Chapter 1

MINI EXERCISES

M1-21. (10 minutes)

L01 Understanding How the Four Business Activities Are Related

In its November 2018 press release, AT&T revealed that CAPEX for fiscal 2019 (capital
expenditures for additional property, plant and equipment) was expected to be in the
$23 billion range. How will this planned expenditure affect operating, investing, and
financing activities in 2019?

Answer

All three types of business activities will be affected.

• Additional CAPEX of $23 billion will increase investing activities. The company will
acquire additional property and equipment.
• Operating activities will likely increase because the additional equipment is to either
expand or improve on the company’s footprint. All things equal, this will increase
the number of customers or perhaps increase revenue per customer.
• Financing activities will likely increase. The additional CAPEX will need to be
financed either by owners or nonowners.

M1-22. (10 minutes)

L02 Understanding What Information Financial Statement Users Demand

Match each of the financial statement users listed to the question they are most likely
to ask.
Financial Statement User Questions
----- A. Current shareholders 1. What is the expected net income for
next quarter?
----- B. Company CEO 2. Will the company have enough cash to
pay dividends?
----- B. Banker 3. Has the company paid for inventory
purchases promptly in the past?
----- D. Equity analyst 4. Will there be sufficient profits and
cash flow to pay bonuses?
----- D. Supplier 5. Will the company have enough cash to
repay its loans?

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 Answer

Financial-statement
users Questions
A. Current shareholders 2. Will the company have enough cash to pay dividends?
B. Company CEO 4. Will there be sufficient profits and cash flow to pay bonuses?
C. Banker 5. Will the company have enough cash to repay its loans?
D. Equity analyst 1. What is expected net income for next quarter?
3. Has the company paid for inventory purchases promptly in the
E. Supplier past?

M1-23. (10 minutes)

L03 Balance Sheet Equation and Financing Sources

In a recent year, the total assets of Microsoft Corporation equal $258,848 million, and
its equity is $82,7 18 million.
Required
a) What is the amount of its liabilities?
b) Does Microsoft receive more financing from its owners or nonowners?
c) What percentage of financing is provided by Microsoft's owners?

Answer

a. Answer: $176,130 million

Explanation: $ millions
Assets = Liabilities + Equity
$258,848 $176,130 $82,718

b. Answer: NONOWNERS

Explanation: Microsoft receives more of its financing from nonowners ($176,130

million) than from owners ($82,718 million).

c. Answer: 32%

Explanation: Owner financing is 32% of its total financing ($82,718 million / $258,848
million). Nonowners finance 68% of Microsoft’s total assets.

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M1-24. (10 minutes)
L03 Balance Sheet Equation and Financing Sources

Best Buy's financial statements, dated February 2, 2019, report total assets of $ 12,901
million and total liabilities of $9,595 million.
Required
a) Why might Best Buy have chosen February 2 as a year-end date? Select all that
apply.
1. February is after the holiday season when sales are high. Best Buy wants to
include those holiday sales in its results.
2. A non-December year end will help reduce federal income taxes.
3. In early February, inventory will be lower because of the holiday season sales
and Best Buy can more easily (and inexpensively) count its inventory.
4. Other retailers pick late January or early February, and so there is an industry
standard that Best Buy wants to use.
b) b. What is the amount of Best Buy's equity at February 2, 2019?
c) c. Does Best Buy receive more financing from its owners or nonowners?
d) d. What percentage of financing is provided by Best Buy's nonowners?

Answer

a. Answer: 1, 3, and 4.

b. Answer: $3,306 million

Explanation:
$ millions
Assets = Liabilities + Equity
$12,901 $9,595 $3,306

c. Answer: Nonowners.

Explanation: Best Buy received $9,595 million from nonowners which is larger than the
$3,306 million from owners.

d. 74.4%

Explanation: $9,595 million / $12,901 million = 74.4%

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M1-25. (15 minutes)
L03 Applying the Accounting Equation and Computing Financing Proportions

Use the accounting equation to compute the missing financial amounts (a), (b), and
(c). Which of these companies is more owner-financed? Which of these companies is
more nonowner-financed?

$ millions Assets = Liabilities + Equity

Hewlett-Packard $106,882 $78,731 $ (a)
General Mills $21,712 $ (b) $5,307
Target $ (c) $27,305 $12,957

Answer

($ millions)
Assets = Liabilities + Equity
Hewlett-Packard $106,882 $78,731 (a) $28,151
General Mills $21,712 (b) $16,405 $5,307
Target (c) $40,262 $27,305 $12,957

Levels of Owner vs. Nonowner Financing. The percent of owner financing for each
company follows:

Hewlett-Packard................... 26.3% ($28,151 million / $106,882 million)

General Mills........................ 24.4% ($5,307 million / $ 21,712 million)
Target.................................. 32.2% ($12,957 million / $ 40,262 million)

Target has the highest percentage of owner financing. General Mills and HP are financed
with roughly the same proportions of nonowner financing, with General Mills having slightly
more.

