the following entry:
Direct costs (+E)
Cash (-A)

300
300

What is the most likely effect of this mistake on the following amounts? Circle U/S if the
amount is understated, O/S if overstated, or NE if there is no effect. (6 points)

Robert Libby

(a)

Net income (year ended 12/31/2005)

U/S

O/S

NE

(b)

Net income (year ended 12/31/2006)

U/S

O/S

NE

300

10

Financial Statements and Notes

Final Examination
NCC 500 Financial Accounting
Fall 2006

There are 8 pages to this booklet.

Robert Libby

301

NABORS INDUSTRIES LTD


Consolidated Balance Sheet

In Thousands For Period Ended


Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory
Deferred income taxes
Other current assets
Total current assets
Long-term investments
Property, plant and equipment, net
Goodwill, net
Other long-term assets
Total assets
Current liabilities:
Current portion of long-term debt
Trade accounts payable
Accrued liabilities
Income taxes payable
Total current liabilities
Long-term debt
Other long-term liabilities
Deferred income taxes
Total liabilities
Commitments and contingencies (Note 12)
Shareholders' equity:
Common shares, par value $.001 per share:
Authorized common shares 400,000; issued and outstanding 157,697 and
149,861, respectively
Capital in excess of par value
Unearned compensation
Accumulated other comprehensive income
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity

Robert Libby

302

12/31/05
-565,001
858,524
822,104
51,292
199,196
121,191
$2,617,308
222,802
3,886,924
341,939
161,434
$7,230,407
-767,912
336,589
224,336
23,619
$1,352,456
1,251,751
151,415
716,645
$3,472,267
----

12/31/04
-384,709
955,304
540,103
28,653
39,599
72,068
$2,020,436
71,034
3,275,495
327,225
168,419
$5,862,609
-804,550
211,600
171,234
11,932
$1,199,316
1,201,686
146,337
385,877
$2,933,216
----

158
1,591,125
(15,649)
192,980
1,989,526
$3,758,140
7,230,407

150
1,358,374
-148,229
1,422,640
$2,929,393
5,862,609

NABORS INDUSTRIES LTD


Consolidated Statements of Income

In Thousands Except Per Share Amounts For Period Ended


Revenues and other income:
Operating revenues
Earnings from unconsolidated affiliates
Investment income
Total revenues and other income
Costs and other deductions:
Direct costs
General and administrative expenses
Depreciation and amortization
Interest expense
Losses (gains) on sales of long-lived assets, impairment
charges and other expense (income), net
Total costs and other deductions
Income before income taxes
Income tax expense (benefit):
Current
Deferred
Total income tax expense (benefit)
Net income
Earnings per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted

Robert Libby

303

12/31/2005
-3,459,908
5,671
85,430
$3,551,009
-1,997,267
249,973
338,532
44,847
46,440
$2,677,059
873,950
-30,517
194,738
$225,255
648,695
-4.16
4
-156,067
162,189

NABORS INDUSTRIES LTD


Consolidated Statements of Cash Flows
In Thousands For Period Ended
Cash flows from operating activities:
Net income
Adjustments to net income:
Depreciation and amortization
Deferred income tax expense (benefit)
Deferred financing costs amortization
Pension liability amortization
Discount amortization on long-term debt
Amortization of loss on hedges
Losses (gains) on long-lived assets, net
Gains on investments, net
(Gains) losses on derivative instruments
Amortization of unearned compensation
Sales of marketable securities, trading
Foreign currency transaction losses (gains)
Loss on early extinguishment of debt
Equity in earnings of unconsolidated affiliates, net of dividends
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable
Inventory
Other current assets
Other long-term assets
Trade accounts payable and accrued liabilities
Income taxes payable
Other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investments
Sales and maturities of investments
Cash paid for acquisitions of businesses, net
Deposits on acquisitions closed subsequent to year-end
Capital expenditures
Proceeds from sales of assets and insurance claims
Investments in affiliate
Net cash used for investing activities
Cash flows from financing activities:
Increase (decrease) in cash overdrafts
(Increase) decrease in restricted cash
Proceeds from long-term debt
Reduction in long-term debt
Debt issuance costs
Proceeds from issuance of common shares
Repurchase of common shares
Termination payment for interest rate swap
Net cash provided by (used for) financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Robert Libby

304

12/31/05
-648,695
-338,532
194,738
4,880
401
20,729
218
19,465
(40,197)
(1,076)
4,819
-465
-(2,600)
-(271,969)
(21,704)
(6,808)
811
121,850
8,262
9,989
$1,029,500
-(745,743)
749,562
(46,201)
(36,005)
(907,316)
27,463
-$(958,240)
-10,813
(8)
-(424)
-194,464
(99,483)
(2,736)
$102,626
6,406
-180,292
384,709
565,001

CONSOLIDATED STATEMENTS OF CHANGES


IN SHAREHOLDERS EQUITY
Nabors Industries Ltd. and Subsidiaries

(In thousands)

Balances, December 31, 2004

Accumulated Other Comprehensive Income (Loss)


Unrealized
Common
Gains
Minimum Unrealized
Shares
Capital in
(Losses) on
Pension
Loss on
Cumulative
Total
Par Excess of
Unearned
Marketable Liability Cash Flow Translation
Retained
Shareholders
Shares Value Par Value Compensation Securities Adjustment Hedges
Adjustment
Earnings
Equity
149,861 $ 150 $1,358,374 $
$
271 $
(2,419) $ (1,143) $ 151,520 $ 1,422,640 $ 2,929,393

