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CHAPTER 2
A Further Look at Financial Statements
Learning Objectives
1. Identify the sections of a classified balance sheet.
2. Use ratios to evaluate a company’s profitability, liquidity, and solvency.
3. Discuss financial reporting concepts.
Copyright © 2016 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 2-1
2-2 Copyright © 2016 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
ANSWERS TO QUESTIONS
1. A company’s operating cycle is the average time that is required to go from cash to cash in prod-
ucing revenue.
2. Current assets are assets that a company expects to convert to cash or use up within one year of
the balance sheet date or the company’s operating cycle, whichever is longer. Current assets are
listed in the order in which they are expected to be converted into cash.
3. Long-term investments are investments in stocks and bonds of other companies where the
conversion into cash is not expected within one year or the operating cycle, whichever is longer
and plant assets not currently in operational use. Property, plant, and equipment are tangible
resources of a relatively permanent nature that are being used in the business and not intended
for sale.
4. Current liabilities are obligations that will be paid within the coming year or operating cycle,
whichever is longer. Long-term liabilities are obligations that will be paid after one year.
5. The two parts of stockholders’ equity and the purpose of each are: (1) Common stock is used to
record investments of assets in the business by the owners (stockholders). (2) Retained earnings
is used to record net income retained in the business.
LO 1 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting
6. (a) Geena is not correct. There are three characteristics: liquidity, profitability, and solvency.
(b) The three parties are not primarily interested in the same characteristics of a company.
Short-term creditors are primarily interested in the liquidity of the company. In contrast,
long-term creditors and stockholders are primarily interested in the profitability and
solvency of the company.
Copyright © 2016 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 2-3
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XXIII
Autumn again with all its loveliness;
Autumn again that brought an end to joy,
Despite the sight of earth in amber dress,
And airs that bear the blitheness of a boy!
Autumn, and leaves that toss
In bright brief triumphing, while they express
The brooding sense of loss.
XXIV
Autumn again down every winding way
That, in the days gone by, our footsteps pressed!—
Instead of woven amaranth would I lay
Above your dust—you gone by paths unguessed—
Love’s deathless asphodel;
Until some happier hour,—when, who shall say?—
Brother in song, farewell!
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