M1-26. (15 minutes)

L03,8 Identifying Key Numbers from Financial Statements

Access the September 30, 2018, 10-K for Starbucks Corporation at the SEC's
database for financial reports (www.sec.gov).
Required
a. Fill in the amounts for Starbucks for fiscal year ended September 30, 2018.
Total assets $----------- Total liabilities $----------- Total equity $-----------
b. Confirm that the balance sheet equation holds.
c. What percent of Starbucks' assets is financed by owners?

Answer

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 a. Answer:
Assets Liabilities Equity
$24,156.4 $22,980.6 $1,175.8

b. Answer: $24,156.4=$22,980.6+$1,175.8

c. Answer: 4.9%

Explanation: $1,175.8 / $24,156.4 = 4.9%

M1-27. (20 minutes)

L03, 8 Analyzing Retained Earnings

Access the 2018 10-K for Symantec Corp. at the SEC's database of financial reports
(www.sec.gov). Use the March 30, 2018, consolidated statement of stockholders'
equity to fill in the blanks below to prepare a statement of retained earnings for the
year ($ millions).

Symantec Corp.
Statement of Retained Earnings
For Year Ended March 30, 2018
Balance, start of year $
Net income (loss)
Cash dividends
Balance, end of year $

Answer

Symantec Corp.
Statement of Retained Earnings
For Year Ended March 30, 2018
$ millions
Balance, start of year $ (761)
Net income (loss) 1,138
Cash dividends (49)
Balance, end of year $ 328

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M1-28. (20 minutes)
L03 Identifying Financial Statement Line Items and Accounts

Several line items and account titles are listed below. For each, indicate in which of
the following financial statement(s) we would likely find the item or account: income
statement (IS), balance sheet (BS), statement of stockholders' equity (SE), or
statement of cash flows (SCF).
a) Cash asset
b) Expenses
c) Noncash assets
d) Contributed capital
e) Cash outflow for capital expenditures
f) Retained earnings
g) Cash inflow for stock issued
h) Cash outflow for dividends
i) Revenue

Answer

a. BS and SCF f. BS and SE

b. IS g. SCF and SE
c. BS h. SCF and SE
d. BS and SE i. IS
e. SCF

M1-29. (10 minutes)

L02 Identifying Ethical Issues and Accounting Choices

Assume you are a technology services provider and you must decide on whether to
record revenue from the installation of computer software for one of your clients.
Your contract calls for acceptance of the software by the client within six months of
installation. According to the contract, you will be paid only when the client "accepts"
the installation. Although you have not yet received your client's formal acceptance,
you are confident it is forthcoming. Fai lure to record these revenues will cause your
company to miss Wall Street's earnings estimates. What stakeholders will be affected
by your decision, and how might they be affected?

Answer

There are many stakeholders impacted by this business decision, including the following
(along with a description of how):

• You as a Manager—your reputation, self -esteem, and potentially your livelihood

could be negatively impacted.
• Creditors and Bondholders—credit decisions based on inaccurate information
could occur.
• Shareholders—buying or selling shares based on inaccurate information could
occur.

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 • Management and other Employees of your company—repercussions of your
decision extend to all other employees. Also, a decision to record these revenues
suggests an environment condoning dishonesty.

Indeed, your decisions can affect many more parties than you might initially realize. The
short-term benefit of meeting Wall Street’s expectations could have serious long -term
ramifications.

M1-30. (15 minutes)

L04 Assessing the Competitive Environment

For each of the following companies, briefly explain what type of competitive
advantage(s) they have, if any. Select from: barriers to entry, product differentiation,
cost leader, or buyer power.
a) Apple
b) Walmart
c) Pfizer
d) Uber
e) American Airlines
f) UPS
g) McDonald’s

Answer

Apple—product differentiation and barriers to entry due to technological advantages and

legal

Walmart—buyer power due to size and cost leader

Pfizer—product differentiation arising from specific compounds and barriers to entry due
to technological advantages and legal

Uber—none, low barriers to entry and product is essentially undifferentiated

American Airlines—some competitive advantage due to barriers to entry arising from

significant capital expenditures and government regulation

UPS—none, product is essentially undifferentiated

McDonald’s—buyer power due to size and cost leader

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M1-32. (15 minutes)
L03 Noncontrolling Interest

The information below comes from the Form 10-K for MGM Resorts International for
2018.