Comprehensive income (loss):


Net income
Translation adjustment
Unrealized gains on marketable securities
Less:
reclassification adjustment for gains included in net income
resulting from sale of marketable securities
Pension liability amortization, net of income taxes of $148
Minimum pension liability adjustment, net of income taxes of
$615
Amortization of loss on cash flow hedges
Total comprehensive income (loss)
Issuance of common shares
Nabors Exchangeco shares exchanged
Repurchase of common shares
Tax effect of stock option deductions
Restricted shares issued
Forfeitures of restricted shares
Amortization of unearned compensation
Subtotal
Balances, December 31, 2005

Robert Libby

648,695
26,589
34,987

(16,393)

(16,393)
253

253
(836)

(836)
151

151

9,198
110
(1,789)

194,455

(1)

(17,673)
35,501
21,163
(695)

327
(10)

7,836

232,751

157,697 $ 158 $1,591,125 $

305

18,594

(583)

151

26,589

648,695

(81,809)
(21,163)
695
4,819
(15,649)
(15,649) $

648,695
26,589
34,987

18,865 $

(3,002) $

(992) $

178,109 $

(81,809)
1,989,526 $

693,446
194,464

(99,483)
35,501

4,819
135,301
3,758,140

3. INVESTMENTS
Certain information regarding our marketable debt and equity securities is presented below:
(In thousands)

2005

Available-for-sale:
Proceeds from sales and maturities
Realized gains, net of realized losses

Year Ended December 31,


2004

$ 688,275
16,524

$ 838,816
13,943

2003

$ 1,393,638
3,417

4. PROPERTY, PLANT AND EQUIPMENT


The major components of our property, plant and equipment are as follows:
December 31,
(In thousands)

2005

Land
Buildings
Drilling, workover and well-servicing rigs, and related equipment
Marine transportation and supply vessels
Oilfield hauling and mobile equipment
Other machinery and equipment
Net profits interests in oil and gas properties
Construction in process (1)

2004

22,413
40,271
4,565,792
152,167
237,303
36,323
195,146
332,779
5,582,194
(1,695,270)
$ 3,886,924

Less: accumulated depreciation and amortization

16,801
31,394
4,078,244
161,567
166,663
31,608
139,130
49,925
4,675,332
(1,399,837)
$ 3,275,495

(1) Relates to amounts capitalized for new or substantially new drilling, workover and well-servicing rigs that
were under construction and had not yet been placed in service as of December 31, 2005 or 2004.
Repair and maintenance expense included in direct costs in our consolidated statements of income
totaled $327.5 million, $253.0 million and $195.7 million for the years ended December 31, 2005, 2004
and 2003, respectively.
Interest costs of $4.2 million, $1.9 million and $.9 million were capitalized during the years ended
December 31, 2005, 2004 and 2003, respectively.
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Our principal operations accounted for using the equity method include a construction operation (50%
ownership) and a logistics operation (50% ownership) in Alaska, and drilling and workover operations
located in Saudi Arabia (50% ownership). These unconsolidated affiliates are integral to our operations in
those locations. See Note 11 for a discussion of transactions with these related parties.
Combined condensed financial data for investments in unconsolidated affiliates accounted for using the
equity method of accounting is summarized as follows:
December 31,
(In thousands)

2005

Current assets
Long-term assets
Current liabilities
Long-term liabilities

$ 105,073
155,104
67,954
40,201

(In thousands)
Gross revenues
Gross margin
Net income
Nabors Earnings from unconsolidated affiliates

Robert Libby

2005
$ 346,127
46,722
16,119
5,671

306

2004

$ 89,097
143,051
48,977
40,201

Year Ended December 31,


2004
2003
$ 256,303
$ 312,008
33,911
41,809
14,184
21,689
4,057
10,183

6. FINANCIAL INSTRUMENTS AND RISK CONCENTRATION


Fair Value of Financial Instruments
The fair value of our fixed rate long-term debt is estimated based on quoted market prices or prices
quoted from third-party financial institutions. The carrying and fair values of our long-term debt, including
the current portion, are as follows:
December 31,
2005
(In thousands)

4.875% senior notes due December 31, 2009


5.375% senior notes due December 31, 2012
$700 million zero coupon senior exchangeable notes
due June 2023
$1.2 billion zero coupon convertible senior
debentures due February 2021

Carrying
Value

Fair Value

$ 224,030
270,844

$ 224,730
278,285

700,000

826,700

824,789

822,497

$ 2,019,663

$ 2,152,212

The fair values of our cash equivalents, trade receivables and trade payables approximate their carrying
values due to the short-term nature of these instruments.
7. DEBT
Long-term debt consists of the following:
December 31,
(In thousands)

2005

4.875% senior notes due December 31, 2009 (par value 225,000)
5.375% senior notes due December 31, 2012 (par value 275,000)
$700 million zero coupon senior exchangeable notes due June 2023
$1.2 billion zero coupon convertible senior debentures due February 2021 (1)

$ 224,030
270,844
700,000
824,789
2,019,663
767,912

Less: current portion

$ 1,251,751

12. COMMITMENTS AND CONTINGENCIES


Operating Leases
Nabors and its subsidiaries occupy various facilities and lease certain equipment under various lease
agreements. The minimum rental commitments under non-cancelable operating leases, with lease terms in
excess of one year subsequent to December 31, 2005, are as follows:
(In thousands)

2006
2007
2008
2009
2010
Thereafter

$ 10,540
7,974
3,049
2,188
1,482
790
$ 26,023

The above amounts do not include property taxes, insurance or normal maintenance that the lessees are
required to pay. Rental expense relating to operating leases with terms greater than 30 days amounted to
$20.1 million, $19.2 million and $22.4 million for the years ended December 31, 2005, 2004 and 2003,
respectively.

Robert Libby

307

14. SUPPLEMENTAL BALANCE SHEET, INCOME STATEMENT AND CASH FLOW


INFORMATION
Accounts receivable is net of an allowance for doubtful accounts of $11.4 million and $11.0 million as
of December 31, 2005 and 2004, respectively.
Accrued liabilities include the following:
December 31,
(In thousands)

2005

Accrued compensation
Deferred revenue
Workers compensation liabilities
Interest payable
Litigation reserves
Other accrued liabilities

2004

$ 88,071
19,542
37,458
9,728
30,182 (1)
39,355

$ 67,648
25,304
28,994
10,442
3,737
35,109

$ 224,336

$ 171,234

Supplemental cash flow information for the years ended December 31, 2005, 2004 and 2003 is as
follows:
(In thousands)

Cash paid for income taxes


Cash paid for interest, net of capitalized interest
Acquisitions of businesses:
Fair value of assets acquired
Goodwill
Liabilities assumed or created
Common stock of acquired company previously owned
Equity consideration issued
Cash paid for acquisitions of businesses
Cash acquired in acquisitions of businesses
Cash paid for acquisitions of businesses, net

Robert Libby

2005

Year Ended December 31,


2004

2003

$ 25,480
28,507

$ 29,306
27,899

$ 16,542
41,033

38,682
9,554
(2,035)

46,201

$ 46,201

308

NCC 500 Fall 2006


Final Exam Solution
4

2a)

2b)

3)

NABORS
10) (a) Decreased
(b) because the fair value is higher than book value.
(c) n=7, PV=278,285, FV=275,000, PMT=14,781.25
No effect. Depreciation expense is an addback. It does not
i = 5.1673
(-1 each input)
affect cash flow from operations.
(d) Bonds payable (L)
270,844
Increase by reducing taxes paid.
(-3 each direction)
Loss on retirement (E)
7,441
Cash (A)
278,285
Investments in unconsolidated affiliates (A) 5,671
(Bonds payable, net 270,844 ok)
Earnings from unconsolidated affiliates (R)
5,671
(-1 each account and amount to -7)
Cash (A)
(5671-2600)
3,071
Investments in unconsolidated affiliates (A)
3,071 11) Cash (A)
194,464
(-1 each account, -2 each of the 2 amounts to -8)
(-1 if 2600)
Common Shares (SE)
9
Capital in excess of par (SE)
194,455
2006 payment only for current liabilities
(-1.5 each account and amount to -9)

1) New deferred revenues recorded were 5,762 less


25,304-19,542= 5,762
(-2 for direction; -2 for amount)

4)

FV=$10,540, n=1, i=10% = $9,582


(-2 each input to -6)
(or $10,540/1.1)
(-2 each input)
1,352,456+9,582=
1,362,038 (-2 )

2
2
4
7

12a) Increase
Decrease

(-3 each)

12b) Increase
No effect

(-3 each)

12c) No effect
Decrease

(-3 each)

12d) No effect
Decrease

(-3 each)

12e) Increase
no effect

(-3 each)

12f) increase

(-3)

(-3 each)

(-2 if add all payments)


6

5) a) O/S; b) NE; c) O/S

(-2 each)

Compensation expense (E)


Accrued compensation (CL)
6

6) Capital in excess of par or RE (SE)


Common Stock (SE)
(-2 each account and -2 amount)

7) a) 38682+9554-46201=
b)

158
158
(-3 if indicate no entry)

2,035 increase
2,035 increase

(-2 each amount and direction)


7

8)

Accumulated Depr and Amort (XA)


1,399,837 Beg (-2)
Disposals 43,099
338,532 Depr & Amort exp. (-3)
1,695,270 End (-2)
9) FV=$225,000; PMT=10,968.75; n=4; i=4.9971% (or 5%)
PV=-224,030
(-1 each input)

57

13) a) U/S; b) O/S


2005
Plant and equipment (A)
Direct costs (E)
Depreciation expense (E)
Accum. Depr. (XA)
2006
Depreciation expense (E)
Accum. Depr. (XA)

400
400
100

(number approx.)
100

100
100
63

-1 math

Robert Libby

309

120

Robert Libby

310

JOHNSON GRADUATE SCHOOL OF MANAGEMENT


Cornell University

Final Examination
NCC 5000
FINANCIAL ACCOUNTING
Summer 2012

Name ____________________

Cornell ID Number: ________________

Instructions:
This open book examination consists of multiple questions. (Be sure that your examination
contains 10 pages, including this page.) All questions are based on the information in the
financial statements and notes packet you were given. Questions can be worked in any order.
For partial credit, please show all calculations and state any assumptions you make. Record your
answers on the exam in the space provided. You may use whatever books, notes, and calculators
you wish. You have 180 minutes to complete this exam. Be sure to answer each question
based on the correct companys statements.
By completing this exam, I acknowledge that I have read and agreed to abide by the School
Honor Code.