Year Ended December 31, 2018

(In thousands)
Net income attributable to MGM Resorts International $ 466,772
Plus: Net income attributable to noncontrolling interests 117,122
Net income $ 583,894

Total MGM Resorts International stockholders' equity $ 6,512,283

Noncontrolling interests 3,957,508
Total stockholders' equity $ 10,469,791

MGM China paid $78 million of dividends to its shareholders of which MGM Resorts
International received $44 million and noncontrolling interests received $34 million.
a) If an investor is interested in the profitability of MGM Resorts ' worldwide
operations, which net income number would be most relevant?
b) What proportion of net income was attributable to shareholders of MGM Re sorts
International in 2018?
c) Of the total equity of MGM Resorts International, what proportion came from
controlling shareholders? Who is the controlling shareholder?
d) Consider the dividends paid by MGM China. Based on this information alone,
what proportion of the MGM China shares is owned by MGM Resorts
International?

Answer
a. An investor is investing in MGM Resorts International, which is publicly traded.
Therefore, the operations of the entire, consolidated entity is of importance. The
investor would find total net income of $583,894 most relevant.

b. Net income attributable to MGM Resorts International / Net income = $466,772 /

$583,894 = 79.9%

c. Total MGM Resorts International stockholders' equity / Total stockholders' equity

= $6,512,283/ $10,469,791= 62.2%. The controlling shareholder is MGM Resorts
International itself, it owns shares in other entities, including MGM China.

d. Dividends received by MGM Resorts International $44 million / Total dividends paid
$78 million = 56.4%. This is greater than 50% and thus MGM Resorts International has
the controlling interest in MGM China.

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 Answer to other exercises and problems

E1-35. (20 minutes)

a. Answer
Assets, Assets, Liabilities, Liabilities, Stockholders'
start end start end Equity, end
($ millions) of year of year of year of year of year
Advanced Micro
$3,552 $4,556 $2,956 $3,290 $1,266
Devices
Intel Corp $123,249 $127,963 $54,230 $53,400 $74,563

Explanation
AMD assets: $4,556 - $1,004 = $3,552. AMD liabilities: $2,956 + $334 = $3,290.
AMD equity: $4,556 - $3,290 = $1,266
Intel assets: $123,249 + $4,714 = $127,963. Intel liabilities: $53,400 + $830 = $54,230
Intel equity: $127,963 - $53,400 = $74,563

b. Answer: AMD $4,054 Intel = $125,606

Explanation
AMD: ($3,552 + $4,556) / 2 = $4,054
Intel: ($123,249 + $127,963) / 2 = $125,606

c. Answer: Intel
Explanation

Assets, Stockholders' Stockholders'

end of year Equity, end of year Equity / Assets
Advanced Micro Devices $4,556 $1,266 28%
Intel $127,963 $74,563 58%

E1-36. (15 minutes)

External constituents use accounting information from financial statements to answer

questions such as the following:

1. Shareholders (investors), ask questions such as:

a. Are the company’s resources adequate to carry out strategic plans?
b. Are the company’s debts appropriate in amount given the company’s existing assets
and plans for growth?
c. What is the current level of income (and what are its components)?
d. Is the current stock price indicative of the company’s profitability and level of debt?

2. Creditors, ask questions such as:

a. Does the business have the ability to repay its debts as they come due?
b. Can the business take on additional debt?
c. Are current assets sufficient to cover current liabilities?

3. Employees, ask questions such as:

a. Is the business financially stable?
b. Can the business afford to pay higher salaries?
c. What are growth prospects for the organization?
d. Will the company be able to pay my pension when I retire?

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E1-37. (15 minutes)

a.
Norfolk Southern Inc.
Consolidated Statements of Changes in Retained Income
Beginning Balance at Dec. 31, 2015 $ 10,191
Net income 1,668
Dividends on Common Stock (695)
Share repurchases (731)
Other (8)
Ending Balance at Dec. 31, 2016 10,425
Net income 5,404
Dividends on Common Stock (703)
Share repurchases (945)

Other (5)
Ending Balance at Dec. 31, 2017 14,176
Net income 2,666
Dividends on Common Stock (844)
Share repurchases (2,639)

Other 81
Ending Balance at Dec. 31, 2018 $ 13,440

a. True.
Explanation: Norfolk Southern did repurchase shares each year. This is shown as a
subtraction because shares repurchased decrease the amount of owners’ investment in the
company.