Points
Assigned

Points Assigned and Suggested Times

Suggested
Times

Problem I TJX

52

65 minutes

Problem II Nautilus

24

30 minutes

Problem III The Buckle

44

55 minutes

Review

30 minutes
120

Robert Libby

311

180 minutes

Problem I TJX (52 points)


Answer the following questions using the attached financial statements and selected footnotes
from the TJX Companies Annual Report. TJX is the leading off-price retailer of apparel and
home fashions in the United States and worldwide. Before answering the questions, take a few
minutes to review the financial statements and footnotes. Familiarity with the available
information will likely save you some time and mistakes. Note that all dollar amounts in the
problems, statements, and notes are in thousands ($000). Treat each question independently
and watch the dates on the statements. The year 2008 refers to the fiscal year ended January
26, 2008. Note that quotes around a term means that it is taken directly from the
statements/notes.
1. Assume that no employee compensation and benefits are prepaid. Did the company
recognize more or less employee compensation and benefits expense than cash paid for
employee compensation and benefits during 2008? How much was the difference?
(Indicate the amount and circle one direction.)
____________ more

(less)

employee compensation and benefits expense than


"employee compensation and benefits paid

2. Assume that, at the end of 2008, the cost of Merchandise inventories was $2,837,378.
What was the most likely effect of the adjustment to lower of cost or market at the end of
2008 on the following amounts? Ignore taxes. Indicate an amount and circle a direction or
no effect.
a) Income before income taxes for 2008 _____________ Increase Decrease

No effect

b) Income before income taxes for 2009 _____________ Increase Decrease

No effect

Robert Libby

312

3. a) What will be total interest expense on the 7.45% unsecured semiannual notes for 2009?
Round interest rates to 4 decimal places.

b) What was the date of issuance market rate for the zero coupon subordinated notes?

c) What will be the net book value of the zero coupon subordinated notes on January 26,
2011?

Robert Libby

313

4. The following list contains the 2006 Cash Flows from Financing Activities, along with some
non-financing activities. Prepare the Financing Section of the 2006 Cash Flow Statement.
(Do not try to reconcile with remainder of statement.)
Cash dividends paid
Cash payments for repurchase of common stock
Increase in accounts payable
Interest paid
Principal payments to financial institution for capital
lease obligation
Payments of rent
Principal payments on long-term debt
Proceeds from borrowings of long-term debt
Proceeds from issuance of common stock
Proceeds from sale of property

5.

(105,251)
(603,739)
35,010
(29,600)
(1,580)
(774,900)
(100,000)
204,427
102,438
9,688

Assume that a 2-for-1 stock split accounted for as a stock dividend (with no change in par
value) took place on the last day of 2008. All statements were retroactively restated to
reflect the stock split. What were the most likely balances in the following accounts on
January 27, 2007 as reported in the 2007 annual report?
Common Stock $___________________

Additional Paid-in Capital $___________________

Retained Earnings $_____________________

Robert Libby

314

Problem II Nautilus (24 points)


Nautilus is a major manufacturer and distributor of exercise equipment. Answer the following
questions using the attached financial statements and selected footnotes from the Nautilus
Annual Report. Before answering the questions, take a few minutes to review the financial
statements and footnotes. Familiarity with the available information will likely save you some
time and mistakes. Note that all dollar amounts in the statements and problems are in
thousands ($000). Treat each question independently and watch the dates on the statements.
The year 2005 refers to the fiscal year ended December 31, 2005. Watch the dates!
1. What would Retained earnings have been on December 31, 2005 had Nautilus used FIFO
for all of its inventories? Assume a 35% tax rate.

2. What amount was transferred from Work-in-process to Finished goods during 2005?

Robert Libby

315

3. Assume that Nautilus had done each of the following in preparation of its 2005
statements, and no adjustments were made. What would be the effect of each event on
the following amounts? Circle U/S for understate, O/S for overstate, or NE for no effect.
Treat each item independently and ignore income tax effects.
(a) The company made the following adjusting entry for depreciation of factory equipment:
Selling, general and administrative expense
Accumulated depreciation
The goods produced by the equipment were sold by December 31. No subsequent
adjustment was made.
(a)

Total assets
at year-end

U/S

O/S

NE

(b)

Gross profit
the year

U/S

O/S

NE

(c)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(d)

Retained earnings
at year-end

(b) On December 31, 2005, Nautilus paid unemployment insurance for the 4th quarter of
2005 for office workers and made the following entry:
Work in process inventory
300
Cash
300
No subsequent adjustment was made.

Robert Libby

(a)

Total assets
at year-end

(b)

Cash flow from


operations for the
year

U/S

O/S

NE

U/S

O/S

NE

(c)

Net income for


the year

U/S

O/S

NE

(d)

Stockholders equity U/S


at year-end

O/S

NE

316

Problem III The Buckle (44 points)


The Buckle is a growing retailer of medium- to better-priced casual apparel. Answer the
following questions using the attached financial statements and selected footnotes from The
Buckle Annual Report. Before answering the questions, take a few minutes to review the
financial statements and footnotes. Familiarity with the available information will likely save
you some time and mistakes. Note that all dollar amounts in the statements and problems are
in thousands ($000). Treat each question independently and watch the dates on the statements.
The year 2009 refers to the fiscal year ended January 31, 2009. Watch the dates!
1. What journal entry did the company record for its common stock purchased and retired
during 2009? The stock was purchased with cash.

2. What was the average price per share received by the company for the Common stock
issued on exercise of stock options?

Robert Libby

317

3. What was the effect of properly recording of Stock option compensation expense on
the following? Indicate a direction and amount or no effect. Ignore taxes.
Net income for 2009 ______________

Increase

Decrease

No effect

Cash flow from operations ______________ Increase


for 2009

Decrease

No effect

Stockholders equity at the ______________ Increase


end of 2009

Decrease

No effect

4. Assume that the company acquired ABC Company at the beginning of the current year.
The company hired two valuation consultants to assist in the $200 purchase price
allocation. They produced the two following allocations:
Alternative A
Accounts Receivable
Inventories
Plant and equipment
Goodwill
Liabilities

$50
30
100
100
80

Alternative B
Accounts Receivable
Inventories
Plant and equipment
Goodwill
Liabilities

$50
30
50
150
80

Which alternative would most likely result in the HIGHEST values for each of the
following values for the current year (2009)? (Circle one alternative for each amount or
indicate no difference.)

Net Income

Alternative A

Alternative B

No Difference

Total Assets

Alternative A

Alternative B

No Difference

Cash Flow from Operations

Alternative A

Alternative B

No Difference

Robert Libby

318

5. The company made two adjusting entries at the end of 2009 to adjust Investments
classified as Available for Sale to market:
a) First they made an entry to record Other than temporary impairment. What was the
effect of this entry on the following? Indicate a direction and amount or no effect.
Ignore taxes.
Net income for 2009 ______________

Increase

Cash flow from operations ______________ Increase


for 2009

Decrease

No effect

Decrease

No effect

b) Second they made an entry to adjust the year end balance for these investments to
market. What was the effect of this entry on the following? Indicate a direction and
amount or no effect. Ignore taxes.
Net income for 2009 ______________

Increase

Cash flow from operations ______________ Increase


for 2009

Robert Libby

319

Decrease

No effect

Decrease

No effect

6. If the company did each of the following during the current year, what would be the most
likely effect on each of the following ratios for the current year? Use definitions from
chapter 5 and 14 and the notes. Ignore taxes. (Circle increase, decrease, or no effect.)
a) Recorded Equity in income of affiliated companies of $500 and received Dividends
received from affiliated companies of $200.
Net income

increase

decrease

no effect

Cash flow from investing activities

increase

decrease

no effect

b) At the end of the year when the market rate was 7.75%, retired long-term debt with a
face value of $1,000, coupon rate of 8%, and date of issuance market rate of 7.5%.
Net income

increase

decrease

no effect

Cash flow from operations

increase

decrease

no effect

Total liabilities

increase

decrease

no effect

Robert Libby

320

10

Financial Statements and Notes

Final Examination
NCC 5000 Financial Accounting
Summer 2012

There are 10 pages to this booklet.

Robert Libby

321

TJX

The TJX Companies, Inc.


Consolidated Statements of Income
Amounts in thousands
except per share amounts
Net sales
Cost of sales, including buying and occupancy costs
Selling, general and administrative expenses
Provision for Computer Intrusion related costs
Interest (income) expense, net

Fiscal Year Ended


January 26,
2008
18,647,126
14,082,448
3,126,565
197,022
(1,598)

Income before provision for income taxes


Provision for income taxes
Net income

1,242,689
470,939
$

771,750

The accompanying notes are an integral part of the financial statements.


F-3

Robert Libby

322

TJX

The TJX Companies, Inc.


Consolidated Balance Sheets

Fiscal Year Ended


January 26,
2008

In thousands

ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Merchandise inventories
Prepaid expenses and other current assets
Current deferred income taxes, net
Total current assets
Property at cost:
Land and buildings
Leasehold costs and improvements
Furniture, fixtures and equipment
Total property at cost
Less accumulated depreciation and amortization
Net property at cost
Property under capital lease, net of accumulated
amortization of $14,890 and $12,657, respectively
Other assets
Goodwill and tradename, net of amortization
TOTAL ASSETS

LIABILITIES
Current liabilities:
Obligation under capital lease due within one year
$
Accounts payable
Accrued expenses and other liabilities
Federal, foreign and state income taxes payable
Total current liabilities
Other long-term liabilities
Non-current deferred income taxes, net
Obligation under capital lease, less portion due within one
year
Long-term debt, exclusive of current installments
Commitments and contingencies
SHAREHOLDERS EQUITY
Common stock, authorized 1,200,000,000 shares, par value
$1, issued and outstanding 427,949,533 and 453,649,813,
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders equity
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $

Robert Libby

323

732,612
143,289
2,737,378
215,550
163,465
3,992,294

January 27,
2007

856,669
115,245
2,581,969
159,105
35,825
3,748,813

277,988
1,785,429
2,675,009
4,738,426
2,520,973
2,217,453

268,056
1,628,867
2,373,117
4,270,040
2,251,579
2,018,461

17,682
190,981
181,524
6,599,934

19,915
115,613
182,898
6,085,700

2,008
1,516,754
1,213,987
28,244
2,760,993
811,333
42,903

1,854
1,372,352
1,008,774

2,382,980
583,047
21,525

20,374
833,086

22,382
785,645

427,950

(28,685)
1,731,980
2,131,245
6,599,934

453,650

(33,989)
1,870,460
2,290,121
6,085,700

TJX

The TJX Companies, Inc.