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P1-44. (30 minutes)

a.
General Mills
Income Statement ($ millions)
For the year ended May 27, 2018
Revenues 15,740.4
Cost of goods sold 10,312.9
Gross profit 5,427.5
Expenses 3,207.2
Income before taxes 2,220.3
Income tax expense 57.3
Net income 2,163.0
b.
General Mills
Balance Sheet ($ millions)
May 27, 2018

Cash $399.0 Liabilities $24,131.6

Noncash assets 30,225.0 Stockholders' equity 6,492.4

Total assets $30,624.0 Total liabilities and equity $30,624.0

c.
General Mills
Statement of Cash Flow ($ millions)
For the year ended May 27, 2018
Cash from operating activities $2,841.0
Cash from investing activities (8,685.4)

Cash from financing activities ($5,445.5 + $31.8) 5,477.3

Net increase (decrease) in cash (367.1)

Cash, beginning year (= $367.1 + $399.0) 766.1

Cash, ending year $399.0

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P1-45. (30 minutes)

a.
Five Below
Income Statement ($ thousands)
For the year ended February 2, 2019

Revenues $1,559,563
Cost of goods sold 994,478

Gross profit 565,085

Expenses 373,278

Income before taxes 191,807

Income tax expense 42,162

Net income $149,645

b.
Five Below
Balance Sheet ($ thousands)

February 2, 2019
Cash $251,748 Liabilities $337,170
Noncash assets 700,516 Stockholders' equity 615,094

Total assets $952,264 Total liabilities and equity $952,264

c.
Five Below
Statement of Cash Flow ($ thousands)
For the year ended February 2, 2019

Cash from operating activities $184,133

Cash from investing activities (39,472)
Cash from financing activities (5,582)

Net increase (decrease) in cash 139,079

Cash, beginning year 112,669

Cash, ending year $251,748

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P1-46. (30 minutes)

a.
J M Smucker Co
Income Statement ($ millions)
For the year ended April 30, 2018

Revenues $7,357.1
Cost of product sold 4,521.0

Gross profit 2,836.1

Expenses 1,497.5

Net income $1,338.6

b. To solve this we can start with the balance sheet numbers we know for 2018 and solve
for the missing number.

2018
Total assets ??
Total liabilities $7,410.1

Total equity $7,891.1

2018 Total assets = $7,891.1 + $7,410.1 = $15,301.2.

Then, we can determine current versus long-term as follows:

Long-term assets = $15,301.2 - $1,555.0 = $13,746.2.
Current liabilities = $7,410.1 - $6,376.3 = $1,033.8.

J M Smucker Co
Balance Sheet ($ millions)
April 30, 2018

Current assets $1,555.0 Current liabilities $1,033.8

Long-term assets 13,746.2 Long-term liabilities 6,376.3
Total liabilities 7,410.1
Stockholders' equity 7,891.1

Total assets $15,301.2 Total liabilities and equity $15,301.2

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 c.
J M Smucker Co
Statement of Cash Flow ($ millions)

For the year ended April 30, 2018

Cash from operating activities $1,218.0
Cash from investing activities (277.6)
Cash from financing activities (914.6)

Net increase (decrease) in cash 25.8

Cash, beginning of year 166.8

Cash, end of year $ 192.6

P1-47. (15 minutes) Abbott Labs

a. We calculate % change in revenue as follows: (Revenue year 2 / Revenue year 1) – 1.

Year Revenue % change

2006 22,476
2007 25,914 15.3%
2008 29,528 13.9%
2009 30,765 4.2%
2010 35,167 14.3%
2011 38,851 10.5%
2012 39,874 2.6%
2013 21,848 -45.2%
2014 20,247 -7.3%
2015 20,405 0.8%
2016 20,853 2.2%
2017 27,390 31.3%
2018 30,578 11.6%
2019 31,904 4.3%

b. In 2012, the most current year change is from 2010 to 2011, which is 10.5%. To forecast
2012 revenue, we start with 2011 revenue and increase by 10.5%, as follows: $38,851 × (1
+ 10.5%) = $42,930.

c. In 2012, the average of the five prior years, is 11.6% (2007 through 2011), calculated as
(15.3% + 13.9% + 4.2% + 14.3% + 10.5%) / 5. We forecast 2012 revenue as follows:
$38,851 × (1 + 11.6%) = $43,358.

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P1-48. (20 minutes)

WINNEBAGO INDUSTRIES
Statement of Stockholders’ Equity
For Year Ended August 25, 2018
Accum.
Other Total
Contributed Treasury Retained Comp. Stockholders’
$ thousands Capital Stock Earnings Income Equity
August 26, 2017 $106,289 $(342,730) $679,138 $ (1,023) $441,674
Issuance of stock 5,822 5,822
Repurchase of stock (4,644) (4,644)
Net income 102,416 102,416
Other comp. income (loss) 1,915 1,915
Dividends (12,738) (12,738)
August 25, 2018 $112,111 $(347,374) $768,816 $ 892 $534,445

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