Consolidated Statements of Cash Flows

In thousands

Cash flows from operating activities:


Net income
$
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Loss on property disposals
Asset impairment charge
Amortization of stock compensation
Excess tax benefits from stock
compensation expense
Deferred income tax (benefit) provision
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable
(Increase) in merchandise inventories
(Increase) decrease in prepaid expenses
and other current assets
Increase in accounts payable
Increase in accrued expenses and other
liabilities
Increase (decrease) in income taxes
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
OMITTED

January 26,
2008

771,750

Fiscal Year Ended


January 27,
2007

369,396
18,318
7,600
57,370

738,039
353,110
32,743

69,804

(6,756)
(101,799)

(3,632)
6,286

(25,516)
(112,411)

26,397
(201,413)

2,144
117,304

(23,179)
50,165

202,893
37,909
22,905
1,361,10

170,592
(42,558)
18,679
1,195,03

Net cash (used in) investing activities


Cash flows from financing activities:
OMITTED

Effect of exchange rate changes on cash


Net (decrease) increase in cash and cash
equivalents
Cash and cash equivalents at beginning of
Cash and cash equivalents at end of year
$

Robert Libby

(6,241)
(124,057)
856,669
732,612

324

(8,658)

391,020
465,649
856,669

TJX

The TJX Companies, Inc.


Notes to Consolidated Financial Statements
A. Summary of Accounting Policies

Depreciation and Amortization: For financial reporting purposes, TJX provides for depreciation and
amortization of property by the use of the straight-line method over the estimated useful lives of the assets.
Buildings are depreciated over 33 years. Leasehold costs and improvements are generally amortized over
their useful life or the committed lease term (typically 10 years), whichever is shorter. Furniture, fixtures
and equipment are depreciated over 3 to 10 years. Depreciation and amortization expense for property was
$364,200 for fiscal 2008, $347,000 for fiscal 2007 and $307,700 for fiscal 2006. Amortization expense for
property held under a capital lease was $2,200 in fiscal 2008, 2007 and 2006. Maintenance and repairs are
charged to expense as incurred. Significant costs incurred for internally developed software are capitalized
and amortized over 3 to 10 years. Upon retirement or sale, the cost of disposed assets and the related
accumulated depreciation are eliminated and any gain or loss is included in net income. Pre-opening costs,
including rent, are expensed as incurred.
Impairment of Long-Lived Assets: TJX periodically reviews the value of its property and intangible
assets in relation to the current and expected operating results of the related business segments in order to
assess whether there has been an other than temporary impairment of their carrying values. An impairment
exists when the undiscounted cash flow of an asset is less than the carrying cost of that asset. Store-by-store
impairment analysis is performed at a minimum on an annual basis in the fourth quarter of a fiscal year. An
impairment analysis is also performed for goodwill and tradenames at a minimum on an annual basis in the
fourth quarter of a fiscal year. In the fourth quarter of fiscal 2008, TJX recorded a pre-tax impairment
charge of $7,626, related to Bobs Stores, which is reflected in Bobs Stores segment results. The
impairment charge relates to certain long-lived assets and intangible assets (specifically the Bobs Stores
tradename discussed above) at Bobs Stores and represents the excess of recorded carrying values over the
estimated fair value of these assets at fiscal 2008 year end.
Advertising Costs: TJX expenses advertising costs as incurred. Advertising expense was $284,100,
$244,700 and $203,000 for fiscal 2008, 2007 and 2006, respectively.
D. Long-Term Debt and Credit Lines
The table below presents long-term debt as of January 26, 2008 and January 27, 2007. All amounts are
net of unamortized debt discounts.
In thousands
General corporate debt:
7.45% unsecured semiannual notes, maturing January 26, 2009 (after reduction
of unamortized debt discount of $119 and $omitted in fiscal 2008 and 2007,
respectively)
Market value adjustment to debt hedged with interest rate swap
C$235 term credit facility due January 11, 2010 (interest rate Canadian Dollar
Bankers Acceptance rate plus 0.35%)
Total general corporate debt
Subordinated debt:
Zero coupon subordinated notes due January 26, 2016 (net of reduction of
unamortized debt discount of $118,625 and $omitted in fiscal 2008 and 2007,
respectively)
Total subordinated debt

Robert Libby

325

January 26,
2008

January 27,
2007

199,881 $
1,215

omitted
(4,370)

233,120
434,216

199,186
394,633

398,870

omitted

398,870

omitted

TJX

F. Commitments

TJX is committed under long-term leases related to its continuing operations for the rental of real estate
and fixtures and equipment. Most of our leases are store operating leases with a ten-year initial term and
options to extend for one or more five-year periods. Certain Marshalls leases, acquired in fiscal 1996, had
remaining terms ranging up to twenty-five years. Leases for T.K. Maxx are generally for fifteen to twentyfive years with ten-year kick-out options. Many of the leases contain escalation clauses and early
termination penalties. In addition, we are generally required to pay insurance, real estate taxes and other
operating expenses including, in some cases, rentals based on a percentage of sales which aggregated to
approximately one-third of the total minimum rent for the fiscal year ended January 26, 2008 and
January 27, 2007, respectively.
Following is a schedule of future minimum lease payments for continuing operations as of January 26,
2008:
Capital
Lease

In thousands
Fiscal Year
2009
2010
2011
2012
2013
Later years
Total future minimum lease payments
Less amount representing interest
Net present value of minimum capital lease payments

3,726
3,726
3,726
3,897
3,912
11,084
30,071
7,689
22,382

Operating
Leases
$

943
898
809
708
586
1,715
5,659

The capital lease commitment relates to a 283,000-square-foot addition to TJXs home office facility.
Rental payments commenced June 1, 2001, and we recognized a capital lease asset and related obligation
equal to the present value of the lease payments of $32,600.
Rental expense under operating leases for continuing operations amounted to $896,600, $837,600, and
$774,900 for fiscal 2008, 2007 and 2006, respectively.
TJX had outstanding letters of credit totaling $32,700 as of January 26, 2008 and $43,800 as of
January 27, 2007. Letters of credit are issued by TJX primarily for the purchase of inventory.

Robert Libby

326

TJX

K. Accrued Expenses and Other Liabilities, Current and Long-Term

The major components of accrued expenses and other current liabilities are as follows:
January 26,
2008

In thousands
Employee compensation and benefits, current
Computer Intrusion
Rent, utilities and occupancy, including real estate taxes
Merchandise credits and gift certificates
Insurance
Sales tax collections and V.A.T. taxes
All other current liabilities
Accrued expenses and other current liabilities

335,180
117,266
158,870
141,528
48,954
117,585
294,604
1,213,987

January 27,
2007
$

307,986
138,293
128,781
51,407
116,092
266,215
1,008,774

All other current liabilities include accruals for advertising, property additions, dividends, freight,
reserve for sales returns, and other items, each of which are individually less than 5% of current liabilities.
The major components of other long-term liabilities are as follows:
January 26,
2008

In thousands
Employee compensation and benefits, long-term
Reserve related to discontinued operations
Accrued rent
Landlord allowances
Fair value of derivatives
Tax reserve, long-term
Long-term liabilities other
Other long-term liabilities

Robert Libby

327

125,421 $
46,076
150,530
58,797
143,091
269,157
18,261
811,333 $

January 27,
2007
119,978
57,677
141,993
53,151
96,475
97,448
16,325
583,047

Nautilus
NAUTILUS INC
PARTIAL Consolidated Statements of Income
(In Thousands Except Per Share Amounts For Period Ended)
12/31/2005 12/31/2004
631,310
523,837
352,496
279,043
278,814
244,794

NET SALES
COST OF SALES
Gross profit
NAUTILUS INC
PARTIAL Consolidated Balance Sheet
In Thousands For Period Ended
CURRENT ASSETS:
Cash and cash equivalents
Short-term investments
Trade receivables (less allowance for doubtful accounts of
$4,085 and $3,252 in 2005 and 2004, respectively)
Inventories
...........
STOCKHOLDERS' EQUITY:
Common stock - 75,000,000 shares authorized; no par value;
issued and outstanding, 32,779,611 and 33,147,758 shares in 2005 and
2004, respectively
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

12/31/05
-7,984
-116,908
-96,084

12/31/04
-19,266
85,319
95,593
-49,104

-1,602

-9,478

248,123
2,741
$252,466
413,286

238,474
4,084
$252,036
359,641 5.

Notes to Consolidated Financial Statements


INVENTORIES
Inventories at December 31 consisted of the following:
2005
Finished goods
$ 69,178
Work-in-process
1,368
Parts and components
25,538
Inventories
$ 96,084

2004
$ 31,170
1,104
16,830
$ 49,104

If all inventories had been accounted for using the FIFO method, inventory values would have been
$12,054 and $10, 276 higher at the end of 2005 and 2004, respectively.

Robert Libby

328

THE BUCKLE, INC.


STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar Amounts in Thousands Except Share and Per Share Amounts)

Number of
Shares
BALANCE,
February 2, 2008
Net income
Dividends paid on
common stock,
($.1667 per share 1st and 2nd qtrs)
($.20 per share 3rd and 4th qtrs)
($2.00 per share 3rd qtr)
Common stock
issued on exercise
of stock options
Issuance of nonvested stock,
net of forfeitures
Amortization of
non-vested
stock grants
Stock option
compensation
expense
Common stock
purchased and retired
Income tax benefit
related to
exercise of stock
options
3-for-2 stock split
Unrealized loss on
investments,
BALANCE, January
31, 2009

Robert Libby

Common
Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Loss

Unearned
Compensation

Retained
Earnings

Total

29,841,668

298

46,977

291,045

338,320

104,409

104,409

(15,269)

(15,269)

(18,474)

(18,474)

(92,922)

(92,922)

994,555

10

12,714

12,724

139,635

4,879

4,879

289

289

(9,354)

(9,359)

13,545
(155)

13,545
-

omitted

omitted

- $

omitted $ omitted

(557,100)

(5)

15,487,507

155

45,906,265 $

459 $

(1)

68,894 $

329

268,789 $

THE BUCKLE, INC.


B. INVESTMENTS
The following is a summary of investments as of January 31, 2009:
Amortized
Cost or
Par Value
Available-for-Sale
Auction-rate securities
Preferred stock

35,495 $
2,000
37,495 $

- $
- $

Held-to-Maturity Securities:
State and municipal bonds $
Fixed maturities
Certificates of deposit
U.S. treasuries

31,965 $
2,500
2,945
2,985

536 $
37
42
19

40,395 $

5,165 $

Trading Securities:
Mutual funds

Gross
Gross
Unrealized Unrealized
Gains
Losses

Other-thanTemporary
Impairment

(1,460) $
(1,460) $

Estimated
Fair
Value

(3,757) $
(1,400)
(5,157) $

30,278
600
30,878

(90)
(7)
(9)

- $
-

32,411
2,530
2,987
2,995

634 $

(106) $

- $

40,923

- $

(1,075) $

- $

4,090

The following is a summary of investments as of February 2, 2008:


Amortized
Cost or
Par Value
Available-for-Sale Securities:
Auction-rate securities
Held-to-Maturity Securities:
State and municipal bonds
Fixed maturities
U.S. treasuries
Trading Securities:
Mutual funds

Robert Libby

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value

145,835 $

- $

- $

145,835

$
$

26,260 $
2,899
4,990
34,149 $

375 $
1
24
400 $

(10) $
(10) $

26,625
2,900
5,014
34,539

4,143 $

5 $

(21) $

4,127

330

10

NCC 5000 Summer 2012


Final Exam Solution

1)

2)

3a)

3b)

3c)

4)

TJX
Current
Non-Cur
Total
Ending
335,180
125,421
460,601
-Beginning
307,986
119,978
427,964
Change
32,637 more
(-2 if just current or non-current)
-3 -3

FG Inventory
8
31,170
390,504
352,496 CGS (-2)
69,178
(to -6)
3a) Cost of goods sold (+E)
(-2 each)
8
CGS (+E) (2,737,378 - 2,837,378)
100,000
Selling, general and administrative expense (-E)
Inventories (-A)
100,000
NE, O/S, NE, NE
a) 100,000 decrease
-1.5 each direction and amount
b) 100,000 increase
3b) Unemloyment ins. Exp. (+E)
(-2 each)
8
WIP Inventory (-A)
(7.45% x 200,000) + 119 =
15,019
O/S, NE, O/S, O/S
-2
-2
-4
or
n = 2; FV = -200,000; PMT = -7,450; PV = 199,881
i = 3.7564
THE BUCKLE
7.5
first half = .037564 x 199881 =
7,508.3299
1) Common Stock (-SE)
5
second half = .037564 x (199881 + 58) =
7,510.5086
Additonal Paid-in Capital (-SE)
9,354
Total for 2009
15,018.8385
Cash (-A)
9,359
(-2 each input determining i; -1.5 each NBV to -8)
(-1 each account; 1.5 each amount) (-2 if dr. to Treas Stk)
(if done annually -2)
(e.g., 7.514% x 199881 or 7.5128% x 199881)
2) 12,724/994,555 = 0.012794 ($thousand)
8
n = 16-8 =8; FV = 398,870+118,625 = 517,495; PV = 398,870
-4
-4
12.79
i = 3.3081
(-1 each input to -4)
3) Compensation expense (+E, -SE)
289
6
n = 16 - 11 = 5; rest same
PV = 439,778.9292
Additional Paid-in Capital (+SE)
289
(-1 for n; look out for carry forwards)
Net income
289 Decrease (-1; -1 )
Cash flow from operations
No effect (-2)
(105,251)
Cash dividends paid
Stockholders' equity
No effect (-2)
(603,739)
Cash payments for repurchase of common stock
(1,580)
Principal payments on capital lease obligation
4) Alt. A would have extra Depreciation expense (+E, -SE)
6
(100,000)
Principal payments on long-term debt
Accum. Depreciation (+XA, -A)
204,427
Proceeds from borrowings of long-term debt
Net Income
Alternative B
102,438
Proceeds from issuance of common stock
Total Assets
No Difference
(503,705)
Cash Flows from Financing Activities
Cash Flow from Ops
No Difference
(-1 each omitted or extra)
(-1 each wrong sign to -3)
(-2 each)
2)

(-3) beg
transfers from WIP
(-3) end

5) RE or APIC(-1) (453,650/2)
226,825
5a) Unrealized Loss (+E, -SE)
5,157
Common Stock
226,825
Investments (-A)
Common Stock
226,825
226,825
Net income
5157
decrease
Paid in capital
zero
226,825 (otherwise -2 each)
CFO
No effect
Retained earnin 2,097,285 1,870,460
perfect
above answer(-1)
5b) Net unreal. Loss (+XSE, -SE)
1,460
Allow to value at market (+XA, -A)
Nautilus
6 1) -Change in End Inv
(12,054.0)
Net income
No effect
(12,054.0) -2
Change in Cum. CGS
CFO
No effect
12,054.0
Change in Cum. Pretax Income
4,218.9 -2
6a) Investment (+A)
500
(.35 x 12,054)
Taxes saved
7,835.1
Change in RE
Equity in inc. of affiliates (+R, +SE)
248,123.0 -2
RE as reported
Cash (+A)
200
RE under FIFO
255,958.1
Investment (-A)
(-3 if also use beginning LIFO reserve)
Net income
Increase
Cash flow from inv.
no effect

6b) Bonds payable (-L)


Discount on BP (-XL)
Gain on retirement (+R, +SE)
Cash (-A)
Net income
Increase
Cash flow from operations
No effect
Total liabilities
Decrease
(-2 each)
(-1 math)

Robert Libby

331

5,157
(-1.5, -1.5)
(-3)
6

1,460
(-3)
(-3)
6

500
200
(-3)
(-3)
6

44
76
120